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ESG Explained - Introduction
- 1. Introduction to ESGThe Key to Sustainable Financial Growth Prepared by Ally Chin
- 2. Overview 1 What is ESG 2 What is ESG vs Responsible Investment 3 Why is ESG Important 4 Who should Care 5 Why Care 6 How to Integrate ESG into Investment Process 7 What’s Next
- 3. ESG ESG is a generic term used by investors to refer to the factors that can affect a company’s ability to create long-term value. It also refers to intangible assets. ~ PRI Academy Definition of ESG What is ESG What is ESG vs Responsible Investment Why ESG is Important Who should Care Why They should Care How to Integrate ESG into Investment Process What’s Next • Pollution • Biodiversity Loss • Climate Change • Deforestation • Resource Depletion • Waste Management E Environmental • Human Rights • Child Labour • Product Safety • Product Mis-selling • Labour Standards • Employee Relations S Social • Accounting • Board Composition • Bribery & Corruption • Executive Pay • Tax Avoidance • Shareholders’ Rights G Corporate Governance
- 4. ESG ESG is Incorporated in Responsible Investment What is ESG What is ESG vs Responsible Investment Why ESG is Important Who should Care Why They should Care How to Integrate ESG into Investment Process What’s Next RI Responsible Investment ESG Issues Active Ownership Commitment to Transparency Commitment to Constructive Engagement
- 5. ESG Responsible Investment is an approach to managing assets that sees investors include ESG factors in their decisions a) about what to invest in and b) the role they play as owners and creditors for the long-term sustainable returns. ~ Principles for Responsible Investment, PRI Definition of Responsible Investment What is ESG What is ESG vs Responsible Investment Why ESG is Important Who should Care Why They should Care How to Integrate ESG into Investment Process What’s Next
- 6. ESG . Responsible Investment Complements Traditional Investment Practices What is ESG What is ESG vs Responsible Investment Why ESG is Important Who should Care Why They should Care How to Integrate ESG into Investment Process What’s Next Traditional Financial Analysis Traditional Portfolio Construction Responsible Investment
- 7. ESG Responsible Investment is Different from Sustainable & Impact Investing What is ESG What is ESG vs Responsible Investment Why ESG is Important Who should Care Why They should Care How to Integrate ESG into Investment Process What’s Next Financial Only Responsible Investment Sustainable Investment Impact Investment Impact Only Limited or no regard for ESG practices Mitigate ESG risks in order to protect value Adopt progressive ESG practices that may enhance value Address societal changes that generate competitive returns Address societal changes that may generate below-market financial returns Address societal changes that require below-market financial returns Address societal changes that cannot generate financial returns
- 8. ESG Responsible Investment is Different from Sustainable & Impact Investing What is ESG What is ESG vs Responsible Investment Why ESG is Important Who should Care Why They should Care How to Integrate ESG into Investment Process What’s Next Financial Only Responsible Investment Sustainable Investment Impact Investment Impact Only Level of Impact FinancialReturns Low High High
- 9. ESG ESG is Important for Financial and Economic Reasons What is ESG What is ESG vs Responsible Investment Why ESG is Important Who should Care Why They should Care How to Integrate ESG into Investment Process What’s Next 01 Improve Financial Performance 02 Support Sustainable Development
- 10. ESG Key ESG-Driving Stakeholders What is ESG What is ESG vs Responsible Investment Who should Care Why They should Care How to Integrate ESG into Investment Process What’s Next Why ESG is Important 01 Investment Firm 02 Company 03 Asset Owner 04 Policymaker
- 11. ESG Why ESG Matters to Investment Firm What is ESG What is ESG vs Responsible Investment Why They should Care How to Integrate ESG into Investment Process What’s Next Why ESG is Important Who should Care 01 To Price Externalities Can price the costs of commercial activities borne by natural ecosystem, society or government as production inputs. Eg, carbon tax 02 To Measure the Intangibles Intangible factors outweigh tangible factors to the corporate value. Eg, quality management, safety, governance, brand equity 03 To Manage Idiosyncratic Risks Can reduce portfolio exposure to companies with high ESG risks specific to the companies 05 To Fulfill Fiduciary Duty Ensure relevant ESG risks and opportunities (long-term value factors) are considered in the investment process 06 To Meet Rising Demand for RI More clients demand fund managers to incorporate ESG analysis in the investment process 04 To Achieve Better Returns Help select companies that can better manage ESG risks and opportunities. Higher ESG performance Better profitability Because ESG integration helps Investment Firm:
- 12. ESG Why ESG Matters to Company What is ESG What is ESG vs Responsible Investment Why They should Care How to Integrate ESG into Investment Process What’s Next Why ESG is Important Who should Care 01 To Improve Long-Term Financial Performance Better ESG performance lead to • Higher profitability • Lower company-specific risks • Lower exposure to systematic risk factors Example of risk is stranded assets 02 To Meet Demand for Better Business Management Standards from Stakeholders • Investor: ESG risk management • Customer: Product safety & trust • Community: Waste management • Policymaker: Responsible corporate management Because ESG integration helps Company:
- 13. ESG Why ESG Matters to Asset Owner/Client What is ESG What is ESG vs Responsible Investment Why They should Care How to Integrate ESG into Investment Process What’s Next Why ESG is Important Who should Care 01 To Achieve Better Returns Help select companies that can better manage ESG risks and opportunities. Higher ESG performance Better profitability, lower idiosyncratic risk and lower exposure to systematic risk factors 02 To Seek for Greater Transparency To know how investment firm invest and manage the investment and whether they fulfil their fiduciary duties to consider the ESG issues for the long-term f benefits of the investment 03 To Reduce Risks as Universal Owners Ensure overall risk exposure is limited for entire investment portfolio across many sectors and jurisdictions 04 To Align with Increasing Awareness on Sustainability & RI Increasingly important to take into account of impacts of ESG issues on various stakeholder (social pressure) and ultimate impact on the investee companies’ values Because ESG integration helps Asset Owner:
- 14. ESG Why ESG Matters to Policymaker What is ESG What is ESG vs Responsible Investment Why They should Care How to Integrate ESG into Investment Process What’s Next Why ESG is Important Who should Care 01 To Achieve Sustainable Economic Growth ESG integration in investment firms leads to better business performance, sustainable businesses and bring positive impacts to environment and society. Eg, lower carbon emission, better employment, lower financial crisis 02 To Meet Increasing Social Pressure Social pressure is mounting on policymakers to take actions to mitigate ESG risks and to prevent additional impacts caused by commercial activities in each aspect of ESG 03 To Address the Need for Regulation Policy framework that supports ESG integration has positive impact on ESG performance. A need to clarify fiduciary duty should include ESG consideration and to introduce regulation to support ESG integration such as ESG disclosure requirement and integration for pension funds Because ESG integration helps Policymaker:
- 15. ESG Integration of ESG into Investment Process (1/2) What is ESG What is ESG vs Responsible Investment How to Integrate ESG into Investment Process What’s Next Why ESG is Important Who should Care Why They should Care 1 Traditional Process ESG-Integrated Process Investable Universe • Broadest screening • Using financial viability and operating structure + ESG Consideration • Include companies with ESG/ sustainability/ CSR reporting Financial Screening • Use Growth at Reasonable Price (GARP), for example + ESG Screening • Use ESG metrics to identify leaders/ laggards in ESG performance trend Fundamental Analysis • Conducts financial modelling and risk assessment • Derive target price + ESG Analysis • Identify material ESG risks & opportunities • Quantify ESG impact into financial models 2 3
- 16. ESG Integration of ESG into Investment Process (2/2) What is ESG What is ESG vs Responsible Investment How to Integrate ESG into Investment Process What’s Next Why ESG is Important Who should Care Why They should Care Traditional Process ESG-Integrated Process Portfolio Optimisation • Determine expected returns based on client’s risk profile + ESG Optimisation • Include ESG intensity in portfolio modelling • Eg, carbon intensity Portfolio Monitoring • Monitor changes in price, volatility, financial and operating conditions + ESG Monitoring • Actively monitor ESG performance, risk exposure & management Passive Ownership • Does not actively promote change in company’s operations or corporate governance structure Active Ownership • Actively effect change in company through voting and engagement policy 4 6 5
- 17. ESG Topics for Future Sharing What is ESG What is ESG vs Responsible Investment How to Integrate ESG into Investment Process What’s Next Why ESG is Important Who should Care Why They should Care 01 Introduction of ESG What is ESG Why is ESG Important Overview of ESG Integration 02 ESG Integration (Before Investment) Environmental Integration Social Integration Governance Integration 03 Active Ownership (Post Investment) What is Active Ownership What is Engagement Implementation of Engagement Policy 04 Implementation of RI Program Framework
- 18. Reference 1. Foundations in RI | Introduction to Responsible Investment by the PRI Academy 2. Part 1 How ESG affects Equity Valuation, Risk and Performance by MSCI 3. Fiduciary Duty in the 21st Century (2015) by UN, UNEP, PRI, Inquiry: Design of a Sustainable Financial System 4. What is Responsible Investment? by the PRI 5. Global Guide to Responsible Investment Regulation by MSCI
- 19. Thank You! Connect with me LinkedIn | Ally Chin