This book reviews the latest methods of sustainable investing and financial profit making and describes how ESG (Environmental, Social, Governance) analysis can identify future business opportunities and manage risk to achieve abnormal returns. Megatrends such as climate change, sustainable development and digitalisation increase uncertainty and information asymmetry and have an impact on the future returns on investments. From a profit perspective, it is largely about how ESG factors affect the long-term value added by companies and the valuation of companies in the financial markets. Although sustainability provides an opportunity for abnormal returns, this phenomenon must be considered in a critical light. The book describes the risks and limitations associated with the accountability and availability of ESG data and tools.
This book provides both academic findings and practical models for assessing the sustainability of investees and introduces practical tools and methods to make ESG analysis practice. It focuses on the ESG analysis of equity investments and fund investments in institutional investment organizations and provides a handbook for all investment analysts who are involved with investment decisions. Readers will benefit from understanding the methods, opportunities and challenges that professionals use in their ESG analysis with cases, interviews and practical tools for both institutional and private investors.
Author(s): Hanna Silvola, Tiina Landau
Edition: 1
Publisher: Palgrave Macmillan
Year: 2021
Language: English
Pages: 241
City: Cham
Tags: Financial services; Risk management; Development economics; Development studies;
Foreword
Acknowledgements
Introduction
Note
Contents
About the Authors
List of Figures
List of Tables
Part I Basics of Sustainable Investing
1 Motivation for Sustainable Investing: What Is the Purpose?
Sustainable Investing is Becoming More Mainstream
Better Returns Over the Long Term
ESG Analysis Helps Investors Find Good Investments in Inefficient Markets
Effective Risk Management
Demand for Sustainable Products and Services is Increasing
International Frameworks of Sustainable Investment
Megatrends Behind Political Decisions and Legislation
Legislation on Sustainable Financing is Increasing
2 Methods of Sustainable Investing
Ethical or Sustainable Investing?
Is Exclusion an Ethical or Financial Decision?
Most Common Methods of Sustainable Investing
The Popularity of Impact Investing is Increasing
References
Part II Engaging with Investees
3 Active Ownership
Making an Impact at General Meetings
Recommendations by International Service Providers Have an Impact
Sustainability Aspects Through Shareholders’ Proposals at General Meetings
Legislation Impacting Shareholders’ Rights
EU Sets Requirements on Remuneration and Ownership Steering
Stewardship Codes Are Becoming More Common
Engagement Through Dialogue
Engagement Through Investor Alliances
Providers and Key Themes of Engagement Services
The Role of Activist Investors in Promoting ESG
Case: Shareholder Resolutions on Climate at the General Meetings of Shell and BP
Summary
Case: Stora Enso’s International Challenges Brought Sustainability to the Core of Strategy
Controversial Publicity for Disputes Over Land in Brazil
Challenges Related to Land Acquired Through Intermediaries in China
Suspected Use of Child Labour by a Pakistani Subcontractor Made the Company a Centre of Controversy
Sustainability Has Been Brought to the Core of the Investor Debate: Continuous Dialogue and Investor Trips
Active Dialogue Started by ESG Service Providers
The Investors Used the Same Service Providers, Which Was Reflected in the Questions They Posed
The Sustainability Crisis Culminated During the Annual General Meeting in 2014
Some Investors Sold Their Holdings Because of Sustainability Issues
Open Communication and a Strong Commitment to Sustainability Were Key in Managing the Crisis
Regaining Investors’ Trust Required Time and Effort
Investors Have Supported the Company’s Transformation in Sustainability
The Dialogue with Investors Has Normalised
Summary
The Perspective of an Engagement Service Provider: Sustainalytics Has Engaged with Stora Enso on Behalf of Investors
Case: KLP Engages with Maersk on Responsible Ship Recycling
Shipowners Use Beaching to Receive Higher Compensation
Maersk Decided to Recycle Ships in India
Weak International Regulation Enables the Dismantling of Ships in Substandard Conditions
KLP Started Investigating Maersk’s Situation After the News Broke Out
KLP Seeks More Transparency from Maersk Over Ship-Recycling Practices
KLP Observed Progress Between 2016 and 2020
KLP Put the Engagement with Maersk on Hold as It Waited for Changes in the EU Regulation
KLP Visits Alang
KLP Views Ship-Recycling Practices Primarily as an Ethical Question
Company Point of View: Maersk Develops Sustainable Practices in Collaboration with Recycling Docks
Summary
References
Part III Sustainability in Investment Analysis
4 Sustainability as Part of Qualitative Analysis
Sustainability in Traditional Investment Analysis
Sustainability Ratings and Specialised Analysis
Understanding the Ambiguity of Sustainability Ratings Is Important
Sustainability Ratings Help Investors Identify Risks
Preparation of an in-Depth ESG Analysis
Sustainability Reports Prepared by Companies: How to Recognise Material Information
External Sources of Information
Management Meetings and Requests for Additional Information
Sustainability Analysis Affects Valuation and Investment Decisions
Case: An Analysis of ABB to Illustrate ESG Analysis
From Initial Analysis to Investment Decisions
Opportunities: Focus on Clean Technology and Innovation
Risks: Compliance with Sustainable Business Principles in International Operations
Ethical Business Principles
Responsible Procurement
Harmful Materials
Environmental Management
Health and Safety
Other Themes Reported by the Company in Addition to Material Risks
An ESG Analyst’s View: ABB Is at the Forefront of the Low-Carbon Energy Transition
The Company’s View: Responses by the Sustainability Unit at ABB to the Questions that Emerged During the ESG Analysis
Summary
5 ESG Analysis Tools for Assessing Listed Shares
Historical Reported Figures
Carbon Intensity
Green/Brown Exposure
Sustainable Development Investments
Case: PGGM’s Analysis Tool for Investing in Sustainable Solutions
Reporting on Impacts Required a New Tool
Assessing Companies’ Net Contribution to Sustainability Is Complicated
Summary
Summaries of Historical Data and Conclusions
Sustainability Ratings
Violations of International Norms
Environmental Costs
Case: Evli Bank’s ESG Tool
The Sustainability Tool Collects Key Data for Portfolio Managers and Customers
The ESG Tool Contains Information About Companies’ Sustainability and Potential Problems
The Process of Sustainable Investing Is Built Around the Analysis Tool
Sustainability Analysis Requires Several Sources of Information and Interpretation
The ESG Analysis Tool Has Been Further Developed
Summary
Forward-Looking Summaries and Conclusions
Preparedness for Climate Change
Climate Scenarios
Combination of Various Sustainability Aspects in Analysis
6 Sustainability of Various Investment Products
Fund Selection
Sustainability as Part of Funds’ Investment Decisions and Sustainability Ratings for Funds
Active Ownership—the Methods of Engagement Are Provided in Reports
Assessment of Competence and Resourcing
Reporting to Investors and Public Principles
Case: OP Monitors the Practices of External Funds Annually
OP Uses Extensive Surveys to Assess Funds’ Sustainable Investing
Meetings and Calls with Asset Managers Are Key Engagement Channels
Passive Managers Are Expected to Promote Sustainability Among Investees
Summary
Sustainability Indices
More Systematic Consideration of ESG in the Selection of Shares Through a Sustainable Benchmark Index
Sustainable ETF Index Funds Increase Market Shares
The Choices of the Service Provider Are Emphasised in the Preparation of Sustainability Indices
Investors Choose Between Standard and Customised Indices
Low-Carbon Indices for Climate Risk Management
Sustainability Assessment in Various Asset Classes
Fixed Income Investments
Green Bonds
Unlisted Investments
Hedge Funds
Opportunities for Private Investors
Investments in Listed Shares
Investments in Funds
Sustainable Investing Requires Study
References
Part IV The Link Between Sustainability and Returns
7 The Nordic Perspective on Integrating ESG
Goal and Status of Sustainable Investing
Motivation for Sustainable Investing
The Level of Implementation Varies
Impacts Within Investment Organisations
What Do the Principles of Responsible Investment Indicate?
Growing Competence Requirements
Critical Perspective
Greenwashing or Real?
Views on Irresponsible Investing
With Sustainable Investing Becoming Mainstream, Will Outperformance Become a Thing of the Past?
8 Is Sustainable Investing Profitable?
Research-Based Information About the Financial Profitability of Sustainability
Sustainability Ratings and Financial Profitability Are Interrelated
Sustainability Improves Market Value
Sustainability Ratings Have a Positive Association with the Return on Capital Employed
Material ESG Factors Generate Returns
Sustainable Companies Fare Well During Recession
Sustainable Companies During the Covid-19 Pandemic
Lower Market Value Volatility
Additional Premium Based on Environmental Friendliness
Irresponsibility Destroys Returns and Capital
Return Impacts of Various Methods of Sustainable Investing
Active Ownership Matters
Not All Exclusion Reduces Returns
ESG Integration and Positive Screening Generate the Best Returns
Challenges in Research and Criticism of Research into Sustainable Investing
9 What Is the Profitability of Sustainability Based on?
The Impact of Sustainability on a Company’s Profitability
Net Sales
Operating Costs
Financial Costs
Taxes
Sustainable Investing and Economic Theory
The Association Between Sustainability and Strategy in Value Creation
The Role of Management
Ethical Corporate Culture as Part of Good Governance
References
Part V Sustainability Trends and the Future of ESG
10 Changes in International Politics and Legislation
Sustainability of the Financial System
The EU Sustainable Finance Strategy
The EU’s Sustainable Finance Legislation Would Change Companies’ Reporting Requirements
The EU Is Preparing a Taxonomy of Sustainable Investments
11 Sustainability Trends and International Frameworks
Combating Climate Change and Adapting to Its Impacts
The TCFD Framework and Analysis Tools in Assessing the Climate Impacts of Investments
Case: The Government Pension Fund Norway Assesses the Future Impacts of Climate Change
Engaging with Companies to Deepen the Understanding of Climate Risks
The Next Step Was to Produce a Set of Recommendations to Companies and Adjust Investment Risk Assessments
Review of Progress Two Years Later and Expansion to New Sectors
Summary
Water Risks
Engagement Is a Key Way to Reduce Water Risks
Case: PGGM Analyses Water Risks and the Preparedness of Companies
Summary
Respect for Human Rights
Investors Can Be Criticised for Negative Impacts Caused by Companies
Gaps in Reporting Affect the Assessment of Human Rights Risks
Data Protection and Information Security
Assessment of Risks Related to Information Security and Data Protection
Other Globally Significant Sustainability Challenges
Identifying Future Winners and Losers
12 Global Investment Trends and Impacts on Sustainable Investing
The Increasing Popularity of Passive and Factor Investing
Opportunities for Broader Analysis
Knowledge of Sustainable Investing Has Become a Requirement
References
Index
