Sustainable Investing: Beating the Market with ESG

Description

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. 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