Covers a wide range of topic regarding ESG integration and ESG factor-based investing. With many pension funds starting to follow the UN’s PRIs, and the signatories representing $70 trillion. ESG factor-based investing cannot be ignored, regardless of the participant's principles. The divestitures we are seeing by major players such as GPIF, Norwegian Oil Fund, CalSTRS as well as many smaller endowment funds. Has this led to an increase in PE activity in the affected sectors, the driver is that the –what can be seen as forced- selling leading to said companies trading at a discount in public markets. Which leads to the question: through ESG conscious funds investing inline with their principles, do they end up bounding their returns (in the case of tobacco divestment) and arguably making the companies who are deemed poor on the E and S vector less transparent and accountable.

1. The Rise, Impact,
and Challenges of
ESG Factor Based
Investing.
By Jacob Reynolds

2. Environmental Factors
 Carbon emissions, greenhouse gas emissions,
disclosure/measurement and reporting
 Climate change; effect on Company/risk
exposure/opportunities
 Ecosystem change
 Hazardous waste disposal/cleanup
 Resource depletion
 Toxic chemical use and disposal

3. Social Factors
 Animal welfare
 Child/slave labour
 Diversity (employee/Board diversity)
 Predatory lending
 Political contributions
 Political risk in troubled markets, countries

4. Governance Factors
 Cumulative voting
 Dual-class share structure
 Executive compensation (pay for
performance, pay equity)
 Majority voting
 Say on pay
 Separation of chairman/CEO position
 Takeover defences/market for control

5. ESG Integration
 Integrating ESG factors in the investment
process to evaluate risks
 Example of integration is by using the
environmental score to assess the risk of
regulatory action resulting from the
environmental track records of a
company.
 Social factor is least important.

6. Sustainable Investing
Explicit incorporation of ESG objectives into
investment products and strategies:
 Exclusionary Screens
 Impact investments
 Taking market-cap weighted benchmark
and overweighting companies with a high
ESG score and underweighting companies
with a low ESG score (broad approach)

7. Investment Stewardship
 Engagement with companies to
protect and enhance the value of
clients’ assets
 Create a mutual understanding of
risks facing companies and the
expectation of management to
mitigate these risks

8. The Demand for ESG
 In a recent survey (conducted May 2017) by the CFA
Institute, 73% of respondents took ESG issues into
account in their investment analysis and of these,
63% said that they did so primarily to help manage
investment risks.
 A 2015 YouGov survey for Good Money Week showed
that 54% of Britons who hold investments want their
pensions or savings to have some positive impact on
the world and that almost a third of adults wanted
a fossil-free option for their savings, rising to 46%
among under-35s and 52% of millennials (18-24
years).

9. Japan's Government Pension
Investment Fund (GPIF)
 World’s largest pension fund
 Has already allocated 1 trillion yen
($8.9 billion) or 3 percent of its
stocks portfolio to companies that
have strong environmental, social
and governance (ESG)
 Japan's GPIF intend to raise ESG
allocations to 10 percent

11. UN Principles for Responsible Investment
(PRI)

12. UN SDGs
Unlike MDGs
the SDG
goals apply
for all
countries.

13. UN Social Development Goals
The UN Commission on Trade and Development
(UNCTAD) has estimated that meeting these targets
will require US$5-7 trillion in investment each year
from 2015-2030
Only an estimated US$1 trillion annually will come
from public funds, leaving a gap of up to US$6
trillion annually for private capital to fill.
The UN Principles for Responsible Investment
have more than 1,800 signatories, from over 50
countries, representing approximately US$70
trillion.

14. Challenges
 There’s still a reliance on self-reported
data to private aggregators, which allows
them to either only report favourable
data or to opt-out.
 ESG data is collected, managed, and
dispersed by multiple data providers. This
impedes the ability of investors to
systematically compare across geographic
regions and industries, either in real time
or over historical time periods.

15. SIGNATORIES’ COMMITMENT
 "As institutional investors, we have a duty to
act in the best long-term interests of our
beneficiaries. In this fiduciary role, we believe
that environmental, social, and corporate
governance (ESG) issues can affect the
performance of investment portfolios (to
varying degrees across companies, sectors,
regions, asset classes and through time).”
 “We also recognise that applying these
Principles may better align investors with
broader objectives of society.”

16. Principles for Responsible
Investment Cont.
 More than 1,800 signatories, from
over 50 countries, representing
approximately US$70 trillion

20. The Downside of ESG Based
Divestment
 The Norwegian Oil Fund’s (largest sovereign
wealth fund) decision to dump tobacco
companies has cost $1.9bn in missed profits
over the past decade
 The Norwegian finance ministry, which sets
the ethical investment guidelines for the oil
fund, said it chooses to blacklist companies
irrespective of “the financial consequences”.
 Calstrs, the $178bn US public pension fund,
estimated it has underperformed standard
indices by 1.53 per cent after divesting from
tobacco in 2010 and firearms in 2013.

23. Vanguard’s CEO Bill McNabb on
(fossil fuel) divestment
“You would take something that was public
and transparent and make it private and
opaque, and a wealth creation vehicle for a
small group of individuals.”
“Companies would get taken private, and
then the private equity guys and the
management teams get rich beyond belief.”

24. SHE:US

26. Legal boundary between ESG
integration & SRI
Fiduciaries may seek to achieve social or ethical objectives
through their investment decisions. However, subject to
two-part test:
 if the intended ethical outcome was supported by their
beneficiaries; and
 whether it would result in significant financial
detriment (when judged against equivalent
investments).
No legal barriers to ESG integration.

27. Policy Recommendations
 Make ESG considerations a part of fiduciary duties.
 Encourage investors to report whether they
integrate ESG factors in their investment analysis
and, if so, their approach to integrating them as
well as stewardship activities.
 There needs to be consistency in how ESG is defined
 ESG disclosure needs to be standardised, therefore,
there needs to be a global consistent framework/
 A governing body should be in place to audit the
self-reported ESG information, as well as holding
those who misreport accountable.

28. Any questions?