2. Learning Objectives
Industry Breakdown 1
• Understand what ESG is
and why it is important
• The role ESG plays in
finance
• Methods of improving ESG
behaviors
• The challenges and
limitations of ESG
5. Company Z
Alternative Investments 1
Production
Social Externality Unethical
Outsourcing Child/Slave
Labour
Use of fossil
fuels in
production
CO2 Emissions
Poor Audit
Board
Lobbyists
Donations
to Party Upholding
Corruption
6. Rationale
Alternative Investments 1
Burden of externalities typically left
to governments and regulators
alone...
Pass Laws
Impose Taxes
But it has
limitations
Improve ESG
practices
7. Rationale behind ESG Investing
Industry Breakdown 1
ESG investing is a way for Investors and Asset
managers to engage with the problems our world
faces and help their investments have a positive
social impact:
Investors:
Inform investment
managers that they
want a strong ESG
emphasis on their
investments:
Investment
managers
Create a portfolio
which overweighs
stocks with high
current ESG ratings
and underweights
stocks with low
current ESG ratings
8. Rationale Behind ESG Investing
Industry Breakdown 1
Clark, Gordon L., Andreas Feiner, and Michael Viehs. 2014. “From the
Stockholders to the Stakeholders: How SustainabilityCan Drive Financial
Performance.” University of Oxford and Arabesque Partners (September):
www.smithschool.ox.ac.uk/library/reports/
SSEE_Arabesque_Paper_16Sept14.pdf.
Robert G. Eccles, Ioannis Ioannou, & George Serafeim. (2014). The Impact of
Corporate Sustainability on Organizational Processes and
Performance. Management Science, 60(11), 2835–2857.
https://us.allianzgi.com/-/media/allianzgi/globalagi/our-
firm/ouresgapproach/esg-in-equities.pdf
https://www.mckinsey.com/business-functions/strategy-and-corporate-
finance/our-insights/why-esg-is-here-to-stay
Good
Equity
Value
Good employee relations/employee satisfaction + well
governed firms perform better than poorly governed firms
(Allianz, 2015)
2014 Oxford led research
80% of studies show:
Good sustainability
practices have a positive
impact on stock price
performance
Eccles et al. 2013
Companies classified as
high sustainability
experience lower market
volatility
A better ESG score
translates to a 10% lower
cost of capital as the risks
that affect businesses are
reduced. (Nuttall, 2020)
9. Momentum of ESG
Industry Breakdown 1
2021 Q1 $1.38 million per minute flowed
into sustainable funds: (FT May 2021)
May 2020: ¼ of US assets under
management are ESG rated (Mckinsey,
2020)
In a poll of retail investors, 78% of 18-34-
year-olds and 67% of 35-55-year-olds, say
ESG affects their investment choices (FT
May 2021)
10. ESG Tools on the buyside
Alternative Investments 1
ESG Integration
Best In Class Selection
Impact
Investing
Active
Ownership/
Stewardship
Exclusionary
Screening
Divestment
Thematic
Investing
11. Green Bonds
Alternative Investments 1
Tool of a banking institution
JP Morgan underwrote $23.7
billion in green, social and
sustainability bonds
Bank
Green
Investment
project gets
finance
Green
Investment
Project pays
bank a fee
Investors
lend to the
company
Bank Takes
on the risk
12. Green Gilts
Alternative Investments 1
Gilt = Name given to a government bond in the UK
Green Gilt: When governments take on debt to finance
abatement projects
UK launched their first Green Gilt programme in November
2020 amid investor demand
Government
Initial Investors
New Investors
Recuperate
fees
Buy Gilts
Money Now
Available
Green Projects
13. Limitations of ESG
Industry Breakdown 1
No Auditing of ESG Reports
ESG related information self declared by companies
In a company’s interest to emphasize the positive aspects and
downplay their negative ESG exposures/risks
Investors hence at risk of being misled by a process called Green
Washing
Inherent Subjectivity:
Lack of standardization of certain metrics
Leaves certain aspects of ESG incomparable and hard to measure
14. Examples of Green Washing
Industry Breakdown 1
Marketing of Recyclable bin liners
- Misleading as it presents an environmental benefit when there is none present
- Bin liners do not get separated from waste at the incinerator
BlackRock: ESG Inconsistency
• Made ambitious commitments to
ESG
• Publicly condemned Proctor &
Gamble for its sourcing of palm oil
from Indonesia
• All while holding a significant stake
$350m in the palm oil company
Astra International
