so today we are going to have summary on ESG integration where we will be discussing a strategic asset allocation and asset uh manager selection how that process happened again I will divide this uh chapter into at least two to three lectures uh because it's a little lenier and given that this is a summary I do not want to make a long a clear so we will go summary wise I will try to give you the whole idea if you want details of course this chapter remains similar to 2023 curricula which is available on our videos on the on online so what we will do we will uh go ahead and look into first part which is strategic asset allocation models and how it works when you are doing ESG integration into investment uh thesis investment philosophy and investment management or decision making what all are covered in module 8 is uh uh 10 learning outcomes uh 10 learning outcomes of course include impact of ESG on asset allocation then ESG integration approaches uh then we will look into the research analysis index and benchmarking screening asset classes um Integrations type of ESG analysis and you know SRI which is socially responsible investing uh and then we will look into managing ESG based portfolio so that's the target for this session uh what we will start with is as strategic asset allocation first ESG integration happens through two ways one is a strategic allocation asset allocation me whatever assets you have for example you have five stocks of a company and when you are trying to integrate ESG in that how you should be doing that's what we we are going to learn of course the methods which are available in traditional finance will be available in ESG uh uh investing as well for example say through mean variance optimization Etc so ESG integration of course happens on four stages it start with informing and shaping a strategic asset allocation decision making process itself so uh whenever you do a strategic asset allocation decision making you need to consider ESG factors to make sure it is productive second is most developed uh uh approach nowadays is ESG integration in asset strategic allocation for listed equity and corporate bonds these are the two segment where it is most developed and people are using it frequently uh so alternative investment and private Equity uh it is less or least used right now uh uh through strategic asset allocation because monetary becomes difficult right uh alternative investment is little illiquid uh so do the private uh Equity where the information is little sporic so saaa in short we always talk about in traditional Finance also we say saaa uh policies May account for 90% of the variability in investment return and this has been established by several empirical studies in past even in India so once you adopt strategic asset alocation your return will be linked to this SAA okay 90% of the varability you will uh be in this SAA approach so if you have selected mean variance optimization as a approach the result which you are expecting in terms of return so say you have a vision that out of I stock I will uh invest 80% of my uh Capital into for a stock okay through a strategic asset allocation to the model which we decide once you have decided that and you after doing that of course you will get a value that this is a return you should expect in long term your variability of your investment of that return will be near to that number okay so for example for stock I will invest uh in uh construction industry and one stock I will invest in a construction material industry so I am literally tilting my portfolio towards construction and infra business isn't it and the return will be what industry of construction and infra will give you me in next 5 year so 90% of my result will come from here 10% of the result comes from technical a tactical asset allocation that's what people say okay so um what do you mean by that tactical so you do it like trading right you do it every day to adjust and allocate uh uh adjust your portfolio based on the daily or weekly uh you know events so that is why it is said 90% of availability comes from the SAA policy then last but not least is establishing the range of asset class exposure based on the return expectation and client characteristics is part of asset allocation strategic asset allocation again I will try to clarify here that you establish any range right that for each asset class for example if I'm investing in equity my on and average returns should be on and above 12% that's what the stock market has given for last uh 20 years of our observation so I should get minimum of 12% and uh from bond market I should get not less than 6% if that is the combin ation and you said that asset or Equity Market I'm allocating 50% and 50% I'm allocating to bond market that means your return which is a weighted average cost of return or weighted average uh return um uh you can calculate it by TVR or MV there are different formulas Total return you can calculate as well so my point here is that return will be 50% multiplied by 12% which is 6% and 6% multiply by 50% which is 3% so on an average you are expecting from this portfolio of your investment 9% return clear that is how the range you can establish when you are considering ESG which is again in traditional Remains the Same so here the first consideration whenever you do a strategic asset allocation the first condition and consideration comes from the macroeconomic climate how macroecon economic is going to to impact my portfolio for example in equity this is definitely sensitive to climate impact on the macroeconomic performance so you will see that how much of uh floods how much of uh rainfall or uh you know um storms are going to impact my this Equity portfolio and what is the sensitivity there because that will impact the macroeconomic performance of My Equity and thereby my strategic allocation inex next 5 year will be impacted yeah so means here we are talking about a standard deviation which we consider in the portfolio right that is the risk so risk measure also you will consider in the similar fashion now here fixed income is definitely sensitive to two things the bond market yeah bond market is sensitive to Physical policy how the uh inflation is behaving how the uh government you know taxation system working Etc because bond has a tax seal isn't it so if the taxation goes high or low it definitely impacts the shield of the bond Bond gives you a shield from the taxation So Physical policy definitely uh uh it that also changes uh relate to CH climate challenges because because of climate there will be new tax countries imposing in that case that Physical policy gets impacted and so do your bond market so green bonds generally gets impacted by climate change uh through Physical policy second way fixed income or bonds get impacted is climate related impact on an asset issuers Credit Credit worthiness so for example in a region where it is quite it is PA to uh uh PR to uh you know uh uh say floods like Himachal Pradesh Etc right so this has a climate related impact which can impact the credit worthiness of of the investment or you or the businesses uh who is getting uh you know this green bonds their credit worthiness can be challenged because they might be bankrupt sometime they might not have any money or access to money and that credit worthiness do get impacted because there was a flood last month yeah so they do not have access to cash or they do not have access to banking system or Etc or their whole asset has been diluted U so in that case again fixed income definitely gets impacted so for Equity it is sensitive to climate impact of microeconomic performance macroeconomic performance fixed income is sensitive to two things Physical policy and climate related impact let's go to the alternative Investments they may allow for greater hedging of climate risk because alternative investment gives you that power that you can hedge the climate risk however for example derivatives yeah as alternative investment if you are using or crypto or gold yeah if you using as a alternative investment to these two fixed income and equity in that case it can allow you for a greater hedging perspective to climate action because if there is a flood or there is a a climate disaster uh gold value doesn't reduce it isn't it gold value remains intact but all other things can be impacted so just just example I'm saying so maybe alternative uh not maybe alternative investment do allow greater hedging of climate risk however risk may be concentrated right opaque or difficult to assess as well like gold value how much of value has increased because of certain disaster hit that area or that in that company or that investment where we have put money is very difficult to judge and calculate hope this is up to here everything is clear if that is the case let's go to the climate scenario analysis so this is one of the analysis which we have learned in chapters three four five everywhere that you need to wherever climate environment comes climate scenario analysis do happen so whenever we are doing integration of ESG we need to also um uh model a climate scenario on our investments here uh we have to do three things first understand the micro macro and ESG sensitivity of an Investment Portfolio how the portfolio gets impacted if there is a micro changes macro changes or ESG sensitivity to my production second uh is a stress test like Bank does right Bank do uh on regular basis nowadays under Bassel 4 Norms stress testing of their asset in different asset classes across region sector time period and temperature resumption so this is the secondary driver which also you need to in uh you need to build to create climate scenario and third and not last you need to do a in climate scenario you also need to do a comparison between near-term and long-term tradeoff s yeah what works in near term might not work in long term what works in long term might not work in near term so you need to do that tradeoff also and when you combine it all these three you have a scenario analysis in place and you can see what is the maximum impact of any climate action on my portfolio model investment impacts can be considered in four steps for example this is a mercer example how Mera does they consider the climate change modeling and literature review so they consider all the documentation which is available in public domain or in specialized domains like World economic Forum Etc that how the climate is changing what kind of impact we are expecting all that you do on the foundation level then on the second level you identify the risk associated with those events right the climate change events and and you create this climate scenario there to build in micro macro ESG sensitivity stress testing so you take it to the stream what can happen and then you also uh uh create a scenario where near-term and long-term Traders are combined once that risk factor and scenario analysis is done then you test it on the assets that how asset will behave you can do back testing you can do uh uh you know econometric modeling to just judge that how the asset is behaving if you are in this scenario once you have done that you get to know how your portfolio overall each asset has changed differently how the portfolio differs for example alternative investment can get give you uh instead of 5% return it can give you 15% return fixed B uh fixed income can give you instead of 6% return 9% return yeah but Equity maybe instead of 12% return it will give you a 2% return or negative return what is this combination and how this is impacting my portfolio need to be calculated once that is done then portfolio implementation by identifying areas of risk and opportunity happens this is the Mercer model and it is working really well in different scenarios then comes integrating e ESG into manager selection so how manager or you whenever you are selecting a stock based on the ESG how you should do it so there are F uh six steps here which you need to cover the first is you need to do due diligence okay based on the publicly available data uh uh you need to do a due delence and create a baseline Matrix that look after looking into this particular stock or asset I believe these are the facts okay and you create that as a baseline Matrix that this is the return I can get this is the risk I'm taking and these are the probability where I can lose control over my asset once that is done then you look into whether this company or asset class which I targeting has ESG policy in build clear is this company has ESG policy if yes then check what kind of affiliation and initiatives they are planning to do in next 5 year okay whether there is an accountability in this company on this regard because a lot of people can talk about it a lot of people can talk about it but may not be able to justify it so uh just a minute I think GC Chu is getting confused just give me one sec please let me so uh Second Step of course is looking into the policy and step do they have affiliation and initiative in place which you can count on and see if there is accountability in play as well okay who is looking into it Etc uh now degree of ESG issues how much integration of the investment process is there that also you need to see okay that is your responsibility because you are taking a bait on certain asset class or certain Equity or debt proposition now once you are doing that see that how much of ESG issues are there and how much of that you can include into your investment process along with looking into ownership and stewardship activity so they might be weak in certain areas of their operation under ESG consideration but can they take that ownership and you can dictate your term through engagement and stewardship activity to control that part of their operation because there will be larger growth possible right that that's the advantage so client reporting capability generally happens and uh uh that's quite important stuff as well which will be last chapter we will be detailing this into the last chapter and how it works clear with that let's go to the next uh discussion point where how to incorporate ESG into this selection of man manager when they select any stock for example you are just in Lay man language if you are planning to take exposure into different stocks how to select those stocks so there are two models available one is the Black Rock alternative advisor model which is on the left hand side and then the right hand side is a table model which also you can use for selecting uh uh uh ESG based Investments so how you do on the Black Rock alternative advisor model you start with sourcing you look into how these guy guys are sourcing or how you are going to Source those assets yeah is it from the public domain it is from uh particular uh regist or or a investment provider then evaluation can I do evaluation on that sour sourcing process itself then you look into how the approval happens in their company and can I monitor my manager on the Periodic basis once that is established that model is blackr alternative model however when you are doing uh independently you can do considering following characteristics of different asset classes okay for example private Equity uh uh you have what kind of return and what kind of risk So based on that inherited characteristics private Equity private debt real estate infrastructure natural resources based on that also you can select your manager then once you have selected it through ESG integration you uh you and you have done all these processes like due diligence existence of ESG procedure affiliation initiative degree of ESG ownership client reporting capability along with uh you know the process of black rock or the tabula method where based on the nature and characteristics you basically take three uh three to four uh kind of integration models are and approaches are there first you have to see that you embade the ESG consideration into all your approaches how you can do that you do it at the highest level of asset allocation decision that any uh asset for example here we are talking about Equity debt alternative investment any exposure I will take I will make sure that the ESG consideration issues opportunities are highlighted at the top itself once that is done you look into portfolio exposure to non Financial factors which is ESG consider sorry ESG consideration so as a portfolio once you have taken asset by asset level for example let me give you example Equity I have taken 5e stock in construction segment I expect there will be 14% return and 20% of risk in next 5 year clear debt I have taken same five uh fixed income products yeah like siram capitals uh green Bond Etc this will give me 9% return but it has virtually 5% risk say 5% it changes based on the uh Central Bank changes the rate so 5% is my risk once I have done that you do not visualize at this level you visualize at portfolio level so combined of these two I put $1 million in equity half million in debt yeah and you have you know how much return and risk is possible there you take a combination of that and at portfolio level how much I am Exposed on the risk side how much I am Exposed on the return side and whether this non-financial factor in debt it is less in equity it is more do it compensate does it both of them compensate each other if that is happening then you are better off and thereby you bring risk management measures and performance attribution to each of this asset class or your investment that's how you embade ESG consideration throughout investment process then comes the role of portfolio managers okay where you we security a specific Factor against macro and microeconomic data macro data means you know uh Countrywide data how country is doing how GDP is performing how inflation remains Etc and micro economic data we are talking about how the consumers are behaving how industry is uh uh you know growing all that we consider both side of it you create a weight based on that for each security or your debt exposures and then you look again to the portfolio financial and non-financial exposure that how much of money terms I will get return and how much of impact I am making clear financial and non-financial exposure along with sensitivity to the potential socks which can come through the climate uh uh climate acction so this need to be considered the there are different models well-known models are two one is discretionary model discretionary ESG we say another model is systemic model discretionary ESG model is fundamental portfolio approach okay this is just looks into the uh basics of that uh security it looks and complement the bottom up financial analysis so remember that theary bottom up BD okay so bottom up financial analysis when you are doing M you are doing security analysis then you are looking into industry and then you are going to macro which is country level analysis that's bottom up it happens in disconary when we are talking about systematic there statistical application of Financial and non-financial Factor happens so you look into statistics specific to that particular company or sector yeah if here in discretionary you understand aggregate portfolio risk in systemic you try to minimize the higher cost associated with the disconary active management okay so you try to minimize it that's why it is system in disconary if you are looking into each stock and then industry each industry and then each country it's a quite a costly uh calculation and if you are doing on regular basis it's a disaster so when you are doing regular basis systematic uh approach is better and when you are doing onetime investment kind of stuff then discretionary is better because looks into fundamental so in long term you more secured then comes the corelation discretionary works on correlation and event risk that one risk for example flood happens then after flood people know right there a lot of uh uh lot of illnesses comes in play so that is a correlation you need to check and how in that condition a Pharma company is performing you need to consider that right so correlation and event risk need to be considered when you are talking about disconary when you are systemic it's focused on the breadth so you look into larger pool here larger portfolio of holding if you have then you go for systemic because it creates a way to follow up Monitor and do selection of managers on a equal valent basis don't forget disc ESD also have a potential portfolio socks which you need to consider when you are using that what are the resources which are available for practicer of such kind of investment so sales side research are always available so people who are trying to sell certain stocks they create the reports and they will give it for to you for analysis and consider academic studies are there on climate action you know development in cop Etc you can find those studies investment consultant research is also there where they are advising where to invest or not to invest like ICI direct Etc then asset manager white papers these are available to only people who are candidate means who are limited partners or potential limited partner for that asset management company and NGO research don't ignore NGO research in ESG because S and E definitely covers into lot of non-governmental oranization research along with uh even governance factors they do highlight all the time so consider all these resources when you are integrating your ESG into investment consideration then comes ESG data provider online platform so illustrative portfolio means exposure of weighing low mid or high that's how you do the mean exposure oh I I was not audible right okay so uh are we on recording no you are audible you are audible I was audible huh H you are audible so Sal side research Etc you were able to hear yeah yeah oh s I saw muted anyway no GC CH you welcome yeah thank you okay so uh let let's look into the data provider online platform so provides portfolio environmental and carbon exposure on absolute basis there are several data providers and it also approximate the overall controversy because controversies are very important whenever you are considering ESG into incorporation like mining uh exploitation of worker worker get getting uh injured on the site all these controversy also are important to be considered all the time because that decides the risk score of a portfolio combine it with proprietary capability and you have a powerful resource at your disposal to use it there is another method which a lot of people are now using is quantitative research development so Quant approach is basically is it describes the ESG performance attribution that how you should look into the opportunity and risk of ESG at portfolio level for each of the stock first you consider and then combine it and look at the portfolio level which requires quantifying the ESG attribute as a factor like e as a factors S as a factor G as a factor here third party data providers are really helpful and they are developing encouragingly sophisticated uh uh Quant approaches which they are making available to People Like Us who is planning to use that and ESG rating and scoring methodology also considers the same where significant underlying correlation with existing factors such as value quality size and momentum are generally used so these are the four ways you can get exposure in ESG rating when you are using Quant approach for ESG integration which are those value investment quality investment size and momentum so how big the company operation is and what is the current momentum in the stock that need to be consider it definitely under the effort to Define ESG attributes as a unique enough to be included in risk factor attribution analysis of course these are little uh DIY terms but when you will read the book and watch our detail video you can understand this very clearly with that I end the session for today okay uh what we can do is we will quickly have uh 10 question okay uh based on the initial 10 slides let's answer those because I have more than 50 question on this chapter okay so next week my plan is we will take two day class maybe again we will have uh on wedness day maybe yeah uh wedness day we are talking about 28th night uh let me see if we can do wednessday or Thursday either of these two we will do one day and then Saturday Sunday we we we need all 3 days to conclude the chapter 8 okay chapter 8 is a little large and longer and that's why I have divided so let me quickly now Showcase with you guys uh can you uh uh scan the code and join us and answer this questions online there to get here only this thing is available mhm the screen is not visual oh okay just give me one sec just give me uh please confirm once the screen is visible uh where to get the okay yes okay so the first question is which of the following is accurate ex of exclusions they are most commonly adopted and applied by which kind of operator asset manager exclusion I'm saying accurate exclusion which people generally use is this asset manager who can exclude who can decide on exclusion what to be included or not asset owner or regulator did you guys able to log in yes H yeah okay all of you are logged in so you can answer now if you missed to answer is it asset manager who can decide on exclusion asset owner who can decide on exclusion or regulator try to understand from a investor point of view if you are manager of course owner has to give you the direction okay regulator of course regulator can do anything they want but can they prescribe exclusion in your portfolio I doubt that generally manager only is it is it asset owners who decide that what I don't want for example I don't want any uh any stock which is into tobacco I don't want this is owner can say asset man research and find out way to exclude it but exclusion generally comes from the asset owner remember that whoever asset owner is they will decide clear but once they have exclusion is decided what to invest is asset manager remember that as well okay stationary or systematic way they can do the investment question according to Mercer consulting which of the following asset classes has the lowest progress towards CSG integration and avability of ESG strategy according to Mercer Mercer 2019 data I shown you right that pyramid so which of the following asset classes has the lowest progress towards asset investment uh towards ESG integration and avability of ESG strategy public Equity private debt or real estate which one you think okay so everybody mostly you are saying it is private debt and that's the correct answer private debt is the lowest progress uh uh uh you know made towards the C integration of today let's see the another question ESG integration focuses on what does it focus on measur measurability and comparability comparability and materity materity and measurability so which one you think ESG integration focuses on materiality measurability which is the third option comparability meas materiality is the second option and measurability and comparability oh everybody has got one answer in their King but look ESG integration doesn't talk about materity materity happens at the stock selection level right ESG integration when you are thinking you are looking into issues and benefits and you want to know whether you can measure those issues and benefits and can you compare that kind of uh measured assets returns toes so that is important here now let's go to next question another five question and we will stop which of the following is a factor that contributed to Greater Vitality of clean energy thematic funds so again it is asset class right clean energy thematic funds is a asset under management which is investing in Market what could be the factor which has contributed to their greater volatility consistent regulatory subsidy strong cash flow profiles or a scarcity premium which one you think has contributed to lot of changes there is a consistent regulatory subsidy strong cash does people get lot of cash because of this or a scarcity premium the correct answer is a scarcity premium okay these theme kind of fund is not being available creates a lot of people of trading in that kind of stuff and it changes because of the scarcity premium so remember that greater volatility in thematic funds happens because of the scarcity premium that's how the links happens let's take three more questions what is an example of discretionary strategy within ESG portfolio integration what is an example of discretionary strategy within ESG portfolio integration is it fundamental portfolio approach custom index with exclusion criteria uh exclusion criteria you remember right it's at the owner level and then you have a beta plus funds me market plus funds Market uh deviations are known as beta deviations and we have a 50/50 50/50 answer so somebody has not answered let me give him a chance to answer and then we will go to the answer what is an example of disconary right disconary looks into what macros correct okay so correct answer is fundamental disconary I told you right fundamental and bottom up approach first point was fundamental portfolio approach second was bottom up approach so you look into the Securities bonds and then you look into industry which industry they are coming from what kind of sensitivity industry has and then you look for the macro that is theary so be very precise on this okay these are small small stuff but very important let's take two more questions uh portfolio manager use the third party and proprietary SG data to do what portfolio manager they use both third party and proprietary ESG data to increase the subject ity among the rating provider they do they want to do that competition and check who is better who is worse or lower over Reliance on the single third party provider or they want to automate portfolio is risk analytics and Reporting uh somebody could not answer so I'm giving them a chance to answer now lower over Reliance on a single third party provider that's why they are taking both or they want to automate the portfolio is risk analytics and Reporting which is the correct answer okay so now we have correct answer given by two people which is lower over Reliance on the third party provider let's go to next ESG portfolio optimization process okay what is exactly this process defines the variable upper and lower Bound in optimization process do you define upper and lower bound do you use negative screening on an absolute basis or you have a result greater diversification benefits which you are using it here yeah let's see the answer and one more question we will stop for today come on with h okay everybody has given independent answer that's very good to see no look I'm just challenging whatever we have learned I know uh uh we have learned today itself and not the correct answer is it defines the variable upper and lower bound whenever we talk about optimization we will have that optimization and lower you cannot go below that thresholds so remember that uh let's take one more question and then we will stop which performance attribution again performance attribution is how one stock is doing and whether you are going to tilt more towards that stock based on its impact in Impact results or return results uh through the standard deviation you do this attribution model and you do you have this capability of decompose ESG performance can you see which ESG has given better result or performing really better or bad there are three models there of course we have not discussed Brinson attribution model uh neither model which is Brinson attribution and risk factor attribution model or neither of these two which model has this capability where you can attribute the performance of portfolio stock neither of these two has that so good somebody has really given the correct answer one more question or we stop I want to answer no As You Wish okay all other people aasi is very silent again oh we can go with this one more question okay let's take one more question if aasi sets then we take one more question no problem what is the most covered asset class for ESG indices which is the most covered asset class which is fixed income Equity or real estate under ESG indices yeah like like msci has indise dodgeon has indise what are the most covered asset class and this could be counterintuitive answer as well okay so just think it through which has the maximum number of exposure oh everybody has a different answer the current answer is equities okay even though the fixed income Market is much much larger than equities but Equity is the most covered class in ESG indices and the reason are simple because it trades every day right so it ticker should change like NSE it has 50e stock BC 30e stock if you have a stock it changes every day and that's why these indices becomes more useful than the indices based on debt Market or fixed income Market or real estate market with that let's stop for today because I I'm I'm worried that I will ask you a question which I have not covered yet and there is a me I have covered only 30% today we need to cover additional 70% which I will try to do it in next class okay uh let's stop here and when we will join all these 10 question also will have plus new questions with that uh I'm ending session any question by the way today's session uh Ain G was able to join GC Choy G was there uh I think NES G has missed last session you were there right for that gr and BRS are reporting correct no I already join in the morning oh okay okay okay so first September again this is happening the point here is we are also bringing a software guy who is really people are appreciating this a lot of people have appreciated uh how the software you can use to automate this process so that's the additional thing which we are discussing and uh this is this session is totally available for everyone so next Sunday if you are free do join in LG and all of you you can always join again and again that's not a problem as you are happy to join okay with that let's end the session today and see you either on wednessday or Thursday just you guys decide and let me know and I'm happy to take the class thank you thank you very much