Title: Investment Management Overview
URL Source: blob://pdf/fae9ccbc-92a2-48bd-8b13-bf5e4f66081e
Markdown Content:
Responsible
# Investment Part III
ESG Factors, Impact Investing, Green Bonds, Active Ownership
> Fernando Forcada, CFA
> Selected Topics, April 2025
## 1Responsible Investment
# Activities and Strategies
The way investors practice responsible investment varies widely :
1) Negative/exclusionary screening : the exclusion from a portfolio of
certain sectors, companies or practices based on specific ESG criteria
2) Positive/best -in -class screening : investment in sectors, companies
or projects selected for positive ESG performance relative to industry
peers
3) Norms -based screening : selection of investments against minimum
standards of business practice based on international norms, such as
those issued by the OECD, UN and UNICEF
4) Integration of ESG factors : the systematic and explicit inclusion by
investment managers of material ESG factors into financial analysis and
investment decisions to help enhance risk -adjusted returns
## 2Responsible Investment
# Activities and Strategies
5) Thematic (sustainability themed) Investing : investment in
specific themes or assets related to sustainability (for example clean
energy, waste and water management, sustainable agriculture or
inclusive finance)
6) Impact Investing : targeted investments aimed at solving social or
environmental problems, and including community investing, as well as
financing that is provided to businesses
7) Active Ownership / Stewardship (corporate engagement and
shareholder action) : the use of shareholder (or bondholder) power to
influence corporate behavior through direct corporate engagement, filing
shareholder proposals, and proxy voting
Encouraging investee companies to disclose information on the ESG
factors that do or could affect them and promoting wider acceptance and
use of responsible investment within the investment industry
## 3Responsible Investment
# Activities and Strategies
## 4Source: GSIR Review 2022
SUSTAINABLE INVESTING ASSETS BY STRATEGY AND REGION 2022
NOTE: European sustainable investing strategy data was not available for the
reporting period .Responsible Investment
# Activities and Strategies
## 5Source: GSIR Review 2020
SUSTAINABLE INVESTING ASSETS BY STRATEGY AND REGION 2020
NOTE: Asset values are expressed in billions of US dollars Responsible Investment
# Activities and Strategies
## 6Source: GSIR Review 2018
SUSTAINABLE INVESTING ASSETS BY STRATEGY AND REGION 2018 ESG Integration
ESG integration refers to the systematic and explicit inclusion of
ESG risks and opportunities in investment analysis
It simply involves including ESG information in investment decision -making,
to ensure that all relevant factors are accounted for when assessing risk
and return
Management of ESG issues can have a material influence on
company profitability, value, and share price
Analysis of ESG factors can help illuminate corporate character and identify
better -managed companies
ESG analysis can be either qualitative or quantitative .
Some techniques could be considered a hybrid of both techniques, such as
scorecards, where a qualitative judgment is turned into a quantitative score
ESG Integration does NOT necessarily mean that :
certain sectors, countries, and companies are prohibited from investing
traditional financial factors are ignored (e .g., interest risk is still a significant
part of credit analysis) ;
every ESG issue for every company/issuer must be assessed and valued ;
every investment decision is affected by ESG issues ;
major changes to your investment process are necessary ; and, finally and most
importantly,
portfolio returns are sacrificed to perform ESG integration techniques 7ESG Integration
A key component of ESG integration is lowering risk and/or
enhancing returns :
Uncovering hidden risks
Looking for investment opportunities to enhance returns
ESG integration typically has three components :
1. Research :
o Information gathering : financial and ESG information from multiple sources
o Materiality analysis : relevant financial and ESG information to identify material
financial and ESG factors affecting a company, sector, and/or country
o Active ownership assessment : Discussing material traditional financial factors and
ESG factors with companies/issuers
2. Security and portfolio analysis : This can lead to adjustments to their
forecasted financials, valuation -model variables, valuation multiples,
forecasted financial ratios, or internal credit assessments
3. Investment decision : The material traditional financial factors and ESG
factors identified and assessed influence a decision to either buy, hold, sell,
or do nothing
## 8ESG Integration
Early evidence suggests that focusing on ESG may be particularly
critical in emerging markets (EMs)
Industry experts think we are likely to move beyond simple
negative screening and towards ESG integration
Four basic requirements for ESG integration that should be reflected in
the investment approach :
Training . Raising awareness and teaching investment professionals how to use
ESG
Available information . Make ESG data, research and analysis accessible to
investment decisions makers
Process integration . Reflect ESG in the way portfolios are constructed
(security selection), discuss ESG risks in investment committees
Active ownership . The purchase of an asset marks the beginning, not the end
of responsibility
More examples of ESG integration :
https ://www .unpri .org/credit -ratings/credit -risk -case -study -colchester -global -
investors -/4028 .article
See attached Word document ESG Integration in practice
## 9Impact Investing
>
Impact investments are investments made with the intention
to generate positive, measurable social and environmental
impact alongside a financial return
>
These investments are typically made across various asset classes ,
including but not limited to :
Cash equivalents
Fixed income
Venture capital, and private equity
Green bonds, social/sustainability bonds, infrastructure private debt
>
The growing impact investment market provides capital to address
the worlds most pressing challenges in sectors such as sustainable
agriculture , renewable energy , conservation , microfinance ,
and affordable and accessible basic services including housing,
healthcare, and education
## 10 Impact Investing
According to Global Impact Investing Network (GIIN), over 3,907
organizations (from 1,340 as of 2018 ) currently manage USD 1.57 tn
in 2024 in impact investing assets worldwide
The practice of impact investing has these core characteristics :
Investors intend to have a social and/or an environmental impact
Investments are expected to generate a financial return on capital
(that ranges from below market to risk -adjusted market rate) and, at a
minimum, a return of capital
Investors are committed to measuring and reporting the social and
environmental impacts
Examples :
https ://www .worldbank .org/en/news/press -release/ 2019 /04 /03 /world -bank -
launches -bonds -to -highlight -the -challenge -of -plastic -waste -in -oceans
https ://www .zurich .com/en/sustainability/responsible -investment/impact -
investment
## 11 Impact Investing
## 12
How do impact investments perform financially? Impact Investing
## 13
Organizational representation and impact AUM by headquarters location Examples of Impact Investing
## 14 Source: World Bank Green Bonds
Green bonds first appeared in 2008 with an issue from the
World Bank(*)
Green bonds are a key tool in efforts to decarbonize the global
economy and are set to see rapid growth
Green Bonds are standard bonds with proceeds going to green
and climate -related assets, projects and activities
Green investing seeks to invest in environmentally conscious companies or
business practices
They can be issued by governments, banks, municipalities or
corporations and can be applied to any debt format, including private
placement, securitization, or covered bond
For example, governments can issue green bonds that generate revenue
for funding conservation of natural resources , development of renewable
energy sources or clean air and water projects
## 15 (*) The European Investment Bank (EIB) and the World Bank pioneered the first green bonds, with EIB issuing
> the Climate Awareness Bond in 2007 and the World Bank issuing its first green bond in 2008.
# Green Bonds
A bond market with cumulative issuance of USD 3.7 trillion by April
2025
There has been an increasing demand from investors , with
oversubscription being the norm
For example, the French sovereign green bond issued in 2017 went initially
to market for EUR 3bn and was upsized to EUR 7bn, after receiving orders in
excess of EUR 20 bn
Particular case : Green City Bonds , a key tool to finance and build
resilient cities :
70 % of global greenhouse gas emissions come from cities
Many of the worlds most populated cities sit on coastlines, rivers and flood
plains, being particularly vulnerable to negative impacts from a changing
climate
## 16 Green Bonds
Green Bond Principles . The International Capital Markets Association
(ICMA) developed a classification framework in 2014 :
Use of proceeds (UOP) : this needs to be adequately defined in the bond
prospectus . To be considered as green the UOP should clearly indicate :
The projects to be financed or refinanced
Why these projects are environmentally beneficial
Their effectiveness in meeting the issuers decarbonization goals
Process for project evaluation . Description of :
The issuers sustainability objectives
The process for determining the eligibility of a project as green
The process for managing environmental and social risks
Management of proceeds : proceeds from green issuance need to be virtually
(but not legally) segregated and linked to the green projects in a credible way
Reporting : the issuer should regularly provide up -to -date information on the
progress of the projects detailed in the UOP
This can be an internally or externally certified process and allows the formal labelling of
an instrument as a green bond
## 17 Sustainable Debt Market (GSS+)
The popularity of green bonds has led to the
development of other sustainable fixed -
income instruments such as blue,
transition, sustainable, and social bonds
Sustainability and social bonds really came
into their own in 2018 , with Sustainable
Development Goals (SDG) bonds emerging
as issuers and investors started adopting
policies and strategies linked to the UNs 17
Sustainable Development Goals
Sustainability -linked bonds (SLBs) have
their financial terms (like the coupon rate)
linked to the issuer's achievement of specific,
pre -defined sustainability targets
For instance, in early 2018 , Dutch bank ING
provided its first Asian sustainability
performance -linked loan to Wilmar International,
a palm oil producer from Singapore
Sustainalytics (an ESG data provider) will track
annually improvements in targets based on ESG
metrics . If the performance milestones are met, the
interest rate for part of the loan will be reduced for the
following year
## 18
Source: Climate Bonds Initiative Mexico Sustainable Debt State of the
# Market Report 2023
Mexico ranks second in Latin American and Caribbeans cumulative
aligned GSS+ market after Chile (USD 57 .4bn) and above Brazil
(USD 29 .7bn), with the three representing almost 70 % of regional
cumulative issued amounts - Climate Bonds Initiative
## 19
Diverse issuer types contribute to Mexicos GSS+ volume
> Source: Climate Bonds Initiative
> Source: Climate Bonds Initiative
# Examples of Green Bonds
## 20 Source: ClimateBonds Examples of Green Bonds
## 21 Source: ClimateBonds Source: ClimateBonds Source: ABN Amro Active Ownership / Stewardship
Active ownership is the use of the rights and position of
ownership to influence the activities or behavior of investee
companies
Active ownership can be applied differently in each asset class . For
listed equities, it includes engagement and voting activities
Active ownership refers to the practice of entering into a
dialogue with companies on ESG issues and exercising both
ownership rights and voice to effect change .
Engagement is often described as purposeful dialogue with a
specific objective in mind ; that purpose often relates to improving
companies business practices, especially in relation to the
management of ESG issues
## 22 Active Ownership / Stewardship
As owners, investors can influence companies to take actions on
ESG issues . This varies in terms of aggressiveness of the approach .
Some investors may use publicized and confrontational measures, whereas
others may prefer a more discreet approach
Note : Activism is typically a specialist form of such engagement and
stewardship, where an investment institution initiates an
investment with the intent of generating investment outperformance
through driving change with respect to a companys governance,
capital allocation, or business practices
Most frequently now associated with activist hedge funds , the activism
mindset appears increasingly short -term and involves extraction
of value rather than the longer -term value creation that is the driver for
most engagement
## 23 Active Ownership / Stewardship
Growing body of evidence that engagement adds value to
portfolios
These studies show that engagement if carried out well, so that it is
focused on material and relevant issues and pursued with
persistence can work
Engaged companies change their behaviors against ESG factors, and this
leads to increased value
Some asset owners will choose to engage with companies directly ,
through team members who act as stewards of the investment
portfolios
Others expect their external fund managers to deliver this work .
Engagement activities can also be entirely outsourced to specialist
stewardship service providers
## 24 Active Ownership / Stewardship
Examples :
Vote in shareholder general meetings
Write a letter to the company
Meet with company representatives
Raise a question at a general meeting of the shareholders
File a shareholder resolution (a proposal to a company's board, asking for a
matter to be voted upon at the company's Annual General Meeting)
Attempt to gain a seat on the board
Call for an extraordinary/special meeting of the shareholders
File a complaint with the regulator/authority
Issue a statement to the news media
Escalation : Many engagement objectives can be managed without
any escalation, and indeed investors may choose to move slower in
an engagement rather than escalate (to maintain positive relations
with a company they wish to remain invested in for many years)
But where escalation is seen as necessary, the investor must consider what
additional steps might be needed to generate the change that is sought
## 25 Examples of Active Ownership
https ://static .aviva .io/content/dam/aviva -
investors/main/assets/about/responsible -
investment/downloads/whitepaper -anti -microbial -resistance -en .pdf
https ://www .unpri .org/social -issues/how -investors -can -promote -
responsible -cobalt -sourcing -practices/ 2975 .article
https ://www .blackrock .com/corporate/about -us/investment -
stewardship#engagement -priorities
https ://www .blackrock .com/corporate/literature/publication/blk -
commentary -engaging -on -palm -oil .pdf
## 26 References (I)
Environmental, Social, and Governance Issues in Investing A Guide
for Investment Professionals . CFA Institute, 2015
Global Investor Study 2016 . What Investors Think About Responsible
Investing Schroders, 2016
ESG : Coming into the mainstream . Aberdeen . April 2017
Mainstreaming Sustainable Investing . CFA Institute Research Foundation,
2018
Guidance and Case Studies for ESG Integration : Equities and Fixed
Income . CFA Institute, 2018
Introduction to Corporate Governance and Other ESG Considerations .
CFA Institute, 2019 . Assem Safieddine , PhD, Young Lee, CFA, Donna F.
Anderson, CFA, and Deborah S. Kidd, CFA
ESG Investing . CFA Institute . CFA Society of the UK
www .unpri .org
www .sriconference .com
www .iso .org
## 27 References (and II)
http ://www .gsi -alliance .org
http ://www .sseinitiative .org
https ://www .climatebonds .net/
https ://www .zurich .com/en/sustainability
https ://www .world -exchanges .org
www .investopedia .com
https ://thegiin .org/
## 28 Annex - The World Bank Green
# Bonds
The World Bank is a key player in the Green Bond Market . Already in
2008 , the World Bank launched its Strategic Framework for Development and
Climate Change and The World Bank Green Bonds . Since 2008 , the World Bank
has now issued more than USD 8 billion equivalent in Green Bonds through over
90 transactions in 18 currencies
Eligible Projects may include projects that target :
Mitigation of climate change including investments in low -carbon and clean
technology programs, such as energy efficiency and renewable energy programs and
projects
Adaptation to climate change , including investments in climate -resilient growth . No
fossil fuel power generation projects are eligible under the green bond framework
Second Opinions : specialists in the area of energy, climate change, transport
and environment identify eligible projects :
As an independent, not -for -profit, research institute, CICERO (Center for
International Climate and Environmental Research - Oslo) provides second
opinions on institutions framework and guidance for assessing and selecting eligible
projects for green bond investments, and assesses the frameworks robustness in meeting
the institutions environmental objectives
Note : 89 % of green bonds issued in 2018 (by amount) received at least one external review . Second
party opinions remain the preferred option . CICERO was the leading provider of external reviews in
2018 , representing 28 % of deals by volume
## 29