Testing For Systematic Esg Fund Construction And Independence Measures

There has been significant research concerning the investment case for Environmental, Social and Governance Funds (ESG), however research into how these funds are constructed has been less studied. The purpose of this study is not to investigate the risk return case for ESG funds. Instead, this study will focus on the uniqueness of construction, and underlying assets of ESG specific funds. The majority of ESG classified investing is done through fund firms who self willingly vet their existing funds to ESG guidelines. It is more elocutionary, rather than a focused construction methodology. The hypothesis of this study is that funds created specifically for ESG investing are built on this same methodology, and are adapted from an existing fund very similar to the S&P 500. To test for uniqueness, large cap US equity ESG funds were compared against how many of the underlying assets were shared with the S&P 500. Signals found heavy overlap. However when looking at how the underlying assets are weighted in the fund verse the S&P 500, differences become more pronounced. Interestingly in the aggregate, the portion of the ESG funds dedicated to stocks that are not included in the S&P 500 were not that significant. There are several funds that are constructed with very different underlying assets than the S&P 500 Index, and funds that are very similar. This study then investigated how much of the underlying assets of each fund differed from the S&P 500 by adjusting the weights of just the underlying assets which it shares with each fund to measure the effect of dilution from the removed "non-ESG" compliant stocks. The resulting increase in overlap was significant for several individual funds, but modest for all funds. Then this study sampled to find if there is more overlap with different common index funds. Interestingly, there was often a higher overlap with the S&P 500 than with a fund's stated benchmark such as the Russell 1000 or Russell 1000 Value Index. Finally this study looked for correlations between the 3 month, 1 year, 3 year and Morningstar ESG peer performance percentiles. Modest correlations were found slightly favoring funds which were more similar to the S&P 500. Then correlations between each fund's management fee and similarity in the underlying assets were tested. There is evidence that the more unique the fund is, the higher the management fee. However, there is no evidence of correlation between the fund's management fee and the fund's Morningstar ESG score. The take away from this study is that some funds are very similar to index funds, like the S&P 500, while other funds have very little in common with standard index funds. There was significant overlap in the underlying assets and the S&P 500, however there was also significant differences in how the underlying assets were weighted. There was not a one to one exchange with a non-ESG compliant underlying asset with another asset with similar characteristic but was ESG compliant.

This survey examines the vibrant academic literature on environmental, social, and governance (ESG) investing. While there is no consensus on the exact list of ESG issues, responsible investors increasingly assess stocks in their portfolios based on nonfinancial data on environmental impact (e.g., carbon emissions), social impact (e.g., employee satisfaction), and governance attributes (e.g., board structure). The objective is to reduce exposure to investments that pose greater ESG risks or to influence companies to become more sustainable. One active area of research at present involves assessing portfolio risk exposure to climate change. This literature review focuses on institutional investors, which have grown in importance such that they have now become the largest holders of shares in public companies globally. Historically, institutional investors tended to concentrate their ESG efforts mostly on corporate governance (the “G” in ESG). These efforts included seeking to eliminate provisions that restrict shareholder rights and enhance managerial power, such as staggered boards, supermajority rules, golden parachutes, and poison pills. Highlights from this section: · There is no consensus on the exact list of ESG issues and their materiality. · The ESG issue that gets the most attention from institutional investors is climate change, in particular their portfolio companies’ exposure to carbon risk and “stranded assets.” · Investors should be positioning themselves for increased regulation, with the regulatory agenda being more ambitious in the European Union than in the United States. Readers might come away from this survey skeptical about the potential for ESG investing to affect positive change. I prefer to characterize the current state of the literature as having a “healthy dose of skepticism,” with much more remaining to be explored. Here, I hope the reader comes away with a call to action. For the industry practitioner, I believe that the investment industry should strive to achieve positive societal goals. CFA Institute provides an exemplary case in its Future of Finance series (www.cfainstitute.org/research/future-finance). For the academic community, I suggest we ramp up research aimed at tackling some of the open questions around the pressing societal goals of ESG investing. I am optimistic that practitioners and academics will identify meaningful ways to better harness the power of global financial markets for addressing the pressing ESG issues facing our society.

In this exciting volume, a diverse and accomplished group of scholars work to integrate theories of institutions with strategic management. The research they present examines a wide range of industrial contexts, ranging from American retailing at the end of the nineteenth century, to German tax law at the beginning of the twenty-first.

Environmental, Social, and Governance (ESG) Investing: A Balanced Analysis of the Theory and Practice of a Sustainable Portfolio presents a balanced, thorough analysis of ESG factors as they are incorporated into the investment process. An estimated 25% of all new investments are in ESG funds, with a global total of $23 trillion and the U.S. accounting for almost $9 trillion. Many advocate the sustainability goals promoted by ESG, while others prefer to maximize returns and spend their earnings on social causes. The core problem facing those who want to promote sustainability goals is to define sustainability investing and measure its returns. This book examines theories and their practical implications, illuminating issues that other books leave in the shadows. Provides a dispassionate examination of ESG investing Presents the historical arguments for maximizing returns and competing theories to support an ESG approach Reviews case studies of empirical evidence about relative returns of both traditional and ESG investment approaches

Combining theory, empirical data, and policy this book provides a fresh analysis of sustainable finance. It explains the sustainability challenges for corporate investment and shows how finance can steer funding to certain companies and projects without sacrificing return, speeding up the transistion to a sustainable economy.

Moving Beyond Modern Portfolio Theory: Investing That Matters tells the story of how Modern Portfolio Theory (MPT) revolutionized the investing world and the real economy, but is now showing its age. MPT has no mechanism to understand its impacts on the environmental, social and financial systems, nor any tools for investors to mitigate the havoc that systemic risks can wreck on their portfolios. It’s time for MPT to evolve. The authors propose a new imperative to improve finance’s ability to fulfil its twin main purposes: providing adequate returns to individuals and directing capital to where it is needed in the economy. They show how some of the largest investors in the world focus not on picking stocks, but on mitigating systemic risks, such as climate change and a lack of gender diversity, so as to improve the risk/return of the market as a whole, despite current theory saying that should be impossible. "Moving beyond MPT" recognizes the complex relations between investing and the systems on which capital markets rely, "Investing that matters" embraces MPT’s focus on diversification and risk adjusted return, but understands them in the context of the real economy and the total return needs of investors. Whether an investor, an MBA student, a Finance Professor or a sustainability professional, Moving Beyond Modern Portfolio Theory: Investing That Matters is thought-provoking and relevant. Its bold critique shows how the real world already is moving beyond investing orthodoxy.

This book tells the story of how the convergence between corporate sustainability and sustainable investing is now becoming a major force driving systemic market changes. The idea and practice of corporate sustainability is no longer a niche movement. Investors are increasingly paying attention to sustainability factors in their analysis and decision-making, thus reinforcing market transformation. In this book, high-level practitioners and academic thought leaders, including contributions from John Ruggie, Fiona Reynolds, Johan Rockström, and Paul Polman, explain the forces behind these developments. The contributors highlight (a) that systemic market change is influenced by various contextual factors that impact how sustainable investing is perceived and practiced; (b) that the integration of ESG factors in investment decisions is impacting markets on a large scale and hence changes practices of major market players (e.g. pension funds); and (c) that technology and the increasing datafication of sustainability act as further accelerators of such change. The book goes beyond standard economic theory approaches to sustainable investing and emphasizes that capitalism founded on more real-world (complex) economics and cooperation can strengthen ESG integration. Aimed at both investment professionals and academics, this book gives the reader access to more practitioner-relevant information and it also discusses implementation issues. The reader will gain insights into how "mainstream" financial actors relate to sustainable investing.

The GHG Protocol Corporate Accounting and Reporting Standard helps companies and other organizations to identify, calculate, and report GHG emissions. It is designed to set the standard for accurate, complete, consistent, relevant and transparent accounting and reporting of GHG emissions.

The Global Outlook on Financing for Sustainable Development 2021 calls for collective action to address both the short-term collapse in resources of developing countries as well as long-term strategies to build back better following the outbreak of the COVID-19 pandemic.