The Responsible Investor An Introductory Guide to Responsible Investment

Contents

About the authors

Preface

Acknowledgements

List of abbreviations

Introduction

1. What is Responsible Investment?

1. What is Responsible Investment?

1. Defining Responsible Investment

2. ESG investment philosophies

1. Ethical investing
2. Impact investing as a philosophy
3. Philanthropic investing
4. Responsible investing
5. Combining philosophies

3. An Introduction to Responsible Investment approaches
4. An Introduction to Responsible Investment tools
5. Chapter 1 key Q&As

2. Responsible Investments is mainstream

1. From ethical to responsible

1. The first ethical funds

2. The rise of responsibility

1. Norm-based screening as the first step
2. Active ownership and other emerging approaches
3. Responsible investing developing alongside corporate responsibility

3. Chapter 2 key Q&As

3. Drivers of Responsible Investment

1. Values
2. Financial Return
3. The Operating Environment

1. Culture
2. Market development, economics and finance
3. Institutions and regulation
4. Case: EU sustainable finance regulation
5. Organizations
6. Reputation

4. Chapter 3 key Q&As

4. Becoming a Responsible Investor

1. Strategy and policy document requirements

1. Defining Responsible Investment
2. Aligning a Responsible Investment policy with overall objectives
3. Ownership policy

2. Implementing Responsible Investment
3. Monitoring
4. Reporting
5. Developing a Responsible Investment roadmap

1. Important dimensions of the roadmap
2. Well begun is half done

6. Chapter 4 key Q&As

5. Materiality and megatrends

1. The three-pillar ESG model and the selection of material ESG issues
2. Company-level materiality
3. Sector-level materiality
4. Megatrends

1. Climate change
2. Biodiversity loss
3. Population growth
4. Digitalization

5. Rising trends

1. Animal rights
2. Cannabis
3. Taxation
4. Human rights
5. Modern slavery
6. Diversity, equality and inclusion

6. Chapter 5 key Q&As

6. Responsible Investment approaches

1. Active ownership

1. Engagement
2. Meeting with company executives
3. Proxy voting

2. ESG integration
3. Impact as an approach

1. Elements of impact investing

4. Screening

1. Negative screening
2. Positive screening
3. Tilting

5. Thematic
6. Selecting Responsible Investment approaches
7. Chapter 6 key Q&As

7. Responsible Investment across different asset classes

1. Listed equity

1. Direct equity investments
2. Indirect equity investments
3. Passive equity investments and ESG

2. Listed fixed income

1. Money market
2. Corporate bonds
3. Government bonds
4. The rise of sustainable bonds

3. Real estate

1. Sustainable real estate in practice
2. Indirect real estate investments
3. Green building certifications
4. ESG initiatives and policies
4. Private equity

1. From compliance to value creation
2. Supporting innovation and impact

5. Hedge funds

1. Hedge fund characteristics and their relevance for RI
2. Opportunities for a responsible hedge fund investor

6. Private debt

1. Private debt characteristics and their relevance for RI
2. Impact and thematic investing opportunities
3. Microfinance

7. Infrastructure

1. Closing the infrastructure gap
2. Managing material risks and delivering value

8. Commodity investments

1. Commodity futures
2. Real assets
3. Commodity-linked companies
4. ESG considerations in commodity sectors

9. Chapter 7 key Q&As

8. ESG data

1. Where does the ESG data come from?

1. Corporate responsibility reporting frameworks as a source of ESG data

2. The characteristics of sustainability data reported by companies
3. ESG information on companies from sources other than the company
4. A hierarchy of ESG data

1. Context
2. Policy, strategy and outcome indicators

5. Chapter 8 key Q&As

9. ESG ratings

1. Factor thinking in ESG analysis
2. Anatomy of an ESG rating or ESG score

1. What do ESG ratings measure?
2. What ESG issues to include in an ESG rating
3. Defining the relative importance of the ESG issues included
4. Establishing the list of indicators and weights for each ESG issue
5. All indicators and issues are rated and combined into the final ESG rating

3. Characteristics of ESG indicators
4. Characteristics of ESG ratings
5. Commercial players in ESG ratings and the data sector
6. Chapter 9 key Q&As

10. Assessing the responsibility of asset managers and funds

1. Evaluating asset managers’ corporate responsibility
2. Evaluating asset managers' Responsible Investment activities
3. Evaluating the responsibility of a particular investment fund

1. RI fund labels
2. ESG ratings-based analysis for funds
3. ESG factor-based analysis for funds

4. Chapter 10 key Q&As

11. Responsible Investment reporting

1. Who is responsible for Responsible Investment reporting?
2. How to report on Responsible Investment?

1. Principles for Responsible Investment
2. Sustainability Accounting Standards Board
3. Task Force on Climate-related Financial Disclosures

3. What gets reported?

1. Description of the general approach
2. Portfolio-level information
3. Practical examples of Responsible Investment activities

4. Chapter 11 key Q&As

Epilogue

Appendix

Index

Biography

Anna Hyrske is the Principal Responsible Investment Specialist at The Bank of Finland. She has over 20 years of finance industry experience as a credit analyst, portfolio manager, ESG specialist and Head of Asian Operations (Hong Kong). Before the Finnish central bank she worked at Ilmarinen, a multi-asset pension insurance company.

Magdalena Lönnroth is the Head of Responsible Investment at the Church Pension Fund. Magdalena has been involved in developing Responsible Investment strategies and practices across a broad range of asset classes since 2006. She was a Founder of Finsif, Finland’s Sustainable Investment Forum, in 2010.

Antti Savilaakso is Head of Research at Impact Cubed in London. He has worked with Responsible Investments in the asset management and advisory industry for over 15 years and has been active in different advisory tasks internationally. Antti was a Board Member of Finsif during 2011–2015 and has been an Investor Member of the GRI stakeholder council since 2014.

Riikka Sievänen, PhD, leads Sustainable Finance services at KPMG in Finland since 2013. She has led KPMG’s Global Sustainable Finance Working Group and advised the European Commission’s Technical Expert Group (EU TEG) on sustainable finance. Riikka pursues post-doctoral studies at the University of Helsinki, has been on the board of Finsif and Finsif’s Representative in Sitra’s National Steering Group for Impact Investments.

"The book takes a simple and pragmatic approach in guiding readers from the basics through the advanced stages of the Responsible Investment process. The authors share their first-hand experience to clearly and concisely connect theory with practice in areas such as ESG-customized scoring and multi-asset sustainable allocation."

Enrico Bernardini, Director, Climate change and Sustainability hub, Banca d’Italia [Disclaimer: The view expressed is that of the writer and does not involve the responsibility of the institution to which he belongs]

"The book is a good introductory outline for investors seeking to understand the background to Responsible Investment, what it is, how it has evolved and where it might be heading, as well as the challenges ahead. It’s also a good refresher and mind map for those already in the field. The authors are all highly experienced practitioners."

Hugh Wheelan, Financial Journalist and Co-Founder of Responsible Investor

"The role of global finance has never been so important. Whether it is meeting the aims of the Paris Agreement, achieving the Sustainable Development Goals (SDGs) or investing in climate change mitigation and adaptation strategies, managing geo-political risks and changing social norm are all issues that investors must consider, and responsible investors know that using an ESG framework is the best way to manage both risks and seize opportunities. This book provides a comprehensive and detailed analysis on what Responsible Investment actually is and the strategies that are used by investors to ensure that they can operate in a fast moving and evolving space. A must read for everyone wanting to understand Responsible Investment – its history, strategies, and future direction."

Fiona Reynolds, CEO, Conexus Financial

"This book is like a driving license for modern and responsible investing, and not simply aimed at the specialists. Corporations wanting to understand the financial industry’s large institutions should look no further."

Pasi Väisänen, Director at Nordea Bank

"The explosion of interest in Responsible Investment has resulted in numerous questions around how best to define it, which data sources to utilise or how to report on its effectiveness. This book should become the starting point for those questions and many more. Anna Hyrske, Magdalena Lönnroth, Antti Savilaakso and Riikka Sievänen have written on the topic in a thoughtful way that will be required reading for anyone interested in understanding how to develop and implement an ESG strategy in today’s market environment. I highly recommend this book for laymen and practitioners alike!"

Matt Christensen, Global Head of Sustainable and Impact Investing, Allianz Global Investors

"This is a timely and practical contribution to the literature on Responsible Investment. It provides a comprehensive overview of key principles, trends and organizational considerations for Responsible Investment in practice. It is a valuable resource for both experienced Responsible Investment professionals, and those at the beginning of their Responsible Investment journey."

Roslyn Stein, Head of Climate and Biodiversity, AXA

"This book provides practical definitions about responsible investing and details how this can be implemented. It informs finance professionals with a keen interest in environmental, social and governance issues why to engage with responsibility in connection with financial performance."

Bert Scholtens, Professor, University of Groningen

"Investing with an ESG focus is central to long term value creation. This timely guide is essential reading for anyone looking to build a responsible investing practice and maximize long-term portfolio impact and return."

Charles Wetherill, Former Head of Origin, Sunfunder　

"Regardless of what you want to achieve with Responsible Investments, this book will provide practical guidance for investors navigating the current Responsible Investment landscape. Based on insights from some of the most experienced Responsible Investments professionals in the Nordics."

Magdalena Håkansson, Head of Sustainable Value Creation, AP 1

"This book brings you up to speed on the subject of Responsible Investments. It provides a full overview of approaches and tools available in the market, and is both inspiring and practical when developing your own Responsible Investment strategy."

Heidi Finskas, Vice President Corporate Responsibility, Kommunal Landspensjonskasse (KLP)

"Very helpful, well and clear written guide in explaining the Responsible Investments!! Different people and organizations have different definitions of Responsible Investments that confuse people sometimes, but this book is able to use plain language to address the concerns and key considerations in mainstreams which is comprehensive and easy to follow…"

Sau Kwan, President, E Fund

"The authors have given the investment profession an exceptionally practical, business-like, yet inspirational and thought-provoking tool to better understand responsible investing and ESG. A must read for everyone in this industry."

Zsombor Incze, Head of Business Development, Diófa Asset Management

"As Responsible Investment labels, approaches and debates proliferate, this guide provides important market, regulatory and historical context for new and old practitioners alike. Recommended for anyone trying to navigate the flood of diverse and often conflicting ESG analysis and punditry."

Stuart Palmer, Head of Ethics Research, Australian Ethical

"Responsible investment is not just a megatrend, it is becoming mainstream as these aspects cannot be ignored by any investor anymore. This book also looks at several new angles of the theme, including fixed income and, importantly, governments’ ESG issues."

Eila Kreivi, EIB Chief Sustainable Finance Advisor, European Investment Bank