Chapter 1

Introduction to ESG
CFA Certificate in ESG
Investing
Agenda
Chapter 1: Introduction to ESG
1. What is responsible investment?
2. Types of responsible investment.
3. Why integrate ESG?
4. Putting ESG into practice.
5. Key initiatives.
Introduction to ESG
What is responsible investment?
Sample Exam Question 1
Which of the following does not represent an example of a social factor?

A. Modern slavery.

B. Working conditions.

C. Pollution and resources.

D. Labour rights.

Knowledge | Skills | Conduct

What is Responsible Investment?
ESG investing represents an approach to managing assets where investors explicitly
acknowledge the relevance of the following factors in their investment decisions:
• Environmental
- Factors that relate to the natural world
- Examples: climate change, pollution, deforestation
• Social
- Factors that affect the lives of humans where categories include management of human resources,
local communities and clients
- Examples: human rights, modern slavery, child labour
• Governance
- Factors that involve issues inherent to the business model or common practice in an industry
- It also considers the interest of wider stakeholder groups
- Examples: bribery and corruption, executive pay, board diversity and structure

Investors will also consider their own role as owners and creditors, with the long-term return
of an investment portfolio in mind.

Knowledge | Skills | Conduct

Definition and Scope of ESG
There is no standard across the industry on breaking down environmental, social
and governance issues. Examples of the definition and scope of ESG issue can
be shown from two widely-referenced organisations:

Knowledge | Skills | Conduct

Corporate Social Responsibility
Corporate social responsibility (CSR) is a wide business concept that
describes a company’s commitment to conducting business in an ethical way.

This has led to the concept of triple-bottom line accounting which expands the
traditional accounting framework that is focused on profit to include two other
performance areas: social and environmental impacts of the company.

These three bottom lines are often referred to as the three P’s:
• People
• Planet
• Profit

In practice, they have been replaced in industry with a broader framework of

sustainability that’s is not just limited to accounting

Knowledge | Skills | Conduct

Introduction to ESG
Types of responsible investment
Sample Exam Question 2
Which of the following is not a form of ESG investment?

A. Sustainable Investment.

B. Green Investment.

C. Thematic Investment.

D. Value investment.

Knowledge | Skills | Conduct

A Spectrum of Capital
Sustainable
Conventional
and
Philanthropy Social impact investing financial
responsible
investing
investing

Fully
Traditional Venture Social Impact ESG
commercial
philanthropy philanthropy invesing investment investing
investment

Investment Enhance
with focus on Investment long-term
Address Address
social and/or with an intent value by
societal societal Limited or no
environmental to have a using ESG
challenges challenges regard for
Focus outcomes and measurable factors to
through the with venture ESG
some environmental mitigate risks
provisions of investment practices
expected and/or social and identify
grants approaches
financial return growth
return opportunities
Use of ESG metrics and methodologies

Social return Financial

Social return Financial
Return and sub- market return
Social return Social return and adequate market return
market focused on
expectation only focused financial
financial long-term only
market rate
return value

Knowledge | Skills | Conduct

Investment Types
Responsible Investment
• Represents a strategy and practice that incorporates ESG factors into
investment decisions and active ownership.
• It will consider how ESG might influence:
- The risk-adjusted return of an asset and stability of an economy, and
- How investment in, and engagement with, assets and investees can impact society
and environment

Knowledge | Skills | Conduct

Investment Types
Socially Responsible Investment (SRI)
• An approach that applies social and environmental criteria when evaluating
companies.
• SRI investors generally score companies using a chosen set of criteria, using
sector specific weightings. A hurdle is then set for inclusion within the
investment universe. This serves as a first screen to identify a list of ESG
qualified companies.
• SRI can be used in combination with:
- Best-in-class investment
- Thematic funds
- High-conviction funds
- Quantitative investment strategies

Source: Compounding Snowballs Blog

Knowledge | Skills | Conduct

Investment Types
Best-in-class Investment
• Involves choosing only the companies that overcome a defined ranking hurdle.
• The ranking hurdle is created using ESG criteria within each sector or industry,
where the factors are weighted according to the sector.
• The portfolio can then be created from the list of qualified companies
• Due to the all-sector approach, it is commonly used in investment strategies
that attempt to maintain certain characteristics of an index e.g. regional or
sectoral diversification, whilst also targeting companies with a higher ESG
rating e.g. MSCI World SRI

Source: Ossiam

Knowledge | Skills | Conduct

Investment Types
Sustainable Investment
• Selection of assets that contributes to a sustainable economy e.g. an asset that
mitigates natural and social resource depletion
• May include best-in-class and also that of ESG integration, which considers
how ESG issue impact an assets risk and return profile.
• Can be used to describe companies with positive impact or companies that will
benefit from sustainable macro-trends.
• Can also be used to screen out activities considered contrary to long-term
environmental and social sustainability e.g. oil exploration in Arctic regions.

Source: CFA
Society, Boston

Knowledge | Skills | Conduct

Investment Types
Thematic Investment
• Selection of companies that sit under a sustainability-related theme e.g. clean-
tech, sustainable agriculture
• Thematic funds will choose companies within various sectors that are relevant
to a theme
• Note, not all thematic funds are considered ‘responsible investments’. This will
depend on the theme of the fund, and also the ESG characteristics of the
investee companies.

Source: Journal
of Portfolio
Management

Knowledge | Skills | Conduct

Investment Types
Green Investment
• Investment into assets that mitigate:
- Climate change
- Resource inefficiency
- Biodiversity loss
- Other environmental challenges

• Some examples include; pollution control, recycling, process innovation and

energy efficiency.
• Can be considered a broad sub-category of thematic investing and/or impact
investing.
• Green bonds are commonly used in this strategy where proceeds of the bond
issue are used to raise money for environmental projects (more detail in can be
found in Chapter 3)

Knowledge | Skills | Conduct

Investment Types
Social Investment
• Investing into assets that address social challenges.
• Could be products that address the bottom of the pyramid (BOP), which
represents the poorest two-thirds of the economic human pyramid.
• BOP has a market-based model to alleviate poverty whilst providing growth and
profits for businesses that serve these communities. Examples include:
- Micro-finance and micro-insurance
- Access to basic telecommunication
- Access to improved nutrition and healthcare
- Access to (clean) energy

• Social impact bonds represent a mechanism to contract with the public sector
which pays for enhanced social outcomes and passes on part of the savings
achieved to the investors.

Knowledge | Skills | Conduct

Investment Types
Impact Investment
• Investing into assets with the specific intent of generating positive, measurable
social and environmental impact in conjunction with a financial return (which
differentiates it from philanthropy).
• Usually associated with direct investments, such private equity, private debt
and real estate.
• Provides capital to address the world’s most pressing challenges by investing in
projects and companies that:
- Offer access to basic services such as housing,
healthcare and education
- Promote availability to low-carbon energy
- Support minority-owned businesses
- Conserve natural resources
Source: CNote

• Impact investors have diverse financial return expectations.

Knowledge | Skills | Conduct
Investment Types
Ethical (Value-driven) and Faith-based Investment
• Investing in line with certain principles, usually using negative screening:
- Catholic investors seeking to avoid investing into companies that are involved in the
production and sales of weapons
- Shariah investors looking to follow Islamic religious principles e.g. seeking to avoid
investments that pay interest

• The process typically avoids investing into companies whose products and
services are deemed morally objectionable by the investor or certain religions,
international declarations, conventions and voluntary agreements:
• Typical exclusions include tobacco, alcohol, pornography, weapons, nuclear
power and breach of agreements e.g. Universal Declaration of Human Rights
• Faith-based investors have a history of shareholder activism to improve the
conduct of the investee companies

Knowledge | Skills | Conduct

Investment Types
Shareholder Engagement
• Active ownership by investors whereby the investor seeks to influence a
corporation’s decisions on matters of ESG
• Could be via dialogue with the corporate officers or through voting powers
• Complementary to the previously mentioned approaches to responsible
investment
• Its effectiveness will usually depend upon the:
- Scale of ownership as an individual or collective (concert party);
- Quality of the engagement dialogue and method used; and
- Whether divestment is identified as a possible sanction.

(Further detail on engagement will be covered in Chapter 6)

Knowledge | Skills | Conduct

Introduction to ESG
Why integrate ESG?
Sample Exam Question 3
A report by McKinsey and Company (2017) identified that while, until
recently, 97% of the Fortune Global 500 were headquartered in developed
economies, nearly half of the world’s large companies are expected to be
headquartered in emerging markets by 2025. Which megatrend does this
relate to?

A. Emerging and urban.

B. Technological disruption.

C. Demographic changes and wealth inequality.

D. Climate change and resource scarcity.

Knowledge | Skills | Conduct

Why Integrate ESG?
1. Financial Materiality
A. Reduced cost and increased efficiency
B. Reduced risk of fines
C. Reduced externalities
D. Improved adaptability to sustainability megatrends

2. Financial Performance
3. Fiduciary Duty
4. Economics
5. Impact and Ethics
6. Client Demand
7. Regulation
We will now go on to look at these in greater detail…

Knowledge | Skills | Conduct

Financial Materiality
A. Efficiency and Productivity
• Sustainable business practices build efficiencies by conserving resources,
reducing costs and enhancing productivity.
• A solid ESG proposition can help companies attract and retain quality
employees, this enhances employee motivation and overall productivity.
• Research has identified that employee satisfaction is positively correlated with
shareholder returns.
B. Reduced Risk of Fines and State Intervention
• State and federal government agencies are enacting regulations to protect the
environment.
• Integrating sustainability into a company will position it to meet changing
regulations in a timely manner.

Knowledge | Skills | Conduct

Financial Materiality
C. Reduced Negative Externalities
• Externalities relates to situations where the production or consumption of
goods and services creates costs (negative externality) or benefits (positive
externality) to others that are not reflected in the prices charged for those goods
or services.
• With negative externalities:
Private costs < Societal costs
Creates market outcomes that are inefficient
and essentially leads to ‘Market Failures’

• Externalities are the main reasons governments intervene e.g. by taxing

polluters an amount equal to the cost of the harm incurred by others.
• As environmental and social regulation and taxation rise, it is expected that an
increasing proportion of this cost might be recorded within companies’ accounts
(a process called internalisation).
Knowledge | Skills | Conduct
Financial Materiality
C. Reduced Negative Externalities – continued.
• Internalisation can happen in many different ways, for example in the
transportation industry:
- Market-based instruments e.g. charges, taxes and tradable permits
- Regulatory instruments e.g. vehicle emission and safety standards, traffic
restrictions
- Voluntary instruments e.g. agreements with the car industry to reduce CO2
emissions from new passenger cars

• The internalisation of these externalities could significantly impact the costs and
profits of companies’ products and services, affecting their bottom line, and
subsequently valuation.
• Also, the uncertainty surrounding the timing and extent of internalisation is a
key component of the overall risk landscape facing investors.

Knowledge | Skills | Conduct

Financial Materiality
D. Sustainability Megatrends
• Key players such as business leaders, investors, economists and governments
are increasingly recognising the economic implications of:
- Social challenges
- Environmental issues

• Whereby these factors have interacted with:

- The aftermath of the financial crisis
- Ageing populations
- The rise of emerging countries
- Rapid advancement in technology

• This interaction increases the complexity and impact that environmental and
social challenges have on sectors and businesses.
• Some widely identified megatrends are highlighted on the next slide.

Knowledge | Skills | Conduct

Financial Materiality
D. Sustainability Megatrends – continued
• Four widely recognized megatrends include:
- Emerging markets and urbanisation
• While, until recently, 97% of the Fortune Global 500 were headquartered in developed
economies, nearly half of the world’s large companies are expected to be headquartered in
emerging markets by 2025
• Nearly half of global gross domestic product (GDP) growth between 2010 and 2025 will come
from 440 cities in emerging markets – 95% of them small- and medium-size cities
• This will impact the supply chain, workforce, expectation of the local community as well as
where new consumers come from
- Technological innovation
• Accelerated adoption of technology attracts accelerated innovation
• Unemployment created as robots replace humans
- Demographic changes and wealth inequality
• A rising and ageing population is straining a shrinking workforce which could hinder economic
growth
- Climate change and resource scarcity

Knowledge | Skills | Conduct

Financial Materiality
D. Sustainability Megatrends – continued
• The risks that these megatrends pose on companies will give a better
understanding their potential future success or failure.
• However, one of the key challenges of incorporating ESG in the investment
process lies with time horizons:
- It is difficult to predict the value of future losses (or gains)
- It is difficult to forecast when the losses (or gains) might occur
- Fund managers’ performance is commonly assessed using shorter time horizons, as
opposed to the longer ones over which ESG factors might have a material impact.

• Identifying the issues which are genuinely material to a sector and company is
one of the most active challenges within ESG investment.

Knowledge | Skills | Conduct

Challenges to Integrating ESG
• Challenges to taking a more proactive approach to ESG investing is present
across the entire investment decision process.
- Before wanting to implement ESG
• The view that implementing ESG will have a negative impact on performance
• The view that fiduciary duty prevents integrating ESG
• Advice given by consultants and advisers, at times, has not been supportive of product that
integrate ESG
- Once the decision to implement ESG has been made
• The lack of understanding of how to create a mandate that effectively promotes ESG
• The view that it will take significant resources are required
• The gap between marketing, commitment and delivery of funds regarding the ESG
performance

• Some institutional investors feel that ‘Tilting’ the portfolio towards desired ESG
characteristics conflicts with their obligation to invest prudently.
- Straying from established market benchmarks will lead to increased tracking error.

Knowledge | Skills | Conduct

Challenges to Integrating ESG
• Many investors are unsure of how to integrate ESG within request for proposals
or mandates.
• Some investor-led initiatives hope to address the issue.
- The International Corporate Governance Network (IGCN) have created the Model
Mandate Initiative.
- The University of Cambridge Institute for Sustainability Leadership have created a
toolkit for creating long-term sustainable mandates.
- The PRI has published many guidance documents to support asset owners.

Knowledge | Skills | Conduct

Challenges to Integrating ESG
• The challenge of resource is a big factor for asset owners with funding
constraints.
• Even when resource is available issues arise when trying to incorporate into
typical financial models.
- Data availability
• Disclosure is still a significant challenge
• Also limited by investors’ understanding of the data and what is deemed material
- Modelling
• ESG factors are mostly long-term financial impacts making it hard to factor into models
• Quantifying the impact of ESG factors is also a challenge
- Valuation techniques
• How to adjust the discount rate in a model in order to consider ESG risks

• As a result, ESG analysis is often qualitative in nature and used alongside

traditional quantitative models.

Knowledge | Skills | Conduct

Challenges to Integrating ESG
• ‘Greenwashing’ is a growing challenge to the industry.
• Greenwashing originally described misleading claims about environmental
practices, performance or product.
• In recent times, it has been used more widely to incorporate ESG factors more
broadly.
• Recently, the EU has created various initiatives to standardise claims around
the green and ESG credential of funds and indices, which will contribute to a
clampdown on greenwashing.

Knowledge | Skills | Conduct

Financial Performance
• Growing recognition in the financial industry an academia that ESG factors
influence financial performance.
• Also, engaging with companies on ESG issues can create value for both
investors and companies.
• Evidence suggests that sustainable companies deliver higher positive financial
performance.
• However, this correlation does not hold for fund performance, suggesting the
inability to translate ESG analysis in alpha.

Knowledge | Skills | Conduct

Fiduciary Duty
• Financial institutions or individuals, known as fiduciaries, manage money or
other assets on behalf of beneficiaries and investors.
• Fiduciary duties exist to ensure that those who manage other people’s money
act in their beneficiaries' interests, rather than serving their own.
• Historically, investors have used the concept of fiduciary duty as a reason not
to incorporate ESG issues. This is due to the misconception that ESG factors
are not financially material.
• More recent reports such as the Freshfields Report (commissioned by the
United Nations Environment Programme Finance Initiative (UNEP FI)) have
concluded:
“Integrating ESG considerations into an investment analysis so as to more reliably predict
financial performance is clearly permissible and is arguably required in all jurisdictions.”

(Further detail on fiduciary duty is covered in Chapter 2)

Knowledge | Skills | Conduct

Economics
• Implementing ESG arises from the recognition that negative megatrends will,
over time, create a pull on economic prosperity as inputs become more scarce
and expensive.
• Also, the prevalence of health and income inequality increases instability
geographically within countries and around the world.
• The Financial Stability Board (FSB) is an international body that monitors and
makes recommendations about the global financial system.
• The FSB has identified climate change as a potential systemic risk

Knowledge | Skills | Conduct

Economics
The Stockholm Resilience Centre
identified 9 planetary boundaries. If we
cross these boundaries, we threaten
our ability to thrive and develop.

In 2015, the SRC assessment

concluded that 5 of these boundaries
had been crossed.

Climate change and biosphere integrity

are ‘core boundaries’ which if crossed
would ‘drive the Earth System into a
new state’

Knowledge | Skills | Conduct

Impact and Ethics
• Another reason for responsible investing comes from a belief by some investors
that their investment can, or even should, serve society alongside providing a
financial return.
• This translates into choosing investments with a positive impact and/or ignoring
those with a negative impact
Client Demand
• Clients and pension fund beneficiaries are increasingly calling for greater
transparency on how their money gets invested due to several factors:
- Growing awareness of that ESG factors influence company value, returns and
reputation
- Increasing focus on the environmental and social impacts of the companies that they
are invested into
(Further detail on demand and supply of RI is covered in Chapter 2)

Knowledge | Skills | Conduct

Regulation
• Irrespective of investors views or beliefs, some investors are being required to
increasingly consider ESG matters.
• A particular surge in policy intervention since the 2008 credit crisis.
• Regulatory change has also been driven by the realisation that financial sector
can play a key role in meeting global challenges such as climate change

(Further detail on impact of regulation on demand for RI is covered in Chapter 2)

Knowledge | Skills | Conduct

Introduction to ESG
Putting ESG into practice
Sample Exam Question 4
Which one of the following is not typically a way that institutional investors
typically reflect ESG considerations?

A. Investment decision-making.

B. Shareholder engagement.

C. Policy engagement.

D. Externality engagement.

Knowledge | Skills | Conduct

United Nations Initiatives
Institutional investors typically reflect ESG considerations in three ways:
1. Incorporating ESG factors into investment decision-making
2. Through corporate engagement; and
3. Through policy engagement.

• Investment Decisions
- ESG factors can be incorporated into investment decision-making throughout the
investment value chain:
• Asset owners requesting ESG factors in their request for proposal and integrating them into
investment mandates and in the monitoring process
• Asset owners and some asset managers can embed ESG into strategic asset allocation
(SAA)
• Asset managers and asset owners who invest directly can incorporate ESG issues within their
security selection process

(Further detail on this process is covered in Chapters 7 and 8)

Knowledge | Skills | Conduct

Putting ESG into Practice
• Shareholder Engagement
- Investors can encourage investees to improve their ESG practice.
- This could happen via a company meeting through voting powers or direct with the
company’s board or management team.

• Policy Engagement
- Policy engagement by institutional investors is a natural extension of an investor’s
responsibility and fiduciary duty to act in the best interests of its beneficiaries.
- Investors can work alongside regulators, standard setters and other parties (e.g.
consultants, stock exchanges, etc.) to create a financial system that:
• Sound and stable
• Creates a level playing field
• Brings ESG more effectively into financial decision-making
- This can be achieved if investors respond to policy consultations, participate in
initiatives and make recommendations to policy makers.
(Further detail on the above processes is covered in Chapter 6)

Knowledge | Skills | Conduct

Introduction to ESG
Key Initiatives
Sample Exam Question 5
Which one of the following is not one of the requirements implemented by
the Principles of Responsible Investment (PRI) in 2018?

A. Investment policy that covers the firm’s responsible investment (RI) approach,
covering >50% of assets under management (AUM).

B. Internal or external staff being responsible for implementing RI policy.

C. Senior-level commitment and accountability mechanisms for RI

implementation.

D. Facilitate knowledge exchange

Knowledge | Skills | Conduct

United Nations Initiatives
• The United Nations (UN) has played a critical role in the advancement of
sustainability and specifically responsible investment in the past 30 years.
• Three of its initiatives are of particular interest to investors:
- United Nations Global Compact (UNGC)
- United Nations Environment Programme Finance Initiative (UNEP FI)
- United Nations Framework Convention on Climate Change (UNFCCC)

Knowledge | Skills | Conduct

United Nations Global Compact (UNGC)
• Launched in 2000 as a collaboration between leading companies and the UN
• Claims to be the largest corporate sustainability initiative in the world
• Over 8,000 corporate signatories spanning the globe
• Agree to adhere to 10 principles derived from broader global standards such
as:
- Universal Declaration of Human Rights
- International Labour Organization’s Declaration on Fundamental Principles and
Rights at Work.

• Provides investors with a useful set of principles to assess and engage with
companies, as well as directly aided companies in becoming more sustainable.

Knowledge | Skills | Conduct

United Nations Environment Programme Finance
Initiative (UNEP FI)
• Partnership between UNEP and the global financial sector to mobilise private
sector finance for sustainable development.
• Started in 1992 and today works with 300 members – banks, insurers and
investors.
• Established UNEP FI frameworks include:
- Principles for Responsible Investment (PRI), established in 2006 by UNEP FI and
the UN Global Compact, now applied by half the world’s institutional investors
(US$83tn).
- Principles for Sustainable Insurance (PSI), established in 2012 by UNEP FI and
today applied by one-quarter of the world’s insurers (25% of world premium).
- Principles for Responsible Banking (PRB) launched with more than 130 banks
collectively holding USD47tn (GBP37tn) in assets, or one-third of the global banking
sector, on 22 September 2019.

Knowledge | Skills | Conduct

United Nations Environment Programme Finance
Initiative (UNEP FI)
Principles for Responsible Investment (PRI)
• Comprises an international network of investors – signatories,
• A common goal to understand the implications of ESG to investment and
ownership decisions and ownership practices
• The PRI provide support in four main areas:
1. Broad range of tools and reports on best practice
2. Hosts a collaborative engagement platform
3. Reviews, analyses and responds to responsible investment-related policies and
consultations
4. The PRI Academy develops, aggregates and disseminates academic studies on
responsible investment-related themes

Knowledge | Skills | Conduct

United Nations Environment Programme Finance
Initiative (UNEP FI)
The six voluntary PRI Principles
We will:
1. Incorporate ESG issues into investment analysis and decision-making
processes.
2. Be active owners and incorporate ESG issues into our ownership policies and
practices.
3. Seek appropriate disclosure on ESG issues by the entities in which we invest.
4. Promote acceptance and implementation of the principles within the
investment industry.
5. Work together to enhance our effectiveness in implementing the principles.
6. Report on our activities and progress towards implementing the principles.

Knowledge | Skills | Conduct

United Nations Environment Programme Finance
Initiative (UNEP FI)
Reporting on Responsible Investment Practices
• The PRI does require members to report annually on their responsible
investment practices, which are assessed by the PRI.
• The report is made available to the public.
• However, the assessment is private to the member, who can then decide
whether, and with whom, they may wish to share it (e.g. asset managers share
the report with an existing or prospective client asset owner).
• In 2018, the PRI implemented three minimum requirements:
1. Investment policy that covers the firm’s responsible investment (RI) approach,
covering >50% of assets under management (AUM).
2. Internal or external staff being responsible for implementing RI policy.
3. Senior-level commitment and accountability mechanisms for RI implementation.

Knowledge | Skills | Conduct

United Nations Framework Convention on Climate
Change (UNFCCC)
• Launched at the Rio de Janeiro Earth Summit in 1992, aims to stabilise
greenhouse gas (GHG) emissions to limit man-made climate change.
• UNFCCC hosts annual Conferences of the Parties (COP) meetings, which seek
to advance members states' voluntary agreements on limiting climate change:
- COP3 meeting in Kyoto in 1997, which created the Kyoto Protocol:
• Commits industrialised countries to limit and reduce their GHG emissions in accordance with
agreed individual targets.
- COP21 meeting in Paris in 2015, which led to the Paris Agreement:
• Commits developed and emerging economies to strengthen the response to the threat of
climate change by keeping a global temperature rise this century well below 2°C (3.6°F) above
pre-industrial levels.

Knowledge | Skills | Conduct

UN Sustainable Development Goals (SDGs)
• The Sustainable Development Goals (SDGs), represents the UN’s blueprint
to address the key global challenges, including those related to poverty,
inequality, climate change, environmental degradation, peace and justice.
• Agreed by all UN
members in 2015
• The 17 goals are
all interconnected
and particularly
aimed at governments.

Knowledge | Skills | Conduct

Other Initiatives
International Corporate Governance Network (ICGN)
• Investor-led organisation established in 1995 to promote effective standards of
corporate governance and investor stewardship to advance efficient markets.
• The ICGN developed two key guidance documents for investors: one on
stewardship and another one on investment mandates.

Global Sustainable Investment Alliance (GSIA)

• An international collaboration of membership-based sustainable investment
organisations. It is a forum itself for advancing ESG investing across all regions
and asset classes.
• Core members of the GSIA includes representatives from the regional
responsible investment forums of Europe, the USA, Canada, Japan, Australia
and New Zealand.

Knowledge | Skills | Conduct

Other Initiatives
Task Force on Climate-related Financial disclosures (TCFD)
• The TCFD takes the Paris Agreement’s 2°C (3.6°F) target and tries to
operationalise it for the business world.
• From a climate-related risk perspective, it urges companies to disclose against
the following:
- Governance: the organisation’s governance around climate-related risks and
opportunities
- Strategy: the actual and potential impacts of climate-related risks and opportunities
on the organisation’s businesses, strategy and financial planning
- Risk management: the processes used by the organisation to identify, assess and
manage climate-related risks
- Metrics and targets: the metrics and targets used to assess and manage relevant
climate-related risks and opportunities

(Further detail can be found in Chapter 3)

Knowledge | Skills | Conduct

Other Initiatives
Global Impact Investing Network (GIIN)
• The GIIN focuses on lowering the barriers to impact investment by building
critical infrastructure and developing activities, education and research that help
accelerate the development of a coherent impact investing industry.
• The GIIN achieves this by:
- Facilitating knowledge exchange
- Highlighting innovative investment approaches
- Building the evidence base for impact investing
- Producing tools and resources

• The GIIN also produces databases:

- IRIS+ (of metrics for measuring and managing impact), and
- ImpactBase (of impact investing funds).

Knowledge | Skills | Conduct

Reporting Initiatives
Global Reporting Initiative (GRI)
• Publishes the GRI Standards, which provide guidance on disclosure across
environmental, social and economic factors for all stakeholders, including
investors, whereas the other major frameworks are primarily investor focused

CDP (formerly Carbon Disclosure Project)

• The CDP is a nongovernmental organisation (NGO) which supports companies,
financial institutions and cities to disclose and manage their environmental
impact
ESG Disclosure Framework of the International Business Council (IBC) aims
to bring greater consistency and comparability to sustainability reporting by
establishing common metrics for company disclosure.

Knowledge | Skills | Conduct

Reporting Initiatives
Climate Disclosure Standards Board (CDSB)
• The CDSB is an international consortium of business and environmental NGOs
with the mission to create the enabling conditions for material climate change
and natural capital information to be integrated into mainstream reporting.

Corporate Reporting Dialogue (CRD)

• Corporate Reporting Dialogue (CRD) is a joint project led by the CDP, the
Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative
(GRI), the International Integrated Reporting Council (IIRC) and the
Sustainability Accounting Standards Board (SASB).
• The ‘Better Alignment Project’ is focused on promoting better alignment in the
corporate reporting landscape, making it easier for companies to prepare
effective and coherent disclosures that meet the information needs of capital
markets and society.

Knowledge | Skills | Conduct

Other Initiatives
Asia Investor Group on Climate Change (AIGCC)
• An initiative to create awareness among Asia’s asset owners and financial
institutions about the risks and opportunities arising from climate change and
low carbon investing

Knowledge | Skills | Conduct

Reporting Initiatives
Value Reporting Foundation (VRF) VRF’s objective is to provide investors and
corporates with a comprehensive corporate
reporting framework across the full range of
Formed by the merger of: enterprise value drivers and standards.

The International Integrated Reporting Council (IIRC)

Created the Integrated Reporting Framework (IRF) that encourages companies
to integrate sustainability within their strategy and risk assessment by integrating
it into the traditional annual report
And
The Sustainability Accounting Standards Board (SASB) that created
standards that are focused on the key material sustainability issues which affect
70-plus industry categories. Along with the SASB materiality maps, is particularly
helpful for investors determining what is material for reporting and facilitates a
more standardised benchmarking process

Knowledge | Skills | Conduct

Reporting Requirements
The EU’s Sustainable Finance Disclosure Regulation (SFDR)
• Designed to support institutional asset owners and retail investors to compare,
select, and monitor the sustainability characteristics of investment funds by
standardising sustainability disclosures
• Applies to all financial advisors and financial market participants that construct
financial products and/or provide investment advice or insurance advice in the
EEA
• Stipulates two levels of disclosure: firm level and product level
• Also introduces a new concept: Principal Adverse Impacts (PAIs) – the
negative effects from an investment on sustainability factors

Knowledge | Skills | Conduct

Answers to Sample Exam Questions
Question 1: C Pollution and resources

Question 2: D Value investment

Question 3: A Emerging and urban

Question 4: D Externality engagement

Question 5: D Facilitate knowledge exchange

Knowledge | Skills | Conduct