chapter 19 Socially responsible investing

What is the Public good ?

Non rivalrous

one persons consumption does not diminsh another’s ability to consume

• examples: sports club , movie theatre)

What is the Public good ?

Non - exclusive

No one is prevented from consuming regardless of who paid for it

• examples local firefighteRS, climate control

SRI ( socially responsible investing)

• selecting stocks that align with personal values and focus on ESG investing

who is investing ?

indiviuals vs institutions

indiviuals: difficult to impelemet with single stock purhcases

insutions: better risk managment , increased return potential

How do the performance objectives of Traditional Finance and Socially Responsible Investing (SRI) differ?

• Traditional Finance: Relies on mean-variance optimization, focusing purely on the trade-off between risk and return to maximize wealth.

• SRI : Incorporates nonfinancial factors (social, ethical, or environmental) into the investment decision-making process

problems

• Lack of guidelines​

• Principles for Responsible Investing (covered last session)​

• Lack of usefulness​

  • Ad hoc reporting makes comparisons challenging

  • Result => lots of data to review

Operationalizing ESG​

Divestment

• The act of removing specific stocks and entire industries from a portfolio based on objections to a firm's business practices.

• involves possibly sacrificing investment returns.

Operationalizing ESG​

NEGATIVE (EXCLUSIONARY) SCREENING

• process of excluding specific companies or entire industries from an investment portfolio based solely on ESG criteria.

• Goal: To avoid firms deemed "objectionable" to societal goals or moral norms.

Operationalizing ESG​

POSITIVE/BEST-IN-CLASS

• strategy actively selects the top ESG performers within each industry.

Operationalizing ESG​

ACTIVE OWNERSHIP

Using your position as a shareholder to influence a company's behavior from the inside.

such as voting on proxy statements, submitting shareholder proposals,

Operationalizing ESG​

THEMATIC INVESTING

Operationalizing ESG​

IMPACT INVESTING

What’s a Fiduciary to Do?​

A person or entity that acts on behalf of another

• bound to put the client's best interests first.

• must take accountability of damages

Examples of fiduciaries

• Financial advisors

• insuracae companies

• stock promoters

• investment corp

• asset managers

What is the primary conflict between a Fiduciary and Shareholders regarding ESG?

manager prioritize ESG goals over the financial interests of the owners, but a fiduciary has to proritze financial goals

: ERISA says: no conflict..

Methods for incorporating ESGfactors:​

• By increasing or decreasing the rate based on a company's ESG profile.

• be careful of Double-counting if ESG risks alreadyincorporated in the discount rate​

• Translate only material ESG factors

• Using Multiples for valuation

Three level of cadbury paradrigm

• Level 1: Net Income and the power of theaccounting system​

• Level 2: Environmental, Social andGovernance considerations​ ( corporate social responisbilty)

• Level 3: Engel principles​