ESG Investing for Fund Accountants

ESG Investing for Fund Accountants

Part 1

The Covid-19 Pandemic has forced investors and lenders to become acutely alert to investment risk that lies outside of the traditional credit, market and operational risk spectrum. Analysing their ESG exposures before investing allows them to appraise their strategic risk spectrum, using a proven set of tools.

Equity and debt issuers are increasingly positioning themselves on an ESG spectrum in order to attract investment funds. Even classic ‘smoke-stack’ industries are working hard to identify an ESG narrative with which to associate themselves. Sometimes their wok manifests as internal/organic development and sometimes it comes as a result of acquisitions.

Investors know from past experience how damaging ESG related events can be to their overall portfolio performance. Ratings systems, such as Morningstar, and index providers, such as MSCI, have helped informing potential and current investors about the ESG risk profile of their investment portfolios.

The ‘Basics of ESG Investing’ programme starts by looking at the typical investment process adopted by fund managers. This includes a description of the ‘investment universe’ with and without ESG qualifying securities, as well as asking the key question whether ESG is an asset class in itself.

The second session looks at the internal components of standard valuation models (no math skills needed here!) in order to identify where ESG metrics are making their presence felt (if any) and the session closes with a look at carbon credit trading as an example of a traded price for one of the most significant components of ESG: CO2 emissions.

Session three focuses on data sources and data availability. In particular, what is the provenance of the data, how granular is it and can it be used to obscure, or ‘greenwash’ a company’s true ESG footprint?

Session four outlines the most important ESG initiatives and comments on their importance to global investment decisions and a changing investment market.

Session five outlines the seven principal metrics that currently are important to investors and discusses the quantitative and qualitative aspects of each metric.

Part 2

According to a February 2021 Bloomberg Intelligence report, global ESG-based investment assets will top USD50trn by 2025, when total global assets under management (AUM) will reach USD140trn. These staggering forecasts underline the importance attributed to this fundamental change to investment management.

This programme offers the informed beginner eight sessions packed with information and opportunity to ask questions and discuss answers.

The first session outlines the breadth and depth of ESG-based investments in terms of types of asset owners, types of funds and size of investment portfolios (AUM).

The following three sessions (2, 3 and 4) describe, contrast and debate the six different ESG strategies professional investors apply in practice.

Session five looks at how traditional equity investment analysis changes as a result of ESG elements in the portfolio. A major element in this session is the debate around how the perpetuity element in CAPM valuation will change and how to quantify it.

Session six asks the same question as in session five, only this time focusing on fixed income investment analysis. It is reasonable to assume that bond spreads will change, thus driving valuation changes, but how will this process be driven? This will be debated in class.

Session seven discusses the use of ESC indices in portfolio allocation and performance appraisal. A small number of actual index calculations will be performed for illustration.

The final session brings participants to discuss practical approaches to managing ESG investment risk in a portfolio, whether by controls, guidelines or sanctions.