Investment Risk vs Return Analysis
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Questions and Answers

What is the primary aim of the UN Principles for Responsible Investment (PRI)?

  • To work collaboratively with investors towards a more sustainable global financial system (correct)
  • To establish strict regulations for investment managers and their practices
  • To mandate financial analysts to prioritize ESG issues
  • To ensure financial service providers regularly disclose ESG-related data

    • As of December 2021, approximately how many signatories are there to the UN Principles for Responsible Investment?

  • 4,600 (correct)
  • 1,200
  • 6,000
  • 2,800

    • Which of the following is NOT an action recommended for investment managers regarding ESG?

  • Avoid any engagement with companies on ESG matters (correct)
  • Incorporate ESG issues into ownership policies
  • Seek appropriate disclosure on ESG issues
  • Request standardized reporting on ESG issues

    • What kind of training is advocated for investment professionals in the context of ESG?

    <p>ESG integration training</p> Signup and view all the answers

    Which of the following best describes the nature of the UN Principles for Responsible Investment?

    <p>Voluntary and aspirational principles aimed at improvement</p> Signup and view all the answers

    What role do investment service providers play in relation to ESG issues?

    <p>They integrate ESG factors into their research and analysis</p> Signup and view all the answers

    What reporting framework is suggested for companies to standardize their ESG disclosures?

    <p>Global Reporting Initiative (GRI)</p> Signup and view all the answers

    Which aspect of ownership practices is highlighted by the PRI?

    <p>Active incorporation of ESG issues in ownership policies</p> Signup and view all the answers

    What is the relationship between risk and potential reward for investors?

    <p>Greater risk indicates greater potential rewards.</p> Signup and view all the answers

    How do Net Zero commitments impact the risk/return profile for investors?

    <p>They alter investment risks and returns favorably over the long term.</p> Signup and view all the answers

    What factors can increase risks for investments in high-carbon sectors?

    <p>Increased litigation risks and stranded assets.</p> Signup and view all the answers

    What effect does the transition to a sustainable, low-carbon world have on investment opportunities?

    <p>It increases opportunities as risks decrease and rewards increase.</p> Signup and view all the answers

    Which of the following statements regarding climate change risks is accurate?

    <p>Physical and transition risks from climate change can alter investment decisions.</p> Signup and view all the answers

    Which of the following trends is likely to impact investor outcomes long-term?

    <p>Growing awareness of climate change implications.</p> Signup and view all the answers

    What happens to the risk/return profile for investors with short investment horizons amid climate change?

    <p>It may become riskier as climate-related factors fluctuate.</p> Signup and view all the answers

    What is one potential drawback for investors focusing on high-carbon sectors?

    <p>Potential for increased regulatory penalties and risks.</p> Signup and view all the answers

    What was the main criticism of ExxonMobil’s strategy according to Engine No.1?

    <p>The company prioritized short-term profitability over long-term value.</p> Signup and view all the answers

    What consequence did ExxonMobil face due to its refusal to accept future declines in fossil fuel demand?

    <p>The company was ill-prepared to address climate risks.</p> Signup and view all the answers

    According to Engine No.1, which strategy might be more effective when investors seek to avoid climate risks?

    <p>Lighter green screening strategies.</p> Signup and view all the answers

    What aspect of ExxonMobil's board was highlighted as a failure?

    <p>Successful transformation and adaptation.</p> Signup and view all the answers

    What is a potential outcome of an undisciplined capital allocation strategy mentioned by Engine No.1?

    <p>Destruction of long-term value.</p> Signup and view all the answers

    Which of the following did Engine No.1 imply was necessary for implementing deeper green strategies?

    <p>Enhanced resource allocation and skills.</p> Signup and view all the answers

    Why might investors prefer deeper green strategies?

    <p>To seek positive environmental and social returns.</p> Signup and view all the answers

    What does Engine No.1 specify regarding the adaptation of ExxonMobil’s strategy?

    <p>It necessitates a shift towards creating long-term value.</p> Signup and view all the answers

    What is the estimated negative impact of climate change on global assets under management by 2050?

    <p>$4.2 trillion in present value</p> Signup and view all the answers

    Which thematic area focuses on advocating for policies to support a net-zero economy?

    <p>Policy Advocacy</p> Signup and view all the answers

    According to the Cambridge Institute for Sustainability Leadership, what percentage of value loss could climate change cause in global equity portfolios?

    <p>Up to 45%</p> Signup and view all the answers

    What type of investments are noted to contain less risk regardless of asset class?

    <p>Sustainable investments</p> Signup and view all the answers

    What is a major risk that firms in high-emission sectors face due to climate change?

    <p>Increased costs from litigation</p> Signup and view all the answers

    How did traditional funds in the US compare to sustainable funds during the market downturns of 2008 and 2009?

    <p>They were more likely to report a loss.</p> Signup and view all the answers

    What percentage loss in fixed income portfolios could result from climate change, according to predictions?

    <p>Up to 23%</p> Signup and view all the answers

    What is a key strategy to mitigate systemic climate risks in investment?

    <p>Supporting value-creating businesses</p> Signup and view all the answers

    What does negative screening imply in relation to asset inclusion within a portfolio?

    <p>Less than 15% of revenues from prohibited activities may still allow asset inclusion.</p> Signup and view all the answers

    Which of the following practices is recommended to improve ESG ratings consistency?

    <p>Introducing regulatory oversight.</p> Signup and view all the answers

    What requirement does the SFDR introduce for financial providers and advisers?

    <p>An adverse impact statement regarding investments.</p> Signup and view all the answers

    What is a potential criticism of 'Article 8' funds according to Morningstar's research?

    <p>They might not be appropriately labeled as promoting sustainability.</p> Signup and view all the answers

    What is a drawback highlighted in utilizing a positive screening approach?

    <p>It can overlook significant ESG risks in some sectors.</p> Signup and view all the answers

    What aspect of communication is emphasized when evaluating companies under ESG ratings?

    <p>Improving communication with companies regarding ESG risk assessment.</p> Signup and view all the answers

    What is indicated as necessary for ESG ratings providers?

    <p>To enhance transparency and disclose potential conflicts of interest.</p> Signup and view all the answers

    What type of investment strategy is highlighted as a possible response to issues with positive screening?

    <p>A more active investment strategy focusing on ESG resilience.</p> Signup and view all the answers

    Study Notes

    Risk vs Return

    • High-risk investments often have the potential to yield high rewards for investors.
    • Conversely, low-risk investments typically offer lower potential returns.

    Risk and Opportunities of Climate Change

    • Investors' understanding of climate change is evolving, including the physical and transition risks associated with it.
    • This evolving understanding is impacting the investment risk/return profile.
    • Investors with long-term horizons are also considering the impact of mid-century Net Zero commitments on the risk/return trade-off.
    • Increased costs, reduced demand, legal risks, and stranded assets are increasing risks and potentially lowering returns in high-carbon sectors.
    • The transition to a sustainable, low-carbon world presents attractive opportunities for investors, as the risks reduce with proven technologies and clearer policy direction, while the potential rewards grow.

    UN Principles for Responsible Investment (PRI)

    • The PRI was established in 2006 by the United Nations Environment Programme (UNEP) Finance Initiative and the UN Global Compact.
    • As of December 2021, the PRI had 4,600 signatories managing assets exceeding US$120 trillion.
    • The Principles encourage investors to incorporate Environmental, Social, and Governance (ESG) factors into their investment decisions.

    PRI Principles

    • Integrating ESG issues into investment analysis and decision-making processes.
    • Incorporating ESG issues into ownership policies and practices.
    • Seeking appropriate disclosure on ESG issues from investee companies.
    • Promoting acceptance and implementation of ESG issues in the investment industry.

    ESG Ratings

    • The International Organization of Securities Commissions (IOSCO) recommends regulatory oversight to ensure consistency in ESG ratings.
    • ESG ratings providers should improve transparency, disclosure, and address potential conflicts of interest.

    Active ESG Investing

    • Investors and investment managers can adopt a more active ESG investment strategy, which may be preferable to relying solely on ESG scores and ratings.
    • A deeper green strategy focuses on positive environmental and social returns, while a lighter green screening strategy aims to avoid climate and sustainability risks.
    • Investors may also choose to avoid specific sectors based on their own values and preferences.

    Climate Change Impact on Investments

    • The global transition to Net Zero is increasing transition risks for many businesses, particularly in high-carbon and impactful sectors.
    • Companies in these sectors face increased costs due to litigation and liability risks.
    • Climate change is estimated to have a negative impact of $43 trillion on global assets by 2100, according to the Economist Intelligence Unit.
    • The Cambridge Institute for Sustainability Leadership estimates that climate change could lead to reductions of up to 45% in global equity portfolios and 23% losses in fixed income investments.

    Sustainable Investment Benefits

    • Sustainable investment strategies can mitigate climate change risks and are showing evidence of success.
    • A Morgan Stanley report (2021) found that sustainable investments contained less risk than traditional alternatives across asset classes.
    • Sustainable investments are more resilient to market downturns and recessions, as evidenced by their performance during the 2008, 2009, and 2015 market crises.

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    Related Documents

    Unit 9: Responsible and Sustainable Investment PDF

    Description

    This quiz explores the complex relationship between risk and return in various investment strategies. It delves into how climate change influences investment decisions, emphasizing both the risks and opportunities for investors. Additionally, key principles of responsible investment are discussed to understand their implications on the risk/return profile.

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