25847 Sustainable Finance – Autumn 2021 Assignment
Subject coordinator: Dr Kylie-Anne Richards1
1 Finance Discipline Group, UTS Business School, University of Technology Sydney; Kylie-Anne.Richards@uts.edu.au This document is available on UTS Canvas under “Assignments”
This Assignment is DUE:
- Assessment Task 2
- Report structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
- Background – Green Asset Management 3
- Task A: ESG Policy [20 marks] 3
- Task B: Equity Portfolio [20 marks] 4
- Required data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
- ESG contribution to the investment strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
- Task C: Fixed Income Portfolio [15 marks] 4
- Report presentation [5 marks] 5
- Additional Resources 6
- The Principles for Responsible Investment (PRI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
- Ratings websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
- MSCI ESG Ratings: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
- Refinitiv ESG Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
- Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
- Data definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1 ASSESSMENT TASK
1. Assessment Task
Task: You will be required to write a 10-page report on a practical application in the area of ESG integration into the investment process. This report is divided into 3 parts with a total of [60 marks] available.
- Task A: ESG Policy [20 marks]
- Task B: Equity Impact Portfolio [20 marks]
- Task C: Fixed Income Portfolio [15 marks]
- Report presentation [5 marks]
The report will assess your understanding of the concepts of sustainable finance and your ability to apply those concepts. It will be assessed according to the following criteria: accuracy of responses to specific questions; understanding of key theoretical concepts; insight of answers to open questions. This is not a financial modelling or quantitative finance course. Whilst the utilization of data is necessary for this assignment, it is not expected that students apply complex statistics or portfolio optimization techniques, rather a demonstration of ESG concepts and integration.
This report is Due: 5.00pm (AEST) Friday 28 May 2021. Please note the due date differs to what is in the subject outline.
1.1. Report structure
The report should be structured in a fluid and articulate manner. The report should be written for a financially literate audience that consists of the firms Chief Investment Officer (CIO), fund managers and analysts who may be new to ESG integration into portfolios.
Answer the below questions IN YOUR OWN WORDS. Do not copy or rephrase passages from the text or websites. You will be required to conduct research to acquire additional information (e.g. Google, Google Scholar, PSU library online). If you use additional material, please cite your sources within the text and provide a list of references at the end of your assignment.
You should write no more than 10 pages (font: 12; spacing: 2), including any charts and tables. The report should follow a the following structure
- Front content: title; subject number and name (25847 Sustainable Finance – Autumn 2021); your name and student number.
- Executive summary: this will summarizes the longer report in such a way that readers can rapidly become acquainted with a large body of material without having to read it all.
- Task A: ESG Policy
- Task B: Equity Impact Portfolio
- Task C: Fixed Income Portfolio
- References: consistency in reference formatting allows readers to focus on the content of your reference list, discerning both the types of works you consulted and the important reference elements (who, when,
what, and where) with ease.
Throughout your document you may cite references, for example, “ESG integration has been shown to have both positive impact on performance and reduction in long term risk exposure ”.
The Reference section at the end of the document, will list all references, for example:
(if a journal reference):  Bob Builder. 2020. “ESG integration is critical for portfolio performance.” The Journal of Learning ESG, 587-595.
(if a web reference):  Bob Builder. “ESG integration is critical for portfolio performance.” www.thejournalofleanringESG.com (accessed 8-May-2021)
3 TASK A: ESG POLICY [20 MARKS]
2. Background – Green Asset Management
Green Asset Management is a newly created asset manager with the aim to become a leader in responsible investment, offering investors a range of Australian investment choices including fixed income and shares. Green Asset Management is committed to undertaking engagement that contributes to growing the market for impact investments via their equity fund, in addition, to provide a defensive strategy with a broad investment universe of fixed income securities to delivery stable absolute returns over time. This will be achieved via two actively managed funds, one being an domestic equity fund and the second being a low volatility domestic fixed income fund.
You have been employed as the Sustainability Manager for Green Asset Management. You job is to develop an ESG Policy for Green Asset Management. You will be required to analyse data and determine a subset of the broader universe of investable shares that score high on ESG metrics, but also within the constraints of the broader fund objectives. This list will form the initial discussions with the CIO, fund managers and analysts for the creation of the investment process and potential investment opportunities which are considered with an ESG lens. Finally, you will need to advise the fixed income fund managers on ESG components that need to be considered within the fixed income setting.
3. Task A: ESG Policy [20 marks]
As the Sustainability Manger of Green Asset Manager, you are required to develop an ESG Policy. The ESG Policy will form the founding philosophy that is integrated within the investment process for Green Asset Management. There is no ‘right’ or ‘wrong’ answer. Points will be awarded for the ability to address each section appropriately and within the context of the firms investment objectives and assets for which it manages. This section requires research of existing ESG Policies for asset managers and a level of creativity of how you might shape Green Asset Manager as a nearly created asset manager. You may explore existing policies and compatibility with them.
The areas which your ESG Policy should address are the following:
- The introductory section of a policy sets the stage and may include some of the following:
- Your organisation’s motives for developing a policy. Beliefs, objectives and beneficiary needs that underpin the policy.
- Your firm believes in it’s duty to act responsibly and sustainably with respect to it’s own carbon footprint but also actions as good citizens. As such, which organisations will you support?
- Is the responsible investment policy an intrinsic part of the main investment policy or is it a distinct policy?
- Who approved the policy and how often it will be reviewed? Are there any implications of policy breaches?
- Responsibilities in relation to the policy, e.g. Chief Investment Officer, Investment Team, Board, etc
- What are the core components of the process?
- What role does research play within the process?
- What construction method do you use? Do you use positive and negative screening? You may wish to complete Task B first and return to this section of the ESG Policy.
- Do you view engagement of stakeholders a core component of your ESG Policy, and if so, who are those key stakeholders and how might you engaged with them? How might this differ for you equity and fixed income portfolios?
- ESG Reporting. For example UNPRI reporting requirements.
Refer to Appendix A.1 for details on The Principles for Responsible Investment (PRI).
5 TASK C: FIXED INCOME PORTFOLIO [15 MARKS]
4. Task B: Equity Portfolio [20 marks]
As a part of the investment process for Green Asset Management, you are required to provide key ESG exclusions and recommendations of inclusions that will ultimately impact the weight adjusted of the optimal risk and return portfolio. The investment universe for Green Asset Management consists of the share members of the S&P/ASX 200 (Explore: S&P/ASX 200), which is a market-capitalisation weighted and float-adjusted stock market index of stocks listed on ASX.
4.1. Required data
The raw data can be found in the Excel spreadsheet titled ‘25847 Sustainable Finance – Autumn 2021 Assignment – Data.xlsx’. Definitions of each column can be found in Appendix A.3.1. You are not required to seek additional data beyond what is provided within the excel spreadsheet.
4.2. ESG contribution to the investment strategy
Your task is the following:
- Begin with exclusion: which stocks will you exclude from each sector and what are the grounds for exclusion? An example, you may exclude tobacco, controversial weapons, etc. Provide justification for the exclusions that are applied to the portfolio.
- Select the top one to three ESG performing stocks within each GICS Sector (Column D). How do you choose the ’top performing ESG stocks?’. There is no right or wrong answer for this and you have the opportunity to be creative here.
- You will begin with the following, but elaborate on what your strategy is: The Investment Manager uses an active investment strategy, investing in a portfolio of securities designed to achieve exposure across each GICS sector of the S&P/ASX 200 Index (Explore: S&P/ASX 200). Those securities will be a subset of the S&P/ASX 200.
- The investment strategy requires exposure across all GICS sectors, that is, at least one security must come from each sector. If the sector has only one security, explain why there is lower sector exposure and does engagement for say transition have some application here?
- You may wish to use the information contained in the SASB Materiality Map to help inform your decisions process.
- Within the spreadsheet you have a selection of (E) environmental (S) social and (G) governance data. In addition, you are provided with ESG ratings from various ratings agencies: Sustainalytics, MSCI, BBG, S&P, ISS. Green Asset Management is sophisticated in it’s selection of best-in-class ESG companies and selecting a single ESG rating agency will be insufficient. Describe your methodology, apply the methodology to the stock selection and present your findings. Do not attempt to create complicated methodology, what is being assessed is your understanding of the general principles we have learnt, not portfolio optimization techniques.
You are required to present both your decision process (described in words) and the final selection of shares with rankings from 1 to 3 for each GICS sector within the report. You will need to include your working excel spreadsheet so that checking of methodology is possible.
5. Task C: Fixed Income Portfolio [15 marks]
Green Asset Management will incorporate fixed income securities into their portfolio. ESG integration is a new area for the fixed income fund managers and they wish to gain an understanding of how the ESG assessment differs for bonds versus shares. You will need to prepare a report discussing the following aspects: why ESG integration is important to fixed income and how it differs to equities; ESG integration for corporate bonds vs. sovereign bonds; impacts of length of maturity of bonds; where the ESG integration may enter the investment process; is engagement possible, and if so, how will this differ to equities; any other considerations you feel should be incorporated?
6 REPORT PRESENTATION [5 MARKS]
6. Report presentation [5 marks]
Marks will be award for the appropriate report presentation, in line with the suggestions detailed in Section 1.1.
A. Additional Resources
A.1. The Principles for Responsible Investment (PRI)
The United Nations-supported PRI is the world’s leading proponent of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.
Explore: UN Principles of Responsible Investment The Principles for Responsible Investment (PRI) are:
- Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
- Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
- Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
- Principle 6: We will each report on our activities and progress towards implementing the Principles.
Explore: PRI: Implementing the six principles
(important resource) Explore: PRI: Policy, structure and proces
A.2. Ratings websites
The following list of rating websites (and embedded links) may provide an additional resource when considering individual companies. This resource is not a requirement, but may supplement your analysis.
A.2.1. MSCI ESG Ratings:
Web access/ enter a single ticker: click here
A.2.2. Refinitiv ESG Ratings
Web access/ enter a single ticker: click here
The data required for this assignment can be found in the accompanying excel spreadsheet titled ‘25847 Sustainable Finance – Autumn 2021 – Assignment – Data.xlsx’. This data was extracted on the 5-May-2021 from, Explore: Bloomberg.
A.3.1. Data definitions
Below you will find a list of definitions to accompany the data within the excel spreadsheet. These definitions are extracted from the Bloomberg Terminal and include the excel field name, which may be of use in your future work.
- GICS Sector (BBG: GICS_SECTOR_NAME): A text description indicating GICS sector classification. GICS (Global Industry Classification Standard) is an industry classification standard developed by MSCI in collaboration with Standard & Poors (S&P). The Global Industry Classification Standard consists of 11 sectors, 24 industry groups, 62 industries, and 132 sub-industries. The GICS classification assigns a sector name to each company according to its principal business activity. For a description of each GICS Sector Visit: Global Industry Classification Standard (GICS). For even more detail Visit: GICS Methodology.
GICS Industry** not included in the s.sheet (BBG: GICS_INDUSTRY_NAME): A text description indicating GICS industry classification. GICS (Global Industry Classification Standard) is an industry classification standard developed by MSCI in collaboration with Standard & Poors (S&P). The Global Industry Classification Standard consists of 11 sectors, 24 industry groups, 62 industries, and 132 sub-industries. The GICS classification assigns an industry name to each company according to its principal business activity.
- Revenue T12M: Trailing 12 month revenue
- GHG Scope 1 (BBG: GHG_SCOPE_1_ESTIMATE): Bloomberg Scope 1 Estimate reflects the estimated value of direct greenhouse gas (GHG) emissions of the company, in thousands of metric tonnes of carbon dioxide equivalent (CO2e). Greenhouse Gases are defined as those gases which contribute to the trapping of heat in the Earth’s atmosphere, including Carbon Dioxide (CO2), Methane, Nitrous Oxide, and others.
- Total GHG Emissions (BBG: TOTAL_GHG_EMISSIONS): Total Greenhouse Gas (GHG) Emissions of the company, in thousands of metric tonnes of carbon dioxide equivalent (CO2e), using the location based method. Greenhouse Gases are defined as those gases which contribute to the trapping of heat in the Earth’s atmosphere, including Carbon Dioxide (CO2), Methane, Nitrous Oxide, and others. Total GHG Emissions as defined in this field, equals the total of company Scope 1 and Scope 2 emissions. It does not include Scope 3 emissions. Definition of Scope 3 emissions remains subject to much interpretation and therefore there is significant variability in company reported data – this could cause undue variation in company Total GHG emissions figure. Emissions reported as CO2 only will NOT be captured in this field.
- GHG/Revenue: Total GHG Emissions divided by Revenue T12M
- Employee Turnover (%) (BBG: EMPLOYEE_TURNOVER_PCT): Number of employees that left the company within the past year expressed as a percentage of the average total number of employees. High employee turnover may indicate that employees are unsatisfied with their work at the company or their compensation, or that conditions at the company are unsafe or unhealthy.
- Women Management to Employee Ratio (BBG: WOMEN_MANAGEMENT_TO_EMPL_RATIO):
Percentage of women employed in management positions at the company as a multiple of the percentage of total women employed. Calculated as: % Women in Management / Women in Workforce.
- Womenemployees(%)(BBG:PCT_WOMEN_EMPLOYEES):Numberofwomenemployedatthecompany expressed as a percentage of the total number of company employees.
- Employees Unionized (%) (BBG:PCT_EMPLOYEES_UNIONIZED): Number of employees that are covered by collective bargaining agreements or belong to labor unions as a percentage of the total number of employees.
- Accidents per 1,000 Employees (BBG: ACCIDENTS_PER_1000_EMPLOYEES): Number of employee accidents during the reporting period per thousand employees. Ratio is calculated based on data items disclosed in company filings. Calculated as: Workforce Accidents * 1000 / Number of Employees
- Number of Directors on the Board (BBG: NUMBER_OF_DIRECTORS_ON_BOARD): Latest available number of directors on the company board. Where the company has a supervisory board and a management board (two-tier board), this is the number of directors on the supervisory board. Field is part of the Environmental, Social and Governance (ESG) group of fields.
- Independent Directors (%) (BBG: PCT_INDEPENDENT_DIRECTORS): Independent directors as a percentage of total board membership.
- Average Age of Board Directors (BBG: BOD_AVERAGE_AGE): Average age of the directors currently on the company board. Where the company has a two-tier board, this field refers to the supervisory board.
- Women Board Members (%) (BBG: PCT_BRD_MEMBERS_THAT_ARE_WOMEN): Percentage of the total board members that are female.
Attendance (%) of Independent Directors to Board Meetings (BBG:
IND_DIRECTORS_BRD_MTG_ATTEND_%): Percentage of board meetings attended by independent directors during the latest period. Where the company has a two-tier board, this field refers to the supervisory board.
- Sustainalytics ESG Rank (BBG: SUSTAINALYTICS_RANK): Overall percentile rank assigned to the company based on its environmental, social and governance (ESG) total score relative to its industry peers. For the top 1% the percentile is 99%; for the bottom 1% the percentile is 1%. This is Sustainalytics’ most comprehensive percentile rank. Aggregate ESG performance encompasses a company’s level of preparedness, disclosure and controversy involvement across all three ESG themes.
- Sustainalytics Social Percentile (BBG: SUSTAINALYTICS_SOCIAL_PERCENTILE): Industry percentile rank for the company’s management of its social impact. For the top 1% the percentile is 99%; for the bottom 1% the percentile is 1%. Social performance is determined by the quality of policies, programs and management systems concerning employees, suppliers, customers and society in addition to related controversies.
- Sustainalytics Environmental Percentile (BBG: SUSTAINALYTICS_ENVIRONMENT_PCT): Industry percentile rank for the company’s management of its environmental record. For the top 1% the percentile is 99%; for the bottom 1% the percentile is 1%. Environmental performance is determined by the level of environmental preparedness and disclosure in addition to environmental controversies.
- Sustainalytics Governance Percentile (BBG: SUSTAINALYTICS_GOVERNANCE_PCT): Industry percentile rank for the company’s management of its governance activities. For the top 1% the percentile is 99%; for the bottom 1% the percentile is 1%.
- MSCI ESG Rank (BBG: ESG_RATING): Provides company’s final ESG Rating. To arrive at a final letter rating, the weighted average of the key issue scores are aggregated and companies are ranked from best (AAA) to worst (CCC). MSCI Environmental, Social and Governance (ESG) Research Limited Liability Company (LLC) provides in-depth research, ratings and analysis of the environmental, social and governance-related business practices of thousands of companies worldwide. MSCI ESG Research products and services are designed to provide critical insights that can help institutional investors identify risks and opportunities that traditional investment research may overlook. This field is part of the MSCI ESG Research Ratings offering. All values and field definitions have been provided by MSCI ESG
- BBG ESG Rank (BBG: ESG_DISCLOSURE_SCORE): Proprietary Bloomberg score based on the extent of a company’s Environmental, Social, and Governance (ESG) disclosure. Companies that are not covered by ESG group will have no score and will show N/A. Companies that do not disclose anything will also show N/A. The score ranges from 0.1 for companies that disclose a minimum amount of ESG data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with data such as Greenhouse Gas Emissions carrying greater weight than other disclosures. The score is also tailored to different industry sectors. In this way, each company is only evaluated in terms of the data that is relevant to its industry sector. This score measures the amount of ESG data a company reports publicly, and does not measure the company’s performance on any data point.
- S&P ESG Rank (BBG: ROBECOSAM_TOTAL_STBLY_RANK): Total sustainability percentile rank, converted from the total sustainability score, based on the S&P Global ESG Rank (formerly RobecoSAM Corporate Sustainability Assessment). A company’s Total Sustainability Score is the sum of all question scores and ranges from 0-100. The Total Sustainability Score is based on individual questions that roll up into criteria, which in turn roll up into three dimensions – Economic, Environmental and Social. The types and weights of individual questions and criteria are adjusted for each industry-specific questionnaire to reflect the materiality of specific sustainability themes within each industry. The Total Sustainability Score can be defined as follows: Total Sustainability Score = (Number of Question points received * Question Weight * Criterion Weight).
ISS ESG Rank (BBG: ISS_QUALITYSCORE): Overall score assigned by Institutional Shareholder Services (ISS) to the company’s governance practices. The score ranges from 1 for best to 10 for worst.