A Guide to the CFA Institute Series on ESG Investing

I set up this collaboration between Business Ethics Magazine and CFA Institute. The eight-article series recaps the Institute’s ongoing research into the application of Environmental, Social and Governance (ESG) standards to investment analysis and selection.

The CFA Institute is a global think tank with more than 150,000 CFA charter holders globally. The Chartered Financial Analyst® designation is the most respected and recognized investment management designation in the world. The author of this article, Matt Orsagh, CFA, CIPM, is one of a team of analysts studying the practical and policy implications of deploying ESG standards around the world.

Here’s a listing of the articles in the series published to date:

  1. What ESG Integration Is and What It Isn’t – When compliance, legal and investment professionals talk about ESG (Environmental, Social Governance) standards and integrating them into their investment analysis, they tend to use a lot of different terms. These include sustainable investing, ESG investing, socially responsible investing (SRI), green investing, ethical investing, and impact investing. These terms make it difficult for those less informed about ESG, and even some who are well informed about ESG, to understand whether or not these standards have been integrated into their investment analyses and processes. Understanding what ESG integration is can be eased by pointing out what it is not.

  2. Integrating ESG Standards: Qualitative and Quantitative Approaches – Analysts and investment managers always need to understand the full story of the companies in which they’re looking to invest – and that’s especially true when incorporating material environmental, social and governance (ESG) factors into investment decisions and investment selection. Specifically, managers need to understand whether there are material risks or opportunities tied up in ESG factors that don’t appear on a balance sheet or income statement. Increasingly, ESG factors cannot be dismissed as immaterial.

  3. ESG Influence In Credit Markets Grows – An increasing number of practitioners incorporate ESG issues into fixed-income portfolios and funds. Unlike their colleagues in equity markets, fixed-income practitioners still can’t vote on ESG issues at companies where they invest. But they do engage.

  4. Integrating ESG Factors Into Corporate Bond Analysis – Originally, corporate bond practitioners adapted the materiality/sustainability frameworks and ESG techniques used by the equity practitioners in their firms. This approach still happens and is relevant today. More recently, ESG integration techniques applied by fixed-income practitioners have become more sophisticated and some practitioners have fully adapted their processes and analysis to integrate ESG factors.

  5. Integrating ESG Factors Into Sovereign Debt Analysis – The current low adoption of ESG integration by sovereign-debt practitioners is due in part to the lack of understanding of how to integrate ESG issues into sovereign debt issues. Unlike some corporate bond practitioners, sovereign-debt practitioners are not able to simply borrow techniques and materiality/sustainability frameworks from their fellow equity practitioners, which might speed up the integration process. Extensions to existing frameworks or new frameworks for country-specific factors are likely needed.

  6. ESG Integration Into Municipal Credit Analysis – At approximately $3.85 trillion in size, the US municipal bond market represents most of the global municipal bond market. ESG factors have long been used to determine a bond’s credit quality in the municipal space and to identify financial risks in a municipality’s operations or for a particular public project.

  7. ESG Integration Practices In Structured Credit Analysis – In addition to bonds issued by governments and companies, the fixed-income market includes securities backed, or collateralized, by a pool of financial assets, such as mort- gages, accounts receivable, or automobile loans. Practitioners are just starting to consider how to systematically integrate ESG factors into structured credit analysis, largely because ESG data coverage is less readily available for some of the transaction parties, including the special purpose vehicles that issue the securities, and the inherent complexity of assessing underlying asset pools that may run into the thousands.

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