Environmental, Social, and Governance ESG Investing

1. Introduction 1

Principles for responsible investing 5

Sustainable development goals 6

The scope of this book 7

Chapter 2: ESG, SRI, and impact investing 8

Chapter 3: Theories of the firm 8

Chapter 4: Fiduciary duty in investment management 9

Chapter 5: Overview of financial institutions 9

Chapter 6: Financial markets: equities 10

Chapter 7: Financial markets: bonds 10

Chapter 8: Shareholder engagement 10

Chapter 9: Defining and measuring ESG performance 10

Chapter 10: ESG in managing institutional investor funds 11

Chapter 11: ESG in managing college and university

endowments 11

Chapter 12: ESG in managing sovereign wealth and government

sponsored funds 11

Chapter 13: ESG in managing family foundations and family

offices 11

Chapter 14: Faith-based investing 11

Chapter 15: ESG investing-organizations having direct impact 12

Chapter 16: What’s next for ESG investing 12

2. ESG, SRI, and impact investing 13

Environmental, social, and governance investing 13

Socially responsible investment 14

Divestment: South Africa 14

Divestment: sin stocks 15

Impact investing 18

The Rise Fund 19

Mission investing 22

United Nations principles for responsible investing 23

United Nations sustainable development goals 25

Financial returns versus social and environmental returns 25

Global sustainable investment 26

3. Theory of the firm 29

The social responsibility of business is to increase its profits 29

Maximize shareholder welfare, not market value 32

Maximizing welfare 34

Shareholder rights 36

Summary 39

Appendix 39

4. Fiduciary duty in investment management 45

Addressing the Agency Problem 46

Fiduciary duty 48

Fiduciary obligations 48

“Prudent Man” rule 49

Uniform Prudent Investor Act 51

Uniform Prudent Management of Institutional Funds Act 53

Freshfields Report 54

Fiduciary II 56

United Nations Principles for Responsible Investing 57

Organization for Economic Cooperation and Development 58

Summary 58

5. Overview of financial institutions 59

Information asymmetries, moral hazard, and adverse selection 60

Commercial banks 63

Credit unions 64

Investment banks 66

Trading and research 68

Asset securitization 70

Mergers and acquisitions 71

Prime brokerage 71

Central banks 71

Conventional monetary tools 73

Unconventional monetary policy 74

Other central banks 75

Shadow banking: other financial intermediaries 76

Insurance companies 78

Categories of insurance 78

Prudential Financial Inc 83

MetLife Inc 84

Zurich Insurance Group 86

Pension funds 86

Largest pension funds 89

CalPERS 90

Florida State Board of Administration 92

Asset managers 92

Hedge funds 94

Private equity 94

6. Financial markets: equities 97

Risk, return, and diversification 98

Capital asset pricing model 100

Efficient market hypothesis 101

Random walk 101

Types of orders 101

Equity trading venues 103

Regulation 105

Investing in equities 106

Collective investment vehicles: mutual funds and exchange-traded

funds 107

Equity indexes 108

ESG indexes 109

MSCI 110

FTSE Russell 111

Morningstar 113

Robo-advisors 115

7. Financial markets: bonds 117

Future value and present value 118

Internal rate of return 120

Credit instruments 121

Fisher’s law 122

Term structure and yield curve 122

Types of debt instruments: money market instruments 124

Types of debt instruments: US Treasury securities 127

Types of debt instruments: agency securities 129

Types of debt instruments: corporate bonds 129

Types of debt instruments: municipal securities 132

Types of debt instruments: sovereign debt 133

Fixed income trading 133

Fixed income indexes and funds 136

ESG bond funds 136

ESG bond fund managers 139

Green bonds 141

8. Shareholder engagement 145

Using engagement to create value for both investors and companies 146

Shareholder activism 147

Shareholder voting by proxy 149

Key corporate governance and shareholder voting trends 150

Recent shareholder proposals 152