Is ESG Investing just a new fad?
Can ESG investing identify market mispricing?
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The appetite for environmental, social and governance (ESG) investing has increased rapidly over recent years but the implications for financial markets and asset pricing are far from clear.
Traditionally, an asset price is thought to be a simple yet powerful signal about the present value of future cash flows. However, this view relies on the assumption that all investors only value financial payoffs (e.g., dividends or coupon payments). The presence of ESG investors that value both financial returns and the ESG performance of their portfolios challenges this view. While heterogeneity in financial markets has always existed, this is different – as different investors are valuing an asset for different reasons.
The financial market is populated with two groups of investors that receive informative signals about both components but have distinct preferences about them. Traditional investors value only the financial payoff and green investors value both payoffs. Importantly, these green investors include individual investors that directly value ESG performance alongside ESG fund managers whose compensation and reputation hinge on their ability to identify ESG assets.
As such, asset prices are driven by both factors and may be informative about cash flows and ESG performance.
Since there is only one price to reflect two factors, trading for one factor naturally dilutes useful information contained in the price about the other. For example, the ESG component makes the price a noisier signal about regular cash flows to traditional investors, as they have a hard time understanding whether a high asset price is driven by high future cash flows or good future ESG performance.
This article comes from the UN PRI Academic Blog and was written by Goldstein (University of Pennsylvania); Kopytov (University of Hong Kong); Shen (INSEAD) and Xiang (Peking University). The article provides further details on The green pricing regime.
In this webinar we will bring together a panel of wide experience in this area – from ESG investing and market pricing. Join this panel discussion to have your burning questions answered.
Who should attend
What you will learn
forewarned is forearmed
Attendees will be provided with a high-level understanding of the intention of ESG funds, the operations of ESG fund analysis, and the identification of effective of ESG indicators.
Join this webinar to learn how to:
Articles of interest
Member of the Advisory Committee
Alex Hetherington is a seasoned corporate sustainability professional with 25-years’ experience in carbon accounting, climate scenario analysis and investor insight into market-related climate risks and opportunities. He has worked with clients in Africa, USA, UK, Europe, Middle East and Australia.
Originally trained as a journalist, with a Bachelor of Arts degree in English and Politics from the University of Cape Town (1993), Alex took a MSc in Environmental Management from Imperial College, London (2004), and recently completed a CPA in Sustainable Finance and Investment from Columbia University in the city of New York (2021).
Having established himself as an early pioneer in corporate sustainability strategy, Alex co-founded Carbon
Calculated, a carbon management and climate change consultancy, which has worked with over thirty companies and brands across multiple geographies. He currently consults on investor understanding of climate risk and response.
Satyajit teaches sustainable investing, cost benefit analysis and mathematics, and serves as Associate Director of the Program in Sustainability Management.
His research interests include the value of ESG information, carbon pricing, the link between portfolio investment and sustainable development in emerging markets and the optimal use of environmental performance metrics for long horizon investment choices.
He is co-author (with Dong Guo and Anne Simpson) of The Financial Ecosystem: The Role of Finance in Achieving Sustainability, published by Palgrave Macmillan in 2019.
His other research is available at the Research Program on Sustainability Policy & Management at the Earth Institute.
Satyajit has extensive expertise in investment banking, asset management, financial restructuring and automated weather risk management. Among other positions, he was a mergers & acquisitions banker, directed quantitative trading strategies at a convertible arbitrage hedge fund managing $1.5 billion in assets and developed machine learning algorithms to optimize weather-based decision tools.
Ann-Maree is a portfolio manager responsible for South African real estate portfolios within Ninety One’s global 4Factor team. She was previously an analyst focused on the real estate sector. She spent her first couple of years at the firm focused on the healthcare sector and before that as an ESG analyst within the ESG Research team. Ann-Maree is therefore uniquely positioned to contribute to the ESG integration within the real estate portfolios.
Prior to joining the firm, Ann-Maree was an ESG analyst at Atlantic Asset Management where she was tasked with developing the ESG capability within the business. She also holds a position on the board of trustees of the Abe Bailey Trust.
Ann-Maree holds a Bachelor of Business Science (Honours) degree in Actuarial Science from the University of Cape Town and a Master of Commerce in Development Finance from the University of Cape Town’s Graduate School of Business.
Member of the Advisory Committee
Shameela has recently taken the position of Chief Executive Officer of teh National Business Initiative. Prior to takein this position, Shameela was Chief Sustainability Officer of the Johannesburg Stock Exchange, chair of the World Federation of
Exchange’s (global) Sustainability Working Group and member of the Strategy Group of the Global Investors for Sustainable Development (GISD) Alliance.
She joined the JSE in 2007 and has also served as Senior Manager: Group Strategy where she was responsible for advising the Executive Committee and Board of the JSE Limited on corporate strategy. She sees strategy and sustainability as inextricably linked to each other.
Her responsibilities at the JSE included all aspects of sustainability including management of the FTSE JSE Responsible Investment Index series. She represented the JSE on various industry advisory panels locally and globally related to sustainability, responsible investing and climate change. As a sustainability specialist she had been a key contributor to the JSE’s research into climate change, the potential for a local market to trade in carbon credits and environment-related products, the development of the sustainability segment of the JSE and the Green Bonds framework,
impact investing, the JSE’s sustainability, innovation and CSI strategies as well as the annual sustainability investor briefing sessions.
Shameela is a trustee of the WWF (South Africa) and served on the board of Directors as a non-executive director until November 2016, and is the board chairperson of the Ubuntu Wilderness Trust. Her previous experience includes senior roles in the banking and insurance industries.
Shameela completed the Master’s Programme in Sustainability Leadership (MSt) at the University of Cambridge and holds a Master of Business Administration (MBA) from the University of Pretoria, Gordon Institute of Business Science (GIBS). She is a recipient of the Chevening and Mansion House scholarships, and is a member of the Institute of Directors of Southern Africa.
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