Passed Exam Today ESG-Investing

Escalation occurs when an investor, after attempting engagement, takes further steps such as divestment, public disclosures, or shareholder resolutions to address ESG concerns.

Why A (Escalation) is correct:

Publishing a list of exclusions signals that prior engagement efforts failed or that the fund has decided to divest based on ethical or financial grounds.

Example: Norway’s Government Pension Fund Global regularly excludes companies due to environmental and human rights concerns.

Why not B or C?

B (Concert party) refers to coordinated investor actions to influence corporate decisions, often in takeovers.

C (Collective engagement) involves multiple investors engaging together but does not necessarily result in exclusions.

References:

Norges Bank’s Exclusion Policy (2023)

PRI: Guide to Investor Escalation Strategies (2022)

Non-disclosure of ESG data due to "commercial sensitivity" (Option B) is a red flag because:

It suggests potential greenwashing or ESG risks hidden from investors.

Regulatory frameworks (e.g., EU CSRD, SEC climate disclosure rules) require transparency.

Option A (Cost constraints) is a valid challenge but does not necessarily indicate poor governance.

Option C (CEO incentive plan disclosure) is important, but not directly an ESG red flag.

References:

EU Corporate Sustainability Reporting Directive (CSRD)

PRI ESG Transparency Guidelines

SEC Climate Disclosure Rules (2023)

For engagement to be effective, it must have clear, specific, and measurable objectives (Option C). Investors should establish well-defined ESG goals, such as reducing carbon emissions by 20% over five years or improving board diversity to at least 30% women. This ensures that engagement efforts can be tracked and measured for success.

Option A is incorrect because while larger investors have more influence, small investors can engage effectively through collaboration (e.g., Climate Action 100+).

Option B is incorrect because prior relationships with companies can be helpful but are not essential for engagement success.

References:

PRI Guide on ESG Engagement Best Practices

Climate Action 100+ Progress Reports

OECD Principles on Shareholder Engagement

Stewardship (Option A) is a core regulatory theme in ESG investing, focusing on how investors influence corporate behavior through active ownership (voting, engagement, and dialogue). Regulatory frameworks such as the UK Stewardship Code, Japan Stewardship Code, and EU Sustainable Finance Disclosure Regulation (SFDR) emphasize investor stewardship responsibilities.

Scenario analysis (Option B) is used for risk assessment, particularly in climate stress testing (e.g., TCFD recommendations), but is not the primary focus of ESG regulations.

Green bond issuance (Option C) is regulated under ICMA Green Bond Principles and EU Green Bond Standards, but ESG investing regulations are broader than just bond issuance.

References:

UK Stewardship Code 2020

EU Sustainable Finance Disclosure Regulation (SFDR)

Japan FSA: Principles for Responsible Institutional Investors