AFA 511 Reviewer

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Toronto Metropolitan University *

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511

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Management

Date

Jun 21, 2024

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docx

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Uploaded by AdmiralNeutronSandpiper38

Lecture 1: Ethics in Reporting and Investing - How do ethics enter into how a firm makes its social and environmental decisions? - What are the personal considerations regarding you firm’s social and environmental performance? - What is the purpose of your sustainability report (marketing or material)? Ethical Investing – Influence of NGO’s - Any firm operating where social and environmental issues are at play can expect to be followed closely by a number of Non-Governmental Organisations (NGO’s or ENGOs) UN principles for Principle Investing PRI – is the set of six principles that provides a global standard for responsible investing. It relates to environmental, social and corporate governance. Organizations follow these principles to meet commitments to beneficiaries while aligning investment activities with the broader interests of society. What is the PRI? The 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. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The PRI is truly independent. It encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations. Wh at is the PRI’s mission? “We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole. The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation. Principle 1 We will incorporate ESG issues into investment analysis and decision-making processes.

Possible actions:  Address ESG issues in investment policy statements.  Support development of ESG-related tools, metrics, and analyses.  Assess the capabilities of internal investment managers to incorporate ESG issues.  Assess the capabilities of external investment managers to incorporate ESG issues.  Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis.  Encourage academic and other research on this theme.  Advocate ESG training for investment professionals. Principle 2 We will be active owners and incorporate ESG issues into our ownership policies and practices. Possible actions:  Develop and disclose an active ownership policy consistent with the Principles.  Exercise voting rights or monitor compliance with voting policy (if outsourced).  Develop an engagement capability (either directly or through outsourcing).  Participate in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights).  File shareholder resolutions consistent with long-term ESG considerations.  Engage with companies on ESG issues.  Participate in collaborative engagement initiatives.  Ask investment managers to undertake and report on ESG-related engagement. Principle 3 We will seek appropriate disclosure on ESG issues by the entities in which we invest. Possible actions:  Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative).  Ask for ESG issues to be integrated within annual financial reports.  Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact).  Support shareholder initiatives and resolutions promoting ESG disclosure. Principle 4 We will promote acceptance and implementation of the Principles within the investment industry. Possible actions:  Include Principles-related requirements in requests for proposals (RFPs).

 Align investment mandates, monitoring procedures, performance indicators and incentive structures accordingly (for example, ensure investment management processes reflect long-term time horizons when appropriate).  Communicate ESG expectations to investment service providers.  Revisit relationships with service providers that fail to meet ESG expectations.  Support the development of tools for benchmarking ESG integration.  Support regulatory or policy developments that enable implementation of the Principles. Principle 5 We will work together to enhance our effectiveness in implementing the Principles. Possible actions:  Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning.  Collectively address relevant emerging issues.  Develop or support appropriate collaborative initiatives. Principle 6 We will each report on our activities and progress towards implementing the Principles. Possible actions:  Disclose how ESG issues are integrated within investment practices.  Disclose active ownership activities (voting, engagement, and/or policy dialogue).  Disclose what is required from service providers in relation to the Principles.  Communicate with beneficiaries about ESG issues and the Principles.  Report on progress and/or achievements relating to the Principles using a comply-or-explain approach.  Seek to determine the impact of the Principles.  Make use of reporting to raise awareness among a broader group of stakeholders Discussion Questions: Do you think that pension funds have an ethical obligation regarding what they invest in? Or, Should they focus on maximising portfolio return? Ethical Investing – final note There are two styles of ‘ethical investing’ 1. The best in class approach, where you choose the best performers, even in sectors with social and environmental issues

i.e pick the best performer in the oil and gas sector, mining sector, banking sector etc. 2. A sector based approach, where you specifically avoid or include sectors i.e avoid oil and gas sector, invest in renewable energy projects (while also have social and environmental implications) Equator Principles The Equator Principles is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in project finance. It is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-making “We strongly support the new Equator Principles as a clear standard for the international financing community by which we can enhance environmental protection efforts and realize a more sustainable global economy. We embrace the Principles as one of the essential elements of our Environmental Policy, which includes monitoring the effects of our activities on the environment and working towards continuous improvement of our environmental management and pollution prevention activities The Equator Principles are intrinsic to our business approach in the area of project finance. We think of corporate responsibility as an important part of our strategy. It governs what we do - banking - with how we do it - responsibly. We can help our clients in an area of increasing activity for many of them by using the Equator Principles to help us manage social and environmental risk better. Our job is to help our clients achieve their financial goals. We believe that the Equator Principles help us do this Equator Principles The framework was designed for banks to apply social and environmental criteria to lending Summary of the Equator Principles Equator Principles (EPs) are a set of voluntary guidelines adopted by private financial institutions to ensure that large scale development or construction projects appropriately consider the associated potential impacts on the natural environment and the affected communities. Equator Principles Financial Institutions (EPFIs) formulate their own environmental and social guidelines to comply with the Equator Principles framework, which in turn confirms compliance with the underlying IFC Performance Standards and World Bank Group EHS Guidelines . EPFIs also establish internal management systems to ensure that clients implement their

projects in consideration with the environment and society. Under these management systems, EPFIs will assess the environmental and social impacts of large–scale projects and will incorporate compliance with EPs as a condition of lending. Since the inception of the Equator Principles in 2003 , the energy and extractives industry has been a major focus of the environmental and social risk reviews conducted by nearly 80 member banks. For example, Bank of Tokyo-Mitsubishi, a leader in project finance, put 225 projects through its Equator Principles review process between 2006 and 2012. Of these, 60 percent were in the mining, oil, gas and energy sectors. Focus on the energy and extractives industry by Equator Principles Financial Institutions (EPFIs) should come as no surprise. These types of projects often take place in emerging economies, where the Equator Principles are most applicable, and require major investment and external financing. Comprehensive identification, planning and management of environmental and social impacts are also essential to responsible natural resource development. With the recent launch of the third version of the Equator Principles, or EP III, some requirements have been expanded. BSR has identified five major changes for energy and extractives companies receiving funding from EPFIs: It has taken the Equator Principles (EP) just 10 years to have a positive impact on lenders and clients alike. In less than a decade, this global framework by which banks manage environmental and social risks in project financing has impacted lending procedures by financial institutions and influenced the work of corporate clients and sponsors. Equator Principles Principle One: Review and Categorisation Category A: significant potential risk Category B: limited potential risk Category C: minimal or no risk Principle Two: Environmental and Social Assessment - For all Category A and B projects on Equator Principles Financing institutions (EPFI) must require the client to perform an environmental and social assessment - To the EPFI’s satisfaction (proper due diligence) Principle Three: Applicable Environmental and Social Standards - Designated countries assessment: pertains to host countries laws, regulations and permits

- Non-designated countries: assessment pertains to International Finance Corporation and World Bank Standards Principle 4: Environmental and Social Management System and Equator Principles Action Plan - Client must develop this - Mainly to address any gaps identified in the assessment process Principle 5: Stakeholder Engagement - Key focus is on affected communities - Have they been communicated with and had their concerns addressed (in their own language) Principle 6: Grievance Mechanism “…. To receive and facilitate resolution of concerns and grievances about the project’s environmental and social performance” Principle 7: Independent Review - Must bring in outside social and environmental consultant - N.B. here is where there can be work for accounting firms Principle 8: Covenants - Many credits arrangement have financial covenants (i.e. you must maintain a particular debt to equity ratio) - A creditor to an EPFI must attach social and environmental covenants to the loan (the remedy is a little ambiguous Principle 9: Independent Monitoring and Reporting Again and opportunity to work in accounting and engineering firms Principle 10: Reporting and Transparency At a minimum must make its environmental and social assessment (from principle 2) publicly available Must also disclose GHG emissions (scope 1&2) Discussion Questions: 1. Would you care if the bank you worked for applied the equator principles? YAS 2. Do you think these have any effect in practice? YAS

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