ASSET ALLOCATION & SUSTAINABLE INVESTING
Sustainable Investing
Contents
1. Lecture 1 – Slides 2
2. Lecture 2 – Krueger et al 6
3. Lecture 2 – Riedl & Smeets 10
4. Lecture 2 – Slides 13
5. Lecture 4 – Blitz & Swinkels 16
6. Lecture 4 – Dimson et al 20
7. Lecture 4 – Slides 24
8. Lecture 5 – Berk & van Binsbergen 26
9. Lecture 5 – Pedersen et al 31
10. Lecture 5 – Slides 36
11. Lecture 6 – Barber et al 38
12. Lecture 6 – Slides 42
13. Lecture 7 – Flammer 45
14. Lecture 7 – Slides 47
1
,Lecture 1 – Slides
What is Sustainable Investing?
• When considering sustainability in general: First distinguish between business and how it is
financed.
• Sustainable business: economic activity geared towards improving the environment and society
at large.
→ Also known as Corporate Social Responsibility (CSR).
• Finance/Investing is about providing the capital and cash to business that it needs to operate.
→ That includes Sustainable Finance/Investing
Contrasting Sustainable Investing to traditional investing
Traditional Investing: the main goal is to achieve the best possible risk-return trade-off.
Sustainable Investing (SI): account for the environment, social society and the governance of firms
(ESG) when investing.
→ Note that this SI definition does not include a single goal.
Sustainable Finance: includes, next to investing, insurance & banking. As this an asset management
course, they are left out.
A plethora of terms is in use
Sustainable Investing (SI):
• ESG Investing
• Durable Investing
• Socially Responsible Investing
• Responsible Investing
• Green investing
It’s all largely the same, but can be interpreted differently by different people. So always consider
closely what is actually said about what it means when these terms are used.
Refinement of SI
So the SI definition does not have one particular goal, because the concept of SI spans investing
strategies with various goals.
→ Do we aim to make as much money as possible without e.g. damaging the environment?
Or do we target environmental improvement without losing money? Something in between, or
aiming for multiple goals at the same time?
Schoenmaker & Schramade (2019) provide an answer by making a useful categorization of the field
of SI.
2
,Framework for sustainable finance
Schoenmaker & Schramade (2019) breakdown
The table shows how S&S categorization translates to practice
S&S only define ESG integration by optimization over F, S and E (SI 2.0), they do not include managing
for ESG in SI 2.1. In the investment industry, however, ESG integration normally means both SI 2.0 &
2.1. The example in S&S 2.4.3.1 is called integration but actually is only optimizing F (= SI 2.0).
S&S do not consider G(overnance), but we do. This is because both the investment industry and
academia take it seriously.
The distinction of SI 2.1 from traditional investing can be blurry. Think of SI 2.1 as more long term
oriented.
Investors also have investment choices at their disposal that are not part of the S&S investment
categorization:
(1) voting at shareholder meetings and
(2) engagement
Voting and engagement are also known as “Voice”.
→ It emphasizes why investors value the G in ESG.
These approaches are discussed in later lecture, including in the guest lecture by Dr. Jeucken.
3
, Managing sustainable development
Social foundations
• Social boundaries or foundations (Doughnut of Kate Raworth, 2017)
➢ Food security (no hunger)
➢ Adequate income
➢ Access to health care
➢ Access to water and clean cooking facilities
➢ Education
➢ Decent work
➢ Modern energy services
➢ Gender equality and social equity
➢ Political voice
• Many people live below these social foundations
ESG plot
Sustainable Investing looks at the following relationships:
Do investment choices that take ESG into account affect ESG results and investment returns, either
directly or indirectly through the financial performance?
Investment choices taking account of ESG
ESG Investment choices: not just picking one of the SI 1.0 – 3.0 strategies to put together the
investment portfolio. It also includes being an active holder of financial instruments. (the 5 items
below are known as the ESG instruments)
4
Sustainable Investing
Contents
1. Lecture 1 – Slides 2
2. Lecture 2 – Krueger et al 6
3. Lecture 2 – Riedl & Smeets 10
4. Lecture 2 – Slides 13
5. Lecture 4 – Blitz & Swinkels 16
6. Lecture 4 – Dimson et al 20
7. Lecture 4 – Slides 24
8. Lecture 5 – Berk & van Binsbergen 26
9. Lecture 5 – Pedersen et al 31
10. Lecture 5 – Slides 36
11. Lecture 6 – Barber et al 38
12. Lecture 6 – Slides 42
13. Lecture 7 – Flammer 45
14. Lecture 7 – Slides 47
1
,Lecture 1 – Slides
What is Sustainable Investing?
• When considering sustainability in general: First distinguish between business and how it is
financed.
• Sustainable business: economic activity geared towards improving the environment and society
at large.
→ Also known as Corporate Social Responsibility (CSR).
• Finance/Investing is about providing the capital and cash to business that it needs to operate.
→ That includes Sustainable Finance/Investing
Contrasting Sustainable Investing to traditional investing
Traditional Investing: the main goal is to achieve the best possible risk-return trade-off.
Sustainable Investing (SI): account for the environment, social society and the governance of firms
(ESG) when investing.
→ Note that this SI definition does not include a single goal.
Sustainable Finance: includes, next to investing, insurance & banking. As this an asset management
course, they are left out.
A plethora of terms is in use
Sustainable Investing (SI):
• ESG Investing
• Durable Investing
• Socially Responsible Investing
• Responsible Investing
• Green investing
It’s all largely the same, but can be interpreted differently by different people. So always consider
closely what is actually said about what it means when these terms are used.
Refinement of SI
So the SI definition does not have one particular goal, because the concept of SI spans investing
strategies with various goals.
→ Do we aim to make as much money as possible without e.g. damaging the environment?
Or do we target environmental improvement without losing money? Something in between, or
aiming for multiple goals at the same time?
Schoenmaker & Schramade (2019) provide an answer by making a useful categorization of the field
of SI.
2
,Framework for sustainable finance
Schoenmaker & Schramade (2019) breakdown
The table shows how S&S categorization translates to practice
S&S only define ESG integration by optimization over F, S and E (SI 2.0), they do not include managing
for ESG in SI 2.1. In the investment industry, however, ESG integration normally means both SI 2.0 &
2.1. The example in S&S 2.4.3.1 is called integration but actually is only optimizing F (= SI 2.0).
S&S do not consider G(overnance), but we do. This is because both the investment industry and
academia take it seriously.
The distinction of SI 2.1 from traditional investing can be blurry. Think of SI 2.1 as more long term
oriented.
Investors also have investment choices at their disposal that are not part of the S&S investment
categorization:
(1) voting at shareholder meetings and
(2) engagement
Voting and engagement are also known as “Voice”.
→ It emphasizes why investors value the G in ESG.
These approaches are discussed in later lecture, including in the guest lecture by Dr. Jeucken.
3
, Managing sustainable development
Social foundations
• Social boundaries or foundations (Doughnut of Kate Raworth, 2017)
➢ Food security (no hunger)
➢ Adequate income
➢ Access to health care
➢ Access to water and clean cooking facilities
➢ Education
➢ Decent work
➢ Modern energy services
➢ Gender equality and social equity
➢ Political voice
• Many people live below these social foundations
ESG plot
Sustainable Investing looks at the following relationships:
Do investment choices that take ESG into account affect ESG results and investment returns, either
directly or indirectly through the financial performance?
Investment choices taking account of ESG
ESG Investment choices: not just picking one of the SI 1.0 – 3.0 strategies to put together the
investment portfolio. It also includes being an active holder of financial instruments. (the 5 items
below are known as the ESG instruments)
4
