​Investment - Trust and Stakeholder Obligations
How Professions Establish Trust
For a profession to be credible, a fundamental goal is to develop confidence among clients and society in general. In doing so, professions have to perform some common duties that, when combined, considerably improve confidence and credibility in professionals and their organisations. The next sections go into further specifics concerning those requirements.

Professions Normalise Practitioner Behaviour

Professionalism is grounded by a code of ethics and standards of conduct created by professional bodies. Regulators often promote professional ethics and appreciate the foundation for ethics that professions can give. Many regulators throughout the world have engaged extensively with professional bodies to understand their codes of ethics (codes) and standards of conduct (standards) as well as how they are implemented.

" " Codes and standards produced by practitioners can be complementary to legislation, codifying many more individual practices than the high-level principles set by regulation. 

Many governments have acknowledged that a profession may establish a more sophisticated system of standards than a regulator can, via continual practitioner input and a strong mutual desire within the profession to preserve good standards and embrace best practices. Government backing of professions is related to the role of professions in serving the public and guaranteeing expert and principled performance of complicated services. 

Professions Provide a Service to Society 

" " There is an obligation for professionals to go beyond norms and standards. Professionals should fight for higher educational and ethical standards in their field – individually and through their associations. Professions can broaden access to services and enhance economic activity by increasing trust in the industries they serve. Professions have understood that obtaining community trust not only provides professional pride and acceptability, but also delivers business rewards.



A profession that earns confidence may ultimately have greater freedom and independence from government and regulators to run its own affairs, which permits members of the profession to establish service models that are both valuable to clients and beneficial to members. 

Professions Are Client Focussed

An vital component of a profession’s mission is to design and manage regulations, best practice guidelines, and standards that guide an industry. These norms, standards, and principles assist ensure that all professionals place the integrity of their profession and the interests of clients above their own personal interests.

" " At a minimum, professionals must act in the best interests of the client, exhibiting a reasonable level of care, skill, and effort. The commitment to deliver a high quality of care when acting for the benefit of another party is called fiduciary duty.

Other institutions, including employers, regulators, trade groups, and not-for-profit organisations, may also promote an industry but are not the same as professional bodies. Unlike professions, these other entities generally do not exist to develop and maintain professional standards. Most businesses urge staff to be members of relevant professional associations, and many financially support this membership to hopefully increase the quality of client service and promote ethical consciousness.

Professions Have High Entry Standards 

Membership in a profession is a statement to the market that the professional will produce high-quality service of a guaranteed standard, extending beyond academic and technical credentials. Professions establish courses that prepare prospective professionals to be competent, including in their knowledge, technical skills, and ethics.

Professions Possess a Body of Expert Knowledge

A repository of knowledge, generated by experienced and expert practitioners, is made available to all members of a profession. This knowledge helps members perform successfully and ethically and is based on best practice.

Professions Encourage and Facilitate Professional Development 


Entry into a profession does not, on its own, guarantee that an individual will maintain competency and continue to observe professional norms. After qualification and throughout the working life of a professional, there will be changes in knowledge and technical skills to perform certain jobs, in technology and standards of ethical behaviour, in services that can be offered, and in the legal and business environment in which professional services are delivered.  


These all demand the development of competency and ethical consciousness. Most professional bodies make it a condition of membership that a particular quantity of new learning is completed each year.

Typically, such requirements define a time commitment, which may be split into distinct competences and forms of learning activity. This is generally referred to as ongoing professional development (CPD) and is viewed as a crucial aspect of maintaining professional standards. The training and education that professionals undertake raise the value of human capital, which can contribute to economic growth and social mobility. 

Professions Monitor Professional Conduct

Members of a profession must be held accountable for their conduct to protect the integrity and reputation of an industry. Doing so frequently includes self-regulation by professional bodies through monitoring and application of punishments on members.

" " Professions Are Collegial

" " Professionals should be respectful to one other, even while they are competing. At the very least, they must respect the rights, dignity, and autonomy of others, especially among co-workers.

​Investment - Application of DEI in Daily Work 

DEI is everyone’s duty, and you can take action to be inclusive in your own behaviours by becoming aware of what is discrimination and harassment. Be proactive in avoiding behaviour that can be regarded as discriminatory, such as inappropriate comments and jokes, excluding people based on their personal characteristics, being unjust in your dealings with others, or opaque in how you reward achievement.

If you are invited to take part in a recruitment panel, and you recognize biased language or behaviors, you should speak up. 

Review Policies, Processes, and Systems


There is the possibility for bias to become institutionalized over time. You can start to address it by analyzing policies and practices and identifying where there could be the potential for prejudice. An easy-to-understand example, such as in the hiring interns example above, is that there can be a practice of recruiting graduates from just the topmost colleges. When analyzing job descriptions, there may be phrasing that is exclusionary, such as ‘Ivy League education’ in the United States or from a ‘red brick university’ in the United Kingdom. There may also be other prejudices, such as phrasing connected to experience containing ‘X years of experience’, which can be a kind of age discrimination.

Bias is easy to recognize in the previous example, but in other circumstances it may not be so evident, which is why data should be collected and analyzed on the impact of policies and processes. This data can help to identify whether there is any differential treatment. 

As an example, collecting data regarding how many employees have been subject to disciplinary proceedings can assist discover patterns, such as if employees from some groups are handled more harshly or are more likely to face disciplinary action for similar issues than other groups.

What Can You Do to Foster a Sense of Belonging?


There are substantial materials available about inclusive leadership and how that may be used to create diverse, egalitarian, and inclusive organisations.

Taking an inclusive leadership style to your job can help develop a sense of belonging within your business — that is, a culture in which employees have their opinions heard and appreciated and people are free to be themselves. Remember, you do not have to be in a managerial or leadership role to adopt inclusive leadership principles in your job.

But leadership on DEI concerns is of crucial importance. According to the Employers Network for Equality & Inclusion,1 ‘Leaders who are aware of their own prejudices and inclinations, actively seek out and evaluate other ideas and perspectives to inspire better decision making. They perceive diverse talent as a source of competitive advantage and empower different people to drive organisational and individual performance towards a shared vision.’

Traits of an inclusive leader include the following:
Seeks out alternative thoughts and perspectives
Takes takes board and offers fair thought to a multiplicity of ideas
Understands the commercial benefits of acquiring, developing, and maintaining diverse personnel
Inspires and inspires diverse people towards accomplishing shared aims


Acknowledging Identities, Beliefs, and Important Events


If you have ever had your name pronounced incorrectly, you know how aggravating it can be. Learning how someone would like to be addressed, their beliefs, and events that are important to them can help create inclusiveness. Bridging differences amongst colleagues is great workplace practice. Try to get to know new colleagues by having open and honest talks. If a coworker describes a habit or event that is important to them, you may ask them to tell you more about it. It is crucial to respect colleagues’ desires if they do not want to disclose an area of their lives. But most individuals will embrace the opportunity to talk about their ideas, customs, and culture.

Acknowledging religious, cultural, and other occasions significant to employees is a step all firms can take to be more inclusive and help build a sense of belonging. A practical approach to accomplish this is by disseminating a calendar of these events to staff and ensuring that these types of events are acknowledged and, when feasible, celebrated. 

Develop an Inclusive Mindset

The following strategies will help you establish a more inclusive mentality, which can, in turn, foster greater inclusivity and sense of belonging inside your company.

Work Inclusively
Have a real commitment to DEI, challenge the current quo, hold people accountable, encourage involvement from all, and become aware of and avoid dismissive verbal and non-verbal habits, such as ignoring someone when they are presenting.

Be Aware of Bias
Take efforts to help uncover your personal prejudices and adopt System 2 thinking Be mindful of systemic prejudices and do not be persuaded by groupthink.

Develop an Open Mindset
Have a genuine curiosity about the perspectives of others, especially those who do not share the same social features, which can help you become more aware of and adapt to the cultures of others.

Enacting DEI Principles 
Enacting DEI principles inside an organisation is a substantial change endeavor and can take a significant amount of time to embed. Ingrained historical bias takes great work and resources to overcome. Change in this respect is more of a marathon than a sprint, and the investment management sector, along with the rest of the economy, will require time to change its ways of operating.

Race and ethnicity programming, for example, were among the first DEI targets to be addressed. But a recent poll in the United Kingdom by the HR membership body, the CIPD, indicated that less than half of businesses gather data on race. But in other areas, such as gender, there has been substantial positive improvement.2

At its foundation, DEI is about respecting others and being open to learning about individuals. Just by being real, open-minded, and polite, you may help to developing an inclusive organisational culture where individuals who are completely engaged create outstanding outcomes.

​Investment - Bias Recognition and Mitigation 
Best Practices and Success Metrics for DEI 
The benefits of DEI and several techniques to improving DEI were briefly reviewed in the preceding sessions. In this course, we delve into greater detail on harnessing DEI for outstanding workplace creativity, problem-solving, and performance.

Simply developing a DEI programme does not by itself bring the types of commercial benefits stated above. Research by Josh Bersin, a notable writer on employment, has indicated that organizations ‘focussing on the correct DEI procedures have superior company performance and results.’1


Delivering DEI Outcomes


Expanding the talent pipeline, the first of the six principles of the CFA Institute DEI Code, is vital to fulfilling the needs of the changing workplace and demands of recruits to the industry.

Events over the past few years have changed the character of the job. People are increasingly working from home and work–life balance is more crucial. Younger job entrants are looking for more purpose from their employment beyond the typical cash incentives. People are far more worried with DEI as well as other concerns, including those involving the environment and social justice. 

So, should corporations first raise the representation of underrepresented groups or make their organisations inclusive so they can employ and retain diverse talent? They actually need to accomplish both concurrently. Role modelling is key: If potential candidates realize that there are people like themselves that are doing well in their careers inside a company, they are more likely to apply. 


Norway, for example, has had a quota for board-level gender diversity for nearly 20 years. Studies have indicated that having this quota has had a good effect on the gender diversity of the talent pipeline and encouraged younger women to enter the field knowing that they can attain to the most senior levels. 

Success Metrics


What does success in implementing DEI look like? There are five sorts of indicators organizations can use to measure success on DEI.

Representation
Increase the percentage of roles from underrepresented groups. 

Recruitment and Selection
Increase the ratio of applications from underrepresented groups, and the percentage being selected for leadership jobs. 

Engagement
Staff surveys should indicate improvement in inclusive practices of managers and leaders. 

Promotion
Increase the number of high-potential internal applicants from underrepresented groups that are promoted. 

Retention
Decrease the turnover of staff from minority groups.   

Robust Monitoring and Tracking
It is crucial for businesses to monitor and track DEI efforts to measure progress. Many organizations, particularly huge firms, put substantial resources and effort into DEI initiatives without any way of understanding whether it has led to a beneficial impact. It is detrimental to engage in DEI initiatives without tracking progress. Programmes may be written off as failures because there was no data to show where underrepresentation had occurred and if it had subsequently been addressed.

Organisations that have built an inclusive culture with a strong sense of fairness, equity, transparency, and community have achieved great performance. According to the 2022 Ipsos Workplace Belonging Survey of US-based workers, these businesses are likely to experience the following:

 1.6x more likely to meet or exceed financial targets
 1.6x more likely to please and retain consumers
 8.4x more likely to be recognised for DEI by stakeholders
 21.1x more likely to have diverse leaders and industry-leading DEI
 3.1x more likely to efficiently respond to change
 2.1x more likely to innovate successfully
 2.6x more likely to engage and retain their personnel
 4.3x more likely to establish a sense of belonging


Why Is a Sense of Belonging an Important DEI Outcome?


People search for a sense of belonging in all parts of their lives, whether it is with friends and family or at work. Until recently, data tying belonging to performance was fairly thin. But there are now extensive studies that indicate a favorable association with a sense of belonging, a feeling of contentment, and employees being more productive.  

The same Ipsos Workplace Belonging Survey linked above, found that 88% of respondents either strongly or somewhat believe that a sense of belonging contributes to increased productivity at work.    

In addition, the survey indicated that only 36% believed they worked in an inclusive atmosphere. The research highlights both the value of belonging and that there is a lot of work to do. If less than 40% of people in the world’s most developed economy feel a feeling of belonging, it obviously suggests that employers need to make a lot more effort.


Lack of a sense of belonging may contribute to low morale among employees, which can result in lower levels of performance. Additionally, if employees do not see long-term career opportunities, they will seek alternate employment. Nearly half of respondents to the study are either actively looking for another role or are open to new chances. The survey also indicated that people actively pursuing another employment are much more likely to feel ‘lonely and excluded at work’.

​Investment - Bias Recognition and Mitigation 
Devise an internal communication plan that not only informs employees of inclusion initiatives but also engages and promotes input. Conduct internal marketing, making use of microsites, blogs, posters, and internal DEI champions. 
 Recognition and Mitigation
Recognising Biases

A typical counterargument to workplace DEI is, ‘if someone has the ability, they will obtain the job’.

This argument relies on employment being granted on merit, the assumption being that recruitment processes are fair and free from bias and discrimination. Therefore, if someone from a minority group fails to secure a job, they did not have the ability.

The concept that the best person will receive the job assumes there is a level playing field, and that if someone fails to achieve in life it is completely their fault. Michael Sandel criticizes this assumption in his book, The Tyranny of Merit.1 He shows evidence that even educational accomplishment is tied to socioeconomic background – for example, two-thirds of Harvard students are from the top fifth of the US income scale. 

Even where you have comparably qualified, skilled applicants, biases might lead to vastly different outcomes. These biases may be conscious or unconscious — that is, purposeful or unintentional. Another, lesser-known aspect is something psychologist, author, and Nobel Prize–winner in economics, Daniel Kahneman, characterizes as ‘noise’. 

Noise refers to external variables that lead to uneven decision making. External influences can include, for example, the time of day someone conducts a job interview, which is also a form of prejudice that can lead to inconsistent decision making.

1 Michael J. Sandel, The Tyranny of Merit: What’s Become of the Common Good (New York: Farrar, Straus and Giroux, 2020).

Bias and Behaviour
Bias is a set of assumptions and stereotypes that people have regarding those different from themselves. Biases are built up by the effects of individuals around them and can include their background, the media they consume, and their network of friends and acquaintances. Biases can be both positive and bad, such as expecting that persons from specific backgrounds will be better at arithmetic or that a person from a less prestigious university will be less capable.  

Bias Is Unavoidable and Human
The amount of information that humans are bombarded with every day is impossible for our conscious brain to cope with, and so, our unconscious brain makes the majority of our daily decisions. In Daniel Kahneman’s book, Thinking, Fast and Slow,2 he discusses System 1 and System 2 thinking. System 1 refers to the quick unconscious decisions that we make, whereas System 2 thinking involves purposeful decisions. According to his studies, more than 90% of our decisions are based on System 1 thinking.  

This technique works well for ordinary daily chores, but how does it effect decision making for crucial tasks? Going back to the hiring practices described above, we find that System 1 thinking can permit unconscious stereotypes and prejudices stored in our brain generate decisions that are contradictory to the ideals of fairness and equity.

Bias Translates into Behaviour
Although mentally we may feel that we are inclusive and embrace the idea of meritocracy, in our daily lives, a considerable percentage of our action will be based on unconscious thinking. A male executive may believe that they favor equality of opportunity and more women getting into senior level roles, but in their dealings with female executives, much of their behaviour may be based on their unconscious biases. If, for example, they had a traditional upbringing in which women in the family performed traditional duties of caregiving and managing the home, it may alter their expectations of female executives and how females should behave in the office.   

Bias Affects Performance
Bias can create an environment in which groups adversely categorized by management are perceived to perform poorly because they present differently. This attitude is typically the cumulative consequence of the expectations of specific groups held by senior management, and so, those groups could become isolated and ignored and not receive as much management support or recognition. Even tiny mistakes by members of these groups could be exaggerated in the perspective of management, which may result in a self-fulfilling prophesy of bad performance. 

INDIVIDUAL
Most diversity projects concentrate at the individual level with the aim of changing attitudes and conduct. Diversity training is the most typical approach at creating inclusiveness. But the media is replete with reports on the ineffectiveness of diversity training, citing substantial study on the subject.

The problem is that training is often being carried out in a vacuum – that is, with no correlation with business objectives. Attitudes and behaviour of individuals may be changed by attending a training session, but if they do not receive support from their supervisors and peers, they may revert to their unconscious biases and related behaviours.  

GROUP/TEAM
At the group/team level, insider–outsider dynamics truly come into play. The influence of unconscious prejudice, which perpetuates stereotypes, can be large and destructive because it impacts an entire community of people.  

If the executive team, for example, predominantly consists of men, then typical male qualities may be perceived as being perfect for leadership. In this circumstance, women coming into the executive team may find it challenging to make an influence.  

ORGANISATION

Stereotypes and bigotry truly become established at the organisation level.  

The insider groups at the top of the hierarchy affect policies and processes as well as the unwritten rules, habits, and traditions. These can have unconscious and inadvertent bias built in.  



The impact of bias in leadership roles can become institutionalised and apparent in policies, practices, and systems, frequently referred to as systemic bias. Some forms of bias may be advantageous, such as an investing firm being risk adverse in its investment decisions, which may serve its investors well during market volatility or economic turmoil. 

While some forms of bias serve a business well, there are other sorts of bias, such as in recruiting or promotion, that can promote prejudice and block talented people from acquiring employment or growing in their career.


MARKETPLACE
A crucial force for change in a linked, globalised society is at the marketplace level.  

Does a company’s brand represent the diversity of its consumer base? Is there a gap between the varied picture portrayed in ads and other promotional material and the real make-up of the organisation? Is the organization able to engage a varied consumer in an inclusive manner?  


An corporate culture that comes from unconscious bias will come over in client

How Bias Can Affect Investment Decisions
Bias not only influences decisions we make about other people, but it also affects other critical elements of our lives, such as how we manage our finances and even how we invest money. Behavioural finance is the study of the role human psychology plays in the way people invest and its impact on financial markets. This contrasts with standard economic and financial theory, in which there is an assumption that investors are rational and make judgments based on an analysis of all available evidence. All investors, from amateurs to seasoned money managers, have the ability to act impulsively.

Irrational behaviour in this context involves departing from proven analytical techniques and objective decision making. Some of this unreasonable behaviour is based on personal biases. As with any sort of bias, these can be altered by group conduct. Studies within this sector have revealed many types of prejudice that are widespread among investors. 

Overconfidence in Forecasting Skills
People displaying unwarranted faith in their own intuitive thinking, judgements, and/or cognitive ability. This bias can lead to hazardous activity, such as persons assuming they can dependably forecast how financial markets would behave.

Confirmation Bias
When a person has an initial theory and is then obsessed on any data that confirms their belief, ignoring other data which may invalidate the hypothesis. 

Availability Bias Individuals giving undue weight to easily accessible information rather than carrying out comprehensive investigation and analysis that may challenge readily available data. 

Illusion of Control
Similar to overconfidence, individuals assume they can control uncertain outcomes, such as corporate success or stock price behaviour

Self-Attribution Bias
People take credit for triumphs while blaming failures on external factors. This behaviour may be an attempt to preserve one’s self-esteem, while insulating oneself from taking personal responsibility for failures.

Hindsight Bias
Another protection strategy when, rather than conceding that their projections were not as accurate as they expected, individuals claim to have ‘known it all along’.

Biases in all their manifestations are ultimately a manifestation of human psychology that can create unreasonable action.


As much as prejudices can affect workplace and team dynamics, they can also impair investor–client relationships and reduce the effectiveness of investment teams. Firms that address workplace bias and effectively build an inclusive working environment will benefit from a workforce that has a strong sense of belonging. This will lead to greater levels of morale and dedication and help eliminate investment bias by permitting strong, yet respectful, debate. 

Mitigating Biases


Variables like bias can lead to unjust decisions being made in all facets of the employee experience. The significance of DEI is that it adds challenge into processes. DEI training enables individuals to take a step back to look at whether their decisions and the decision-making process were fair and transparent.

Building in supervision and examination into decision-making processes ensures a fairer conclusion. Even where there are fair and open processes in place, extraneous variables, such as time constraint, might lead to circumvention. If there is comprehensive and consistent scrutiny of decisions, bypassing protocols is less likely to happen. 

" " Consistently following an inclusive strategy leads to behaviour change as the approach becomes part of organizational culture. 

Can People Become De-Biased?


The objective of unconscious bias training is to make attendees aware of biases and assist them accept and realize that they and everyone else have biases. The theory is that if people comprehend the notion of bias and acknowledge their own prejudices, this heightened awareness would lead to less prejudiced decision making.

" " Single training sessions without ongoing coaching, however, are unlikely to lead to any good or long-lasting behavioural change. Despite unconscious prejudice being innate in all of us, there are steps that businesses may take to lessen its impact:

Help individuals acknowledge the idea that they and everyone else have biases, and that it has an impact on their decision making and behaviours.


Individuals should become aware of their prejudices by intentionally thinking about views that they hold about others different from themselves. Writing things down and establishing a list to which they can refer can be beneficial.


Interact often with people different from yourself.


Utilise 360 feedback systems as part of performance review, in which a varied set of colleagues can remark on performance.


Develop cross-cultural awareness through literature and training.

Addressing Workplace Bias

A proven strategy to avoid bias from impacting judgments is to build in safeguards, oversight, and examination to interrupt biased behaviour. As an example, just establishing a policy stating hiring managers need to conduct interviews of job applicants as a panel would not contribute to inclusion unless there are measures to assure adherence to agreed-on policies. Safeguards include requiring recruiting managers to confirm who will be the panel members for all rounds of interviews, sending interview notes to HR, and following objective and consistent criteria. Additionally, the talent acquisition unit should perform frequent random audits of the hiring process and interviewees to guarantee compliance.

Assess the organisation’s culture in connection to DEI through surveys, focus groups, and one-to-one interviews.

Review policies, processes, and systems and analyse customer and marketplace data. 

Adopt a top-down strategy. Form a diversity council chaired by the CEO or other senior leaders to design a plan and oversee DEI activities. The council should include of top officials from major revenue-generating departments, not merely the human resources department. 

Produce DEI metrics with both quantitative and qualitative indicators.

As part of the broader approach, provide diversity-awareness training looking at unconscious prejudice and techniques for recognizing individual fears surrounding dealing with persons from under-represented groups.

Assess the impact of DEI programmes. Review data on the achievement of targets set in diversity measures. Assess what has and what has not worked. Identify follow-up actions.

Over time, new behaviours will get embedded, and that is when actual behavioural change will happen.  

Individuals can limit the influence of their personal prejudices simply by ensuring they follow processes, and, over time, it becomes a part of business as usual.  

As an example, when a manager has to recruit a new team member either owing to business development or an existing employee departing, they are under a time pressure. It is customary in such cases to go with the safest alternative in the manager’s judgment, which means the decision is impacted by the manager’s personal biases. If the manager works in an organisation where there is strong scrutiny of recruitment decisions, following a fair and transparent process becomes internalised by management.

​Investment - Key Concepts in DEI 
CFA Institute DEI Code 
A major purpose that CFA Institute offers is to design and implement codes, best practices, and guidelines for the investment management sector. CFA Institute launched the DEI Code in February 2022 in response to demand from investment industry professionals. Built by a very diverse working group of investment industry professionals, CFA Institute members, workers, and DEI practitioners, the Code is a set of six principles aimed to encourage diversity, equity, and inclusion across the investment management business. It is a global code and is being rolled out on a regional basis, commencing with the United States and Canada presently and then followed by the United Kingdom and Europe.

Principle 1

Pipeline – We commit to expanding the diversified talent pipeline.

Principle 2

Talent Acquisition — We pledge to establishing, executing, and sustaining inclusive and equitable hiring and onboarding policies.

Principle 3

Promotion and Retention — We commit to establishing, implementing, and maintaining inclusive and equitable promotion and retention procedures to minimize barriers to development.


Principle 4

Leadership — We promise to leveraging our position and voice to support DEI and improve DEI outcomes in the investing industry. We will hold ourselves responsible for our firm’s growth.

Principle 5

Influence – We vow to leverage our role, position, and voice to support and increase measurable DEI results in the investing sector.

Principle 6 – Measurement — We commit to measuring and reporting on our progress in driving superior DEI results inside our organization. We will offer regular reporting on our firm’s DEI indicators to our senior management, our board, and CFA Institute.

Drivers for Engaging on DEI
Human distinctions, such as color, gender, ethnicity, ability, age, religion or belief, sexual orientation, and socioeconomic status, position individuals either within dominant social identity groups or subjugated groups. This separation promotes insider–outsider dynamics, with the insider groups usually at the top of the hierarchy. The demographic environment often decides who is part of the insider group and who is part of the outsider group. Beyond demographic disparities, insider–outsider relations may be based on the level of education, university attended, and even which workplace department individuals are a part of, with some departments and individuals perceived as bringing more value to the business than others. 

DEI is vital in the workplace because valued employees perform better, and people feel valued when they can be themselves. If individuals have to cover any element of their identity in order to fit in, they may not feel engaged in the workplace. As a result, people may not perform to their best skills.

There is a body of evidence that says having a diverse workforce raises levels of innovation and creativity, enhances abilities for addressing challenges, and improves financial performance.

A 2013 report from Deloitte Australia and Victorian Equal Opportunity and Human Rights Commission titled ‘Waiter, Is That Inclusion in My Soup? A New Recipe to Improve Business Performance’, demonstrated that inclusive businesses experience the following:
83% increase in the ability to innovate 31% uplift in the responsiveness to changing client needs
42% boost in team collaboration

Willis Towers Watson, which has USD2.6 trillion in assets under advisement, studied more than 2,400 individual investment teams globally and found that diverse groups outperformed those with no gender or ethnic minority personnel by 20 bps (basis points) a year, on average.

What is Discrimination? 
There are three types of discrimination, which are detailed in the slides below. The slides will first introduce the form of discrimination and clarify each term, and then you will be presented with a scenario to assist you better grasp how prejudice can manifest in practice.

Direct Discrimination
Direct discrimination is when an individual is discriminated against because of a personal attribute they possess or are believed to possess.   

Indirect Discrimination
Indirect discrimination is where a condition applies equally to everyone yet puts individuals that share a particular attribute at a disadvantage. The condition has no objective justification.   

Harassment
Harassment includes unwanted activity, verbal and/or physical, that has the impact of making a person uncomfortable, embarrassed, intimidated, or upset. Sexual harassment is one of the most common types of harassment. 

Investment - ​Investor Engagement and Stewardship
Stewardship is often used as an overall word embracing the approach that investors adopt as active and involved owners of the firms and other entities in which they invest through voting and engagement. The name ‘steward’ is derived from two old English words — ‘stig’, meaning house, and ‘weard’, meaning guard. What in the Middle Ages referred to protection of the home, in the 21st century can apply to the protection of financial assets. The steward is the representative of the owner, responsible with acting in the owner’s interests and producing returns and long-term value from their assets.


Fiduciary duty is a requirement by the person (fiduciary) to look after another person’s assets, and they must attempt to maintain and increase the value of the assets with which they have been charged so that they are able to restore them in good order to their owner. As a steward is the representative of the owner, caring for assets on their behalf, the steward is tasked with fiduciary duty. 

Shareholder involvement is the means in which investors put into effect their stewardship obligations in keeping with the second principle from the Principles for Responsible Investment (PRI), which states:  

‘We will be engaged owners and incorporate environmental, social, and governance (ESG) issues into our ownership policies and practices’.



Stakeholder involvement is sometimes described as purposeful discussion with a specific objective in mind. That purpose will vary every investment, but often relates to improving companies’ business processes, notably in relation to the management of ESG issues.  

Given its focus on protecting and enhancing long-term value on behalf of the asset owner, engagement can span a vast range of issues that affect the long-term worth of a firm, including the following:  

Strategy 
Capital structure 
Operational performance and delivery 
Risk management
Pay
Corporate governance

ESG elements are crucial to these challenges. Opportunities and challenges afforded by ESG changes need to be incorporated in a business’s strategic thinking. A complete review of operational success must involve not only financials, but also critical areas essential to the company’s stakeholders: 

The long-term health of the firm, such as interactions with the workforce 
A culture that supports long-term value generation 
Dealing freely and fairly with suppliers and consumers
Having sufficient and effective environmental controls in place

An awareness of the whole range of significant risks facing a firm will always include ESG factors, and investors will want to engage with companies on this basis. 

Engagement Dynamics
In a 2018 report, PRI outlined three ESG engagement characteristics that it believes create value:
Communicative dynamics (the sharing of information) 
Learning dynamics (improving knowledge) 
Political dynamics (creating relationships)

Developing these dynamics needs investors to go beyond a financial understanding of the firm and its actions. Unless the steward attempts to develop communication and relationships and has a desire to learn, engagement is unlikely to be successful. 

To be successful in engagement, investors need to respect the specific conditions of the company, seeking knowledge and rapport rather than just proclaiming that business practices need to change.  

Benefits of Stewardship and Engagement
Stewardship and participation are important because they boost shareholder value and support investors in the performance of their fiduciary obligation. When done correctly, stewardship and engagement foster better information flows between investors and investees as the parties discuss and debate business-related issues.  

This flow allows them to learn from each other and to create a connection, but most crucially to encourage change when shareholders convey their thoughts on major difficulties that the firm is facing.  

Engagement helps organizations understand their investors’ (and potential investors’) expectations, allowing them to modify their long-term strategies accordingly to fit them. Engagement also enables companies to explain how their approach to sustainability links to their overall business strategy and provides an opportunity for corporations to remark on grades or scores determined by frameworks that they may believe do not reflect the complexity of an issue.   

Engagement also allows investors to work closely with a company over time on specific governance, social, or environmental concerns that the investor perceives as posing a downside risk to the business. By interacting with companies’ management — either individually or collectively — investment firms are able to push corporations to adopt better ESG practices, or at least to relinquish problematic practices.   

Effective Engagement


If involvement is to be effective in achieving change results, it needs that a clear objective is set from the start. The Investor Forum – a UK association set up to encourage collective conversation between investors and investees — explains involvement as follows:

‘Engagement is active discussion with a particular and targeted objective.… The underlying aim…should always be to protect and enhance the value of assets’.

Characteristics of effective engagement include the following:
Focus on long-term value preservation and creation
Framed by a comprehensive understanding of the nature of the company and drivers of its business model
Recognition that change is a process and should not be unnecessarily rushed
Consistent, clear, and honest messages and dialogues
Resourced correctly so that it may be delivered professionally
Resourced efficiently
Ongoing reflection so that lessons are gained to better future engagement activities

There are occasions in which engagement compels an investor to have a view. These instances include corporate acts, such as share issuances in which the investor can choose to participate or not, and planned takeovers in which the investor must decide whether to sell or to hang on to their shares. 

Voting
Voting is one part of stewardship engagement and tends to focus on corporate governance problems highlighted at shareholders’ meetings. Voting normally occurs yearly at the annual general meeting (AGM) and occasionally in between at special sessions called extraordinary general meetings (EGMs).  

questions considered for vote include frequently fundamental questions like the organization of the board, audit and oversight, CEO remuneration, and the capital structure of the company. Considering such matters with due care is part of fiduciary duty, and appropriate care may often demand active communication with the corporation to grasp the issues and convey any concerns and opinions. 

Engagement Styles 


Engagement styles differ depending on the legacy of stewardship teams. There is a distinction in thinking and strategy between investment teams with a history of governance-led involvement and those that have worked more on the environmental and social side. As material E and S concerns come from the nature of a company’s business activities, teams with this background tend to be organised by sector.

Such teams tend to focus on individual environmental and social issues and to pursue them strongly across sectors or the market as a whole. Because governance is determined more by national law and norms, firms with a governance legacy tend to focus on particular enterprises.

The beginning point for passive investors is often a particular issue and they attempt to engage with all companies impacted by that issue. 

Active investors start with a company and its business difficulties and design a bespoke involvement approach cutting across a range of issues.  

Issue-based methods to involvement are generally complemented with examples of best practices in a given area. By expecting all companies in a given sector to embrace certain best practices, investors may over time shift overall sector or industry practice advances. 

firm-focussed engagement tries to improve practice across a number of important ESG issues at a particular firm – the purpose is to boost performance of the portfolio overall, both in terms of ESG performance and investment performance.   

" " Used successfully, engagement can be a conduit for positive outcomes. It can be carried out throughout the complete range of financial asset types. The ideas and mindset of involvement and stewardship need to be applied with good reason and discretion to the diverse conditions and the levers that the investor controls. 

​Investment - The Benefits and Challenges of ESG Adherence

Perspectives for Adhering to Good Practices in ESG
There are a range of viewpoints on the purpose and value, both to investors and to society more broadly, on integrating ESG factors into investing decisions. We will explore those perspectives in the next sections.  

Risk Perspective
According to the World Economic Forum’s (WEF) top global hazards, climate now tops the risk agenda.

In 2015, Mark Carney, then Governor of the Bank of England and head of the Financial Stability Board, in a speech to financial regulators that became a cornerstone for the integration of climate change, referred to climate change as the tragedy of the horizon. In his annual letter to chief executives in 2020, Larry Fink, the CEO of BlackRock, announced that the investment firm would step up its assessment of climate change in its investment research since climate change was altering the world’s financial system.  

In a parallel letter to its clients, BlackRock committed to divesting from its actively managed portfolios any companies that generate more than 25% of their revenues from coal production and to requiring reporting from investee companies on their climate-related risks and plans for operating under the goals of the Paris Agreement to limit global warming to less than 2°C (3.6°F) above pre-industrial levels.

Fiduciary Duty and Economic Perspectives 
FIDUCIARY DUTY PERSPECTIVE
In the current investment system, financial institutions or individuals, known as fiduciaries, manage money or other assets on behalf of beneficiaries and investors. Beneficiaries and investors rely on these fiduciaries to serve in their best interests, which are often defined purely in financial terms.  

Because of the misunderstanding that ESG elements are not financially relevant, some investors have used the concept of fiduciary obligation as an excuse to not include ESG issues. But increasingly, academic studies and work performed over the past decade by progressive investing associations, such the Principles for Responsible investing (PRI), have underlined that financially material ESG considerations must be incorporated into the investment decision-making process.

Furthermore, failing to consider long-term value drivers, which include ESG problems, in investment practice is commonly regarded a violation of fiduciary obligation.

ECONOMIC PERSPECTIVE
Negative megatrends (e.g., climate change and resource scarcity) will, over time, produce a drag on economic development as fundamental inputs, such as water, energy, and land, become increasingly scarce and expensive and the prevalence of health and income inequities increases.  

The Financial Stability Board (FSB), an international agency that monitors and provides recommendations concerning the global financial system, has recognized climate change as a potential systemic risk.

The economic ramifications of environmental difficulties (such as climate change, resource shortages, biodiversity loss, and deforestation) and social challenges (such as poverty, income inequality, and human rights) are increasingly being recognised.

The Stockholm Resilience Centre has identified nine ‘planetary boundaries’ within which humanity can continue to develop and thrive for generations to come, but in 2017 found that four — climate change, loss of biosphere integrity, land system change, and altered biogeochemical cycles — had been crossed.  

A popular theory that builds on that of planetary borders is called ‘doughnut economics’, which blends planetary boundaries with the complementing concept of social limits.  

​Large institutional investors have assets, which due to their scale, are widely diversified across all industries, asset classes, and locations. As a result, their portfolios are sufficiently representative of global capital markets that they effectively own a slice of the total market. Their investment returns are consequently dependent on the continuous excellent health of the overall economy.  

Inefficiently allocating capital to companies with strong negative externalities can affect the profitability of other portfolio companies and the overall market return. It is in their advantage to act to decrease the economic risk offered by sustainability challenges to improve their whole, long-term financial performance.

Impact, Ethics, Client, and Regulatory Perspectives 
Impact and Ethics Perspective
Another rationale for adopting responsible investment is some investors’ idea that investments may, or should, help society alongside delivering financial gain. This attitude translates into emphasizing on investments with a positive impact and/or avoiding those with a negative impact.

Client Perspective
Clients are increasingly seeking for greater transparency about how and where their money is invested. This is motivated by the following: 

Growing awareness that ESG considerations influence firm value, returns, and reputation 

Increasing focus on the environmental and social implications of the enterprises in which they have invested 

Regulatory Perspective
Regardless of their ideas or convictions, some investors are being obliged to increasingly examine ESG problems. following the mid-1990s, responsible investment regulation has increased dramatically, with a boom in policy interventions following the 2008 financial crisis. Regulatory change has also been spurred by an awareness among national and international regulators that the financial sector may play an essential role in tackling global concerns, including as climate change, modern slavery, and tax dodging. 

Benefits of Adhering to Good Practices in ESG


One of the key motivations for ESG integration is the awareness that ESG investing can decrease risk and boost returns since it examines additional risks and injects new and forward-looking insights into the investment process.

Reduced Cost and Increased Efficiency
Sustainable business methods increase efficiencies by preserving resources, decreasing expenses, and boosting production. Significant cost reductions can emerge from improving operational efficiency through improved management of natural resources, such as water and energy, as well as from avoiding waste.  

Consider the impact of Unilever’s (UL:NYSE) eco-efficiency plan. Since 2008, Unilever avoided more than GBP639 million of energy expenditures, saved more than GBP106 million by improving water efficiency in their plants, and lowered costs by roughly GBP106 million by using fewer resources and producing less waste.  

Reduced Risk of Fines and State Intervention
Amid rising knowledge of climate change, dwindling energy resources, and environmental effect, state and federal government agencies are establishing legislation to safeguard the environment. Integrating sustainability into a business will position it to anticipate changing requirements in a timely manner.  

For example, a 2019 UN Environment Programme report revealed that there has been a 38-fold rise in environmental regulations placed in place since 1972. The greatest corporate fine to date was issued against BP (BP:NYSE) in the wake of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the largest in history. BP settled with the US Department of Justice for USD20.8 billion in 2016; the total compensation ultimately paid out by the business reportedly topped USD65 billion.

Reduced Negative Externalities
The term ‘externalities’ refers to circumstances in which the production or use of products and services creates costs or advantages to others that are not represented in the prices charged for them. In other words, externalities include the consumption, production, and investment decisions of organizations (and individuals) that affect others not directly participating in the transactions.  

In the instance of pollution, a polluter makes judgments based on solely the direct cost and profit potential involved with production and does not consider the indirect costs to those afflicted by the pollution. These indirect costs, which are not borne by the producer or consumer, may include poorer quality of life, increased healthcare costs, and forgone production opportunities — for example, when pollution impairs business operations, such as tourism.

Improved Ability to Benefit from Sustainability Megatrends
There are a plethora of ramifications from the so-called sustainability megatrends. Some of the megatrends that investors are increasingly concentrating on include the following:

Urbanisation 

Technological innovation 

Demographic change and wealth inequality 

Climate change and resource scarcity 

Being able to integrate a response to these trends into business operations might be a success element for an investee organization. From the investment standpoint, these megatrends can be part of a successful portfolio construction approach.

Therefore, business leaders, investors, economists, and governments are increasingly recognising the economic implications of social challenges (such as increasing income inequality and addressing poverty and human and labour rights abuses) and environmental issues (such as climate change, biodiversity loss, and resource scarcity).

Challenges in Integrating ESG


ESG investing has undergone remarkable progress in recent years, yet barriers still remain to its further growth.  

Some investors still doubt if considering ESG problems may add value to investment decision making despite wide-spread dissemination of studies suggesting that ESG integration can assist control volatility and boost returns.

Interpretations of fiduciary obligation are partially tied to the perception of the impact of ESG investment on risk-adjusted returns. Despite regulators in several jurisdictions articulating a modern conception of fiduciary obligation, contrasting perspectives continue as to how ESG integration fits in with institutional investors’ duties. Some institutional investors remain unwilling to modify their governance processes because they see a conflict between their responsibilities to defend the financial interests of their beneficiaries and the inclusion of ESG factors.

The difficulty is not just regarding the impact of ESG investing on portfolio returns.

Screening, divestment, and theme investment methods entail ‘tilting’ the portfolio towards desirable ESG qualities by over- or under weighting sectors or firms that either perform well or poorly in those areas. Institutional investors may believe that this contradicts with their responsibilities to invest sensibly because it requires departing from established market standards.  

Despite the obstacles and concerns, there is a growing acceptance in the financial industry and in academics that ESG considerations indeed influence financial performance. An examination of more than 2,000 academic research on how ESG elements affect business ;financial performance found an overwhelming percentage of positive outcomes, with just 1 in 10 revealing a negative association.1 Various research results also indicate that engaging with firms on ESG concerns can produce value for both investors and corporations by driving improved ESG risk management and more sustainable business practices. These results give evidence that ESG problems can be financially material to companies’ performance and potentially to alpha.

Challenges Prior to Wanting to Implement ESG –

Challenges prior to incorporating ESG considerations include the following: 


The perception that incorporating ESG elements may have a negative influence on investment performance. 

The interpretation that fiduciary duty hinders investors from integrating ESG.  

The advice supplied by investment consultants and retail financial advisers has many times not been supportive of solutions that integrate ESG.  

Challenges Faced After the Decision to Implement ESG

Challenges faced when deciding to apply ESG include the following:  
A lack of awareness of how to construct an investment mandate that successfully supports ESG or lack of understanding of the needs of asset owners about ESG.  

The impression that considerable resources, which may be missing in the market or may be pricey, are needed. These include human resources, technical capabilities, data, and tools. 

A gap between marketing, commitment, and delivery of funds regarding ESG performance

​
Investment- Environmental Factors
The range of environmental factors that have a meaningful impact on investments – the ‘E’ in ESG — is large and far-reaching. Environmental dangers have continued to acquire prominence and are creating heightened concern worldwide. We shall cover three essential elements relating to the environment:    


Climate Change

Climate change is defined as a shift, directly or indirectly related to human activity, that modifies the composition of the global atmosphere, and which is, in addition to natural climate variability, observable over comparable time periods. It is one of the most complex issues facing us today. It is an issue having local manifestations (e.g., extreme weather events, such as more frequent and/or more intense tropical cyclones) and global repercussions (e.g., rising global average temperatures and sea levels), which are predicted to increase in severity over time.

The principal man-made cause of the warming of the world is increased emissions of heat-trapping greenhouse gases (GHGs).  

Greenhouse gasses trap heat in the atmosphere, boosting the atmosphere’s temperature. CO2 is the most significant contributor to the warming impact; the display below demonstrates that its concentration in the atmosphere has bounced between 200 and 300 ppm (parts per million), and presently sits at 415 ppm and growing, leading to elevated physical and transition dangers. 

Climate change will damage economies and markets in the coming decades at an accelerated rate if we do not bend the PPM curve back towards the x-axis. Additionally, climate change could influence our brains; research published in the journal Environmental Health Perspectives indicated that at roughly 945 ppm concentration of CO2 in the atmosphere, human cognitive function reduces by about 15%. With a CO2 level of 1,400 ppm, cognitive performance is expected to diminish by around 50%

Physical Climate-Related Risks
Physical climate-related risks emerge from extreme weather occurrences, either acute or chronic dangers from longer-term shifts in climate patterns — for example, increased temperatures. 

Transition Risks
Transition risks are a result of changes in climate and energy policies, a shift to low carbon technologies, and liability difficulties.  

Pressure on Natural Resources
Nearly 70% of the planet is covered by water, but just 2.5% of it is fresh water.2 Water is a key natural resource, not just for human consumption, but also for a range of agricultural, industrial, and home energy generation and for recreational and environmental activities.

Water shortage is the lack of freshwater supplies to meet water demand. The UN’s Sustainable Development Goal (SDG) 6 is the requirement ‘to ensure availability and sustainable management of water and sanitation to all’ by 2030.3 Water shortage — caused either by economic issues, such as lack of investment, or by physical repercussions connected to climate change — continues to generate substantial concern, especially among developing and emerging economies.

Biodiversity, as defined by the Convention on Biological Diversity, means the ‘variability among living organisms from all sources, including among other things, terrestrial, marine, and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species, and of ecosystems’.

Unfortunately, global biodiversity is undergoing a catastrophic reduction. In 2019, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) presented a historic assessment, which stated that about one million animal and plant species are now threatened with extinction, many within decades, more than at any other time in human history

Land use management strategies and forestry, commonly known as agricultural, forestry, and other land use (AFOLU), have a huge impact on natural resources like water, soil, nutrients, plants, and animals. Covering nearly 30% of the world’s land area, or little under 4 billion hectares, forests are a critical element of the carbon cycle. They convert the CO2 in the air to oxygen, through the process of photosynthesis, and are a natural regulator of CO2, with the world’s tropical forests playing a particularly vital role in sequestering carbon. The more trees, the less CO2, and the more oxygen there is in the atmosphere.

Unfortunately, deforestation is accelerating: From 2001 to 2019, there was a total of 386 million hectares of tree cover loss globally, corresponding to a 9.7% decline in tree cover since 2000 and 105 mega tons of CO2 emissions, according to Global Forest Watch

Absorbing 50 times more CO2 than the atmosphere, the ocean is the planet’s largest carbon sink, with photosynthetic micro-organisms on its surface layer providing over half of the world’s oxygen. It is one of the most important natural resources.

The OECD (Organisation for Economic Cooperation and Development) estimates that ocean-based industries provide around EUR1.3 trillion to global gross value added. Oceans supply fish and are commonly used for transportation (shipping). They are also mined for minerals (salt, sand, and gravel as well as some manganese, copper, nickel, iron, and cobalt, which can be found in the deep sea) and drilled for crude oil.

The oceans’ riches are a source of economic growth and are also known as the blue economy.6 Communities in close association with coastal ecosystems, small islands (especially Small Island Developing States), polar zones, and high mountains are particularly sensitive to ocean change, such as the rise in sea level and temperature.

Pollution, Waste, and a Circular Economy
Pollution is the leading environmental cause of disease and premature death in the world today. According to findings published in October 2017 by the Lancet Commission on pollution and health, diseases caused by pollution were responsible for an estimated 9 million premature deaths in 2015 — 16% of all deaths worldwide — which is three times more deaths than from AIDS, tuberculosis, and malaria combined and 15 times more than from all wars and other forms of violence.

New research published in the journal Environmental Research in February 2021 demonstrates that the combustion of fossil fuels is a substantial source of airborne fine particulate matter and a key contributor to the worldwide burden of mortality and disease.   

Water pollution occurs when contaminants (such as toxic chemicals or microbes) are introduced into the natural environment through the ocean, rivers, streams, lakes, or groundwater. Water contamination can be caused by spills and leaks from untreated sewage or sanitation systems and industrial waste discharge. 


The circular economy is an economic model that tries to reduce waste and to conserve the value of resources (raw materials, energy, and water) for as long as feasible. It is an effective model for organizations to examine and manage their operations and resource management since it is an alternate method to the use–make–dispose economy. The circular economy is built on three principles:   


Design out waste and pollution

Keep products and supplies in use
Regenerate natural systems

Use of these principles can help lessen demand on natural resources and lead to more sustainable behaviors. Companies who employ these principles may also be a more tempting investment possibility for those concerned with environmental problems. 

Social Factors


Social factors – the ‘S’ in ESG — can be divided between those effecting external stakeholders (such as customers, local communities, and governments) and groupings of internal stakeholders (such as a company’s employees).

​Governance Factors
Corporate Governance — the ‘G’ in ESG — is the process by which a corporation is managed and overseen. Governance is about people and processes, although rules vary worldwide. Governance stems from the legal system of the country in which a corporation is incorporated.

Corporate governance is about the individuals who manage a corporation and how those people are supported by systems to exercise their responsibilities effectively. Good governance is also about building an acceptable company culture that will back the execution of excellent business performance without excessive risk-taking and via appropriate conduct of business operations.

In practice, corporate governance comes down to two ‘A’s’: Accountability and Alignment.

Accountability 


For accountability to work, people require the following:


To be granted the authority and duty for decision making   


To be held accountable for the implications of their decisions and the efficacy of the work they deliver 

Just as people are most effective when they are mindful of being answerable to someone — often their manager — in the same way, top executives need to feel accountable to the non-executives on the board of directors. In turn, that board will be most effective when its non-executive members feel accountable to shareholders for effective delivery. 

Therefore, corporate governance has a particular focus on board structure and the independence of directors. The function of the chair of the board is crucial in facilitating a balanced discourse in the boardroom. Consequently, many investors prefer that the chair be an independent non-executive director. 

​Alignment 
Alignment boils down to the challenge of the agency problem. The agency problem arises because the interests of professional managers, the agents, may not always be entirely aligned with the interests of the owners of the firm, and so the company may not be run in the way the owners want it to be run. Corporate governance seeks to guarantee that there is greater alignment in the interests of the agents with the owners through incentives, but also through suitable chains of accountability to limit the possible negative implications of the agency problem.

Accountability: Board Committees 


The three core committees of the board, normally required by corporate governance laws, are established to respond to three key challenges: accountability and the board, accountability and accounting, and alignment and executive pay.

Nominations Committee
The nominations committee works to ensure that the board overall is balanced and effective, ensuring that management is held accountable

Audit Committee 
The audit committee monitors financial reporting and the audit, delivering accountability in the accounting. The audit committee will also monitor internal audits, when this exists, and unless there is a separate risk committee, will also have responsibility for risk oversight

Remuneration Committee
The remuneration committee strives to deliver an appropriate alignment between owners and management through executive pay and benefits.   

Corporate Governance Codes 
Corporate failures and scandals have been a significant motivation for the formalisation of corporate governance and the adoption of codes. The world’s first formal corporate governance code emerged in the United Kingdom in 1992 and was based on recommendations of the Committee on the Financial Aspects of Corporate Governance in their final report7, also called the ‘Cadbury Report’ because the committee was chaired by Sir Adrian Cadbury.

Much of what the report advised is still considered best practice today and has been incorporated in codes and standards globally. The committee’s primary premise is that no one should have ‘unfettered powers of decision’. For example, the duties of chair and CEO should not be mixed.  

A formalized set of rules for good governance has emerged from the core concepts of accountability and alignment. The following themes are constant across most of the world’s corporate governance codes:   

Board leadership and company purpose
Division of responsibilities
Composition, succession, and evaluation
Audit, risk, and internal control
Remuneration

Governance vary from country to country depending on culture and historical development as well as local corporation legislation. At the most basic level, some nations, including Germany and the Netherlands, have two-tier boards with fully non-executive supervisory boards overseeing management boards. 

Others have single-tier boards, with some dominated by executive directors (in Japan). Some have a combined CEO and chair (most typically seen in the United States and France), and some lie in between these types (for example, the United Kingdom). 

Of the three ESG criteria, governance is the element most typically taken into consideration by traditional investment analysts. Academic research reveals that among the three ESG elements, governance has the closest link to financial performance. Good governance is crucial to a company’s performance, both in terms of long-term shareholder value creation and the creation of greater prosperity for society and all stakeholders. 

If a firm delivers good governance, it is more probable that it will also handle environmental and social concerns with the proper long-term attitude, and thus avoid or effectively manage important risks and capture relevant possibilities. Failures of governance can be damaging to shareholders and other capital suppliers.

​Investment- Approaches to Responsible  investing 
ESG investing is part of a range of practices collectively referred to as responsible investment or sustainable investment. Although ESG investing is concerned with how ESG concerns can effect the long-term return of assets and securities, alternative responsible investment techniques can also take into account non-financial value creation and reflect stakeholder values in an investment strategy.

Responsible investment may mix financial with non-financial outcomes and complements typical financial research and portfolio creation strategies.

The table below illustrates some of the conceptual differences between these approaches and how they range from strictly ‘finance-only’ investments, with no consideration of responsible investing factors, to the other end of the spectrum, where the investor may be prepared to accept returns lower than comparable investments in exchange for the higher positive impact that the projects and companies in the portfolio deliver.

As investors shift towards the right side of the spectrum, they are increasingly interested in aligning their capital with responsible investment possibilities in order to gain associated financial returns and/or to have a good influence by financing solutions to societal difficulties.
The Spectrum of Responsible and Financial Investing



Defining ESG Investing
ESG investing is a strategy to managing assets in which investors deliberately consider environmental, social, and governance (ESG) factors in their investment decisions with the long-term return of an investment portfolio in mind. In other words, ESG investing tries to appropriately identify, evaluate, and price social, environmental, governance, and economic risks and opportunities.

ENVIRONMENTAL FACTORS
Environmental elements are those relevant to the natural world. These include the use of, and interaction with, renewable and non-renewable resources (e.g., water, minerals, ecosystems, and biodiversity).

Social influences affect the lives of humans. The category encompasses the management of human capital, non-human animals, local communities, and clientele.   

GOVERNANCE FACTORS
Governance elements are those that involve issues connected to countries and/or jurisdictions or are normal practice in an industry as well as the interests of broader stakeholder groups.    

The Scope of ESG Investing
There is currently no common criteria for allocating E, S, and/or G to issues, and they may overlap with one another. Investors interested in investigating E, S, and/or G factors are typically concerned about the associated challenges, which the following table presents a few examples of for each factor

Corporate Social Responsibility
ESG investing and corporate social sustainability are closely intertwined. Corporate social sustainability is an approach seeking to produce long-term stakeholder value through the implementation of a company plan that emphasizes on the ethical, social, environmental, cultural, and economic components of doing business.

ESG investing understands that the development of long-term sustainable returns is dependent on stable, well-functioning, and well-governed social, environmental, and economic systems, which is often dubbed the triple bottom line (TBL). The TBL accounting theory widens the traditional accounting framework, which has previously primarily centered on profit, to include two new performance areas: the social and the environmental impact of a company’s operations

Responsible Investment Approaches
ESG is an important component of responsible investing. We will now discuss approaches to responsible investment and their characteristics. The following slides illustrate approaches that all integrate ESG factors.

Socially Responsible Investment (SRI) is a method that applies social and environmental issues to evaluate enterprises. Investors applying SRI generally grade firms using a defined set of criteria in conjunction with sector-specific weightings. A hurdle level (minimum ESG score for companies being evaluated) is established for qualification within the investment universe based on employing either the complete universe or sector-by-sector analysis. This information serves as the initial filter to produce a list of SRI-qualified companies.  

SRI rating can also be used in connection with best-in-class investments, thematic funds, high-conviction funds, or quantitative investment methodologies.      

The Best-in-Class Investment method entails selecting only those companies that overcome a set rating hurdle, developed using ESG criteria within each sector or industry.  

Typically, organizations are assessed on a variety of parameters that are weighted according to the respective sector.  

The portfolio is then created from the list of qualified companies. 

The Sustainable Investment strategy selects assets that contribute in some way to a sustainable economy — that is, an asset that minimises natural and social resource depletion.  

It is a broad phrase, with a broad variety of interpretations that may be utilized for the assessment of common ESG issues.  

It may incorporate best-in-class and/or ESG integration, which evaluates how ESG problems effect an investment’s risk and return profile.  

It is further used to characterize companies having good influence or companies that will benefit from sustainable macro-trends.  

The word ‘sustainable investment’ can also be used to imply a strategy that screens out activities considered contradictory to long-term environmental and social sustainability, such as coal mining or prospecting for oil in the Arctic regions.  

The Thematic Investment strategy entails selecting companies that fall under a sustainability-related theme, such as clean-tech, sustainable agriculture, healthcare, or climate change mitigation. Thematic funds identify companies throughout several sectors that are connected to the theme.  

A smart city fund, for example, might invest in companies offering activities or products connected to electric vehicles, public transportation, smart grid technology, renewable energy, and/or green buildings. 

The Green Investment method entails allocating funds to assets that minimize the following:

Climate change 

Biodiversity loss 

Resource inefficiency  

Other environmental concerns (e.g., low carbon power generation and cars, smart grids, energy efficiency, pollution control, recycling, and waste management)  

Green investment can thus be considered a large sub-category of theme investing (see previous slide) and/or impact investing (see next slide). Green bonds, a sort of fixed-income instrument that is particularly intended to raise money for climate and environmental projects, are extensively utilized in green investing.  

The Social Investment method directs funds to assets that address social concerns. These can be goods that address the bottom of the pyramid (BOP). BOP refers to the lowest two-thirds of the economic human pyramid, a group of more than four billion people living in poverty.  

More broadly, BOP refers to a market-based strategy of economic development that tries to simultaneously reduce poverty while generating growth and profitability for enterprises servicing these regions. The following are some examples: 

Microfinance and microinsurance 
Access to basic telecommunication 
Access to improved nutrition and health care 
Access to clean energy 


In effect Investing, investments are undertaken with the specific goal of generating positive, measurable social and/or environmental effect alongside a financial return (which differentiates it from venture philanthropy). These are frequently connected with direct investments, such as in private debt, private equity, and real estate. But in recent years, impact investing has gradually become more common in the public markets.  

Impact investments provide capital to address the world’s most pressing concerns by investing in projects and companies that may do the following: 

Offer access to basic services, including housing, healthcare, and education 

Promote availability of low-carbon energy 

Support minority owned businesses 

Conserve natural resources 

Measurement and tracking of agreed-on impact is at the heart of the investment proposition. Impact investors have various financial return expectations. Some purposely accept lower returns than comparable investments in keeping with their strategic objectives. Others pursue market-competitive and market-beating returns, often compelled by fiduciary duty. 

An ethical (also known as value-driven) and Faith-Based Investment approach refers to investing in line with certain principles, often using negative screening to avoid investing in companies whose products and services are deemed morally objectionable by the investor or certain religions, international declarations, conventions, and voluntary agreements. Typical exclusions include tobacco, alcohol, pornography, weapons, nuclear power, and substantial infringement of agreements, such as the Universal Declaration of Human Rights or the International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work.  

Shareholder engagement represents active ownership by investors in which the investor strives to influence a company’s actions on concerns of ESG, either through communication or votes at a shareholder meeting. It is considered as complementary to the other techniques since it pushes firms to operate more responsibly.

All types of ethical investment, except for engagement, are ultimately tied to portfolio construction – that is, the securities a fund holds. The investing approaches mentioned above highlight the wide variety of different types of ethical investment. 

​Investment- Performance Attribution

Benchmarks constitute the basis of performance measurement, which is an important aspect of performance evaluation. By comparing the performance of a UK equity fund with the performance of an appropriate UK equity index, the fund’s investors can get an idea of how well the fund is performing relative to the market in general, both in terms of average return and in terms of risk, by calculating the fund’s tracking error or information ratio.



Benchmarks can also be utilized to analyze the causes behind the fund’s performance. By employing proper financial market indicators, the fund manager’s performance can be deconstructed to uncover the sources of returns. Depending on the nature of the fund, the performance itself could originate from the following sources: 
 Asset allocation 
Sector selection
Stock selection 
Currency exposure

Determining how much of the performance is the consequence of the choices of asset classes, sectors, individual stocks, and currencies is known as performance attribution. The following example provides an illustration of performance attribution.