CFA Sustainable Investing cheat sheet

ESG is a three-pillar framework (environmental, social, governance) used to identify material risks and opportunities that traditional financial analysis may omit.

Responsible investment is the umbrella term; ESG integration, screening, thematic investing, impact investing and stewardship are approaches within it.

Brundtland Commission (1987): sustainable development meets present needs without compromising the ability of future generations to meet their own needs.

Financial materiality: an ESG issue is material if it could reasonably affect an entity's cash flows, cost of capital or enterprise value; materiality is sector- and time-specific.

Double materiality (EU) requires disclosure of both how sustainability issues affect the company financially and how the company impacts environment and society.

Shareholder primacy targets maximisation of owner value; stakeholder theory also weighs employees, customers, communities and suppliers.

The six PRI Principles were launched in 2006, convened by UNEP FI and the UN Global Compact; signatories commit to incorporation, ownership, disclosure and reporting.

Impact investing requires intentional, measurable positive environmental or social outcomes alongside financial return; ESG integration alone does not.

GSIA's seven responsible investment strategies: exclusionary screening, best-in-class, norms-based screening, ESG integration, sustainability-themed, impact investing, corporate engagement and shareholder action.

Green, social and sustainability bonds follow ICMA principles: use of proceeds, project evaluation and selection, management of proceeds, and reporting.

Sustainability-linked bonds impose no use-of-proceeds restriction; the issuer commits to KPIs and sustainability performance targets (SPTs), typically with coupon step-ups on failure.

EU Taxonomy: substantial contribution to one of six environmental objectives, do no significant harm to the others, and comply with minimum social safeguards.

SFDR distinguishes Article 6 (no ESG promotion), Article 8 (promotes E/S characteristics) and Article 9 (sustainable investment objective); it is a disclosure regime, not a label.

TCFD (FSB, 2017) recommends disclosure across four pillars: governance, strategy, risk management, and metrics and targets.

The ISSB issued IFRS S1 (general sustainability-related financial disclosures) and IFRS S2 (climate) in June 2023.

Rating divergence across providers stems from differences in scope, indicator selection, weights, normalisation and qualitative judgement; coverage is weakest for small issuers and emerging markets.

GHG Protocol: Scope 1 = direct emissions; Scope 2 = purchased electricity, heat and steam; Scope 3 = all other value-chain emissions, typically the largest and hardest to measure.

Physical risk divides into acute (flood, storm, wildfire) and chronic (sea-level rise, temperature change); transition risk into policy/legal, technology, market and reputational.

Portfolio carbon footprint = (sum of holding value x holding Scope 1 and 2 emissions) / portfolio value, expressed in tCO2e per $m invested.

WACI = sum of (weight_i x emissions_i / revenue_i); carbon intensity metrics differ by denominator (revenue, EVIC, market cap), so comparison requires an identical basis.

PCAF attribution factor for listed equity = outstanding amount invested / investee enterprise value including cash (EVIC).

TCFD scenario analysis typically uses orderly, disorderly and hot-house world pathways, commonly illustrated at 1.5°C, 2°C and 4°C.

Stranded assets are fossil-fuel reserves or infrastructure that may lose value before the end of their economic life under decarbonisation and policy constraints.

Environmental externalities (emissions, water use, waste, biodiversity loss, deforestation) are unpriced costs; carbon pricing or regulation converts them into financial risk.

Core social issues: human capital and labour standards, health and safety, product safety and quality, customer welfare, data privacy, community relations, and access to finance or healthcare.

ILO core conventions cover forced labour, child labour, freedom of association, collective bargaining, equal remuneration and non-discrimination.

UN Guiding Principles on Business and Human Rights: the state duty to protect, the corporate responsibility to respect, and access to remedy.

Modern slavery and supply-chain transparency laws (e.g., UK Modern Slavery Act 2015, Australia 2018) mandate disclosure rather than direct import bans.

Norms-based screening excludes issuers that breach international norms (UN Global Compact, OECD Guidelines) rather than screening on sector.

Social data is generally less standardised, more qualitative and less frequently reported than environmental or governance data.

Just transition assesses the distributional effects of decarbonisation on workers, communities and consumers, and is the social dimension of climate policy.

Key governance factors: board composition and independence, separation of chair and CEO, committee structure, audit quality, remuneration, shareholder rights, ownership structure, anti-corruption controls.

One share-one vote supports minority protection; dual-class shares, staggered boards and poison pills reduce shareholder influence.

Say-on-pay votes are usually advisory; a high dissent level signals concerns over remuneration levels or pay-for-performance linkage.

Executive pay is assessed on structure (fixed versus variable, LTIP), performance metrics, time horizon, clawback provisions and disclosure quality.

Related-party transactions and controlling shareholders are governance red flags for expropriation of minority investors.

G20/OECD Principles of Corporate Governance address shareholder rights, equitable treatment, disclosure, board responsibilities and stakeholder roles.

Governance is the most standardised and quantifiable ESG pillar and historically shows the strongest empirical link to financial outcomes.

Bribery, corruption, tax avoidance and weak whistleblowing channels raise regulatory, reputational and litigation risk.

The UK Stewardship Code 2020 contains 12 Principles and an apply-and-explain reporting regime; signatories report annually or are removed from the list.

Escalation ladder: monitoring, private dialogue with management, board engagement, voting against resolutions or directors, shareholder resolutions, public statements, litigation, divestment.

Proxy advisers (e.g., ISS, Glass Lewis) supply voting research and recommendations, but the voting decision and fiduciary responsibility remain with the investor.

Collaborative initiatives (PRI, Climate Action 100+ and investor networks) increase leverage but dilute individual control over objectives and timing.

Engagement effectiveness is judged against milestones and objectives agreed in advance, not by the number of meetings held.

Divestment forfeits future engagement leverage and exposure to the transition, but provides a clear signal and may be required by client policy.

Asset owners apply stewardship codes to their managers through mandate terms, monitoring and reporting obligations.

Voting policies should cover director elections, remuneration, capital allocation, climate resolutions and shareholder proposals.

Integration requires ESG factors to be explicit, systematic and documented in research and valuation, with a traceable link to the investment decision.

SASB industry standards (now maintained under the ISSB) map financially material ESG topics to 77 industries across 11 sectors.

Valuation transmission routes: revenue and costs (cash flows), capex and asset life, discount rate/WACC, terminal value, and impairment risk.

Analysts apply ESG overlays as qualitative adjustments, quantitative score adjustments to forecasts, or scenario-weighted valuations.

Higher perceived ESG risk raises the required return and can compress multiples; demonstrated mitigation works in the opposite direction.

Third-party ESG scores vary materially, so proprietary assessment should weight material issues and underlying data over composite scores.

Green premium / brown discount describes valuation differentials observed between green and carbon-intensive assets, notably in fixed income and real estate.

Sector-relative benchmarking is essential because raw ESG scores embed industry bias.

Construction levers: exclusions, ESG tilts, best-in-class selection, optimisation with ESG constraints, thematic allocations and impact sleeves.

Every added constraint shrinks the feasible set relative to the benchmark and generally increases tracking error and concentration.

Benchmark choice drives sector and factor exposures; an ESG benchmark can differ substantially from a mainstream benchmark in composition and risk.

Exclusions reduce the investable universe and create sector, style and factor biases (e.g., underweight energy, overweight technology or quality).

ESG scores correlate with quality, low volatility and size factors, so ESG portfolios carry unintended factor tilts that should be measured.

Optimisation inputs (expected returns, covariance, ESG scores) are estimates; constraints should be stress-tested for feasibility and turnover.

Passive ESG products track ESG indices, so the index methodology (ratings-based, exclusion-based, Paris-aligned) determines the resulting exposures.

Monitoring covers holdings drift, constraint breaches, the engagement overlay and continuing alignment with the stated mandate.

Mandate design elements: investable universe, benchmark, active risk budget, liquidity, exclusions, voting policy, reporting requirements and fees.

Pooled funds offer standardised terms and lower cost; segregated mandates permit bespoke ESG constraints and client-specific reporting.

The IPS documents objectives, return target, risk tolerance, liquidity needs, time horizon, tax and legal constraints, and any ESG preferences.

Fiduciary duty requires ESG factors to be considered where financially material; purely non-financial preferences need explicit client direction and disclosure.

Client types: retail/wealth, high-net-worth, defined benefit and defined contribution pensions, endowments and foundations, insurers, sovereign funds.

Regulatory drivers include EU IORP II and SFDR, UK pension climate governance regulations, and US ERISA rules on pecuniary factors.

Values-based mandates (e.g., faith-based or ethical exclusions) differ from value-based mandates justified by financial materiality alone.

Fee and reporting terms should reflect the added cost of ESG research, engagement and data.

Core climate metrics: total carbon emissions, carbon footprint per $m invested, WACI, carbon intensity, fossil-fuel reserves exposure, green revenue share, implied temperature rise.

Financed emissions attribute investee emissions to the investor via an attribution factor (PCAF), which differs for listed equity, corporate debt, sovereigns, real estate and mortgages.

Denominator choice (revenue, market cap, EVIC) changes metric values and rankings, so comparisons require consistent methodologies.

Data quality should be disclosed using PCAF's five-point score (1 = verified reported data, 5 = estimated or proxy data).

Attribution decomposes relative return into allocation, selection and interaction effects; ESG attribution extends this to ESG-related exposures.

Ex-ante risk uses current holdings and a factor model; ex-post tracking error is the realised standard deviation of active returns.

Scenario analysis translates climate pathways into loss probabilities (climate VaR) and depends on horizon, coverage and pathway assumptions.

Backtests of ESG strategies suffer from look-ahead bias (data and ratings available only after the fact), survivorship bias and shifting index methodologies.

Reporting must be accurate, balanced and comparable across periods; methodology, data sources and limitations must be disclosed to avoid greenwashing.

SFDR periodic reports for Article 8 and Article 9 funds must show how E/S characteristics were met, taxonomy alignment, and for Article 9 the sustainable investment proportion.

EU Taxonomy alignment is reported as the proportion of turnover or capital expenditure in taxonomy-eligible and taxonomy-aligned activities (two approaches).

TCFD-aligned reporting covers governance, strategy, risk management and metrics/targets; ISSB standards increasingly form the baseline.

Stewardship reporting discloses engagement priorities, activities, escalation and voting records with rationale for significant votes.

UK pension schemes publish a Statement of Investment Principles and an annual implementation statement describing how ESG and stewardship policies were applied.

Impact reporting follows the Impact Management Project's five dimensions (what, who, how much, contribution, risk) and frameworks such as GIIN IRIS+.

Metric selection should match client objectives; a carbon footprint alone does not convey transition alignment or exposure to climate solutions.