Acid-Test Ratio

August 26, 2024August 14, 2024 by Anant JAIN

Acid-Test Ratio

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) explains how the Acid-Test Ratio can be used to assess the liquidity of company.

Introduction

The Acid-Test Ratio, also called the quick ratio or the acid ratio, is a liquidity ratio that determines if a company’s short-term assets are adequate to pay its short-term liabilities. Short-term liabilities can be debts (like bank debts) and commitments (like salaries). In other words, the acid-test ratio is a measure of a company’s ability to meet its financial obligations in the short term. There is a considerable danger of default if this is not accomplished.

Creditors regularly use the Acid-Test Ratio to assess their customers and borrowers, respectively. It may also be used by shareholders to determine if a company has enough cash to pay a dividend to its shareholders.

Calculation Of Acid-Test Ratio

To get a company’s acid test ratio, sum up all of its liquid assets, such as cash and cash equivalents along with its short-term investments such as marketable securities, as well as accounts receivable, and divide by the entire amount of current liabilities. On a company’s balance sheet, all of this information is listed as separate line items. On the balance sheet, the current liabilities amount is shown as a subtotal.

The acid-test ratio is calculated as follows:
Acid Test Ratio Formula 1

Where,

Cash and cash equivalents: company’s most liquid current assets, such as savings accounts, term deposits, and T-bills
Marketable securities: liquid financial instruments (like money market mutual funds) that may be easily turned into cash
Accounts receivables: funds owed to the company as a result of selling in credit products and/or services to customers
Current liabilities: debts and commitments that are due in the next 12 months:

Another method to calculate the numerator is to add up all current assets and exclude illiquid assets, such as inventory. As a result, the acid-test ratio formula can also be represented as follows:
Acid Test Ratio Formula 2
Where,

Current assets: assets that can be turned into cash in a year’s time
Inventory: value of goods and materials that a firm holds in order to sell to consumers
Current liabilities: debts and commitments that are due in the next 12 months

The argument behind this is that inventory is typically sluggish moving and hence difficult to convert into cash. Furthermore, if it needed to be turned into cash fast, it would most likely be sold at a significant discount to the balance sheet carrying cost. Other assets on a balance sheet, including advances to suppliers, prepayments, and deferred tax assets, etc., should be deducted if they cannot be utilized to fulfil liabilities in the short term.

Current Ratio VS Acid Test Ratio

Both the current ratio (also known as the working capital ratio) and the acid-test ratio calculates the capacity of a company to earn enough cash in the short term to pay off all of its current liabilities if they all came due at the same time. However, there are a few differences between both the ratios which are as follows:

The acid-test ratio, on the other hand, is regarded more cautious than the current ratio because it excludes assets like inventories, which might be difficult to liquidate rapidly.
Another distinguishing feature is that the current ratio considers assets that can be converted to cash in one year whereas the acid-test ratio only considers assets that can be converted to cash in 90 days or fewer.

Understanding Acid-Test Ratio

Analysts favor the acid-test ratio over the current ratio (also known as the working capital ratio) in some cases because the acid-test technique eliminates assets like inventories, which might be difficult to dispose rapidly. As a result, the acid test ratio is a more cautious and conservative measurement.

As a rule, the acid-test ratio should be higher than one such that the short-term assets cover the short-term liabilities. Companies having an acid-test ratio of less than one has insufficient liquid assets to cover their present liabilities and should be avoided. Moreover, if the acid-test ratio is significantly lower than the current ratio, a company’s current assets are heavily reliant on inventories.

This isn’t always a bad indicator, though, because certain company models are fundamentally inventory dependent. For example, retail stores may have extremely low acid-test ratios without being in a dire situation. The best acid-test ratio for a firm is determined by the industry and markets in which it works, the type of the company’s activity, and its overall financial health. For example, a low acid-test ratio is less important for a well-established company with long-term contract income or a company with excellent credit that can readily get short-term financing when needed. Usually, the acid-test ratio should be ideally greater than 1.

A high ratio, on the other hand, isn’t necessarily a positive thing. It might mean that money has accumulated and is sitting idle rather than being re-invested in productive use or returned to shareholders. Some IT corporations (like Apple) produce enormous cash flows, resulting in acid-test ratios much larger than one (up to 7 or 8). While this is definitely preferable than the alternative (an acid-test ratio less than one), activist investors who prefer that shareholders receive a piece of the earnings have criticized these corporations.

Drawbacks Of The Acid-Test Ratio

There are a number of drawbacks and limits and to utilize the acid-test ratio which are as follows:

The acid-test ratio alone is insufficient to identify the company’s liquidity condition. Other liquidity ratios, such as the current ratio or cash flow ratio, are frequently employed with the acid-test ratio to offer a more full and accurate picture of a company’s liquidity position.
Inventory is not included in the computation since it is not typically considered a liquid asset. Some firms, on the other hand, are able to sell their goods promptly and at a reasonable market price. In certain situations, the company’s inventory qualifies as an asset that can be turned into cash quickly.
The ratio does not include information on the timing and magnitude of cash flows, which are crucial in establishing a company’s capacity to meet its commitments on time.
The acid-test ratio presupposes that accounts receivable are easily and quickly collectible, although this isn’t always the case (due to delay of payments and bankruptcy of customers).

Conclusion

Acid-test ratio, also known as the quick ratio (as funds have to be quickly available on the assets side), determines whether a company has or can get sufficient cash to pay off its immediate liabilities, such as short-term debt. The acid-test ratio should be more than one. If it’s less than one, a company’s liquid assets are insufficient to cover its present liabilities, and it should be avoided. If the current ratio is significantly higher than the acid-test ratio, then it implies that a company’s current assets are heavily reliant on its inventory. A high acid-test ratio, on the other hand, may imply that cash has accumulated and is not being reinvested in productive use or returned to shareholders.

As a result, the ratio is most beneficial in scenarios where some assets, such as inventories, have fluctuating and uncertain liquidity. These goods may take a long time to convert to cash, thus they should not be compared to current liabilities. As a result, the ratio is frequently used to assess companies in industries that rely heavily on inventory, such as retail and manufacturing. It is less useful in service-based companies with substantial cash balances, such as Internet companies.

Useful Resources

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

The Paris Agreement

August 26, 2024May 16, 2022 by Anant JAIN

The Paris Agreement

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks the Paris Agreement.

Introduction

The Paris Agreement is a global agreement that intends to keep global average temperatures below 2 degrees Celsius above pre-industrial levels by the end of the 21^st century, with efforts to keep it below 1.5 degrees.

The Paris Agreement was drafted during the Conference of the Parties (COP 21) of the United Nations Framework Convention on Climate Change (UNFCCC21) and signed on December 12, 2015. The agreement was ratified on April 22, 2016, which was recognized as Earth Day by the United Nations, and was signed by all 196 UNFCCC members. In June 2017, President Donald Trump announced that the United States would withdraw from the Paris Agreement, claiming that it was not in the country’s best interests to do so.

Greenhouse gas emissions are considered as the primary cause of global warming.
To accomplish the agreement’s objectives, scientists have agreed that global greenhouse gas emissions must be reduced. As a result, the 20/20/20 targets were established: a 20% reduction in carbon dioxide (CO₂) emissions, a 20% increase in renewable energy market share, and a 20% increase in energy efficiency through current technology such as insulation. The signatories are obligated to put efforts through Nationally Determined Contributions (NDCs), and to continue to do so in the future. This includes the duty to report on national emissions and decarbonization initiatives on a regular basis.

To keep global warming to a maximum of two degrees Celsius by 2100, scientists agree that the world will need to become carbon neutral by 2050. The International Panel on Climate Change (IPCC) issued a study in October 2018 warning that in order to meet the lower 1.5-degree objective, emissions must be reduced by 40-60% from 2010 levels by 2030, with net zero by 2050. To meet the less ambitious 2-degree objective, emissions must be reduced by 25%. Failure to do either will result in irreversible climate change beginning around 2030, according to the paper. According to the IPCC, if current levels of (in)activity continue, the 2-degree target will most likely be met by 2030, with global warming of 3 degrees by the end of the century becoming increasingly likely. The IPCC also warned in September 2019 that unless the world takes action now, sea levels will increase by at least one meter by 2100.

According to studies, CO₂ produced by burning fossil fuels for power, heating, cooling, and transportation is the primary cause of global warming. Carbon dioxide levels in the atmosphere in 2017 were last seen on Earth three million years ago, according to research from the Potsdam Institute for Climate Impact. Before humans originated, the average surface temperature was 2-3 degrees Celsius higher than pre-industrial levels, and the average sea level was up to 25 meters higher than it is today during the Pliocene Era.

The Working Process

The Paris Agreement’s implementation necessitates economic and societal transformations based on the best available knowledge. The Paris Agreement is structured on a five-year cycle in which countries take more ambitious climate action each year. Countries must submit their climate action plans, known as Nationally Determined Contributions (NDCs) by 2020.

NDCs

Countries need to establish the steps that they will take to alleviate greenhouse gas emissions in their NDCs to align with the Paris Agreement’s agendas. Countries also outline the activities they plan to take to build resilience and adapt to the effects of rising temperatures.

Long-Term Planning

The Paris Agreement called for nations to draft and submit long-term low-carbon development strategies by 2020 in order to effectively define their efforts toward the long-term goal (LT-LEDS).

The long-term vision offered by LT-LEDS is beneficial to Nationally Determined Contributions (NDCs). They are not required, unlike NDCs. Irrespective, they place the NDCs in the context of countries’ long-term planning and development goals, giving them a vision and direction for future development.

How are countries supporting one another?

The Paris Agreement establishes a framework for assisting developing countries with financial, technical, and capacity-building support.

Finance

The Paris Agreement maintains that affluent countries should lead in providing financial support to less developed and vulnerable countries, while also encouraging voluntary contributions from other Parties for the first time. Since large financial resources are required to adjust to the negative effects of climate change and mitigate its consequences, it is imperative to adapt climate finance (financing that supports projects to contribute to climate change).

Technology

The Paris Agreement outlines a goal of fully implementing technological development and transfer in order to improve climate change resilience while also lowering greenhouse gas emissions (GHG) emissions. Through its policy and implementation arms, the mechanism is increasing technology development and transfer.

Capacity-Building

Many of the issues posed by climate change are beyond the capabilities of many developing countries. As a result, the Paris Agreement places a strong emphasis on developing nations’ climate-related capacity-building efforts and calls on all wealthy countries to increase their assistance for such efforts.

How are we tracking progress?

Countries adopted a more transparent framework with the Paris Agreement known as the Enhanced Transparency Framework (or ETF) to report information. Starting in 2024, countries will be required to report honestly on their activities and progress in climate change mitigation, adaptation, and support offered or received under the ETF. It also establishes worldwide protocols for the examination of reports provided.

The data from the ETF will be incorporated into the Global Stocktake, which will assess how far we’ve progressed toward our long-term climate goals. This will lead to recommendations for countries to establish more ambitious targets in the next phase.

What have we achieved so far?

Even though massive improvements in climate change action are required to reach the Paris Agreement’s goals, low-carbon solutions and new markets have already emerged in the years after it went into effect. A growing number of governments, regions, cities, and corporations are setting carbon neutrality goals. Zero-carbon solutions are becoming more competitive across a variety of economic sectors that account for 25% of total emissions. This trend is especially obvious in the electricity and transportation sectors, and it has opened up a slew of new business opportunities for those who get in early.

By 2030, zero-carbon solutions may be competitive in industries that account for more than 70% of world emissions.

Useful resources

United Nations The Paris Agreement

United Nations What Is Climate Change?

United Nations How the Paris Agreement will help tackle the climate crisis (with Aidan Gallagher)- Within Our Grasp (video)

United Nations What is the ‘Paris Agreement’, and how does it work? (video)

About the author

The article was written in May 2022 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Social Impact Bonds

August 26, 2024May 16, 2022 by Anant JAIN

Social Impact Bonds

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Social Impact Bonds.

Introduction

Social impact bonds (also known as a social benefit goods or social bonds) are one-of-a-kind public-private partnerships that use performance-based contracts to fund effective social services. They are a type of financial security that provides capital to the government to fund projects that improve social outcomes while saving money. Impact investors provide capital to help high-quality service providers scale their operations. If and when the project achieves outcomes that generate public value, the government repays those investors.

Social impact bonds transfer the risk from the public sector to the private sector and further align project partners on the achievement of meaningful impact projects. For example, these projects can help low-income mothers have healthy births, reduce carbon emission, or support refugees through job training. In 2010, Social Finance UK issued the first ever social impact bond in the market. Over 160 social impact bonds have been issued in 28 countries, with more than 25 in the United States.

Purpose of Social Impact Bonds

The goal of social impact bonds is more than just to make money. The securities are designed to bring together the interests of various entities, such as governments, investors, social enterprises, and the general public, in order to develop effective solutions to public-sector problems.

Despite the fact that these securities are called bonds, they lack many of the characteristics of traditional bonds. Social impact bonds have a fixed term, but investors do not receive a fixed interest rate of return. Instead, the success of the project that was subsidized with the bonds is what determines whether the bonds are repaid or not.

If a project is successful, the government repays the investors by using the savings generated by the project. The investors, on the other hand, receive nothing if the project fails. As a result, social impact bonds carry a high level of risk for investors.

How Does a Social Impact Bond Work?

Social impact bonds are often differentiated from other fixed-income securities by the number of key players involved in the capital-raising process. It is further illustrated by Figure 1 and the steps involved are mentioned below.

Figure 1. Social Impact Bond Working Process.

Source: Social Finance, UK .

1. Partner

The government determines the social issue and the goal by working with an intermediary, such as Social Finance, and high-performing service providers (organizations with a track record of success and evidence that their programs work) to achieve its goal.

2. Develop & finance

The project’s design, negotiation, and financial structure are all driven by Social Finance in collaboration with the government and the provider. Then, to provide upfront, flexible funding, the project raises capital from impact investors.

3. Deliver services

With ongoing support from Social Finance, the provider provides services to the target population, including governance oversight, performance management, course corrections, financial management, and investor relations.

4. Attain positive results

People in need can improve their lives by having healthy births, raising kindergarten-ready children, staying out of prison, and finding and keeping good jobs with the help of high-quality services.

5. Measure the outcomes

The impact of the project is measured by an independent evaluator using predetermined outcome metrics. If the project is a success, the government reimburses the project’s backers. The government, on the other hand, only pays based on the level of results achieved.

A Social Impact Bond in Practice

In 2010, the United Kingdom’s Peterborough Prison issued one of the world’s first social impact bonds. The bond raised £5 million from 17 social investors to fund a pilot project aimed at lowering short-term prisoner re-offending rates. Over the course of six years, the relapse or re-conviction rates of Peterborough inmates will be compared to the relapse rates of a control group of inmates.

The Peterborough Social Impact Bond was declared a success by the Ministry of Justice in 2017, with a 9 percent reduction in reoffending of short-sentenced offenders compared to a control group, exceeding the bond’s target of a reduction 7.5 percent. As a result, investors received a yearly return of 3%.

Useful resources

Social Finance, UK

Reducing reoffending in Peterborough

About the author

The article was written in May 2022 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

The World 10 Most Sustainable Companies in 2021

August 26, 2024May 16, 2022 by Anant JAIN

The World 10 Most Sustainable Companies in 2021

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about the World 10 Most Sustainable Companies in 2021.

Introduction

The Corporate Knights’ yearly list is a ranking of the 100 most sustainable companies. It is based on the analysis of companies with revenues over $1 billion (8,080 companies in 2021). This year marks the 17th year of the list.

This list is usually revealed during the World Economic Forum in Davos. The Davos Agenda is a ground-breaking gathering of world leaders to shape the values, policies, and alliances required in this difficult new environment. The World Economic Forum has been a trusted venue for leaders from business, government, international organizations, civil society, and academia to assemble at the start of each year to discuss crucial issues.

In 2021, the breakdown of the most sustainable firms by geographical areas is as follows:

46 in Europe
33 in North America
18 in Asia
2 in South America
1 in Africa

The top 10 most sustainable corporations of 2021 are as follows:

1. Schneider Electric SE, France
2. Orsted A/S, Denmark
3. Banco do Brazil SA, Brazil
4. Neste Oyj, Finland
5. Stantec Inc, Canada
6. McCormick & Company Inc, United States
7. Kering SA, France
8. Metso Outotec, Finland
9. American Water Works Company Inc, United States
10. Canadian National Railway Co, Canada

We detail below the characteristic of each company in the dimension of sustainability.

1. Schneider Electric SE

Industry: Electrical Equipment
Location: France
Year Founded: 1836

Schneider Electric has been named the world’s most environmentally friendly firm. This European energy and automation multinational corporation was praised for its quick and consistent response to ESG – environmental, social, and governance – issues, moving up from 29th place in 2020.

Schneider Electric is helping to reduce CO2 emissions and the rise of the Earth’s temperature by focusing on innovative and renewable alternatives. Its efforts are assisting in the prevention of global warming and the production of ecologically friendly goods that improve energy access.

The core of Schneider Electric’s strategy, according to Chair and CEO Jean-Pascal Tricoire, is to build a sustainable business and organization. Schneider has long been committed to environmental issues, and it continues to raise the bar for itself, its customers, and its partners.

2. Ørsted A/S

Industry: Electricity Generation
Location: Denmark
Year Founded: 2006

After vowing to combat climate change with renewable energy, Ørsted was voted the world’s second most sustainable company. Despite dropping to second position in 2020, the Danish power company is still the world’s most sustainable energy provider, a title it has held for three years.

The corporation, which is also renowned as one of the top renewable energy generators, has switched its operations from fossil fuels to renewable energy and has set a goal of becoming carbon neutral by 2025.

Ørsted CEO Mads Nipper said the company’s strong placement in the Global 100 report underlines both its commitment to driving a successful and sustainable business and its resolve to become a catalyst for green energy change. He also stated that in order to be effective in the fight against climate change – and to stay in business – all businesses must adopt a sustainable business model.

3. Banco do Brazil SA

Industry: Financial Services
Location: Brazil
Year Founded: 1808

Banco do Brazil, Brazil’s, and Latin America’s largest bank by assets, is also one of the most sustainable companies. The 212-year-old bank aspires to be inclusive and contribute to digitally improving society by providing internet access and supporting education by fostering innovation and motivating entrepreneurs.

In 2020, the government-owned corporation was ranked ninth, but it has quickly risen through the ranks this year.

4. Neste Oyj

Industry: Oil and Gas Industry
Location: Finland
Year Founded: 1948

Neste is a global pioneer in sustainability, with products such as renewable diesel, sustainable aviation fuel, chemical recycling to reduce plastic waste, and raw material refining innovation. The Finnish company dropped from third to fourth place in a year, but it has been on the Corporate Knights Global 100 Index for the 15th year in a row, far longer than any other global energy company.

The company’s mission of making the world a better place for our children, according to Peter Vanacker, President and CEO of Neste, drives them to strive for greater heights every day. Many companies are constantly improving their sustainability programs, making it more difficult to make the list each year. More businesses are actively implementing sustainability into their operations, which is encouraging.

5. Stantec Inc.

Industry: Engineering, Architectural Design
Location: Canada
Year Founded: 1954

Stantec is not only one of the most ecologically responsible companies in the world, but it is also a leader in North America. Clean earnings and clean investment, which are goods and services with a demonstrated environmental and social impact, accounted for half of the company’s overall score.

Gord Johnston, President and CEO of Stantec, remarked that its remarkable track record on sustainability is the result of its people’s deep commitment and good leadership throughout the company’s global operations. Its teams are striving to improve sustainability in its own operations and aiding clients in developing and achieving sustainability goals.

6. McCormick & Company Inc.

Industry: Processed & Packaged goods
Location: U.S.A.
Year Founded: 1889

McCormick & Company is not just the world’s sixth most sustainable company, but it is also the leader in the food market. Since the index’s debut five years ago, the packaged and processed foods industry in the United States has advanced 16 points to its highest position.

According to Lawrence E Kurzius, Chairman, President of McCormick & Company, it has never been more important to work together for the future of flavor and to limit its impact on the environment. The company is dedicated to producing clean revenue, providing renewable energy projects, and making the transition to 100% circular packaging.

7. Kering SA

Industry: Luxury
Location: France
Year Founded: 1963

Gucci, Saint Laurent, Bottega Veneta, Ulysse Nardin, and Pomellato’s parent business are the only luxury brands to make the top 10 sustainable companies list.

When measured against 24 quantitative key performance indicators (KPIs), including resource management, people management, financial management, clean revenue and investment, and supplier performance, Kering maintained its strong position. In order to build the future of luxury, sustainability is promoted at every level of governance, from the Board of Directors to the operational managers.

Kering’s vow to protect the environment on which it relies, according to the CEO Dr. M Sanjayan, is a big step forward for the fashion business, and it offers a massive doorway for the luxury sector to influence the people and help rethink fashion and luxury goods.

8. Metso Outotec

Industry: Industrial Machinery
Location: Finland
Year Founded: 2020

Metso Outotec is ranked 8th on the Global 100 Index, a global leader in sustainable technology and services for the recycling, aggregates, and mineral processing industries. In order to have a good impact on the globe as a sustainable leader, the Finland-based firm has set a number of lofty goals, including reducing global warming to 1.5 degrees Celsius.

Piia Karhu, Senior Vice President Business Development at Metso Outotec, remarked that their customers in the aggregates and metals and minerals industries are focused on producing sustainable goods and services. They collaborate with their customers, partners, and communities to advance sustainable innovation.

9. American Water Works Company

Industry: Utilities, Water and Wastewater
Location: U.S.A.
Year Founded: 1886

Because of its leadership and transparency, American Water is one of the top ten sustainable firms. The largest publicly listed water and wastewater utility firm in the world, founded in 1886 and employing over 6,800 people, is based in the United States.

Despite serving 15 million people in 46 states, the company saves 12.5 billion liters of water each year through efficiency measures. It has also promised to reducing greenhouse gas emissions by 40% by 2025.

10. Canadian National Railway Company

Industry: Rail Transport
Location: Canada
Year Founded: 1919

The lone railway company on the list for 2021 was the Canadian National Railway. The railway conglomerate adheres to a global standard for sustainability activities, adhering to the UN Global Compact principles and the Sustainable Development Goals of the United Nations (SDGs).

Useful resources

General resources

Corporate Knights’ Global Ranking List

The Davos Agenda

Top 10 sustainable companies

#1 Schneider Electric SE, France

#2 Orsted A/S, Denmark

#3 Banco do Brazil SA, Brazil

#4 Neste Oyj, Finland

#5 Stantec Inc, Canada

#6 McCormick & Company Inc, USA

#7 Kering SA, France

#8 Metso Outotec, Finland

#9 American Water Works Company, USA

#10 Canadian National Railway, Canada

About the author

The article was written in May 2022 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Dow Jones Sustainability Index

February 4, 2025May 16, 2022 by Anant JAIN

Dow Jones Sustainability Index

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Dow Jones Sustainability Index (DJSI).

Introduction

The Dow Jones Sustainability Index (DJSI) was established in 1999 to honor publicly traded companies that excel in the field of sustainability. As of 2021, it includes 323 companies from a variety of industries that stand out for their outstanding environmental, social, and governance (ESG) performance.

The DJSI was created by S&P Dow Jones Indices (one of the world’s leading resources for benchmark and investable indices) and SAM (corporate sustainability assessment issued by S&P Global) to select the most sustainable companies from 61 industries, combining the experience of an established index provider with the expertise of a specialist in Sustainable Investing.

The indices act as a benchmark for investors who incorporate sustainability considerations into their portfolios, as well as a platform for investors who want to encourage companies to improve their corporate sustainability practices.

Sustainability

Generally speaking, sustainability can be defined as the ability to maintain or support a process over time. Applied to the planet, it refers to the prevention of natural resource depletion to maintain ecological balance for future generations. The term sustainable development was first coined and defined in the 1987 Brundtland Report, Our Common Future, published by the World Commission on Environment and Development of the United Nations (UN): “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” In the business context, corporate sustainability is a comprehensive approach to managing operations while ensuring long-term environmental, social, and economic balance. It encompasses a company’s strategies and actions aimed at minimizing negative environmental and social impacts within its market. The sustainability practices of a firm or any organization are typically assessed against environmental, social, and governance (ESG) criteria.

Understanding DJSI

Companies that are included in the DJSI gain not only public recognition and a high level of acceptance from their stakeholders (for their best practices in this field), but they also become a benchmark for many other companies that aspire to be included in the index and want to improve their ranking to be among the best in the world. It is also a key tool for investors, who find these companies appealing and trustworthy, and value them for including policies like these in their strategy, which outperforms other organizations in terms of long-term profitability.

Being accepted into the Dow Jones Sustainability Index is a difficult task. Companies need to pass a rigorous assessment questionnaire with approximately 600 indicators that measure various criteria relating to their corporate governance, code of ethics and conduct, risk management, business, and providers in order to be included in this demanding ranking. Other environmental aspects are also investigated, such as the development of products and programs that are more environmentally friendly and promote efficiency, as well as initiatives aimed at defending human rights, encouraging talent retention and financial inclusion, and improving employee health and well-being.

S&P Global, the world’s largest index provider, is in charge of verifying each of the indicators using a questionnaire with 100 questions about the companies’ environmental, social, and governance performance. The businesses are then graded on a scale of one to one hundred points. Analysts at S&P Global also look at how companies break down public information in their communications with analysts and investors. Only those who achieve the highest ranking in their field of activity are invited to join the DJSI.

Example

MAPFRE is included in the Dow Jones Sustainability World Index for the third year in a row (from 2016 to 2019), with a total score of 77 out of 100. In the areas of customer relationship management, principles for sustainable insurance, social and environmental reporting, and financial inclusion, the company has improved its environmental and social rating and received the highest score (100 points).

MAPFRE has set more than 30 objectives for 2021 to address global issues such as climate change and inequality. It does so as part of its commitment to sustainability and in accordance with its Sustainability Plan 2019–2021, a roadmap that lays out a series of projects aimed at helping the company achieve carbon neutrality, become a leader in the circular economy, promote women’s leadership, and improve financial education, among other objectives.

Methodology

Based on the companies’ Total Sustainability Scores from the annual S&P Global Corporate Sustainability Assessment, the DJSI uses a transparent, rules-based component selection process (CSA). For inclusion in the Dow Jones Sustainability Index family, only the top-ranked companies in each industry are chosen. This process does not exclude any industries. The methodology used by S&P Global to build the DJSI index family is illustrated in Figure 1.

Figure 1. S&P Global methodology for the DJSI index family.
MSCI ESG Classification
Source: S&P Global.

As mentioned by S&P Global on its website, the DJSI is rebalanced quarterly and is reviewed each year in September based on the S&P Global ESG Scores resulting from the annual SAM CSA.

Index family

As shown in the following list, the Dow Jones Sustainability Index family includes global, regional, and country benchmarks:

DJSI World
DJSI North America
DJSI Europe
DJSI Asia Pacific
DJSI Emerging Markets
DJSI Korea
DJSI Australia
DJSI Chile
DJSI MILA Pacific Alliance

S&P Dow Jones Indices also offers DJSI Indices with exclusion criteria such as Armaments & Firearms, Alcohol, Tobacco, Gambling, and Adult Entertainment for investors who want to limit their exposure to controversial activities.

All DJSI indices are calculated and disseminated in real time, in both price and total return versions.

Useful resources

Brundtland, G.H. (1987) Our Common Future: Report of the World Commission on Environment and Development.

S&P Global

MAPFRE

About the author

The article was written in May 2022 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Carbon Disclosure Rating

August 26, 2024October 4, 2021 by Anant JAIN

Carbon Disclosure Rating

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Carbon Disclosure Rating.

Introduction

Carbon disclosure rating (CDR) is a medium to measure the environment sustainability of a company. It is calculated based on the voluntarily disclosure by a company itself. This rating is useful for an ethical investor who wish to incorporate environmental, social, and governance (ESG) factors into their investment decision making process. It focuses on the environmental factor.

Environmental, social, and governance (ESG) criteria constitute a framework that helps socially conscious investors to screen potential investments which incorporate their personal values/agendas. The ESG criteria screen companies based on sound environmental practices, healthy social responsibilities and moral governance initiatives into their corporate policies and daily operations.

The most commonly used carbon disclosure rating is administered by Carbon Disclosure Project (CDP), a United Kingdom based non-profit organization. It is comparable with Global Reporting Initiative (GRI) which is a Netherlands based organization. GRI works with businesses and organizations while CDP works with individual companies.

Framework of Carbon Disclosure Rating

Carbon Disclosure Rating is calculated by a general framework based on questionnaire generated by CDP. About 6,800 companies, which participated as of year 2020, usually submit responses to a series of industry specific questions depending on the industry of a specific company. The responses are then evaluated, analyzed, and graded. They are finally made accessible to institutional investors and other interested parties as well.

The grading separate companies based on their comprehension and application of climate-related changes. The grading mention below is stated from CDP.

Figure 1. Carbon Disclosure Project (CDP) Scoring Board.

Source: Carbon Disclosure Project (CDP) .

CDP then publishes a list of most favorable companies that were graded at “Leadership Level A and A-”. In the year 2020, 313 companies were features on the list. Majority of those companies were large multinational corporations who are a leader in their specific industry. It included many prominent companies, such as Ford Motor Company, Apple, Bank of America, Johnson & Johnson, and Walmart.

Benefits of CDR

There is a constant increasing demand for environmental disclosure due to rise in ethical investing. As a result, there are numerous tangible benefits gained by a company when it discloses the requested informed asked by the CDP. They are as follows:

Improve and protect a company’s reputation as it builds confidence via transparency and concern for environment
Helps gain a competitive edge while performing on the stock market
More preparedness for mandatory environmental reporting regulations
Discover new opportunities and mitigate potential risks by identifying emerging environmental risks and opportunities which might have been overlooked otherwise
Assessing and tracking progress in comparison to the competition in the same industry

Criticism

The biggest criticism of carbon disclosure rating is that the score does not reflect an honest depiction of the actions taken by a company to alleviate its impact on climate change or reduce its carbon footprint. It may simply reflect a that a company didn’t disclose information with CDP. For instance, Amazon in the year 2020 was given a score “F” by CDP because it did not respond to CDP’s request for information.

Therefore, an “F” score may simply mean that a company failed to provide enough information to receive an evaluation. It does not necessarily mean that company’s inability to reduce its carbon footprint. As a result, CDP’s rating is termed to be inconclusive since many companies do not provide information to CDP on thier actions to reduce their carbon footprint and actions to limit their impact on climate change.

Useful resources

Carbon Disclosure Project (CDP)

Global Reporting Initiative (GRI)

About the author

The article was written in October 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Carbon Trading

August 26, 2024October 4, 2021 by Anant JAIN

Carbon Trading

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Carbon Trading.

Introduction

Carbon trading is a market-based system focused on alleviating greenhouse gases, particularly carbon dioxide which is emitted by burning fossil fuels. Carbon trading is essentially the purchasing and selling of credits that allows a country, company, or entity to emit a specific quantity of carbon dioxide. The credits are authorized by governments with the aim to gradually reduce the overall carbon emission and alleviate its contribution to climate changes.

China, in July 2021, started a national emission-trading program. The program currently involves 2,225 companies in the power sector. The program is designed to aid the country reach its goal of achieving carbon neutrality by 2060. This program will overtake the European Union Emissions Trading System to become the world’s largest carbon trade market.

How does Carbon Trade work?

The carbon trade commenced with the Kyoto Protocol. It was a United Nations treaty set in 2005 with the aim to alleviate the global carbon emission and mitigate climate change.

The carbon trade works in the following way. Each country is allocated with a certain number of permits to emit carbon dioxide. For instance, if a country does not utilize all of its permits, it can sell the unused permits to another country. However, a slightly small number of new permits is allocated to each country every year.

The main agenda is to motivate each country to cut back on its carbon emission as an incentive to sell its new permits. The bigger and wealthier nations used to buy the credit from the poor and higher polluting countries. But over time, those wealthier countries reduced their emissions. As a result, those nations don’t need to buy as many on the market now.

The Cap-and-Trade System

The cap-and-trade system is a variation on carbon trade, in which, the trade is conducted between companies and is authorized and regulated by the government. Each firm is given a maximum carbon pollution allowance and unutilized allowances can be sold to the other firms. The main aim is to ensure that companies as a whole do not exceed the baseline level of pollution, which is reduced annually.

In the U.S. and Canada, a group of states and provinces got together to start the Western Climate initiative while the state of California has its own cap-and-trade program.

Countries don’t pay for the harsh effects of burning the fossil fuels and producing carbon dioxide, they incur some costs such as the price of the fuel. While the price of the fossil fuel is a cost itself, there are other costs as well, which are known as externalities. Externalities are the cost or benefits received by the society at large who may or may not consume products that cause such externalities. Even though externalities can be positive in nature, they are usually negative which means that consumption causes adverse effects on third party. For example, using fossil fuel as a source of energy causes environmental harm and global warming which are negative externalities experienced by the almost everyone despite people who might not indulge in fossil fuel consumptions.

Does carbon trading work to reduce emission?

Carbon trading is extensively criticized, especially because of the carbon dioxide emissions in industrialized countries is not declining at the necessary rate to avert the catastrophic climate change.

Many scientists believe that the best way is to shift to a low carbon energy, transport, agriculture, and industrial world now. They believe that we don’t have time to wait on the high price on carbon, thus, we need to directly regulate the use of the fossil fuel. There has been no evidence to prove that carbon trading has provided us with any form of monetary gain. However, the concept of pollution trading keeps appearing in proposals to reduce the environmental harm, despite the flaws.

Advantages of Carbon Trading

The argument is that companies have a choice to use the most cost-effective method of meeting the requirements. For instance, these firms have incentives to reduce the carbon emissions and develop better technology to promote that. However, it is said to believe that if the price of permits is low, these companies might decide to buy more.

The main idea behind carbon trading is to gradually reduce the number of permits given every year by the government. Thus, forcing the companies to find more ways to reduce carbon emissions.

Disadvantages of Carbon Trading

Deciding the number of permits to allow is a complex task. For instance, in the initial period of 2005 – 2007, when the EU introduced the system of carbon trading, the price of the carbon permits came down to zero as the EU misinterpreted the number of permits.
It is very difficult to measure the carbon emissions of a company. Hence, making it a complicated system as well as difficult in measuring the constant transaction costs involved in the buying and selling of permits.
If carbon trading is effective in one country but not being followed in the other countries, it may cause a production shift to the others, known as the Free rider problem. Excess carbon emissions are a global issue and requires a global solution. Thus, countries don’t want to start carbon trading due to the fear of other countries free riding on their efforts.
Carbon tax might be a much simpler and easier to administer. Carbon trading might have greater impact on the low-income areas who have opportunities to change their lifestyle.

Useful resources

About the author

The article was written in October 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Green Investments

August 26, 2024October 4, 2021 by Anant JAIN

Green Investments

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Green Investments.

Introduction

Green investments, also known as eco investments, are investment activities that target companies focusing on environmentally conscious business projects or practices. This includes, but is not limited to, protection of natural resources, production of clean energy resources, or execution of sustainable projects. Green investments are a type of Socially Responsible Investing (SRI) but they are much more specific than SRI.

Green investments, according to some investors, are investments in any company that has eco-friendly policies and practices guiding its day-to-day operations and future growth. Other investors argue that a company can only be considered a green investment if it is directly involved in environmentally beneficial products or services, such as renewable energy or compostable materials. However, the idea is simple: a green investment should have a positive environmental impact. As a result, green investments are becoming increasingly popular among those seeking to align their financial lives with their environmental values.

Green issues have taken the center stage in the financial world. Many investors started looking for companies that were “better than their competitors in terms of managing their environmental impact” in the 1990s. While some investors continue to concentrate their funds on avoiding only “the most atrocious polluters”, many investors have shifted their focus to using money in a positive, transformative way.

Since 2007, over $1.248 trillion has been invested in solar, wind, geothermal, ocean/hydro, and other green sectors, according to the Global Climate Prosperity Scoreboard, which was launched by Ethical Markets Media and The Climate Prosperity Alliance to track private investments in green companies. This figure includes investments from North America, China, India, and Brazil, as well as investments from other developing nations.

SRI, ESG, and green investing: what is the difference?

Environmental, Social, & Governance (ESG) criteria refers to healthy practices undertaken by firms. It helps investors to analyze potential investments that may have a prominent impact on the environment/society. ESG criteria are integrated to enhance the traditional financial analysis of investment by identifying potential risks and opportunities beyond purely financial valuations. The main objective of ESG evaluation remains financial performance, even though social performance is also taken into account.

Socially Responsible Investing (SRI) is a step up to ESG since the investment process actively eliminates or selects investments according to specific ethical agendas. SRI uses ESG criteria (which facilitate valuation) to apply negative or positive screens on the investments.

While green investing is often lumped together with SRI or ESG criteria, it is technically not the same thing. To be clear, green investing could be considered a type of SRI and ESG criteria. But while SRI and ESG criteria also includes companies that make quality choices with regards to human rights, social justice or other positive social impacts, green investing sticks solely to companies with environmentally beneficial policies and products.

Understanding Green Investing

Green investments that generate all or majority of their profits from green activities are termed as pure-play green investments. Despite its widespread use, the term “green” can be ambiguous. When people talk about “green investments,” they are referring to activities that, in a popular sense, are either directly or indirectly beneficial to the environment.

What qualifies as a “green investment” is a bit of a grey area because individual beliefs on what constitutes a “green investment” differ. Some investors prefer pure-play investments, such as companies that conduct research or manufacture renewable fuels and energy-saving technology. Other investors back businesses that not only follow good business practices in terms of how they use natural resources and manage waste but also generate revenue from a variety of sources.

For some, buying stock in a company that pioneers environmentally conscious business practices in a traditionally “ungreen” industry may be a green investment, but for others, it isn’t. For example, an oil company that has a good track record in terms of environmental practices. While it is environmentally sound for the company to take precautions to limit direct environmental damage, some people may object to buying its stock as a green investment because such companies are a primary cause of global warming since they indulge in burning of fossil fuels.

Advantages and disadvantages of green investing

Green investing is a fantastic way to financially support companies that share your environmental values. However, all investments have advantages and disadvantages, and green investing is no exception.

Advantages of green investing

Supports environmentally conscious businesses

When it comes to bringing positive environmental change, it can sometimes feel like an individual does not have much power as an individual. However, by investing in environmentally friendly businesses, an individual investor can, directly and indirectly, encourage them to make environmentally sound decisions.

Aids in the financing of new environmental innovation

As the climate changes, our world faces a slew of new challenges. Dealing with these issues requires a significant investment of financial resources. As a result, investing in environmentally friendly businesses can aid in the development of new green technologies.

Long-term growth potential

As countries around the world seek to mitigate the effects of climate change, renewable energies and other environmentally friendly products and services are well-positioned for long-term growth. This means that a small investment in a green business now could pay off handsomely in the future.

Disadvantages of green investing

The potential for short-term losses

While there is a lot of hope that green investments will be financially successful in the long run, they may not be as successful in the short term as other businesses. Green investments may result in losses or only modest gains in the near future, as eco-conscious companies will not compromise their values for financial gain.

Finding green investments is difficult

While many companies believe that slapping some green packaging on a product qualifies them as an environmentally conscious company, this is far from the case. This could make it more difficult for someone to find good green investments as an investor. To determine whether a company is truly committed to positive environmental policies and action, one must often conduct extensive research.

Policies and practices of a company can change at any time

It’s important to remember that policies and practices of a company can change at any time, and not always for the better. A new CEO or stakeholder pressure can cause a company to abandon its green initiatives, lowering the ethical value of your investments.

Useful resources

About the author

The article was written in October 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Conscious Capitalism

August 26, 2024October 4, 2021 by Anant JAIN

Conscious Capitalism

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Conscious Capitalism.

Introduction

Conscious Capitalism is mainly focused on creating a more ethical business, whilst pursuing profits. The main premise behind conscious capitalism is to make businesses more socially responsible in their economic and political philosophies. Ideally, these businesses should consider benefitting all its stakeholders including employees, suppliers and customers, and the environment and society at large, not just the shareholders and the top management team.

Conscious capitalism is not only about funding charitable events or about the different programs. It is driven by an ongoing and integrated approach to self-awareness, social responsibility and purposeful decision making.

Comprehending Conscious Capitalism

The concept of Conscious Capitalism has been founded by John Mackey, co-founder and CEO of Whole Foods Market as well as Professor Raj Sisodia (Marketing department, Tecnológico de Monterrey, Mexico), who wrote a book together on this philosophy “Conscious Capitalism: Liberating the Heroic Spirit of Business” and founded a non-profit organization called “Conscious Capitalism” which has chapters in more than two dozen U.S. cities and 10 other countries.

While the conscious capitalism credo acknowledges free market capitalism being the most powerful system to ensure human progress and social cooperation, firms and other organizations can still achieve more. It does not mean that profit seeking will take a backseat in conscious capitalism, but it encourages to incorporate all common interests into the plan. Conscious capitalism includes competition, entrepreneurship, freedom to trade, and voluntary exchange. But the credo is also built on the foundation of traditional capitalism as well as elements including trust, compassion, value creation and collaboration. Although profit seeking is not minimized in conscious capitalism, the concept focuses on integrating the interests of all major stakeholders in a company.

There are four guiding principles behind this philosophy:

Higher Purpose

A company that sticks to the main principles of conscious capitalism focuses on profits as well as the purpose beyond this profit. This purpose inspires and engages with the key stakeholders.

Stakeholder Orientation

Companies have various stakeholders including customers, employees, suppliers, and investors among others. Some companies focus on return to their stakeholders, barring everything else. On the other hand, a conscious business, focuses on the business as a whole to create and optimize its value for all its shareholders.

Conscious Leadership

Conscious leaders focus on the value of “we” rather than “I” to drive their businesses. This in turn cultivates a culture of conscious capitalism in the company.

Conscious Culture

The sum of the values and principles that constitute the social and moral fabric of a business is known as corporate culture. A conscious culture, on the other hand, is where the policy of conscious capitalism enters a business and creates a spirit of trust and cooperation among all its shareholders.

What is the difference between Conscious Capitalism and Corporate Social Responsibility?

The main difference between conscious capitalism and Corporate Social Responsibility (CSR) is that conscious capitalism is rooted in a company’s philosophy, it is a more comprehensive and holistic approach connecting companies to the society. On the other hand, CSR employs the traditional business models to different entities.

Moreover, conscious capitalism works to create new ethics and values for its stakeholders. In their book, “Conscious Capitalism: Liberating the Heroic Spirit of Business”, Mackey and Sisodia explain how conscious companies do not necessarily have to do anything outside of its normal functions to become socially responsible, which in turn creates value for its internal and external stakeholders. But at times such businesses also employ various CSR initiatives.

Benefits of Conscious Capitalism

A growing number of businesses including Whole Foods Market, Starbucks, The Container Store, and Trader Joe’s have adopted the practices and principles of conscious capitalism, making it an increasingly popular concept in the business world. Companies that choose to reject this may notice an adverse effect on their profits and revenues.

Companies that have chosen to adopt this philosophy reap significant rewards. Nowadays, many investors and consumers consider the impact of businesses on the environment. These stakeholders look for businesses that give equal importance to moral principles as well as corporate values. According to Nielsen’s 2014 report titled, “Global Survey on Corporate Social Responsibility”, 55% of consumers worldwide, said they would prefer to spend more on products and services that support worthwhile causes.

Criticism of Conscious Capitalism

There has been an overall favorable sentiment towards the philosophy of conscious capitalism, but there has been some criticism as well. The critics are opposed to the philosophy that conscious capitalism can fix the issues within the corporate world. They also believe that adopting such practices might not sit well with the shareholders of the company who are solely after good returns. Some critics believe that the responsibility of conscious capitalism should not only fall on the private sector. They believe that through the collective efforts of the leaders and public policy the responsibility can be shared, and change can be brought out.

Useful resources

About the author

The article was written in October 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Sin Stocks

August 26, 2024October 4, 2021 by Anant JAIN

Sin Stocks

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about sin stocks.

Introduction

Sin stocks are shares of publicly traded companies that are indulged in business activities or industries considered unethical, corrupt, or unpleasant. It is referred for companies involved in sectors dealing with morally dubious actions. Traditionally, the sectors mainly included weaponry, alcohol, gambling, and tobacco. Ethical investors, that is investors who believe in socially responsible investing, exclude sin stocks since such companies tend to make money by exploiting society and the environment.

Diverse cultures have different opinions on what constitutes a sin, making it a relative concept. Generally, sin stocks include alcohol but for instance, brewing beer or making wine is considered a noble tradition in different parts of the world. While some investors disregard weapon production on account of ethical basis, serving in the military can be considered as an act of patriotism by others.

Understanding Sin Stocks

Sin stock sectors often include tobacco, alcohol, gambling, weapon manufacturers, and sex related industries. They can also be categorized by the regional and societal expectations of our society which varies across the world. Political beliefs can also influence what is considered as a sin stock. Some people include military contractors, while others consider supporting the military a sign of patriotism. Sin stocks, also known as “sinful stock”, are on the opposite side from ethical and socially responsible investing whose main aim is to find investments that give an overall benefit to the society.

It is difficult to categorize sin stocks, as sin relies on the personal feeling of the investor towards the industry. Alcohol producers like Anheuser-Busch and tobacco firms like Phillip Morris are often on the list of sin stock. Even weapon manufacturers like Smith & Wesson are on those lists. A company like General Dynamics may not make the list, depending upon the investor’s views on supplying weapon systems to the military. Many gambling stocks are linked to hotels, such as Caesars Entertainment Corporation or Las Vegas Sands Corp. Therefore, it can also be difficult to disentangle the sin portions of some businesses.

Benefits of Sin Stocks

Investing in sin stocks may be objectionable to some investors. However, many of these sin stocks are sound investments. The essence of their business ensures that they have a steady flow of customers. The demand for their products or services is relatively inelastic (an increase in the price of the good does not decrease the demand of that good to a great degree and vice versa), making their business more recession-proof than other companies. Due to the social and regulatory risks, competitors get discouraged from entering the market, thus adding to the downside protection. The lesser level of competition ensures big margins and stable profits for sin stocks.

Some researchers suggest that sin stocks may also be undervalued. The negative depiction of sin stocks causes analysts and institutional investors to avoid them, making them more attractive to investors willing to take the risk. Several of the biggest sin stocks generate amazing long-term record of shareholder value.

Disadvantages of Sin Stocks

Sin stocks face a greater political risk than most other stocks, which may translate into higher risk of declaring bankruptcy. Furthermore, sin stocks face a greater risk of being declared unethical and forced out of business. The first step towards outlawing an industry is directly related to its public perception. For instance, prohibitions on drugs and alcohol would’ve seemed very strange in the 18th century in the U.S. while, it seemed completely normal during parts of the 20th century. This is due to the public who began to associate alcohol and drugs with various crimes taking place in the 19th century before these bans.

Sin taxes are a threat that is faced by sin stocks even when they are not outlawed. This is due to the political and economic factors. Politically speaking, many conservatives who are generally opposed to taxes are willing to cast their vote for taxes on practices they consider immoral. From an economic standpoint, sin taxes are supported, resulting in higher taxes for sin stocks. Whenever a good or service is taxed, some people reduce its consumption in response to the tax, resulting in, not producing any tax revenue. Moreover, it decreases the happiness of people who would otherwise consume the good or service. Such a typical result of a tax is a deadweight loss for community. However, it can be argued that taxing a sin stock, for instance, tobacco, benefits the society as lower tobacco consumption eventually progresses health and lowers medical expenses.

Conclusion

In conclusion, the decision to invest in stocks questions the general issue of socially responsible and ethical investing – and whether you feel that your principles should influence your principal.

Some investors believe that it is up to individuals to decide whether they want to smoke, drink, or gamble, despite the risks. Other investors think that the companies producing these products are partly to blame for individuals’ consumption, especially when that consumption becomes addictive, and products are engineered to be addictive.

Useful resources

List of Sin Stocks

About the author

The article was written in October 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

United Nations Global Compact

August 26, 2024October 4, 2021 by Anant JAIN

United Nations Global Compact

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about the United Nations Global Compact.

Introduction

The United Nations (UN) Global Compact is a worldwide initiative to assist and support companies devoted to responsible business practices in human rights, environment, labor, and corruption. This UN-led initiative supports activities that contribute to sustainable development goals to build a better world.

The UN Global Compact is formulated on Ten Principles that should define a company’s core value system and its approach to conducting business. Within the compact (an agreement between the UN and any company becoming a member), member companies are expected to engage in specific business practices that help people and the planet while seeking profitability with integrity. Beyond the agreement, the UN assist and support member companies in different ways:

Networking opportunities with other UN Global Compact participants from over 160 countries
Local network support by the UN Global Compact’s country specific teams in over 85 countries
Access for partnership with a range of stakeholders
Access to tools, resources, and training along with the best practical guidance by the UN Global Compact.

The Ten Principles of the United Nations Global Compact

The Ten Principles of the UN Global Compact, as stated on its website, are mentioned below:

Human rights

Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights.

Principle 2: Make sure that they are not complicit in human rights abuses.

Labor

Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining.

Principle 4: The elimination of all forms of forced and compulsory labor.

Principle 5: The effective abolition of child labor.

Principle 6: The elimination of discrimination in respect of employment and occupation.

Environment

Principle 7: Businesses should support a precautionary approach to environmental challenges.

Principle 8: Undertake initiatives to promote greater environmental responsibility.

Principle 9: Encourage the development and diffusion of environmentally friendly technologies.

Anti-corruption

Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

Companies that join the UN Global Compact initiative are expected to integrate the ten principles of the UN Global Compact into their corporate strategies, organizational culture, and daily logistics. The companies are also expected to promote the principles publicly. Any company may join the UN Global Compact and commit to uphold the principles, but it is not legally binding and purely voluntary.

Benefits for companies to join the UN Global Compact

Companies may choose to join the UN Global Compact because of the significance of corporate codes of conduct for growing and sustaining healthy relationships with clients, employees, and other stakeholders. It is also essential to avoid governing and judicial problems.

Moreover, companies that pledge to sustainability might gain the upper hand in untapped markets, attract and retain business partners, develop new products and services in a lower-risk environment, and boost employee satisfaction and efficiency.

UN Global Compact Strategy 2021-2023

The United Nations Global Compact is positioned to assist companies to align with their sustainable practices while recuperating from the COVID-19 pandemic. With the aid of all 193 participant countries of the United Nations General Assembly, the UN Global Compact continues to be the exclusive global regulating authority and the reference point for action and leadership within a developing global corporate sustainability transition. Its latest strategy intends to leverage this position and upgrade the expected outcomes of businesses to incorporate the principles laid down by UN Global Compact.

The UN Global Compact provides a blueprint to companies. The COVID-19 global pandemic and ongoing climate crisis already hindered the progress, the world attained by embracing the global goals in 2015. Therefore, this strategy aims to regain that lost grip and advance much further by persuading global businesses to scale up their contributions.

The 2021–2023 UN Global Compact Strategy is formulated around five chief elements. Each element follows a fixed set of preferences, engagement with specific personnel, programs to be emphasized, and operations methodology. The impact for this mission will be derived through two main media, which are as follows:

Accountable companies: Businesses dedicated to fastening their own individual company’s progress to implement and sustain the Ten Principles, and to contribute to the Global Goals.
Enabling ecosystems: Global and local communities and networks that inspire, support and aid combined effort to attain the goal.

The new global strategy for 2021–2023 covers five essential transformations to increase the actions and the scale of these actions of businesses. The five primary shifts are mentioned below:

1) Making Companies Accountable

One of the main elements of the new strategy is to fasten the pace and the growth rate of the participating companies’ corporate sustainability and responsible practices while keeping the companies accountable. The UN Global Compact will use explicit, measurable targets within an intensified reporting framework to hold the participating companies accountable.

2) A Harmonious Growth of Local and Regional Networks

The UN Global Compact will empower the Global Compact Local Networks and the base of all their work. They will also build more dynamic national ecosystems for business sustainability. This step should help start new national and regional Global Compact networks. The focus areas will be the Global South, the United States, and China.

3) Mapping Impact in Priority Areas

UN Global Compact programs will concentrate on the Ten Principles to direct action on five priority Global Goals. These programs will be co-created with the Local Networks that will finally deliver these programs. All programs will be adapted to country-specific requirements. The priority areas are as follows:

Gender Equality (SDG 5): to achieve gender equality and empower all women and girls.
Decent Work and Economic Growth (SDG 8): to promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.
Climate Action (SDG 13): to take urgent actions to combat climate changes and its impacts.
Peace, Justice and Strong Institutions (SDG 16): to promote peaceful and inclusive socities for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels.
Partnerships (SDG 17): to strengthen the means of implementation and revitalize the global partnership for sustainable development.

4) Harnessing the Combined Action of Small and Medium-Sized Businesses (SMEs)

The UN Global Compact includes most of the world’s businesses and employers. They will leverage this to establish targeted and cross-cutting SME programs that will utilize digital tools and value chains to improve the scale.

5) More active engagement with the United Nations and its partners

The UN Global Compact will increase their collaboration at the global and nation level with United Nations agencies and UN country-specific teams. The main agenda for this is to increase the outreach to promote responsible business practices around the world.

Useful resources

About the author

The article was written in October 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

The Top 5 Impact Investing Financial Firms

August 26, 2024July 28, 2021 by Anant JAIN

The Top 5 Impact Investing Financial Firms

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about the top 5 Impact Investing financial firms on the basis of assets under management.

Introduction

Impact investing is defined as an investment decision made with the aim to generate positive social and environmental impact that can be measured, along with positive financial performance. It is essentially an investment strategy that may take the form of numerous asset classes and may result in many specific outcomes. The main point of impact investing is to utilize money and investment capital for positive social results.

Impact investing considers both the physical investments of firms (on the assets side of the balance sheet of the firm) and their impact on the environment and society, and the financial investments of investors, debt, or equity (on the liabilities side of the balance sheet of the firm) to finance the physical investments.

Impact investing is concerned with investing in firms that will create measurable societal benefits along with positive financial returns. Impact investing focuses on addressing a social or environmental issue, such as education, gender equality, renewable energy, to name a few.

Asset Under Management (AUM) is the cumulative market value of investments, that a person or entity manages on behalf of their respective clients.

As published by BlueOrchard Finance (on 08/01/2020), the top five impact investing firms based on assets under management are:

#1 Triodos Investment Management
#2 Vital Capital Fund
#3 BlueOrchard Finance
#4 The Reinvestment Fund
#5 Community Reinvestment Fund

#1 Triodos Investment Management

Impact Area: Renewable Energy
Location: Zeist, Netherlands
Year Founded: 1980

Triodos Investment Management, headquartered in the Netherlands, is a subsidiary of Triodos Bank (one of the world’s leading sustainable banks). Triodos has approximately $5 billion in assets under management. It is a globally acknowledged leader in impact investing. It offers investable solutions to solve today’s numerous significant sustainability challenges. Since 1995, Triodos has been actively involved in impact investing. Triodos is also one of the founding members of the Global Impact Investing Network (GIIN). Having more than 25 years of experience in impact investing, Triodos established its global expertise in Energy & Climate, Inclusive Finance, Sustainable Food & Agriculture, and Impact Equities & Bonds. The main areas where its investments are spread are Europe, South America, Africa, India, and Southeast Asia.

#2 Vital Capital Fund

Impact Area: Development
Location: Zurich, Switzerland
Year Founded: 2010

Vital Capital is a prominent impact investment, private equity fund. It primarily focuses on sub-Saharan Africa. Having more than 30 years of experience in Africa, its impact investing has delivered essential development growth to millions of individuals in low and middle-income communities. Vital Capital invests in businesses and projects designed to enhance the quality of life and offers substantial investment returns. With more than $350 million in assets under management, Vital Capital Funds primarily focuses on health care, agro-industrial projects, renewable energy, sustainable infrastructure, and education.

#3 BlueOrchard Finance S.A.

Impact Area: Microfinance
Location: Zurich, Switzerland
Year Founded: 2001

BlueOrchard Finance has invested more than $8 billion across more than 90 countries, including Asia, Latin America, Africa, and Eastern Europe. It has achieved an impact on more than 215 million people affected by poverty in emerging markets by providing them with access to financial and related services. BlueOrchard Finance was founded as part of a United Nations initiative in 2001 to mobilize market forces to alleviate poverty and empower them to create a better life. BlueOrchard Finance was the first commercial institution to microfinance investment globally. It provides both debt and equity funding to small businesses. It focuses on alleviating hunger and poverty, establishing food production and education programs, fostering entrepreneurship, and working on climate change issues.

#4 Reinvestment Fund

Impact Area: Community Development
Location: Philadelphia, Pennsylvania, USA
Year Founded: 1985

Reinvestment Fund is a national financial institution in the USA that generates opportunities for under-resourced people and areas via partnerships. Headquartered in Philadelphia, Pennsylvania, Reinvestment Fund has an estimated $2.5 billion in assets under management. The Reinvestment Fund finances housing projects, access to health care, educational programs, and job initiatives. Reinvestment Fund officially works with offices in Atlanta, Philadelphia, and Baltimore. It provides them with public policy advice and data analysis services to assist in developing community programs.

#5 Community Reinvestment Fund, USA

Impact Area: Community Development
Location: Minneapolis, Minnesota, USA
Year Founded: 1988

Community Reinvestment Fund (CRF) is a not-for-profit organization with a mission to empower people, improve their lives, and empower the communities through innovative financial solutions. Community Reinvestment Fund was founded in 1988, in Minneapolis, Minnesota. It is accredited as a community development financial institution. CRF develops products and services to increase the flow of capital to historically underinvested communities across the USA. With more than $3 billion in assets under management, CRF has utilized these funds to help increase job creation and economic development, provide affordable accommodations, and aid with communal amenities.

Useful resources

Triodos Investment Management

Vital Capital Fund

BlueOrchard Finance

The Reinvestment Fund

Community Reinvestment Fund

Global Impact Investing Network (GIIN)

About the author

The article was written in July 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

MSCI ESG Ratings

August 26, 2024July 28, 2021 by Anant JAIN

MSCI ESG Ratings

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about MSCI ESG Ratings.

Introduction

MSCI ESG Rating is a measure of a company’s commitment to environmental, social, and governance (ESG) criteria and socially responsible investments (SRI). The MSCI ESG rating focuses on a company’s exposure to financially relevant ESG risks. It applies a rule-based methodology to distinguish companies into industry leaders and laggards based on their exposure to ESG risks and their relative aptitude to manage those risks compared to their peers. The ESG Ratings are ranked from leader (AAA, AA) to average (A, BBB, BB) to laggard (B, CCC).

Rating companies on the basis of ESG dimensions enables socially conscious investors to screen potential investments according to their personal investment goals and values.

Environmental, social, and governance (ESG) criteria

ESG criteria constitute a framework that helps socially conscious investors screen potential investments that incorporate their personal values/agendas. The ESG criteria screen companies based on sound environmental practices, healthy social responsibilities and moral governance initiatives into their corporate policies and daily operations.

Socially responsible investing (SRI)

SRI is a type of investment that is categorized to be socially responsible due to the nature of the operation the company conducts. SRI is an investment that considers two aspects:1) social/environmental changes; 2) financial performance. In other words, socially responsible investors promote practices that they believe will lead to environmental benefits, consumer protection, racial/gender diversity, etc. Some socially responsible investors also do the opposite of investing by avoiding companies that negatively impact society, such as alcohol, tobacco, deforestation, pollution, etc.

How Do MSCI ESG Ratings Work?

Over the past decade, ESG investing has become more popular. In 2020, the US SIF: The Forum for Sustainable and Responsible Investment published that more than $17 trillion of professionally managed assets were held in sustainable assets (about one-third of all assets under management).

Data providers have created various scoring criteria to rank and access potential ESG investments. Besides MSCI, other financial firms have curated their own proprietary ESG scoring models, including Standard & Poors (S&P), Blackrock, and Russell Investments. As a result, socially responsible investors can make more informed decisions when screening companies, ETFs, or mutual funds to include in their portfolios.

Division of ESG into pillars

MSCI’s ratings segregate ESG into its three pillars: environment, social, and governance. Figure 1 below shows the main components of each pillar and the key issues of each component.

MSCI evaluate thousands of data points across 35 ESG Key Issues that focus on the junction between a company’s core business and the industry-specific issues that may create significant risks and opportunities for the company. All companies are automatically evaluated for Corporate Governance and Corporate Behavior.

Figure 1. MSCI ESG classification.

Source: MSCI.

For example, in Figure 1, we take the example of a soft drink sub-industry (say Coca-Cola). In this scenario, the key issues for the environment and social pillar are highlighted. All the key issues mentioned for the governance pillar will be automatically considered for this industry (or any other industry).

Calculation of MSCI scores

When calculating the ESG scores for a company, MSCI rates each key issue from zero to ten. Zero indicates virtually no exposure, and ten represents very exposure to a particular ESG risk or opportunity.

MSCI also evaluates a company for its possible exposure to dubious business activities (e.g., gambling, weapons, tobacco, etc.). The data informing these scores are received from corporate filings, financial reports, and press releases. In addition to this, almost half of all data comes from hundreds of third-party media, academic institutions, non-government organizations (NGO), regulatory, and government sources.

Scores based on a company’s individual metrics are aggregated, weighted, and scaled to the relevant industry sector. Finally, an intuitive letter-based grade gets assigned to the company.

Assessment of MSCI scores

MSCI distinguishes its grades into three categories, mentioned below in descending order:

1. Leader (grade AAA & AA) – this grade indicates that a company is leading its relative industry. The company is managing the most significant ESG risks and opportunities.
2. Average (grade A, BBB & BB) – this grade indicates a company has an unexceptional or mixed track record of alleviating ESG risks and opportunities.
3. Laggard (grade B or CCC) – this grade indicates that a company is lagging in its industry because of the high exposure to ESG risks and failure to mitigate them.

Figure 2. MSCI ESG Score board.

Source: MSCI.

Example of MSCI ESG rating

The following case below is a real-life example of the MSCI ESG rating of Tesla, an electric vehicle producer. The company attained an overall grade of “A”, achieving the higher end of the “average” category.

When we look at the breakdown of this rating:

Tesla exceeds corporate governance and environmental risks, maintains a comparatively small carbon footprint, and utilizes green technologies.
The company scores an average grade for product quality and safety due to its past experiences of exploding batteries, undesirable crash test ratings, and accidents involving the car’s “autopilot” feature.
Tesla’s score is below-average for labor management practices. Tesla has been found to violate labor laws by blocking unionization. It has also repeatedly violated the National Labor Relations Act.

It is fascinating to note that the French auto parts maker, Valeo SA is the only company in the auto industry that earns a “leader” category grade from the MSCI ESG Ratings.

Useful resources

MSCI

MSCI Ratings Methodology

Tesla’s MSCI Rating

US SIF

About the author

The article was written in July 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Environmental, Social & Governance (ESG) Criteria

August 26, 2024July 28, 2021 by Anant JAIN

Environmental, Social & Governance (ESG) Criteria

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Environmental, Social & Governance (ESG) criteria and its individual components.

Introduction

Environmental criteria analyze how an organization performs as an agent of nature. Social criteria examine how it manages relations with employees, suppliers, customers, and the communities where it operates. Governance criteria deal with a companies’ audits, taxation, and firm management (composition of boards, shareholder rights, etc.).

There has been a rise in social investing, particularly by the younger section of the potential investors such as millennials and Gen-Z. As a result, financial products (exchange-traded funds for example) following the ESG criteria appeared. According to the report from US SIF Foundation, “there has been an increase in the assets chosen by ESG criteria from $8.1 trillion in 2016 to $11.6 trillion in 2018.”

Components of ESG

ESG criteria provide investors insight into a company’s adherence (or lack of adherence) to ethical practices. The three components of ESG criteria are defined as follows:

Environmental Criteria

These criteria measure a company’s impact on the environment and its ability to alleviate potential risks that could harm the environment in the future. It includes issues such as a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals.

Social Criteria

These criteria assess a company’s relations with other businesses, its standing in the local community, its commitment to diversity and incorporation among its workforce and board of directors, its charitable contributions, and whether it practices employee policies that foster health and safety.

Governance Criteria

These criteria assess a company’s internal processes, such as transparent accounting systems, executive compensation and board composition, and its relations with employees and stakeholders.

Types of ESG Criteria

The table below provides the different types of issues mentioned by the CFA institute for each criterion of the ESG component. They are as follows:

Table 1. ESG components.

Source: MSCI.

Why is ESG Growth Accelerating?

Global sustainability challenges such as natural disasters, privacy and data security, and changes in demographics are introducing new risk factors for investors that may not have been seen previously. As companies face rising complexity at a global level, investors may re-evaluate traditional investment approaches. The demand for ESG criteria is increasing for the following reasons:

1. The world is transforming

Global issues, such as climate risk, increased regulatory pressures, social and demographic changes, and privacy concerns, represent new or increasing risks for investors. Companies face increasing complexities and more significant analysis if they do not adequately manage their ESG aspects.

2. A new era of investors

Millennial investors actively want to contribute back to society leading to rapid growth in ESG investment. In a 2018 survey, Bank of America Merrill Lynch said that “they could conservatively estimate $20 trillion of assets growth in U.S. ESG funds alone in the next two decades.”

3. Advancing technology

Advanced technology, including artificial intelligence (AI) and alternative data extraction techniques, reduces the dependency on voluntary disclosure from organizations. Machine learning and natural language processing are helping increase the timeliness and precision of data collection, interpretation and validation to deliver dynamic content and financially relevant ESG insights.

Working of ESG Criteria

To evaluate a company based on ESG criteria, financial investors look at a broad range of factors. They mainly follow any or all of the three criteria: Environment, Social, and Governance.

It is unlikely for a company to pass all the tests in every category. Therefore, investors need to prioritize their personal agendas that align with the ESG criteria. At a pragmatic level, investment firms that follow ESG criteria must also set priorities. For example, as of March 2020, Trillium Asset Management, with $2.8 billion under management, uses various ESG factors to help identify companies positioned for strong long-term performance. Trillium’s ESG criteria include avoiding companies with known exhibition to coal mining, nuclear power or weapons. It also avoids investing in companies with disputes related to workplace discrimination, corporate governance, and animal welfare, among other issues.

Conclusion

Earlier, only rating agencies specializing in sustainability paid attention to ESG criteria and similar concepts, with some dependency on information from the sector of the analyzed company. These agencies would collect information from the sustainability or CSR teams and provide their customers with their assessments.

In recent years, a rise in the interest of climate and social issues has led some of the most significant asset management companies to create specialized teams, developing internal methodologies to assign sustainable ratings. It is especially true with passive management funds (like Vanguard, State Street, BlackRock) and some active management funds.

As a result, in the year 2020, there was a striking increment in analysis and demand for information on environmental and social issues from investors.

Useful resources

The US SIF Foundation

The Bank of America Merrill Lynch Global Research Issues

The Trillium Asset Management

About the author

The article was written in July 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Socially Responsible Investing

August 26, 2024July 28, 2021 by Anant JAIN

Socially Responsible Investing

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Socially Responsible Investing.

Introduction

Socially responsible investing (SRI) is a type of investment that is categorized to be socially responsible due to the nature of the operation the company conducts. SRI is an investment that considers two aspects: 1) social/environmental changes; and 2) financial performance.

SRI refers both to the firms which invest by considering the environment and society (on the assets side of their balance sheet) and financial investors (banks, funds, etc.) who brings financial resources (debt or equity) to finance the physical investment (on the liabilities side of firms’ balance sheet).

In other words, socially responsible investors promote practices that they personally believe will lead to environmental benefits, consumer protection, racial/gender diversity, etc. Some socially responsible investors also do the opposite of investing by avoiding companies that have a negative impact in society such as alcohol, tobacco, deforestation, pollution, etc.

Understanding SRI

For socially responsible investing, financial investors do not use the typical metrics such as financial performance to select a company for investment. While investing in SRIs, investors ensure that the operation and business practices of a company aligns with his or her personal values. Since every investor has a different set of personal values, the definition of SRI varies from person to person.

For example, if you are concerned about the environment, your portfolio may have investments in green energy (such as wind, water or solar energy). If you are enthusiastic about racial equality, you might invest in companies employing or founded by people from different racial groups.

In recent years, “socially conscious” investing has been increasing into a mass followed practice as there are multiple funds and investment opportunities available to investors.
For example, mutual funds and exchange-traded funds (ETFs) provide investors with exposure to multiple companies spread across various sectors with a single investment vehicle.

As mentioned above, SRIs have two main aspects: environmental/social impact and financial performance. But it does not mean both these aspects have to go hand-in-hand. There is no surety that an investment resulting in positive environmental impact, will also result in financial gains for investors. Therefore, investors should still access the financial outlook of the investment while focusing on its environmental/social value.

Ways to Make Socially Responsible Investments

Investors looking to make investments in SRIs focus on the following criteria: Environmental, Social and Governance (ESG). They use these criteria to access the sustainability or social impact of an investment. Socially responsible investors use different approaches to ensure their ventures achieve social goals: negative screening, positive investing and community investing.

Negative Screening

This method involves screening a company’s operations and products/services before taking a decision to invest in it. It means that if investors discover that a particular company indulges in practices that is against their personal values, for example, say gender discrimination, then investors won’t invest in that company.

Positive Investing

Investors agree to invest in companies whose operations align with their personal values. For example, an investor who cares about environment would invest in green energy.

Community Investing

If an investor is keen to invest in SRIs, community investing is an excellent approach. The investor basically puts his or her money in projects that boosts local communities economically. For example, investing in projects that utilize resources that are readily available and create employment opportunities for the unemployed.

Types of Socially Responsible Investments

There are different types of SRIs available to investors. Three of the most common mediums are mentioned below:

Mutual funds and exchange-traded funds (ETFs)

Some mutual funds and ETFs follow the Environmental, Social and Governance (ESG) criteria. For example, investors looking to invest in either of the two funds can visit the SIF website, which displays over 100 socially responsible mutual funds and socially responsible ETFs.

Community Investments

Investors can socially invest by directly putting their money into projects that benefit communities. An easy way to make such investments is by contributing to Community Development Financial Institutions (CDFIs).

Microfinance

Investors can also make socially conscious investments by offering micro-loans or small loans to start-ups. They can search for businesses in developing countries that require financial assistance.

SRI financial performance

A socially responsible investment may result in financial gains. A 2020 research analysis from asset-management firm Arabesque Partners found that 80% of the reviewed studies demonstrated that sustainability practices have a positive influence on investment performance.

Several studies have indicated that SRI mutual funds are not only at par with traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.

In the past, there have been controversies about SRI, with opponents arguing that restricting the field of investment options can also lead to a restriction of investment returns. Now, there is a growing pool of evidence that indicates the opposite: SRI is not only good for the society, but also for you!

Useful resources

The US SIF Foundation

Arabesque

About the author

The article was written in July 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Impact Investing

August 26, 2024July 19, 2021 by Anant JAIN

Impact Investing

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Impact Investing.

Introduction

Impact investing is defined as the investment process made with the intention to generate positive social and environmental impact that can be measured, along with positive financial performance. The main point of impact investing is to utilize money and investment capital for positive social results.

Impact investing considers both the physical investments of firms (on the assets side of the balance sheet of firms) and their impact on the environment and society, and the financial investments of investors, debt or equity (on the liabilities/shareholders’ equity side of the balance sheet of firms) to finance the physical investments.

Impact investments can be made in both emerging and developed markets. Emerging markets are riskier compared to developed markets. An impact investor can target a desired market according to his or her strategic goals and desired returns from the investments.

Two key elements are present in impact investments:

Intentionality: an investor’s intention should include some element of both social impact and financial return.
Measurement: while there is more availability on metrics for financial performance, an impact investor should also aim to measure the social impacts of the investment.

All investments make an impact on society, either positive or negative. Impact investors intentionally make investments that lead to measurable positive social impacts.

Parts of Impact Investments

Impact investments come in different forms of project size and risk level. Just like any other type of investment, impact investments provide investors with a wide range of possibilities when it comes to investment expected returns. The only differentiating factor with impact investment is that it does not only provide investors with positive financial returns but also has a social or environmental impact via the physical investments of firms that it finances.

The market for impact investment may vary and investors may choose to invest their money into emerging or developed markets/economies. Impact investments cover a huge number of industries including healthcare, education, energy mainly renewable energy and agriculture.

There are mainly two parts of impact investment: the choice of criteria and the use of these criteria for investing (selection of firms in the portfolio of investors).

Environmental, Social, & Governance (ESG) Criteria

ESG criteria refers to healthy practices undertaken by an investment. It helps us to analyze potential investment that may have a prominent impact on the environment/society. ESG criteria are integrated to enhance the traditional financial analysis of an investment by identifying potential risks and opportunities beyond purely financial valuations. Even though there is a parallel social conscience, the main objective of ESG evaluation remains financial performance.

Socially Responsible Investing (SRI)

Socially responsible investing (SRI) is a step up to ESG since it actively eliminates or selects investments according to specific ethical agendas. SRI uses ESG criteria (which facilitate valuation) to apply negative or positive screens on the investments. SRI uses ESG criteria to select potential impact investments.

Benefits of Impact Investing

The following points mentioned below are some of the benefits of impact investing:

Return on investment (ROI)

An impact investor can invest a fixed amount of money in a series of socially beneficial projects or organization. The returns on the investment would vary from below-market to market rate. However, in impact investing, even a simple return of principal amount used for investing creates philanthropic leverage that is unattainable through tradition investing methods.

Alignment with goals of financial investors

Firms have traditionally been focused on achieving profit maximization. This is also known as shareholder theory where the main goal of the firm is to maximize the shareholders’ returns. With impact investing, firms can utilize more assets to be leveraged for social or environmental goals. This is also known as stakeholder theory where the goal of the firm is to maximize shareholders’ profit without harming the environment or society.

Negation of onvestor’s conflict

When investors utilize their money for impact investing, they are aware that the investments are in line with ethical values. As a result, investors do not find themselves in situations of conflict with the management regarding the utilization of money for social or environmental benefits.

Examples of impact investing

The Gates Foundation

One of the most commonly known impact investment funds is the Bill & Melinda Gates Foundation. It was launched with a total endowment of nearly $50 billion. The Foundation has a strategic investment fund with $2.5 billion under management, which is invested in ventures that align with the Foundation’s social goals.

Soros Economic Development Fund

Launched by billionaire philanthropist George Soros, the Soros Economic Development Fund is part of the Open Society Foundations. Out of the $18 billion contributed to the Open Society Foundations, the Soros Economic Development Fund uses $90 million to actively invest in impact ventures.

The Bottom Line

Socially and environmentally responsible practices tend to attract impact investors. It means that companies can gain financial benefits by committing to socially responsible practices. It is observed that impact investing is more attractive to younger generation, such as Millennials and Gen-Z, who want to give back to society.

Investors also tend to profit from impact investing. A 2020 survey by the Global Impact Investing Network (GIIN) found that more than 88% of impact investors reported that their investments were meeting or surpassing their financial expectations.

By engaging in impact investing, individuals or organizations essentially state their support to the vision and the mission of the company working towards a certain social or environmental change. As we see a shift in the investor’s perspective to be more socially conscience, and to engage in impact investing, it will most likely result in more companies to become socially conscious.

Useful resources

The Gates Foundation

The Open Society Foundation

The Global Impact Investing Network (GIIN)

About the author

The article was written in July 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

My internship experience at Deloitte

August 26, 2024June 14, 2021 by Anant JAIN

My Internship Experience at Deloitte

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) shares his experience as a strategist intern with Deloitte, and talks about the functioning of Deloitte and Robotics Process Automation (RPA).

About Deloitte

Founded in 1845, Deloitte is one of the biggest professional service providers in the world. Being one of the “Big Four” accounting firm, it provides services in audit & assurance, consulting, financial advisory, risk advisory, tax and legal advisory. A key aspect about Deloitte is that it does not sell any products but rather services. Hence, it’s crucial for Deloitte to find the right mix of people to be hired for the job as explained below. Moreover, Deloitte likes to focus on automation of its processes because it increases the human productivity by removing repetitive tasks and allows its employees to focus more on crucial and important tasks. It doesn’t decrease the human input but in fact, increases the human output.

The working process

The working process for a new mission for a client is decomposed in three steps.

Step 1: The engagement letter

When is a new client comes onboard, the first step is to sign the engagement letter which defines the scope of the project, the estimated input and billable hours for the project and its breakup, and finally the price quotation to the client. This is always followed by a negotiation between the client and Deloitte and upon mutual agreement, the engagement letter gets signed.

Step 2: On-boarding

When the client gets “onboarded” with Deloitte then Deloitte’s employees who will be working with that particular client also get onboarded with the client’s firm. For example, if Coca-Cola is a client at Deloitte, then the employees at Deloitte working with Coca-Cola will also have to get onboarded with Coca-Cola’s employee platform .

Step 3: The plan and delegation

The next step is to do a thorough analysis of the project and the problems, the target areas, the areas requiring more efficiency, etc. This is usually followed by a thorough plan formulated by a Director or Senior Manager of Deloitte. The plan is then passed on to the Associates and Analysts with their designated tasks for the project with deliverables to be achieved and deadlines to be met.

The Organizational Hierarchy at Deloitte

The hierarchy of Deloitte is quite simple with titles and levels. In an ascending order, it is given by:

Analyst (I-III)
Analyst IV / Associate Consultant
Consultant (I-II)
Consultant (III-IV) / Assistant Manager
Manager (I-II)
Senior Manager (I-II)
Director
Partner

To reach a position as a Manager or above, it is important to show your business potential to get clients for the firm. Therefore, it important for a person, aiming to reach that level, to have a good network and communications skills.

Work Ethics & Environment

As a Deloitte employee, you have to restructure your schedule according to your client’s requirement especially if the client works at a different time zone (although it is extremely rare to be assigned a client with a huge time-zone difference). It is also important to realize that an employee essentially works at two firms, one being his/her employer, Deloitte, and the second being the Client’s firm. Hence, it is important for an employee to not only work with the Client but constantly update his/her progress at Deloitte. The work has to be extremely presentable to the client because the data and numbers can become very complex and difficult for a client to understand during a presentation. Therefore, it becomes important to make sure that your work is presentable and readable. The work has to be very categorical and detailed.

The working environment is quite pleasant. There are multiple team-building events and activities with various offsites, conducted throughout the year to integrate the employees more. At the same time, your supervisors and co-workers are really helpful. Even though initially one can find the environment quite fast paced and overwhelming, one can get a hang after a short period of time.

Despite the tough schedule and huge amount of workload, it is actually quite rewarding because understanding different clients’ businesses and operations make you more equipped and knowledgeable and thus adds value to your profile.

What is Robotics Process Automation (RPA)?

Robotics Process Automation (RPA) is the utilization of artificial intelligence (AI) to transform and digitize business processes. In this new era of AI, more and more organizations are on the process of completely digitizing and automating every department in their organization and RPA serves as a base for it essentially. RPA is a software which uses robots that can emulate the digital desktop work that people do. RPA is governed by business logic and structure inputs. But it does not mean that they are physical robots, they are just a digital software used to carry out functions which are monotonous, repetitive and one tone in nature. RPA can be utilized in a wide range of daily cases such as the “copy paste” activities, which can be automated using RPA for actions such as copying items from a mail to an Excel sheet, filling out forms, etc. It uses computer software robots called ‘bots’ to carry out these tasks. RPA eliminates more and more mundane admin work and handles it well and in full in compliance. This enables an organization to achieve greater efficiency by streamlining processes and improving accuracy. It also enables humans/employees to focus more on work that requires judgement, creativity, and interpersonal skills.

Robotic process automation uses a logit/probit regression as one of its bases to achieve its function of handling mundane and repetitive tasks. Logit/probit regression is a binary regression model in which the dependent variable (DV) takes the value of 0 or 1. In practice, it is used for answering tasks that have only two outputs: “yes” (1 in the model) or “no” (0). The diagram below explains how RPA functions and how it uses logit/probit in the process. The diagram shows how RPA assesses a mail and enters any relevant information in an Excel sheet and sends it to the employee related to it. The bot (robots called in RPA processes as already mentioned) reads an email sent to the employee, opens the Excel file attached to the email, and enters data from the Excel file into an Enterprise Resource Planning (ERP) platform. When this happens, the bot enters the information in the Excel file, then looks for any possibility of the matter being escalated or not (to be defined). If escalation is required, then the bot sends a notification to the employee for analysis which eventually ends the task. If escalation is not required, then the bot automatically ends the task.

Figure 1. RPA Working Process

Source: Krify

My Experience at Deloitte

As a student pursuing his graduation in Economics, landing an internship at Deloitte was really surreal. I was always inclined towards consultancy and getting a first-hand experience really helped me be more certain about my hunch. I worked as a trainee in the Strategy & Operations Department in New Delhi. During my short six-week internship, I was primarily required to execute individual analysis of RPA and its applicability in Accounts Payable Processes. It was quite an interesting individual project to understand how the digitization of organizations are executed and the capacity to which processes and tasks can be automated using AI. The internship was an eye opener about the effort and handwork required to make as a consultant in one of the “Big Four” companies.

What I learnt during my internship

The three main things I learnt during my internship at Deloitte are as follows:

I gained information about the structure and working environment at Deloitte.
I learnt about digital transformation, particularly Robotics Process Automation.
I acquired an insight about the soft and hard skills required to make as an intern at Deloitte.

About the author

The article was written in June 2021 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Acid-Test Ratio

Introduction

Calculation Of Acid-Test Ratio

Current Ratio VS Acid Test Ratio

Understanding Acid-Test Ratio

Drawbacks Of The Acid-Test Ratio

Conclusion

Useful Resources

Related Posts On The SimTrade Blog

About The Author

The Paris Agreement

Introduction

The Working Process

NDCs

Long-Term Planning

How are countries supporting one another?

Finance

Technology

Capacity-Building

How are we tracking progress?

What have we achieved so far?

Related posts on the SimTrade blog

Useful resources

About the author

Social Impact Bonds

Introduction

Purpose of Social Impact Bonds

How Does a Social Impact Bond Work?

1. Partner

2. Develop & finance

3. Deliver services

4. Attain positive results

5. Measure the outcomes

A Social Impact Bond in Practice

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Useful resources

About the author

The World 10 Most Sustainable Companies in 2021

Introduction

1. Schneider Electric SE

2. Ørsted A/S

3. Banco do Brazil SA

4. Neste Oyj

5. Stantec Inc.

6. McCormick & Company Inc.

7. Kering SA

8. Metso Outotec

9. American Water Works Company

10. Canadian National Railway Company

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Useful resources

General resources

Top 10 sustainable companies

About the author

Dow Jones Sustainability Index

Introduction

Sustainability

Understanding DJSI

Example

Methodology

Index family

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Useful resources

About the author

Carbon Disclosure Rating

Introduction

Framework of Carbon Disclosure Rating

Benefits of CDR

Criticism

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About the author

Carbon Trading

Introduction

How does Carbon Trade work?

The Cap-and-Trade System

Does carbon trading work to reduce emission?

Advantages of Carbon Trading

Disadvantages of Carbon Trading

Useful resources