* Principle of Monitoring:
* Regular monitoring of investee companies is a fundamental principle in stewardship codes, ensuring that institutional investors remain informed about the companies in which they invest and can effectively engage with them on ESG and performance issues.
* According to the CFA Institute, continuous monitoring allows investors to identify potential risks and opportunities, engage with company management, and advocate for improvements in governance and practices.
* Stewardship Codes:
* Stewardship codes, such as the UK Stewardship Code and the International Corporate Governance Network (ICGN) Global Stewardship Principles, emphasize the importance of regular monitoring as part of responsible investment practices.
* The CFA Institute highlights that these codes provide frameworks and guidelines for institutional investors to follow, promoting transparency, accountability, and proactive engagement with investee companies.
* Engagement and Escalation:
* Regular monitoring enables investors to engage with companies on a continuous basis, addressing issues as they arise and escalating concerns if necessary. This ongoing engagement is crucial for effective stewardship and long-term value creation.
* The Principles for Responsible Investment (PRI) also advocate for regular monitoring and engagement, encouraging investors to take an active role in improving corporate behavior and sustainability practices.
* Examples of Monitoring Activities:
* Monitoring activities include reviewing financial statements, ESG reports, meeting with company management, and participating in shareholder meetings. These activities help investors stay informed and influence corporate strategies and practices.
* The CFA Institute notes that effective monitoring involves a comprehensive approach, integrating financial analysis with ESG considerations to provide a holistic view of investee companies.
References:
* CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."
* UK Stewardship Code and ICGN Global Stewardship Principles documents, which outline the principles of regular monitoring and engagement.

Weitzman'sdismal theoremsuggests that traditionalcost-benefit analysis failsto accurately measure the downside risks of climate change because ofuncertainty in extreme tail events. It argues thatlow-probability, high-impact events (e.g., catastrophic global warming)candominate economic risk calculations, making itdifficult to justify inactionbased on expected cost assessments alone.
This theorem challenges standard economic models thatdiscount future risks too heavily, advocating forprecautionary climate policieseven in cases ofuncertain probability distributions.
References:
* Weitzman, M. L. (2009). "On Modeling and Interpreting the Economics of Catastrophic Climate Change"
* IPCC Climate Risk Frameworks
* Nicholas Stern Review on Climate Economics
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Sustainability-linked bonds (SLBs) (Option C) are financial instruments where issuers commit to achieving specific ESG-related targets, such as reducing carbon emissions or improving workforce diversity. If the issuer fails to meet these targets, they may face financial penalties, such as higher interest rates.
Option A (Transition bonds) are issued by companies in high-emitting sectors (e.g., oil & gas, steel) to fund their transition toward sustainability but do not necessarily include performance-based ESG targets.
Option B (Sustainability bonds) are used to finance specific green or social projects but do not always include conditional ESG performance metrics.
References:
ICMA Sustainability-Linked Bond Principles (2020)
EU Green Bond Standard Report (2021)
Moody's ESG Credit Ratings Methodology

A portfolio manager may need to adopt a more appropriate ESG benchmark rather than a broad market benchmark if the degree of exclusions results in high active share and high tracking error. High active share indicates that the portfolio significantly deviates from the benchmark, while high tracking error measures the volatility of these deviations.
High Active Share: Excluding a significant number of securities from the investment universe to align with ESG criteria can lead to a portfolio that is very different from the broad market benchmark. This high active share reflects the extent to which the portfolio composition differs from the benchmark.
High Tracking Error: The deviations from the benchmark can lead to high tracking error, indicating the portfolio's performance can vary significantly from the benchmark. This variability can be a result of the different risk and return characteristics of the excluded securities.
Appropriate ESG Benchmark: To accurately measure performance and risk, it is essential to use a benchmark that reflects the ESG criteria applied in the portfolio. An ESG-specific benchmark would provide a more relevant comparison and better align with the investment strategy.
Reference:
MSCI ESG Ratings Methodology (2022) - Explains the importance of selecting appropriate benchmarks for ESG-focused portfolios to ensure alignment with investment objectives.
ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the impact of exclusions on portfolio metrics such as active share and tracking error, and the need for suitable ESG benchmarks.

ESG (Environmental, Social, and Governance) information is critical for investors to evaluate the sustainability and ethical impact of their investments. Different sources of ESG information vary in their primary and secondary nature based on how they are created and disseminated. Understanding the distinctions among these sources helps investors make informed decisions.
1. Annual Reports: Annual reports are primary sources of ESG information. They are produced by the companies themselves and provide a comprehensive overview of financial performance, strategic direction, and often include sections dedicated to ESG initiatives and performance. These reports are considered primary because they originate directly from the reporting entity and provide firsthand insights into a company's operations and ESG commitments.
2. ESG Rating Reports: ESG rating reports are considered secondary sources of ESG information. These reports are produced by independent third-party agencies like MSCI, Sustainalytics, and others. ESG rating agencies analyze data from multiple sources, including company disclosures, government databases, media reports, and other specialized datasets. They assess and rate companies on their ESG performance, providing an independent evaluation that investors can use to compare companies across sectors and regions. ESG rating reports consolidate and interpret primary data to provide a synthesized and often standardized view of a company's ESG standing.
3. Corporate Sustainability Reports: Corporate sustainability reports, like annual reports, are primary sources of ESG information. These reports are specifically focused on a company's sustainability practices, environmental impact, social responsibility initiatives, and governance structures. They are published by the companies themselves and offer detailed insights into their sustainability strategies and achievements.
Detailed Explanations:
Primary Source: A primary source is an original document or firsthand account that has not been interpreted by another party. In the context of ESG information, primary sources include documents produced directly by the company, such as annual reports and corporate sustainability reports. These documents provide raw data and insights directly from the source, making them essential for understanding a company's self-reported ESG performance.
Secondary Source: A secondary source interprets and analyzes primary data to provide an additional layer of insight. ESG rating reports are secondary sources because they take data from various primary sources, analyze it using specific methodologies, and present an independent assessment of a company's ESG performance. These ratings help investors by offering an objective view that can be compared across different companies and industries.
Reference from CFA ESG Investing:
ESG Ratings and Methodologies: The CFA Institute highlights the importance of ESG ratings as secondary sources of information that help investors evaluate the relative ESG performance of companies. These ratings are based on comprehensive methodologies that incorporate data from primary sources and apply consistent analytical frameworks (as detailed in the MSCI ESG Ratings Methodology Executive Summary).
Use of ESG Information: The CFA curriculum emphasizes the use of both primary and secondary sources of ESG information for thorough investment analysis. Primary sources provide direct insights from companies, while secondary sources like ESG rating reports offer independent evaluations that can enhance the investment decision-making process by providing benchmarks and comparisons.
In conclusion, ESG rating reports are most likely a secondary source of ESG information because they compile, analyze, and interpret data from various primary sources to provide an independent assessment of a company's ESG performance.