Responsible Investment Banking: Risk Management...
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We live in a complex world in which crises proliferate and magnify risks to our financial system. Climate change is increasing the frequency and intensity of extreme weather events, resulting in property damage, business disruption, and the devaluation of investments and other assets. To continue to thrive in the face of global competition, it is essential that New York financial institutions integrate consideration of the financial risks from climate change into their governance frameworks, risk management processes, and business strategies and start developing their approach to climate-related financial disclosure.
The report is intended to provide insurers with an example of a tool that can help them analyze their transition risks and inform actions to mitigate them. Working with DFS, 2DII analyzed the transition risks of New York domestic insurers by assessing the alignment of their equity and corporate bond portfolios using their 2019 Schedule D data against different climate scenarios. The report also outlines investment-related strategies that insurers can consider to mitigate their transition risk exposure.
Mizuho positions \"Environmental and human rights considerations for investment and lending\" as one of our key sustainability areas (materiality). Additionally, regarding our stance on responsible financing and investment from a risk management perspective, we are addressing issues based on the changes in the external environment and the status of responses by internal management.
The Bank has adopted a broad vision of sustainability for its investments, which includes environmental, social and corporate governance (ESG) aspects, giving priority to firms that: a) focus on the responsible use of natural resources and their impact on ecosystems; b) maintain adequate conditions regarding safety, health, justice, equality and inclusion; and c) generate income and employment in compliance with ethical principles and with the best corporate governance.
The Charter also refers to the recommendations of the Network for Greening the Financial System, in which the Bank has been an active participant since 2019, and to the common stance that has emerged in the Eurosystem for applying sustainable and responsible investment criteria to non-monetary policy portfolios.
The techniques used in sustainable investing have advanced as well. While early ethics-based approaches such as negative screening remain relevant today, other strategies have since developed. These newer strategies typically put less emphasis on ethical concerns and are designed instead to achieve a conventional investment aim: maximizing risk-adjusted returns. Many institutional investors, particularly in Europe and North America, have now adopted approaches that consider ESG factors in portfolio selection and management. Others have held back, however. One common reason is that they believe sustainable investing ordinarily produces lower returns than conventional strategies, despite research findings to the contrary.
A sustainable investment strategy consists of building blocks familiar to institutional investors: a balance between risk and return and a thesis about which factors strongly influence corporate financial performance. The following questions can help investors define these elements:
Where should ESG specialists fit into the organization Some investors put their ESG specialists outside the investment team (for example, within a communications group). Leading investors typically embed ESG experts within their investment teams, with a head of ESG who reports to the chief investment officer. ESG specialists then provide ongoing support to portfolio managers. Some funds have made it a priority to hire ESG specialists with strong investment backgrounds. For example, the Canada Pension Plan Investment Board hired a senior investment professional as its head of ESG. Other funds have chosen not to have dedicated ESG specialists, but to assign responsibility for related issues to ESG-trained portfolio managers. At one Scandinavian investor, portfolio managers must fully account for all drivers of risk and return, including those related to ESG factors.
Using ESG triggers to find new investment opportunities. If assessing a whole portfolio with regard to ESG risks is one side of a coin, then seeking investment opportunities based on ESG factors is the other side. As with assessing risk exposure, institutional investors will need a point of view about ESG-related trends and their long-term effects on asset prices. One way to develop a thesis is to identify the most significant trends and the sectors they influence (for example, asking what opportunities will be created by the widespread shift toward renewable energy).
Fully describe compensation, fees, and calculations for base services, as well as any fees based on volume of activity and for special requests. Ensure the contracts do not include burdensome upfront fees or incentives that could result in inappropriate risk taking by the bank or third party. Indicate which party is responsible for payment of legal, audit, and examination fees associated with the activities involved. Consider outlining cost and responsibility for purchasing and maintaining hardware and software. Specify the conditions under which the cost structure may be changed, including limits on any cost increases.
Specify whether the bank or third party is responsible for responding to customer complaints. If it is the third party's responsibility, specify provisions that ensure that the third party receives and responds timely to customer complaints and forwards a copy of each complaint and response to the bank. The third party should submit sufficient, timely, and usable information to enable the bank to analyze customer complaint activity and trends for risk management purposes.
The bank's board of directors (or a board committee) and senior management are responsible for overseeing the bank's overall risk management processes. The board, senior management, and employees within the lines of businesses who manage the third-party relationships have distinct but interrelated responsibilities to ensure that the relationships and activities are managed effectively and commensurate with their level of risk and complexity, particularly for relationships that involve critical activities:9
A bank is exposed to strategic risk if it uses third parties to conduct banking functions or offer products and services that are not compatible with the bank's strategic goals, cannot be effectively monitored and managed by the bank, or do not provide an adequate return on investment. Strategic risk exists in a bank that uses third parties in an effort to remain competitive, increase earnings, or control expense without fully performing due diligence reviews or implementing the appropriate risk management infrastructure to oversee the activity. Strategic risk also arises if management does not possess adequate expertise and experience to oversee properly the third-party relationship.
This paper surveys the literature on socially responsible investments (SRI). Over the past decade, SRI has experienced an explosive growth around the world. Particular to the SRI funds is that both financial goals and social objectives are pursued. While corporate social responsibility (CSR) - defined as good corporate governance, sound environmental standards, and good management towards stakeholder relations - may create value for shareholders, participating in other social and ethical issues is likely to destroy shareholder value. Furthermore, the risk-adjusted returns of SRI funds in the US and UK are not significantly different from those of conventional funds, whereas SRI funds in Continental Europe and Asia-Pacific strongly underperform benchmark portfolios. Finally, the volatility of money-flows is lower in SRI funds than of conventional funds, and SRI investors' decisions to invest in an SRI fund are less affected by management fees than the decisions by conventional fund investors.
As a responsible institutional investor, Nomura Asset Management aims to realize a sustainable and prosperous society by helping clients to build wealth. In addition to helping clients build wealth through the asset management business, we support the creation of social value by the companies held in our portfolios by realizing a virtuous cycle of investment (investment chain) through engagement and other efforts.
We recognize that moves toward addressing ESG related issues are becoming increasingly important in supporting the virtuous cycle of the investment chain. As a responsible investor, we expect the companies in which we invest to manage their operations with an appropriate emphasis on material ESG related issues, while we ourselves also conduct our own business activities with a focus on ESG. More specifically, we are stepping up our initiatives to address issues related to climate change, natural capital, human rights, diversity and inclusion, value creation to realize well-being within society and corporate governance, and corporate social responsibility, based on the understanding that these are key long-term challenges. In March 2019, Nomura Asset Management published its ESG Statement, clarifying its efforts to promote initiatives related to ESG issues.We will review this statement as necessary to appropriately reflect changes in the external environment and our approach to stakeholder engagement.
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