A threshold assessment involves setting minimum criteria that companies must meet to be considered for investment. This often includes governance factors which are critical for evaluating the leadership and management effectiveness of a company.
Step 2: Focus Areas in Governance Assessment
Cost of Capital: More related to financial metrics and not directly linked to governance assessments.
Quality of Management: A key governance factor, assessing the capabilities, track record, and integrity of a company’s management team.
Level of Confidence about Future Earnings: While important, it is more related to financial forecasting than to governance assessments.
Step 3: Verification with ESG Investing References
Governance assessments in ESG investing place significant emphasis on evaluating the quality of management. This includes leadership practices, board effectiveness, executive compensation, and overall management competence: "Quality of management is a crucial aspect in governance assessments, determining the strategic direction and risk management practices of a company".
Conclusion: When using a threshold assessment to integrate governance factors, fund managers most likely focus on the quality of management.
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