Environmental Factors

Question 1

How are the study of economics and environmental sustainability linked?

Answer 1

Both consider the trade-offs between present costs and future benefits i.e. the depletion of resources, especially those that are scarce such as natural resources.

Question 2

According to the Stockholm Resilience Center 4 of the 9 planetary boundaries have been crossed, name them?

Answer 2

1) Climate Change
2) Loss of Biosphere Integrity
3) Land-system change
4) Altered Biogeochemical cycles ( phosphorous and NO2 loading aka ferts)

Other 5 include:

5) Ocean acidification
6) Chemical pollution
7) Freshwater withdrawals
8) Ozone layer depletion
9) Air pollution

Question 3

Primary E factors relevant to how investors assess risks and opportunities?

Answer 3

A) climate change
B) pressures on natural resources
C) Pollution and waste

Question 4

Define Climate Change (CC) and name 5 of its primary dimensions:

Answer 4

Defined as the change of climate directly or indirectly attributed to human activity, that alters the composition of the global atmosphere. Includes:

• Science
• Economics
• Society
• Politics
• Moral and ethical questions

Question 5

What is the primary contributor to the warming effect on the planet?

Answer 5

Rising emissions of GHG’s - primarily CO2 (Two thirds) - most of which comes from Fossil fuels.

Other important GHGs include methane, N02, and other fluorinated gasses.

Question 6

Potential tipping points - regardless of a decrease in energy emissions?

Answer 6

1) melting of permafrost in Northern Hemisphere
2) disintegration of the west Antarctic ice sheet
3) dying of Amazon rainforest
4) melting arctic changes water currents

Question 7

Caveats of Economic Cost Models of CC?

Answer 7

1) Standard cost benefit analysis is inadequate to deal with catastrophic circumstances aka Dismal Theorem and discounting is hard to quantify
2) Many economic models fail to model sharp discontinuities and instead assume gradual negative impacts

Question 8

Climate Mitigation and Adaptation Strategies for governments/economies/companies?

Answer 8

1) Deploying renewables i.e. wind, power, solar
2) Retrofitting buildings to be more energy efficient and using materials that reduce carbon footprint
3) Sustainable transportation and infrastructure
4) Reducing deforestation
5) Better land mgmt for crops/grazing
6) Carbon reduction policies that penalize heavy emitters
7) Develop more energy efficient processes as well as equipment for carbon capture, power storage, etc.

Question 9

What does the UN Emissions Gap Report 2020 state?

Answer 9

That we are currently heading for world temp increase of 3.2 degrees C warmer by the end of this century even with full implementation of unconditional nationally determined contributions (NDCs) under the Paris agreement.

Fun fact: Covid pandemic induced largest recorded emissions drop ever of 7%. Estimated that we need this to occur each year to 2030 in order to achieve the 1.5 degree C target.

Question 10

What is climate adaptation?

Answer 10

Adapting to a changing climate or expected future climate events thereby increasing society’s resiliency and reducing vulnerabilities

Examples include: Building flood defenses, drought resilient crops, clean cooling systems

Added Context:
Frontline of adaption are cities and municipalities due to high concentration of people, assets and economic activities. At the same time cities are a major contributor of GHG emissions because of transport and buildings.

Global commission of Adaptation claims a $2 Tn investment will yield $7Tn in avoided costs and benefits.

Question 11

Name the natural resources and the causes of increasing pressures on them?

Answer 11

Land, biodiversity, forestry, marine resources, and non renewable commodities such as fossil fuels, minerals, and metals.

Increased pressure caused by

• population growth
• health improvement
• economic growth
• increased consumption from all type of economies

Question 12

Primary land usage issues in modern society?

Answer 12

1) modern agriculture is dependent on phosphorus rock which is non renewable. Global reserves may be depleted in 50-100 years.
2) world is currently using half of its vegetated land for agriculture
3) issues compounded by changes in lifestyle including a global affluent middle class, increased use of rare earths and minerals for products like smart phones, higher standards of living, increasing meat and dairy consumption

Question 13

What kinds of effects does technological innovation have on natural resources?

Answer 13

in short term there is a decoupling effect of increasing economic activity and use of resources but long term this decoupling is merely altered and not reduced.
Prime example is EV market - less gas, more precious metals

This is theorized in the Jevons Paradox

Question 14

How is water demand interconnected in a way other resources are not?

Answer 14

Only 2.5% of water is freshwater and is used not only for human consumption for for a range of industries including agri, energy, manufacturing as well as recreational and environmental.

2 Billion people experience high water stress, 4 Billion experience severe water scarcity one month of the year.

Question 15

Biodiversity underpins what ecosystem services? What is the term for this?

Answer 15

Natural Capital is defined as the world’s stock of natural assets including: geology, soil, water, air and all living things . Together they provide a wide range of things for humans.

• Food
• Clean water
• Genetic resources
• Flood protection
• Nutrient cycling
• Climate regulation

Question 16

Companies with exposure to deforestation in their supply chain face what kinds of risks?

Answer 16

• Supply disruptions
• Cost volatility
• Reputational damage

Question 17

What are some of the largest issues caused by air pollution?

Answer 17

1) Environmental effects
2) impacts human health- 1/10th of all deaths each year with greatest mortality in regions with substantial fossil fuel related PM ( particulate matter)
3) destroys ecosystems
4) impoverishes biodiversity
5) reduces crop harvests because of soil acidification

Question 18

What are the 3 principles of the circular economy?

Answer 18

1) Design out waste and pollution
2) Keep products and materials in use
3) Regenerate natural systems

Question 19

Difference between physical and transitional risks? What are some aspects of Transitional Risks?

Answer 19

Physical risks stem from inaction on CC whereas risks and trade-offs associated with climate action are called transitional risks.

This is acute for energy companies - If govt policies changed in line with Paris Agreement than 2/3rd of worlds known fossil fuels could not be burned and would lead to massive change in value of these assets affecting banks and insurance companies as well as companies that depend on these types of resources such as car makers, plane builders and manufacturers of steel and cement, etc.

Transition risks can be broken down into
Policy Risks
Legal Risks
Technology Risks

Question 20

Kinds of impacts between business and natural resources?

Answer 20

Direct Impacts such as use of water.
Indirect Impacts which are effects of supply chain and can range from biodiversity loss to displacement of workers
These effects can be positive or negative.

Question 21

What is traceability in supply chains?

Answer 21

Analysis of supply chain-related risks by tracing the history, distribution, location, and application of products, parts, and materials.

This ensures the reliability of sustainability claims in the areas of human rights,
labor (including health and safety), the environment, and anti-corruption.

Fun Fact: In the context of E, GHG emissions in supply chains are estimated to be on average 5x higher than direct operations. (AKA Scope 3 emissions)

Question 22

What is the leading cause of deforestation in the world?

Answer 22

Commodity production but mostly beef, palm oil, soy, and timber which also receive a significant amount of financing.

Question 23

How should investors assess whether a company is doing enough to mitigate supply chain risk?

Answer 23

1) Company should be able to clearly explain the E & S requirements that suppliers are expected to meet via a procurement policy such as supplier code of conduct
2) Company should be able to assess E & S risks through supply chain and discuss whether it has a protocol in place to improve poor practices

Fun Fact: CDP estimates that while 71% of partner companies have a zero deforestation target, only 27% had policies to match these ambitions.

Question 24

Name all the international climate and environmental agreements adopted over the last decade?

Answer 24

1) Kyoto protocol effective in 2005 was first international convention on emission targets
2) Paris agreement 2015 by UN Framework Convention on Climate Change was a landmark agreement to mobilize response to threat of climate change by limiting global temp increase to 1.5 degrees Celsius.
3) UN SDG’s are 17 global goals set by UN GA in 2015
4) Kigali amendment in 2106 to phase out HydroFluro Carbons
5) International Maritime Org (IMO) 2020 regulation to cap sulphur content of fuel oil used in ships
6) CORSIA or Carbon Offsetting and Reduction Scheme for International Aviation is a UN mechanism to help aviation industry reach aspirational goals to make all international flights carbon neutral by 2020.

Question 25

When was European Green Deal signed and what is it?

Answer 25

Dec 2019 EU announced plan to make EU economy climate-neutral by 2050 through sustainable finance including:

1) reorient capital inflows by a classification system
2) institute standards for green bonds, benchmarks, etc.
2) mainstream sustainability into risk mgmt including advice, ratings, and research.
3) foster transparency and long-term thinking through disclosure requirements

Question 26

What is required under SFDR ( Sustainable Finance Disclosure Regulation)?

Answer 26

Investors must provide transparency around

• how impacts of sustainability risks on their financial products ar being assessed
• how asset managers will seek to address negative implications of investment activities
• products labeled ESG

Question 27

What is NFRD and what is its focus?

Answer 27

Non-Financial Reporting Directive established in 2019 currently under review. Focuses on double materiality which includes company impact on climate change or E & S Materiality…
and climate change impact on company or Financial Materiality

Question 28

What is the problem with current climate benchmarks? What has EU developed to increase alignment?

Answer 28

Most widely used benchmarks are primarily based on company size ( equities focused) and thus do not directly reflect low-carbon considerations in their methodologies.

EU PAB - Paris Aligned Benchmarks. Constituents must have:

1) reduce carbon emission by at least 50% in starting year
2) have a 4:1 ration of green to brown investments
3) no fossil fuel (FF) investment

EU CTB - Climate Transition Benchmarks. Constituents:

1) Require a 30% intensity reduction in starting year
2) At least a 1:1 ratio of green to brown investments
3) Permit FF investment

Question 29

What is the precautionary principle and how does it apply to ESG?

Answer 29

Precautionary principle states that if an action/policy has a suspected risk of causing severe hardship to the public domain ( such as health, or the environment), that action should not be taken in the absence of scientific certainty about its safety.

Since we cannot predict the future evolution of global climate with certainty, we must take precautionary measures. This principle is used as a legal requirement for the duties of a pension fund.

Question 30

China is the largest GHG emitter globally but how is it combatting this?

Answer 30

1) Largest global investors of energy transition in 2020 (50 billion more than US who is number 2)
2) Largest manufacturer of solar cells, LIoBatteries, EV’s
3) 2020 alone China doubled its construction of new wind and solar plants
4) Largest green bond market globally

Question 31

What is the most influential international framework for the disclosure of climate change risks and opportunities affecting companies and financial institutions?

Answer 31

TCFD or Task Force on Climate related Financial Disclosures.
Launched in 2015 following a request from G20 Financial Stability Board to investigate risks of climate change on financial system stability.
TCFD provides recommendations/framework focused on transparency around climate risks. Thinking is that better information will help investors engage with companies on resilience of CC strategies which promotes a smoother transition to sustainability and LCE.
2017 TCFD published final recs in four key areas:
Governance -> Strategy ->
Risk mgmt -> Metrics and targets

TCFD has support from 1300 companies, also introduced concept of physical vs transitional risks

Question 32

Different ways to implement a “Polluters Pay” scheme?

Answer 32

1) Emissions Trading Scheme: System based on the exchange of permits where actors who have polluted more, have to buy permits from those who have polluted less. The effectiveness can be restrictive as offshoring can occur.
2) Carbon Taxation: Explicitly price GHG emissions. This offers greater predictability but concerns such as passing costs on to consumer and elasticity of demand will determine effectiveness. Initial price range (2020-2030) of $40-80/ton

Fun Fact: Over the last ten years, many companies – especially in energy-intensive sectors – have used the practice of shadow carbon pricing to guide their decision-making process. An internal or shadow price on carbon creates a theoretical or assumed cost per ton of carbon emissions. For example, the major oil company, BP,
uses a price assumption of a US$100 (£72) per tonne of CO2by 2030151 to better understand the potential impact of future climate regulation on the profitability of a project, a new business model or an investment

Question 33

Give Examples of Public Finance structures?

Answer 33

1) Export Credits
2) Development Banks
3) Concessionary Lending to SME’s
4) Guarantees
5) R&D
6) Infrastructure investment

Question 34

What is SASB?

Answer 34

Sustainability Accounting Standards Board
established in 2011 to develop and disseminate sustainability accounting standards. The standards identify financially material issues that are reasonably likely to impact the financial condition or operating performance
of a company and therefore are most important to investors.

Question 35

According to the G20 Green Finance Study, FI’s need to combine two types of approaches to assess environmental risks, what are they?

Answer 35

1) Understanding what E factors may pose risks to financial assets/liabilities and how these risks may evolve over time
2) Translate E risk factors into quantitative measures of financial risks that can inform risk mgmt and investment related decisions

Question 36

What are the levels of analysis that must be considered when analyzing E risk and what are the various approaches to evaluating this type of risk?

Answer 36

1) Project or company level
2) Sector Level
3) Country Level
4) Market Level

Approaches include: Carbon Footprinting and/or Carbon Metrics; Natural Capital Approach; Climate Scenario Analysis

Question 37

Measuring Carbon Footprint means an investor can…?

Answer 37

• Compare against global benchmarks
• Identify priority areas and determine steps to reduce
• Track progress in reductions

Note: The use of carbon footprinting applies the international accounting tool of the GHG Protocol Standards.

Question 38

Biggest Challenges across Carbon Footprinting ?

Answer 38

• Lack of disclosure for unlisted or private assets
• Scope 3 emissions are rarely included thus failing to capture companies full value chain
• Double Counting ( one companies scope 1 is a another companies scope 3)
• Use of different methodologies for aggregation and estimation
• Does not measure potential investment risks related to physical impacts of climate change

Question 39

What are the formulas for Total Carbon Emissions and Weighted Carbon Emissions?

Answer 39

TCE = Sum (current value of investment / issuers market cap) X Issuers Scope 1 +2 E

WCE = Sum (current value of investment / current portfolio value) X (Issuers Scope 1 + 2 E / issuers US$M of Revenue )
* WCE is the recommended method by TCFD

Question 40

What are SBTs and name some types?

Answer 40

Net Zero targets underpinned by the latest climate science and evaluated by the Science-Based Target initiative (SBTi) with the aim of providing standardization

Emissions Trajectories - used to assess required reductions necessary to reach a stated goal For example - Net Zero by 2050

Temperature Alignment - Comparing climate profiles of companies, sectors or portfolios against a global benchmark. This allows a degree of quantification of the implied future temperature levels associated with a company or portfolio.

Green Capital Expenditures - Looks at level of green capital expenditures vs existing revenue/future revenue streams to gauge direction of business

Fun Fact: Paris Agreement Capital Transition Assessment (PACTA) is a public tool developed by 2° Investing Initiative, with backing from the UN PRI, which aims to measure the alignment of financial portfolios with climate scenarios. The analysis incorporates the business and capital expenditure plans of companies for the next five years. The tool compares portfolios to the trajectory required to meet the goals of the Paris Agreement. There are two versions: one for publicly listed securities (equity and fixed income); and an open source data and modelling suite for private portfolios (such as bank loan books).

Question 41

What is the approach used to describe the relationship between nature and measuring and valuing nature’s role in decision-making?

Answer 41

Natural Capital explains the complex ways in which natural, social and economic systems impact each other.

This has lead to Task Force on Nature-related Financial Disclosures (TNFD) was announced in mid- 2020, a collaboration between UN-affiliated institutions, Global Canopy and WWF.

Question 42

Walk through the investor framework for climate related scenario analysis as outlined by the Institutional Investors Group on Climate Change (IIGCC)?

Answer 42

1) Establish Objectives: What is approach - Alignment focused or Financial Materiality and determine existing internal governance
2) Scenario Selection: Understand types of climate scenarios and how they can be translated into parameters to guide investment analysis
3) Mapping: Top down mapping to determine main areas of risk and/or a bottom up analysis to determine magnitude of risk
4) Review Findings and Consider Actions: Iterate to determine range of actions, analyze further and gather data
5) Disclosure: Reporting and Communication: Internally to portfolio managers, investment committees & trustees; Externally to clients, regulators, and stakeholders

Question 43

Name the key opportunities in relation to climate change and describe what they mean?

Answer 43

.1) Circular Economy - Where products and materials are reused and recycled thereby safeguarding natural assets and accelerating transition to LCE.
2) Blue Economy - as defined by world bank: sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem.
3) Clean and Tech Innovation - Technological innovation and the development of new business ventures associated with the environment, sustainable forms of energy and products,
4) Green and ESG related products - The risks and opportunities associated with environmental sustainability and mitigating climate change necessitates a re-alignment of financial products and services in order to facilitate the transition to a LTE. .
Examples include Green bonds, Sustainability linked Loans, ESG ETF’s, Crowdfunding

Question 44

List what clean-tech innovations can have the greatest impact in decarbonisation?

Answer 44

Low Carbon Electricity as power is the mover of all things in the economy so the knock-on effects are exponential. This obviously includes renewables but also biofuels

Electrification of Industrial Processes such as in steel making which has a substantial carbon footprint. Need for Electric Furnaces, greater recycling, and alternative reductants (hydrogen or gas instead of coal). In chemicals the use of hydrogen, synthetic fuels, different catalysts, and alternative feedstocks.

Buildings have significant embodied carbon is associated with the construction materials, the building process, the fixtures and fittings inside, as well as from deconstruction and disposal at the end of its lifetime.

Transport with its continued shift to EV.

Food Industry has substantial emissions associated with food production, packaging and consumption. Innovation is also needed in agricultural techniques to produce less toxic fertilizers and better regenerative techniques.

Question 45

List considerations for determining the framework for whether an ESG product/Green Finance instrument is green enough?

Answer 45

1) Eligibility of assets and criteria needed to meet ESG objectives
2) Proceeds being allocated effectively
3) Transparency, key measures of impact and reporting requirements
4) Issuer or borrower has a clear sustainability/ESG strategy

Question 46

Name some existing frameworks for green finance instruments?

Answer 46

• ICMA set the Green Bond Principes in 2014 by a consortium of banks
• Climate Bonds Initiative has a Taxonomy on how to meet Paris Agreement objectives
• Green Loan Principles established by the UK and Asia Pac Loan Market Association
• Center for International Climate Research (CICERO) established shades of green methodology in 2018 to help determine how green bonds align with a low carbon future
• In 2019, the UK, APLMA and the US Loan Syndications and Trading Association
  launched the Sustainability-linked Loan Principles (SLLP).

Question 47

What is the the Blue Economy Development

Framework (BEDF)?

Answer 47

Launched by World Bank and Euro Commission the BEDF intends to help coastal countries and regions to develop evidence-based investment and policy reform plans for its coastal and ocean resources.
▶ prepare policy, fiscal, and administrative reforms;
▶ identify value creation opportunities from blue economy sectors; and
▶ identify strategic financial investments.

Question 48

How can internal (shadow) carbon pricing guide the decision making process of companies?

Answer 48

1) To better understand the potential impact of future climate regulation on the profitability of a project, a new business model or an investment.
2) Its use reveals hidden risks and enables businesses to build this factor into future valuations and estimates of capital expenditure.
2) When emissions bear a cost in profit-and-loss statements, it helps to uncover
inefficiencies and incentivize low carbon innovation within departments, cutting a company’s energy use.