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CFA ESG 22 > Chapter 3: Environmental Factors > Flashcards

Chapter 3: Environmental Factors Flashcards

1
Q

Which FOUR PLANETARY BOUNDARIES have been crossed?

(of 9 total; Stockholm Resilience Centre)

A
  • CLIMATE change (>350ppm)
  • Loss of BIOSPHERE integrity (amazon burning)
  • LAND-SYSTEM change (arable land)
  • ALTERED BIOCHEMICAL CYCLES (Baltic Sea; phosphorus & nitrogen loading)

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2
Q

What are transition risks?

A
  • Result from changes in climate and energy policy and the shift to low-carbon tech
    1. Climate policy +
    2. Technology change
    3. Consumer preferences
    4. Market change
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3
Q

What are physical risks?

A
  • Results from extreme weather events, acute or chronic risks from longer-term changes
  • Travel and leisure industries’ highest risk
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4
Q

What are the goals for climate change mitigation?

A
  • Avoid significant human interference with climate system
  • Stabilize GHG in time sufficient for ecosystem to adapt
  • Ensure food production
  • Enable economic and sustainable development
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5
Q

What are the main climate scenarios in terms of temperature increase and emission trajectory?

A
  • RCP 2.6 -> not likely to exceed 2 degees / Aggressive mitigation / Emissions halved by 2050
  • RCP 4.5 -> More likely than not to exceed 2 degrees / Strong mitigation /emissions half by 2080
  • RCP 6.0 -> Likely to exceed 2 degrees / Some mitigation / Emissions rise to 2080, than fall
  • RCP 8.5 -> As likely as not to exceed 4 degrees, emissions rise at current rate, business-as-usual
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6
Q

What sectors are particularly exposed to biodiversity loss?

A
  • Agriculture
  • Extractive industries
  • Forestry
  • Tourism
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7
Q

What material risks are companies facing that are exposed to deforestration?

A

○ Supply disruption
○ Cost volatility
○ Reputational damage (Germany)

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8
Q

What are the key components of a Green Bond Framework?

A
  • Eligible use-of-proceeds criteria
  • Process for project evaluation and selection
  • Management of proceeds
  • Reporting
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9
Q

What is governed by the Green Loan Principles?

A
  1. Green use of loan proceeds
  2. Projects sustainability objectives have been evaluated and communicated to lenders
  3. Management
  4. Reporting
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10
Q

What should investors in the Green Loan and Bond Market know?

A
  • Eligibilty of assets and criteria to meet ESG objectives
  • Effective allocation of proceeds
  • Transparent reporting requirements and KPI
  • Issuer or Borrower has sustainability and ESG strategy
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11
Q

What describes a circular economy?

A
  • In a circular economy, products and materials are repaired, reused and recycled rather than thrown away
  • Based on the principle that waste and pollution is designed out
  • Keeping products and materials in use, regenerating natural systems
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12
Q

What steps should one take to conduct a climate scenario analysis?

A
  1. Establish objectives - Alignment or financial materiality/impact
  2. Understand climate scenarios and how they can be translated into investment analyses parameters
  3. Top-down mapping to identify main areas of riks OR bottom-up in-depth analysis
  4. Review findings and consider actions
  5. Ongoing monitoring
  6. Disclosure
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13
Q

What is the general approach to conduct a materiality assessment of environmental risks on companies?

A
  • Take set of transparent and credible data source (quantitative or qualitative)
  • Apply recognize methodology
  • Focus on materiality - specific business model, operation, financial performance
  • Generate outputs that can be measured in KPIs
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14
Q

What is the purpose of a climate scenario analysis?

A
  • Forward-looking assessment of climate-related risks and opportunities
  • Describes a process of evaluating how an organisation, sector, country or portfolio might perform in different future states
  • To understand key drivers and outcomes
  • Used to understand financial impact or need for alignment
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15
Q

What are the different scopes of emission?

A
  • Scope 1
    ○ Fuel combustion
    ○ Company vehicles
    ○ Fugitive emissions
  • Scope 2
    ○ Purchased electricity, heat and steam
  • Scope 3:
    ○ Purchased goods and services
    ○ Business travel
    ○ Employee commuting
    ○ Waste disposal
    ○ Use of sold products
    ○ Transportation and distribution (up- and downstream)
    ○ Investments
    ○ Leased assets and franchises
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16
Q

What is carbon footprinting and what is it used for, and what does the TCFD say about it?

A
  • Portfolio carbon footprint measures carbon emissions and intensity associated with a company operations in a portfolio
    ○ Investors can compare it to global benchmarking
    ○ Identify priority areas and actions for reducing emssions,
    ○ Track progress in making reductions
  • TCFD recommends that asset owners and managers report weighted average carbon intensity associated with their investments
17
Q

What is the rationale and what are the types of carbon pricing?

A
  • Putting price on carbon considered very effective -> Polluter pays principle
  • Types of Carbon pricing
    ○ Emission trading system -> Emitter can trade emission units
    ○ Carbon Tax
18
Q

What is a shadow carbon price and what can it do for companies and investors?

A
  • Theoretical or assumed price of carbon,
  • Used to better understand the impact on project profitability, new business model or investment
  • Reveals hidden risks and helps business factor in future valuations and capital expenditures
  • Investors use shadow pricing in their financial analysis
19
Q

What are the key impacts of climate risks and opportunities for organisations?

A

○ Companies’ strategic planning and risk management
○ Financial impact
- Income statement (Revenues, Expenditures)
- Cash flow
- Balance sheet (Assets and liabilities, capital and financing)

20
Q

What do investors need to do to understand companies exposure to climate risks?

A
  • Understand environmental factors that pose for financial assets and liabilities
  • Translate environmental factors and risks into quantitative measures of financial risk to incentive companies to management
21
Q

How are companies evaluating materiality of environmental risks?

A
  • Investors looks at qualitative and quantitative environmental factors to make an informed evaluation of the embedded risks
  • Judgement is made how material the risk are and whether these risks are are priced or not
  • Materiality is highly influenced by the industry, sector, country and jurisdiction where companies or projects are located
  • Investors can assess materiality of environmental risk by analyzing rate of companies utilization or consumption of natural resources
22
Q

What are potential consequences of a material risk assessment on company evaluation?

A
  • Assessment of material environmental risks will inform assessment of key financial metrics as monitored and disclosed in financial statements (like profit and loss or balance sheet)
  • Sector-wide assumptions need to be overlayed on company
  • Companies in exposed sectors tend to be influenced by environmental risk premium, which may affect discount rate used.
  • Adjustment can be made to remove regional or sectoral biases that align with investment strategy
23
Q

What key company efficiency and profitability ratios are likely affected by materiality assessment?

A

a. E.g Price-to-earnings ratio which reflects company’s competitiveness
b. Adjustment of costs assumptions

24
Q

What are the systemic impacts of climate risk?

A
  • Impact will affect all agents in the economy, all sectors and across all geographies
  • Impact will be correlated and non-linear
  • Impacts will be much greater scale that other risks.
25
Q

What are the key supply chain risks?

A

○ Material toxicity
○ Raw material use
○ GHG
- Biodiversity

26
Q

Which industries are particularly affected by supply chain risk?

A

○ Oil and gas
○ Mining
○ Beef
○ Forestry,
○ Palm oil
- Leather

27
Q

What is Jevon’s Paradox?

A

Improvements in efficiency are offset by increased consumption of a given product

28
Q

What is Dismal Theorem?

A

Coined by Martin Weitzman

  • Standard cost-benefit analysis is inadequate to deal with potential downside losses
29
Q

What is COP21?

A

Conference Of the Parties

  • Paris Accord, 2015
30
Q

What was the Paris Agreement Temperature Goal?

A

Limit increase to 2°C

31
Q

What was the difference between Kyoto (05) and Paris (15) Accords?

A

Kyoto –> Developed Nations only
Paris –> Global response

32
Q

Green Bond Principles (GBP)

A

ICMA –> International Capital Markets Association
- Voluntary guidelines established by consortium of investment banks

  • Promote integrity of green bond markets..
    • Transparency
    • Disclosure
    • Reporting

External review second party to track proper use of proceeds

33
Q

Increased pressure on natural resources

A
  • Population growth rates
  • People living longer
  • Economic growth
  • Accompanying increased consumption
34
Q

Climate change mitigation

A

Goal to avoid significant human interference with climate system

  • Stabilise GHG levels
  • Ensure food production is not threatened
  • Enable economic development to proceed in a sustainable manner
35
Q

National Capital Partners (NCP)

A

Helps companies to identify, measure, and value the direct & indirect impacts and dependencies on natural capital

  • Apparel
  • Food & beverage
  • Forest products
36
Q

Climate adaptation

A

Anticipating adverse effects of climate change, then taking action to prevent / minimize damage they can cause

  • Drought resilient crops
  • Building flood defenses
  • Planning for scarce water
  • Protecting energy and public infrastructure
37
Q

EU Taxonomy

A

(6)
Requirements to be classified as environmentally sustainable economic activity

1) Climate change mitigation
2) Climate change adaptation
3) Sustainable use of protection of water and marine resources
4) Transition to a circular economy, waste prevention, and recycling
5) Pollution prevention and control
6) Protection healthy ecosystems

38
Q

National Determined Contributions (NDCs)

A

Determined by Paris Agreement

  • Voluntary efforts by each country to reduce national emmissions & adapt to impacts of climate change
  • Requires every signatory to determine, plan & report on NDCs every FIVE (5) years

CFA ESG 22 (9 decks)

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