CFA exam qs Flashcards

Question

Which of the following statements regarding private, corporate, sub-investment grade debt is least accurate?

Answer 1

Most lenders are banks [most lenders are actually institutional investors ]

Answer 2

General insurer [For a general insurer, the time horizon for claims on policies is short-term, limiting the investment time horizon to just one or two years. A family office (“20 to 100+ years”) goes from a high net worth individual down to the next generation, hence a slightly longer-than-lifetime time horizon. Retail investors (“1 to 50 years”) vary enormously by investor, but generally within their lifetimes. Defined contribution pension schemes (“10 to 70 years”) have a time horizon of the rest of each beneficiary’s life.

Answer 3

Both will be mandatory.

Answer 4

$200 million in XT, $50 million in ZW. Carbon intensity is expected to be 30 tCO2/$m for XT and 80 for ZW. Today’s carbon intensity is not relevant here. Total investment value is $400 million for XT and $160 million for ZW. Shah is recommending that NP invest in both, and the firm needs at least 30% in each, i.e. at least $120m in XT, $48m in ZW. This eliminates the “250 X” and “100 X, 150 Z” options. The WACI for the other two options: “200 X, 50Z”: WACI = (200 x 30 + 50 x 80) ÷ 250 = 40, acceptable. “150 X, 100Z”: WACI = (150 x 30 + 100 x 80) ÷ 250 = 50, too high.

Answer 5

Historical energy consumption records that show the impact of changing climatic conditions [Energy consumption records that show a changing climate would be more useful when assessing chronic physical risks. The other items can more directly help with transition risks: changes to the building code are part of policy risk; comparison to IPCC pathways indicates the risk of asset stranding, carbon penalties or retrofitting costs; and newer buildings would help with assessing market risk and, in the extreme, reputation risk. Note that tenant refitting has no impact on the building structure, tending to be cosmetic and short-term]

Answer 6

The price is determined by the government. [The price of carbon emissions units is determined by the MARKET. High demand will cause the price to rise, high supply (or low demand) will cause the price to fall. Overall emissions are capped, and low emitters can sell credits to high emitters]

Answer 7

The supplier of an asset is still owed money at the end of the asset’s life. [A stranded liability arises when the owner of a stranded asset (often caused by new regulations) does not have the resources to retire the asset. In such cases it may be left to the government (or taxpayers) to cover the shortfall]

Answer 8

High and limited. [With late action, far more extreme regulations need to be put in place (compared to if action is taken now). This creates high transition risks. The regulations will reduce physical risks to a low, limited level.]

Answer 9

Capital expenditure. Energy demand and mix. [[Choice of climate models and which physical risks are included are both analytical choices rather than key assumptions; and capital expenditure is a business impact]]

Answer 10

A 2.22 degrees. [[The PACTA principle is the Paris Agreement Capital Transition Assessment. With this assumption (“relevant sectors”) we are neither extrapolating a company to the sector, nor the sector to the whole economy. The total overshoot is 15% x 0.3 x 0.2 = 0.9%. Hence PTA = 2.2 degrees x (1 + 0.009) = 2.2198 degrees]]

Answer 11

Contributing to national forums on trade and technology.

Answer 12

For the oil and gas sector, there are likely to be three red line corporate assessment topics: decarbonisation strategy, capital allocation alignment and climate policy alignment

Answer 13

(1) Are physical assets likely to become stranded? - COSTS (stranded assets will lead to write-down costs) (2) Is carbon pricing likely to be implemented, and at what level? - COSTS (3) Will the company need to raise funds to fund a low carbon transition? - COST OF CAPITAL (fund raising relates to cost of capital, as investors have a required return) (4) What is the analyst’s opinion of the company’s attitude to climate risk? - COST OF CAPITAL (5) Which products and services will become obsolete in a low carbon world? - REVENUES

Answer 14

funded activities should be EU taxonomy aligned [four recs are: (1) use of proceeds: proceeds should funda climate mitigation or adaptation project; (2) process for projectevaluation & selection: the borrower should explain their sustainability objectives, and why the project is eligible; (3) management of proceeds: funds should be segregated and monitored; and (4) reporting: the use of proceeds should be reported annually to lenders. There is no requirement to fit within the EU Taxonomy definitions]

Answer 15

(1) Exclude companies making controversial weapons. (2) Translate scores into tilts, using five criteria. (3) Remove stocks that do not help the objective. (4) Publish index and review annually ii, iii, iv, i

Answer 16

The index is constructed bottom up, using data from developed and emerging markets [[The three key indicators are green building certification, energy usage and carbon emissions: of these, certification and energy usage are used to tilt portfolio weights. Carbon emissions are based on reported data]]

Answer 17

2.13 C Note that (1) nuclear power is not Taxonomy-aligned and bond YY is therefore excluded; and (2) PTA is calculated as a simple arithmetic mean, not weighted. The AVERAGE overshoot is (10 – 5 + 15) ÷ 3 = 6.67%. PTA is therefore, in degrees: 2.00 x (1 + 0.0667) = 2.13.

Answer 18

The robustness of the decarbonisation pathway; * The extent to which the funded projects can support this pathway; and * Whether unproven technology or carbon offsets are appropriate in achieving the pathway. Details of historical carbon emissions are backward-looking and fundamentally less useful in assessing decarbonisation plans

Answer 19

Bond XX is a sustainability bond: this means it is a USE OF PROCEEDS bond with funds allocated to a specific asset or project. Bond ZZ is a sustainability-linked bond, KPI-linked, not use-of-proceeds, and not secured on specific assets or activities. The coupon of bond ZZ (not bond XX) may rise if KPI targets are not achieved. Both bonds are subject to ICMA frameworks: ICMA Sustainability Bond Guidelines for bond XX, and ICMA Sustainability-Linked Bond Principles for bond ZZ.

Answer 20

ASIA Asia contains populations that have the greatest absolute numbers of undernourished people. Sub-Saharan Africa contains populations with the highest PROPORTION of undernourished people, but not the highest in absolute terms

Answer 21

REDUCTION OF ATMOSPHERIC C EMISSIONS Although reducing atmospheric carbon emissions would be an approved activity, the specified list would include this under the objective “Climate change mitigation”.

Answer 22

It can incorporate Scopes 1 and 2 emissions but not Scope 3. [[This method can be applied to Scopes 1, 2 and 3 emissions if the data are available.]]

Answer 23

TRADE DECLINE [also, sea-level rise impacts consumption (via loss of land).]]

Answer 24

Effective carbon price = [(Emissions – free allowance)  carbon price]  Emissions = [(500 – 100)  €40] ÷ 500 = €32

Answer 25

By far the greatest increase in default probability is in the MINING sector, followed (with about half the probability) by transport, agriculture and electricity & gas. Manufacturing is further down the list

Answer 26

OC by 2030, EC by 2050.

Answer 27

An external audit. [[An external audit is designed to confirm that funding was appropriately allocated and is carried out post-issuance]]

Answer 28

The usage of nominee accounts. [Many forms of stress testing are limited by data protection, including nominee accounts and the usage of intermediary investment vehicles. This limits the ability to know the location of ownership and therefore be able to predict the impact of shocks. Contagion between institutions and asset valuation are both taken into account when stress testing, and the split of cash flows between lenders and shareholders is unlikely to cause limitations]]

Answer 29

Transition bonds.

Answer 30

Asset-backed. [[Asset-backed green bonds have a security structure that directly links the funding to the green project. Other types of bond are more likely to have the “tagging” issue]]

Answer 31

To have annual verification of funded activities [[The GBP framework includes (1) use of proceeds, (2) process for project evaluation and selection, (3) management of proceeds and (4) reporting. The Climate Bonds Standard are far stricter in requirements, including that approved verifiers provide an initial and annual verification that funded activities meet the requirements for CBS certification]]

Answer 32

gREEN mARK - Singapore DGNB = Germany CASBEE - Japan Green Star - Australia

Answer 33

Maintenance [Operational carbon includes lighting, heating, equipment operation, etc. For some assets (e.g. roads) the users cause most of the emissions. Maintenance is a part of embodied carbon]

Answer 34

of Company X is larger (downwards), of Company Y is larger (upwards).

Answer 35

D An industry-specific version of a General Issue Category.

Answer 36

(1) Very low and (2) very low. [Climate risk has almost no impact on the credit ratings for either sovereign bonds or structured finance. To date, no sovereign bond has been downgraded as a direct result of climate; and structured finance bonds are usually protected from climate through a diversified pool of collateral assets.]

Answer 37

Includes trees, forests, floodplains and parks. [Green & blue infrastructure is natural, better for biodiversity, health, cooling, flood risk management, etc, but has less certain life and financial return. Green infrastructure consists of trees, hedges, parks, forests, etc. Blue infrastructure is rivers, canals, wetlands, floodplains, etc - read q carefully - floodplains are blue infrastructure

Answer 38

Identify risk.

Answer 39

Portfolio total emissions are the sum of the shares of company emissions, based on the proportions owned. For example, for Company X, 300 ÷ 1,500 = 20% of the market cap is owned, hence emissions are 20% x 5,000 = 1,000. In total: (300 ÷ 1,500 x 5,000) + (500 ÷ 4,000 x 10,000) + (1,000 ÷ 10,000 x 15,000) = 1,000 + 1,250 + 1,500 = 3,750 tCO2e

Answer 40

Carbon intensity for a company is GHG ÷ Revenues = 5,000 ÷ 2,000 = 2.5 tCO2e per £ million

Answer 41

WACI is the sum of (GHG ÷ Revenues), weighted according to the portfolio. With a total portfolio value of 300 + 500 + 1,000 = 1,800 we get WACI = (5 ÷ 2) x (300 ÷ 1,800) + (10 ÷ 3) x (500 ÷ 1,800) + (15 ÷ 12) x (1,000 ÷ 1,800) = 2.037 tCO2e per £ million

Answer 42

Portfolio carbon intensity is the portfolio total emissions divided by the portfolio’s share of revenues. Portfolio total emissions are the sum of the shares of company emissions, i.e.: (300 ÷ 1,500 x 5,000) + (500 ÷ 4,000 x 10,000) + (1,000 ÷ 10,000 x 15,000) = 1,000 + 1,250 + 1,500 = 3,750 tCO2e. Portfolio’s share of revenues is: (300 ÷ 1,500 x 2,000) + (500 ÷ 4,000 x 3,000) + (1,000 ÷ 10,000 x 12,000) = £1,975 million. Portfolio carbon intensity = 3,750 ÷ 1,975 = 1.8987 or 1.90 tCO2e/£m

Answer 43

Exceed the performance benchmarked by the GLIO/GRESB ESG Index. The GLIO/GRESB ESG index is specifically for INFRASTRUCTURE and not real estate. The other three are all suitable KPIs and, indeed, were used by Great Portland Estates in their 2020 unsecured revolving credit facility

Answer 44

Article 5. Articles 3, 4 and 5 relate to the firm and not the financial products: * Article 3: integration of sustainability risks into investment decisionmaking processes. * Article 4: due diligence to understand and mitigate principal adverse impacts of investment decisions on sustainability. * Article 5: consistency of remuneration policies with integration of sustainability risks. Article 6 relates to investment products that do not have ESG factors as part of the decision-making process

Answer 45

The price is highly sensitive to the discount rate used. [An internal carbon price is set by a company and can be used to support decision-making and for modelling potential carbon transition risks. It is specifically recommended by TCFD. However, it is NOT affected by the discount rate. (Note that the usage of the social cost of carbon is highly sensitive to the discount rate.)

Answer 46

Qualitative narratives describing trends that can impact future society [SSPs describe possible trends in socioeconomic factors that impact future society. They can be used with Integrated Assessment Models to forecast emissions.]

Answer 47

Emissions measurement, in particular Scope 3, is highly inaccurate [Emissions measurement for Scopes 1 and 2 is not highly inaccurate – and this would be an argument in favour of carbon offsetting.]

Answer 48

Level 3 [The TPI levels of management quality are: * Level 0: Unaware of CC as a business issue * Level 1: Acknowledges CC as a business issue * Level 2: Building capacity * Level 3: Integrating into operational decision-making * Level 4: Strategic assessment.]

Answer 49

practicality [The five key principles are: * Impact: long-term emissions reductions * Rigour: science-based and Paris aligned * Practicality: widely implementable * Accessibility: clear methodologies * Accountability: alignment can be assessed by stakeholders.]

Answer 50

Sovereign bonds. [The Climate Change Performance Index is a monitoring tool for tracking and ranking countries’ performance on climate protection. It is therefore a suitable methodology for national or sovereign-issued securities, but not corporate-issued securities or real estate.]

Answer 51

eg.Portfolio total emissions are 15,450 tCO2e, from earlier. Portfolio’s share of revenues is: (800 ÷ 8,000 x 6,000) + (750 ÷ 15,000 x 12,000) + (600 ÷ 4,000 x 4,500) + (500 ÷ 2,500 x 4,000) = 600 + 600 + 675 + 800 = $2,675m. Portfolio carbon intensity = 15,450 ÷ 2,675 = 5.7757 tCO2e/$m.

Answer 52

The internal carbon price is the total cost of green power purchases, carbon offsets and other internal initiatives, all divided by total emissions: ($1,500,000 + $1,200,000) ÷ 36,000 = $75 / tCO2e. Carbon-based power is excluded, as are (external) regulatory costs.

Answer 53

market risk - not immediate

Answer 54

Doha extended this to 18% by 2020.

Answer 55

SSP3 and SSP4

Answer 56

Avoid high-carbon companies. The three main strategies within the “Act” step are (1) engage with policymakers and investee companies; (2) invest in low-carbon solutions, and with climate change integrated into decisions; (3) avoid high-carbon companies. Identifying stranded assets may form part of the early analysis; divesting is not the recommended strategy (don’t invest in the first place!); and computing the carbon footprint would be part of the third step “Review”.

Answer 57

weighted av temp change A highly regarded approach to combining multiple scenarios into a single temperature change is through a WEIGHTED AVERAGE, assigning a probability to each scenario.

Answer 58

The high temperature increase should be associated with physical impacts such as raw materials scarcity, extensive weather disruptions to production and supply chain, and distortion of seasonal clothing market. Low temperature increase is more closely associated with transitional impacts from greater regulation and behavioural shifts – for instance fashion regulation, higher transportation costs, changing consumer preferences (e.g. in favour of circular solutions and greater durability), and limitations on animal-based materials such as leather and wool.

Answer 59

All large companies, both listed and private

Answer 60

Active ownership can be included with BONDS (though investors have less influence than shareholders), and even sovereign bonds provided that there is no appearance of lobbying or otherwise trying to influence government policy. Unlike impact investing, active ownership can be at ANY STAGE along a transition pathway.

Answer 61

Low carbon transition score. The three factors for tilting the weightings are fossil fuel reserves, carbon emissions and green revenues. Low carbon transition score is used with MSCI climate change indices.

Answer 62

In a defined benefit pension plan, the primary responsibility of the trustees and plan manager is to be able to fund liabilities relating to post-retirement income of the plan members. This puts a fiduciary duty on the managers. For a life insurer, investment returns belong to the insurance company; for a sovereign wealth fund it is effectively the country’s government; and for an individual it is them personally.

Answer 63

the underlying assets REITs are real estate investment trusts, which invest in properties – hence this is a common factor between the two types of investment. REITs are highly liquid, with potentially short time horizon and a simple exit (sell the shares); real estate assets are illiquid, with long time horizon and complex exit. Note that the REIT is likely to invest long-term in a property, but the investor may choose to invest in the REIT itself short-term.

Answer 64

Access to liquid securities.

Answer 65

Scope 3 then Scope 2 then Scope 1.

Answer 66

No company is compatible with a 2-degree target.

Answer 67

Acknowledging climate change as a business issue.

Answer 68

Scope 3 emissions.

Answer 69

To adjust the cost of capital instead of including cost estimates

Answer 70

Include new technologies once economically viable.

Answer 71

At least 20% from tier 1 or 2 activities

Answer 72

At least 50% from tier 1 activities.

Answer 73

To take company size into account.

Answer 74

Decarbonisation strategy.

Answer 75

Has knowledge of each insured asset.

Answer 76

The expected lifetime increases.

Answer 77

Increasing the discount rate.

Answer 78

enterprise value -> market capitalisation MINUS cash plus debt

Answer 79

Competing companies manage climate risks less efficiently

Answer 80

EBITDA – taxes – capital expenditure – increase in working capital.

Answer 81

£15 Effective carbon price = [(Emissions – free allowance) x carbon price] ¸ Emissions = [(20 – 8) x £25] ÷ 20 = £15

Answer 82

Demand for the end product is inelastic. [Cost passthrough is how much inflation (i.e. change in the input prices) can be passed onto customers? In general, passthrough is higher if there is inelastic demand or companies have high pricing power; passthrough is lower when competition is based on cost-leadership, there is product homogeneity, or where there are close substitutes]

Answer 83

Sales are INCREASED [The passthrough is the amount of the cost increase that can be passed onto customers. It is therefore added to sales to show the additional amount paid by customers for the products sold to them.]

Answer 84

The increase in the year’s research & development and capex. [The abatement budget is defined as the increase in the year’s research & development expenditure and capex.]]

Answer 85

Are liability-driven. [[Liability-driven investors often use a buy-and-hold investment strategy. The regular long-term low-risk nature of infrastructure cash flows makes this debt highly suited to these investors. The level of diversification is not specifically relevant. ]]

Answer 86

Poorer countries may receive less inward investment for climate projects [[In general, engagement with sovereign debt issuers is less effective than corporate engagement. As a result, sovereign engagement is less likely to achieve decarbonisation and investors would have preference for lower carbon developed country bonds, leaving higher carbon less developed sovereign issuers with less available funding for climate initiatives]]

Answer 87

Agency mortgage-backed securities [[ issued by US agencies Fannie Mae and Freddie Mac. In most recent years, agency MBS have accounted for significantly more than half of all green ABS issued.]]]

Answer 88

To provide science-based indicators to determine Paris-alignment [[The Climate Bonds Taxonomy is grounded in science and aims to encourage common green definitions to grow a bond market that can help to deliver a lowcarbon, Paris-aligned, economy. Note that Articles 8 and 9 refer to the EU Taxonomy (under TCFD) and the ICMA Green Bonds Principles recommend pre- and post-issuance external reviews.]]

Answer 89

Industry [ 2% of the total.]

Answer 90

The same credit risk. [The labelled bond is very similar, pari passu, to the equivalent traditional bond of the same issuer. It is generally not secured on the underlying project, has the same credit risk and seniority. Liquidity would depend on supply and demand]]

Answer 91

China and France.

Answer 92

Transport.

Answer 93

Bond L = Bond U = Bond X. The credit risk of these three bonds is the SAME. Although labelled bonds have a greater reporting requirement, there is no difference to credit risk as the three bonds are pari passu.

Answer 94

The issuer can remove the bond from the balance sheet to help scale up [The UoP bond and its financial risks remain on the balance sheet in most cases (there are a few exceptions, including asset-backed securities), which helps the issuer to scale up. The other options are strengths: UoP bonds help to track both corporate and portfolio climate performance. The “greenium” is a slightly higher price (lower yield) caused by increased demand for green bonds compared to the equivalent conventional bond.

Answer 95

May be used on other, potentially non-green, assets.

Answer 96

None – it is for general corporate purposes. [A sustainability-linked bond does not require any specific tagging of projects or assets – this bond is to reward a company’s overall sustainability transition.]

Answer 97

The company will be required to pay an increased coupon to investors from then onwards. [A sustainability-linked bond is structured to penalise the issuer if sustainability KPIs are not achieved: the coupon will step up periodically if targets are missed]

Answer 98

The classification of the activity within a green taxonomy [Transition bonds are for activities that do not fall within a green taxonomy.]

Answer 99

Public sector bodies.

Answer 100

Technologies and how they support environmental objectives

Answer 101

Recommended, with public disclosure. [The GBP is a recommended framework and not mandatory.]

Answer 102

Determination of a green bond rating. [, by a credit rating agency, is more likely to be pre-issuance]

Answer 103

Insignificant. [no relationship]

Answer 104

Average risk levels

Answer 105

Reduced post-default recovery values. [Recovery values are more likely to affect a bond’s credit spread than the overall market interest rates. Natural capital depletion can reduce productivity (hence rates may fall); increased energy efficiency can reduce inflation (downward pressure on rates); and the credit quality of sovereign bonds will impact the bond yields that represent market interest rates.]

Answer 106

Credit impact score, CIS: MOODY'S Green Evaluation: S&P Global Issuer Profile Score, IPS: Moody's Relevance Score, ESG.RS: Fitch Ratings

Answer 107

Weak, because ESG ratings are aimed at different stakeholders than credit ratings. [ESG ratings are targeting a far wider range of stakeholders than credit ratings (which are primarily for credit counterparties).]

Answer 108

AA: this is 85% aligned, but has a waste issue that seems to breach the DNSH requirement. BB: fully aligned. CC: recycling and EV-based collection are aligned, totalling 90%, hence this is sufficient. DD: 65% GRESB-approved offices are below the 70% threshold. EE: 80% transit railway is sufficient. Total investment is therefore BB + CC + EE = 25 + 15 + 20 = £60 million

Answer 109

Bonds included in the sub-portfolio, and their alignment, are: EE: £20m, with 80% alignment. YY: £15m, with 85% alignment. ZZ: £25m, with 75% alignment. Bond AA is excluded on DNSH grounds and Bond DD is excluded on the basis of eligibility threshold (65% vs a required 70%). Weighted average alignment is: [(20 x 80%) + (15 x 85%) + (25 x 75%)] ÷ (20 + 15 + 25) = 79.17%.

Answer 110

AA and EE have the same score. The alignment scores are: 3 for BB (full alignment), 1 for all the others. The PTA scores are +2 for BB (PTA of –20% is best), –2 for EE (+25% is worst) and 0 for AA, CC and DD. Total scores are therefore: AA 1, BB 5, CC 1, DD 1, EE –1. Hence AA and EE have different scores. BB has the highest score (5); exactly one score (EE) is negative; and three investments (AA, CC and DD) have the same score

Answer 111

Regarding neither DD nor EE. The new eligibility decision is based on the percentage of revenue aligned with the EU Taxonomy. Before the increased revenue, and using the 70% eligibility threshold, Roberts should calculate DD as 65% aligned, therefore not included, and EE as 80% aligned, therefore included. By adding a further 10% Taxonomy-aligned revenue to each of DD and EE, the new percentages become: DD: (65 + 10) ÷ 110 = 68.2%, still below the threshold. EE: (80 + 10) ÷ 110 = 81.8%, still above the threshold.

Answer 112

Indemnity The lowest level of transparency is indemnity, i.e. linking the pay out on the cat bond to actual insured losses incurred. This minimises basis risk for the bond issuer or sponsor (as the receipt is highly correlated with the insurance liability), but at the cost of higher complexity and lower transparency for investors.

Answer 113

$100 million The XOL structure is a particular tranche of loss, in this case from $500 million to $650 million (i.e. 500 + 150): below $500 million of losses there is no pay out, and above $650 million there is no further pay out. With losses of $600 million, a $100 million pay out (i.e. the excess loss above $500 million) is borne by the bondholders.

Answer 114

Answer: 0 to 4. The TPI assessment of management quality produces one of five levels, ranging from Level 0 (“Unaware”) up to Level 4 (“Strategic Assessment”).

Answer 115

4.2% per year on a linear scale. [SBTs are often linear targets, with an SBTi standard reduction of 4.2% per year. An alternative scale uses economic intensity, i.e. per unit of value added (rather than absolute): this is set at a 7% reduction per year.]

Answer 116

In Europe but not in the US. [Assumptions over future carbon and commodity prices are generally published by the oil and gas majors in Europe. In the US, the companies in the sector consider this information as proprietary and have, to date, been reluctant to reveal it.]

Answer 117

Answer: (1) Mitigation and (2) adaptation. [The majority of sustainable bond financing is on climate mitigation (only a tiny proportion of green bond financing is on adaptation); the vast majority of NDCbased public funding is on adaptation. This makes sense when the nature of adaptation projects is considered: very long term, often on public infrastructure, and with no simple profitability measures.]

Answer 118

Climate-aligned bond. [A climate-aligned (or unlabelled) bond is often in the form of an asset-backed security, in which the bond and the associated assets are removed from the issuer’s balance sheet. Green bonds and sustainability bonds (two of the three parts of “GSS”, along with social bonds) are tagged to underlying assets or projects, but remain on the issuer’s balance sheet. Sustainability-linked bonds are unsecured, not asset-tagged, and hence remain on the balance sheet]

Answer 119

Sustainability -LINKED C Climate-aligned. [Climate-aligned, or unlabelled, bonds have no formal label. Although they are often in the form of asset-backed securities, this is not a requirement and they are not considered UoP bonds. Sustainability-linked bonds are unsecured, not asset-tagged, and hence are not UoP. Sustainability bonds are tagged UoP bonds. Transition bonds, although outside traditional taxonomies, are also tagged UoP bonds.]

Answer 120

The two primary motivations were for the insurance sector as a whole to spread the risks further (i.e. more than the reinsurance market could); and for portfolio managers to improve diversification, as insurance losses were largely uncorrelated with losses in other financial sectors. The reinsurance market in the 1990s already existed (in fact it began in the late 19th century!) and new types of loss were not a motivation

Answer 121

Property and casualty. , as this is where the extreme losses (e.g. after a hurricane) existed.

Answer 122

The production method of the territorial approach has methodology issues [The consumption method, not the production method, of the territorial approach has methodology issues: it is far easier to measure emissions from production than emissions from consumption]

Answer 123

Correlations with other assets.

Answer 124

The reinsurance market is soft. [ILS returns are linked to premiums in the reinsurance market: when reinsurance premiums are low, i.e. the market is soft, then demand for reinsurance is low – this links to demand for ILS also being low]

Answer 125

The degree of look-through. [

Answer 126

The special purpose vehicle. [The special purpose vehicle (SPV) owns the stable value asset, having purchased it with the proceeds of selling cat bonds to investors. This collateral then provides assurance of pay out to the sponsor should an insured loss ensue.]

Answer 127

The yield on a stable value asset plus the premium paid by the BOND SPONSOR [The cat bond investors receive a yield equivalent to the yield on a stable value asset (e.g. government bonds) plus the premium paid by the cat bond sponsor to the special purpose vehicle. Economically this makes sense: the stable value asset is effectively the risk-free return, and the premium compensates for the risk of having to make a pay out in the event of an insured loss.]

Answer 128

To pay a regular premium to the cat bond sponsor. [[The SPV has a relationship with both the sponsor and the investors of the cat bond. (1) The sponsor makes regular premium payments to the SPV (and not the other way round) and, in the event of the loss scenario, receives a pay out. (2) The investors pay the SPV for the purchase of the bonds and receive back a regular yield – investors lose part or all of their principal in the event of the loss scenario. The SPV also owns (and receives yield from) a stable value asst]]

Answer 129

Multiple tranches with different risk and return profiles

Answer 130

Actual losses declared by the investors.

Answer 131

complexity [Private market investments, compared to listed securities, typically have longer time horizons, less liquidity, more complexity, less transparency and a lower level of regulations]

Answer 132

They will need PERMISSION from both general and limited partners to sell their holding.

Answer 133

MOBILITY and transport

Answer 134

Descriptions of seed assets. [Descriptions of seed assets are very useful for LPs in making their decisions – however these are internally created and generally for indirect investing (e.g. through blind pools). The PPM may include input from external resources such as a bespoke materiality matrix, SASB materiality mapping, BII’s ESG Toolkit, or materials from Initiative Climate International (iC International).]

Answer 135

Limited partner expert representatives.

Answer 136

Private equity firms. [Initiative Climate International or iC International is a PRI-sponsored voluntary initiative of major private equity investors (such as Permira, HarbourVest and Ardian) who are aiming to reduce carbon emissions and climate risk in their portfolios]

Answer 137

Revenue growth.

Answer 138

The debt NEGOTIATION process provides time for engagement.

Answer 139

The negotiation process allows for the involvement of outside parties, including climate specialists. [pre-investment engagement and not post-investment]

Answer 140

Optimisation. [Optimisation in practice is currently not feasible to any material extent in the private debt market, as the ESG or climate ratings on which this would be constructed do not generally exist yet for private debt. Engagement is likely to have the best results; divestment and exclusions have limited impact.]

Answer 141

Europe, Middle East and Africa. [europe largest]

Answer 142

It has insufficient green project capital expenditure [Sustainability-linked loans use key performance indicators (KPIs) that are based on overall company performance, and not specific projects or assets, as is the case with use-of-proceeds instruments. For this reason an SLL is more likely than a UoP instrument when there are fewer distinct projects or there is less capital expenditure on which to secure a loan. There is no specification on company profitability, activities may be taxonomy aligned, and the coupon could well be higher than a UoP loan

Answer 143

Energy [s, the SLB market has as the largest sectors (2019-20 data) utilities (24%) then materials (19%) and industrials (18%), sectors that are HARDER TO ABATE. Energy represents just 2% of issuance]

Answer 144

Bad only for SLBs; good or bad for SLLs. [SLBs typically have a one-sided margin increase (i.e. bad for the issuer) if KPIs are not achieved; but SLLs have an adjustment either way depending on whether or not the KPIs have been achieved]

Answer 145

It requires a different carbon intensity calculation.

Answer 146

Annually until fully drawn down, then updated as necessary.

Answer 147

To the lender, with wider publication encouraged

Answer 148

To buy an option. [With a futures contract, an agreement is made for a future transaction – this would offset (to some extent) the risk of adverse weather, but works both ways: if it is beneficial one way, it is detrimental the other. The farmer has said she does not with to reduce revenue excessively. Hence buying an option is the best strategy which, in return for an upfront premium, provides a one-way benefit.]

Answer 149

Credit default swap. [A credit default swap would enable the bank to hedge the credit risk of the borrower. In return for a (fixed) premium, they would receive a pay-out in the event of a default. An interest rate swap would hedge against changing interest rates. Traded options and futures are standardised contracts that would not exist on private debt]

Answer 150

Liquidity is reduced. [If a contract definition narrows then the increased precision makes its usage more limited. This means that fewer contracts would be traded, a thinner liquidity potentially leading to greater volatility]

Answer 151

Foreign exchange risk. [A foreign exchange option or futures contract could be used to hedge currency risk if, for instance, the shares are in a currency different to that of the investor, or if the share price materially depended on an exchange rate. Credit and interest rate risks are far more likely with bond investors and not shareholders. Liquidity can be a concern for some shares, but if the investor is long-term then liquidity is not a material risk]

Answer 152

Emissions are capped at a predetermined level.

Answer 153

The SCC is calculated as the monetary cost of future damage [The SCC is the PRESENT VALUE of future damage, hence highly sensitive to the discount rate. It includes all GHG emissions in a holistic calculation designed to help with climate change policy.]

Answer 154

The impact of other taxes on petrol causes prices to rise in proportion by less than that of coal

Answer 155

Is more complex to implement

Answer 156

Direct operating expenses. [The ETS creates a new charge for each unit of emissions. Companies that emit greenhouse gases will have to pay the charge (or purchase allowances), companies that do not emit GHGs can sell their allowances. The wind energy generator is likely to have: Direct revenues increasing through the sale of emissions allowances. Indirect revenues increasing through the increase in the market price of electricity. Direct operating expenses mostly unchanged. Indirect operating expenses increasing, as some supply chain costs will be higher]

Answer 157

Emissions trading systems. [The ETS creates a new charge for each unit of emissions. Companies that emit greenhouse gases will have to pay the charge (or purchase allowances), companies that do not emit GHGs can sell their allowances. The wind energy generator is likely to have: Direct revenues increasing through the sale of emissions allowances. Indirect revenues increasing through the increase in the market price of electricity. Direct operating expenses mostly unchanged. Indirect operating expenses increasing, as some supply chain costs will be higher.]

Answer 158

Offset projects are only valid if not otherwise mandated or financially viable. [Offset projects must count as both regulatory additionality (no regulation has mandated the project) and financial additionality (it is only viable with the extra revenue). The other statements are false: voluntary markets are largely unregulated; carbon should be removed for at least 100 years; and carbon avoidance and reduction projects are highly subjective – carbon removal is much easier to verify.]

Answer 159

Buying then retiring offsets Each offset can only be used once. If a company purchases an offset then retires it, it is removed from the market and has therefore had some impact.

Answer 160

The INCENTIVE mismatch. [The incentive mismatch is between owners and occupiers. The owner would be paying for the refurbishment, but the tenant or occupier would be the beneficiary through lower costs.]

Answer 161

End of life plans to be in place to avoid embodied carbon.

Answer 162

2050 with 40% reduction by 2030.

Answer 163

Operational carbon and embodied carbon

Answer 164

Increased, with demands for cooling and appliances and increased floor area outweighing the reduction in buildings’ energy intensity

Answer 165

Landlord-procured energy for operational use. [The most material emissions within a full carbon footprint of real estate are likely to be: * Landlord, operational use energy: Scopes 1 and 2; * Occupier, operational use energy: Scope 3; and * Embodied, for development and refurbishment: Scope 3.]

Answer 166

Fit-out works. [Fit-out works are considered embodied carbon, as they are part of the structure. Operational carbon includes energy, water, waste, refrigerants and transport.]

Answer 167

The International Finance Corporation, IFC. [This is being used for green bond issuance and IFC financing in many countries.]

Answer 168

NABERS and EDGE [both voluntary]

Answer 169

Different building types need adjusted frameworks. [Many of the schemes are tailored to specific asset types, e.g. residential, office, industrial, healthcare). The other statements represent valid criticisms.]

Answer 170

Will have lower construction costs

Answer 171

Renewable energy generation.

Answer 172

Engagement with management is similar to that of equity-holders. [Typically, engagement from shareholders is stronger than from lenders. To offset this, clauses in the lending contract can help to increase disclosure and transparency. Debt is usually very long-term, up to 30 years and more, and climate factors need to be an integral part of the lending decision as a result of the extended timescale.]

Answer 173

Climate Bonds Initiative.

Answer 174

Roads and electricity

Answer 175

Meeting basic needs and enabling economic development.

Answer 176

Is designed for COST-EFFECTIVE upgrading as the climate changes. [A managed adaptive approach is where infrastructure is built to be resilient to anticipated future climatic conditions or designed to allow for cost-effective upgrades as the climate changes.]

Answer 177

LANDSLIDES

Answer 178

Understand risk context.

Answer 179

Understand context; Identify risk; Evaluate; Manage; Measure UIEMM

Answer 180

A minority for both funds and assets.

Answer 181

under the GHG protocol, the "control approach" means that in general the proportion of emissions controlled are reported. Any controlled subsidiary would have 100% of emissions shown, but zero for associate investments. Exception is for joint ventures - for this investment type the proportion owned is reported

Answer 182

Operational carbon and embodied carbon.

Answer 183

REITs may issue bonds and receive loans much the same as other listed companies [REITs are not restricted in terms of bonds and loans. In recent years the sector has in fact become one of the biggest issuers of green bonds.]

Answer 184

A building that is EDGE Certified [EDGE Certified is referred to as eligible for green bond financing. The ineligible criteria are specifically (1) buildings not meeting the required certification standards (e.g. LEED Bronze or Silver), (2) properties with EPC ratings of B and below in the EU and an equivalent level in other locations, and (3) airport terminal buildings.]

Answer 185

The income from the bond is variable [Municipal bonds for infrastructure are generally long-term, low risk, with taxexempt income for investors. Income is likely to remain stable over the whole tenor of the bond]

Answer 186

ENERGY [The four primary UoP categories for green munis are water, buildings, transport and waste. Energy is more likely to be funded by a private sector bond.]

Answer 187

There is no income from tenants. [Infrastructure REITs own and manage real estate such as fibre cables, wireless infrastructure, telecoms towers and energy pipelines. They collect rent from tenants that provides steady income with very low risk. Although the first Chinese REIT was issued in 2021, China has the largest infrastructure market and rapid expansion is expected.]

Answer 188

The index uses GRESB scores that evaluate the transparency of sustainability information. [The GLIO/GRESB ESG index is for assets in specified infrastructure groups (energy transportation & storage, communications infrastructure, transportation, renewable energy and regulated network utilities) and companies must generate at least 75% of their EBITDA from these groups. The index contains listed companies (not private), weighted by their GRESB Public Disclosure scores, which measure the transparency of publicly available sustainability information.]

Answer 189

Non-existent. [no scientific evidence linking the actions of investors to real world outcomes.]

Answer 190

decarbonising portfolios and investing in climate solutions (II) and (III).

Answer 191

Comparability.

Answer 192

Security level. - not a component of PAII

Answer 193

Implementing alignment [others under 'external' or 'portfolio/fund level]

Answer 194

i and iii Under PAII the portfolio level, top-down targets are: (1) emissions intensity reductions and < 10 year target on Scopes 1, 2, and (2) absolute emissions reductions and <5 year target on Scopes 1, 2 and 3. (intensity reduc - 10 yr, absolute reduc - 5 year)

Answer 195

Include sector-specific emission variations for each sector. [ There are no industry- or sector-specific objectives at this level. - PAII PORTFOLIO/FUND level]

Answer 196

Use market capitalisation-based benchmarks for SAA. [[The PAII recommendations for SAA at the portfolio level include (1) scenario analysis, (2) including climate-related metrics to supplement standards SAA, (3) include other asset classes such as renewable energy infrastructure, (4) use asset class variants such as climate-tilted indices and (5) review any alignment constraints and consider greater flexibility to facilitate alignment. The use of market capitalisation-based benchmarks is not mentioned, nor would it be appropriate for climate-based SAA]]

Answer 197

Engage with companies to generate real world outcomes. The three key requirements under the I4CE framework are: (1) “Do no harm”, i.e. stop funding environmentally harmful activities; (2) “Support Paris consistent climate co-benefits”, i.e. support low-carbon (and carbonreducing) activities; (3) “Foster TRANSFORMATIVE outcomes”, i.e. invest in projects that could be environmentally transformative.

Answer 198

Asset-liability management

Answer 199

Failed < Disorderly < Orderly < Baseline.

Answer 200

Physical and transition risk [The three aspects of exposure measurement proposed by the Society of Actuaries are (1) carbon risk, (2) climate change risk under scenario-based models and (3) stranded asset risk.]

Answer 201

Carbon budget [physical risks, company data, economic data]

Answer 202

High tracking error. [A passive fund with an exclusionary strategy in place will not be able to track a benchmark closely (unless it is itself a climate-adjusted benchmark), leading to high tracking error. Passive funds do not involve discretion. The exclusion is likely to reduce emerging market exposure (which could have high fossil fuel revenue). Utilities are unlikely to be excluded: although often high carbon, they do not generally own fossil fuel reserves and therefore do not generate revenues from them.]

Answer 203

Increased engagement can help accelerate companies transitioning to low carbon. [Exclusionary strategies preclude the use of engagement as they, by definition, prevent investing in (hence engaging with) high emission companies. The other descriptions are valid advantages]

Answer 204

As it is an active strategy it allows investment managers to demonstrate superior investing skills. [TILTING STRATEGIES OFTEN PASSIVE]

Answer 205

Which asset classes are affected by the project. [Under IMP, the five dimensions of impact investing are: What: outcome, from stakeholders’ perspective. Who: which stakeholders benefit? How much: extent ($, time) of benefit. Contribution: how much better an outcome (and how likely) with the investment? Risk: likelihood of desired outcome.]

Answer 206

Portfolios often exhibit a lack of diversification, as well as low liquidity on occasions

Answer 207

INTEGRATION The “triple I” framework scores investments under (1) Investment (business model, risk, ESG, liquidity, etc), (2) Intention (mission statement, strategy, management transparency, culture) and (3) Impact (measurability, SDGfocused revenues, additionality).

Answer 208

IMPACT INVESTING [Impact investing, by definition, is the investment in companies that are making a positive and measurable impact. The other strategies all rely on some form of measurement, but it is only impact for which the magnitude and measurability of impact is fundamental to the strategy.]

Answer 209

Thematic. In this case the theme is the circular economy, even though companies are selected from a range of different sectors

Answer 210

exclusion systematically excluding companies that exceed certain thresholds (e.g. revenues from coal).

Answer 211

BEST IN CLASS This strategy is in the form of best-in-class, or positive screening: companies are selected for having particular metrics that are better than other companies – e.g. lower emissions, lower carbon intensity. Tilting would involve being overweight/underweight relative to a benchmark; thematic would use a particular trend or topic (rather than a range); and exclusion is the systematic removal of certain companies from the investment universe

Answer 212

EU PAB 7%, EU CTB 7%. in line with the IPCC 1.5 degrees scenario, and with little or no overshoot.

Answer 213

EU PAB 4-to-1, EU CTB 1-to-1.

Answer 214

Year 4 and Year 6. [An index is immediately disqualified from using the EU PAB label (or the EU CTB label) if it fails to meet the decarbonisation trajectory EITHER in two consecutive years (e.g. Years 3 and 4) OR in three out of any ten years (e.g. Years 1, 5 and 10 or Years 4, 6 and 8). Failing in Years 4 and 6 does not result in immediate disqualification.]

Answer 215

Equities. [By far the largest number and volume of ESG and climate indices, as well as passive investment products based on these indices, are in equities.]

Answer 216

Carbon tilting. [This index series is an extension of the FTSE EPRA Nareit Global Real Estate Index Series. It uses the FTSE Russell tilting methodology to adjust weights and improve the sustainability characteristics of the index. It limits active sector /country weights and therefore limits tracking error against the parent benchmark.]

Answer 217

Certain high-carbon sectors are excluded from the index. [Low carbon equity indices avoid exclusion, instead are optimised to increase exposure to climate-hedged companies, while minimising tracking error with the parent index. The objective is to reduce transition risks but maintain broad equity performance]

Answer 218

[The strategy of climate indices goes beyond a low-carbon strategy to invest in leaders in climate mitigation, and those that will benefit from decarbonisation. Compared to exclusionary and low-carbon strategies, this has lower sectoral bias and better diversification. Construction involves over- and underweighting assets: climate laggards have reduced weightings but are not excluded.]

Answer 219

Invest exclusively in companies generating cleantech revenues. [Environmental indices are specific to environmental products, services and technologies. Companies typically generate revenues from five cleantech areas: renewable energy, energy efficiency, sustainable water, green building and pollution prevention]

Answer 220

Environmental [Environmental indices typically invest in five cleantech areas (renewable energy, energy efficiency, sustainable water, green building and pollution prevention)]

Answer 221

Corporate fixed income. [The CTB and PAB labels are still quite new, limited to equity and corporate fixed income indices. Indices based on sovereign debt, private market assets or sector-specific (or activity-specific) assets do not yet exist.]

Answer 222

Make controversial weapons.

Answer 223

Low-carbon bond index. [The three categories of fixed income climate indices are climate change indices, Paris-aligned indices and green bond indices.]

Answer 224

Disagreement on classification definitions. [ Although there are different definitions of classifications (e.g. ICMA GBP and MSCI), each one is welldefined.]

Answer 225

Biodiversity.

Answer 226

CNSI includes a narrower sector range of sovereign green bonds. [Both CNSI and WGBI invest in sovereign bonds, not sovereign green bonds (of which not many exist yet).]

Answer 227

Energy purchased. [The three key indicators are (1) green building certification, (2) energy usage and (3) carbon emissions.]

Answer 228

Carbon score.

Answer 229

Carbon momentum.

Answer 230

The calculation ignores consumption-based accounting.

Answer 231

Scenario 1 because of more restrictive climate policies.

Answer 232

Utilities.

Answer 233

Lower temperature rise and late action.

Answer 234

eg2 - case specifically states that eligibility requires that the threshold is met taking into account only activities that provide substantial contribution to climate change mitigation. rules our fossil gas and nuclear. Plus nuclear is limited to power generation in the complementary climate change delegated act from 2022. Landfill without gas capture is also not aligned. If it is not clear if an activity is aligned (eg. courier services could be airmail or long distance road logistics) - assumed they are not aligned/covered

Answer 235

A surveyor’s engineering analysis identifying risks and their impact. [physical risk identification]

Answer 236

Higher decarbonisation scale or faster timing. The higher the scale and the faster the timing of decarbonisation, the higher the tracking error tends to be.

Answer 237

Absolute emissions savings to absolute induced emissions

Answer 238

Reprocessed emissions ÷ green bond size x portfolio exposure.

Answer 239

Is issued by Paris Agreement signatories.

Answer 240

-Shareholder engagement - Collaborative policy advocacy

Answer 241

Provide diversification

Answer 242

geographical exposure

Answer 243

185 emssions / INVESTMENT value in portfolio (not revenue)

Answer 244

the metric normalises the portfolio attributed emissions by the portfolio attributed revenues [see formula]

Answer 245

Internally consistent and normalised

Answer 246

the unweighted average of company over/undershoots = (15% - 25% +10% +15% +10%) / 5 = 5% so portfolio PTA = 2C x 1.05 = 2.1-

Answer 247

Adding the new division would lead to the level of alignment increasing - TRUE The assessment whether or not the bond meets the eligibility criteria would change - FALSE

Answer 248

an ENGINEERING ANALYSIS identifying relevant physical risks and mapping their impact on each asset

Answer 249

Climate framework relating to the acquisition and ONGOING MANAGEMENT of the underlying properties to give Stephanie comfort in each REITs climate awareness

Answer 250

Info on local climate resilience and level of use of low carbon building technology Local electricity and heat emission factors to improve quality of GHG metrics

Answer 251

Investor stewardship group

Answer 252

Fluoroform (HFC-33)

Answer 253

RE-WEIGHTING companies with a broad and diversified opportunity set

Answer 254

average yeild [DOES need to consider impact of fiscal policy, potential impact on issuers creditworthiness, tenor of debt]

Answer 255

impact and thematic strategy

Answer 256

Food, agri and landuse

Answer 257

a carbon tax gives some certainty about cost of Ghg emissions [not c tax applies a price per unit of carbon consumed]

Answer 258

Carbon INTENSITY

Answer 259

Current price relationships will last over time

Answer 260

Notional carbon taxes can DISCONNECT from their implied role in climate economy models

Answer 261

A TRANSITION risk which results in a liquidity risk

Answer 262

Use-phase emissions of cards PRODUCED during reporting period

Answer 263

Carbon capture and storage

Answer 264

Net zero target

Answer 265

- Access to the Board and CEO - Limited influence beyond primary issuance

Answer 266

Direct refinancing of green assets

Answer 267

- provision of infrastruc finance through a public-private partnership - donation to the Green Party in Germany

Answer 268

Every 5 years

Answer 269

The statement is incorrect, because the disclosure is NOT COMPATIBLE WITH OTHER PORTFOLIOS WITHIN THE SECTOR

Answer 270

the TIME HORIZON of investment returns

Answer 271

investment consultants

Answer 272

DISCLOSURE of climate and ESG stewardship activity

Answer 273

The company may still be able to issue EITHER sustainability linked loans (SLLs) or sustainability linked bonds (SLBs)

Answer 274

Strategy and Implementation

Answer 275

Scope 1 emissions generally priced in but indirect emissions are not - TRUE

Answer 276

New buildings should have at least 30% less embodied carbon by 2030 - FALSE All buildings with direct control should operate at net zero carbon by 2030 - TRUE All buildings must be net zero operational carbon by 2050- TRUE New buildings will have at least 50% less embodied carbon by 2050 - FALSE

Answer 277

The World Green Building Council does not currently require embodied to be included in net zero commitments - FALSE

Answer 278

Investors stand to lose the principal is specifci catastrophe happens

Answer 279

Companies can only be adversely affected by mandatory carbon markets

Answer 280

Adjust for any free allowances/exemptions Adjust for estimated increases / decreases in future allowances

Answer 281

Food security - higher atmospheric co2 concs will increase the efficiency of photosynthesis of some crops which will increase their productivity

Answer 282

INTEGRATED ASSESSMENT MODELS

Answer 283

Propose a shareholder resolution to prevent the Chairman and CEO from lobbying

Answer 284

investment fiduciaries and senior management

Answer 285

Apply and explain

Answer 286

Non-existent

Answer 287

which metrics are used by the board to assess cliamte related risks and opportunities in line with the strategy

Answer 288

Functions that make strategic decisions. [The three lines of defence are (1) functions that own and manage risk; (2) functions that oversee risk management and compliance; and (3) functions that provide independent assurance – e.g. internal audit. Functions that make strategic decisions may well overlap with some of the other functions, but are not a part of this list.]

Answer 289

annual dialogue [Annual dialogue, or “housekeeping” engagement, is the regular discussion between an individual investor and an investee company, to maintain and enhance a relationship, but with no other specific engagement objectives. The others are all collaborative: a concert party is when a group of investors act with common concrete objectives; soliciting support is when a firm tries to involve multiple other firms for publicly stated targets; and follow-on dialogue is an extension from company engagement to gain broader support.]

Answer 290

The company’s climate strategy.

Answer 291

Votes against the board.

Answer 292

Vote in favour of resolutions unless there are strong grounds to vote against them. [Having a tendency to vote in favour of resolutions may be inappropriate in many situations and does nothing to mitigate conflicts of interest]

Answer 293

The Investor Agenda.

Answer 294

The number of high-carbon companies divested from the portfolio. Performance indicators could include the number and type of engagements, the number of changes within companies that are a result of engagements, the companies’ carbon footprints, the proportion of the fund invested in climateconscious investments, etc. The number of divestments is unlikely to be a performance indicator (why was the portfolio invested in these in the first place?), but the resulting drop in portfolio emissions is a far more useful indicator.

Answer 295

Say on Climate. [Say on Climate is a global initiative that urges companies to voluntarily hold shareholder votes on their climate plans. Ceres is focused on promoting equitable market-based solutions and support with collective engagement on ESG issues; Climate Action 100+ monitors the top carbon emitting companies; and the Glasgow Financial Alliance for Net Zero brings other initiatives together to bring climate targets in line with the UN’s Race to Zero.]

Answer 296

A Cutting Scope 3 emissions.

Answer 297

Better understanding of physical risks.

Answer 298

Participating in national or international forums on trade and technologies. - DIRECT influence

Answer 299

Tightening national legislation. The IPDD’s objectives in Brazil are, in brief, to reduce deforestation, enforce regulations, prevent fires and to provide public access to data. They are not trying to amend legislation – merely achieve its enforcement (along with the Forest Code).

Answer 300

Consistent third-party calculation methodologies. [DO NEED A GLOBAL TAXONOMY; OBJECTIVE METRICS & CERTIFICATIONS; COMMON GLOBAL DISCLOSURE STANDARDS)

Answer 301

Methane, and they exceed the bottom-up measurements.

Answer 302

Fixed asset investment. - No sig influence [Under the equity share approach of greenhouse gas emissions reporting, a company reports the proportion of emissions of investments that are group companies, associate investments, joint ventures or franchises. For fixed asset investments, for which there is no significant influence, no emissions are reported.]

Answer 303

joint venture fixed asset investment [For joint ventures, both methods report the equity share of emissions; for fixed asset investments, both methods report zero emissions. For franchises and group companies, the equity share method reports the proportion owned and the control method reports 100% of emissions.]

Answer 304

Joint venture [With a joint venture, a company reports the equity share of emissions, regardless of whether they are using the equity share approach or the control approach to emissions reporting. They will report 100% emissions for a subsidiary company or a franchise, and zero emissions for an associate company investment.]

Answer 305

Weighted average carbon intensity. [The WACI is the only measure that ignores market capitalisation, the measure of total equity value. WACI is based on company carbon intensity (emissions ÷ revenues) and is weighted by the portfolio holding. Carbon emissions and carbon intensity use each company’s market cap to allocate emissions – they are therefore more suited to equity investments.]

Answer 306

Portfolio efficiency. [Portfolio carbon intensity describes efficiency in terms of emissions per unit of output (or revenue). A normalised carbon footprint would be shown by the carbon emissions of a company within a portfolio (emissions per $ million invested). This is aggregated to total carbon emissions, the whole portfolio footprint. The portfolio’s exposure to carbon-intensive companies is shown by the weighted average carbon intensity, which is weighted by size of investment]

Answer 307

The scheme does NOT permit the usage of CARBON OFFSETS [carbon offsets are permitted only in the airline sector, through the CORSIA scheme. Supply and demand for carbon credits is how carbon pricing is determined. carbon leakage is a serious cnocern and the proposed EU Carbon Border Adjustment Mechanism (CBAM) would add a carbon price to imports]

Answer 308

EFFiCIENCY no 2) is renewables, 3) fuel switch, CCUS and other

Answer 309

Does not specify what the targets should be [TCFD focuses on target disclosures, while SBTi specifies what the targets should actually be. They both require time frame and base year and both permit absolute or intensity-based targets.]

Answer 310

They both permit both types of target [Both TCFD and SBTi permit both absolute targets and intensity-based targets. SBTi states that if an intensity-based target is used, then absolute emissions must also be shown to be reducing.]

Answer 311

(both statements are false) The first Oxford principle is that reducing a company’s own emissions should take priority over purchasing carbon offsets. The second principle is that if a company is offsetting carbon, it is better for this to involve carbon removal than the reduction of another entity’s emissions. Note the priority: (1) is reducing your own emissions, removing the need for offsetting in the first place. (2) If we do need to offset, it should be carbon removal rather than someone ELSE’s emissions reduction

Answer 312

Aerosols, negative. Total, positive. GHGs, larger positive [from the probability density functions (PDFs), the impact from aerosols is most likely negative. GHGs are very strongly positive, and the total is between the two, but still strongly positive]

Answer 313

It is a general equilibrium model GCAM is a “partial equilibrium model” with respect to land use and energy. Because it is not a general equilibrium model, there is no future equilibrium towards which variables trend. Each discrete time period uses today’s prices recursively, i.e. with no knowledge of future pricing and equilibria. Hundreds of regions are modelled for water (235 regions) and land use (384 regions).

Answer 314

Some physical risks are modelled across hundreds of regions [The Regional Model of Investment and Development, or REMIND, is a general equilibrium model in which economic actors move towards an optimal technological solution, with perfect foresight of how resources and prices will change through the 21st century. The world is modelled across 12 regions, not hundreds.]

Answer 315

SSP4 ((ssp1 - sustainability and ssp5 - rapid growth have low adaptation challenges. ssp2 -middle of the road) is moderate and ssp4 (inequality) and ssp3 (regional rivalry) have high adaptation challenges]

Answer 316

ssp3 [ssp1 is described as 'sustainability', ssp2 as 'middle of the road', ssp3 as regional rivalry', ssp4 as 'inequality' and ssp5 as 'rapid growth]

Answer 317

sustainability

Answer 318

ssp3 - regional rivalry

Answer 319

rcp4.5 (with moderate forcing levels)

Answer 320

Stated Policies Scenario as a result of Covid-19 The Delayed Recovery Scenario is a slower version of the Stated Policies Scenario, or SPS, taking into account the possibility of the Covid pandemic causing a slower than expected economic recovery, with uncertainties over industrial output, construction

Answer 321

choice of climate models [Carbon prices, the discount rate and the climate sensitivity assumption are all considered key assumptions and parameters for designing scenario analyses. The choice of climate models (and data sets) is an analytical choice impacting the results – but this is not an assumption or parameter.]

Answer 322

macroeconomic and demographic variables [macroeconomic and demographic variables are considered key parameters/assumptions. the others (timing of implications under scenarios, which scenarios are used for transition impact analysis, whether the scenario exercise is quantitative or qualitative]

Answer 323

I is in 3 II is in 2 III is in I Prices of key commodities is a core parameter/assumption; which physical risks are to be included is an analytical choice; and the implications for capital expenditure is a business impact/effect.

Answer 324

Portfolio Warming Potential, PWP. PWP uses asset-specific assumptions and is effectively a bottom-up approach. PTA is the allocation of a carbon budget to assets, enabling an analyst to evaluate a portfolio with respect to global warming trajectories, with the allocation usually top-down. The SDA allocates the carbon budget for high emission sectors, and GEVA specifies carbon reductions in terms of value added – neither being specifically top-down or bottom-up.

Answer 325

Vary from negative up to strongly positive [correlations amongst PTA providers vary widely, including as low as -57% and as high as +88%

Answer 326

1.91 degrees. [The company overshoot is allocated to the sector in proportion to the output or revenue, here given as 40%. The sectoral overshoot is 15% x 40% = 0.06, hence PTA = 1.8 degrees x 1.06 = 1.908 degrees] [BUT if assumption that the overshoot applies to all COMPANY'S, the company's share of the sector output is not relevant]

Answer 327

The company overshoot is allocated to the sector in proportion to the output or revenue, here given as 40%. The sectoral overshoot is 18% x 40% = 0.072, which we assume applies across all sectors (the sector share of total is therefore not relevant). Hence PTA = 1.5 degrees x 1.072 = 1.608 degrees.

Answer 328

2.02 degrees [With the assumption that the company-level overshoot applies only to the relevant sectors, we are neither extrapolating a company to the sector, nor the sector to the whole economy. The total overshoot is 25% x 0.3 (company produced 30% of sector output) x 0.15 (sector carbon budget is 15% of the total) = 1.125%. Hence PTA = 2.0 degrees x (1 + 0.01125) = 2.0225 degrees.]

Answer 329

Simple method: company overshoot = (2.4 ÷ 2.0) – 1 = 20%. Temperature rise = (2.0 – 1.5) x (1 + 0.20) = 0.60 degrees, hence PTA = 1.5 + 0.6 = 2.1 degrees

Answer 330

0.0000000000071 degrees per tonne. Climate sensitivity is the amount of warming per tonne of emissions, i.e. (2.0 – 1.4) ÷ 85,000,000,000 = 7.06 x 10–12 or 0.00000000000706

Answer 331

Feedback and tipping points can make PTA calculations highly complex (as it considers a linear relationship between emissions and warming)

Answer 332

consumer expenditure [[the 3 economic drivers of the model are consumption, net exports and potential productivity]

Answer 333

Sea-level rise. As sea levels rise, all countries with coastlines are impacted. Land is lost, hence productivity from the land is lost, which in turn reduces income and consumption

Answer 334

net exports [The model attempts to demonstrate the impacts of physical risks on real GDP, unemployment and HPI (house price index, a measure of inflation). Net exports is one of the economic drivers from which real GDP is determined]

Answer 335

CVaR is forward-looking or prospective, while carbon footprinting is retrospective. It is a measure of value lost at different temperatures, hence measured in currency units, and is calculated as a net present value from forecasts, not the financial statements

Answer 336

Close to zero [The correlation between Scopes 1+2 and Scopes 1+2+3 emissions is effectively zero as they measure very different aspects of GHG emissions]

Answer 337

The net present value of replacing it is higher than that of keeping it running. Although the model itself may be highly complex, an asset becomes stranded when it is more profitable for the company to replace it than to keep it operating – this calculation is based on net present values that include a notional cost of carbon.

Answer 338

It considers the underlying owners where intermediary investment vehicles are used. [Where intermediary investment vehicles are used, data protection prevents the knowledge of ownership, which can prove a serious limit to many forms of stress testing]

Answer 339

High and limited. With late action, far more extreme regulations need to be put in place (compared to if action is taken now). This creates high transition risks. The regulations will reduce physical risks to a low, limited level

Answer 340

Limited transition risks. Under the NGSF hot house world, EITHER just current policies will remain, OR NDCs will be adhered to (but nothing more). In either case, there is no transition as such, hence low transition risks. The flip side of this is high physical risks and permanently lower economic growth. There is no sudden recession (this would occur with late action) and no delayed policy implementation (as no new policies are implemented).

Answer 341

Sustainable Development Scenario maintains a 2 degree warming limit. Net Zero by 2050 maintains a 1.5 degree limit, and no limit is shown for the others

Answer 342

All power generation from renewable sources. [The IEA’s Net Zero by 2050 scenario requires (1) rapid and largescale renewables and EVs, (2) changes in behaviour by governments and consumers, and (3) rapid rollout of new technologies (including as yet non-existent ones). The scenario does not require all power generation to be from renewable sources, and in fact acknowledges that this is unlikely.]

Answer 343

[Have few standard practices. Avoided carbon emissions are based on new or expanded operations and consider the emissions by comparison to an alternative product or service (e.g. EV vs ICE). Compared to saved carbon emissions (which describe existing operations, and have few standard practices for calculating), avoided emissions are more objective and have a lower risk of overstatement. Have few standard practices. Avoided carbon emissions are based on new or expanded operations and consider the emissions by comparison to an alternative product or service (e.g. EV vs ICE). Compared to saved carbon emissions (which describe existing operations, and have few standard practices for calculating), avoided emissions are more objective and have a lower risk of overstatement.]

Answer 344

global reporting initiative

Answer 345

Increase linearly to 100% by 2040. [Under the SBTi Portfolio Coverage Approach, engagement targets are set by financial institutions to have a portion of their investees set their own SBTiapproved science-based targets, in such a way that the financial institution achieves 100% by 2040 along a linear path.]

Answer 346

Every 5 years

Answer 347

Monitor the results: use science-based targets for comparison. [The NZAOA Target Setting Protocol includes four components: Engagement targets (20 high emitting companies) Sector targets (intensity/absolute reductions, including Scope 3 if possible) Sub-portfolio emission targets (Scopes 1 and 2, tracking Scope 3, absolute or intensity-based KPIs) Financing transition targets (contributing to greater transparency or enhancing climate solution reporting). ]

Answer 348

The International Energy Agency, or IEA

Answer 349

Reserves x net calorific value x carbon content x conversion factor. Carbon emissions from reserves can be calculated as E = R x V x C x F

Answer 350

Fossil fuel exposure [Fossil fuel exposure is the percentage of a company’s revenues that is linked to fossil fuel activities such as extraction and production. Power generation is the power volume generated, installed capacity or revenue by fuel type. Carbon intensity is carbon emissions per unit of revenue (e.g. US$ millions), and carbon score is the ranking of carbon intensities within a sector.]

Answer 351

stakeholders [The six capitals are: financial, manufactured, intellectual, human, social relationship and natural]

Answer 352

Coal India.

Answer 353

To translate the carbon budget into a benchmark. [The three main steps for forward-looking climate scenario analysis (including temperature portfolio alignment) are: (1) to translate carbon budget into a benchmark, (2) to assess each company’s alignment with benchmark, and (3) to aggregate company data into the portfolio level. Identifying the company overor undershoot is a part of the second step.]

Answer 354

Deciding whether to use carbon intensity or absolute emissions. [The three main steps for forward-looking climate scenario analysis are: (1) to translate carbon budget into a benchmark, (2) to assess each company’s alignment with benchmark, and (3) to aggregate company data into the portfolio level. Deciding whether to use carbon intensity or absolute emissions is part of the first step, as this is defining the benchmark. The other statements (scope of emissions, how to express the metric and cumulative vs point-in-time emissions accounting) are all part of the second step, assessing the company’s alignment with the benchmark.]

Answer 355

Medium, High, Limited.

Answer 356

Medium and limited. With early action, regulations are put in place now: this creates medium transition risks (though far less harsh than if action is delayed), and those regulations limit physical risks. Medium and limited. With early action, regulations are put in place now: this creates medium transition risks (though far less harsh than if action is delayed), and those regulations limit physical risks.

Answer 357

developing crop irrigation systems

Answer 358

Operating costs.

Answer 359

The lowest downward-reaching pillar

Answer 360

The total potential saved annual GHG emissions.

Answer 361

Upward-reaching to downward-reaching.

Answer 362

Lower price, lower volume The transition from BAU to CTS involves the demand curve shifting to the left. With an upward-sloping supply curve, the equilibrium point is now at a lower price and lower volume.

Answer 363

Indirectly through risks faced by their client base.

Answer 364

Adaptation required on government-owned buildings. The primary mitigation impacts on government bodies are loss of tax receipts, lower resource sales/values and additional unemployment costs. In most situations the adaptation of buildings is a less significant impact.

Answer 365

To rise in volume for at least another ten years. (until 2030 to 2040, then gradually fall)

Answer 366

China China is responsible for just over half of coal production and well over half of global consumption.

Answer 367

COPPER The transition will cause an increase in demand for a range of metals and minerals, in particular copper, cobalt and nickel. Manganese and molybdenum are far less significant, and steel should reduce in demand.

Answer 368

An increase in the price of Y

Answer 369

Mitigation activities are likely to cause many failures amongst manufacturers of speciality chemicals. As commodity chemicals are generally continuous production, highly competitive and low margin, it is likely that mitigation activities will cause failures in the sector as volume demanded falls. Speciality chemical production is unlikely to suffer in the same way, as it is higher margin, small batch production.

Answer 370

Low, because deforestation is usually illegal. Changes to forestry and agricultural practices will have a low impact on the financial markets. This is because (1) deforestation is usually illegal, hence not part of the markets, (2) land ownership is usually fragmented and not owned by public companies and (3) prices may rise to offset increases in costs. Knock-on commodity impacts from deforestation should be low, as ESG risk factors would already have priced in such impact. In most cases governments are unlikely to offer compensation for stopping an illegal practice

Answer 371

Sovereign bonds. Sovereign credit risk may be impacted by a material drop in exports and hence negative impact on country-level finances. Listed commodity and livestock companies will have low impact as rising prices will to some extent offset falling volumes. The reduction in deforestation, which is usually illegal, will have little impact on (presumably fully legitimate) REITs.

Answer 372

China and India for coal power generation, and the cement sector [[CCS has developed more slowly than hoped. As a result, “coal + CCS” is less economically viable than renewable energy in most parts of the world, though coal-dependent nations such as China and I]ndia are exceptions. The cement sector, and possibly in the future the steel sector, could use CCS as an economically efficient method for carbon reduction

Answer 373

A flood defence system. Incremental resilient investments are ordinary or mainstream investments that are adapted to be resilient against physical climate risks – for example buildings and infrastructure that perform their function in a resilient manner. A flood defence system would be considered an “investment in resilience”, providing a specific solution to physical risks, in this case flooding.

Answer 374

Securitisation

Answer 375

: Scoping and data gathering; Materiality assessment; Resilience building; Economic and financial analysis.

Answer 376

How do options impact the internal rate of return? PCRAM has four steps and three “gates”. (Step 1) Scoping and data gathering; (Gate A) Are data good and sufficient? (Step 2) Materiality assessment; (Gate B) Are physical climate risks material to the asset? (Step 3) Resilience building; (Gate C) What are resilience options to this asset? and (Step 4) Economic and financial analysis.

Answer 377

On a national scale. The SRF publishes national resilience metrics, including economic, social and ecosystem exposure to climate risks and projects of the highest potential. Their objective is to help national and local decision-makers to integrate physical climate risks into investment decisions

Answer 378

The investors receive a lower level of income. [[Although there are different structures, with an insurance-linked security, risk is transferred from the issuer to the investors. This means that should the catastrophe take place, the issuer would make a lower level of payout to the investors in the form of coupons and principal.]

Answer 379

Reduce volume of energy imports.

Answer 380

(1) more than 50%, (2) more than 50%, (3) 30% the global food system uses 50% of all habitable land and 70% of water, creating 80% of deforestation and one-third (close to 30%) of global GHG emissions

Answer 381

Retail, Consumers

Answer 382

Extended supermarket shelf lives.

Answer 383

The potential price of carbon [Many factors should be considered in the technology transition of steel production. The price of carbon does not affect emissions or the environment, though of course would affect the economics of the change. The other factors are all relevant to the environmental impact]

Answer 384

ELECTRICITY [largest required emissions savings, with a reduction of 397Gtco2e. The second highest is food, agriculture and land use, at 185 Gtco2e, less than half of the electricity sector

Answer 385

refrigerants

Answer 386

Accelerating, with 95% dated since year 2000. The number is accelerating, with 95% of policies developed since 2000. In 2020 there were 124 new or revised policies, the highest number to date.

Answer 387

Climate Change Risk Assessment.

Answer 388

All of the above.

Answer 389

Carbon Offsetting and Reduction Scheme for International Aviation. [The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is a UN initiative. The others are EU initiatives: Fit for 55 is the European Commission’s plan to reduce GHG emissions by 55% by 2030; the Green Bond Standard is a regulation on how bonds should finance sustainable investments; and the Carbon Border Adjustment Mechanism is the EU’s adding of a carbon price to imports to avoid carbon leakage or offshoring of GHG emissions.]

Answer 390

China. Germany, South Korea and the European Union (distinct from its member states) have all enacted net zero targets into their laws. China has committed to a net zero target of 2060, though this is not yet an enacted law.

Answer 391

Have emissions deducted from a subsequent commitment period. Countries exceeding their limits would have 1.3 tonnes of emissions deducted from a subsequent period, per tonne by which their limit had been exceeded.

Answer 392

1.4 degrees C. Prior to the commitment (or implementation) of pledges relating to the Paris Agreement, it was estimated that the global average temperature in year 2100 would be 3.5 degrees higher than pre-industrial levels. The most recent estimate is around 2.1 degrees higher – hence a decrease of 1.4 degrees.

Answer 393

Understanding, planning, finance. The GCA policies are listed under the headings of (1) strengthening understanding of climate adaptation, (2) strengthening planning of climate adaptation, and (3) strengthening finance of climate adaptation.

Answer 394

The price is determined by the government. A carbon tax is set by a central authority such as a government body, generally based on the carbon content of fossil fuels. If emitters wish to pay the tax then there is no limit on overall emissions. Unlike a trading system, low and high emitters cannot trade credits, and supply and demand have no impact on the level of the tax

Answer 395

Global emissions reductions. The eight key policy levers are: carbon pricing, coal phase-out, 100% clean power, zero emission vehicles, low-carbon buildings, clean industry, low emissions agriculture and forestry. Global emissions reductions is a much looser description of an overall objective rather than a specific policy area

Answer 396

European Investment Bank. The European Investment Bank, or EIB, lead the world in green and sustainable bonds – they have issued more than €38 billion of bonds in 17 currencies.

Answer 397

False By contrast, more than 10,000 companies/cities/states/regions published (non-financial) info on risks and impacts.

Answer 398

IASB. The International Accounting Standards Board, or IASB, produces IFRS accounting standards. ICMA is the International Capital Market Association; IPCC is the Intergovernmental Panel on Climate Change; and SASB is the Sustainability Accounting Standards Board

Answer 399

The Protocol is a global standard on reporting GHG emissions. Reporting would be covered by CDP standards or under GRI. The other statements are correct: the Protocol focuses on Scopes 1 and 2, with Scope 3 being relatively rare. It applies to companies, cities and at national levels.

Answer 400

Scope 3 only. PCAF reporting relates to emissions from organisations in which the reporting entity has invested – by definition these are Scope 3 emissions.

Answer 401

Multiplied by outstanding loan amount divided by total vehicle value at origination. [Economic emissions intensity is computed as absolute emissions (as tCO2e) divided by the loan size (e.g. in €m). For absolute emissions there is no denominator; for physical emissions intensity the denominator would be output (e.g. MWh or tonnes); and for WACI it would be revenues

Answer 402

Global Reporting Initiative.

Answer 403

Climate change mitigation. D: Pollution prevention and control. The full list is: * Climate change mitigation * Climate change adaptation * Sustainable use and protection of water and marine resources * Transition to a circular economy * Pollution prevention and control * Protection and restoration of biodiversity and ecosystems.

Answer 404

article 8 Article 8 of the SFDR specifies activities that promote environmental or social characteristics. Article 9 activities have specific sustainable objectives (alongside generating financial returns). Article 6 activities are those that do not meet the criteria as Article 8 or 9; and Article 5 is not relevant.

Answer 405

Has a sustainable investment objective [Making a substantial contribution to a Taxonomy objective, and doing no significant harm to other objectives, are both requirements for an activity to be taxonomy-eligible, but are not specific to an Article.]

Answer 406

Management’s role in assessing and managing climate-related risks and opportunities.

Answer 407

Sustainability Dimension. Within the SASB Standards, Sectors and Industries define the industry classification, as used on the materiality map. Sustainability Dimensions are the high-level sustainability themes – i.e. environment, social capital, human capital, business model & innovation, and leadership & governance. Within these, General Issue Categories are themes applicable to all industries; and Disclosure Topics are industry-specific versions of the GICs.

Answer 408

TCFD. The UK’s Financial Conduct Authority (FCA) and Department for Work and Pensions (DWP) have introduced rules for listed companies and financial firms to make TCFD disclosures (sometimes on a “comply or explain” basis). GRI and SASB are voluntary, and SFDR does not apply in the UK.

Answer 409

A rule having the force of law. B An authoritative rule dealing with procedure. Regulation is a strict requirement for the regulated entity: an authoritative rule dealing with details or procedure, and having the force of law. Policy is more about intent: “a course or method of action … to guide and determine present and future decisions or a high-level overall plan embracing the general goals and acceptable procedures especially of a governmental body.

Answer 410

Each country independently.

Answer 411

Returns Mobilisation The four areas of the COP26 Private Finance Agenda are reporting, risk management, returns and mobilisation.

Answer 412

germany Germany’s target date for net zero is 2045. The EU and the UK have a date of 2050 and China is 2060.

Answer 413

Be prescriptive to achieve optimal results. The NAP should not be prescriptive, but facilitate country-owned countrydriven action. The other descriptions are correct: the NAP should, inter alia, (1) follow a country-driven, gender-sensitive, participatory and fully transparent approach, taking into consideration vulnerable groups, communities and ecosystems, and (2) be based on, and guided by, the best available science and, as appropriate, traditional and indigenous knowledge.

Answer 414

High cost. Carbon prices should be low cost, so that the lowest cost carbon mitigation projects can be undertaken. They should also be fair (treating all emissions equally), broadly effective (wide coverage in the economy) and economically efficient (roughly equivalent to the societal externality cost)

Answer 415

Sunk high-carbon costs. Sunk high-carbon costs mean that fossil fuel generation can continue with low marginal costs – this is a potential barrier to the climate transition and could discourage research into low-carbon solutions. National regulations are likely to encourage such innovation, as are falling renewable energy costs. Carbon pricing in any form should encourage low-carbon development.

Answer 416

To reduce the need for investor engagement on a company’s green activities. The purpose of a green taxonomy is to help direct investment towards green investment activities, to guide national policy and to reduce the risks of greenwashing. It also supports investors engaging with companies.

Answer 417

: Climate Bond Taxonomy. The Climate Bond Taxonomy was developed by the Climate Bonds Initiative in 2013 – this was the first taxonomy

Answer 418

Recently having been included.

Answer 419

Sustainability Disclosure Requirements The Sustainability Disclosure Requirements, SDR, are a UK requirement, not EU. SFDR, CSRD and TCFD all apply in the EU (though TCFD is global).

Answer 420

New Zealand was the first country to introduce mandatory TCFD-aligned climate disclosures. This was in 2020 – the UK, China and Switzerland followed soon after this

Answer 421

Cross-cutting, environment, social, governance

Answer 422

UK. These labels were proposed by the UK’s Financial Conduct Authority in 2022.

Answer 423

ESG integration Negative screening

Answer 424

To provide science-based indicators to determine Paris-alignment.

Answer 425

Has no screening criteria. The China Green Bond Catalogue has no screening criteria or emissions metrics, unlike for the EU Taxonomy. Definitions of green activities are therefore less strict; both mitigation and adaptation are covered; and it is not industry-specific.

Answer 426

Campaigner and just consider a fund’s headline terminology. Regulators act to some extent like campaigners, with the (potentially simplistic) view that a green fund should not invest in certain assets, regardless of the mandate nuance.

Answer 427

Article 6. Articles 3, 4 and 5 relate to investment firms, Articles 6, 8 and 9 relate to financial products

Answer 428

Climate change. Climate change is the only ESG factor explicitly referred to in the Code, including in two of the Principles.

Answer 429

Is a direct result of the emission of greenhouse gases.

Answer 430

Hydrofluorocarbon HFC-23

Answer 431

The creation of an urban forest. Creating an urban forest is both mitigation (carbon absorption) and adaptation (providing resources for wildlife). Drought-resistant crops, business continuity and flood protection are all examples of adaptation activities – none of them directly reduces emissions as part of mitigation

Answer 432

Water conservation. Water conservation is both adaptation (as water supply becomes more limited) and mitigation (helping to reduce consumption). Flood protection and business continuity planning are adaptation activities; sustainable transportation is a mitigation activity

Answer 433

Distribution of sold goods. Scope 3 indirect emissions include transportation and distribution of goods sold by the company. Company-owned vehicles are within Scope 1; generation of purchased electricity is within Scope 2; heating of customer properties is outside the scope of company emissions.

Answer 434

Transportation of goods to a customer.

Answer 435

Generating power from wind energy. Power generation from wind energy is an example of a supply-side mitigation initiative. Meat consumption, low-energy lighting solutions and low-carbon building materials are all examples of demand-side initiatives.

Answer 436

The building is powered by renewable energy. If the building is powered by renewable energy, then reducing energy consumption will have no impact on carbon emissions, as no emissions are associated with the generation of the power used.

Answer 437

The exit being in the form of an initial public offering. Private equity investments are more likely to end with a trade or secondary sale as exit – IPOs are less common. The holding period can be around ten years; transition risks are highly important over such a long time period; and in a blind pool fund the investors would not know the underlying assets at the time of investment.

Answer 438

Scopes 1 and 2 emissions of an investee company. Scope 3 emissions of a borrower in which FC owns bonds. Financed emissions are those emissions of investee and borrower companies, in which a finance company has invested or lent. These include Scopes 1 and 2 emissions, with Scope 3 ideally as well. Emissions from an asset leased by FC would be Scope 3, but not “financed”; an asset purchased with financing would lead to Scope 1 emissions (i.e. the method of purchase being irrelevant).

Answer 439

Answer: Scopes 1 and 2, and ideally Scope 3. Financed emissions include Scope 1 and 2 of investee company emissions, but ideally with Scope 3 included as well

Answer 440

Finance sector alliances. Members of the Glasgow Financial Alliance for Net Zero, or GFANZ, are finance sector-specific alliances, including the Net Zero Asset Owner Alliance (NZAOA), the Net Zero Asset Managers initiative (NZAM), plus alliances of banks, insurers and financial service providers.

Answer 441

Sovereign wealth fund. The primary driver for climate-focused investment is reputational risk for sovereign wealth funds. For pension funds it is fiduciary duty, for life insurers it is time horizon implications, and for individuals it is personal ethics and perspectives

Answer 442

: General insurer. Risk tolerance is positively linked to time horizon: for a general insurer, the time horizon for claims on policies is short-term, hence such investors will take on a lower level of risk than other longer term investors. Family offices (linked to high net worth individuals), sovereign wealth funds and defined benefit pension schemes are all very long-term investors that have a high risk tolerance.

Answer 443

Endowment. An endowment is typically managed to last forever – certainly multiple centuries (“50 to 250+ years”). Life insurer (“10 to 50 years”) and defined benefit pension scheme (“10 to 70 years”) have a time horizon of the rest of each beneficiary’s life. A family office (“20 to 100+ years”) goes from a high net worth individual down to the next generation, hence a slightly longer-than-lifetime time horizon.

Answer 444

: Sovereign wealth fund. A sovereign wealth fund is likely to have an investment policy that includes some climate-based exclusions, along with integration of climate risk and opportunity. Life insurers and defined benefit pension schemes are more likely to have a climate-integrated approach; and retail investors may invest in thematic or screened funds, or have a climate-integrated approach.

Answer 445

Water vapour. Water represents up to 4% of the atmosphere and is a greenhouse gas. It is less harmful than carbon dioxide as it only lingers for a few days

Answer 446

The density of carbon dioxide

Answer 447

Increased over the year. B Increased at a slower rate than in 2019.

Answer 448

Halving by 2030, reaching net zero by 2050

Answer 449

ocean acidification

Answer 450

Less than one degree.

Answer 451

The long-term temperature rise caused by doubling the CO2 in the atmosphere.

Answer 452

Could be strongly positive or negative.

Answer 453

Land areas have risen [in temperature] twice as fast as the oceans.

Answer 454

Accelerates rising sea levels. [Greater humidity will have minimal impact on sea levels. However, it increases the likelihood of flooding, makes rainfall heavier and provides additional energy to tropical storms.]

Answer 455

They understate extreme risks, hence underestimate the potential scale of systemic risk.

Answer 456

Policy risk

Answer 457

Between 40 and 50%.

Answer 458

An increase in global warming.

Answer 459

Identifying Scope 3 emissions.

Answer 460

Product life, from extraction of raw materials to discarded waste [The linear economy is the “take-make-waste” approach of extracting raw materials, transforming them to products, then, after use, discarding them as waste. It contrasts with the circular economy, in which materials and products are repaired, reused and recycled.]

Answer 461

70 to 80%.

Answer 462

Photosynthesis.

Answer 463

Higher insurance costs.

Answer 464

Higher workforce absenteeism. Acute physical risk is from extreme events such as hurricanes and cyclones. The potential occurrence of these will impact the well-being of the workforce and cause higher absenteeism. Increased stakeholder concern is more likely to be part of reputation (transition) risk; lack of insurance is longer term, hence a consequence of chronic (not acute) physical risk; and higher costs of GHG emissions are the result of policy and legal risk, or market risk, both being transition risks

Answer 465

More reliable supply chain. Resource efficiency should result in cost reductions, less waste, more recycling, more efficient and therefore higher value of assets. A more reliable supply chain is external to the company and more closely associated with resilience

Answer 466

Increased operating costs from transition risks. From a CDP survey, the biggest financial impact driver from climate risks is increased operating costs as a result of transition risks – for instance higher compliance and insurance costs

Answer 467

Europe, from OPPortunities. The highest perceived opportunities are in Europe, with US$1,297bn of perceived value (CDP survey, 2019); the downside for physical and transition risks in Europe is US$640bn, less than half the amount. The US figures are $453bn of opportunities, $110bn of downside from risks

Answer 468

Diversifying. If a company diversifies its risk profile, it maintains all the risks but in the hope that correlations amongst projects are low. The other descriptions involve another party or product taking on the risk exposure: insuring → an insurance company or the reinsurance market; hedging → the other party to the transaction for that particular instrument; divesting → sale of the entire project to another organisation.

Answer 469

IMPROVING Improving is when a company changes the risk profile of an existing project to try to reduce any potential negative impact. Insuring is when the company pays an outside insurer to provide compensation in the event of negative impact; hedging is when the company enters into a financial transaction to offset the risk (e.g. with derivatives); and diversifying is when the company accepts the risk in the hope that the correlation with other project risks is low

Answer 470

The difference between the net present values of two scenarios. Climate value at risk is the difference between two net present value calculations: one being “business as usual” or BAU, the other being a selected climate transition scenario.

Answer 471

The analysis is independent of discount rate The calculation of net present value is highly dependent on discount rate: a higher rate leads to a lower present value. NPV incorporates timing, considers valuation in today’s (present value) terms, and is highly flexible.

Answer 472

Nitrogen trifluoride. Nitrogen trifluoride, NF-3, is associated with the manufacturing of electronics such as semiconductors. Perfluorocarbons and hydrofluorocarbons are used in refrigerants, while sulphur hexafluoride is used in electric insulation.

Answer 473

Methane. Methane has the shortest lifetime of all the greenhouse gases, at just under 12 years. Nitrous oxide has a lifetime of 109 years, carbon dioxide around 1,000 years and sulphur hexafluoride around 3,200 years

Answer 474

the Seychelles issued the first sovereign blue bond in 2018 to protect marine areas. It is a ten-year 6.5% coupon US$15 million bond.

Answer 475

HEDGING Hedging is where a company offsets the risk profile of a risk that has not been divested or improved. For example, if a business is heavily exposed to the price of an input commodity, they can purchase a futures contract to offset the price risk. Insuring is when the company pays an insurance company to provide compensation; improving is changing the risk profile; and diversifying is where multiple projects or assets are in place with risks that are not correlated

Answer 476

The price is highly sensitive to the discount rate used. An internal carbon price is set by a company and can be used to support decision-making and for modelling potential carbon transition risks. It is specifically recommended by TCFD. However, it is NOT AFFECTED BY DISCOUNT RATE. (Note that the usage of the social cost of carbon is highly sensitive to the discount rate.)

Answer 477

Qualitative narratives describing trends that can impact future society. [SSPs describe possible trends in socioeconomic factors that impact future society. They can be used with Integrated Assessment Models to forecast emissions. ]

Answer 478

Emissions measurement, in particular Scope 3, is highly inaccurate. [Emissions measurement for Scopes 1 and 2 is not highly inaccurate – and this would be an argument in favour of carbon offsetting.]

Answer 479

Providing capital. [In a limited partnership the general partner, or GP, is in effect the fund manager, responsible for determining the mandate, raising funds, identifying suitable investments, managing the investments, managing the sale, etc. The limited partner, or LP, provides the funds but has relatively little input into the investment proces]

Answer 480

Insufficient pressure from limited partners to justify detailed ESG analysis.

Answer 481

Practicality The five key principles are: * Impact: long-term emissions reductions * Rigour: science-based and Paris aligned * Practicality: widely implementable * Accessibility: clear methodologies * Accountability: alignment can be assessed by stakeholders.

Answer 482

Sovereign bonds. [a monitoring tool for tracking and ranking countries’ performance on climate protection. It is therefore a suitable methodology for national or sovereign-issued securities, but not corporate-issued securities or real estate]

Answer 483

Corporate GHG emissions are not part of regulated reporting.

Answer 484

Glaciers and ice sheets contain one third of all Earth’s freshwater. [Glaciers and ice sheets contain around two-thirds of all freshwater, the rest being within lakes, soil, rivers and the atmosphere. Freshwater represents just 3% of water on Earth – 97% is in the oceans.]

Answer 485

Market risk. [. The company does not immediately have market risk, as consumer habits are unlikely to affect the company; nor are consumers buying directly from the company]

Answer 486

An 18% reduction by 2020.

Answer 487

SSP3 and SSP4. [SSP3 “Regional rivalry” has high mitigation challenges and high adaptation challenges. SSP5 “Rapid growth” has high mitigation challenges but low adaptation challenges.]

Answer 488

The company overshoot is extrapolated to the entire economy, hence the estimate of the PTA is 1.8 degrees x (1 + 0.20) = 2.16 degrees. Given the assumption that the overshoot applies to all companies, the sector’s share of the total is NOT relevant.

Answer 489

By failing to renew financing on maturity. [For bondholders, failing to renew financing is equivalent to divesting from the company – a drastic move, but it fits the description. Voting against directors could work for shareholders, but bondholders are unlikely to have this option. Publishing a voting record is a useful part of engagement but not particularly relevant to this specific scenario. Engaging a proxy firm creates indirect engagement, not direct]

Answer 490

Avoid high-carbon companies. [The three main strategies within the “Act” step are (1) engage with policymakers and investee companies; (2) invest in low-carbon solutions, and with climate change integrated into decisions; (3) avoid high-carbon companies. Identifying stranded assets may form part of the early analysis; divesting is not the recommended strategy (don’t invest in the first place!); and computing the carbon footprint would be part of the third step “Review”]

Answer 491

A weighted average temperature change [A highly regarded approach to combining multiple scenarios into a single temperature change is through a weighted average, assigning a probability to each scenario].

Answer 492

All large companies, both listed and private. [will apply to both public listed and private companies]

Answer 493

low carbon transition score The three factors for tilting the weightings are fossil fuel reserves, carbon emissions and green revenues. Low carbon transition score is used with MSCI climate change indices.

Answer 494

Defined benefit pension scheme. [In a defined benefit pension plan, the primary responsibility of the trustees and plan manager is to be able to fund liabilities relating to post-retirement income of the plan members. This puts a fiduciary duty on the managers. For a life insurer, investment returns belong to the insurance company; for a sovereign wealth fund it is effectively the country’s government; and for an individual it is them personally]

Answer 495

The underlying assets. [REITs are real estate investment trusts, which invest in properties – hence this is a common factor between the two types of investment. REITs are highly liquid, with potentially short time horizon and a simple exit (sell the shares); real estate assets are illiquid, with long time horizon and complex exit. Note that the REIT is likely to invest long-term in a property, but the investor may choose to invest in the REIT itself short-term.]

Answer 496

Gross profit margins. [Gross profit margins are revenues minus costs of goods sold, neither of which is likely to rely on materiality judgements. The other options do rely on such judgements: credit losses are based on estimated future losses on loans and bonds; asset impairment is a downward adjustment based on today’s assessed value versus the carrying value; and contingent liabilities are provisions for estimated future costs and losses]

Answer 497

Hydrogenated esters and fatty acids.

Answer 498

1.65 degrees. Simple method: company undershoot = (3,000 ÷ 4,000) – 1 = –25%, i.e. 25% undershoot. Temperature rise = (1.8 – 1.2) x (1 – 0.25) = 0.45 degrees, hence PTA = 1.2 + 0.45 = 1.65 degrees

Answer 499

To appoint activist directors. To disclose all political and climate lobbying.

Answer 500

The Investor Agenda. The Investor Agenda, founded by seven partners, was developed to push for a scaling up of Paris Agreement goals.

Answer 501

To increase the cost of capital. [The objective of this type of exclusion is to make funding scarcer for the counterparty company, hence more expensive with a higher cost of capital. This is of reduced impact if less principled investors step in to provide funding. Divestment may be a result of client requests, though this is a less direct objective. There is no objective in terms of making a company equity-funded (though this would generally have a higher costs of capital). Divestment is not a form of indirect engagement: it is often a result of direct engagement not having been successful]

Answer 502

Issuance is dominated by utilities, materials and industrials sectors.

Answer 503

Sustainability-linked bond.

Answer 504

An expert tourism forecast on the nature of future travel. Forecast requirements of emissions pathways for buildings under EU and Portuguese regulations. [Rothman is concerned over transition risks rather than physical risks. The forecast on tourism should help Rothman determine market risk, a part of transition risk. Likewise the requirements of emissions pathways will provide information on policy risk. The other two reports relate to physical risks: Four Twenty Seven is a part of Moody’s that analyses physical risks of properties and organisations; and the engineering report focuses on chronic physical risks.

Answer 505

Multiplied by outstanding loan amount divided by property value at origination. [The relevant emissions are the total building emissions multiplied by the outstanding amount of the mortgage divided by the property value at origination of the loan.]

Answer 506

Asset-level data are rarely available. [To assess portfolio impact, CVaR needs to drill down to the asset level then back out to the portfolio level. Asset-level data are rarely available and with such uncertainties, the accuracy can only be assessed with hindsight (“Were we right?”). The discount rate is subjective, though this has a smaller impact than unknown asset-level data. Carbon taxes and different future temperatures are a part of the model, rather than a current uncertainty]

Answer 507

Medium and limited. [With early action, regulations are put in place now: this creates medium transition risks (though far less harsh than if action is delayed), and those regulations limit physical risks.]

Answer 508

New technology is likely to be funded through venture capital.

Answer 509

Recommended, to the lender. [No public disclosure is required or recommended. Green loans are private contracts and the GLP represents a framework of recommendations.

Answer 510

Building design to minimise required energy consumption with no wastage. [Minimising energy consumption with no wastage is a guiding principle of “net zero operational carbon” rather than embodied carbon. The four guiding principles of net zero operational carbon are: * Prevent: choose optimal strategy to avoid embodied carbon from the outset * Reduce and optimise: upfront and lifecycle carbon * Plan for the future: avoid embodied carbon during and at end of life * Offset: last resort, using verified schemes]

Answer 511

Benchmark granularity. [The three main steps for forward-looking climate scenario analysis are: (1) to translate carbon budget into a benchmark, (2) to assess each company’s alignment with benchmark, and (3) to aggregate company data into the portfolio level. Determining benchmark granularity is part of the first step (as this determines the level of detail within the required data); deciding scope of emissions and emissions accounting are part of the second step; and aggregating to portfolio level is the third step]

Answer 512

Climate-related risks and opportunities that have been identified over short, medium & long term. falls under STRATEGY section

Answer 513

At least 95% of total revenues are from green projects.

Answer 514

Investors can benefit from an increased coupon. [The coupon on an SLB increases if targets are missed. So, although investors can benefit from an increased coupon, this is a weakness and not an advantage. The other options describe strengths of SLBs.

Answer 515

Statements 1 and 2 are both TRUE. Statement 1 is TRUE: Green bonds often finance assets (e.g. green energy) that avoid emissions. As long as disclosures are transparent, this provides attractive metrics for investors. Statement 2 is TRUE: Unlabelled debt is currently less likely to report on the environmental impact at the asset or bond level, with reporting being more focused on the issuer’s environmental risk exposures

Answer 516

A pre-retrofit baseline can be used where market data are not available.

Answer 517

INFRASTRUCTURE Under the IPR’s FPS, changes to infrastructure valuations range from +13% (best performers) to –36% (worst performers). This is a much higher variation than any other asset class. Public equities range from +3% to – 10%, real estate +3% to –3%, private equity +6% to –13%, and sovereign and corporate bonds are within +/–1%

Answer 518

An emissions intensity reduction for Scopes 1 and 2 and a ten-year target.

Answer 519

TEMperature portfolio alignment The CCPI monitors and assesses countries in order to evaluate their progress towards the Paris Agreement. From an investing perspective this can be applied to sovereign bonds

Answer 520

Assets and funds The two GRESB benchmarks are GRESB Infrastructure Fund Assessment and GRESB Infrastructure Asset Assessment. Other infrastructure categorisations may be within these two benchmarks, but funds and assets are the top levels..

Answer 521

It has legal basis in the EU and China but not elsewhere. [The CGT has no legal basis. It is a comparison of the EU and Chinese taxonomies, not a taxonomy itself, and considers climate mitigation activities across six sectors]

Answer 522

Pure parametric. [The basis risk is the potential mismatch between the pay out to the cat bond’s sponsor from the bond and the actual losses incurred. With a pure parametric trigger, the structure is most transparent and the investors can assess losses from public sources, but the basis risk is increased as a result]

Answer 523

The project is already profitable. [There are many challenges to the offset market. Carbon avoidance and reduction are highly subjective; offsets need to be “permanent”, defined as for at least 100 years; and carbon reduction projects use highly subjective baselines. Only the profitability prevents a project from being eligible: offset projects must count as both regulatory additionality (no regulation has mandated the project) and financial additionality (it is only viable with the extra revenue).]