Ch 3 Environment Flashcards

Question

What is the first international convention to set targets for emissions of the main GHGs? What are the goals for the Paris Agreement?

Answer 1

The Kyoto Protocol was adopted in 1997 and became effective in 2005. It was the first international convention to set targets for emissions of the main GHGs. It established top-down, binding targets, but only for developed nations, recognising the historical links between industrialisation, economic development and GHG emissions. ------------------------------------------- At the 21st Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) in Paris in 2015 (COP21), a landmark agreement was reached to mobilise a global response to the threat of climate change in the form of the Paris Agreement. The agreement’s long-term goal is to keep the increase in global average temperature to well below 2°C (3.6°F) above pre-industrial levels, and to limit the increase to 1.5°C (2.7°F), since this would substantially reduce the risks and effects of climate change.

Answer 2

Putting a price on carbon emissions is viewed as one of the most effective methods of tackling climate change: this is often called the polluter pays principle. There are many types of carbon pricing; the most common are the emission trading system (ETS) and carbon taxes, roughly corresponding to quotas and tariffs in international trade. Emission trading system An ETS is a system based on the exchange of permits for emission units, where actors who exceed their emissions limits are required to buy permits from those that have emitted less. The overall quantity of emissions is fixed, and market mechanisms are used to set their price. Carbon taxation takes a different approach by directly setting an explicit price on GHG emissions (e.g. per tonne of CO2). This has the advantage of predictability, although the carbon tax rate, alongside the elasticity of demand for different products and the extent to which companies can pass on the carbon costs to their end consumers, will be key determinants of effectiveness.

Answer 3

Putting a price on carbon emissions is viewed as one of the most effective methods of tackling climate change: this is often called the polluter pays principle. There are many types of carbon pricing; the most common are the emission trading system (ETS) and carbon taxes, roughly corresponding to quotas and tariffs in international trade. Emission trading system An ETS is a system based on the exchange of permits for emission units, where actors who exceed their emissions limits are required to buy permits from those that have emitted less. The overall quantity of emissions is fixed, and market mechanisms are used to set their price. Carbon taxation takes a different approach by directly setting an explicit price on GHG emissions (e.g. per tonne of CO2). This has the advantage of predictability, although the carbon tax rate, alongside the elasticity of demand for different products and the extent to which companies can pass on the carbon costs to their end consumers, will be key determinants of effectiveness.

Answer 4

Limiting global warming has occasionally been compared with the case of an overfilling bathtub, which requires both turning off the taps and draining the tub – in other words, reducing both the flow of new emissions and the stock of existing GHGs in the atmosphere as close to zero as possible. The challenge is that, even if new emissions were to stop completely, some further global warming and associated changes to the climate are likely to be irreversible due to the already accumulated GHGs. One concerning possibility is that the world might be on course to breach certain ‘tipping points’. Like a sand pile toppling when just a few more grains are added, this notion is used to describe abrupt – and potentially irreversible – changes to the Earth system in response to a relatively small change in warming.

Answer 5

Examples of sectors with particularly complex and/or high-risk supply chains include: ▶ oil and gas; ▶ mining; ▶ beef; ▶ cocoa; ▶ cotton; ▶ fisheries; ▶ leather; ▶ palm oil; ▶ agriculture; and ▶ forestry -------------------------------------------------------------------- Some of the main environmental risks in the supply chain include: ▶ material toxicity and chemicals; ▶ raw material use; ▶ recyclability and end-of-life products; ▶ GHG emissions; ▶ energy use; ▶ water use and wastewater treatment; ▶ air pollution; ▶ biodiversity; and ▶ deforestation.

Answer 6

Climate change is defined as a change of climate, directly or indirectly attributed to human activity, that alters the composition of the global atmosphere and which is, in addition to natural climate variability, observed over comparable time periods. Climate change involves many different dimensions, including: ▶ science; ▶ economics; ▶ society; ▶ politics; and ▶ moral and ethical questions. It is an issue with local manifestations (e.g. extreme weather events, such as more frequent and/or more intense tropical cyclones) and global impacts (e.g. rising global average temperatures and sea levels), which are estimated to increase in severity over time. The main man-made driver of the warming of the planet is rising emissions of greenhouse gases (GHGs). They form a layer in the atmosphere that prevents increasing amounts of the heat reaching the Earth from the Sun from being radiated back into space. Carbon dioxide (CO2) is the most significant contributor to the warming effect, because of its higher concentration in the atmosphere, which is at levels not seen since before Homo sapiens first appeared.

Answer 7

To determine the result of the worst-case scenario given the assessment of scenario risks, the possible impact on financial ratios, and what the company can do to plan for the future. Explanation Analyzing different environmental factors for a particular company helps to show how the selected environmental factors may impact the financial performance of infrastructure organizations. This elaborates on the potential impact pathways from the selected environmental factors to specific financial ratios or inputs into financial models. These potential pathways can help the company make long-term decisions and plans for the future. (Reading 3.6, LO 3.1.7)

Answer 8

MATERIAL ENVIRONMENTAL FACTORS FOR INFRASTRUCTURE A) Quantifiable Degradation and pollution: 1. Air (health) & water pollution; 2. Air (climate) – GHG emissions Resource efficiency – sourcing, use, treatment: 3. Energy (E); 4. Water (E); 5. Solid waste (E); 6. (Raw) Materials and supply chain (E/S) B) Difficult-to-quantify 7. Biodiversity and habitat (E) 8. Physical climate change impacts (E)

Answer 9

the term cleantech as an umbrella term “encompasses the investment asset class, technology, and business sectors which include clean energy, environmental, and sustainable or green, products and services”. The term CLEANTECH became increasingly popular approximately 20 years ago.

Answer 10

Dark green wind energy Medium green plug-in hybrid Light Green efficient inv for fossil fuel tech Brown on the shades of green scale used by CICERO, is allocated to projects and solutions that are in opposition to the long-term vision of a low-carbon and climate resilient future. Example: New Infrastructure for coal

Answer 11

The process of evaluating the sustainability of infrastructure assets, can help to demonstrate how and where to integrate the results of a comprehensive ESG assessment as INPUT into the key financial ratios and variables of a financial model— such as the forecasting of revenues, operating costs, and capital expenditures— which form the basis of discounted cash flow (DCF) analysis.

Answer 12

Public finance is a key policy instrument to both incentivize and enable the transition to green growth. Domestically, governments are a significant economic actor – commissioning new buildings, roads and other forms of infrastructure, for example – highlighting the importance of aligning public procurement and sustainability. Governments also contribute to international development, with public sector financing often blended with funding from multilateral development finance institutions in developing countries and disbursed through investment vehicles, such as: ▶ green infrastructure funds (e.g. the Association of Southeast Asian Nations (ASEAN) Catalytic Green Finance Facility under the ASEAN Infrastructure Fund); ▶ specialised banks (e.g. Asian Infrastructure Investment Bank); and ▶ funding platforms (e.g. the Tropical Landscapes Finance Facility).

Answer 13

For the purpose of arriving at a shortlist of environmental factors for which the potential impact of environmental risk on infrastructure financials can be demonstrated, a two-step process was followed: 1. A longlist of widely recognized environmental factors was derived. The longlist was reduced to a shortlist of environmental factors that are typically among those considered key to an environmental assessment in the context of infrastructure. 2. If, and to what extent, any of the selected environmental factors has a material impact on the infrastructure asset will be revealed by the asset-specific ESG due diligence process.

Answer 14

Scenario analysis is an approach for the forward-looking assessment of risks and opportunities. Scenario analysis describes a process of evaluating how an organization, sector, country or portfolio might perform in different future states, in order to understand its key drivers and possible outcomes. Climate-related risk has been identified as one of the most complex macro-existential risks, which is least understood and hardest to quantify. The TCFD recommends that companies and financial institutions: “Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C (3.6°F) or lower scenario and, where relevant to the organization, scenarios consistent with increased physical climate-related risks.” In the current landscape, there is no common set of scenario analysis methodology used by investors. Instead, the types of approaches and models will depend largely on the objectives and scope of the work.

Answer 15

Carbon footprinting can be used to assess, the total carbon emissions associated with a given investee company or portfolio. The total carbon emissions associated with a given investee company or portfolio recognizes that investments that may be seen to have a disproportionately high contribution to global emissions may have a higher exposure to future policy interventions on carbon emissions. Total carbon emissions = ∑ (current value of investment/issuer’s market capitalization) × issuer ’ s Scope 1 and 2 emissions Alternatively, investors may wish to track carbon emissions INTENSITY (e.g. emissions scaled in relation to a particular metric such as a company’s revenues). The TCFD recommends that asset owners and managers report the weighted average carbon intensity associated with their investments.

Answer 16

The World Bank defines blue economy as the “sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem”. It essentially relates to a broader perspective on sustainable economic and social activity associated with the world’s oceans and coastal areas. Investors and policymakers are now beginning to recognize: ▶ the growth prospects for the ocean economy; ▶ its capacity for future employment creation and innovation; and ▶ its role in addressing global challenges.

Answer 17

Carbon footprinting is one of the most common approaches used by companies and investors. A portfolio carbon footprint effectively measures carbon emissions and intensity associated with operations of the companies in a portfolio. Measuring the carbon footprint of a portfolio means that an investor can: ▶ compare it to global benchmarks; ▶ identify priority areas and actions for reducing emissions; and ▶ track progress in making those reductions. The use of carbon footprinting applies the international accounting tool of the GHG Protocol Standards. While Scopes 1 and 2 cover direct emissions sources (such as the fuel used in company vehicles and purchased electricity), Scope 3 emissions cover all indirect emissions arising from the activities of an organisation. These include emissions from both suppliers and consumers.

Answer 18

A country’s environmental regulations, emission targets and their enforcement may vary in emphasis across different jurisdictions. Often, investments may be multi-jurisdictional and hence, several country-specific considerations and regulations will need to be factored into the valuation of a company based on the country it is located or where its operations lie. Disclosure and transparency of environmental data will also vary by region – for example, companies in emerging markets tend to have fewer comprehensive disclosures. Country analysis is relevant not just to corporate securities, but also to government bonds. Climate change, air quality, water stress, vulnerability to natural hazards and food security can have immediate and direct impact on a sovereign’s ability or willingness to pay (credit risk), and/or ESG profile. For example, the consistent deterioration in a country’s rating scores on food security and high vulnerability to climate change could lead an asset manager to reduce their position despite the bond’s scarcity and attractive relative value, but – conversely – they can also hold an overweight position based on a view that starting with a relatively low environmental score is acceptable, when reforms and a green economy push from the government are expected to lead to ESG score improvements.

Answer 19

Initiatives that typically require public and private sector funding with high environmental impacts include energy, water and waste, transport, and flood defenses

Answer 20

RISKS POTENTIAL IMPACTS Release of air pollutants (air emissions) → Pollution of air, land and surface water Release of liquid effluents or contaminated wastewater into local water bodies or improper wastewater treatment → Surface water pollution Generation of large amounts of solid waste and improper waste management → Pollution of land, and ground and surface water Improper management of hazardous substances → Contamination of adjacent land and water Excessive energy use → Depletion of local energy sources and release of combustion residuals leading to air pollution Excessive water use → Depletion of water resources High or excessive noise levels → Negative effects on human health and disruption of local wildlife Improper or excessive land use → Soil degradation and biodiversity loss

Answer 21

The Helsinki Principles, signed by a number of finance ministers around the world, encourage signatories to “take climate change into account in macroeconomic policy, fiscal planning, budgeting, public investment management, and procurement practices.”

Answer 22

Emissions trajectories can be used to assess the required reductions to reach a stated goal (for example, net zero carbon by 2050) and compare the pathways implied by corporate commitments, policies or individual assets (for example, proposed refurbishments to a building to improve its energy efficiency). For instance, the Transition Pathway Initiative is an asset-owner-led collaboration, which has developed a publicly available tool that aims to assess companies’ preparedness for the low-carbon transition. Temperature alignment seeks to compare the climate profiles of companies, sectors or portfolios against a benchmark of global temperature. As global ‘carbon budgets’ impose constraints on the amount of emissions that are compatible with maintaining a reasonable chance of global temperatures not exceeding certain levels, this allows a degree of quantification of the implied future temperature levels associated with a company or portfolio. For example, Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, estimates its portfolio of equities and bonds are aligned with a warming trajectory of around 3°C (5.4°F).