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ESG Binder Notes > Ch 4 Environment > Flashcards

Ch 4 Environment Flashcards

1
Q

According to an update by the Stockholm Resilience Centre from 2017, four of nine planetary boundaries have already been crossed as a result of human activity:

A

▶ climate change;
▶ loss of biosphere integrity;
▶ land-system change; and
▶ altered biogeochemical cycles (phosphorus and nitrogen loading).

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2
Q

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.

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3
Q

Climate change is one of the most complex issues facing us today and involves many different
dimensions, including:

A 
▶ science;
▶ economics;
▶ society;
▶ politics; and
▶ moral and ethical questions.
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4
Q

The main man-made driver of the warming of the planet is

A

rising emissions of greenhouse gases (GHGs) - 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 Homosapiens first appeared

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5
Q

Other important GHGs include

A

methane, nitrous oxide and other fluorinated gases. Although the average lifetime in the atmosphere of such gases is shorter than that of carbon dioxide, they tend to “compensate” by having a higher ‘warming potential’

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6
Q

Emissions of GHGs primarily come from

A

energy, industry, transport, agriculture and changes in land-use (such as deforestation), with CO2 resulting from the burning of fossil fuels comprising the highest share – around two-thirds - of all GHGs.

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7
Q

tipping points include

A

The melting of the permafrost
The disintegration of the West Antarctic ice sheet
The ‘dieback’ of the Amazon rainforest
Melting Arctic ice sheets

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8
Q

SELECT SOCIOECONOMIC IMPACTS OF CLIMATE CHANGE

A 
LIVEABILITY AND WORKABILITY (Heat waves) 
FOOD SYSTEMS (drought or ocean warming) 
PHYSICAL ASSETS (Fire or hurrucane)
INFRASTRUCTURE SERVICES (flooding)
NATURAL CAPITAL (Melting of ice)
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9
Q

Responding to climate change is usually presented in terms of two main approaches:

A
  1. reducing and stabilising the levels of heat-trapping GHGs in the atmosphere (climate change mitigation); or
  2. adapting to the climate change already taking place (climate change adaptation) and increasing climate
    change resilience.
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10
Q

Climate change mitigation is a human intervention that involves reducing the sources of GHG emissions, The goal of mitigation is to:

A

▶ avoid significant human interference with the climate system;
▶ stabilise GHG levels in a timeframe sufficient to allow ecosystems to adapt naturally to climate change;
▶ ensure that food production is not threatened; and
▶ enable economic development to proceed in a sustainable manner.

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11
Q

Examples of mitigation strategies include greater adoption and policies to promote sustainability across
different areas, such as:

A

▶ Energy – deploying renewable energy sources (such as wind, solar, geothermal and hydro or biofuels from
sustainable sources).
▶ Buildings – retrofitting buildings to become more energy efficient and using building materials and equipment
that reduce buildings’ carbon footprint.
▶ Transport – adopting more sustainable transportation and infrastructure, particularly in cities (such as electric
vehicles, rail and metro and bus rapid transit), but also decarbonising shipping, road and air transport.
▶ Land use and forestry – improving forest management and reducing deforestation.
▶ Agriculture – improving crop and grazing land management to increase soil carbon storage.
▶ Carbon pricing – implementing carbon reduction policies which penalise heavy emitters and promote GHG
emission reductions in the form of either a carbon tax or cap-and-trade mechanism.
▶ Industry and manufacturing – developing more energy efficient processes and products, as well as equipment
and processes to facilitate carbon capture, power storage (e.g. batteries, pump systems), recycling efficiency,
etc.

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12
Q

The higher the ambition of mitigation policies, the higher the required upfront investment - estiamted cost in energy?

A

In the energy sector alone, the International Chamber of Commerce (ICC) estimates that between US$1tn to US$4tn (£0.7tn
to £2.9tn) of additional annual investment in energy supply, and around US$1tn (£0.7tn) in energy demand
will be needed up to 2050 to limit warming to 1.5°C (2.7°F)

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13
Q

Adapting to a changing climate involves adjusting to actual or expected future climate events, thereby
increasing society’s resilience to climate change and reducing vulnerabilities to its harmful effects

A

The faster
the climate changes, the more challenging it is to adapt. The World Bank aptly describes adaptation and
resilience as ‘two sides of the same coin’

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14
Q

Examples of adaptation strategies include a variety of development plans on how to deal with:

A

▶ protecting coastlines and adapting to sea-level rise;
▶ building flood defences;
▶ managing land use and forestry practices;
▶ planning more efficiently for scarce water resources;
▶ developing drought resilient crops;
▶ protecting energy and public infrastructure; and
▶ developing clean cooling systems.

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15
Q

Waer is tied to SDG 6

A

to ensure availability and sustainable

management of water and sanitation to all’ by 2030.

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16
Q

Companies with exposure to deforestation in their supply chains may face material financial risks, such as:

A

▶ supply disruption;
▶ cost volatility; and
▶ reputational damage.

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17
Q

The circular economy is an economic model that aims to avoid waste and to preserve the value of resources for as long as possible

A
  1. design out waste and pollution;
  2. keep products and materials in use; and
  3. regenerate natural systems.

Circular economy is holisitic where recycling econonly has non recyclable waste

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18
Q

Transition risks are multiple in nature, including

A

▶ policy risks – such as increased emissions regulation and environmental standards (see Section 3);
▶ legal risks – such as lawsuits claiming damages from entities (corporations or sovereign states) believed to be
liable for their contribution to climate change; and
▶ technology risks – such as low-carbon innovations disrupting established industries.

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19
Q

A direct impact: an organisation’s activities directly affecting biodiversity. For example, when

A

» degraded land is converted for the benefit of production activities;
» surface water is used for irrigation purposes;
» toxic materials are released; or
» local species are disturbed through the noise and light produced at a processing site.

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20
Q

An indirect impact: the impact is caused by parties in an organisation’s supply chain(s).

A

For example, when an
organisation imports fruits and vegetables, produces cotton shirts, sells construction materials or publishes
books, the production of the inputs for these goods will have indirect impacts on biodiversity.

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21
Q

Define Scope 1,2,3 emissions

A

-direct emissions from core operations (‘Scope 1’
emissions) and;
-purchased energy (‘Scope 2’).
-indirect emissions from the whole value chain, including those produced by suppliers and
customers (‘Scope 3’ emissions).

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22
Q

Examples of global traceability schemes include:

A

▶ the Forest Stewardship Council (FSC);
▶ the Marine Stewardship Council (MSC);
▶ Roundtable for Sustainable Palm Oil (RSPO); and
▶ the Fairtrade Labelling Organizations International (FLO).

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23
Q

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, namely:

A
  1. CO2;
  2. methane (CH4);
  3. nitrous oxide (N2O);
    +4 other

It established top-down, binding targets, but only for developed nations, recognising the historical links
between industrialisation, economic development and GHG emissions. agreement was extended to 2020 as the addoption of the paris agreement

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24
Q

what is the Paris Agreement

A

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

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25
Q

Structure of Paris Agreement

A

Nationally determined contributions (NDCs) are at the heart of the agreement. Instead of top-down
imposed contributions, they capture voluntary efforts by each country to reduce national emissions and adapt to the impacts of climate change, and require every signatory. updates to commitments every five years. While commitments
vary, they tend to fall in the 25–30% range of GHG emissions relative to 2005 by 2030.

26
Q

Other international agreements, which have impacted companies’ environmental practices:

A

-UN SDGs
-Kigali Amendment to the Montreal Protocol
International Maritime Organization (IMO) 2020 Regulation
-‘Corsia’ (Carbon Offsetting and Reduction Scheme for International Aviation)

27
Q

The UN SDGs are

A

a set of 17 global goals set in 2015 by the UN General Assembly seeking to address key global
challenges such as poverty, inequality and climate change. Although primarily intended as a framework
for government action, the SDGs are now regularly cited by corporate and investment actors as material
to their business planning and operations.

28
Q

SDG buckets

A

SDGs 7 (affordable and clean energy),
11 (sustainable cities and communities),
12 (responsible consumption and production),
13 (climate action),
14 (life below water) and
15 (life on land) are some of the most directly relevant to the environmental debate.

29
Q

EU taxonomy. Approved

by the EU Parliament in June 2020, it aims to significantly reduce..

A

the risk
of green-washing financial products by providing a classification system to determine whether an economic
activity is environmentally sustainable

30
Q

EU taxonomy. categories

A
  1. climate change mitigation;
  2. climate change adaptation;
  3. sustainable use of protection of water and marine resources;
  4. transition to a circular economy, waste prevention and recycling;
  5. pollution prevention and control; and
  6. protection of healthy ecosystems.
31
Q

The two main categories of Climate benchmarks

A
  1. EU Paris-Aligned Benchmarks (EU PABs), which must:
    » reduce carbon emissions intensity by at least 50% in their starting year;
    » have a four-to-one ratio of ‘green’ to ‘brown’ investments relative to the investable universe; and
    » not invest in fossil fuels.
  2. EU Climate Transition Benchmarks (EU CTBs), which require a 30% intensity reduction in starting year and at
    least an equal ‘green’ to ‘brown’ ratio, but permit fossil fuel investments as part of a transition process.
32
Q

Task Force on Climate-related Financial
Disclosures (TCFD) published its final recommendations for how companies should report, structured around four thematic areas:

A
  1. governance;
  2. strategy;
  3. risk management; and
  4. metrics and targets.
33
Q

carbon pricing is fundamental in the transition to a decarbonised economy. Putting a price on carbon
emissions is viewed as one of the most effective methods of tackling climate change

A

one of the most effective methods of tackling climate change:

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.

34
Q

Emission trading system based on the exchange of per mits for emission units

A

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.

In theory, this creates an economic incentive for emissions reductions to occur at the point of least cost

The effectiveness in practice, however, depends crucially on the design of the ETS - If the scheme is too restrictive, it may encourage the offshoring of industries into jurisdictions with fewer constraints

35
Q

Carbon taxation takes a different approach by directly setting an explicit price on GHG emissions

A

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.

It has been estimated that an explicit global carbon
price of US$40 to US$80 (£29 to £58) per tCO2 in the 2020s, more than doubling to US$50 to US$100 (£36 to £72)
per tCO2 by 2030, is required to meet the goals of the Paris Agreement

36
Q

Over the last ten years, many companies – especially in energy-intensive sectors – have used the practice
of

A

shadow carbon pricing to guide their decision-making process. An internal or shadow price on carbon
creates a theoretical or assumed cost per ton of carbon emissions.

37
Q

Materiality consideration for corp projects

A

energy consumption, water utilisation and waste utilistaion

38
Q

review 4 LOD

A

Assess key “megatrends” influencing environmental change in terms of potential impact on companies and
their environmental practices:
• Growth of environmental and climate policies.
• International climate and environmental agreements and conventions.
• International, regional and country-level policy and initiatives.
• Carbon pricing.

39
Q

company level enviro anaysis

A

it is important to undertake an analysis of how well the
company is managing these risks - Often, analysts and portfolio managers will have their own internal environmental (social and governance)
scoring system utilising a combination of external third-party data providers and internal analysis

40
Q

Sector level enviro factors

A 
▶ environmental risks such as:
» chemicals;
» energy;
» steel and cement;
» extractives;
» food or beverages; and
» transportation; or
Physical - building or urban infrastructure
41
Q

Country level enviro risk

A

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 (includes corp and gov securities)

  • 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
42
Q

Market Level enviro risk

A

Recognising the cross-cutting impacts of environmental risks, central banks and the Bank of International
Settlements have warned of the potential systemic effects of both physical and transitional risks:

Consideration of such market-wide impacts can influence investors’ strategic asset allocation and long-term
investment strategy, although research has sounded a note of caution with regards to the limits of some
traditional risk mitigation strategies – such as diversification and hedging

43
Q

3 waays to analyse enviro risk

A

A. carbon footprinting and other carbon metrics;
B. natural capital approach; and
C. climate scenario analysis.

44
Q

Carbon footprinting is one of the most common approaches used by companies and investors. A portfolio carbon footprint

A

effectively measures carbon emissions and intensity associated with operations

▶ compare it to global benchmarks;
▶ identify priority areas and actions for reducing emissions; and
▶ track progress in making those reductions.

45
Q

Examples od Scope 1/2/3

A

S1 - • Fuel combustion.
• Company vehicles.
• Fugitive emissions .

S2 - • Purchased electricity,
heat and steam.

S3 - • Purchased goods and services.
• Business travel.
• Employee commuting.
• Waste disposal.
• Use of sold products.
• Transportation and distribution
(up- and downstream).
• Investments.
• Leased assets and franchises.
46
Q

Challenges for carbon footprinting

A

▶ the lack of disclosure for unlisted or private assets;
▶ Scope 3 emissions are rarely being included, thus failing to capture companies’ full value chain;
▶ ‘double-counting’ (a metallurgical coal miners’ Scope 3 emissions can be a steel-makers’ Scope 1 emissions);
▶ the use of different estimation methodologies; and
▶ it does not measure potential investment risks related to the physical impacts of climate change.

47
Q

Review total carbon emission and weighted carbon emission equation

A

Total Carbon emissions = Sum of investment in company X S1/2

WA Carb emissions = Sum of weight X (issuer S1/S2 over Issuer US$ Rev)

48
Q

Another approach are measures of temperature alignment. This seeks to compare the climate profiles of
companies, sectors or portfolios against a benchmark of global temperature

A

While intuitively easy to understand the aim of these measures and seemingly easy to compare temperatures,
there is significant variation in the market around such metrics. They:
▶ go under different names (e.g. ‘implied temperature rise’, ‘global warming potential’ or ‘temperature
alignment’);
▶ use different inputs for climate performance (including carbon footprint, share of investments in ‘green’
technologies, proportion of investee companies with (science-based) emissions targets); and
▶ result in a different quantification of output – a binary statement (aligned or not), a score, a percentage of
misalignment or a temperature number).

49
Q

Capital expenditures, ‘green’ revenues and research and development

A

A different approach looks in more detail at companies’ level of ‘green’ capital expenditures, revenue streams
and R&D to gauge the direction of travel for their business models.

An alternative is to consider existing revenues. Data providers including FTSE Russell and HSBC have compiled
proprietary databases to assess the sales companies generate from over 100 low-carbon products and
services

50
Q

A term often used to describe the relationship between nature and measuring and valuing nature’s role in decision-making is

A

natural capital. Natural capital helps businesses identify, measure, value and prioritise their
impacts and dependencies on biodiversity and the ecosystem, which ultimately give businesses new insight into their risks and opportunities

51
Q

Scenario analysis is an approach for the

A

forward-looking assessment of risks and opportunities. Scenario analysis describes a process of evaluating how an organisation, sector, country or portfolio might perform in different future states, in order to understand its key drivers and possible outcomes.

52
Q

The Institutional Investors Group on Climate Change (IIGCC) published a practical investor guide, which
provides a useful framework - two objectives

A
  1. Financial impact: the use of scenario analysis enables the assessment and pricing of climate-related risks and
    opportunities.
  2. Alignment: aligning the portfolio(s) with a 2°C (3.6°F) or lower future. This is typically driven by a set of
    investment beliefs.
53
Q

General framework from The EU’s NFRD (no one size fits all)

A

taking a set of transparent and credible data sources and assumptions, which can be quantitative or
qualitative;

applying recognisable, accepted methodologies,

focusing on materiality

generating a set of outputs which can be measured in terms of key performance indicators.

54
Q

Review 6 LDO - Case study only

A

Identify approaches to environmental analysis in both developed and emerging countries, including:
• Company, project, sector, country and market level analysis.
• Environmental risks including carbon footprinting and other carbon metrics, natural capital approach and
climate scenario analysis.

55
Q

what are the 4 opportunities related to cliemt change?

A

A. the circular economy;
B. clean and technological innovation;
C. green and ESG-related products; and
D. the blue economy.

56
Q

what are the 4 opportunities related to cliemt change?

A

A. the circular economy;
B. clean and technological innovation;
C. green and ESG-related products; and
D. the blue economy.

57
Q

decribe the circular economy;

A

In a circular economy, products and materials are repaired, reused and recycled rather than thrown away,
ensuring that waste from one industrial process becomes a valued input into another. The circular economy
concept is now a core component of both the EU’s 2050 Long-Term Strategy to achieve a climate-neutral Europe
and of China’s five-year plans

58
Q

decribe clean tech innovation

A

umbrella term “encompassing the
investment asset class, technology, and business sectors which include clean energy, environmental, and
sustainable or green, products and services” became increasingly popular approximately 20 years ago

Energy as the ‘prime mover’ of the economy, reducing the emissions associated with energy production has
knock-on effects across all sectors. The production of low-carbon electricity has been at the forefront of these
developments,

59
Q

List the areas of clean tech innovation

A 
Energy
HVAC
Indusry process
buildings - better building partnership 
Transport 
Food
60
Q

Green and ESG-related products

A

Some specific financial products that have emerged include:
▶ a range of green, sustainability and ESG indices;
▶ green bonds and loans, sustainability funds and ETFs;
▶ retail and institutional deposit or savings products; and
▶ crowdfunding investments

61
Q

Green bond issuances by banks and corporates have accelerated in recent years, with total cumulative issuance
surpassing

A

USD $1t

Useage - Renewable energy, building transport (rep 85%)

62
Q

investors need to have a clear framework by which to assess these assets. The following are
some of the considerations:

A

▶ the eligibility of assets and criteria to meeting their green, ESG or SDG-related objectives;
▶ the use of proceeds effectively allocated to eligible projects;
▶ the transparency and reporting requirements and key measures of impacts; and
▶ the issuer or borrower has a clear sustainability and ESG strategy.

“Shades of Green” (example could be questions)

ESG Binder Notes (13 decks)

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