Chapter 3 pt 4 Flashcards
(51 cards)
1
Q
What is a carbon risk premium?
A
- exists when investors demand higher returns to compensate for the risks associated with high-carbon companies.
- Studies show mixed results—some suggest that companies with high CO₂ emissions yield higher returns, while others find that reducing carbon footprints improves financial performance.
- Risk vs return: Some see investing in carbon-heavy industries as an opportunity for excess returns, while others believe such companies face long-term financial risks due to shifting consumer preferences, technology, and regulations.
2
Q
What is brown divestment?
A
- publicly traded firms exit polluting businesses by sales to third parties
- may help the selling firm appear more climate friendly but will not reduce pollution if the buyer continues to operate the brown business without implementing changes.
3
Q
What is country analysis relevant for?
A
- Corporate securities
- Government bonds
4
Q
What does “unhedgeable risk” refer to?
A
- “Unhedgeable risk” refers to the portion of equity and fixed-income portfolios that may decline (lose value) without being protected by traditional strategies like diversification or hedging.
5
Q
What are some of the ways used by investors to assess material environmental risks (and opportunities)?
A
- carbon footprinting and emission accounting,
- natural capital approach, and
- climate scenario analysis.
6
Q
What are the benefits of carbon foot printing?
A
- the potential to aggregate emissions across industries and value chains (for countries and portfolios, enabling comparisons between companies or portfolios) and across sectors and geographies
- to focus the analysis on emission intensity.
7
Q
What are some of the main challenges of carbon footprinting?
A
- the lack of disclosure for unlisted or private assets,
- Scope 3 emissions rarely being included, thus failing to capture companies’ full value chain,
- double counting (e.g., a metallurgical coal miner’s Scope 3 emissions can be a steel maker’s Scope 1 emissions),
- the use of different estimation methodologies
- ignoring potential investment risks related to the physical impacts of climate change
8
Q
What is Carbon Emission Intensity?
A
- emissions scaled in relation to a particular metric, such as a company’s revenues
- amount of carbon emissions produced per unit of a specific output,
- The TCFD recommended that asset owners and managers report the weighted average carbon intensity associated with their investments
9
Q
What are alternative methods of calculation scaling emissions by?
A
- companies’ market capitalization or enterprise value (which takes into account companies’ issuance of both equity and debt, as well as in some cases, the companies’ cash reserves).
10
Q
What is one way that companies can be standardised on net-zero targets?
A
- Science Based Target initiative (SBTi), a partnership between several environmental institutions that provides independent certifications of the strength of companies’ targets.
- As of May 2023, over 5,000 companies have committed to set targets via the SBTi, about 2,000 of which have been verified
- developed a sectoral decarbonization approach, which looks at the necessary emission pathways in key sectors
11
Q
Which orgs/initiatives are developing frameworks to help benchmark investor’s transition to net zero?
A
- The UN Principles for Responsible Investment (PRI)
- the UNEP Finance Initiative
- Institutional Investors Group on Climate Change (IIGCC)
- (United Kingdom launched the Transition Plan Taskforce, which sets out good practice for robust and credible transition plan disclosures across various sectors.)
12
Q
What have PCAF done?
A
- The Partnership for Carbon Accounting Financials (PCAF)
- Developed guidance for financial institutions to assess the GHG emissions of their loans and investments
- PCAF provides methodology guidance for financed emissions, which is being adopted in the banking, investment, and asset management sectors.
13
Q
What are emission trajectories used for?
A
- used to assess the required reductions to reach a stated goal (for example, net-zero carbon by 2050)
- compare the pathways implied by corporate commitments, policies, or individual assets (for example, proposed refurbishments to a building to improve its energy efficiency)
14
Q
What is the Transition Pathway Initiative?
A
an asset owner–led collaboration that has developed a publicly available tool that aims to assess companies’ preparedness for the low-carbon transition
15
Q
Give an example of temperature alignment
A
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
16
Q
What are the 3 steps that practitioners can use when measuring alignment?
A
- Step 1 is about building the benchmark
- Step 2 is about comparing company-level alignment against the benchmark
- Step 3 is about aggregating alignment at the portfolio leveL
17
Q
What are the judgements in step 1 of measuring alignment?
A
- Judg 1: what type of benchmark should be built
- Judge 2: how should benchmark scenarios be selected
- Judge 3: should you use absolute emissions or intensity
18
Q
What are the judgements in step 2 when measuring alignment?
‘ about comparing company-level alignment against the benchmark’
A
- Judge 4: what scope of emissions should be included
- Judge 5: How should emissions baselines be quantified
- Judge 6 How should forward-looking emissions be estimated
- Judge 7: How should alignment be measured
19
Q
What are the judgements in step 3 when measuring alignment?
‘aggregating alignment at the portfolio leveL’
A
- Judge 8: How should alignment be expressed as a metric
- Judge 9: How do you aggregate counterparty-level metrics into a portfolio-level score
20
Q
What are free-to-use tools to measure temperature alignment?
A
- The CDP/WWF temperature rating methodology,
- The Paris Agreement Capital Transition Assessment (PACTA), provides tools to model publicly listed securities and an open-source data and modeling suite for private portfolios, such as bank loan books 3. The climate portfolio optimizer from ESG for Investors, which models temperature as part of a “3D” framework, covering risk, return, and climate impact
21
Q
What are the key points of Shell’s plan to reach net-zero by 2050?
A
- Emission reduction targets: By 2030, Shell aims to reduce absolute emissions by 50% relative to 2016 levels.
- The firm is targeting investments of $10 billion to $15 billion before the end of 2025.
- It plans to eliminate routine flaring of natural gas by 2025, which should cut carbon emissions from its upstream operations.
- The firm aims to maintain methane emission intensity below 0.2% and achieve near-zero emissions by 2030.
- Demonstrated progress: By the end of 2023, Shell had achieved more than 60% of its target to halve Scope 1 and 2 emissions from its operations before 2030.
- In 2024, Shell added a new goal of reducing customer emissions from its use of oil products by 15%–20% by 2030, relative to 2016.
22
Q
What role does green capital expenditure (capex) play in understanding a company’s transition?
A
Green capex, reported in annual reports, is a useful proxy for understanding how a company is transitioning to greener operations and can be compared over time with other companies.
23
Q
What is the Integrated Biodiversity Assessment Tool (IBAT)?
A
- global biodiversity database
- provides information on key biodiversity areas and legally protected areas to assess biodiversity risks and opportunities.
- Have a mapping tool which allows decision-makers to easily access and use up-to-date information to identify biodiversity risks and opportunities within a project boundary.
24
Q
What is the Enabling a Natural Capital Approach (ENCA)?
A
ENCA is a policy tool and guidance developed by the UK Department for Environment, Food & Rural Affairs in 2020, aimed at promoting the integration of natural capital considerations into decision-making.
25
What are the water risk assessment tools developed by CERES and WWF?
1. The CERES Aqua Gauge, developed by CERES and CDP
2. The WWF Water Risk Filter
3. The World Resources Institute water tool, Aqueduct
26
What is scenario analysis?
1. forward-looking assessment of climate related risks and opportunities.
2. Scenario analysis is a process of evaluating how an organization, sector, country, or portfolio might perform in various future states, in order to understand its key drivers and possible outcomes
3. Allows assessment of financial impact and alignment to 2 degrees or lower
27
What are the 6-steps for applying scenario analysis to climate-related risks and opportunities according to the TCFD?
1. Ensure governance is in place
2. Assess materiality of climate related risks
3. Identify and define range of scenarios
4. Evaluate business impacts - key sensitivities
5. Identify potential responses -adjustments needed
6. Document and disclose
28
What are the inputs that the TCFD say the scenario outcomes are dependent on?
1. Parameters/assumptions (e.g., discount rate, carbon pricing, energy demand/mix, macroeconomic variables, etc.)
2. What climate models or data sets are used
3. Analytical choices (e.g., is the scenario quantitative or a mix of quantitative and qualitative, and what is the analysis horizon: 10, 20, or more years)
4. Business impacts and effects: What are the impact on earnings, margins, dividends? How are revenues and costs and asset values impacted? Are there implications for future capex and investments?
29
What are key considerations about applying CSRD
1. ESRS
2. Require external auditor or certifier
3. Direct and indirect relationships
4. Essential to maintain market access to EU
30
How much of the world's GDP is moderately or highly dependent on nature?
1. Half
2. But viewed holistically 100% (need clothes, water, food etc)
31
Between 1992 and 2014 what happened to produced capital, human capital and natural capital?
1. Produced per person doubled
2. Human capital per person increased by 13%
3. Natural capital declined by nearly 40%
32
What did the EU create to address the issue of deforestation?
1. Regulation on Deforestation-free Products (EUDR)
2. a policy framework introduced to limit the EU market’s impact on global deforestation and forest degradation.
3. It came into force in June 2023.
33
Under the EUDR what must operators or traders engaged in importing or exporting commodities to EU market demonstrate?
1. the products are not linked to deforestation or forest degradation.
2. The commodities covered by the EUDR include cattle, cocoa, coffee, oil palm, rubber, soya, and wood, as well as many derived products.
34
Give example of the macro-economic transmission channels
1. Changing demand
2. Raw material price volatility
35
Give examples of the micro-economic transmission channels
1. Asset value
2. Change in profitability & increased litigation
3. Disruption of activities/value chains
36
What are transition risks
1. Policy and legal
2. Market
3. Technology
4. Reputation
37
What are opportunities
1. Resource efficiency
2. Markets
3. Financing
4. Resilience
5. Reputation
38
What are the systemic risks?
1. Ecosystem collapse
2. Aggregated risk
3. Financial stability
39
What do the TNFD consider the 5 main drivers of nature change?
1. Climate change
2. Resource exploitation
3. Land and sea-use change
4. Pollution
5. Invasive alien species
40
What percentage of Aviva’s corporate holdings exposed to deforestation risk had weak deforestation policies?
1. 38% were weak - Financial and retail
2. 43% were medium
3. 19% were strong.
41
How did Aviva assess sovereign investments for deforestation risk?
1. It used Global Forest Watch (GFW) data to identify sovereign debt issuers with high tree cover loss
2. Brazil, U.S., and Canada - greatest average tree cover loss
3. Brazil, Indonesia, and Malaysia - main exposure to commodity-driven deforestation
4. It found that it had minimal exposure to commodity-driven deforestation through sovereign debt.
42
How did Aviva assess deforestation risk in loans to companies and infrastructure?
1. It analyzed sector and country-level risks
2. By taking a sector view, the potential exposure to commodity-driven deforestation was assessed to be in a conglomerate, chemical, and infrastructure companies.
3. Overlaying this information with the geographic locations of these companies, the exposure to forest risk commodities was determined to be low.
43
What framework has TNFD developed to help companies and financial institutions locate their interface with nature,?
1. LEAP: locate, evaluate, assess, prepare
2. understand and evaluate their dependence and impacts on nature, assess material risks and opportunities for their operations
3. prepare responses (e.g., business strategy, monitoring metrics, risk management approach, resource allocation) and nature-related disclosures.
44
What are the 2 ways assets can be affected by environmental issues?
1. may originate outside the asset but could impact its technical ability to operate or impact its profitability (for instance, temperature rise and increased water scarcity).
2. Externalities: may be caused by the asset itself and impact its surrounding environment and communities (such as water effluence and the quality of life of the communities around it).
45
What are teh typical environmental factors
1. Degradation and pollution
2. Resource efficiency: raw materials, energy, water, waste
3. Physical risk- impact on asset such as flooding
46
What are the quantifiable material environmental factors for infrastructure?
1. Air (health) and water pollution
2. Air (climate)—GHG emissions: Resource efficiency—sourcing, use, or treatment
3. Energy (E)
4. Water (E)
5. Solid waste (E)
6. (Raw) materials and supply chain (E/S)
47
What are the difficult to quantify material environmental factors for infrastructure?
1. Biodiversity and habit
2. Physical climate change impacts
48
What increases Opex
1. obtaining relevant permits
2. enhanced disclosure requirements
3. rClient demand for introduction of climate tax/price/loss of subsidies
4. Energy risk
5. Increased water scarcity
6. Conflicts with community
7. Stringent regs on water withdrawal
8. Extreme weather
49
What increases provisions
1. Tightening regulations
2. reputational risk
3. Solid waste
4. Raw materials supply chain
50
What increases capex?
1. Anything where investments is needed
2. e.g. investment in water-saving measures
3. Preventive investment
4. Extreme weather
51
