CFA exam qs Flashcards
ch7 - Which of the following correctly reflects one of the 5 Climate Bond Initiative’s transition principles
Technological viability taken into account but not economic competitiveness
ch7 - 3 main investment reasons an analyst would prefer companies prioritising emissions reduction over using carbon offsets and abatement technologies. Which is NOT one of them
Reliance on abatement technologies may lead to increased costs
ch7 -all of the following have exhibited a strong correlation in relation to equity valuations, except for:
climate temp scenario alignment and returns
in order to reverse anthropogenic climate change, it is most accurate to state that
we must:
-> artificially move carbon dioxide from the atmosphere
(NOT - plant more trees, reach net zero emissions, remove dependence on fossil fuel energy)
For the steel industry to reach net zero within a predetermined timescale, there are
many potential priorities. Which two of the following are likely to produce the
lowest impact in the shorter term?
- to produce direct reduced iron with green hydrogen
- to capture emissions from production eg. with CCS technology
***A company has total greenhouse gas emissions of 5,000 tCO2e. They spend
£150,000 on sustainably-generated power, £200,000 on gas-produced power,
£100,000 on carbon offsets and £30,000 on complying with emission-reduction
regulations. The company’s INTERNAL CARBON PRICE is closest to:
£50 / tCO2e.
internal carbon price is the total cost of internal initiatives, green power purchases and carbon offsets, all divided by total emissions
(150 + 100) / 5 = £50 / tCo2e
Carbon based power is excluded, as are (external) regulatory costs
Engagement, as part of investment management, is LEAST likely to include:
shareholders voting on resolutions
(voting would take place at a general meeting and is not, when done by shareholders themselves, part of engagement)
The TCFD recommended disclosures under the “Governance” pillar in relation
to management’s role in assessing and managing climate-related risks and
opportunities least likely includes which of the following?
The impact of identified climate-related risks and opportunities on the
business, strategy and financial planning.
The impact of identified risks on the
business etc fall under the “strategy” column, and not “governance”.
Compared to a smaller capitalisation listed company, a larger listed company is
LEAST likely to have greater:
Cost of capital. [MORE LIKELY TO BE LOWER THAN HIGHER]
(not liquidity, disclosures or transparency)
The TPI management assessment levels 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
By comparison to other forms of private equity investing, venture capital
investments most likely
Have fewer legacy assets
VC investing is typically in smaller, earlier stage companies with no
legacy assets and therefore less exposure to transition and physical climate
risks.
A limited partner is considering a blind pool investment in a private equity
firm. Their most useful source of information is:
The track record of the general partners.
[they must rely on assurances gained
through interrogating the GPs, their climate policies and track record.]
Empirical evidence of a link between investor activity and real-world impact
by investee companies is least likely to be seen when:
The fund has an impact-based mandate.
The Paris Aligned Investment Initiative Net Zero Investment Framework, or
PAII, has framework sections under “Portfolio / fund level” that include the
following, except for which one?
Implementing alignment
[The three sections of “Portfolio / fund level” are (1) Governance and
strategy, (2) Portfolio reference targets and (3) Strategic asset allocation.
Implementation alignment falls under the “Asset class level”.]
A financial institution uses the SBTi Portfolio Coverage Approach to create an
engagement objective for its investees to adopt science-based targets, with
notional start date in 2020. For which of the following coverage statistics are
they complying with the methodology appropriately?
75% by 2035.
[Under the SBTi Portfolio Coverage Approach, the proportion of investees
that use SBTi-approved science-based targets should reach 100% by 2040,
along a linear path. Hence beginning in 2020 would require at least 50% by
2030, 75% by 2035 and 100% by 2040.]
Companies YYY and ZZZ are both in the chemicals sector. YYY began to
decarbonise ten years ago and has made significant progress. ZZZ is at a much
earlier stage. Both companies now wish to use the SBTi absolute contraction
method for their Scopes 1 and 2 emissions. The required percentage reductions
per year for the two companies from now onwards should be:
The same.
[Under the SBTi absolute contraction method, the requirement is 4.2% per
year (based on the same initial date), regardless of where the companies
are in their decarbonisation trajectory]
EU Taxonomy Alignment…
100% aligned, as both wind turbine construction (80%)
and sustainable logistics (20%) are aligned.
Solar panel technology (75%) is aligned, and
above the 70% threshold. Nuclear power is not aligned
s 100% aligned, as PV panel production is included
. Electric rail service (60%) is aligned; the
courier service (40%) may or may not be taxonomy-aligned, and
we err on the cautious side by assuming it is not. Hence OO is
below the 70% threshold
WEIGHTED AVERAGE ALIGNMENT of portfolio
LL: $28m. Aligned 100% = $28m.
* MM: $15m. Aligned 75% = $11.25m.
* NN: $34m. Aligned 100% = $34m.
* Pre1: $20m. Aligned 85% = $17m.
* Pre2: $18m. Aligned 75% = $13.5m.
Total investment is 28 + 15 + 34 + 20 + 18 = 115
Total aligned investment is 28 + 11.25 + 34 + 17 + 13.5 = 103.75
Hence weighted average alignment = 103.75 ÷ 115 = 90.22%.
aligned investment divided by total investment
Within the energy sector, the highest contribution of greenhouse gases is from:
Heating, cooling and powering buildings.
Which of the following statements least accurately describes a challenge to
passive climate-focused investing?
A low-carbon index may unintentionally be biased towards energy and
agriculture sectors.
[A low-carbon index may have an unintentional bias away from the
traditionally high-carbon sectors of energy and agriculture. Although this
achieves the low-carbon content, it omits sectors that should be
transformational as the economy transitions to lower carbon
***An analyst is looking at a marginal abatement cost curve, or MACC. Projects
range from –100 to +100 in terms of dollars per tonne of emitted greenhouse
gases. She draws on this diagram a line representing a proposed carbon price, set
at $25. Her most accurate conclusion should be that it is economically
worthwhile to fund projects that are:
Below the +$25 level.
[The column height of each project is the abatement cost per tonne of GHG
emissions. With no carbon prices, all negative values are worthwhile, as
carbon savings represent a positive dollar return. If a carbon price of $25 is
set, then positive values (i.e. per tonne costs) below this level also become
economically viable. Hence worthwhile projects are now those with (1)
positive costs below $25/tonne or (2) negative costs]
Of the five Shared Socioeconomic Pathways, which of the following has the
lowest challenges for mitigation?
SSP4 (inequality) [and ssp1 sustainability low mitigation challenges]
[ssp 2 moderate, ssp3 (regional rivalry and ssp5 (rapid growth) have high mitigation challenges]
A conflict of interest is least likely to arise when:
The investor wishes to vote against a resolution
When analysing a company’s carbon emissions, using a sectoral average as a
benchmark is least likely inappropriate because:
Sectoral averages can be computed in multiple ways
Which of the following statements regarding private, corporate, sub-investment
grade debt is least accurate?
Most lenders are banks
[most lenders are actually institutional investors ]
For which of the following categories of investor is the time horizon usually one
to two years?
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.
In 2025, what will be the level of applicability to a UK listed company of (1)
climate-related financial disclosures under TCFD and (2) enhanced climaterelated disclosures under the FCA?
Both will be mandatory.
If NP wishes to invest $250 million in infrastructure, which of the following
investments is most likely to meet the firm’s commitments and Shah’s
recommendations?
$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.
If Shah wishes to assess the transition risks of YR [private equity commercial office buildings ], which of the following would
be least useful?
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]
***Which of the following statements regarding emissions trading systems (ETS) is
least accurate?
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]
Which of the following descriptions of stranded liabilities is least accurate?
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]
Under the Bank of England’s climate biennial exploratory scenario, or CBES,
there are three scenarios: early action, late action and no additional action. Under
the late action scenario, transition and physical risks are, respectively:
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.]
When designing scenario analyses for climate-economy outputs, the Financial
Stability Board checklist proposes key parameters and assumptions for the analyst
to define during the design. These are most likely to include:
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]]
A climate analyst is estimating the Portfolio Temperature Alignment, or PTA,
using the assumption that the company-level overshoot applies only to the
relevant sectors across a portfolio (the PACTA principle). A 2.2 degree sectorlevel carbon budget is set and a company overshoots their own budget by 15%.
The company produces 30% of the sector’s output, and the sector carbon budget
is 20% of the total. The analyst is most likely to estimate the PTA as:
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]]
According to the PRI, direct methods for influencing climate policy least likely
include:
Contributing to national forums on trade and technology.
Under the Climate Action 100+ (CA100+) Net Zero Company Benchmark, which of
the following indicators for corporate assessments would usually be considered a “red
line”, essential for any investment, within the oil and gas sector?
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
When analysing a company to incorporate climate issues into an equity
valuation, an analyst needs to ask many questions. Categorise the questions
below into revenues, costs and cost of capital. Drag and drop the questions into
the most appropriate category.
(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
The Green Loan Principles (GLP) have four core transparency
recommendations, which exclude which of the following?
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]
During the construction of a FTSE TPI Climate Transition Index, the following
steps are taken:
(I) Publish index.
(II) Exclude companies.
(III) Translate scores into tilts.
(IV) Remove stocks that do not contribute to the objective.
Place these four steps in the correct sequence
(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
When constructing FTSE EPRA Nareit Green Indices, which of the following is
the least accurate description of part of the process?
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]]
**IF the bonds suggested by O’Connor that are EU Taxonomy-aligned were to be
invested in at their full potential investment size, but in a separate portfolio, then
the portfolio temperature alignment, or ** PTA, for the separate portfolio would be
how much?
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.
For transition bonds, which are not within a green taxonomy, investors
should pay particular attention to:
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
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.
The region that is home to the greatest undernourished populations in absolute
size terms is:
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
Which of the following is not one of the specified list of environmental
objectives under the EU Taxonomy?
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”.
When considering the “bottom-up” warming function of PWP (Portfolio
Warming Potential), which of the following statements is least accurate with
respect to the emission intensity contraction approach?
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.]]
When analysing physical risks using the Roson-Sartori Damage Function and
the Moody’s Analytics framework, which category of physical risk least likely
feeds into the economic driver potential productivity?
TRADE DECLINE
[also, sea-level rise impacts
consumption (via loss of land).]]
***A company emits 500 tonnes of carbon dioxide in a year. They have a free
allowance of 100 tonnes, and the carbon price is €40 per tonne. The effective
carbon price per emitted tonne is most likely:
Effective carbon price = [(Emissions – free allowance) carbon price]
Emissions = [(500 – 100) €40] ÷ 500 = €32
When considering the impact of a “hot house world” in a sectoral stress test,
companies in which sector would have the biggest increase in default likelihood
on their borrowings?
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
Under the vision of the World Green Building Council, buildings should be “net
zero operational carbon” (“OC”) and “net zero embodied carbon” (“EC”)
respectively by:
OC by 2030, EC by 2050.
The ICMA Green Bond Principles (GBP) recommend that issuers commission
an external review prior to bond issuance. The least likely form of this is:
An external audit.
[[An
external audit is designed to confirm that funding was appropriately
allocated and is carried out post-issuance]]
When conducting bottom-up climate-economy stress testing, a major limitation
is most likely to be:
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]]
In the labelled bond market, which of the following categories has seen the
highest growth in the last few years?
Transition bonds.
One concern of green bonds is that of the lack of additionality, in which a
company plans an environmental project, regardless of the nature of the funding
structure, and the proceeds of a green bond may be “tagged” to projects using
the issuer’s discretion. This concern least likely applies if the bond is:
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]]
By comparison to the ICMA Green Bond Principles (GBP), the Climate Bonds
Standard (CBS) require an issuer:
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]]
green building certification schemes around the world
gREEN mARK - Singapore
DGNB = Germany
CASBEE - Japan
Green Star - Australia
For an infrastructure investment, Operational carbon is least likely to include:
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]
Scenario 1 has lower warming as a result of more extensive and stricter
new climate policies. This increases both the transition risk CVaR of
Company X (larger negative value) and the transition opportunity CVaR
of Company Y (larger positive value).
of Company X is larger (downwards), of Company Y is larger (upwards).
Within the SASB Standards, a Disclosure Topic is best described as:
D An industry-specific version of a General Issue Category.
To what extent in practice is climate risk material to the credit ratings process
for (1) sovereign bonds and (2) structured finance (such as residential mortgagebacked securities)
(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.]
By comparison to grey infrastructure, green infrastructure least likely:
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
When managing infrastructure risks using the UN Handbook for Local and
National Governments, at what stage would the risk manager consider whether a
risk is natural, accidental or intentional?
Identify risk.
Calculate PORTFOLIO TOTAL EMISSIONS, in tonnes of carbon dioxide emitted
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
The CARBON INTENSITY (using tonnes of CO2e and millions of pounds) of Company
X is closest to:
Carbon intensity for a company is GHG ÷ Revenues = 5,000 ÷ 2,000 = 2.5
tCO2e per £ million
The weighted average carbon intensity, or WACI, is closest to:
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
The PORTFOLIO CARBON INTENSITY is closest to:
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
A REIT enters into a credit facility in which the margin above a variable interest
rate is based on ESG factors. Which of the following possible key performance
indicators (KPIs) is LEAST likely to be used to create a favourable adjustment to
the margin?
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
Under the Sustainable Finance Disclosures Regulation, or SFDR, a firm must
disclose information regarding the consistency of remuneration policies with
integration of sustainability risks. This is covered under:
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
emissions from company vehicles are within the definition of Scope…
1
Which of the following statements regarding internal, or shadow, carbon pricing
is least accurate?
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.)
Shared Socioeconomic Pathways, or SSPs, are best described as:
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.]
Climate change, as a systemic risk, is explicitly referred to as a required
consideration in the stewardship code of which country or region?
UK
As an investment justification, the least likely reason why emissions reductions
should take priority over carbon offsetting is that:
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.]
Management of a company are integrating climate change into their operational
decision-making. Under the TPI assessment of management quality, the company
is most likely to be considered at:
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.]
The Paris Aligned Investment Initiative Net Zero Investment Framework, or PAII,
outlines five key principles in the approach that an investor takes to alignment,
which include which of the following?
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.]
Under the Paris Aligned Investment Initiative, or PAII, the Germanwatch Climate
Change Performance Index (CCPI) is the recommended methodology for
assessing alignment and climate solutions criteria for which asset class?
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.]
Portfolio carbon intensity is the portfolio total emissions divided by the
portfolio’s share of revenues.
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.
The internal carbon price for Company W is most likely to be:
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.
A mining company supplies its refined output to mobile handset manufacturers. It
has a high level of both carbon emissions and fresh water usage, relative to its
immediate competitors, most of whom use far cheaper solar energy and less
water. Which of the following transition risks is the mining company least likely
to be exposed to?
market risk - not immediate
Of all vegetation types, the highest level of carbon storage (for the same ground
area) is with:
peatlands
For developed nations, Kyoto specified that a 5% reduction (from 1990
levels) was to be achieved between 2008 and 2012.
Doha extended this to
18% by 2020.
Under the shared socioeconomic pathways, SSPs, the highest mitigation
challenges are under:
SSP3 and SSP4
The PRI Climate Change Strategy Project proposes a framework for investors to
use within a climate change strategy. Within the “Act” step, the recommended
strategies include:
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”.
An analyst is using multiple models from several sources to estimate a single
value for the temperature change by 2100. His most appropriate solution is to use:
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.
greater regulation of fashion - low temp increase
increased cost of transportation - low temp increase
chaging consumer prefs - low temp increase
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.
Proposed reporting requirements under the EU’s Corporate Sustainability
Reporting Directive (CSRD) will be required by which EU companies?
All large companies, both listed and private
With active ownership, collective action can result in more effective
engagement than the actions of a single investor.
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.
When considering the FTSE “tilt-tilt” climate equity index building methodology,
weightings are least likely adjusted from which of the following factors?
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.
In which of the following categories of investor is fiduciary duty the primary
driver for climate-focused investment?
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.
When considering climate-related issues for different asset classes, the most likely
common factor between investing in listed REIT shares and real estate assets is:
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.
Advantages for a company to list its shares on a stock exchange least likely include:
Access to liquid securities.
The reliability of different scopes of emissions data can be listed, from least
reliable to most reliable as:
Scope 3 then Scope 2 then Scope 1.
According to the Transition Pathway Initiative, or TPI, in the oil & gas sector:
No company is compatible with a 2-degree target.
Under the company management quality assessment scoring of the Transition
Pathway Initiative, or TPI, Level 4 is described as:
Acknowledging climate change as a business issue.
*A producer of internal combustion engine vehicles will most likely have most
greenhouse gas emissions in the form of:
Scope 3 emissions.
*An analyst is incorporating costs of emissions reductions into the valuation of a
producer of household and personal products (HPP). The cost modelling is rather
complex and uncertain. The analyst’s best solution is:
To adjust the cost of capital instead of including cost estimates
Under the Climate Bonds Initiative, the five transition principles include the
following except for:
Include new technologies once economically viable.
Within the FTSE Russell Environmental Markets Index Series, company revenues
are classified in three tiers. For a company to be eligible for the Environmental
Opportunities series, what is the minimum revenue requirement?
At least 20% from tier 1 or 2 activities
Within the FTSE Russell Environmental Markets Index Series, company revenues
are classified in three tiers. For a company to be eligible for the Environmental
Technology series, what is the minimum revenue requirement?
At least 50% from tier 1 activities.
An absolute science-based target for a company’s carbon emissions reduction is
least likely:
To take company size into account.
The Science Based Targets initiative, SBTi, requires an annual reduction in
greenhouse gas emissions per unit of value added, of how much per year?
7.00%
Under the Climate Action 100+ (CA100+) Net Zero Company Benchmark, which of
the following indicators for corporate assessments would usually be considered a
“red line”, essential for any investment?
Decarbonisation strategy.
*When analysing physical climate risk on a company, an insurance company may be
particularly well placed, because the insurer:
Has knowledge of each insured asset.
In the financial statements of a company, a climate-related adjustment to asset values
is least likely to be required if:
The expected lifetime increases.
A company produces an IMPACT analysis of a temperature pathway through to 2100.
An equity analyst is best advised to reflect these more pessimistic climate risks by:
Increasing the discount rate.
An analyst is valuing a company using comparable company analysis. One price
multiple is enterprise value to EBITDA. In this ratio, enterprise value is best
defined as:
enterprise value -> market capitalisation MINUS cash plus debt
If a company’s price-earnings multiple is higher than other companies in the same
sector, then it is least likely that:
Competing companies manage climate risks less efficiently
When valuing a company with discounted free cash flows, the definition of free cash
flow is:
EBITDA – taxes – capital expenditure – increase in working capital.
An analyst is computing the impact of carbon on a company’s financial statements,
using the Credit Suisse HOLT® methodology. They observe that the company emits
20 kilotons of carbon dioxide in a year. The company has a free allowance of 8
kilotons, and the carbon price is £25 per ton. The effective carbon price per emitted
ton is most likely:
£15
Effective carbon price = [(Emissions – free allowance) x carbon price] ¸
Emissions = [(20 – 8) x £25] ÷ 20 = £15
An analyst is computing the impact of carbon on a company’s financial
statements, using the Credit Suisse HOLT® methodology. The cost pass-through is
most likely to be higher if:
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]
An analyst is computing the impact of carbon on a company’s financial statements,
and creating a financial model using the Credit Suisse HOLT® methodology. The
analyst has computed a cost pass-through. How should the income statement
(profit & loss) be affected by the PASS-THROUGH?
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.]
*An analyst is computing the impact of carbon on a company’s financial
statements, using the Credit Suisse HOLT® methodology. The model shows
an “ABATEMENT BUDGET”. This is best defined as:
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.]]
Infrastructure debt is most suited to investors who:
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. ]]
If engagement with sovereign debt issuers is less effective than corporate engagement, one result would be that:
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]]
Green asset-backed securities (ABS) cover many types of asset. Which of the
following categories is the largest of all green ABS issuance to date?
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.]]]
The main objective of the Climate Bonds Taxonomy is:
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.]]
*Which of the following uses of green bond proceeds is the smallest proportion of
total bond issuance?
Industry
[ 2% of the total.]
Compared to an otherwise similar bond from the same issuer, a labelled corporate
bond is most likely to have:
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]]
The climate-aligned bond market is dominated by issuers in which markets?
China and France.
Within the climate-aligned bond market, which sector accounts for the biggest
proportion of the total issuance market?
Transport.
A company issues three bonds: Bond L, which is labelled; Bond U, which is
unlabelled climate-aligned; and Bond X, which is neither. All else equal, the CREDIT RISKS of the three bonds are:
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.
Some bonds are described as use of proceeds or UoP bonds. Strengths of UoP
bonds least likely include which of the following?
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.
*Under the ICMA green bond principles, or GBP, the proceeds of refinanced green
assets:
May be used on other, potentially non-green, assets.
*A sustainability-linked bond is most likely to have what specified financing
requirements in place?
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.]
A company issues a sustainability-linked bond (SLB) that specifies target key
performance indicators (KPIs) to which the bond is linked. If the company fails to
achieve the KPIs, then it is most likely that:
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]
*When considering investing in a transition bond, an analyst is least likely to pay
attention to:
The classification of the activity within a green taxonomy
[Transition bonds are for activities that do not fall within a green taxonomy.]
Funding for climate adaptation and resilience projects is most likely to be from:
Public sector bodies.
The ICMA Green Bond Principles (GBP) specify that a bond issuer should
publish a pre-issuance framework, which includes the following core components,
except for:
Technologies and how they support environmental objectives
Under the Green Bond Principles, GBP, reporting on the use of green bond
proceeds by the borrower is:
Recommended, with public disclosure.
[The GBP is a recommended framework and not mandatory.]
Under the ICMA Green Bond Principles (GBP) recommendations, a POST-issuance
external review on a green bond is least likely to include:
Determination of a green bond rating.
[, by a credit rating agency, is more likely to be pre-issuance]
When analysing sovereign debt across multiple countries, the relationship
between the public sector share of (1) carbon emissions and (2) total spending as a
percentage of GDP is most accurately described as:
Insignificant.
[no relationship]
When considering carbon metrics of sovereign debt, the most appropriate metric
to use would be carbon dioxide emissions divided by:
GDP
When modelling climate scenarios for the purposes of determining climate risks
of sovereign bonds in a large and diverse country, the least relevant information
to be modelled is:
Average risk levels
Bond values are affected by both market interest rates and credit spreads. Which
of the following factors is least likely to impact market interest rates?
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.]
- For each of the following ESG ratings, Select it onto the credit rating agency that
uses the measure.
Credit impact score, CIS: MOODY’S
Green Evaluation: S&P Global
Issuer Profile Score, IPS: Moody’s
Relevance Score, ESG.RS: Fitch Ratings
The connection between a company’s credit rating and its ESG rating is best
described as being:
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).]
- Calculation of PTA is on a linear basis: for instance a 10% GHG overshoot
would lead to a temperature rise 10% above target, in this case 1.8 x 1.10 = 1.98
degrees.
For a portfolio, the calculation uses an unweighted average.
For this portfolio, the average over/undershoot is (%) (10 – 20 – 10 +10 + 25) ÷
5 = 15 ÷ 5 = +3%.
Hence PTA = 1.8 x 1.03 = 1.854 degrees C.
example q - Given the information in the table, what is the total investment that Roberts
should consider from the securities listed?
For a company to be eligible for investment it needs to pass three tests: (1)
supporting EU Taxonomy objectives to at least the extent of the 70% alignment
threshold; (2) do not significant harm to other objectives; and (3) have suitable
safeguarding in place. We are told that the third is satisfactory for all investments.
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
***Given these and the original investments from Roberts’ selection, calculate the
weighted average alignment of the bond sub-portfolio.
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%.
- Roberts decides to create a simple climate ranking, based on the sum of two
scores: (1) an alignment score of 3 for full EU Taxonomy alignment, 1 for partial
alignment (ignoring the 70% threshold), 0 for no alignment; (2) PTA ranking,
with +2 for the best PTA, –2 for the worst, 0 for the others. Which of the following
statements is incorrect?
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
*During her research, Roberts discovers that both companies DD and EE plan to
increase their revenues by 10% with new EU Taxonomy-aligned projects. Were
this to be taken into account by Roberts when undertaking her investment
analysis, it would change her investment decision:
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.
When considering the types of trigger on a catastrophe (or cat) bond, the trigger
that has the lowest level of transparency is:
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.
** In a catastrophe bond (cat bond) structure, the loss pay out is calculated as
“excess of loss” or XOL, with a description of “a layer equal to $150 million of
losses in excess of a $500 million deductible”. During the life of the bond, a $600
million loss is incurred. Losses to the bondholders on their principal is:
$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.
Under the TPI assessment of management quality level, the range of levels is
from:
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”).
**For a science-based decarbonisation target to be calculated on an absolute
contraction basis, the reduction is most likely to be:
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.]
An oil and gas company is likely to publish its assumptions regarding future
carbon and commodity prices:
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.]
Consider the two types of funding (1) sustainable/green bond financing and (2)
public funding via countries’ NDCs. The majority of such climate-based funding
is on:
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.]
The type of bond most likely to be off-balance sheet for the issuer is a:
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]
Which of the following bond types are least likely to be labelled as “use of
proceeds” or UoP? Select TWO of the following
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.]
The initial motivations for creating insurance-linked securities were which of the
following? Select TWO of the options
Insurers needed to spread their risk further.
Investors had a new opportunity for improved diversification.
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
The market for insurance-linked securities began in which insurance sector?
Property and casualty.
, as this is where the extreme losses (e.g. after a
hurricane) existed.
When measuring greenhouse gas emissions relating to sovereign bonds, there are
two methods, the government expenditure approach and the territorial approach.
Which of the following descriptions is least accurate?
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]
A key difference between the performance of ILS (insurance-linked securities)
during Hurricane Katrina and during the Global Financial Crisis related to:
Correlations with other assets.
The returns on ILS (insurance-linked securities) is likely to be lowest when:
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]
Some funds of insurance-linked securities are seeking SFDR Article 8 status. One
key challenge they are facing relates to:
The degree of look-through.
[
In a typical catastrophe bond (cat bond) structure, collateral is provided by assets
of stable value. This collateral is most likely to be owned by:
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.]
In a typical catastrophe bond (cat bond) structure, the return to the investors, in
the absence of an insured loss, is most likely to be calculated as:
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.]
- In a typical catastrophe bond (cat bond) structure, built around a specific insured
loss scenario, the purpose of the special purpose vehicle, or SPV, is least likely:
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]]
A reinsurance company wishes to issue a $2 billion catastrophe (or cat) bond. If a
typical cat bond is no bigger than $500 million, then it is most likely that the
sponsor will issue:
Multiple tranches with different risk and return profiles
A reinsurer has issued a catastrophe (cat) bond to investors. Which of the
following is least likely to be a trigger for a pay out to the sponsor?
Actual losses declared by the investors.
ch 8 - Compared to listed securities, private market investments are most likely to have
a higher level of:
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]
In a private equity partnership, if a limited partner wishes to exit early, it is most
likely that:
They will need PERMISSION from both general and limited partners to sell their
holding.
When considering venture capital investment into climate tech, the sector receiving
the biggest proportion of investment is:
MOBILITY and transport
When a private equity firm is identifying a potential new investment, the general
partners compile a private placement memorandum (PPM) for the limited partners.
This least likely includes external input from:
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).]
The general partners of a large mature private equity firm have set up an ESG
committee. It is most likely that the committee contains, in addition to the
general partners:
Limited partner expert representatives.
*The PRI-sponsored Initiative Climate International is best described as a
collaboration of:
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]
The requirement for investors to publish a principal adverse impact statement (PAIS)
is most prominently required by:
SFDR
Which of the following areas of a company’s corporate financial reporting is least
directly affected by the company replacing a machine with a more efficient one?
Revenue growth.
Debtholders can be particularly effective at engaging with companies because:
The debt NEGOTIATION process provides time for engagement.
Private debtholders can have more effective post-investment engagement than public bondholders for reasons excluding which of the following:
The negotiation process allows for the involvement of outside parties, including
climate specialists.
[pre-investment engagement and not post-investment]
In the private debt market, which form of managing debt is least likely to generate
tangible climate-related results?
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.]
In recent years green loans and sustainability-linked loans (SLLs) have grown by
the largest monetary amount in:
Europe, Middle East and Africa.
[europe largest]
A company is most likely to generate funding via a sustainability-linked loan rather
than a use-of-proceeds instrument because:
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
In the sustainability-linked bond and loan market for non-financial corporate
issuers, the least prominent sector is:
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]
Sustainability-linked bonds and loans (SLBs, SLLs) typically have embedded
adjustments determined by whether key performance indicators (KPIs) are met
or not. If potential adjustments are considered as “good” if KPIs are achieved
or “bad” if they are not achieved, then, from the issuer’s perspective,
adjustments are most likely to be:
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]
An investor is comparing the purchase of debt in private and public companies, the
due diligence required beforehand, and the impact on portfolio metrics. Private
company debt least likely differs from public company debt in that:
It requires a different carbon intensity calculation.
Under the recommendations of the Green Loan Principles, GLP, information on the
use of green loan proceeds should be reported by the borrower to the lender:
Annually until fully drawn down, then updated as necessary.
Under the Sustainability-Linked Loan Principles, SLLP, reporting on sustainability
performance targets, or SPTs, by the borrower should be:
To the lender, with wider publication encouraged
A sustainable farmer wishes to offset the risk of adverse weather affecting her
revenue, without excessively reducing revenue in the event of favourable weather.
Her best use of derivatives would be:
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.]
A bank has provided debt capital to a company running a sustainable project. If
they wish to hedge their exposure to the risk of the project not generating sufficient
cash flow, the bank’s most appropriate derivative contract to use would be a/an:
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]
If a commodity derivative specification is narrowed, then the impact is most likely
to be that:
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]
A long-term investor owns shares in a solar panel manufacturing business. They
are most likely to use derivatives to hedge:
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]
Of all the carbon pricing schemes that exist around the world, the largest by
volume is in:
China
The least accurate description of a carbon tax is that:
Emissions are capped at a predetermined level.
Which of the following statements regarding a social cost of carbon, SCC, is least
accurate?
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.]
When considering the impact of introducing a carbon pricing tax on the supply and
demand for oil and coal, which of the following statements is least accurate?
The impact of other taxes on petrol causes prices to rise in proportion by less than
that of coal
When describing internal carbon pricing, a carbon fee can most accurately be
described as differing from a shadow price in that a carbon fee:
Is more complex to implement
A company that operates wind-powered electricity generation has very low direct
emissions but a varying supply chain. The company is in a country that introduces a
mandatory emissions trading system. It is least likely that which of the following will
increase?
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]
Demand for carbon offsets least likely comes from which of the following sources?
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.]
voluntary carbon markets supply of offsets - verification must be independent - outside the project
Which of the following is the most accurate description of a challenge
relating to voluntary carbon markets?
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.]
A company wishes to create an environmental impact using the carbon offsets
market. The company is most likely to achieve this by:
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.
ch9 = An impediment to a property owner from retrofitting or refurbishing a
property to make it more carbon efficient is most likely to be:
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.]
Under the vision of the World Green Building Council, for a building to be
“net zero OPERATIONAL carbon” LEAST likely requires:
End of life plans to be in place to avoid embodied carbon.
*Under the vision of the World Green Building Council, buildings should be
“net zero operational carbon” by:
2050 with 40% reduction by 2030.
Under the vision of the World Green Building Council, are carbon offset
schemes allowed to be used for either “net zero operational carbon” or “net
zero embodied carbon”? Carbon offset schemes may be used for net zero:
Operational carbon and embodied carbon
Including upstream power generation, emissions from buildings globally
have, in recent years:
Increased, with demands for cooling and appliances and increased floor area
outweighing the reduction in buildings’ energy intensity
When computing the carbon footprint of a tenanted real estate portfolio, it is
least accurate to state that which of the following components is
predominantly Scope 3 emissions?
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.]
When considering carbon emissions from the real estate investment lifecycle,
which of the following are least likely to be considered a component of
operational carbon?
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.]
*The EDGE certification (Excellence in Design for Greater Efficiencies) has
been developed by:
The International Finance Corporation, IFC.
[This is being used for green
bond issuance and IFC financing in many countries.]
Which of the following schemes are market-led, as opposed to regulatory,
for reducing property transition risk?
I: NABERS, Australia.
II: Green Mark, Singapore.
III: Energy Performance Certificates, UK.
IV: Excellence in Design for Greater Efficiencies or EDGE
NABERS and EDGE
[both voluntary]
There are many green building certification schemes around the world.
Criticisms of these schemes LEAST likely include that:
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.]
The construction of a net zero carbon building has benefits over the construction
of a less efficient building for reasons that exclude that the net zero carbon
building:
Will have lower construction costs
The largest number of private sector infrastructure project investments
globally is in which area?
Renewable energy generation.
Which of the following statements regarding private infrastructure debt is
LEAST accurate?
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.]
- The series of reports “Green Infrastructure Investment Opportunities”
(GIIO) is produced by which organisation?
Climate Bonds Initiative.
Between now and 2040, the largest gaps in global infrastructure investment (i.e.
what is needed versus what is expected) are in which sectors?
Roads and electricity
In underdeveloped markets, infrastructure investment in the next few decades
is most required for:
Meeting basic needs and enabling economic development.
- For an infrastructure asset to have a “managed adaptive approach” most
accurately means that the asset:
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.]
What climate-based challenge are gabions most likely to be a solution for?
LANDSLIDES
- When managing infrastructure risks using the UN Handbook for Local and
National Governments, at what stage would the risk manager consider whether a
risk is strategic, tactical or operational?
Understand risk context.
*When managing infrastructure risks using the UN Handbook for Local and
National Governments, what is the correct sequence of steps?
Understand context; Identify risk; Evaluate; Manage; Measure
UIEMM
Participants in the GRESB assessments of funds and assets [systematically] incorporate transition
and physical climate risks to what extent?
A minority for both funds and assets.
50% stake in the project -> report 50% emissions as it’s a JOINT VENTURE
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
If QP computes carbon emissions of the SG investment in accordance with the
guidance of the World Green Building Council, then carbon offsets would be
permitted as part of:
Operational carbon and embodied carbon.
To what extent are real estate investment trusts, or REITs, permitted to issue
debt?
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.]
Under the Climate Bond Initiative threshold requirements for green bonds, which
of the following buildings is least likely to be deemed ineligible for financing?
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.]
If a US local government funds an infrastructure project using municipal bond
financing, then the least likely feature of the bond is that:
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]
Many green US municipal bonds finance public projects under use of proceeds
(UoP) categories. These categories include the following, except for:
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.]
Which of the following statements regarding infrastructure REITs (real estate
investment trusts) is least accurate?
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.]
Which of the following statements regarding the GLIO/GRESB ESG index is
most accurate?
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.]
ch10 - the extent to which there is a scientific connection between actions of financial
institutions and the real-world outcomes of investee companies is best described as:
Non-existent.
[no scientific evidence linking the actions of investors to real world outcomes.]
The Paris Aligned Investment Initiative Net Zero Investment Framework, or
PAII, identifies two key dimensions. Which of the following are they?
(I) Increasing disclosures.
(II) Decarbonising portfolios.
(III) Investing in climate solutions.
(IV) Engagement with companies and policy-makers.
decarbonising portfolios and investing in climate solutions (II) and (III).
The Paris Aligned Investment Initiative Net Zero Investment Framework, or PAII,
outlines five key principles in the approach that an investor takes to alignment. They
include the following, except for:
Comparability.
The Paris Aligned Investment Initiative Net Zero Investment Framework, or PAII,
has top level framework sections that include the following, except for which one?
Security level. - not a component of PAII
Within the Paris Aligned Investment Initiative Net Zero Investment Framework,
or PAII, which of the following sections falls under the “Asset class level”?
Implementing alignment
[others under ‘external’ or ‘portfolio/fund level]
The Paris Aligned Investment Initiative, or PAII, recommends portfolio level,
top-down reference targets in line with science-based net zero pathways. The
emissions reduction goals are:
(I) Intensity reductions, < 10 year target, Scopes 1 and 2 emissions.
(II) Intensity reductions, < 20 year target, Scopes 1 and 2 emissions.
(III) Absolute reductions, < 5 year target, Scopes 1, 2 and 3 emissions.
(IV) Absolute reductions, < 10 year target, Scopes 1, 2 and 3 emissions
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)
The Paris Aligned Investment Initiative, or PAII, includes the requirement to
set objectives and targets under the “Portfolio / fund level”. These sciencebased net zero pathways should have the following characteristics, except for
which one?
Include sector-specific emission variations for each sector.
[ There are no industry- or sector-specific
objectives at this level. - PAII PORTFOLIO/FUND level]
The Paris Aligned Investment Initiative, or PAII, includes a description of strategic
asset allocation (SAA) at the portfolio level. Key recommendations include the
following, except for which one?
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]]
The Institute for Climate Economics, or I4CE, has a framework supporting
financial institutions aligning with the Paris Agreement. The three key requirements are as follows, except for:
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.
