Ch 3 Environment

Question 1

3.1.1 Explain key concepts relating to Climate Change from an evidence-based perspective, including: climate
change; climate change mitigation; climate change adaptation and resilience measures.

Question 2

3.1.2 Explain key concepts relating to other Environmental issues from an evidence-based perspective,
including: pressures on natural resources, including depletion of natural resources, water, biodiversity
loss, land use and marine resources; pollution, waste and a circular economy.

Question 3

the environmental issues covered will include:

Answer 3

For the purposes of this syllabus, the
environmental issues covered will include:

A. climate change;
B. pressures on natural resources (including water, biodiversity, land use and forestry, and marine resources); and
C. pollution, waste and a circular economy

Question 4

What do natural resources cover?

Answer 4

For the purposes of this
syllabus, natural resources cover:
▶ fresh water;
▶ biodiversity loss;
▶ land use; and
▶ forestry and marine resources.

Question 5

What is the blue economy?

Answer 5

the blue economy is the “sustainable use
of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean
ecosystem”

Question 6

What is
The circular economy?

Answer 6

The circular economy is an economic model that aims to avoid waste and to preserve the value of resources
(raw materials, energy and water) for as long as possible

Question 7

What are the three principles that The circular economy is based on?

Answer 7

The circular economy is based on three principles:
1. design out waste and pollution;
2. keep products and materials in use; and
3. regenerate natural systems.

Question 8

What are (climate) transitional risks?

Answer 8

transitional risks are climate risks and trade-offs associated with action (climate friendly)
– as the world shifts towards a low-carbon economy.

Question 9

Physical risks and
Transition risks

Answer 9

Physical risks
(Extreme weather events and gradual
changes in climate)

Transition risks
(Policy, technology, consumer
preferences)

Question 10

What are the 3 scopes of GHG emissions?

Answer 10

in terms of GHG emissions, the initial focus has been on
direct emissions from core operations (‘Scope 1’
emissions) and
purchased energy (‘Scope 2’).
emissions produced by suppliers and customers (‘Scope 3’ emissions).

Question 11

What is the long-term goal of Paris agreement?

Answer 11

Paris agreement’s long-term goal is to keep the increase in global average temperature to well below 2°C (3.6°F)
above pre-industrial levels, and to limit the increase to 1.5°C (2.7°F)

Question 12

What is the goal of EU taxonomy?

Answer 12

EU taxonomy aims to significantly reduce the risk of green-washing financial products by providing a classification system to determine whether an economic
activity is environmentally sustainable.

Question 13

What are the six environmental objectives relates to EU taxonomy?

Answer 13

Inclusion in the taxonomy is restricted to activities that contribute to at
least one of the six environmental objectives:
1. climate change mitigation;
2. climate change adaptation;
3. sustainable use of protection of water and marine resources;
4. transition to a circular economy, waste prevention and recycling;
5. pollution prevention and control; and
6. protection of healthy ecosystems

Question 14

How companies should report climate change risks and opportunities?

Answer 14

Task Force on Climate-related Financial
Disclosures (TCFD)

recommendations for how companies should report, structured around four thematic areas: GSRM
1. governance;
2. strategy;
3. risk management; and
4. metrics and targets

Question 15

What is the primary objective of the EU Taxonomy?
(a) Clear labelling of the use of proceeds for green bonds.
(b) An EU-wide classification system of sustainable activities.
(c) A classification of what ‘green’ activities states can finance domestically without breaching
competition rules.
(d) A classification system of the Scope 1, 2, and 3 emissions associated with the activities of EU
companies.

Answer 15

(b) An EU-wide classification system of sustainable activities.

Question 16

What are the roles for climate benchmarks?

What are the two main types of benchmarks?

Answer 16

Climate benchmarks play an important role in investments, serving – as their name suggests – as a comparator to measure the performance of investments (in the case of actively managed funds), or as a target for the construction of investment solutions, which aim to replicate (or ‘track’) the composition of certain widely used benchmarks.

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

Question 17

What do Transition risks include?

Answer 17

Whereas physical risks stem primarily from inaction on climate change, there are also climate risks and
trade-offs associated with action – the so-called transitional risks.

Transition risks are multiple in nature, including:

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

(Reading 3.2, LO 3.1.3)

does not include Geopolitical risk

Question 18

Meteorological events

Geophysical events

A physical risk of climate change is largely noted as being more frequent severe weather events

Climatological events

Climatological.
Meteorological.
Hydrological.
Geophysical.

Answer 18

Tropical, extratropical, convective, and local storms are all examples of meteorological events.
(Reading 3.2, LO 3.1.3)

Earthquakes, tsunamis, and volcanic eruptions are all examples of geophysical events.

A physical risk of climate change is largely noted as being more frequent severe weather events,
such as flooding, droughts, and storms.

Extreme temperatures, droughts, and wildfires are all examples of climatological events.

Question 19

four thematic areas should report

The Task Force on Climate-Related Financial Disclosures (TCFD) noted that companies should report climate matters structured around four thematic areas.

Answer 19

The Task Force on Climate-Related Financial Disclosures (TCFD) noted that companies should report climate matters structured around four thematic areas, which include:

governance,
strategy,
risk management, and
metrics and targets.

Alternatives are not part of this list of recommendations.
(Reading 3.3, LO 3.1.4)

Question 20

two main approaches for Responding to climate change

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

reducing & adapting

Answer 20

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

Question 21

What do
Natural resources cover?

What caused the
Governments and businesses are having to deal with increased pressure on natural resources?

Answer 21

Natural resources cover:
▶ fresh water ▶ biodiversity loss; ▶ land use; and ▶ forestry and marine resources.
Natural resources also include non-renewable resources (such
as fossil fuels, minerals and metals), which cannot be replenished quickly enough to keep up with their consumption.

Governments and businesses are having to deal with increased pressure on natural resources, caused by:

▶ population growth;
▶ health improvements leading to people living longer;
▶ economic growth; and
▶ the accompanying increased consumption in developed and emerging economies.

not by demand for electronics

Question 22

What is The circular economy?

What are the three principles that
The circular economy is based on?

Linear Economy –> Reuse Economy –> Circular Economy

Answer 22

The circular economy is an economic model that aims to
avoid waste and to
preserve the value of resources (raw materials, energy and water) for as long as possible.

It is an effective model for companies to assess and manage their operations and resource management (see Figure 3.5) as it is an alternative approach to the use-make-dispose economy.

The circular economy is based on three principles:
1. design out waste and pollution;
2. keep products and materials in use; and
3. regenerate natural systems.

Raw-Mat – Production – Use – Non-recyclable-waste
Raw-Mat – Production – Use – Recycling

Question 23

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

What do environmental issues cover (include)?

Answer 23

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

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

not freshwater withdrawals yet

Environmental issues covered will include:
A. climate change;
B. pressures on natural resources
(including water, biodiversity, land use and forestry, and marine resources); and
C. pollution, waste and a circular economy.

Question 24

What material financial risks will
Companies with exposure to deforestation in their supply chains may face?

What contributions can companies make if they shift their business practices to adopt more sustainable land management approaches?

Answer 24

Companies with exposure to deforestation in their supply chains may face material financial risks, such as:
▶ supply disruption; ▶ cost volatility; and ▶ reputational damage.

By contrast, shifting business practices to adopt more sustainable land management approaches contributes to:

▶ agricultural and economic development, both locally and globally;
▶ the health and stability of forests and ecosystems,
and the continued provision of ecosystem services at an increasing scale; and
▶ the reduction of GHG emissions from deforestation and degradation.

Question 25

What is the first international convention to set targets for emissions of the main GHGs?

What are the goals for the Paris Agreement?

Answer 25

The Kyoto Protocol was adopted in 1997 and became effective in 2005. It was the first international convention to set targets for emissions of the main GHGs.
It established top-down, binding targets, but only for developed nations, recognising the historical links
between industrialisation, economic development and GHG emissions.
——————————————-
At the 21st Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) in Paris in 2015 (COP21), a landmark agreement was reached to mobilise a global response to the threat of climate change in the form of the Paris Agreement.

The agreement’s long-term goal is to
keep the increase in global average temperature to well below
2°C (3.6°F) above pre-industrial levels, and to
limit the increase to 1.5°C (2.7°F),
since this would substantially reduce the risks and effects of climate change.

Question 26

What is the polluter pays principle?

What are the most common types of carbon pricing?

What is Emission trading system?

What is carbon taxation?

Answer 26

Putting a price on carbon emissions is viewed as one of the most effective methods of tackling climate change: this is often called the polluter pays principle.

There are many types of carbon pricing; the most common are
the emission trading system (ETS) and
carbon taxes, roughly corresponding to quotas and tariffs in international trade.

Emission trading system
An ETS is a system based on the exchange of permits for emission units, where actors who exceed their emissions limits are required to buy permits from those that have emitted less. The overall quantity of
emissions is fixed, and market mechanisms are used to set their price.

Carbon taxation takes a different approach by directly setting an explicit price on GHG emissions (e.g. per tonne of CO2). This has the advantage of predictability, although the carbon tax rate, alongside the elasticity of demand for different products and the extent to which companies can pass on the carbon costs to their end consumers, will be key determinants of effectiveness.

Question 27

What is the polluter pays principle?

What are the most common types of carbon pricing?

What is Emission trading system?

What is carbon taxation?

Answer 27

Putting a price on carbon emissions is viewed as one of the most effective methods of tackling climate change: this is often called the polluter pays principle.

There are many types of carbon pricing; the most common are
the emission trading system (ETS) and
carbon taxes, roughly corresponding to quotas and tariffs in international trade.

Emission trading system
An ETS is a system based on the exchange of permits for emission units, where actors who exceed their
emissions limits are required to buy permits from those that have emitted less. The overall quantity of
emissions is fixed, and market mechanisms are used to set their price.

Carbon taxation takes a different approach by directly setting an explicit price on GHG emissions (e.g. per
tonne of CO2). This has the advantage of predictability, although the carbon tax rate, alongside the elasticity of demand for different products and the extent to which companies can pass on the carbon costs to their end consumers, will be key determinants of effectiveness.

Question 28

What are required for Limiting global warming?

Answer 28

Limiting global warming has occasionally been compared with the case of an overfilling bathtub, which requires both turning off the taps and draining the tub – in other words,

reducing both the flow of new emissions and the stock of existing GHGs in the atmosphere as close to zero as possible.

The challenge is that, even if new emissions were to stop completely, some further global warming and associated changes to the climate are likely to be irreversible due to the already accumulated GHGs. One concerning possibility is that the world might be on course to breach certain ‘tipping points’. Like a sand pile toppling when just a few more grains are added, this notion is used to describe abrupt – and potentially irreversible – changes to the Earth system in response to a relatively small change in warming.

Question 29

What are examples of sectors with particularly complex and/or high-risk supply chains?

What are some of the main environmental risks in the supply chain?

Answer 29

Examples of sectors with particularly complex and/or high-risk supply chains include:
▶ oil and gas; ▶ mining; ▶ beef; ▶ cocoa; ▶ cotton; ▶ fisheries; ▶ leather; ▶ palm oil; ▶ agriculture; and ▶ forestry

Some of the main environmental risks in the supply chain include:

▶ material toxicity and chemicals; ▶ raw material use;
▶ recyclability and end-of-life products; ▶ GHG emissions;
▶ energy use; ▶ water use and wastewater treatment;
▶ air pollution; ▶ biodiversity; and ▶ deforestation.

Question 30

What is Climate change?

What dimensions does climate change involves?

Answer 30

Climate change is defined as a change of climate, directly or indirectly attributed to human activity, that alters the composition of the global atmosphere and which is, in addition to natural climate variability, observed over comparable time periods.

Climate change involves many different dimensions, including:
▶ science; ▶ economics; ▶ society; ▶ politics; and ▶ moral and ethical questions.

It is an issue with local manifestations (e.g. extreme weather events, such as more frequent and/or more intense tropical cyclones) and global impacts (e.g. rising global average temperatures and sea levels), which are estimated to increase in severity over time.

The main man-made driver of the warming of the planet is rising emissions of greenhouse gases (GHGs). They form a layer in the atmosphere that prevents increasing amounts of the heat reaching the Earth from the Sun from being radiated back into space.
Carbon dioxide (CO2) is the most significant contributor to the warming effect, because of its higher concentration in the atmosphere, which is at levels not seen since before Homo sapiens first appeared.

Question 31

What is the ultimate goal of
analyzing different environmental factors for a particular company or sector?

Answer 31

To determine the result of the worst-case scenario given the assessment of scenario risks, the possible impact on financial ratios, and what the company can do to plan for the future.

Explanation
Analyzing different environmental factors for a particular company helps to show how the selected environmental factors may impact the financial performance of infrastructure organizations. This elaborates on the potential impact pathways from the selected environmental factors to specific financial ratios or inputs into financial models. These potential pathways can help the company make long-term decisions and plans for the future.

(Reading 3.6, LO 3.1.7)

Question 32

What are two types of MATERIAL ENVIRONMENTAL FACTORS FOR INFRASTRUCTURE

Answer 32

MATERIAL ENVIRONMENTAL FACTORS FOR INFRASTRUCTURE

A) Quantifiable
Degradation and pollution: 1. Air (health) & water pollution; 2. Air (climate) – GHG emissions
Resource efficiency – sourcing, use, treatment:
3. Energy (E); 4. Water (E); 5. Solid waste (E); 6. (Raw) Materials and supply chain (E/S)

B) Difficult-to-quantify
7. Biodiversity and habitat (E) 8. Physical climate change impacts (E)

Question 33

What is CLEANTECH?

Answer 33

the term cleantech as an umbrella term “encompasses the
investment asset class, technology, and business sectors
which include clean energy, environmental, and sustainable or green, products and services”.

The term CLEANTECH became increasingly popular approximately 20 years ago.

Question 34

CICERO Shades of Green

Answer 34

Dark green wind energy
Medium green plug-in hybrid
Light Green efficient inv for fossil fuel tech

Brown on the shades of green scale used by CICERO, is allocated to projects and solutions that are in opposition to the long-term vision of a low-carbon and climate resilient future.
Example: New Infrastructure for coal

Question 35

What is the goal of the process of evaluating the sustainability of infrastructure assets?

How and where to
integrate the results of a comprehensive ESG assessment?

Answer 35

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

Question 36

What are the investment vehicles that are use to disburse funds for transition to green growth?

Public sector financing is often blended with funding from multilateral development finance institutions in developing countries and disbursed through investment vehicles.

Answer 36

Public finance is a key policy instrument to both incentivize and enable the transition to green growth.

Domestically, governments are a significant economic actor – commissioning new buildings, roads and
other forms of infrastructure, for example – highlighting the importance of aligning public procurement
and sustainability. Governments also contribute to international development, with public sector financing often blended with funding from multilateral development finance institutions in developing countries and
disbursed through investment vehicles, such as:

▶ green infrastructure funds
(e.g. the Association of Southeast Asian Nations (ASEAN) Catalytic Green Finance Facility
under the ASEAN Infrastructure Fund);

▶ specialised banks (e.g. Asian Infrastructure Investment Bank); and

▶ funding platforms (e.g. the Tropical Landscapes Finance Facility).

Question 37

What are the two-step process for arriving at a shortlist of environmental factors for which the potential impact of environmental risk on infrastructure financials?

What can the asset-specific ESG due diligence process reveal?

Answer 37

For the purpose of arriving at a shortlist of environmental factors for which the potential impact
of environmental risk on infrastructure financials can be demonstrated, a two-step process was
followed:

1. A longlist of widely recognized environmental factors was derived. The longlist was reduced to a shortlist of environmental factors that are typically among those considered key to an environmental assessment in the context of infrastructure.
2. If, and to what extent, any of the selected environmental factors has a material impact on the infrastructure asset will be revealed
   by the asset-specific ESG due diligence process.

Question 38

What is Scenario analysis?

Answer 38

Scenario analysis is an approach for the forward-looking assessment of risks and opportunities.

Scenario analysis describes a process of evaluating how an organization, sector, country or portfolio might perform in different future states, in order to understand its key drivers and possible outcomes.

Climate-related risk has been identified as one of the most complex macro-existential risks, which is least understood and hardest to quantify.

The TCFD recommends that companies and financial institutions:
“Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C (3.6°F) or lower scenario and, where relevant to the organization, scenarios consistent with increased physical climate-related risks.”

In the current landscape, there is no common set of scenario analysis methodology used by investors. Instead, the types of approaches and models will depend largely on the objectives and scope of the work.

Question 39

Total carbon emissions

carbon emissions INTENSITY

Answer 39

Carbon footprinting can be used to assess, the total carbon emissions associated with a given investee company or portfolio.
The total carbon emissions associated with a given investee company or portfolio recognizes
that investments that may be seen to have a disproportionately high contribution to global emissions may have a higher exposure to future policy interventions on carbon emissions.

Total carbon emissions =
∑ (current value of investment/issuer’s market capitalization) × issuer ’ s Scope 1 and 2 emissions

Alternatively, investors may wish to track carbon emissions INTENSITY (e.g. emissions scaled in relation to a particular metric such as a company’s revenues).

The TCFD recommends that asset owners and managers report the weighted average carbon intensity associated with their investments.

Question 40

What is blue economy?

What 3 things have Investors and policymakers recognized?

Answer 40

The World Bank defines blue economy as the
“sustainable use of ocean resources for economic growth,
improved livelihoods, and jobs while preserving the health of ocean ecosystem”.

It essentially relates to a broader perspective on
sustainable economic and
social activity associated with the world’s oceans and coastal areas.

Investors and policymakers are now beginning to recognize:

▶ the growth prospects for the ocean economy;
▶ its capacity for future employment creation and innovation; and
▶ its role in addressing global challenges.

Question 41

What is Carbon footprinting?

What can an investor do for Measuring the carbon footprint of a portfolio?

Scope 1, 2 & 3 emissions

Answer 41

Carbon footprinting is one of the most common approaches used by companies and investors.

A portfolio carbon footprint effectively measures carbon emissions and intensity associated with operations of the companies in a portfolio.

Measuring the carbon footprint of a portfolio means that an investor can:
▶ compare it to global benchmarks;
▶ identify priority areas and actions for reducing emissions; and
▶ track progress in making those reductions.

The use of carbon footprinting applies the international accounting tool of the GHG Protocol Standards.

While Scopes 1 and 2 cover direct emissions sources (such as the fuel used in company vehicles and purchased electricity),
Scope 3 emissions cover all indirect emissions arising from the activities of an organisation. These include emissions from both suppliers and consumers.

Question 42

Why evaluating an investment’s environmental risk at the country level is important?

Answer 42

A country’s environmental regulations, emission targets and their enforcement may vary in emphasis across different jurisdictions. Often, investments may be multi-jurisdictional and hence, several country-specific considerations and regulations will need to be factored into the valuation of a company based on the country it is located or where its operations lie.

Disclosure and transparency of environmental data will also vary by region – for example, companies in emerging markets tend to have fewer comprehensive disclosures.

Country analysis is relevant not just to corporate securities, but also to government bonds. Climate change, air quality, water stress, vulnerability to natural hazards and food security can have immediate and direct impact on a sovereign’s ability or willingness to pay (credit risk), and/or ESG profile.

For example, the consistent deterioration in a country’s rating scores on food security and high vulnerability to climate change could lead an asset manager to reduce their position despite the bond’s scarcity and attractive relative value, but – conversely – they can also hold an overweight position based on a view that starting with a relatively low environmental score is acceptable, when reforms and a green economy push from the government are expected to lead to ESG score improvements.

Question 43

What are Initiatives that typically require
public and private sector funding with high environmental impacts?

Answer 43

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

Question 44

IDENTIFICATION OF ENVIRONMENTAL RISKS AND IMPACTS AT COMPANY OR PROJECT LEVEL

Risks vs Potential Impacts

Answer 44

RISKS POTENTIAL IMPACTS

Release of air pollutants (air emissions) → Pollution of air, land and surface water

Release of liquid effluents or contaminated
wastewater into local water bodies or improper
wastewater treatment → Surface water pollution

Generation of large amounts of solid waste and
improper waste management → Pollution of land, and ground and surface water

Improper management of hazardous substances → Contamination of adjacent land and water
Excessive energy use → Depletion of local energy sources and release of
combustion residuals leading to air pollution
Excessive water use → Depletion of water resources
High or excessive noise levels → Negative effects on human health and disruption of local wildlife
Improper or excessive land use → Soil degradation and biodiversity loss

Question 45

What is The Helsinki Principles?

Answer 45

The Helsinki Principles,
signed by a number of finance ministers around the world, encourage signatories to

“take climate change into account in macroeconomic policy,
fiscal planning,
budgeting,
public investment management,
and procurement practices.”

Question 46

What is Emissions trajectories?

What is Temperature alignment?

Answer 46

Emissions trajectories can be used to assess the required reductions to reach a stated goal
(for example, net zero carbon by 2050) and
compare the pathways implied by corporate commitments, policies or individual assets
(for example, proposed refurbishments to a building to improve its energy efficiency).

For instance, the Transition Pathway Initiative is an asset-owner-led collaboration, which has developed a publicly available tool that aims to assess companies’ preparedness for the low-carbon transition.

Temperature alignment seeks to compare the climate profiles of companies, sectors or portfolios against a benchmark of global temperature.
As global ‘carbon budgets’ impose constraints on the amount of emissions that are compatible with maintaining a reasonable chance of global temperatures not exceeding certain levels, this allows a degree of quantification of the implied future temperature levels associated with a company or portfolio.

For example, Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, estimates its portfolio of equities and bonds are aligned with a warming trajectory of around 3°C (5.4°F).