Chapter 10

Question 1

What is the FCA’s anti-green washing rule?

Answer 1

Applies to all FCA authorised firms making sustainability-related claims about their products and services.

Question 2

How can asset owners develop their position on climate change?

Answer 2

By following guidance from the Pensions and Lifetime Savings Association (PLSA), which also produces a Stewardship Checklist. This checklist includes a defined set of agreed investment beliefs and how to monitor a scheme’s investment policies.

Question 3

What does the PRI say asset owners should require of investment managers?

Answer 3

1. Integrate ESG issues into investment research, analysis, and decision making
2. Implement effective stewardship policies
3. Engage policymakers
4. Report on actions taken and outcomes achieved

Question 4

What is asset liability management?

Answer 4

Similar to SAA, but considers factors such as equities being a hedge against inflation or fixed income being less volatile

These assumptions are impacted by climate

Question 5

The Society of Actuaries consider which 3 aspects of measuring climate risk exposures in portfolios?

Answer 5

1. Carbon risk
2. Climate change risk under scenario-based models
3. Stranded asset risk

Question 6

Name 3 popular investment frameworks

Answer 6

1. PAII/IIGCC NZIF
2. Investment Association (IA): the Responsible Investment Framework
3. Institute for Climate Economics (I4CE) Framework

Question 7

Two key dimensions of NZIF?

Answer 7

Decarbonising portfolios in line with net zero
Increasing investment in climate solutions

Question 8

5 principles of NZIF?

Answer 8

Impact
Rigour
Practicality
Accessibility
Accountability

Question 9

Which targets does NZIF suggest?

Answer 9

Top down: emissions intensity and allocation to climate solutions
Bottom up: % alignment and minimum coverage for engagement (or alignment)

Question 10

What does the IA’s Responsible Investment Framework call on investment managers to do?

Answer 10

Make commitments to:
1. Engage companies
2. Support asset owners in communicating how they want asset managers to incorporate climate
3. TCFD disclosure
4. Link to initiatives on Paris alignment
5. Support work of FCA/PRA Climate Financial Risk Forum
6. Support creation of investable opportunities such as green gilts

Question 11

What does the I4CE framework say?

Answer 11

Alignment of portfolios should be:
- integrated into overall investment strategies
- integrated into operational frameworks and procedures
- focused on new activities while covering existing portfolios

Question 12

Disadvantages of climate improvers approach?

Answer 12

Restricts investable universe to those companies disclosing the metric selected and have been doing so for several years to judge improvement

Question 13

Disadvantage of best in class?

Answer 13

Valuation premium already baked in

Question 14

What is the tilting portfolio exposure strategy?

Answer 14

Weighting climate leaders more but still investing in all. Often passive.

However, may be seen as weaker if no exclusions at all to manage greatest risks

Question 15

Disadvantages of thematic investing?

Answer 15

Little diversification
Hard to benchmark
Overcrowding in specific areas such as clean energy

Question 16

How does the Global Impact Investing Network (GIIN) define impact investing?

Answer 16

1. Intentionality
2. Financial returns - not philanthropy
3. Range of asset classes - can be any
4. Impact measurement and reporting

Question 17

What is the European Benchmark Regulation and its relevant climate delegated acts?

Answer 17

Contains ESG disclosure requirements for all investment benchmarks in addition to the EU Climate Transition Benchmark and the EU Paris-aligned Benchmark.

Question 18

What does the EU aim to achieve on climate benchmarks?

Answer 18

Comparability
Took for investment strategy
Transparency
Preventing greenwashing

Excludes current and interest rate benchmarks

Question 19

Benchmark provides must do what under EU benchmark legislation?

Answer 19

Outline how methodology Akins to Paris agreement. And providers should endeavour to provide one or more EU Climate Transition Benchmarks

Question 20

Benchmarks using EU CTP or PAB labels must?

Answer 20

Adhere to strict controls, e.g. 7% YoY reduction and cannot breach for 2 years in a row or fails to reach targets 3 times out of 10 years

Only cover equities and corporate fixed income

Question 21

How can the applications of indices be categorised?

Answer 21

1. Policy benchmark to guide asset allocation
2. Performance benchmark
3. Financial instruments can leverage benchmark (e.g. ETFs or derivatives)
4. Engagement tools. E.g. index ratings

Question 22

What are the 3 key index construction steps?

Answer 22

1. Index (universe) selection
2. Index methodology
3. Index governance

Question 23

Which indexing approach yields lower tracking error?

Answer 23

Optimisation over reweighting

Question 24

Challenges with green bond indices?

Answer 24

Lack of diversification and low liquidity given still emerging asset class

Question 25

How is PAB structure than CTB?

Answer 25

• has fossil fuel exclusion thresholds
• 50% versus 30% co2 intensity reduction versus universe
• much better much better green-brown ratio than universe

Both must have scope 1-3 disclosure at company level, and science based pathways for each company

Question 26

Global food production accounts for?

Answer 26

33% of global emissions
50% of habitable land use
80% of deforestation