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CFA Climate Investing > Chapter 3 > Flashcards

Chapter 3 Flashcards

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1
Q

What is the European Green Deal?

A

Fit for 55 package aims to deliver 55% (updated to 57% in 2022) GHG emissions reduction by 2030

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2
Q

What UK real economy strategies have been produced after targeting net zero by 2050?

A

Industrial Decarbonisation Strategy
And
Net Zero Strategy

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3
Q

Which organisation sponsors the TCFD?

A

The Financial Stability Board (FSB)

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4
Q

Which organisation has since adopted TCFD recommendations after it was disbanded?

A

International Sustainability Standards Board (ISSB)

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5
Q

When was the UNFCCC ratified and what does it aim to achieve in global policy?

A

1994.
1. Recognise the problem and act in the face of uncertainty
2. Set a goal
3. Burden sharing
4. Monitor progress

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6
Q

When was the Kyoto protocol adopted and ratified, and what did it do?

A

1997 and 2006. Set the first commitment period for specified developed countries to achieve emissions reductions, 5% reduction 2008-2012

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7
Q

What is the second commitment period?

A

Doha amendments in 2012 introduced second commitment period for an 18% reduction by 2020.

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8
Q

What are Annex 1 parties?

A

Mostly OECD countries who are predominantly responsible for historic GHG emissions and were expected to do the most under the UNFCCC

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9
Q

What are the 3 flexible mechanisms in the Kyoto Protocol?

A
  1. Purchase of emissions credits through Article 17
  2. Support joint implement of projects in other developed countries to claim Emissions Reduction Units - Article 6
  3. Support projects in developing countries through the Clean Development Mechanism - Article 12
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10
Q

What was the Kyoto compliance mechanism?

A

Every tonne of emissions exceeded in current commitment period would result in 1.3 tonnes being deducted from country budget in next commitment period

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11
Q

When was the Paris Agreement?

A

COP21 in 2015

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12
Q

What did the IPCC’s 6th Assessment Report identify?

A

World was approaching irreversible levels of climate change with catastrophic impacts rapidly becoming inevitable. Now or never to take drastic action.

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13
Q

The SDGs are included in which UN Resolution?

A

The 2030 Agenda for Sustainable Development

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14
Q

NDCs are ? And ?

A

Self-determined and non-binding

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15
Q

Which organisation produces the Emissions Gap Report?

A

UNEP

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16
Q

Which EU strategy governs SFDR, CSRD etc.?

A

The EU action plan for financing sustainable growth

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17
Q

The EU’s Startegy for financing the transition to a sustainable economy focuses on which 4 areas?

A
  1. Transition finance, e.g. Taxonomy
  2. Inclusiveness, e.g. measure for SMEs and green loans/mortgages
  3. Resilience and contribution of the financial sector - e.g. double materiality
  4. Global cooperation
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18
Q

What does the UK’s Climate Change Act require?

A

Climate Change Risk Assessment report every 5 years and a National Adaptation Programme

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19
Q

What does the UK’s Ten point plan for a green Industrial Revolution require on green finance?

A

Mandatory reporting across most of the economy by 2025

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20
Q

What are the 5 key objectives of the UK Green Finance Strategy?

A
  1. Uk financial services growth and competitiveness
  2. Investment in the green economy
  3. Financial stability
  4. Incorporation of nature and adaptation
  5. Alignment of global financial flows with climate and nature objectives
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21
Q

What are the US’ top 2 commitments?

A

50-52% emissions reduction by 3030 (NDC) and carbon-free electricity by 2035

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22
Q

What are the two key Biden administration pieces of legislation?

A

The Infrastructure Investment and Jobs Act
And
The Inflation Reduction Act

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23
Q

What is the name for the SEC disclosure rule, subject to agreement?

A

The Enhancement and Standardisation of Climate-related Disclosure for Investors

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24
Q

Which insurance company took assesses G7 countries on mitigating and adapting to climate change?

A

Aviva’s Climate-Ready Index

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25
Q

What is China’s NDC and strategy?

A

China aims to reduce CO2 emissions per unit of GDP by 65% by 2030 versus 2005, achieving peak emissions in 2030 and carbon neutrality by 2060. The national agenda is to establish an “ecological civilisation”, which sets five year plans. The current five year plan covers 6 areas of energy development, including construction of 8 large scale clean energy bases, coastal nuclear power, transmission and flexibility, fossil fuel transportation and storage

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26
Q

India’s NDC

A

2070, but worked with world bank to issue green sovereign bonds for renewable energy and electrification of transport

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27
Q

What is the PRI tool for forecasting policy and what does it expect?

A

The Inevitable Policy Response (IPR) and it’s associated Forecast Policy Scenario predict continued acceleration of climate policy through 2025, driven by the 2023 Global Stocktake and the 2025 Ratchet for NDCs. These policies will be increasingly forceful and abrupt. Net zero CO2 expected for 2060, and 2080 for all GHGs. Temperatures will peak at 1.7-1.8 in the 2030s

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28
Q

What does the PRI IPR FPS expect for India’s NDC? And what about several non OECD countries?

A

It will be brought forward by 5 years
Some countries will miss NDCs by several years due to poor progress so far

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29
Q

Carbon prices are expected to have a stronger role where?

A

In developed markets

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30
Q

What are the key challenges identified by the PRI IPR FPS analysis?

A

50% of policy gap relates to coal power in India and China
Forecast requires action from countries not supportive of climate agenda, e.g. Saudi Arabia and Russia
Competition for land use

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31
Q

What did the Paris Agreement call for on adaptation?

A

A global goal on adaptation. COP27 tried to do this via 30 targets and at COP28 the loss and damage fund was established.

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32
Q

What does the national adaptation plan (NAP) process do?

A

Enables UNFCCC parties to formulate and implement plans as a means of identifying medium- and long-term adaptation needs, and implementing strategies to address them.

33
Q

In the EU, why may carbon prices be more difficult to implement than ETS?

A

Unanimous decision required versus qualified majority

34
Q

What does a cap and trade scheme say about offsetting?

A

Can offset with credits from countries outside the market

35
Q

What is a market carve out?

A

A producer subsidy requiring buyers to meet a minimum level of low-carbon versions of a product

36
Q

What is the core concept of blended finance?

A

Lower the cost of capital because some risks are better borne by public sector (e.g. policy risks or currency risks ) and others by private sector

37
Q

The EU taxonomy is mapped to?

A

NACE codes

38
Q

What are the key components of taxonomies?

A

Objective - single or multiple
Scope - activity
Scope - users

39
Q

What are the 2 taxonomy approaches for identifying green technologies?

A

Technical screening criteria - e.g. lower then X CO2 intensity to 2025 for vehicles (used by EU and Climate Bonds Initiative)
Versus
White list based - directly specifies which technologies are eligible or not (e.gx China)

40
Q

Which NGO provides what guidance on bond taxonomy?

A

Climate Bonds Initiative first launched the Climate Bonds Standard in 2011, then releasing the Climate Binds Taxonomt in 2013.

41
Q

The Climate Bonds Standard can be used for assessing what?

A

Debt instruments usually. But recently expanded to assess companies too

42
Q

How is the Climate Bonds Taxonomt structured?

A

Technical screening criteria across 8 categroires (targets, governance, plans etc.). Not all subsectors are advanced enough for certification
Entities are certified as aligned to 1.5C (level 1) or transition (level 2)

43
Q

The EU taxonomy establishes which 6 objectives?

A
  1. Climate change mitigation
  2. Climate change adaptation
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy
  5. Pollution prevention and control
  6. Protection and restoration of biodiversity and ecosystems
44
Q

The EU taxonomy has how many screening criteria?

A

80 climate change mitigation activities, 100 climate change adaptation activities, and DNSH criteria across all 6 environmental objectives

45
Q

The 4 delegated acts of the EU taxonomy will bring in screening criteria for?

A

The remaining 4 environmental objectives, which require:
- substantial contribution to one of the six objectives
- DNSH to any of the others
- meet minimum social safeguards

46
Q

How does he EU taxonomy define substantial contribution?

A

Economic activities contributing substantially based on own performance, or those that enable a substantial contribution by other activities (but must not lock in currently polluting assets)

47
Q

How does the EU taxonomy define a ‘transition’ activity, one way an activity can claim to be making a substantial contribution?

A
  1. No feasible alternative technology
  2. Best in class GHG emissions
  3. Does not hamper deployment of lower carbon alternatives or lead to lock in of carbon intensive assets
48
Q

The EU considers which controversial power sources as transition?

A

Nuclear and fossil gas, but restrictive criteria in place limiting how many projects will be permitted under this

49
Q

What are the EU taxonomy extensions?

A

The EU’s adviser, the Platform for Sustainable Finance (PSF) has outlined an approach to extend the taxonomy and capture more transition activities. This focuses on 1) unsustainable activities that cannot be improved so should promote responsible decommissioning 2) those unsustainable activities that would benefit from finance to transition to an intermediate performance level, 3) intermediate performance improving to stay out of harmful performance, and 4) low environmental impact activities that do not fit other criteria

50
Q

China’s latest taxonomy is the?

A

Green Bond Endorsed Projects Catalogue, consolidated from several taxonomies. It takes a white list approach

51
Q

What has been developed to dismantle the challenge of taxonomy interoperability?

A

The IPSF developed the Common Ground Taxonomy, which is not a taxonomy but a detailed comparison of EU and Chinese taxonomies.

The ISO has also developed its own international standard for green bonds, building on CBI, ICMA, and EU taxonomy. But won’t include nuclear and gas.

52
Q

How does the BoE’s expanded climate mandate affect its work?

A

MPC and bond-buying should consider climate risks
The Financial Policy Committee is responsible for resilience of financial system and is pushing for disclosure. The PRA also requires oversight of regulated banks’ climate risk governance, disclosure, scenario analysis

53
Q

What is the UK’s climate stress test for the financial system?

A

The Biennial Exploratory Scenario (BES)

54
Q

What was the Bank of England’s report finding?

A

Still unclear whether banks are sufficiently capitalised to bear climate losses, so more macro prudential work required

55
Q

Would pillar 1 capital requirements be a good route for managing climate risks?

A

Long-term climate risk horizons mean pillar 1 may be suboptimal; NGFS also find limited empirical evidence of a risk differential between green and brown assets in the short-term on which to base prudential treatment. Scenario analysis is nascent and so hard to calibrate.

56
Q

What has the ECB committed to on climate?

A

Tilting bond purchases towards those issuers with stronger climate performance. It will also limit share of assets issued by entities with high emissions that can be pledged as collateral. Also investing in BIS green fund.

57
Q

What body was established in response to NGFS recommendation for capacity building in financial sector?

A

Climate Financial Risk Forum, Co-chaired by UK FCQ and PRA, to build capacity and share best practices across regulators and industry.

58
Q

Regulators can exercise degree of compulsion in which way?

A

Voluntary, comply or explain, to mandatory

59
Q

The IMF’s bilateral surveillance mandate under Article IV covers what?

A

Surveillance of adaptation efforts in vulnerable countries and policies to deliver NDCs.

60
Q

What recommendations are there on emissions reporting?

A

TCFD: Scope 1 and 2, and 3 if applicable (but no suggested methodology)
GHG protocol: Scopes 1-3
GRI: does not prescribe what scopes should be reported

61
Q

The CSRD’s ESRS requires what on transition plans?

A

Comply or explain basis for how company will deliver targets aligned with 1.5C

62
Q

The CSRD will be based on…?

A

The ESRS

63
Q

The ISSB provides what framework?

A

IFRS, which focuses on financial materiality of disclosure. G7, G20 to provide support for adopting. Uk has provisional commitment to make mandatory

64
Q

ICMA stands for what and does what?

A

International Capital Market Association
Provides green and sustainability-linked bonds principles. An alternative to climate bonds standard from CBI etc.

65
Q

CSRD will supersede ? And is applicable to?

A

NFRD
All listed companies and large private companies

66
Q

What do the EBA standards relate to?

A

FIs reporting counterpart credit risk and net stable funding ratios

67
Q

TCFD reporting is mandatory in the UK for?

A

Listed companies, FIs, pension funds, master trusts, and fund products

68
Q

Which UK disclosure scheme is mandatory for all comapnies?

A

SDR - Sustainability Disclosure Requirements . Aims to greater align financial sector with climate objectives.

69
Q

What is the UK Stewardship code and how binding?

A

Requires fund managers to consider ESG issues when investing; applicable to all UK funds on an APPLY AND EXPLAIN explain basis

Japan has similar code but is comply or explain. It covers ESG since 2020 but does not mention climate change.

70
Q

What is the ESAP?

A

European Single Access Point would provide centralised access to publicly available information relevant to financial services, thanks to a requirement that companies tag information against a digital categorisation system. This should improve investor visibility of this data. ESMA is tasked with implementing by end of 2024.

71
Q

TCTD comprises which four areas?

A

Governance, strategy, risk management, and metrics and targets

72
Q

What are the 7 principles of TCFD reporting?

A

Disclosures should be:
1. Relevant
2. Specific and complete
3. Clear, balanced, and understandable
4. Consistent over time
5. Comparable
6. Reliable, verifiable, and objective
7. Timely

73
Q

8 MDBa proposed the Framework and Principles for Climate Resilience Metrics in Ongoing Operations to tackle what?

A

Adaptation reporting gap compared to mitigation. Framework focuses on identifying project design quality and project results.

74
Q

The World Bank rates projects on adaptation how?

A

With its Resilience Rating System, which assesses the resilience of the project and the resilience through the project

75
Q

The Climate Bonds Taxonomy was updated to include what else beyond green bonds? (In 2023)

A

Transition in hard-to-abate sectors and emissions KPIs for companies with a 1.5C pathway

76
Q

What does SFDR require on PAI reporting?

A

Reporting against 18 PAIs for all asset managers

77
Q

In 2023, the UK’s SDR introduced what labels?

A

Sustainability impact
Sustainability focus
Sustainability improvers
Sustainability mixed goals

78
Q

In 2023, the UK’s SDR announced what on greenwashing?

A

New anti-greenwashing rule to come in in May 2024 for all FCQ authorised firms for product and entity level disclosures

79
Q

TCFD was founded by?

A

Financial Stability Bord

CFA Climate Investing (10 decks)

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