chapter 3 Flashcards
Introduction to Environmental Factors in ESG
Overview
Environmental factors within ESG
investing encompass a broad range of issues that significantly impact investments, from climate change to resource depletion.
Importance
Understanding these factors is
crucial for identifying risks and opportunities in portfolios, aligning with the growing global emphasis on sustainability and environmental responsibility
Climate Change: Key Concepts and
Approaches
Climate Change Overview: Climate change refers to significant alterations in the Earth’s climate system, driven by human activities such as the emission of greenhouse gases (GHGs).
Mitigation: Focuses on reducing or stabilizing GHG levels in the atmosphere. Strategies include transitioning to renewable energy, enhancing energy efficiency, and improving land use practices.
Adaptation: Involves adjusting to current or anticipated climate impacts. This includes developing resilient infrastructure, protecting coastlines, and adopting new agricultural practices.
Resilience Measures: Actions that maintain effectiveness under changing climate conditions, such as building flood defenses and designing climate-resilient buildings.
Pressures on Natural Resources and the Environment
Natural Resource Depletion: The over-extraction of resources like metals, forests, and water, leading to scarcity and increased costs. Examples include declining metal ore grades and deforestation driven by agricultural expansion.
Water Scarcity: A critical issue with over 2 billion people facing high water stress. Water is vital for agriculture, industry, and human consumption, and its scarcity poses significant risks to global stability.
Biodiversity Loss: The decline in species and ecosystems, exacerbated by habitat destruction, pollution, and climate change. Biodiversity is essential for ecosystem services that support human life and economic activity.
Pollution and Waste Management: The accumulation of pollutants in the environment, including air and water pollution, plastic waste, and the challenges of managing increasing waste in a linear economy.
The Circular Economy and its Role in
Sustainability
Concept Overview: The circular economy is an alternative to the traditional linear economy (take, make, dispose) that focuses on minimizing waste and maximizing resource use.
Principles: Designing out waste, keeping products and materials in use, and regenerating natural systems.
Examples: Recycling materials like plastics, reusing products through remanufacturing, and adopting sustainable agricultural practices that reduce waste and improve efficiency.
Impact: Shifting to a circular economy can significantly reduce environmental impacts, conserve resources, and create new economic opportunities.
Systemic Risks and Business Impact of Environmental Issues
Systemic Risks: Climate change and
environmental degradation pose systemic risks to financial stability and business operations. Examples include physical risks from extreme weather events and transitional risks from shifts to a low-carbon economy.
Supply Chain Transparency: Businesses must manage their environmental impacts across the entire supply chain, including sourcing, production, and waste management. Transparency is key to managing risks and maintaining consumer trust.
Case Studies: Examples such as the Vale dam disaster and the impact of Thai floods on global supply chains illustrate the profound effects of environmental issues on businesses and economies
The Growth of Environmental and
Climate Policies
Policy Landscape: The past decade has seen a significant increase in environmental and climate policies, particularly in Europe. These policies aim to reduce emissions, protect natural resources, and promote sustainability.
International Agreements: Key agreements include the UN Framework Convention on Climate Change (1992), Kyoto Protocol (2005), and Paris Agreement (2015), which set global targets for reducing GHG emissions and limiting global warming.
National and Regional Initiatives: Examples include the EU’s Green Deal, carbon pricing mechanisms, and regulations to promote renewable energy and energy efficiency.
Integrating Environmental Factors into Financial Analysis
Environmental Risk Assessment: Investors need to assess environmental risks at various levels, including company, sector, and country. This involves analyzing carbon footprints, natural capital, and climate scenarios.
Financial Modeling: Applying environmental factors to financial models, including ratio analysis and risk assessment, to better understand the impact of environmental risks on investment returns.
Opportunities: Identifying investment opportunities in sectors like renewable energy, sustainable agriculture, and the circular economy. Green bonds and ESG-related products are also growing areas of interest.
Exploring the Blue Economy and Green Products
Blue Economy: The sustainable use of
ocean resources for economic growth, improved livelihoods, and job creation, while preserving the health of ocean ecosystems. Key areas include sustainable fisheries, marine conservation, and ocean-based renewable energy.
Green and ESG Products: The rise of green bonds, ESG-themed investment funds, and products that align with sustainable development goals. These products provide opportunities for investors to support environmental sustainability while achieving financial returns.
Case Studies in Environmental Risk and Opportunity
Case Studies in Environmental Risk and Opportunity Escondida Copper Mine (Chile): A shift from freshwater to desalinated seawater to sustain operations in an arid environment, reflecting the importance of water management in mining.
PG&E Bankruptcy (USA): The role of climate change in triggering the bankruptcy of a major utility company due to wildfire liabilities, illustrating the financial impact of environmental risks.
Circular Economy Innovations: Companies that have successfully implemented circular economy practices, such as recycling programs and sustainable product designs, showcasing the potential for profitability in sustainable business models.
