Chapter 3: E FACTORS Flashcards

Question

Examples of adaptation strategies include a variety of development plans on how to deal with:

Answer 1

▶ protecting coastlines and adapting to sea-level rise; ▶ building flood defences; ▶ managing land use and forestry practices; ▶ planning more efficiently for scarce water resources; ▶ developing drought resilient crops; ▶ protecting energy and public infrastructure; and ▶ developing clean cooling systems. Climate change adaptation and resilience measures require location-specific assessment of climate risks and suitable approaches to address them.

Answer 2

In late 2019, Climate Bonds Initiative published the first Climate Resilience Principles, which provide a framework for developing location-specific climate resilience measures and financing them in the green bond market.

Answer 3

A group of multilateral development banks have also put forward A Framework and Principles for Climate Resilience Metrics in Financing Operations.... .... which provide guidance on how to create effective climate resilience projects and how to measure direct outcomes and wider system impacts.

Answer 4

Cities and municipalities in particular are at the frontline of adaptation and resilience due to their high concentration of people, assets and economic activities. Representing 80% of global gross domestic product (GDP), cities are heavily exposed to climate change risks in the forms of: ▶ sea level rise; ▶ extreme weather events, such as flooding and drought; and ▶ increase in the spread of tropical diseases.

Answer 5

All of these will have an economic and social cost to cities’ inhabitants, infrastructure, businesses and the built environment. At the same time, cities are a major contributor of greenhouse gas emissions mainly from transport and buildings. A 2019 report by C40 outlines useful best practices of various cities’ climate adaptation strategies.

Answer 6

The relationship between businesses and natural resources is becoming increasingly important due to the loss of biodiversity and access to natural resources being less secure. For the purposes of this syllabus, natural resources covers... fresh water, biodiversity, 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 its consumption.

Answer 7

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

Answer 8

... this can help drive better financial management of resources... ... but also spur technological innovations that can have a beneficial impact on the bottom line... ... in support of a more sustainable and resilient economy and society.

Answer 9

▶ 8.6 billion in 2030; ▶ 9.8 billion in 2050; and ▶ 11.2 billion in 2100.

Answer 10

Recently, as the interlocking trends of population increase, food production, non-renewable resource depletion and pollution generation have become more prominent, ...organisations have shown more of an inclination to address the risks of over-population.

Answer 11

The Club of Rome, an organisation of eminent global experts ranging from scientists to politicians, has continued – following the publication of what was a landmark book in 1972, The Limits to Growth – to focus on this theme.

Answer 12

The prognosis is, particularly in the face of climate change and associated environmental pressures, that it is finally time to redefine growth in a more balanced fashion, addressing three factors in particular: population, affluence and technology. Central to the UN’s Sustainable Development Agenda 2030, is the importance of shifting to a more sustainable consumption and production model (SDG12), which is about meeting the needs of all whilst using fewer resources, including energy and water and producing less waste and pollution.

Answer 13

Nearly 70% of the planet is covered by water, but only 2.5% of it is fresh water. Water is a vital natural resource, not only for human consumption but also for a range of agricultural, industrial, household, energy generation, recreational and environmental activities. It is critical to many industrial processes, including minerals extraction and cooling for industrial plants. Water demand is set to increase in all sectors.

Answer 14

According to the World Economic Forum, water also connects these sectors into a broader economic system that must balance social development and environmental interests. As the world continues to face multiple water challenges, a decision to allocate more water to any one sector implies that less water will be available for other economic uses, for the public water supply and other social services, or for environmental protection.

Answer 15

Water scarcity is the lack of freshwater resources to meet water demand. Water scarcity is present on every continent and is one of the largest global risks in terms of potential impact over the next decade.

Answer 16

UN Water reports that over... ...two billion people experience high water stress across different countries, and about ...four billion people experience severe water scarcity ... ...at least one month of the year.

Answer 17

The UN’s Sustainable Development Goal 6 is the need “to ensure availability and sustainable management of water and sanitation to all”. Water scarcity – caused either by economic factors such as lack of investment or by physical impacts related to climate change – continues to cause major concern, especially among the developing and emerging economies.

Answer 18

Biodiversity, land-use and associated ecosystems provide a range of invaluable services to society that underpin human health, well-being and economic growth. Ecosystem services are the benefits that people, including businesses, derive from ecosystems. Biodiversity (or biological diversity), as defined by the Convention on Biological Diversity, means the “variability among living organisms from all sources including, among other things, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems”

Answer 19

According to the International Union for Conservation of Nature (IUCN), biodiversity underpins ecosystem services, provides natural resources and constitutes our ‘natural capital’. Some of these ecosystem services include food, clean water, genetic resources, flood protection, nutrient cycling and climate regulation, amongst many others.

Answer 20

“the world's stocks of natural assets which include geology, soil, air, water and all living things. It is from this natural capital that humans derive a wide range of services, often called ecosystem services, which make human life possible.” The importance of taking a natural capital approach is explained in more detail in Section 7, which discusses investment opportunities.

Answer 21

In 2019, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) published a landmark report, which showed that around one million animal and plant species are now threatened with extinction, many within decades, more than ever before in human history. The IPBES report provides a stark and comprehensive set of scientifically proven findings that highlight the deterioration of biodiversity and its ecosystem functions and services. According to the report, humans have impacted over 75% of Earth’s land areas and 66% of the oceans. This deterioration is caused by a combined result of land/sea use change, direct exploitation, climate change and pollution.

Answer 22

The WWF’s 2018 Living Planet Report shows an overall decline of 60% in species’ populations between 1970 and 2014, a trajectory it claims will likely be exacerbated by global warming. A major driver of this decline is loss of habitat, linked to overexploitation due to large-scale infrastructure and agriculture activity.

Answer 23

...loss in biodiversity by 2050 under a ***business-as-usual scenario, threatening the provision of these services. Biodiversity loss is already causing severe problems for land use and marine industries, such as the fishing sector.

Answer 24

▶ agriculture; ▶ the extractives industries (cement and aggregates, oil and gas, and mining); ▶ forestry (palm oil and timber); and ▶ tourism.

Answer 25

``` ...through transformative changes across economic, social, political and technological factors. ```

Answer 26

Land use management practices and forestry (also known as Agriculture, Forestry and Other Land Use (AFOLU)), have a major impact on natural resources including water, soil, nutrients, plants and animals.

Answer 27

According to the IPCC, the AFOLU sector is responsible for 23% of total net **anthropogenic emissions**, mainly from deforestation, and agricultural emissions from livestock, soil and nutrient management.

Answer 28

...it will negatively affect biodiversity, ecosystems and all the natural resources that humans depend on and underpin economic growth.

Answer 29

....the stability of food supply is projected to decrease as the magnitude and frequency of extreme weather events that disrupt food chains increases.

Answer 30

Forests cover approximately 30% of the world’s land area, or just under 4 billion hectares. Forests are a vital part of the carbon cycle. They convert the CO2 in the air to oxygen, through the process of photosynthesis, and, in this way, they can be considered a natural regulator of carbon dioxide (which is underlined by the important role that the world’s tropical forests play in sequestering carbon from the atmosphere). The more trees, the less carbon dioxide in the atmosphere, and the more oxygen there is.

Answer 31

Deforestation and forest degradation account for approximately 10–15% of the world's greenhouse gas emissions. The IPBES report states that: “100 million hectares of tropical forest were lost from 1980 to 2000, resulting mainly from cattle ranching in Latin America (about 42 million hectares) and plantations in South-East Asia (about 7.5 million hectares) (of which 80% is for palm oil, used mostly in food, cosmetics, cleaning products and fuel) among others.

Answer 32

``` According to CDP, up to US$941bn (£751.5bn) of turnover in publicly listed companies is dependent on commodities linked to deforestation, including: soy, palm oil, cattle and timber. ``` Soft commodity supply chain risks from these industries can affect standard financial metrics such as revenue, asset valuation or costs, which can impact the credit worthiness or market value of the debt or equity of investee companies.

Answer 33

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

Answer 34

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 greenhouse gas emissions from deforestation and degradation.

Answer 35

The ocean is the planet’s largest carbon sink, producing over half of the world's oxygen and absorbing 50 times more carbon dioxide than the atmosphere. It is one of the most valuable natural resources, providing seafood and is also widely used for transportation (shipping). The UN’s Sustainable Development Goal 14 is ‘life below water'

Answer 36

The Organisation for Economic Co-operation and Development (OECD) estimates that ocean-based industries contribute roughly €1.3 trillion (£1.2tn) to global gross value added.

Answer 37

Oceans are also mined for minerals (salt, sand and gravel as well as some manganese, copper, nickel, iron and cobalt, which can be found in the deep sea) and drilled for crude oil. The oceans’ resources are a source of economic growth and are also known as the blue economy.

Answer 38

According to the World Bank, the blue economy is the "sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem”.

Answer 39

Communities in close connection with coastal environments, small islands (including Small Island Developing States (SIDS)), polar areas and high mountains are particularly exposed to ocean change, such as sea level rise. Low-lying coastal zones are currently home to around 680 million people (nearly 10% of the 2010 global population), projected to reach more than one billion by 2050

Answer 40

Due to the increase in the human population, the oceans have been overfished, with a resulting decline of fish critical to the economy. In 2015: ▶ 33% of marine fish stocks were being harvested at unsustainable levels; ▶ 60% were fished to maximum capacity; and ▶ only 7% harvested at levels lower than what can be sustainably fished. The control of the world’s fisheries is a controversial subject, as production is unable to satisfy the demand, especially when there aren’t enough fish left to breed in healthy ecosystems.

Answer 41

Air pollution Clean air is essential to health, the environment and economic prosperity. Increased air pollution: ``` ▶ adversely affects the environment; ▶ has a negative impact on human health; ▶ destroys ecosystems; ▶ impoverishes biodiversity; and ▶ reduces crop harvests as a result of soil acidification. ```

Answer 42

Indoor and outdoor air pollution are together responsible for more than one-tenth of all deaths globally each year, according to the World Health Organization (WHO). Evidence by the WHO further shows that more than 90% of the world’s population live in areas with levels of air pollution that exceed WHO guidelines. Urban air pollution is predicted to worsen, as migration and demographic trends drive the creation of more megacities.

Answer 43

Pollution is the largest environmental cause of disease and premature death in the world today. According to findings published in October 2017 by the Lancet Commission on Pollution and Health, diseases caused by pollution were responsible for an estimated: * ** 9 million premature deaths in 2015 – * **16% of all deaths worldwide – * **three times more deaths than from AIDS, tuberculosis and malaria combined, and * **15 times more than from all wars and other forms of violence.

Answer 44

Yet water pollution is one of the most serious environmental threats faced. Water pollution occurs when contaminants **(such as harmful chemicals or microorganisms) ** are introduced into the natural environment – through the ocean, rivers, streams, lakes or groundwater. Water pollution can be caused by spills and leaks from untreated sewage or sanitation systems and industrial waste discharge. Plastic waste has also found itself in waterways.

Answer 45

n 2014, the Flint city water service in the state of Michigan (USA) changed its water source to the local Flint River in an effort to cut costs. However, the water in the river failed to be properly treated and dangerous levels of lead leached from old pipes. This caused a public health crisis that endangered thousands of children and adults, and continues to have long-term health implications. Flint residents have since filed more than a dozen lawsuits against the city, the state and the federal government. The state attorney general, on the other hand, filed a lawsuit against the companies that were involved at the time, including Veolia, a global utility company.

Answer 46

In view of the concerns about growing pressures on natural resources – combined with opposition to all types of pollution – waste and waste management has, in recent decades, become a bigger priority for policymakers, businesses and citizens. Increasing consumption and waste levels are putting more pressure on space for landfill waste, which in turn is causing landfill taxes to rise. Alongside tougher regulation on how waste is handled and managed, businesses are becoming increasingly incentivised to help economies, notably through recycling and by adopting a **circular economy business model.

Answer 47

A recent striking example of the public’s concern over excessive waste is the campaign against plastics, especially in relation to the serious damage that they are doing to our oceans. This has led to actions by national and local authorities on waste management, and greater responsibility conferred on businesses to manage their waste responsibly. A global commitment by companies led by the Ellen MacArthur Foundation and the UN Environment Programme (UNEP) has set a benchmark for ‘best practices’ to address the plastic waste and pollution system.

Answer 48

In most developed countries, domestic waste disposal is funded from national or local taxes, which may be related to income, or property values. Commercial and industrial waste disposal is typically charged for as a commercial service, often as an integrated charge that includes disposal costs. This practice may encourage disposal contractors to opt for the ***cheapest disposal option such as landfill rather than the best environmental solution such as re-usage and recycling.

Answer 49

Landfill remains the most common means of waste management globally. Incineration of waste is carried out in some countries; but it is a controversial practice owing to its generation of gaseous pollutants. This has led to a rise of recycling waste in developed and, increasingly, developing countries. Many consumer products (such as metal cans and glass bottles) are recyclable, although the practice varies by city and country. A financial mechanism, which is growing in popularity in the consumer space, is the use of hypothecated taxes, including the plastic bag charge, designed to discourage waste and promote recycled usage.

Answer 50

The circular economy is an **economic model** that aims to avoid waste and to preserve the value of resources for as long as possible. That's: raw materials, energy and water. It is an effective model for companies to assess and manage their operations and resource management as it is an alternative approach to the **use-make-dispose** economy.

Answer 51

1. design out waste and pollution; 2. keep products and materials in use; and 3. regenerate natural systems.

Answer 52

The government of the Netherlands has developed a programme for a circular economy, aimed at “preventing waste by making products and materials more efficiently and reusing them. If new raw materials are needed, they must be obtained sustainably so that the natural and human environment is not damaged”.

Answer 53

A recent report from the Ellen MacArthur Foundation, stresses the importance of a circular economy as a fundamental step towards achieving climate targets. To illustrate this potential, the paper demonstrates how applying circular economy strategies in just five key areas 1. Cement. 2. Aluminium. 3. Steel. 4. Plastics. 5. Food can eliminate almost ***half*** of the remaining emissions from the production of goods – 9.3 billion tonnes of CO2e in 2050 – equivalent to cutting current emissions from all transport to zero.

Answer 54

This Chapter EXPLAINS The systemic relationships and activities between business activities and ecosystem services, including: climate change and other environmental issues; supply, operational and resource management issues; supply chain transparency and traceability; systemic impact of climate risks on the financial system.

Answer 55

This is due to the difficulty in valuing and measuring natural resources and so, this has not been fully priced into the costs of doing business. This is also known as the *****cost of pricing externalities****

Answer 56

▶ more extreme weather effects, such as unprecedented rainfall (Houston in 2017) or severe drought and bushfires (southern Australia in 2018 and again in 2019); ▶ rising sea levels caused by the melting of glaciers (in Antarctica and Greenland), and the well-documented roll- back of Arctic ice; ▶ the acidification of the oceans and degradation of marine life, notably on coral reefs and plankton ecosystems; and ▶ the impacts on food and crops (The World Food Programme (WFP) sees major risks to food availability and access to food for developing countries. This is because lower food production could negatively affect incomes and increase the prices of major crops in some regions.) All these impacts are set out in IPCC's Special report: Global warming of 1.5 °C. A manifestation of the economic consequences of climate change can be seen in the growing evidence of direct linkages between climate-derived catastrophes and business risks. Intergovernmental Panel on Climate Change

Answer 57

There is also growing awareness that the transition to a low-carbon economy entails policy, legal, technology and market risks related to climate change, and can be particularly acute for high-emission businesses and economic activities that are highly vulnerable to climate change impacts. For example, in the UK, a minimum level of energy efficiency standards introduced in 2018 prohibits private landlords from letting residential units if their ***EPC (Energy Performance Certificate) rating is E **** or lower, effectively creating stranded assets unless the landlord invests in energy efficiency upgrades to their properties. In 2019, some of the UK’s leading commercial property owners representing more than $305 billion in AUM and +11,000 commercial properties globally signed a groundbreaking commitment to tackle climate change through the delivery of net zero carbon real estate portfolios by 2050.

Answer 58

According to the UN Environment Programme, policy and regulatory measures backing green finance have more than doubled since 2015, and reporting and disclosure are a focal point for policy and regulatory action – comprising roughly 25% of all measures implemented. As multilateral organisations, central banks and governments step up their efforts to tackle climate change, the rate of policy action and demands on disclosure around climate change risks and risk mitigation are expected to increase, posing a business risk in their own right if not or inadequately addressed.

Answer 59

▶ A direct impact: An organisation’s activities directly affecting biodiversity. For example when degraded land is converted for the benefit of production activities, surface water is used for irrigation purposes, toxic materials are released, or local species are disturbed through the noise and light produced at a processing site. ▶ An indirect impact: the impact is caused by parties in an organisation’s supply chain(s). For example, when an organisation imports fruits and vegetables, produces cotton shirts, sells construction materials or publishes books, the production of the inputs for these goods will have indirect impacts. Indirect impacts can also include those from activities that have been triggered by the operations of the organisation. For example, a road constructed to transport products from a forestry operation can have the indirect effect of stimulating the migration of workers to an unsettled region and encouraging new commercial development along the road. ***Indirect impacts may be relatively difficult to predict and manage, but they can be as significant as direct impacts and can easily affect an organisation. Impacts on biodiversity can be either negative (degrading the quality or quantity of biodiversity) or positive (creating a net contribution to the quality or quantity of biodiversity)

Answer 60

▶ agriculture, aquaculture, fisheries and food production; ▶ extractives, infrastructure and activities or projects involving large-scale construction activities; ▶ fast-moving consumer goods (FMCG) companies – primarily through the sourcing of raw materials in products; ▶ forestry; ▶ pharmaceutical (in some cases); ▶ tourism and hospitality (in some cases); and ▶ utilities, including those involved in hydropower or open-cycle power plants generating significant thermal discharges.

Answer 61

``` ▶ toxic waste; ▶ water pollution; ▶ loss of biodiversity; ▶ deforestation; ▶ long-term damage to ecosystems; ▶ water scarcity; ▶ hazardous air emissions and high greenhouse gas emissions; and energy use. ``` Failure to address these challenges will expose businesses to ***additional risks***, while working on solutions presents a business opportunity to develop climate-resilient business strategies. The circular economy described in Section 1 is a useful model for companies to assess and manage their operations and resource management.

Answer 62

Providing guidelines for businesses to measure and report their environmental impacts, including greenhouse gas emissions. The guide emphasises the use of environmental key performance indicators (KPIs) to capture the link between environmental and financial performance.

Answer 63

In March 2019, the EU Commission adopted an ambitious Circular Economy Action Plan to address the challenges of climate change and pressures on natural resources as well as ecosystems.

Answer 64

The global mining and metals sector has a considerable impact on the environment and the community in which it operates. In January 2019, Brazil’s iron ore producer, Vale, experienced a deadly dam disaster, which resulted in the deaths of more than 250 people. The share price fell, wiping out 71.34 billion reais (£11.9bn) in market value. Sustainalytics, a company that rates the sustainability of companies based on their ESG performance, immediately downgraded Vale after the dam collapse, and the company was also removed from Brazil’s ISE corporate sustainability index. In February 2020, the International Council on Mining and Metals (ICMM) launched the Mining Principles. These define good practice ESG requirements for the mining and metals industry through a comprehensive set of performance expectations, including self-assessments and independent, third-party assessments, in addition to transparent disclosure of the outcomes.

Answer 65

Supply chain sustainability is the management of ESG impacts and practices (during its production and distribution), throughout the lifecycles of goods and services. Supply chains are complex to understand due to the fact that they are heavily interdependent. As such, the relationship between products and services and environmental risk factors are intertwined across sectors and throughout every level of the supply chain. Companies are increasingly expected to understand, manage and disclose their exposure to supply chain ESG risks or are left exposed to reputational, operational and financial risks. As such, it is becoming increasingly important for investors to factor into their due diligence and active stewardship a stronger understanding of the supply chain management of their portfolio companies. Addressing emissions in industry and the food system presents a particularly complex challenge. In industry, a growing demand for materials coupled with a slow adoption rate of renewable electricity and incremental process improvements, make it especially difficult to bring emissions down to net-zero by 2050. In the food system, significantly reducing emissions will also be challenging and will require changing the consumption habits of billions of people, changing the production habits of hundreds of millions of producers, and decarbonising long and complex food supply chains. Traceability is a useful practice to identify and trace the history, distribution, location and application of products, parts and materials. This ensures the reliability of sustainability claims, in the areas of human rights, labour (including health and safety), the environment and anti-corruption.

Answer 66

``` ▶ oil and gas; ▶ mining; ▶ beef; ▶ cocoa; ▶ cotton; ▶ fisheries; ▶ leather; ▶ palm oil; ▶ agriculture; and ▶ forestry. ```

Answer 67

Some of the main environmental risks in the supply chain include: ▶ material toxicity and chemicals; ▶ raw material use; ▶ recyclability and end-of-life products; ▶ greenhouse gas emissions; ▶ energy use; ▶ water use and wastewater treatment; ▶ air pollution; ▶ biodiversity; and ▶ deforestation.

Answer 68

▶ the Forest Stewardship Council (FSC); ▶ the Marine Stewardship Council (MSC); ▶ Roundtable for Sustainable Palm Oil (RSPO); and ▶ the Fairtrade Labelling Organizations International (FLO).

Answer 69

▶ The **Sustainability Consortium (TSC)**, which has built a set of performance indicators and a reporting system that highlights sustainability hotspots for more than 110 consumer-product categories, covering 80–90% of the impact of consumer products. ▶ The **World Wildlife Fund (WWF)** offers more than 50 performance indicators for measuring the supply-chain risks associated with the production of a range of commodities, as well as the probability and severity of those risks. ▶ CDP and the Global Reporting Initiative (GRI) have created standards and metrics for comparing different types of sustainability impact. ▶ The Sustainability Accounting Standards Board (SASB) has developed standards that help public companies across ten sectors, including consumer goods, to give investors material information about corporate sustainability performance along the value chain. ▶ The **EU Taxonomy for Sustainable Activities and the Climate Bonds Sector Criteria** provide sector-specific metrics and indicators to assess if assets, projects and activities across energy, transport, buildings, industry, agriculture and forestry, water and waste management, etc., ... are compliant with the Paris Agreement, and more specifically limiting global warming to 2°C (3.6°F).

Answer 70

(i) clearly explain the environmental (and social) requirements that suppliers are expected to meet via a procurement policy (such as a supplier code of conduct); and, (ii) enable it to assess environmental (and social) risks throughout its supply chain and discuss whether it has a mechanism in place to improve poor practices.

Answer 71

In an open letter, the investors state that “animal agriculture is the world’s highest-emitting sector without a low-carbon plan”, urging recipients to bolster the sustainability requirements of their respective meat and dairy supply policies. WOOOOWWW

Answer 72

1. Physical risk: Arises from damage to property, infrastructure and land. Financial impacts of this can go beyond physical infrastructure damage, depending on the region supply chains can be particularly vulnerable. From an investment perspective, when investing in a company with global and complex supply chains it can be difficult to fully understand all its risk exposures. 2. Transition risk: Results from changes in climate policy, technology, and consumer and market sentiment during the transition to a lower-carbon economy. Transitional impacts on businesses and the financial system can vary substantially depending on scenarios for policy and technology changes.

Answer 73

In a 2016 report from the Grantham Research Institute at the London School of Economics, the climate value- at-risk (VaR) of global financial assets reached US$2.5 trillion (£1.9tn) in a business-as-usual scenario and US$24.2tn (£18.7tn) at the 99th percentile of the probability distribution.

Answer 74

The Economist Intelligence Unit highlights the economic cost to the asset management industry caused by climate change, through weaker growth and lower asset returns. It estimates the value-at-risk, as a result of climate change, to the total global stock of manageable assets ranges from US$4.2tn to US$43tn (£3.2tn to £33.1tn) between now and the end of the century. VaR

Answer 75

There has been a considerable number and adoption of environmental and climate policies in the last decade, with the majority coming from Europe. The London School of Economics undertook a mapping of the global climate change laws in 2017, and found that there were 1,200 climate change or relevant climate change relevant laws globally, a twenty-fold increase over twenty years. Since then, the number of climate and environmental policies has only continued to increase.

Answer 76

The study provides a comprehensive review of the ongoing state of play and key challenges for the next five years, covering climate action policies to environmental policies. The study identified three thematic priorities: 1. protection and enhancement of natural capital; 2. establishment of a resource-efficient and green low-carbon economy; and 3. protecting the citizens’ health and wellbeing.

Answer 77

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 six main greenhouse gases, namely: 1. carbon dioxide (CO2); 2. methane (CH4); 3. nitrous oxide (N2O); 4. hydrofluorocarbons (HFCs); 5. perfluorocarbons (PFCs); and 6. sulphur hexafluoride (SF6).51 The first commitment period expired in 2012, but was extended to 2020. Negotiations at United Nations Framework Convention on Climate Change (UNFCCC) conferences on measures to be taken after the second commitment period ends in 2020 resulted in the 2015 adoption of the Paris Agreement.

Answer 78

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. Although the Paris Agreement is not legally binding under international law, it serves as a significant landmark in tackling climate change on a global scale.

Answer 79

NDCs embody efforts by each country to reduce national emissions and adapt to the impacts of climate change, and require every signatory (whether a higher or lower income country) to determine, plan and report on its **NDCs***, with updates to commitments every five years, starting in 2020. While commitments vary, they tend to fall in the 25–30% range of greenhouse gas emissions relative to 2005 by 2030. Unfortunately, many countries are not on track to achieving their targets, according to Climate Action Tracker, and progress so far is not sufficient to keep global warming to 2oC (3.6oF) and avoid the consequences.

Answer 80

▶ At the 2018 COP24 in Katowice, Poland, the parties reaffirmed their intention to implement the Paris Agreement and the process by which national governments must enhance their individual emissions reduction pledge. ▶ At the COP25 in Madrid in 2019, no consensus was reached on Article 6 of the Paris Agreement relating to carbon markets. At COP26 in Glasgow in 2020, all countries who have signed up to the Paris Agreement will need to reach a binding agreement with respect to Article 6.

Answer 81

...where the value of certain assets is significantly reduced because they are rendered obsolete or non-performing from a financial perspective.

Answer 82

... either in their entirety or individually, ...are now regularly cited by corporate and investment actors as material to their business planning and operations.

Answer 83

...a global agreement to phase out the manufacture of ozone-depleting hydrofluorocarbons (HFCs) substances by 80–85% against their baselines by 2045.

Answer 84

...Apart from the 2015 Paris Agreement which has no doubt been the most instrumental driver.

Answer 85

which aims at deepening and further integrating the capital markets of EU member states through “Investing for long term, infrastructure and sustainable investment”.

Answer 86

▶ a classification system, or 'taxonomy', to provide market clarity on what is 'sustainable'; ▶ clarifying the duties of investors when it comes to achieving a more ***sustainable financial system; ▶ improving disclosure by financial institutions and companies on ***how sustainability is factored into their decision-making; ▶ an EU-wide label for green investment funds ***(the Ecolabel); ▶ making sustainability part of the mandates of the ***European Supervisory Authorities (ESAs); and ▶ a European standard for ***green bonds.

Answer 87

To reduce the risk of ‘green-washing’ of financial products. The taxonomy provides a classification system to determine whether an economic activity is environmentally sustainable.

Answer 88

▶ climate change mitigation; ▶ climate change adaptation; ▶ sustainable use of protection of water and marine resources; ▶ transition to a circular economy, waste prevention and recycling; ▶ pollution prevention and control; and ▶ protection of healthy ecosystems.

Answer 89

Full details are published in the June 2019 report by the Technical Expert Group (TEG), which was open for public consultation. A supplementary report on using the taxonomy provides further guidance and examples. Technical Expert Group (TEG)

Answer 90

At the end of 2019, the EU co-legislators reached a common understanding on the taxonomy for green economic activities, which will be subject to approval by the European Parliament and the Council in 2020.

Answer 91

Another area led by the TEG is the creation of Climate Benchmarks as a pillar for climate resilient risk management.

Answer 92

They start at −30% and −50% greenhouse gas intensity compared with the investable universe: ▶ EU Paris-aligned Benchmark (**EU PAB**) must achieve a 7% year-on-year reduction in CO2 emissions plus a 1.5°C (2.7°F) limit to global temperature rises by 2050, and excludes fossil fuel companies; and ▶ EU **Climate Transition Benchmark** (EU CTB) has similar targets but permits fossil fuel investments as part of a transition process.

Answer 93

Further progress on developments from the ***EU Commission’s Sustainable Action Plan*** will continue to play a pivotal role in the development of the markets towards greater harmonisation in the financial markets, thereby influencing policy.

Answer 94

...starting with defining key metrics and strategies, risk management and moving towards scenario analysis and evidence for any adjustments to risk weights. Among other initiatives, the regulator will look into the evidence around the prudential treatment of ’green’ exposures, which would be expected to impact pricing of a wide variety of instruments.

Answer 95

This includes looking at climate stress testing, risks from ***green bonds***, and getting ***credit rating agencies*** to incorporate ESG factors.

Answer 96

Countries and **regions** are leading the way in influencing the regulatory framework to promote the economic and financial mainstreaming of climate change and environmental factors. An example of this is **The French Energy Transition Law**, which took effect in January 2016, and requires major **institutional investors and asset management companies** to explain how they take ESG criteria into account in their risk management and investment policies.

Answer 97

The UK Pensions Regulator has issued guidance to pension funds relating to ESG and climate change along similar lines. From 1 October 2020, ****trustees of defined contribution (DC) pension schemes will be required to produce an implementation report*** setting out how they acted on the principles set out in the SIP.

Answer 98

...which has become a key player in the growing green bonds market. China has begun combining its global leadership position on renewable energy with a greater desire for its financial system to address climate and the environment. Chinese policymakers are also increasingly engaging with the EU on issues such as a green taxonomy and environmental disclosure.

Answer 99

There is a growing consensus among both governments, the financial community and businesses on the fundamental role of CARBON PRICING in the transition to a DECARBONISED ECONOMY. Putting a price on carbon emissions is viewed as one of the most effective methods of tackling climate change: the *******‘polluter pays principle’******.

Answer 100

There are many types of carbon pricing; the most common are the emission trading system (ETS) and carbon tax. An ETS is a system where emitters can trade emission units to meet their emission targets. On the other hand, a carbon tax directly sets a price on carbon by defining an explicit tax rate on greenhouse gas emissions, for example a price per tonne CO2e.

Answer 101

Carbon pricing and the trading of emissions trading certificates were initially trialled in the UK in the early 2000s. The European Union subsequently adopted emissions trading as one of its flagship climate policies with the establishment of the European Union Emissions Trading System (ETS) in 2005. The ETS covers the main energy and carbon-intensive industries, regulating about half the European economy with a carbon price.

Answer 102

The growth of national carbon pricing schemes since then has been sporadic. However, schemes are now also operating in California, the Eastern seaboard of the USA, New Zealand, South Korea and some Canadian provinces. Following the running of pilot schemes in some Chinese provinces, a fully-fledged national Chinese scheme is expected to launch in 2020. When it does, it will become the largest carbon market in the world, superseding the EU ETS. The global aviation industry also plans to cap emissions from 2021 via the use of carbon offsets.

Answer 103

Over the last ten years, many companies – especially in energy-intensive sectors – have used the practice of shadow carbon pricing to guide their decision making process. An internal or shadow price on carbon creates a theoretical or assumed cost per ton of carbon emissions. Shadow pricing is used to better understand the potential impact of external carbon pricing on the profitability of a project, a new business model or an investment. Its use reveals hidden risks and enables businesses to build this factor into future valuations and estimates of capital expenditure. In addition, when emissions bear a cost in profit-and-loss statements, it helps to uncover inefficiencies and incentivise low carbon innovation within departments, cutting a company’s energy use and carbon pollution. Likewise, investors use shadow carbon pricing in their financial analysis. Some governments are using internal carbon pricing as a tool in their procurement process, policy design and project assessments in relation to climate change impacts. More recently, financial institutions have also begun using internal carbon pricing to assess their project portfolio.

Answer 104

According to a CDP report, over 1,300 companies – including more than 100 Fortune Global 500 companies with a total annual revenue of about US$7tn (£5.4tn) – reported that they are currently using an internal price on carbon or plan to do so.

Answer 105

The most influential international framework for disclosure of climate change risks and opportunities affecting companies and financial institutions is the framework from the Task Force on Climate-related Financial Disclosures (TCFD).

Answer 106

“The risks of inadequate information can lead to a mispricing of assets and misallocation of capital and can potentially give rise to concerns about financial stability since markets can be vulnerable to abrupt corrections”. Furthermore: “Climate change is the tragedy of the horizon. We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix"

Answer 107

...The TCFD also took the view that better information will help investors engage with companies on the resilience of their strategies and capital spending, including more efficient allocation of capital, which should help to promote a smooth transition to a more sustainable, low-carbon economy.

Answer 108

That “one of the most significant, and perhaps most misunderstood, risks that organisations face today relates to climate change”.

Answer 109

▶ Governance; ▶ Strategy; ▶ Risk management; and ▶ Metrics and targets.

Answer 110

▶ Governance The organisation’s governance around climate-related risks and opportunities. ▶ Strategy The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning. ▶ Risk management The processes used by the organisation to identify, assess and manage climate-related risks. ▶ Metrics and targets The metrics and targets used to assess and manage relevant climate-related risks and opportunities.

Answer 111

1. Transition Risk - The Risk Arising from Transition to a Low Carbon Economy. Transitioning to a lower-carbon economy may entail extensive policy, legal, technology and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organisations. 2. Physical risk – risks related to the physical impacts of climate change. Physical risks resulting from climate change can be event driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications for organisations, such as direct damage to assets and indirect impacts from supply chain disruption. Examples of physical climate risks include risk of floods, drought and hurricanes.

Answer 112

A growing number of public and private sector organisations are showing their support for the TCFD recommendations, including global companies, banks, insurers, asset managers, stock exchanges and governments. The TCFD’s Status Report in 2019 provides an encouraging overview of the progress and adoption of climate-related disclosure by major financial and non-financial institutions.

Answer 113

The NGFS is a coalition of central banks and was set up to strengthen the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilise capital for green and low-carbon investments in the broader context of environmentally sustainable development. In April 2019, the NGFS published its first comprehensive report, which proposes recommendations aimed at facilitating the role of the financial sector in achieving the objectives of the Paris Agreement. This report is a significant step for the financial industry as it demonstrates that central and supervisory bodies recognise the importance of climate-related risks as a source of financial risk and are working collectively to ensure the financial system is resilient to these risks.

Answer 114

Assess material impacts of environmental issues on potential investment opportunities, including the dangers of overlooking them: corporate and project finance; public finance initiatives; asset management.

Answer 115

it is clear that environmental factors, such as climate change, can influence the ability of a business (and industry) to produce goods and services. These impacts can be immediate, for example, if flooding causes a business to close temporarily, or they can occur over time in a more dynamic sense, for instance by increasing the costs of operating in a specific location to the point where relocation or closure are the only viable options for the business.

Answer 116

The macroeconomic impacts of such climate-related events have been most important to the insurance industry, and are becoming of increasing interest to institutions involved in... Project finance, Corporate finance and Investment.

Answer 117

Efforts by investors to assess the material financial impacts caused by environmental risks have begun to increase in terms of their analytical scope and sophistication. This includes, for example, considering a wider range of environmental factors, such as those from policy and technology responses (transition risks), as well as the impacts of environmental events and physical risks.

Answer 118

Based on both quantitative and qualitative data, ***environmental analysis*** will potentially determine adjustments to forecasted: financials and ratios, valuation-model variables, valuation multiples, credit assessments and portfolio allocation weightings. The challenge however is that definitions and classifications of measuring the level of risk in environmental factors vary and environmental risk is complex to analyse.

Answer 119

At a company or project level, investors looking to identify and measure a company’s environmental impact or materiality would need to analyse both quantitative and qualitative environmental factors in order to make an informed evaluation of the environmental risks embedded within. A judgment is then made on how material the risks are and whether those risks are priced in or not. A scoring system is also typically used to benchmark the company against its peers. Materiality is also highly influenced by the industry/sector of the company, as well as its country and jurisdictions where projects are located. This is also particularly relevant in the financing and investments of infrastructure projects. Investors can assess the materiality of specific environmental risks by analysing the rate of a company’s utilisation or consumption in critical natural resources, such as energy, water and waste.

Answer 120

...can be measured by the level of absolute emissions of greenhouse gases from fossil fuel combustion and industrial processes, and is measured by the amount of CO2e. This could also include savings in energy and performance relative to a ***benchmark*** year, and can be provided on an annualised or lifetime basis, based on estimates (particularly relevant for projects) or actual measurement (relevant to operational assets).

Answer 121

can be calculated as the costs generated by water usage efficiency in operations taken directly from the ground, surface waters or purchased. Water and wastewater treatment can be assessed against ****indicators tracking reductions*** in pollutants and harmful substances in supply areas, as well as incident reports and sanctions.

Answer 122

... is measured as the costs generated from the disposal of waste in operations such as through landfill, incinerated waste, recycled or hazardous waste. Aspects that may need to be factored into the analysis include carbon capture and storage (e.g. for closed landfill, industrial operations), pollution control (soil, air, water), waste-to-energy facilities and waste-to-biofuel.

Answer 123

At corporate level, materiality could also be relative within the industry or peer group. The Transition Pathway Initiative (TPI), a global, asset-owner led initiative, which assesses companies' preparedness for the transition to a low carbon economy has developed a ****tool to benchmark companies**** against their peers in terms of climate policy and maps their commitments to a decarbonisation transition trajectory by sector and overall.

Answer 124

At a project finance level, when assessing project infrastructure initiatives, the ***International Finance Corporation’s (IFC) Equator Principles*** Have become a globally recognised risk management framework, and are adopted by financial institutions for determining, assessing and managing environmental and social risk in project finance. They set out performance standards that address environmental factors such as resource efficiency, biodiversity and land resettlement, as well as other social-oriented standards.

Answer 125

“identify the potential negative environmental (and social) risks in order to develop the appropriate strategies to address the risks and their potential impacts.”

Answer 126

Another framework to assess materiality is the Integrated Biodiversity Assessment Tool (IBAT), which is a central database for globally recognised biodiversity information including key biodiversity areas and legally protected areas. Through an interactive mapping tool, decision-makers can easily access and use this up-to- date information to identify biodiversity risks and opportunities within a project boundary.

Answer 127

As governments continue to raise the level of ambition in their national environmental and climate plans in line with the Paris Agreement, resources are allocated and investments from the public sector are mobilised to implement these plans. Public finance is a key policy instrument to both incentivise and enable the transition to green growth. Exposures to climate-related and other environmental risks can vary significantly from country to country, and lower- and middle-income economies are typically more vulnerable to physical climate risks.

Answer 128

Public sector financing is 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 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). A variety of financing initiatives leveraging public sector and development finance for sustainable agriculture, biodiversity conservation and the blue economy are also emerging, particularly targeting more vulnerable and developing economies.

Answer 129

The latest report by the Climate Policy Initiative (CPI) reported that the average annual public climate finance totalled US$253bn (£195bn) in 2017/18, representing 44% of total commitments, with the vast majority of spending on ▶TRANSPORTATION. Other areas of spending were dedicated to: ▶ adaptation and resilience; ▶ energy efficiency; ▶ land use; and ▶ infrastructure projects with cross-sectoral impacts.

Answer 130

``` ▶ export credit; ▶ development banks; ▶ concessionary lending to small and medium enterprises (SMEs); ▶ guarantees; ▶ research and development (R&D); and ▶ investment in infrastructure. ```

Answer 131

▶ energy; ▶ water and waste; ▶ transport; and ▶ flood defences.

Answer 132

Investments that lock in high-carbon emission pathways, such as fossil fuel power generation and supply infrastructure, would be considered potential stranded assets. In addition, public finance needs to align their investment to broader regional climate goals and country-level NDC (Nationally Determined Contribution) targets, government regulation and to the systemic and fiscal risks as a result of its environmental and climate- related policies in the longer term. Governments also need to be aware of increasing climate-related litigation risks. A recent study found that climate change cases have been reported in at least 28 countries around the world, and of the recorded cases more than three-quarters have been filed in the USA.78

Answer 133

At a portfolio level, the University of Cambridge Institute for Sustainability Leadership (CISL) compares the vulnerability and resilience of different portfolio types to climate change-related risks in the shorter term. The information provided in their study is intended to help investors understand how to hedge risk and invest in assets with the lower potential of being affected by climate change risk. The study reveals that global investment portfolios could lose up to 45% in their equity investment portfolio value (and 23% loss for fixed income portfolio) as a consequence of short-term shifts in climate change sentiment such as climate change policy, technological change, asset stranding, weather events and longer-term physical impacts.

Answer 134

An example used by companies for reporting and disclosure, and investors in assessing the environmental (including social and governance) risks of companies is the SASB (Sustainability Accounting Standards Board), which was established in 2011 to develop and disseminate sustainability accounting standards. The standards identify financially material issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors. SASB provides an interactive proprietary tool that identifies and compares disclosure topics across different industries and sectors, described as a ‘materiality map’.

Answer 135

``` greenhouse gas emissions; air quality; energy management; water and wastewater management; waste and hazardous materials management; and ecological impacts. ```

Answer 136

Increased frequency and severity of major weather events mean that climate change has increased the risks and costs of insurance. The impact of physical climate change events on the insurance sector is one of the most complex to measure and estimate.

Answer 137

Another illustration of how environmental risk (in this case caused by physical climate change) affects different industries, is Schroders’ analysis (based on their internal proprietary metrics). This shows the potential costs to some companies of insuring their assets against the impact of physical climate change. The sector exposures analysed tend to vary according to the capital intensity of the business.

Answer 138

▶ 1. Understanding environmental factors that may pose risks to financial assets and liabilities (for example the wrong pricing of a pollution liability or natural disaster insurance policy could be a risk to liability, if the event probability is underestimated), and how such risks may evolve over time. and, ▶ 2. Translating environmental risk factors into quantitative measures of financial risk that can, in turn, inform firms’ risk management and investment decisions.

Answer 139

Similarly, the choice of approach depends on the type of direct or indirect exposure to an environmental risk factor. For example, the probability of physical risks from flooding will have to be incorporated differently than transition risks stemming from the transition to a low-carbon economy due to policy change. Depending on the investment strategy and objectives, different levels of analysis will likely be performed: at the individual asset level, portfolio level, and at the macroeconomic or systemic level.

Answer 140

Company or project level At a company or project level, an assessment of material environmental risk factors will inform key financial metrics as monitored and disclosed in financial statements (such as **profit and loss and balance sheet). For example, companies operating in water-scarce areas are exposed to higher risk than for those operating in areas where water availability is high. Therefore, it is important to undertake an analysis of * **how well the company is managing these risks * **(e.g. improvement in water-efficiency over time.) Often, analysts and portfolio managers will have their own internal environmental (social and governance) scoring system utilising a combination of external third-party data providers and internal analysis. Qualitative and quantitative assessments are then made to determine the ***environmental materiality of a particular company; and how it will affect key efficiency or profitability ratios which might be used to value and compare across different companies. This could include a decision being made to adjust the target price-to-earning (P/E) ratio, which reflects a company’s competitiveness in comparison to its peers with higher or lower environmental standards. Cost assumptions can also be adjusted according to ***future capital expenditure in environmental (mitigation or adaptation) spending.

Answer 141

▶Environmental risks (for example, carbon emissions), such as: ``` » greenhouse gas emissions; » chemicals; » energy; » steel and cement; » extractives; » food or beverages; and » transportation; ``` or ▶ Physical risk from natural disasters, for example, to: » buildings; or » urban infrastructure. Companies in these sectors tend to be influenced by an environmental risk premium, which may affect the discount rate used. Hence, alongside the company level analysis above, these sector-wide considerations need to be considered and overlaid on the company analysis. Adjustments are made to remove any regional/sector biases that align with the manager’s investment strategy and process.

Answer 142

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.

Answer 143

It is not possible to outline all the available approaches for investors to assess environmental risks because there is no one common standard. However, based on a combination of independent third-party research and data and useful frameworks, practitioners are able to map out and analyse the environmental risks and costs across different types of asset classes by company and sector, in order to make their own quantitative and qualitative risk assessments. The following outlines some of the approaches that are used by investors to assess material environmental risks (and opportunities): A. carbon foot-printing; B. natural capital approach; and C. climate scenario analysis. We will look at each of these approaches in further detail in the following sub-sections.

Answer 144

▶ compare it to global benchmarks; ▶ identify priority areas and actions for reducing emissions; and ▶ track progress in making those reductions.

Answer 145

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

Answer 146

The use of carbon footprinting applies the international accounting tool of the Greenhouse Gas (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,

Answer 147

* Fuel combustion | * Company vehicles • Fugitive emissions

Answer 148

• Purchased electricity, heat and steam

Answer 149

``` • Purchased goods and services • Business travel • Employee commuting • Waste disposal • Use of sold products • Transportation and distribution (up- and downstream) • Investments • Leased assets and franchises ```

Answer 150

it is not yet available for unlisted assets; Scope 3 emissions are rarely being included; it uses different estimation methodologies; and it does not measure potential investment risks related to the physical impacts of climate change.

Answer 151

A term often used to describe the relationship between nature and measuring and valuing nature’s role in decision-making is ***natural capital. Natural capital helps businesses identify, measure, value and prioritise their impacts and dependencies on biodiversity and the ecosystem, which ultimately give businesses new insight into their risks and opportunities. Understanding the value of both natural capital impacts and dependencies helps business and financial decision-makers assess the significance of these issues to their institution, and therefore make more informed decisions.

Answer 152

Assessing environmental factors using the Natural Capital Protocol (NCP), a decision-making framework, enables organisations to identify, measure and value the direct and indirect impacts and dependencies of companies on natural capital. It currently provides guidance for the apparel sector, food and beverage sector and forest products sector. The protocol allows companies to measure, value and integrate natural capital impacts and dependencies into existing business processes such as risk mitigation, sourcing, supply chain management and product design.

Answer 153

**Scenario analysis is an approach for the forward-looking assessment of risks and opportunities. Scenario analysis describes a process of evaluating how an organisation, 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 organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario and, where relevant to the organisation, 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.

Answer 154

The Institutional Investors Group on Climate Change (IIGCC) published a practical investor guide, which provides a useful framework (see Figure 3.10) in which to approach climate-related scenario analysis.

Answer 155

1. Financial impact: the use of scenario analysis enables the assessment and pricing of climate-related risks and opportunities. 2. Alignment: aligning the portfolio(s) with a 2°C (3.6°F) or lower future. This is typically driven by a set of investment beliefs.

Answer 156

At the over-arching level, however, there is no ‘one size fits all’ methodology that investors can use to determine materiality and they consequently use financial modelling and concepts, such as financial ratio analysis. The EU Non-Financial Reporting Directive, which helps analysts and investors to evaluate the non- financial performance of large companies, sums up the most effective and recommended approach well. This involves: ▶ taking a set of transparent and credible data sources and assumptions, which can be quantitative or qualitative; ▶ applying recognisable, accepted methodologies, which will probably have the backing of an industry body, government department or multilateral institution; ▶ focusing on materiality – looking in particular at business models, operations and financial performance; and ▶ generating a set of outputs which can be measured in terms of KPIs. In order for the financial system to achieve a better appreciation of climate change risks (and opportunities), there is a need for more data, greater disclosure, better analytical toolkits, advanced scenario analysis and new risk management techniques.

Answer 157

Apply material environmental factors to: financial modelling; ratio analysis; risk assessment; quality of management.

Answer 158

This case study demonstrates 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, focusing on the environmental assessment: ▶ Consideration of environmental (social and governance) factors may inform the forecasting of financials, such as revenues, operating costs and capital expenditure, which are utilised in the context of assessing an infrastructure asset. ▶ These financial ratios or variables form the basis of financial models including ***discounted cash flow (DCF) models and ultimately asset valuations. ▶ It provides an illustration as to how investors may benefit from the derived insights by illustrating ways to approximate and quantify, and thus linking them to expected revenues, costs, necessary capital expenditures, financing requirements or reserves, which, in turn, inform the financial model. ▶ Note that this example focuses only on the environmental impacts. In reality, the social and governance factors need to be considered in parallel for a full ESG materiality assessment.

Answer 159

Over the lifetime of an infrastructure project – from development to construction, to operation, and all the way through to the decommissioning phase – infrastructure assets face all kinds of ESG issues. These vary depending on asset type, sector, size, geographic location and stage in the life cycle. Some of the environmental issues may originate outside the asset but could impact its technical ability to operate on its profitability (for instance, temperature rise and increased water scarcity). Other issues may be caused by the asset itself and impact its surrounding environment and communities (such as water effluence and the quality of life of the communities around it). In this latter case, this is called ‘externalities’, which can (and will) increasingly impact the asset’s financial performance via various feedback loops (including protests of the surrounding community). It is thus important to realise that both directions of potential environmental impact (impact ON the asset, and impact FROM the asset) may have financial consequences for the investors. 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 recognised 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 any given infrastructure organisation or asset will be revealed by the asset-specific ESG due diligence process.

Answer 160

MATERIAL ENVIRONMENTAL FACTORS FOR INFRASTRUCTURE: ``` A) QUANTIFIABLE: ***Degradation or pollution: • Air (climate) – greenhouse gas emissions. • Air (health) – other pollution • Water. • Ground or contamination. • Noise and light. • Biodiversity. ``` ``` ***Resource efficiency sourcing, use or treatment: • (Raw) materials including supply chain. • Energy. • Water. • Waste. ``` B) Difficult-to-quantify 7. Biodiversity and habitat (E) 8. Physical climate change impacts (E)

Answer 161

(ii) it simplifies the framework: 1. Transition risks and opportunities, with the sub-categories of: a) reputational; b) regulatory/legal; c) operational; and d) market; and 2. Physical risks and opportunities. The following table helps to show how the selected environmental factors may impact the financial performance of infrastructure organisations. It elaborates on the potential impact pathways from the selected environmental factors to specific financial ratios/inputs into financial models. Page 131

Answer 162

Previous sections have covered the risks of neglecting the implications of key environmental factors from companies as a result of direct and/or indirect business activities. The increased awareness of climate change and environmental impact has resulted in an accelerating search for viable societal and economic solutions to enable a transition to a less carbon intensive economy. Estimates for this transition reach trillions of dollars and the magnitude of change required will be pervasive.

Answer 163

*****A study by the Global Commission on the Economy and Climate found that the world is expected to invest about US$90tn (£69tn) in infrastructure over the next 15 years****** ****** requiring an urgent shift to ensure that this capital is spent on low-carbon, energy-efficient projects. The report further describes that “transformative change is needed now in how we build our cities, produce and use energy, transport people and goods, and manage our landscapes”. It is therefore no surprise that there is an increasing number of investment strategies that focus primarily on the opportunities of the low-carbon transition and green finance. Investing in sectors such as technology and resource efficiency, waste management, circular economy and sustainable agriculture and forestry are just some of the investment opportunities available relating to climate change and environmental issues.

Answer 164

clean technology, renewable energy and green infrastructure.

Answer 165

``` Renewable and alternative energy Energy efficiency Water infrastructure and technologies Pollution control Waste management and technologies Environmental support services Food, agriculture and forestry ```

Answer 166

A key concept required to understand and recognise the potential opportunities in addressing environmental issues is the circular economy: “A circular economy is based on the principles of designing out waste and pollution, keeping products and materials in use, and regenerating natural systems.” This opposes the current approach of a linear economy where natural resources are extracted as input materials for the manufacture of products which are then used and eventually discarded. The ‘take-make- waste’ (linear) approach is not a sustainable approach for the earth’s finite natural resources; therefore, the circular economy can be the focus of a thematic investment strategy that seeks to invest in businesses that provide specific solutions to create a circular economy (in addition to being a consideration in all investment decisions, especially for large companies that need to improve their operational efficiency to reduce their use of natural resources and waste generation.) Companies that factor in circularity in their business model are able to play a major role in safeguarding natural resources and transform the way we currently use natural resources and support a transition to a low-carbon economy (Figure 3.12). In a circular economy, products and materials are repaired, reused and recycled rather than thrown away, ensuring that waste from one industrial process becomes a valued input into another. The circular economy concept is now a core component of both the EU’s 2050 Long-Term Strategy to achieve a climate-neutral Europe and of China’s five-year plans.

Answer 167

Nike In its efforts to combat waste and focus on more efficient design and manufacturing technologies, in 2019, Nike created a set of ten circular design principles that have the potential to transform how the apparel industry operates and create a common language for circularity.95 This can be seen, for example, with the ‘material choices’ principle, which asks: “How could your material choice increase the lifecycle or durability of the product?” Heineken As part of their Zero Waste Programme, 102 of their 165 production units sent zero waste to landfill in 2018. The waste from these sites was instead recycled into animal feed, material loops, compost or used for energy recovery.96 Schneider Electric The company specialises in energy management and automation. It uses recycled content and recyclable materials in its products, prolongs product lifespan through leasing and pay-per-use and has introduced take-back schemes into its supply chain. Circular activities now account for 12% of its revenues and will save 100,000 metric tons of primary resources between 2018–2020.97 Stora Enso The company provides renewable solutions in packaging, biomaterials, wooden constructions and paper. Reducing waste operates at the heart of the “bioeconomy and contributes to a circular economy”.98 In 2019, the European Investment Bank launched an investment fund to support the circular bioeconomy.99

Answer 168

Technological innovation and the development of new business ventures associated with the environment have been around for some time. However, the term cleantech as an umbrella term “encompassing the investment asset class, technology, and business sectors which include clean energy, environmental, and sustainable or green, products and services” became increasingly popular approximately 20 years ago.

Answer 169

▶ Long-term subsidy regimes have underpinned the rise of wind and solar power; possibly the most conspicuous example being the German Energiewende. This is a planned transition to a low-carbon economy in which a transparent and systematic subsidies regime has led to about 40% of Germany’s electricity now coming from renewable sources. ▶ A harmonisation of minimum technology standards has also assisted in driving forward cleantech innovations. The revolution in lighting systems in Europe over the last decade has been driven by EU policymakers’ decisions to phase out incandescent light bulbs, replacing them with low-energy emitting fluorescent bulbs and latterly light-emitting diode (LED) bulbs. ▶ The International Organization for Standardization (ISO) helps companies to manage their energy efficiently through a set of management system standards. Many governments around the world also incentivise more efficient energy usage in buildings through the practice of energy performance certificates, which are needed whenever a building is built, sold or rented.

Answer 170

The real estate sector has been undergoing significant change with property developers and owners deciding to take advantage of energy efficient materials and low-carbon technologies. This has been aligned with a push by regulatory authorities in most European countries playing a major role in driving market development, for example through introducing energy performance certificates (EPCs) and making them part of the documentation package for lettings and sales; setting tighter performance requirements on energy efficiency in building codes (particularly in the Nordic countries) or by stipulating that all new residential build meets a minimum low-carbon threshold.

Answer 171

In the UK, new legislation has introduced a minimum EPC ratings threshold for residential lettings, and this is being expanded to commercial lettings. Property owners are also increasingly assessing their assets against building certification and/or energy performance standards (e.g. Leadership in Energy and Environmental Design (LEED), which works internationally; National Australian Built Environmental Rating System (NABERS), which covers Australia; Comprehensive Assessment System for Build Environment Efficiency (CASBEE), which works in Japan; EnergyStar that operates in USA; Green Building – China; etc.), while lenders and institutional investors are benchmarking holdings, e.g. using the GRESB framework. Property lenders have developed mortgages that reward borrowers for investing in energy efficiency, adding to a range of government-backed initiatives that support energy efficiency retrofits in buildings and production facilities and promote energy efficient new construction.

Answer 172

According to cost analysis from the International Renewables Energy Agency (IRENA), new solar photovoltaic (PV) and onshore wind power are on the verge of costing less than the marginal operating cost of existing coal-fired plants. The report predicted that by 2020, onshore wind and solar PV are set to consistently offer a less expensive source of new electricity than the least costly fossil fuel alternative, without financial assistance. Equally impressive cost reductions for offshore wind are following suit in the rest of Europe, notably in Germany and the Netherlands.

Answer 173

``` ▶ transportation; ▶ water management; ▶ waste management; ▶ smart energy and resource efficiency; and ▶ food and agriculture. ```

Answer 174

There has also been increasing activity in corporate venturing and investments by incumbent fossil-fuel based corporations into clean and renewable technologies. These private sector efforts have been complemented by greater supra-national and public sector support, for example the European Institute of Innovation and Technology (EIT) InnoEnergy, which was established to invest in and accelerate sustainable energy innovations. Another initiative, still in concept phase is the World Economic Forum’s Sustainable Energy Innovation Fund (SEIF), which matches up private funding with public investment.

Answer 175

Some specific financial products that have emerged include a range of green, sustainability and ESG indices, green bonds and loans and sustainability funds and ETFs, retail and institutional deposit/savings products, SRI retail bonds and crowdfunding investments.

Answer 176

The first green bond issuance was announced in 2007 by the European Investment Bank to raise funding for climate-related projects. Green bonds were created to fund projects that have positive environmental and/or climate benefits. The majority are green ‘use of proceeds’ or asset-linked bonds . The International Capital Markets Association (ICMA) sets out voluntary best practice guidelines called the Green Bond Principles (GBP), which were established in 2014 by a consortium of investment banks to promote the integrity of the green bond market by recommending transparency, disclosure and reporting. As part of ensuring the integrity of the use of proceeds, an external verification is obtained through a second party opinion provider who will track and report on whether proceeds are used as promised. According to the Climate Bonds Initiative, green bond issuances by banks and corporates have accelerated in recent years, with total issuance rising from around US$44.5bnn (£31bn) in 2015, to exceed US$170bn (£154bn) in 2018. In 2019, issuance is almost US$258bn (£199bn), or 51% up over 2018, and 2020 has started off strongly for sovereigns and non-financial corporates.

Answer 177

In addition to green bonds, which focus closely on climate-change solutions, there has been increased issuance in other labelled debt, primarily green and sustainability loans that are linked to climate impact key performance indicators. There are also transition bonds, which is a newly coined term for bonds issued by high- emission companies to finance their reduction in greenhouse gas emissions. Some of these products finance measures that may not be considered “green enough” but still aim to address climate change.

Answer 178

there is clear green use of loan proceeds; the project's sustainability objectives have been clearly evaluated and communicated to lenders; loan proceeds are strictly managed through project accounts; and detailed and strict reporting is mandated.

Answer 179

Some of these loans have no specific green purpose, but the borrower is incentivised to drive ESG or SDG improvement by a margin ratchet linked to key performance indicators. As these are considered to be in the private markets, the size of the market is not fully transparent. However, based on data by Refinitiv, it was reported that global green and ESG-linked loans totalled US$92bn (£73.6bn) in 2019. This growth in ESG-related products will only continue to accelerate.

Answer 180

ISSUER AND TYPE USE OF PROCEEDS Green bond issued by Louisiana Local Government Environmental Facilities and Community Development Authority (2018) Coastal flood defenses. Dutch sovereign green bond (2019) Chile’s sovereign green bond (2019 and 2020) Flood protection under its Delta Programme. First dedicated resilience bond under the Climate Resilience Principles by European Bank for Reconstruction and Development (EBRD) (2019)112 Climate resilient infrastructure in Eastern Europe and North Africa. The first issue in 2019 was focused on financing solar, low carbon transport, low carbon building upgrades and water infrastructure. The 2020 issue was focused primarily on low carbon transport. Rizal Commercial Banking Corporation (RCBC), one of Philippines largest banks, issued the first ASEAN sustainability bond (2019) First SDG-linked bond, launched by the Italian energy producer Enel (2019) Starbucks issued a sustainability bond (2019), following its previous issues in 2016 and 2017 Thames Water became the UK’s first corporate to issue a £1.4bn sustainability linked revolving credit facility (2018) RCBC applied its Sustainability Finance Framework, which includes seven eligible green categories (energy, buildings, transport, urban and industrial energy efficiency, waste, water and land use) and five eligible social categories (affordable basic infrastructure, access to essential services, employment generation, affordable housing and socioeconomic advancement and empowerment). Proceeds aimed at general corporate purposes. However, the new instrument requires Enel to measure its performance against several environmental and social KPIs, to which the coupon will be dependent. Eligible categories fall under socioeconomic advancement and empowerment and access to essential services and under green (green buildings). Interest payments are linked to its GRESB (Global Real Estate Sustainability Benchmark) infrastructure score. Solvay, a Belgium chemical company issued a sustainability linked loan The first to link to an ambitious greenhouse gas reduction target – in this case one million tonnes of CO2 by 2025.

Answer 181

▶ the eligibility of assets and criteria to meeting their green, ESG or SDG-related objectives; ▶ the use of proceeds effectively allocated to eligible projects; ▶ the transparency and reporting requirements and key measures of impacts; and ▶ the issuer or borrower has a clear sustainability and ESG strategy.

Answer 182

Dark -- Wind and Solar Medium -- Hybrid buses Light -- More efficient fossil fuels Brown - New Coal Infra

Answer 183

The World Bank’s definition of blue economy refers to a “sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem”. All other definitions of the blue economy essentially relate to a broader perspective on sustainable economic and social activity associated with the world’s oceans and coastal areas.

Answer 184

* Aquaculture. * Fisheries. * Fish processing industry. * Shipbuilding and repair. * Marine extraction. * Maritime transport. * Desalination. * Blue bioeconomy and biotechnology. * Ports and warehousing. * Coastal and environmental protection. * Offshore wind energy. * Coastal tourism. * Ocean energy. * Deep water source cooling.

Answer 185

Investors and policymakers are now beginning to recognise: the growth prospects for the ocean economy; its capacity for future employment creation and innovation; and its role in addressing global challenges.

Answer 186

1. approaches that produce win–win outcomes for ocean business and the ocean environment across a range of marine and maritime applications; 2. the creation of ocean-economy innovation networks; and 3. initiatives to improve the measurement of the ocean economy via satellite accounts of national accounting systems.

Answer 187

▶ prepare policy, fiscal, and administrative reforms; ▶ identify value creation opportunities from blue economy sectors; and ▶ identify strategic financial investments. In short, the BEDF will help coastal countries and regions to develop evidence-based investment and policy reform plans for its coastal and ocean resources. The OECD suggests that many ocean-based industries have the potential to outperform the growth of the global economy as a whole, both in terms of value added and employment. Projections suggest that the ocean economy could more than double its contribution to global value added to over US$3tn (£2.3tn), in addition to huge potential in employment growth by 2030.