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CFA ESG Certificate > Chapter 3 Environmental Factors > Flashcards

Chapter 3 Environmental Factors Flashcards

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1
Q

What are the direct and indirect impact of business on ecosystem ?

A

Direct: toxic materials are released, land is converted to production activities, local species are disturbed by activities

Indirect: impact caused in supply chain. If i sell books - production will impact environment.

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2
Q

Can we have positive impact on biodirversity

A

Yes, we can - positive impact create contribution to biodiversity

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3
Q

Which sectors mostly rely on natural resources

A

Agro, extravities, infrastructure, forestry, pharma, tourism. utilities

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4
Q

Do companies need to measure impact from direct operations

A

Yes, they do, both positive and negative

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5
Q

Which model can be used by companies to assess and manage their operations and resource management

A

Circular economy

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6
Q

What is Environmental Reporting Guidance ?

A

In UK the guidance for business to measure and report environmental impact.

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7
Q

What is Double materiality

A

In EU guidance to report both impact of climate change of company and vice versa. Important - that entitre value chain should be considered

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8
Q

What was the case of Brazilian iron ore producer Vale ?

A

It had two dam disasters (in 2019 250 died) and in 2015 . Downgraded rating, share sell off. Investors initiated new measures.

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9
Q

What is the challenge of bringing down emission to net zero by 2050?

A

In energy: Growing demand of materials and low adoption of green enegy. In food - need to change consumption habits of people and decarbonising long supply chain

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10
Q

What is the difference between GHG emissions from direct operations and from supply chain

A

5x times more in supply chain

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11
Q

What are the challenges of forest linked commodities?

A

1 th investments linked to deforestation and related production beef palm oil, soy, timber. Governments impose fines on companies if in their supply chain there is illegal deforestation. Asset managers also trying to avoid this.

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12
Q

What is Scope 3 ?

A

Emissions outside company gate (suppliers and consumers)

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13
Q

Scope 1, Scope 2

A

Scope 1 - direct emissions from production, Scope 2 emissions from purchased energy

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14
Q

What investor should focus on measuring portfolio companies policies ?

A
  1. Clearly explains how compnay’s supplyers adress environmental issues (through procurement)
  2. Be able to access environmental risks
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15
Q

What are tools to measure sustainable issues in supply chain ?

A

A lot of not for profit organisations offer measurement frameworks

Sustainable Consortcium - indicators for consumer products

WWF - indicators for production of commodities

SASB (Sustainability Accounting Standards Board)

EU Taxonomy - sector specific metricks

And any other

There are also joint intiatives in complex industries: for example Forest Stewardship, Marine Stewardship

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16
Q

How many climate laws in the world

A

in 2021 LSE counted 2092 climate laws and policies across the globe

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17
Q

What is Kyoto protocole ?

A

Orginised in 2005, extended to 2020. After Paris Agreement came in place.

Set targets for GHG emission for developed nations

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18
Q

What is the main longt term goal of Paris Agreement ?

A

Keep averege global tempreture below 2 C and increase below 1.5. While it is not legally binding it serves is significant agreement.

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19
Q

How emissions are regulated in Paris Agreement ?

A

It is not top down, every nations report Netaionally determined contributions and update commitments every 5 years . We are well behind the targets

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20
Q

What other international agreements ?

A

17 global goals set in 2015. Supposed to be guidance for goverments but now adopte by companies

Other: Kigali, IMO, Corsia

21
Q

What are the regional policies ?

A

In EU European Green Deal - plan to make EU climate neutral by 2050. Main actions

  • reorient capital
  • sustainability part of risk management (credit ratings, financial advice, market research)
  • foster transperency
22
Q

What is EU taxonomy ?

A

The idea is to avoid green washing by providing classification whether activity is environmentally friendly.

23
Q

What other EU main regulation ?

A

SFDR and NFRD. NFRD - non financial reporting directive - reporting guidance in relation to environmental protection. It looks at two way impact

24
Q

What is TCFD ?

A

International framework for companies to disclose better information. It also help companies to build abd quantify information climate related risk and opportunities intho decision. UK was the first country which made framework mandatory. Now UK, EU and New Zealand. Now more than 1300 companies use it with market cap of 12.6 trln.
There are 4 thematic areas: governance, strategy, risk management, targets

As a result of TCFD were introduced clasiffication of physical and trasitional risk, recommending companies to report on both diminsions.

25
Q

What is transition risk in climate change

A

Risk of changing policy, technologies, market, reputation.

26
Q

What is Chronic risk ?

A

Physical climate risks are either acute or chronic. Acute risks include droughts, floods, extreme precipitation and wildfires. Chronic risks include rising temperatures, the expansion of tropical pests and diseases into temperate zones, and an accelerating loss of biodiversity.

27
Q

What is the specific of Networkf for Greening the Financial System

A

It was created by global central banks to strengthen the response of financial system to climate risk.

28
Q

What are mechanisms of Carbon Prising

A
  1. Emission trading system -e xchange of emission units between low and high carbon intense companies. There is a problem, companyies tend to change jurisdictions to with a fewer constraints and thus fail to reduce emissions
  2. Taxes. IMG guidance 2$ per tCO2. But in reality from 40-80 and 50 -100 (2030) should be real price to reduce carbon emission to Paris Agreement goal.

Some companies use shadow carbon emission tax makeing investment and financail decision. For example BP 100$ per tCO2 to better understand the potential future regulation on business projects

29
Q

What is the focus of investors and their concerns ?

A

Investors are thinking about material environmental issues. They try to identify materiality to determine the environmental impact - positive and negative. Based on environmental analysis investor may change forecasted financials and ratios.

30
Q

What investor can consider on corporate and project finance level ?

A

Analyse use of energy, water and waste.
For example can be analysed savings in energy or excessive amount of CO2 comparing with benchmark, water usage and efficiency (against reduction in pollution), or waste utilisation

31
Q

What IMF developed in assessing infrastructure intiative?

A

IMF developed framework which is adopted by financial institutions for determining, assessing and managing environmental and social risk in project finance. It also offer set of potential risks (excessive water energy, waste use for example) and their impact

32
Q

What is public finance initiative ?

A

Set of initiative (for example Helsinki principles) to incorporate in macroeconomic, fiscal, budgeting, public investments climate change into cosideration. Averege annual public climate finance around 300 bn with higest proportion on decarbonisation.

33
Q

What is SASB?

A

The Sustainability Accounting Standards Board (SASB) is an ESG guidance framework that sets standards for the disclosure of financially material sustainability information by companies to their investors.

Like TCFD, SASB is also an ESG guidance framework often used by financial stakeholders such as investors, insurers, and debt holders. However, SASB focuses on quantifying and reporting the outward ESG impacts and risks of an organization’s performance across 77 different industry standards, while TCFD addresses how climate change might impact the organization’s ability to create value.

Both TCFD and SASB are focused on financial materiality. Where SASB provides a backward-looking snapshot of sustainability performance, TCFD is more interested in the organization’s approach to sustainability and climate change, and in assessing an organization’s readiness to deal with the associated risks and opportunities. The two frameworks are therefore complementary rather than interchangeable.

34
Q

Which approaches financial institutions can use according to G20 Green Finance study to asess environmental risk

A
  1. Estimate environmental factors that may pose risks on assets and liabilities (misprising of insurance can lead to risk for liabilities of insures)
  2. Translate risk factors into quantitate measures and integrate them into investment decision or risk management
35
Q

Which level of environmental risk analysis investor can conduct ?

A

Al levels

  1. Company or project
  2. Sector level
  3. Country
  4. Market
36
Q

What does it mean to conduct company level analysis of environmental risk ?

A

It is important to identify key environmental risks and their influence on financial statement. For example how water scarcity will influence financial metrics, P/E ratios. Often analysts have their own scoring system how integrate this risk into valuation

37
Q

Why it is important to conduct sector level analysis

A

Because different sectors have different exposure to different risks, both environmental (industries like chemicals, energy, cement, extravities and other) and phisical from natural disaster (buildings or infrastructure damage)

38
Q

How country level analysis works ?

A

Through analysis of regulation, disclosure, emission targets and through influence of environmental risk on country’s resistance to natural hazards or credit rating.

39
Q

What is the porblem with market level strategic allocation ?

A

If the sentiment is changing, for example investors change focus from high carbon to low carbon industries, they can be unhedgeable - not enough assets to manage properly portfolio. This reaafirms the need of system solutions

40
Q

Which approached do investors use to analyse environmental risks ?

A

Carbon footprint
Natural capital
Climate scenario analysis

41
Q

WHAT IS CARBON FOOTPRINT??

A

Measure carboon footprint across sectors, companies

Investors can compare with benchmark, identirfy areas of improvement, track progress

Carbon tracking conducted using GHG Protocol (1,2,3 Scopes)
Scope 1 direct consumption
Scope 2 purchase electricity, heat, steam
Scope 3 Purchased good and services, bsuness trevel, transportation and distribution

Challengies of carbon footprint
Lack of disclosure for unlisted companies
Scope 3 rarely included
Double counting
Different methodologies
it does not estimate of investment risk from climate change

Investors use 2 formulas to etimate exposure to carbon emission

Total carbon emission and weighted carbon emission

Investment process -> estimate carbon foortpring -> estimate environmental ambitions -> estimate carbon pricing in different climate scenarios

There are several sub categoreis of analysing are Net zero / Science based targets; Emissions trajectory; Tempreture alignmnt; Green CAPEX, revenue R&D

42
Q

What is Natural Capital Protocol

A

The Natural Capital Protocol is a decision-making framework that enables organisations to identify, measure and value their direct and indirect impacts and dependencies on natural capital.

43
Q

What is climate scenario analysis ?

A

It analysing different climate scenario (for example a 2C or lower scenario) and influence on performance

44
Q

How environmental factors influence infrastructure projects?

A

Give several examples

45
Q

What is the share of green economy and how much infrastructure need to invest ?

A

Now share of green companies (with positive influence on environment) is 5% with strong growth. Infrastructure investments around 90 trln usd dollars next 15 years.

46
Q

What are the investment opportunities related to climate change ?

A

Circular economy
Clean and technology innovation
Green and ESG related products
The blue economy

47
Q

What opportunities create circular economy ?

A

Today in EU only 12% of materials are recycled. Investment opportunities can arise from innovations encouraging shift toward circular economy. Asset managers increased allocation to circular economy from 0.3 bn to 2 bn.

48
Q

What are the clean and technological innovation ?

A

Overall we talk about cleantech - set of insutries and technologies delivering sustainable development

In energy -> low carbon electricity generation (including nuclear energy and biofules). But problems in heating and cooling

Electrification of industrial production -> through clean energy (gas vs coal), green hydrogen an other

The building sector contributes 40% of GHG. Source: construction and operation (heating and cooling, light). In construction the most CO2 intens is cement production. Now there are technologies with higher energy efficiency

In transport -> electric vehicles. Open question is massive decarbonisation of heavy trucks (through hydrogen potentially)

In food ->protein alternaitves and less toxic fertilisers

CFA ESG Certificate (6 decks)

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