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CFA ESG Investing > Chapter 3 - Environmental Factors > Flashcards

Chapter 3 - Environmental Factors Flashcards

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1
Q

Climate Change

(Bonus: 2 Examples)

A

Changes in the earth’s systems which determine climate, e.g.
* increase in heat-trapping gases in the atmosphere
* change in reflectivity of earth’s surface

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2
Q

Climate Change Mitigation

A

A set of actions that reduce the earth’s added warming

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3
Q

Examples and Challenges of Climate Change Mitigation Actions

(4 Examples)

A
  • avoid dangerous interference with climate system
  • stabilize GHG levels to allow reduction in atmosphere and therefore lower earth’s temperature
  • ensure food production is not threatened
  • ensure economic development to proceed in sustainable manner
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4
Q

Climate Change Adaption

A

A set of actions for humans to adapt to warming world, rising seas, droughts, rainfall and storms

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5
Q

Examples of Climate Change Adaption Actions

(7 Examples)

A
  • protecting coastlines and adopting 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
  • developing clean cooling systems
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6
Q

Resiliance Measures

A

Adaption actions that function even though climate is changing

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7
Q

Issues in the Quantification of Losses from Climate Change in the Future

(3 Issues)

A
  • due to discounting (inflation), cash flows in the future have little present value
  • Dismal Theorem: no matter how small the probability, if the uncertainty of climate change is large (e.g. civilization collapse) the expected value becomes negative infinity
  • negative impacts of climate damages ramp up only gradually, without tipping points, in the estimations
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8
Q

What are the Climate Change estimates of the Intergovernmental Panel on Climate Change (IPCC)?

(3 Estimates)

A
  • human activities caused approx. 1.1°C of global warming (above pre-industrial levels)
  • likely to reach 1.5°C by 2040, even under the very low emission scenario
  • difference between 1.5°C and 2.0°C by 2100: 400 million fewer people exposed to extreme heatwaves and 10 million fewer people exposed to rising sea levels; arctic and warm water coral reefs mostly disappear at 2.0°C (above pre-industrial levels)
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9
Q

Pressures and Measures on Water as Natural Resource

(3 Examples)

A

70% of the planet is water, but only 2.5% of it is Fresh Water
* water demand set to increase in all sectors (e.g. agricultural, industrial, energy generation, mineral extraction and cooling)
* currently 2 billion people experience high water stress; 4 billion people experience water scarcity at least one month of the year
* UN’s Sustainability Development Goal 6 (SDG 6) “ensure availability and sustainable management of water and sanitation to all” by 2030

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10
Q

Pressures on Biodiversity as Natural Resource

(5 Examples)

A
  • around 1 million animal and plant species are now threatened with extintion
  • humans impacted over 75% of earths land and 66% of oceans
  • WWF: world wildlife population dropped 68% since 1970
  • 70% of cancer drugs are organic or from organic substances
  • biodiversity ecosystem services: food, clean water, genetic resources, flood protection, nutrient cycling, climate regulation, pollination
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11
Q

Pressures on Land Use and Forestry as Natural Resource

(4 Examples)

A
  • impact on natural resources, e.g. water, soil, nutrients, plants, animals
  • 30% of worlds land are forests
  • forests are vital to convert CO₂ into Oxygen, the older the tree the better the conversion
  • from 2001 to 2019: 9.7% decrease in tree cover
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12
Q

Pressures on Marine as Natural Resource

(3 Examples)

A
  • ocean is planets largest CO₂ reservoir (43x more than atmosphere)
  • provides: food, shipping ways, mineral mining and oil
  • over-fishing is a concern: 33% fish harvested at unsustainable levels; 60% harvested at maximum sustainable levels; 7% harvested below sustainable levels
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13
Q

Effects of Air Pollution

(7 Effects)

A
  • adversely affects environment
  • negative impact on human health
  • destroys ecosystems
  • impacts biodiversity
  • reduces crop harvest due to soil acidification
  • over 7 million deaths globally each year
  • 99% of population living in places where air quality levels were not met
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14
Q

Effects of Water Pollution

(2 Effects)

A
  • contaminents (e.g. chemical or harmful microorganisms, sewage and industrial waste) are introduced into the water
  • fines for water pollution are increasing worldwide
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15
Q

Issues with Waste and Waste Management

(3 Issues)

A
  • landfill space limited and charges rising
  • recycling practices very uneven between countries
  • concern regarding single-use plastics and the damages it does to the ocean
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16
Q

Plastic Strategies for Waste and Waste Management

(2 Strategies)

A
  • UN Environment Assembly: commit to develop international legally binding agreement to end plastic pollution
  • European Strategy for Plastics in a Circular Economy: all plastic packaging must be reuseable or recycleable by 2030
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17
Q

Principles of a Circular Economy

(3 Principles)

A
  • design out waste and pollution
  • keep product and materials in use
  • regenerate natural systems

Circular Economy in 5 key areas can eliminate emissions by half:
(cement, aluminium, steel, plastics, food)

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18
Q

Physical Risks of Climate Change

(2 Risks)

A
  • more frequent or severe weather events, e.g. flooding, droughts, storms
  • Insurer are double exposed as events affect real estate in their portfolio and liabilities
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19
Q

Transition Risk of Climate Change for Entities

(3 Risks)

A
  • Policy Risk: e.g. increased emission regulation and environmental standards
  • Legal Risk: e.g. lawsuits claiming from entities believed to be liable for the contribution to climate change
  • Technology Risk: e.g. low-carbon innovations disrupting established industries
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20
Q

Impacts of an Organisation on Biodiversity

(5 Impacts)

A

Direct Impact:
* degraded land is converted for production activities
* surface water as supply to fields

Indirect Impact:
* from supply chains (e.g. import fruit and vegetables, produce cotton shirts, sell construction materials, publish books)

Negative Impact:
* degrading quality or quantity of biodiversity

Positive Impact:
* creating a net contribution to quality and quantity of biodiversity

Indirect Impact is difficult to predict and manage, but can be major

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21
Q

Sectors with highest potential Negative Affect to Biodiversity

(6 Sectors)

A
  • agriculture, aquaculture, fisheries, food production
  • fast moving consumer goods
  • forestry (wood products, paper, fiber, energy)
  • pharmaceutical (in some cases)
  • tourism and hospitality (in some cases)
  • utilities (incl. hydropower or open-cycle power plants with significant thermal discharges)
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22
Q

Potential Environmental Impacts from direct Operations

(8 Impacts)

A
  • Toxic Waste
  • Water Pollution
  • Loss of Biodiversity
  • Deforestation
  • Energy Use
  • Long-term Damage to Ecosystem
  • Water Scarcity
  • Hazardous Air Emissions and high GHG Emissions
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23
Q

Supply Chain Sustainability

(2 Points)

A

To manage ESG impacts and practices for raw materials and components that come from outside the factory gates.
Looking at the broader life cycle of goods and services, particularly with regard to the sourcing of raw materials and components.

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24
Q

Challenges of addressing Climate issues in the Supply Chain

(for 2 Industries)

A

Industry:
* growing demand for materials with slow adoption of renewable energy and process improvements

Food System:
* require change in food consumption behaviour and food production behaviour, as well as decarbonization of supply chains

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25
Q

Explain Traceability in Supply Chains

(2 Points)

A

A useful practice to trace history, distribution location and application of products, parts and materials. Also reliable tool for human rights, labor (incl. health and safety), environment and anti-corruption.

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26
Q

Sectors with a complex high-risk Supply Chain

(10 Sectors)

A
  • oil and gas
  • mining
  • beef
  • cocoa
  • cotton
  • fisheries
  • leather
  • palm oil
  • agriculture
  • forestry
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27
Q

Key Areas of Environmental Risk for Supply Chains

(9 Key Areas)

A
  • material toxicity and chemical
  • raw material use
  • recyclability and end-of-life products
  • GHG emissions
  • energy use
  • water use and wastewater treatment
  • air pollution
  • biodiversity
  • deforestation
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28
Q

UN Framework Convention on Climate Change (UNFCCC)

(5 Points)

A

Established 1992
* overarching international treaty relating to climate change
* goal: “avoid dangerous anthropogenic interference with the climate system”
* all agreements, e.g. Kyoto Protocol are protocols of this treaty
* responsible for annual Conference of the Parties (COP), e.g. COP21 (Paris)

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29
Q

Kyoto Protocol

(4 Points)

A

COP3, 1997
* set targets for emission of the main GHGs, e.g. CO2, CH4, N2O, etc.
* targets are legally binding for developed countries, commitment became effective in 2005 but extended to 2020
* no US participation

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30
Q

Paris Agreement

(5 Points)

A

COP21, 2015
* global average temperature well below 2.0°C (above pre-industrial levels), and limit increase to 1.5°C
* nationally determind contributions (NDCs), voluntary efforts which are not legally binding
* includes developed and developing countries, endorsed by 191 nations (194 now)
* updated commitments every 5 years (current commitments 25-30% GHG reduction by 2030) - many countries are not on track!

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31
Q

Glasgow Climate Pact

(4 Points)

A

COP26, 2021
* phase down the use of coal power (without carbon capture and storage CSS)
* recognition of shorter-term emissions pathways (50% by 2030, net-zero by 2050)
* NDCs were submitted by countries, which would bring global warming to around 2.4°C, if all met

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32
Q

UN Sustainable Development Goals (SDG)

(don’t need to name them all)

A

17 goals by UN General Assembly to address challenges, like poverty, inequality, and climate change.

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33
Q

Name the most material Sustainable Development Goals (SDG’s)

(6 SDG’s)

A
  • SDG7: affordable and clean energy
  • SDG11: sustainable cities and communities
  • SDG12: responsible consumption and production
  • SDG13: climate action
  • SDG14: life below water
  • SDG15: life on land
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34
Q

Kigali Amendment to the Montreal Protocol of 2016

A

Is a global agreement to phase out the manufacture of hydrofluorocarbons (for cooling and refrigerating)

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35
Q

International Maritime Organization (IMO) 2020 Regulation

A

Is limiting sulphur oxide emissions by capping maximum sulphur content in fuel oil of ships

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36
Q

Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)

A

It makes all growth in international flights after 2020 cabron neutral by offsetting their emissions

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37
Q

EU Taxonomy

(5 Points)

A

Is a classification system to determine whether economic activities are environmental sustainable.

Conditions to be considered environmental sustainable:
* contributing substantial to at least 1 of the 6 environmental objectives
* doing no significant harm to other 5 environmental objectives
* comply with minimum, EU-specified, social and governance safeguards

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38
Q

Environmental Objectives of the EU Taxonomy

(6 Objectives)

A
  • climate change mitigation
  • climate change adaption
  • sustainable use and protection of water and marine resources
  • transition to a circular economy
  • pollution prevention and control
  • protection and restoration of biodiversity and ecosystems
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39
Q

Sustainable Finance Disclosure Regulation (SFDR)

(6 Points)

A

(EU)
More Transparency and Standardization of ESG Factors in the Financial Sector and providing Disclosure Requirements.

Investors are required to provide more transparency around:
* how the impacts of sustainability risk on their financial products are being systematically assessed (e.g. integrated into due diligance and research)
* how asset managers consider - and seek to address - the potentially negative implications of investment activities on sustainable factors
* products labeled with an explicit ESG focus

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40
Q

Sustainable Finance Disclosure Regulation (SFDR) ESG Categorisation

(3 Points)

A
  • Article 6 Products: are not promoted as incorporating any ESG factor or objectives
  • Article 8 Products: claimed to promote environmental and social characteristics
  • Aritcle 9 Products: with sustainable investment as an objective
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41
Q

Corporate Sustainability Reporting Directive (CSRD)

(6 Points)

A

(EU)
It is enhancing the quality and consistency of sustainability reporting by expanding reporting requirements for large companies; and introducing standardized disclosure frameworks.

  • replaces and strengthens existing EU requirements around non-financial reporting
  • covering all large companies and all listed companies in EU
  • requires an assessment of double materiality
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42
Q

EU Paris-Aligned Benchmarks (EU PABs)

(4 Points)

A

For Investment Portfolios:
* 50% carbon emission intensity reduction in first year
* 4:1 ratio of green to brown investments
* not invest in fossil fuels

43
Q

EU Climate Transition Benchmarks (EU CTBs)

(4 Points)

A

For Investment Portfolios:
* 30% carbon emission intensity reduction in first year
* 1:1 ratio of green to brown investments
* permit fossil fuel investments as part of a transition process

44
Q

Country-Level Policies and Prudential Actions for France

A

France Energy Transition for Green Growth Law:
* mandatory disclosures from major institutional investors around their exposure to climate risks and efforts to mitigate climate change

45
Q

Country-Level Policies and Prudential Actions for USA

(6 Points)

A

More conservative stance with ongoing debate whether trustees should consider ESG and climate factors in the management of their assets.

Securities and Exchange Commission (SEC) unveil proposals for companies to report on:
* the governance and impacts of climate-related risks
* GHG emissions (Scope 1, Scope 2, and where material Scope 3)
* other climate-related financial statement metrics (some subject to audit/assurance)
* climate-related targets and goals and transition plans

46
Q

Country-Level Policies and Prudential Actions for Japan

(4 Points)

A
  • committed to net-zero GHG emissions by 2050
  • new clean energy strategy
  • development of Sustainability Standards Board of Japan for corporate disclosures
  • climate stress testing in the banking sector
47
Q

Environmental Country-Level Policies and Prudential Actions for UK

(11 Points)

A

10-point plan for a green industrial revolution, with aim:
* scale up low-carbon technologies and infrastructure
* increase protections for biodiversity
* further the green finance agenda

UK is first to introduce mandatory climate disclosures based on TCFD.

They conducted climate change stress tests for liabilities and investments to investigate resilience of financial system.

The Pensions Regulator (TPR) issued guidance to pension fund relating to ESG issues and climate change.

“Green Finance: A Roadmap to Sustainable Investment” policy about:
* new disclosure requirements for corporates, asset managers, asset owners and investment owners, based on TCFD and ISSB
* establishment of UK Green Taxonomy

48
Q

Country-Level Policies and Prudential Actions for China

(6 Points)

A
  • country with highest levels of investments in low-carbon energy transition
  • country with highest absolute GHG emissions
  • efforts for roll-out of a national carbon market
  • support for environmental stress-test and mandatory environmental disclosures

China’s policymakers committed to:
* countries CO2 emissions peak before 2030
* roadmap to net-zero carbon by 2060

49
Q

Country-Level Policies and Prudential Actions for India

(2 Points)

A

Securities and Exchange Board of India strengthened disclosure requirements for 1000 largest listed companies to report on sustainability and social aspects of business practices.

50
Q

Country-Level Policies and Prudential Actions for Australia

(2 Points)

A

Securities and Investments Commission:
Consulting on proposals to develope mandatory climate reporting rules and will investigate greenwashing.

51
Q

Task Force on Climate-Related Financial Disclosures (TCFD)

(9 Points)

A

TCFD is a global initiative that provide voluntary guidelines for companies to disclose climate-related risks and opportunities in their financial reporting.

TCFD recommends how companies should report, structured around 4 thematic areas:
* governance
* strategy
* risk management
* metrics and targets

TCFD introduced classification of climate-related risk into physical and transition risk, and recommending companies to report on both.

Recommended the Climate Scenario Analysis.

Guideline for voluntary reporting, but UK, EU and NZ announced policies requiring TCFD-aligned disclosures.

52
Q

Network for Greening the Financial System (NGFS)

(3 Points)

A
  • over 70 central banks and financial supervisors in this network
  • developed technical guidance, including publishing a series of climate scenarios, for the regulatory supervision of climate risks
  • introduced “climate stress tests” for bankers and other financial institutions
53
Q

Carbon Pricing

(3 Points)

A

“Polluter Pays Principle” by putting a price on carbon emissions.

There are many types of carbon pricing, with the most common being:
* Emission Trading System (ETS)
* Carbon Taxes

54
Q

Emission Trading System (ETS)

(4 Points)

A

ETS is a system based on exchange of permits for emission units. Actors that exceed their emission limits are required to buy permits from those that have emitted less.

System creates incentive for emission reductions to occur at the point of least cost.

Effectiveness depends on the design:
* if too restrictive, may encourage offshoring to juristrictions with fewer constraints
* if too open (cheap), there is no proper incentive for decarbonization

55
Q

Carbon Taxation

(Explanation, Advantage & Alternatives)

A

Carbon Taxation directly sets an explicit price on GHG emissions, therefore has the advantage of predictability.

Price level is key determinant of sucess, current prices are far below those required to achieve the goals of the Paris Agreement.

Alternative ways of Carbon Taxation:
* Shadow Carbon Pricing, for Companies to help in decision making
* Internal Carbon Pricing, for Governments in procurement, policy design and project assessments
* Internal Carbon Pricing, for Financial Institutions to assess their project portfolio

56
Q

Carbon Offsetting

(Explanation & Challenges)

A

Offset carbon emissions with an activity providing emission reductions.
Implementation can be challenging, e.g.:
* compensating a farmer to maintain a forest when the farmer had no intention of cutting it down in the first place
* netting present emissions against the future carbon reduction by a newly planted tree over its lifetime

57
Q

How to assess Materiality in Corporate and Project Finance?

(2 Steps)

A
  1. analyze quantitative and qualitative environmental factors (e.g. energy consumption, water utilization, waste utilization)
  2. make judgement on materiality and whether risks are priced in. A scoring system is typically used. The materiality is highly influenced by industry or sector, as well as country and jurisdictions.
58
Q

Types of Public Finance

(6 Types)

A

Government allocation of funds.
* export credit (provide finance and insurance for domestic exports)
* development banks
* concessionary lending to SMEs (small and medium-sized enterprises)
* guarantees (e.g. promise to replay loan if borrower can’t)
* research and development (R&D)
* investment in infrastructure

59
Q

Public Finance Initiatives

(3 Points)

A
  • governments are allocating resources and mobilizing investments to implement plans to achieve climate targets
  • Helsinki Principles: signed by finance ministers around the world, encourages signatories to “take climate change into account in macroeconomic policy, fiscial planning, budgeting, public investment management and procurement practices”
  • may be achieved via sustainability investment vehicles e.g. green infrastructure funds, specialized banks and funding platforms

(public finance - government allocation of funds)

60
Q

Asset Management Tools for ESG

(3 Points)

A
  • Asset Managers increasingly focus on development of standardized frameworks and data points to assess climate and environmental risk.
  • Sustainability and Accounting Standards Board (SASB) provides an interactive proprietary tool that identifies and compares disclosure topics across different industries and sectors, called “Materiality Map”.
  • SASB was consolidated under International Sunstainability Standards Board (ISSB) in 2022.
61
Q

Environmental Factors covered under SASB

(Sustainability and Accounting Standards Board)
(6 Factors)

A
  • GHG emissions
  • air quality
  • energy management
  • water and wastewater management
  • waste and hazardous materials management
  • ecological impacts
62
Q

Environmental Risk Analysis

(7 Points)

A
  • understand environmental factors that may pose risks to finacial assets and liabilities and how such risk may evolve over time
  • translating environmental risk factors into quantitative measures of financial risk
  • environmental risk assessments are conducted at:
    1. company or project level
    2. sector level
    3. country level
    4. market level
63
Q

Environmental Analysis at Company or Project Level

(3 Points)

A
  • analyze how well a company is managing environmental risks
  • may use an own scoring system based on external data and internal analysis
  • determine materiality of environmental risks and how they may affect key efficiency or profitability ratios, leading to adjustments, e.g. PE ratios or directly to financial statement items (balance sheet, expenses)
64
Q

Environmental Analysis at Sector Level

(2 Points)

A
  • varying degree of impact from environmental risks and physical risks on different sectors
  • environmental risk premium for companies in sectors exposed to higher risks
65
Q

Issues of Environmental Analysis at Country Level

(2 Points)

A
  • differences in environmental regulations, emission targets and enforcement
  • disclosure and transparency of environmental data also varies by regions
66
Q

Environmental Analysis at Market Level

(2 Points)

A
  • potential systemic effets of both physical and transition risk: central banks may be called upon by their local constituencies to intervene as climate rescuers of last resort
  • “Unhedgeable Risk” - investor intending to shift away from high carbon sectors may find that there are not enough available low-carbon assets to buy
67
Q

Approaches to assess Material Environmental Risks

(3 Approaches)

A
  • carbon footprinting and other carbon metrics
  • natural capital approach
  • climate scenario analysis
68
Q

Carbon Footprinting

(4 Points)

A

Measures carbon emission and intensity.
GHG protocol standards define 3 different types of emission:
* Scope 1 (direct): fuel combustion in furnances or company vehicles
* Scope 2 (indirect): purchased electricity, heat and steam
* Scope 3 (indirect): from activities of an organization, suppliers and consumers, e.g. purchased goods/services, business travel, employee commute, waste disposal, use of sold products, investments, etc.

69
Q

Types of Carbon Footprinting

(2 Points)

A

Total Cabron Emissions: investments with high contribution to global emissions have higher exposure to future policy intervensions
Weighted Carbon Emissions: emissions scaled in relation to a particular metric, such as company’s revenues

70
Q

Issues of Net-Zero/Science-Based Targets

(5 Issues and 1 Initiative)

A

Significant variation among net-zero targets:
* absolute or relative targets
* cover different scopes of emissions (Scope 1, 2, 3)
* cover different types of emissions (CO2 or all GHG)
* focus on differing or multiple time frames
* rely on offsets

Standardization from Science-Based Target initiative (SBTi) provides independent cerifications of the strength of the companies targets produced decabonization guidance for sectors like power, apparel and footwear, IT and financial sector.

71
Q

Partnership for Carbon Accounting Financials (PCAF)

A

PCAF developed guidance for financial institutions to assess the GHG emissions of their loans and investments

72
Q

Emission Trajectories

A

Emission Trajectories are used to assess the required reductions to reach a stated goal, e.g. net-zero carbon by 2050

73
Q

Temperature Alignment

A

Compares climate profiles of companies, sectors or portfolios against a benchmark of global temperature.

74
Q

Significant Variations in the Temperature Alignment Method

(3 Points)

A

There are significant variations in the market around metrics:
* inclusion of implied temperature rise, global warming potential and temperature alignment
* using different inputs for climate performance, including carbon footprint, share of investment in “green” technologies and proportion of investee companies with emission targets
* resulting in a different quantification of output - a binary statement (aligned or not), a score, a precentage of misalignment or a temperature number

75
Q

Free-to-use Temperature Alignment Tools

A
  • CDP Temperature Methodology
  • Paris Agreement Capital Transition Assessment (PACTA), developed by 2° Investing Initiative with backing from UN PRI, provides tools to model publicly listed securities and an open-source data and modeling suit for private portfolios
  • Climate Portfolio Optimizer from ESG for Investors, models temperature as part of a “3D” framework, covering risk, return and climate impact
76
Q

Green Capital Expenditures

A

Carbon Tracker Initiative created a framework to assess potential expenditures on new oil and gas projects, compared against cost of production, associated emissions and demand levels in different climate scenarios.

77
Q

Existing Green Revenue Data

A

FTSE Russell and HSBC have databases to assess generated company sales from over 100 low-carbon products and services.

78
Q

Green R&D Data

A

Data providers constructed methodologies to analyze patents for low-carbon technologies filed by companies. But, accumulation of patents does not always lead to materiality.

79
Q

Natural Capital Approach

(3 Points)

A
  • identify, measure, value and prioritize companies impacts and dependencies on biodiversity and the ecosystem
  • Natural Capital Protocol (NCP) provides decision-making framework to identify, measure and value the direct and indirect impact and dependencies on natural capital
  • Task Force on Natural-Related Finacial Disclosures (TNFD) released nature-related risk management framework for market consultation
80
Q

Natural Resource Risk Assessment Tools

(for Inverstors and Policymakers)
(3 Tools)

A
  • Integrated Biodiversity Assessment Tool (IBAT)
  • Enabling a Natural Capital Approach (ENCA)
  • CERES and WWF water risk assessment tools
81
Q

Integrated Biodiversity Assessment Tool (IBAT)

A

IBAT, by International Union for Conservation of Nature, is a central global biodiversity database that includes key biodiversity risks and opportunities through an interactive mapping tool.

82
Q

Enabling a Natural Capital Approach (ENCA)

A

ENCA is a policy tool and guidance developed by the UK Deparment for Environment, Food and Rural Affairs.

83
Q

Water Risk Assessment Tools

(4 Points)

A

CERES and WWF have developed water risk assessment tools, targeted at Investors, Lenders and Policymakers:
* CERES Aqua Gauge, developed by CERES and CDP
* WWF Water Risk Filter
* Aqueduct, a water tool developed by World Resources Institute

84
Q

Climate Scenario Analysis

(5 Points)

A

Is a forward-looking assessment of risks and opportunities.

TCFD recommends that companies and financial institutions describe the resilience of the oganizations strategy, taking into consideration scenarios, including a 2°C or lower scenario.

Institutional Investors Group on Climate Change (IIGCC) published a practical investor guide with 2 objectives of undertaking scenario analysis:
* financial impact: use of scenario analysis enables assessment and pricing of climate-related risks and opportunities
* alignment: aligning the portolio with a 2°C or lower future, which is typically driven by a set of investment beliefs

85
Q

EU’s Non-Financial Reporting Directive most effective and recommended approach

(4 Points)

A
  • taking a set of transparent and credible data sources and assumptions, which can be quantitative or qualitative
  • applying recognizable accepted methodologies, which have backing of an industry body, government department or multilateral institution
  • focusing on materiality (in particular for business models, operations and fiancial performance)
  • generating a set of outputs that can be measured in terms of key performance indicators
86
Q

Investment Opportunities from Circular Economy

(3 Points)

A
  • significant investment opportunities by encouraging a shift towards recycling and reusing materials
  • only a fraction of material imputs being currently recycled (less than 12% in EU in 2019), creating room for innovations in circular economy
  • assets managed through public equity funds focused on circular economy have increased sixfold
87
Q

Opportunities from Clean and Technological Innovation

(2 Points)

A
  • state support and favorable policies have drive early growth of clean technologies, like wind and solar energy
  • venture capital into cleantech grew 3 times faster than similar investments into AI
88
Q

Major Sectors for Decarbonizing Technologies

(6 Sectors)

A
  • Energy
  • Heat & Cooling
  • Industrial Process
  • Built Environment
  • Transport
  • Food
89
Q

Decarbonizing Technologies in Energy Sector

(8 Points)

A

Low-carbon electricity production from:
* solar photovoltaics
* onshore and offshore wind
* hydroelectricity
* nuclear energy
* tidal energy
* geothermal energy.
Primary mover of economy and reducing emission has knock-on effects across all sectors.

90
Q

Decarbonizing Technologies in Heat & Cooling Sector

(4 Points)

A

Residential and Commerial Properties:
Potential heating solutions are ground and air source heat pumps, combined heat and power and district heating.

High-Temperature Processes:
Use of renewable energy to produce hydrogen, which can burn at high temperature.

Other Technologies:
Nuclear fusion and next-generation battery storage.

91
Q

Decarbonizing Technologies in Industrial Processes Sector

(2 Points)

A

Steel Making:
Use of electric arc furnances, increased steel recycling, hydrogen or gas instead of coal, and carbon capture and storage (CCS).

Chemical Industry:
Use of green hydrogen, synthetic fuels, new catalysts, alternative feedstocks, development of lightweight materials and plastic alternatives.

92
Q

Decarbonizing Technologies in Built Environment Sector

A

Building material alternatives to “clinkers” (one of cements major components), and cabon capture and storage (CCS).

93
Q

Decarbonizing Technologies in Transport Sector

(2 Points)

A

Cars:
Battery Electric Vehicles (BEVs)

Heavy-Duty Transport:
Electrification or other Fuel Sources (e.g. Ammonia, Hydrogen Fuel Cell or Biofuels)

94
Q

Decarbonizing Technologies in Food Sector

(2 Points)

A

Development of protein alternatives (plant-based or laboratory-grown meat) and innovation in agricultural techniques (e.g. regenerative agriculture, less toxic pests, low-nitrous oxide emission nitrogen fertilizers).

95
Q

Risks and Opportunities of Green and ESG-related Products

(3 Points)

A
  • issues in recognizing a product to be “green” or “sustainable”
  • investors need to have a clear framework to assess those assets
  • “Shades of Green”-methodology developed by Center for International Climate Research
96
Q

“Shades of Green” Methodology

(4 Points)

A
  • Dark Green: solutions and projects that realize the long-term vision of a climate-resilient and low-carbon future, e.g. zero-emission solutions like renewable energy projects.
  • Medium Green: solutions and projects that are making progress towards the long-term vision but are not fully realized, e.g. sustainable buildings with good (but not excellent) energy effeciency ratings.
  • Light Green: solutions and projects that aren’t part of long-term vision but are still environmentally friendly, e.g. short-term improvement in fossil fuel efficiency that reduce GHG emissions.
  • Brown: solutions and projects that don’t enable long-term vision of a climate-resilient and low-carbon future, e.g. new infrastructure project for coal
97
Q

Investor Framework to assess Green and Sustainable Assets

(5 Points)

A

Investors need to have a clear framework to asses assets:
* eligability of assets and criteria to meeting their “Green”, ESG or SDG-related objectives
* use of proceeds effectively allocated to eligible projects
* transparancy, reporting requirements and key measures of impacts
* issuer/borrower has a clear sustainability and ESG strategy

98
Q

Transition Bonds

A

Transition Bonds are issued by high-emission companies to finance their reduction in GHG emissions.

99
Q

Green Bond Principles (GBP)

(3 Points)

A

Established in 2014 by International Capital Markets Association (ICMA):
* sets out voluntary guidelines and promotes integrity of the green bond market by recommending transparency, disclosure and reporting
* external review is obtained through a second-party opinion provider that will track and report whether proceeds are used as promised

100
Q

Green Loan Principles (GLP)

(6 Points)

A

Established in 2018 by Loan Market Association (LMA) and Asia Pacific Loan Market Association (APLMA).
Sets 4 pillars for a green loan:
* there is clear green use of loan proceeds
* project’s sustainability objectives have been clearly evaluated and communicated to lenders
* loan proceeds are strictly managed through project accounts
* detailed and strict reporting is required

101
Q

Blue Economy

(5 Points)

A

Sustainable use of ocean resources for economic growth, improved livelihoods and jobs, while preserving the health of ocean ecosystems.

OECD study finds 3 priority areas for action:
* approaches that produce win-win for ocean business and ocean environment
* creation of ocean-economy innovation networks
* initiatives to improve measurement of ocean economy via satellite account (term by UN to measure size of economic sectors)

102
Q

European Green Deal

(5 Points)

A

In December 2019 EU announced the European Green Deal, a plan to make the EU economy climate neutral by 2050 by boosting the efficient use of resources, restoring biodiversity, and cutting pollution.

The main ambitions are:
* reorient capital flows by establishing a classification system for sustainable activies (EU Taxonomy), labels for green bonds and increasing EU funding for sustainable projects
* mainstream sunstainability into risk management, and proposal on treatement of “green” assets in the capital requirements of banks and insurers (“green supporting factor”)
* foster transparency and long-term thinking by strengthening disclosure requirements on sustainability

103
Q

Impact to Arctic Ice at different global warming levels, according IPCC

(3 Points)

A
  • 1.5°C: Arctic Summer Sea Ice is likely to be maintained
  • 2.0°C: Risk of an ice-free Arctic in Summer is about 50% or higher
  • 3.0°C+: The Arctic is very likely to be ice-free in Summer
104
Q

Jevons Paradox

(2 Points)

A

Relative improvements in efficiency (using fewer resources per unit of production) may be offset by increased consumption of a given product.

E.g. increased efficiency of air conditioning units (lower operation costs) might lead to higher demand of the same (offsetting the improvements).

CFA ESG Investing (10 decks)

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