Chapter 3: Environmental Factors Flashcards
Which planetary boundaries have been crossed?
- Climate change (>350ppm)
- Biosphere integrity (amazon burning)
- Land-system change (agreable land)
- Biochemical circles (Baltic Sea)
What are transition risks?
- Result from changes in climate and energy policy and the shift to low-carbon tech
1. Climate policy +
2. Technology change
3. Consumer preferences
4. Market change
What are physical risks?
- Results from extreme weather events, acute or chronic risks from longer-term changes
- Travel and leasure highest risk
What are the goals for climate change mitigation?
- Avoid significant human interference with climate system
- Stabilize GHG in time sufficient for ecosystem to adapt
- Ensure food production
- Enable economic and sustainable development
What are the main climate scenarios in terms of temperature increase and emission trajectory?
- RCP 2.6 -> not likely to exceed 2 degees / Aggressive mitigation / Emissions halved by 2050
- RCP 4.5 -> More likely than not to exceed 2 degrees / Strong mitigation /emissions half by 2080
- RCP 6.0 -> Likely to exceed 2 degrees / Some mitigation / Emissions rise to 2080, than fall
RCP 8.5 -> As likely as not to exceed 4 degrees, emissions rise at current rate, business-as-usual
What sectors are particularly exposed to biodiversity loss?
- Agriculture
- Extractive industries
- Forestry
- Tourism
What material risk are companies facing that are exposed to deforestration?
○ Supply disruption
○ Cost volatility
○Reputational damage (Germany)
What are the key components of a Green Bond Framework?
- Eligible use-of-proceeds criteria
- Process for project evaluation and selection
- Management of proceeds
- Reporting
What is governed by the Green Loan Principles?
- Green use of loan proceeds
- Projects sustainability objectives have been evaluated and communicated to lenders
- Management
- Reporting
What should investors in the Green Loan and Bond Market know?
- Eligibilty of asses and criteria to meet ESG objectives
- Effective allocation of proceeds
- Transparent reporting requirements and KPI
- Issuer or Borrower has sustainability and ESG strategy
What describes a circular economy?
- In a circular economy, products and materials are repaired, reused and recycled rather than thrown away
- Based on the principle that waste and pollution is designed out
- Keeping products and materials in use, regenerating natural systems
What steps should one take to conduct a climate scenario analysis?
- Establish objectives - Alignment or financial materiality/impact
- Understand climate scenarios and how they can be translated into investment analyses parameters
- Top-down mapping to identify main areas of riks OR bottom-up in-depth analysis
- Review findings and consider actions
- Ongoing monitoring
- Disclosure
What is the general approach to conduct a materiality assessment of environmental risks on companies?
- Take set of transparent and credible data source (quantitative or qualitative)
- Apply recognize methodology
- Focus on materiality - specific business model, operation, financial performance
- Generate outputs that can be measured in KPIs
What is the purpose of a climate scenario analysis?
- Forward-looking assessment of climate-related risks and opportunities
- Describes a process of evaluating how an organisation, sector, country or portfolio might perform in different future states
- To understand key drivers and outcomes
- Used to understand financial impact or need for alignment
What are the different scopes of emission?
- Scope 1 ○ Fuel combustion ○ Company vehicles ○ Fugitive emissions - Scope 2 ○ Purchased electricity, heat and steam - Scope 3: ○ 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
What is carbon footprinting and what is it used for, and what does the TCFD say about it?
- Portfolio carbon footprint measures carbon emissions and intensity associated with a company operations in a portfolio
○ Investors can compare it to global benchmarking
○ Identify priority areas and actions for reducing emssions,
○ Track progress in making reductions - TCFD recommends that asset owners and managers report weighted average carbon intensity associated with their investments
What is the rational and what are the types of carbon pricing?
- Putting price on carbon considered very effective -> Polluter pays principle
- Types of Carbon pricing
○ Emission trading system -> Emitter can trade emission units
○ Carbon Tax
What is a shadow carbon price and what can it do for companies and investors?
- Theoretical or assumed price of carbon,
- Used to better understand the impact on project profititability, new business model or investment
- Reveals hidden risks and helps business factor in future valuations and capital expenditures
- Investors use shadow pricing in their financial analysis
What are the key impacts of climate risks and opportuities for organisations?
○ Companies’ strategic planning and risk management
○ Financial impact
- Income statement (Revenues, Expenditures)
- Cash flow
- Balance sheet (Assets and liabilities, capital and financing)
What do investors need to do to understand companies exposure to climate risks?
- Understand environmental factors that pose for financial assets and liabilities
- Translate environmental factors and risks into quantitative measures of financial risk to incentive companies to management
How are companies evaluating materiality of environmental risks?
- Investors looks at qualitative and quantitative environmental factors to make an informed evaluation of the embedded risks
- Judgement is made how material the risk are and whether these risks are are priced or not
- Materiality is highly influenced by the industry, sector, country and jurisdiction where companies or projects are located
- Investors can assess materiality of environmental risk by analyzing rate of companies utilization or consumption of natural resources
What are potential consequences of a material risk assessment on company evaluation?
- Assessment of material environmental risks will inform assessment of key financial metrics as monitored and disclosed in financial statements (like profit and loss or balance sheet)
- Sector-wide assumptions need to be overlayed on company
- Companies in exposed sectors tend to be influenced by environmental risk premium, which may affect discount rate used.
- Adjustment can be made to remove regional or sectoral biases that align with investment strategy
What key company efficiency and profitability ratios are likely affected by materiality assessment?
a. E.g Price-to-earnings ratio which reflects company’s competetiveness
b. Adjustment of costs assumptions
What are the systemic impacts of climate risk?
- Impact will affect all agents in the economy, all sectors and across all geographies.
- Impact will be correlated and non-linear
- Impacts will be much greater scale that other risks.
What are the key supply chain risks?
○ Material toxiticity
○ Raw material use
○ GHG
- Biodiversity
Which industries are particularly affected by supply chain risk?
○ Oil and gas ○ Mining ○ Beef ○ Forestry, ○ Palm oil - Leather
