Environmental Factors Flashcards
planetary boundaries- processes that regulate the stability and resilience of the earth system
4/9 planetary boundaries have been crossed as a result of human activity:
- climate change
- loss of biosphere integrity
- land-system change
- altered biogeochemical cycles
environmental issues:
a. climate change
b. pressure on natural resources
c. pollution, waste and a circular economy
Climate change
one of the most complex issue facing us today and involves many different dimension, including:
- science
- economics
- society
- politics
- moral and ethical questions
main man-driver: rising emission of greenhouse gases
IPCC intergovernmental panel on climate change in 2018 estimated human activities caused approx. 2C of global warming above pre-industrial levels
global warming is likely to reach 1.5c between 2030-2052.
limiting warming to 1.5 instead of 2 by the end of this century could reduce ‘climate-related risks to health, livelihoods, food security, water supply, human security and economic growth’
dismal 惨淡theorem - martin weitzman
std cost-benefit analysis is inadequate to deal with the potential downside losses from climate change.
Economist Nicholas Stern argued that moral considerations warrant the use of low discount rate when assess future climate damages
thrust of stem and weitzaman arguments is that
the issue of how much society should invest today in order to safeguard a livable climate in the future requires a different- mathematical and ethical - treatment to std economic problems like “would you prefer to receive 10 today or 100 in one year”.
responding to climate change in 2 main approaches:
- reducing and stabilizing the levels of heat-trapping GHGs in the atmosphere
- climate change mitigation - adapting to the climate change already taking place and increasing climate change resilience
(climate change adaptation)
climate change mitigation
human intervention that involves reducing the sources of GHG emission or enhancing the sinks that store these gases.
Goal:
- avoid significant human interference with the climate system
- stabilize GHG levels in a time frame sufficient to allow ecosystems to adapt naturally to climate change
- to ensure that food production is not threatened
- enable economic development to proceed in a sustainable manner
aim of the international Paris Agreement on climate change:
to hold the increase in the global average temperature to well below 2C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5C above pre-industrial levels by the end of the century.
examples of mitigation strategies - adaption and policies to promote sustainability across diff. areas such as:
- Energy deploying renewable energy sources
- Buildings
retrofitting buildings to become more energy efficient and using building materials and equipment that reduce buildings’ carbon footprint
-Transport
adopting more sustainable transportation and infrastructure, particularly in cities, but also decarbonizing shipping, road and air transport.
- land use and forestry
- agriculture
- carbon pricing - implementing carbon reduction policies which penalize heavy emitters and promote GHG emission reductions in the form of either a carbon tax or cap-and-trade mechanism
- industry and manufacturing
the higher the ambition of mitigation policies, the higher the required upfront investment.
2020 UN emission gap report: 3.2c warnmer by the end of this century, even with full implementation of unconditional nationally determined contributions (NDCs) under the paris agreement.
COVID-19 pandemic led to the largest recorded drop in yearly CO2 emission - of circa~ 7%
green pandemic recovery could shave up to 25% off the emissions we would expect to see in 2030 with implementation of uncontaionql NDCs - bring the world close to 2c pathway
Climate change adaptation and resilience
the faster the climate changes, the more challenging it is to adapt.
wold bank aptly 恰如其分 describes adaptation and resilience as ‘two sides of the same coin’.
examples of adaptation strategies include a variety of development plans on how to deal with:
- protecting coastlines and adapting to sea-level rise
- building flood defense
- managing land use and forestry practices
- planning more efficiently for scarce water resources
- developing drought resilient crops 抗干旱的农作物
- protecting energy and public infruasturcture
- developing clean cooling systems
some of the most effective climate policies contribute to both adaptation and mitigation simultaneously
close to half of the global production of iron ore and zinc is estimated to be in areas facing high flood risk
representing 80% of global GDP, cites are heavily exposed to climate change risks in the forms of:
- sea level rise
- extreme weather events, such as flooding and drought
- increase in the spread of tropical diseases
useful best practices of various cities’ climate adaptation strategies include:
- incorporating flood risk into building design and planning for enhanced water absorption rates into city infrastructure
- modeling the impact of natural disasters on energy supply
- analyzing the resiliency to disruption of food supply systems
potential benefits: the Global Commission on Adaptation in 2019 estimated that circa US$2tn of investment in adaption measures would result in an over US$7tn return in avoided costs and other benefits.
Climate bonds Initiative published the 1st Climate Resilience Principles in late 2019
- provide a framework for developing location-specific climate resilience measures and financing them in the green bond market
a frame 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
Pressures on natural resources
relationship b/w businesses and natural resources is becoming increasing important due to dramatically accelerating biodiversity loss and less secure access to nature resources.
Natural resources cover:
fresh water
biodiversity loss
land use
forestry and marine resources
gov’t and business are having to deal with increased pressure on natural resources, caused by:
- population growth
- health improvements leading to people living longer
- economic growth
- the accompanying increased consumption in developed and emerging economics
leading to risk of resource scarcity
Depletion消耗 of natural resources
tech innovating and moving from a linear to a circular economy has the potential to reduce the need for virgin resources.
Jevons paradox
relative improvements in efficiency may be offset by increased consumption of a given product.
clean energy technologies generally require more minerals than fossil fuel-based couterparts.
EV uses 5 times as much mineals as a conventional car and an onshore wind plant requires 8 times as much minerals as a gas-fire plant of the same capacity.
water
70% of the planet is cover
only 2.5% of fresh water
water scarcity is the lack of fresh water resources to meet water demand.
Biodiversity loss 生物多样性
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 the ecosystems.
landmark report Biodiversity and Ecosystem services IPEBES
- human have impacted over 75% of earth’s land areas and 66% of the oceans.
caused by a combined result of land and sea use change, direct exploitation, climate change and pollution.
major driver of decline to wild life population loss 68% since 1970 -
loss of habitat linked to overexploitation
econsystem services provided by bodiversity:
food clean water genetic resources flood protection nutrient cycling climate regulation, amongst among others
Natural capital
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.
intrinsic value of biodiversity
the ideas that the beauty of nature is worth preserving and that mankind and other species should strive for a harmonious co-existence have been a mainstay of many cultures, religions and belief systems.
land-use change resulting from agricultural expansion, logging, infrastructure development and other human activities is the most common driver of infectious disease emergence
conserving nature and improving the sustainable use of nature resources is possible, but can only be achieved through transformative changes across economic, social, political and technological factors.
land use and forestry - agriculture, forestry and other land use (AFOLU)
this sector is responsible for 23% of total net anthropogenic emissions, mainly from deforestation, and agricultural emissions from livestock, soil and nutrient management.
key driver of deforestation - production of commodities
responsible for up to 2/3
companies with exposure to deforestation in their supply chains may face materialfinancial 物质金融risks:
supply disruption
cost volatility
reputational damage
shifting business practice 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
- the reduction of GHG emissions from deforestation and degradation
sustainably managed land resources and protection,
positively affect biodiversity, ecosystems and all the natural resources that underpin economic growth and human flourishing.
Marin resources
ocean absob 50 times more CO2 than atmosphere
largest carbon sink
Blue economy
oceans’ resources are a source of economic growth and are also known as the blue economy
sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem.
Planet tracker estimates that the typical seafood processor can double its EBIT margin, currently low at 3%
mainly due to lower recall, product waster and legal costs.
pollution, waster and a circular economy air pollution
increased air pollution:
- adversely affects the environment
- has a negative impact on human health
- destroys ecosystems
- impoverishes biodiversity
- reduces crop harvests as a result of soil acidification
indoor and outdoor air pollution are responsible for more than 1/10 of all deaths globally each year, according to World Health Organization (WHO)
90% of world’s population live in areas with levels of air pollution that exceed WHO guidelines
pollution is the largest environmental cause of disease and premature death in the world today
16% of all deaths worldwide
15 times more than all wars/violence
3 times more than AIDs
Water pollution
most serious environmental threats faced
global commitment by companies led by Ellen MacArthur Foundation and the UN environment programme UNEP has set a benchmark for ‘best practices’ to address the plastic waste and pollution system
the international criminal police organization INTERPOL has also started tracking criminal trends in the global plastic waste market
Circular economy
economic model that aims to avoid waste and to preserve the value of resources for as long as possible. based on 3 principles: - design out waste and pollution - keep products and materials in use - regenerate natural systems
apply strategies in just five key areas cement aluminum steel plastics food can eliminate almost half of these remaining emissions
gov’t of 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.
due to difficulty in valuing and measuring natural resources
detrimental impacts不利影响 have not been fully pried into the costs of doing business
if such costs were to be fully internalized by businesses or their investors, there could be significant market disruptions.
physical risk to financial system
-may lead to full-scale bankruptcy
lower property/corp asset value
lower household wealth
market losses
credit losses
steeming from more frequent/severe weather events such as flooding, droughts and storms
costs are rising: inflation-adjusted losses from extreme weather events have increased fivefold 5times in recent decades.
significant macroeconomic effects:
knock-on effect on overall spending in the economy
transitional risks as world shifts towards a low-carbon ecnomy
policy, tech, consumer preference
lower corp. profits more litigation
lower growth and productivity affecting financial conditions
underwriting losses
operational risk
economy face big shifts in asset values or higher costs of doing businesses
including:
- policy risks
increased emissions regulation and environmental standards - legal risks
lawsuits claiming damages from equities believed to be liable for their contribution to climate change - technology risks
low carbon innovations distrupting established industries
GRI global reporting initiative
global sustainability reporting framework, explains the causes of direct and indirect impacts and dependencies of businesses on biodiversity resources
direct impact:
- degraded land is converted for the benefit of production activities
- surface water is used for irrigation purposes
- toxic materials are released
- local species are disturbed through the noise and light produced at a processing site.
indirect impact:
caused by supply chain, triggered from operation
difficult to predict and manage
impact can be negative or positive
negative: degrading the quality or quantity of biodiversity
positive - creating a net contribution to the quality or quantity of biodiversity
negatively affect biodiversity secotors:
- agriculture, aquaculture, fisheries, food production
- extractives, infrastructure and activities or projects involving large scale construction work
- fast-moving consumer goods companies
- forestry
- pharmaceutical
- tourism and hospitality
- utilities, including those involved in hydropower or open-cycle power plants generating significant thermal discharges
supply, operational and resource management issues
environmental impacts from direct operations can include:
- toxic waste
- water pollution
- loss of biodiversity
- deforestation
- LT damage to ecosystems
- Water scarcity
- hazardous air emissions and high GHG emissions
- Energy use
UK Gov Environmental reporting guidelines in March 2019 emphasises
the use of environment key performance indicators (KPI) to capture the link between environmental and financial performance
March 2019 EU commission adopted Circular Economy Action Plan
to address the challenges of climate change and pressures on natural resources as well as ecosystems.
Non-financial reporting directive introduced the concept of ‘double materiality’
asking company’s activities on climate change and the environment, stipulating that companies should consider their whole value chain, both upstream in the supply-chain and downstream.
Supply chain transparency and traceability可追溯性
traceability is a useful practice to identify and trace the history, distribution, location and application of products, parts and materials.
complex and/or high-risk supply chain:
- oil and gas
- mining
- beef
- cocoa
- cotton
- fisheries
- leather
- palm oil
- agriculture
- forestry
main environmental risks in the supply chain include:
material toxicity and chemicals raw material use recyclability and end-of-life product GHG emissions energy use water use and wastewater treatment air pollution biodiversity deforestation
think-tank, planet tracker, est. the deforestation risks a
are rising in ETFs, according to 2020 report exchange traded deforestation.
investors should access whether a company in their portfolio has policies and systems in place which:
- clearly explain the environmental/social requirements that suppliers are expected to meet via a procurement 采购policy
- enable it to assess environmental/social risks throughout its supply chain and discuss whether it has a mechanism in place to improve poor practices
Sustainability consortium 财团 TSC
build a set of performance indicators and a reporting system that highlights sustainability hotspots for more than 100 consumer-product categories, covering 80-90% of the impact of consumer products
WWF offer more than 50 perf. indicators
for measuring the supply-chain risks associated with the production of a range of commodities, as well as the probabilty and severity of those risks
CDP and GRI have created standards and metrics for comparing different types of sustainbility impact
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 waster management are compliant with the goals of the Paris agreement
TRASE transparency for sustainable economics tool
a partnership b/w the stockholm environment institute and global canopy
Exploring natural capital opportunities, risks and exposure encore tool
an initiative of the UN environmental program world conservation monitoring center (wcmc), UNEP Finance Initiative and Global Canopy
Terra Carra (Earth Charter)
an initiative under the patronage of the Prince of Wales, providing a roadmap for business action on climate change and biodiversity
examples of global traceability schemes include:
- Forest Stewardship Council FSC
- Marine Stewardship Council MSC
- Roundtable for Sustainable Palm Oil RSPO
- Fairtrade Labelling Organizations Imternational FLO
growth of environmental and climate policies
20-fold increase over 20 years
1,400 climate change-relevant laws globally in 2017
1/2021, the LSE database counted a total of 2,092 climate laws and policies in countries across the globe.
Kyoto Protocol 2005
established top-down, binding targets but only for developed nations
adopted in 1997 and became effective in 2005
1st international convention to set targets for emissions of the main GHGs
1. Co2 2, methane CH4 3. nitrous oxide N20 4. hydrofluorocarbons HFCs 5. perfluorocarbons PFCs 6. Sulphur hexafluoride SF6 and 7. nitrogen trifluoride NF3
Paris Agreement 2015
a landmark agreement was reached to mobilize a global response to the threat of climate change in the form of the Paris Agreement
LT Goal: keep the increase in global average temp. to well below 2C above pre-industrial levels
limit the increase to 1.5C to reduce the risks and effects of climate change.
National determined contributions NDCs
heard of the agreement
instead of top-down imposed contributions, capture voluntary efforts by each country to reduce national emissions and adapt to the impacts of climate change, and require every signatory to determine, plan and report on its NDCs, with updates to commitment every 5y years.
dealendorsed by 191 nations, with only 6 parties to the UNFCCC
other international agreements that impacted companies’ environmental practices:
- UN SDGs are a set of 17 global goals set in 2015 by the UN General Assembly seeking to address key global challenges such as poverty, inequality and climate change
SDGS 7 affordable and clean energy 11 sustainable cities and communities 12 responsible consumption and production 13 climate action 14 life below water 15 life on land
Kigali Amendment to the Montreal Protocol of 2016
global agreement to phase out the manufacture of hydrofluorocarbons
international maritime organization IMO 2020 regulation
caps the maximum sulphur content in the fuel oil used by ships
Corsia Carbon offsetting and reduction scheme for international aviation
responsible for 2/3 of CO2 emissions from aviation - under remit of ICAO
UN mechanism designed by the UN International Civil Aviation organization ICAO designed to help the aviation industry reach its aspirational goal to make all growth in international flights after 2020 carbon neutral, with airlines required to offset their emissions
International, regional and country-level climate policy and initiatives
12/2019 EU announced the European Green deal
plan to make the EU economy climate-neutral by 2050 by boosting the efficient use of resources, restoring biodiversity and cutting pollution
main ambitions:
1. to reorient capital flows by:
establishing:
- classification system/taxonomy for sustainable activities
- standards and labels for green bonds, benchmarks and other financial products and
- increasing EU funding for sustainable projects
- to mainstream sustainability into risk management
by efforts to incorporate sustainability into financial advice, credit ratings and market research, as well as more technical proposals on the treatment of ‘green’ asset in the capital requirements of banks and insurers - to foster transparency and LT thinking
by strengthening the disclosure requirements relating to sustainability
EU Taxonomy分类
aims to significantly reduce the risk of green-washing financial products by providing a classification system to determine whether an economic activity is environmentally sustainable
inclusion in the taxonomy is restricted to activities that contributes to at least one of the 6 environmental objectives:
- climate change mitigating
- 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
- protection of healthy ecosystems
Sustainability disclosures
Sustainable Finance Disclosure Regulation SFDR
Non-Financial reporting directive NFRD
Under SFDR, investors will be required to provide more transparency around:
how the impacts of sustainability risks on their financial products are being systematically assessed
how asset managers consider - and seek to address - the potentially negative implications of investment activities on sustainability factors and
products labelled within an explicit ESG focus
Under NFRD
Non-Financial reporting directive
companies are expected to report on the policies they have in relation to environmental protection and a range of other social and governance factors.
the double materiality perspective of the NFRD in context of reporting climate related information
financial materiality
climate change impact on company
primary audience: investors
environmental/social materiality
company impact on climate
primary audience:
consumers, civil society, employees, investors
Climate benchmark
most widely used are primarily based on company size and thus do not directly reflect low-carbon considerations in their methodologies
current benchmarks are likely to be more aligned with a ‘business-as-usual’ scenario where temp rises range from 4-6c, leading to catastrophic damage to the Earth
two main categories of benchmarks are:
- EU Paris-Aligned benchmarks EU PABs, which must
- reduce carbon emissions intensity by at least 50% in their starting year
- have a 4-to-1 ratio of ‘green’ to ‘brown’ investments relative to the investable universe
- not invested in fossil fuels - EU climate transition benchmarks EU CTBs
requires 30% intensity reduction in starting year and at least an equal ‘green’ to ‘brown’ ratio, but permit fossil fuel investments as part of a transition process
country-level policy and prudential actions
counties/regions leading in influencing the regulatory framework to promote the economic and financial mainstreaming of climate change and environmental factors
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
UK
10-point plan for a green industrial revolution that aims to:
-scale up low-carbon technologies and infrastructure
-increase protections for biodiversity
-further the green finance agenda
Prudential Regulation Authority PRA and
Financial Conduct Authority FCA
published separate consultations on climate change in 2018
resulted in increased requirements on UK banks and insurers
introduction of a climate change stress-test for their liabilities and investments to investigate the resilience of the financial system by testing the implications of high-impact climate change scenarios
the precautionary principle
if an action or policy has a suspected risk of causing severe harm to the public domain, the action should not be taken in the absence of scientific near-certainty about its safety.
intended to provide a safeguard in cases where the absence of evidence and the incompleteness of scientific knowledge carries profound implications and in the presence or risks of ‘black swans’, unforeseen and unforeseeable events of extreme consequence.
UK Department for Work and Pensions DWP proposed
corp. pension fund trustees should publish a fund statement of investment principles SIP by 10/2019 that takes account of financially material ESG issues
TPR The pension regulator in the UK has issued guidance to pension funds relating to ESG and climate change along similar lines.
since 10/2020, DC pension will be required to produce an implementation report setting out how they acted on the principles set out in the SIP.
2/2021 amendments to the Pension Schemes Act
required UK pension schemes to consider
the steps that might be taken for the purpose of achieving the Paris Agreement goal
USA has historically more conservation stance on this issue compared to UK and EU
since 2015 DOL review
discussion focuses on extent to which the incorporation of ESG issues can be interpreted as prioritising non-financial objectives over LT financial security of retirees.
China
largest green bonds market
will exclude fossil fuel projects from green bonds taxonomy to bringing the country closer to international practice
LARGEST manufacturer of solar cells, lithium-ion batteries and eclectic vehicles
with the highest levels of inv. in the low-carbon energy transition, the the highest absolute GHG emissions
India
central bank study:
climate change can exacerbate 加剧 food price inflation and the country also is host to one of the largest green bond market among emerging markets
Japan
pledged to enshrine into law a target for net zero GHG emission by 2050
Financial services agency is piloting climate ‘stress-testing’ for its largest banks
Task force on climate-related financial disclosures
TCFD
coordinates work of national financial supervisors and international standard setting bodies - to investigate the risks of climate change on the stability of the financial system and the appropriate response
most influential international framework for disclosure of climate change risks and opportunities affecting companies and financial institutions is the framework from TCFD.
set to provide recommendations and a framework for companies and financial institutions to provide better info to support investors, lenders, insurers and other financial stakeholders to identify, build and quantify climate-related risks and opportunities into their decisions.
more efficient allocation of capital to help promote a smooth transition to a more sustainable, low-carbon economy
7/2017 TCFD published final recommendations for how companies should report, structured around 4 thematic areas:
introduced influential classification of climate-related risks into physical and transition risks, recommending that companies report on both of these dimensions.
recommendation of climate scenario analysis
TCFD core elements of climate-related financial disclosures
- governance
- strategy
- risk management
- metrics and targets
climate-related risks, opportunities and financial impact according to TCFD
strategic planning risk mgmt - financial impact income statement cf statement balance sheet
risk transition risks - policy/legal technology market reputation
physical risks
acute急性
chronic慢性
opportunities - resource efficiency energy source products/services markets resilience
network for greening the financial system NGFS
is set up to strengthen the global response required to meet the goals of the Paris Agreement
to enhance the role of the financial system to manage risks and to mobilise capital and low-carbon investments in the broader context of environmentally sustainable development
guidance on climate scenarios
carbon pricing
polluter pays principle
putting a price on carbon emissions - most effective methods of tackling climate change
types of carbon pricing
ETS emission trading system
carbon taxes
Emission trading system ETS
- a system based on the exchange of per mits for emission units, where actors who exceed their emissions limits are required to buy permits from those that have emitted less.
the overall quantity of emissions is fixed, market mechanisms are used to set their price.
Carbon taxation
directly setting an explicit price on GHG emissions
has the advantage of predictability, although the carbon tax rate, alongside the elasticity of demand for diff. products and the extend to which companies can pass on the carbon costs to their end consumers, will be key determinants of effectiveness.
carbon pricing and trading of emissions trading certificates
a process which contributed substantially to the swift displacement of coal in the UK’s electricity mix.
as of 2020 61 carbon pricing initiatives implemented or scheduled
30 carbon taxation
31 ETFs mechanisms
cover 22% of global GHG emissions
assessment of materiality of environmental issues
both negative and positive
operating and capital expenditure, revenue growth, margin and risk
efforts to assess material financial impacts caused by environmental risks have begun to increase in terms of their analytical scope and sophistication
- wider range of environmental factor
- impacts of environmental events and physical risks
type of analysis/approach of materiality mostly be dependent on the type of assets being assessed
company, sector, geographic location, and on a portfolio level
corporate and project finance
analyze both quantitative and qualitative environmental factors
a scoring systel typically used to benchmark the company against its peers
useful starting point is analyzing how a company or project use energy, water and waste:
energy consumption can be measured by the level of abs. emissions of GHGs
water utilization can be calculated as the costs generated by water usage efficiency in operations taken directly
waster utilization measured as the cots generated from the disposal of waste in operations
project finance -
international finance corporation’s IFC equator principles
based on IFC’ Performance Standards
have become a globally recognized risk management framework
adopted by financial institutions for determining, assessing and managing environmental and social risk in project finance.
identification of environmental risk and impacts at company/project level
risks
- release of air pollutants
- release of liquid effluents or contaminated wastewater into local water bodies or improper wasterwater treatment
- Generation of large amounts of solid waster and improper waster management
- improper mgmt of hazardous substances
- excessive energy use
- excessive water use
- high or excessive noise levels
- improper or excessive land use
potential impact
- pollution of air
- surface water polluion
- pollution of land, and ground and surface water
- contamination of adjacent land and water
- depletion of local energy sources and release of combustion residuals leading to air pollution
- depletion of water resources
- negative effects on human health and disruption of local wildlife
- soil degradation and biodiversity loss
public finance initiatives
Helsinki Principles - encourage signatories to ‘take climate change into account in macroeconomic policy, fiscal planning, budgeting, public investment management, and procurement practices’.
green infruasturcture fund
specialized banks
funding platforms
examples of the types of public finance include:
export credit development banks concessionary lending to small and medium enterprises SMES guarantees research and development R&D and investment in infrastructure
initiatives that typically require public/private sector funding with high environmentaal impacts are:
energy
water and waste
transport
flood defenses
asset management
focus on development of standardise frameorks and data points to be able to assess climate and environmental risks across multiple sectors, this recognizes that:
- companies within the same sector may face different levels of risk
- these risks are likely to be complex, interlocking and affecting all sectors, not just those with high carbon emissions
SASB develop and disseminate sustainability accounting standard
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
environmental factors cover
GHG emissions air quality energy management water and wastewater management waste and hazardous materials management ecological impacts
Schroders’ analysis
show the potential costs to some companies of insuring their assets against the impact of physical climate change
EV adj. for physical climate risk% largest negative: oil and gas utilities basic resources travel and leisure
least negative: technology
SASB - focused on financial materiality
GRI has much wider stakeholder and materiality lens
CDP Climate disclosure priorities -zoom in on emissions and supply chains
concerted effort 2020 by standard setters and accounting firms to work together towards comprehensive reporting to:
- align disclosures
- identify key sustainability metrics to facilitate the
creation and interpretation of disclosures - scale up adoption of sustainability reporting including under TCFD.
according to G20 Green Finance Study, financial institutions need to combine two types of approaches to assess environmental risks:
- understanding environmental factors that may pose risks to financial assets and liabilities, and how such risks may evolve over time
- translating environmental risk factors into quantitative measures of financial risk that can, in turn, inform firms risk management and investment decisions.
levels of environmental analysis
environmental risk assessments are conducted along with social and governance assessments at:
- company or project level
- sector level
- country level
- market level
company or project level
assessment of material environmental risk factors will inform key financial metrics as monitored and disclosed in financial statements
sector level
some sectors have higher exposure to environment risks such as:
chemical energy steel and cement extractives food or beverages transportation
physical risk from natural disaster
- building
- urban infrastructure
Country level
relevant for corporate securities and gov’t bonds
Climate change, air quality, water stress, vulnerability to natural hazards and food security can have immediate and direct impact on a sovereign’s ability or willingness to pay, and/or ESG profile.
Market level
recognizing the cross-cutting impacts of environmental risks, central banks and the bank of international settlements have warned of the potential systemic effects of both physical and transitional risks.
The need for predictable policy measures, which priority real-world emissions reductions and an orderly
transaction to the low-carbon economy.
not possible to access environmental risks because no one common standard, however based on a combination of independent 3rd party research and data along with useful framework, practitioners are able to map out and analyze 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.
approaches to assess material environmental risks
a. carbon footprinting and other carbon metrics
b. natural capital approach
c. climate scenario analysis
carbon footprinting and other carbon metrics
one of the most common approaches
a portfolio carbon footprint effectively measures carbon emissions and intensity associated with operates of the companies in a portfolio
measuring the carbon footprint of a portfolio means that an investor can:
- compare it to global benchmarks
- identify priority areas and actions for reducing emissions
- track progress in making those reductions
use of it applies the international accounting tool of the GHG protocol standards
GHG protocol standards
scope 1&2 cover direct emission sources
scope 3 cover all indirect emissions
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 solid products
- transportation and distribution
- investments
- leased assets and franchises
benefit of carbon footprinting
- potential to aggregate emissions across industries and value chains, for countries and portfolios, enable comparisons between companies or portfolios, across sectors and geographies, and to focus the analysis on emissions intensity
limitation/challenges as a risk measure and is increasingly seen as too backward-looking or static
main challenges of carbon footprinting:
the lack of disclosure for unlisted or private assets
scope 3 emissions are rarely being included, thus falling to capture companies’ full value chains
‘double-counting’
the use of different estimation methodologies and
it does not measure potential investment risks related to the physical impacts of climate change
total carbon emissions
in absolute or relative metric
current value of invi
/ issuer’s market capitalization
* issuer’s scope 1 and 2 emissions
TCFD recommends that asset owners and managers report the weighted average carbon intensity associated with their investment.
weighted average carbon intensity=
current value of investment i
/ current portfolio value
* issuer’s scope 1 and 2 emissions
/ issuer’s USD of revenue
provide a measure of how carbon-efficient companies are, allowing for an element of comparability between companies of different sizes, and recognising that high levels of carbon emissions are not a perfect levels of emissions.
net zero/science-based targets with significant variation among these targets:
PRI UN Principles for Responsible
UNEP Finance Initiative and
the Institutional Investor Group on Climate Change
are developing framework to help benchmark investors’ transition to net zero
- be absolute or relative targets
- cover diff. scopes of emissions or include some or all of the value chain and different types of emissions
- focus on differing or multiple timeframes
- rely on offsets
science-based targets (SBT):
Target underpinned by the latest climate science and evaluated by the Science-Based Target initiative (SBTi), a partnership b/w several environmental institution, which provides independent certifications of the strength of companies’ targets.
Emissions trajectories 排放轨迹
can be used to assess the required reductions to reach a stated goal and compare the pathways implied by corporate commitments, policies or individual assets.
the Transition Pathway Initiative is an asset-owner-led collaboration, which has developed a public available tool that aims to assess companies’ preparedness for the low-carbon transition.
measure of temperature alignment - another approach
seek to compare the climate profiles of companies, sectors or portfolio against a benchmark of global temperature
significant variation in the market around such metrics:
- go under different name
- use different inputs for climate performance
- result in a different quantification of output - a binary statement, a score, a percentage of misalignment or a temperature number
The Paris Agreement Capital Transition Assessment PACTA
public tool developed by 2 degree Investing Initiative, backing from UN PRI
aim to measure the alignment of financial portfolios which climate scenarios
the analysis incorporates the business and capital expenditure plans of companies for the next 5 years.
capital expenditures, ‘green’ revenues and research and development
diff. approach looks in more detail at companies’ level of
‘green’ capital expenditures, revenue streams and R&D to gauge the direction of travel for their business models
an alternative is to consider existing revenues
FTSE Russell and HSBC are the data providers
Natural capital approach
Natural capital: describe the relationship b/w nature and measuring and valuing nature’s role in decision-making
help businesses identify, measure, value and prioritize their impacts and dependencies on biodiversity and the ecosystem, which ultimately give businesses new insight into their risks and opportunities.
Natural Capital Protocol NCP
to assess environmental factor
a decision-making framework, enables organizations to identify, measure and value the direct and indirect impacts and dependencies of companies on natural capital.
provides guidance for the apparel sector, food and beverage sector and forest products sector.
TNFD Task Force on Nature-related Financial Disclosures
initiative that recognize the need for increased consideration of natural capital issues by financial decision-makers
collaboration between UN-affiliated institutions, Global Canopy and WWF, supported by financial institutions and gov’t
IBAT Integrated Biodiversity Assessment Tool for Business
developed by International Union for Conservation of Nature IUCN
central global biodiversity database
include key biodiversity areas and legally protected areas
through it, decision-makers can easily access and use this up-to-date info to identify biodiversity risks and opportunities within a project boundary
ENCA Enabling a Natural Capital Approach
policy tool and guidance developed by the UK Department for Environment, Food & Rural Affairs
CERES and WWF developed water risk assessment tools
targeted at investors, lenders, and policymakers:
CERES Aqua Gauge-
a Comprehensive Assessment Tool for Evaluating Corporate Management for Water Risk.
WWF Water Risk Filter
Climate Scenario analysis
approach for the forward-looking assessment of risks and opportunities
Climate-related risk has been idenfitied as one of the most complex macro-existential risks
least understood and hardest to quantify
TCFD recommends that companies and financial institutions:
‘Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2C or lower scenario and, where relevant to the organization, scenarios consistent with increased physical climate-related risks. ‘
Institutional Investors Group on Climate Change IIGCC published a practical investor guide
provides a useful framework to approach climate-related scenario analysis
guides’ 2 objectives
- Financial impact:
the use of scenario analysis enables the assessment and pricing of climate0related risks and opportunities - Alignment:
aligning the portfolios with a 2C or lower future
driven by a set of inv. beliefts
EU’s NFRD
non-financial performance of large companies, sums up the most effective and recommended approach to determine materiality:
- taking a set of transparent and credible data sources and assumptions, which can be quantitative or qualitative
- applying recognizable accepted methodologies, which will probably have the backing of an industry body, gov’t department or multilateral institution
- focus on materiality - looking in particular at business models, operations and financial performance
- generating a set of outputs which can be measure in terms of key performance indicators
potential impact of environmental risks on infrastructure financials can be demonstrated in 2-step process:
- a longlist of widely recognized 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 - if, and to what extent, any of the selected environmental factors has a material impact on the infrastructure asset will be revealed by the asset-specific ESG due diligence process.
Circular economy
products and materials are repaired, reused and recycled rather than thrown away.
is 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
Clean and technological innovation
cleantech -
encompassing the inv. asset class, technology, and business sectors which include clean energy, environmental, and sustainable or green, products and services”.
Green and ESG-related products
that have emerged:
- a range of green, sustainability and ESG indices
- green bonds and loans, sustainability funds and ETFs
- retail and institutional deposit or saving products
- crowdfunding investments
the 1st green bond issuance was announced in 2007 by EU inv bank to raise funding for climate-related projects
green bond was created to fund projects that have positive environmental climate benefits.
use of green bond and loan proceeds
- renewable energy 35%
- buildings 27%
- Transportation 22%
- water 6%
- Land use
- Waste
assessment for assets framework considerations:
- eligibility of assets and criteria to meeting their green, ESG or SGD-related objectives
- the use of proceeds effectively allocated to eligible projects
- the transparency and reporting requirements and key measures of impacts
- the issuer or borrower has a clear sustainability and ESG strategy
Green bond principles GBP 2014
to promote the integrity of the green bond market by recommending transparency, disclosure and reporting
Climate bonds initiative has regular information about the state of the green bond market.
Green Loan Principles GLP
established by UK and Asia Pacific Loan Market Association APLMA
The 4 pillars of GLP:
- 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
- Detailed and strict reporting is mandated
Climate bonds initative’s Bonds and Climate Change: State of the Market 2018
provides information on the scale of the unlabelled climate bond market relative to the green bond market
Blue economy
sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem.
investor and policymakers are beginning to recognize stress:
- the growth prospects for the ocean economy
- its capacity for futures employment creation and innovation
- its role in addressing global challenges
World Ocean Initiative suggested inclusion of Ocean Accounting
- adding ocean-related services and assets to national balance sheets
3 priority areas for action are presented:
- approaches that produce win-win outcomes for ocean business and the ocean environment across a range of marine and maritime applications
- the creation of ocean-economy innovation networks
- initiatives to improve the measurement of the ocean economy via satellite accounts of national accounting systems
BEDF Blue Economy Development Framework launched by the World Bank and European Commission
new step in the area of international ocean governance
helps developing coastal states transition to diverse and sustainable blue economies while building resilience to climate change
aims to create a roadmap that assists governments to:
- prepare policy, fiscal, and administrative reforms
- identify value creation opportunities from blue economy sectors and
- identify strategic financial investments
