ESG Chapter 3 Key Facts Flashcards
- The range of environmental factors that have a material impact on investments are broad and far- reaching.
These include, but are not limited to:
a. climate change;
b. natural resources (including water, biodiversity, land use and forestry and marine resources);
c. pollution, waste and circular economy.
The Paris Agreement of 2015 (COP21), was reached to mobilise a global response to the threat of climate change and growing concern reported by scientific experts.
The Paris Agreement’s long- term goal is to keep the increase in global average temperature ‘well below’ 2°C (3.6°F) above pre-industrial levels, and to limit the increase to 1.5°C (2.7°F).
The Paris Agreement is not legally binding under international law, but it provides a mechanism for countries to make more ambitious emissions reductions pledges every five years (the next such deadline being 2020).
Putting a price on carbon emissions is seen by many economists as one of the most effective methods of tackling climate change: carbon pricing and emissions trading certificates were trialled in the UK in the early 2000s, and the EU subsequently established the European Union Emissions Trading System (ETS) in 2005.
Carbon markets are steadily growing around the world. The wider application of putting a price on carbon also reads across to other financial mechanisms, such as fuel duties.
There is increasing pressure on water and land use as access to natural resources become less secure.
Threats to nature and the drive and pressure behind these threats because of agricultural practices and over-exploitation remain the biggest threats to biodiversity and ecosystems.
Clean air is essential to health, the environment and economic prosperity; but there is growing concern about indoor and outdoor air pollution (now responsible for more than 10% of all deaths globally).
Waste and waste management, given the strain on natural resources, have become increasingly large priorities for policymakers and business.
Material environmental issues are factors that could have a significant impact – both positive and negative – on a company’s business model and value drivers, such as operating and capital expenditure, revenue growth, margins and risk.
The material factors differ from one sector to another.`
Environmental risks can be effectively integrated into company analysis and investment decision- making processes, using various financial tools and models.
The types of risk analysis tools and associated metrics primarily depend upon the asset classes and risk types financial institutions are exposed to.
Similarly, the choice of approach depends on the type of direct and/or indirect exposure to an environmental risk factor.
Although this chapter concentrates on the risks of neglecting the implications of key environmental factors from companies as a result of direct and/or indirect business activities, the environment also presents differing types of investment opportunities.
(including energy efficiency; renewable energy and green buildings).
Looking at broader trends, there is an increasing number of policy initiatives at both country
and regional level to promote the economic and financial mainstreaming of climate change and environmental factors.
Notably, the European Commission is now working, as a key element of its sustainable finance action plan, on measures to make more transparent how investors integrate sustainability into their decision-making process more transparent
Efforts by investors to assess the financial impacts caused by environmental risks have begun to increase in terms of their analytical scope and sophistication.
Various approaches include carbon footprinting and climate scenario analysis based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
NATURAL CAPITAL PROTOCOL
currently provides guidance for the apparel sector, food and beverage sector and forest products sectors.
