Policy, Regulations, and Implications

Question 1

Describe the 17 SDGs

Answer 1

17 SDGs (Sustainable Development Goals)

SDG 1: No poverty

SDG 2: Zero hunger

SDG 3: Good health and well-being

SDG 4: Quality education

SDG 5: Gender equality

SDG 6: Clean water and sanitation

SDG 7: Affordable and clean energy

SDG 8: Decent work and economic growth

SDG 9: Industry, innovation, and infrastructure

SDG 10: Reduced inequalities

SDG 11: Sustainable cities and communities

SDG 12: Responsible consumption and production

SDG 13: Climate action

SDG 14: Life below water

SDG 15: Life on land

SDG 16: Peace, justice, and strong institutions

SDG 17: Partnerships for the goals

Question 2

Describe preconditions and the 6 transformations considered to be the modular building blocks of SDG achievement

Answer 2

Preconditions:

1. MECE
2. Systems-based
3. Aligned with government-based organisation
4. Easily communicable
5. Few in number

Transformations:

1: Education, gender, and inequality
2: Health, well-being, and demography
3: Energy decarbonisation and sustainable industry
4: Sustainable food, land, water, and oceans
5: Sustainable cities and communities
6: Digital revolution for sustainable development

Question 3

Explain the “leave-no-one behind principle” in SDG Implementation

Answer 3

This principle of equity and fairness aims to overcome inequalities and discrimination by gender, race, social status, or other qualifiers, which result from a range of factors, including power dynamics, discrimination, poor system design, and insufficient financing.

Question 4

Explain the “principle of circularity and decoupling” in SDG achievement

Answer 4

Countries must change patterns of consumption and production to decouple human well-being from environmental degradation, including through circularity that promotes reuse and recycling of materials. This must underlie all SDG transformations, with a special emphasis on decarbonisation.

Question 5

Explain the 4 governance mechanisms to design and operationalise the SDG transformations, i.e. to implement the transformations.

Answer 5

1: Goal-based design and technology missions
2: Goal-based organisation of government and financing
3: Social activism to change norms and behavious
4: Diplomacy and international cooperation for peace, finance, and partnerships

Question 6

[Regarding the 6 SDG transformations:] Explain the four-point “action agenda” for the scientific community to address knowledge gaps in designing pathways and strategies for transformation, implementing them, and monitoring results.

Answer 6

1: Capacity for designing transformations
2: Time-bound benchmarks
3: Stakeholder engagement and co-design
4: Policy tracking, monitoring, and evaluation

Question 7

Explain the “black vs. green swan” concept

Answer 7

Black swan (coined by Nassim Nicholas Taleb) := An event that is I) unexpected and rare, lying outside the realm of regular expectations, II) impacts wide ranging or extreme, III) can only be explained after the fact.

Green swan := “climate-related black swan events” with the following caveats:

1: High degree of certainty that some combination of physical and transition risk will materialise in the future”
2: Climate catastrophes are more serious than most systemic financial crises
3: Complexity related to climate change is of a higher order than for black swans (e.g., complex chain reactions and cascade effects generate fundamentally unpredictable environmental, geopolitical, social and economic dynamics)

Question 8

[FROM GRADUAL GLOBAL WARMING] Describe the main climate related shocks on macroeconomic demand and supply

Answer 8

Shocks on demand:
1: Investment
(uncertainty about future demand and climate risks)
2: Consumption
(changes in consumption patterns, e.g. higher savings rate)
3: Trade
(changes in trade patterns due to changes in transport systems and economic activity)

Shocks on supply:
1: Labour supply
(Loss of hours due to extreme heat. Labour supply shock from gradual migration)
2: Energy, food, and other inputs
(Decrease in agricultural productivity)
3: Capital stock
(Diversion of resources from productive investment to adaptation critical)
4: Technology
(Diversion of resources from innovation to adaptation critical)

Question 9

[FROM EXTREME WEATHER EVENTS] Describe the main climate related shocks on macroeconomic demand and supply

Answer 9

Shocks on demand:
1: Investment
(uncertainty about climate risk)
2: Consumption
(increased risk of flooding to residential property)
3: Trade
(disruption to import/export flows due to extreme weather events)

Shocks on supply: 
1: Labour supply
(loss of hours worked or mortality due to natural disasters, labour supply shocks from sudden migration)
2: Energy, food, and other inputs
(sudden food and other input shortages)
3: Capital stock
(damage due to extreme weather)
4: Technology
(Diversion of resources from innovation to reconstruction and replacement)

Question 10

Challenges of climate risks to monetary policy

Answer 10

I) While the use of cyclical instruments aims to stimulate or subdue activity in the economy over relatively short periods, climate change is expected to maintain its trajectory for long periods of time. This situation can lead to stagflationary supply shocks that monetary policy may be unable to fully reverse.

II) Climate change is a global problem that demands a global solution, whereas monetary policy seems, currently, to be difficult to coordinate between countries. As such, the case for a single country or even a monetary zone to react to inflationary climate-related shocks could be irrelevant.

III) Even if central banks were able to re-establish price stability after a climate-related inflationary shock, the question remains whether they would be able to take pre-emptive measures to hedge ex ante against fat-tail climate risks, i.e. green swan events.

Question 11

What are the main channels through which climate change can affect financial stability? In what ways can they materialise?

Answer 11

I) Physical risks (acute / chronic)
II) (rapid) Transition risks

Materialise in:
1: Credit risk
(induce higher probabilities of default [PD] and higher loss-given-default [LGD])
2: Market risk
(under abrupt transition, investors’ perception could create “stranded assets”, leading to fire sales and trigger a financial crisis)
3: Liquidity risk
(banks and non-bank financial institutions, whose balance sheet could be hit by credit and market risks, could be unable to refinance in the short-term. This can lead to tensions on the interbank lending market)
4: Operational risk
(direct exposure to climate-related risks, e.g. physical risks)
5: Insurance risk
(higher than expected insurance claim payouts, potential underpricing of new insurance products covering green technologies as a result from transition risks)

Question 12

Define “impact investing”

Answer 12

Managing investments into companies or organizations with the intent to contribute to measurable positive social, or environmental impact, alongside financial returns.

Question 13

Impact investing: Describe the operating principles for impact management

Answer 13

I) Strategic intent

1: Define strategic impact objective(s), consistent with the investment strategy
2: Manage strategic impact on a portfolio basis

II) Origination & Structuring

3: Establish the manager’s contribution to the achievement of impact
4: Assess the expected impact of each investment, based on a systematic approach
5: Assess, address, monitor, and manage potential negative impacts of each investment

III) Portfolio Management
Also 5: Assess, address, monitor, and manage potential negative impacts of each investment
6: Monitor the progress of each investment in achieving impact against expectations and respond appropriately

IV) Impact at Exit

7: Conduct exits considering the effect on sustained impact
8: Review, document, and improve decisions and processes based on the achievement of impact and lessons learned

V) [Continuous] Independent Verification
9: Publicly disclose alignment with the principles and provide regular independent verification of the alignment

Question 14

Define “ESG of an investment”

Answer 14

ESG refers to 3 key factors when measuring the sustainability and ethical impact of an investment.
I) Environmental factors: look at how a company functions as a steward of the natural environment
II) Social factors: examine how a company manages relationships with its employees, suppliers, customers, and the communities where it operates
III) Governance: deals with a company’s leadership, executive pay, audits, internal controls, risk, shareholder rights, and stakeholder engagement

Question 15

Define the SDGs (high-level)

Answer 15

The Sustainable Development Goals (SDGs) are a collection of 17 global goals set by the United Nations in 2015. They represent a universal call to action to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity.

Question 16

What is the PRI initiative?

Answer 16

The United Nations-supported Principles for Responsible Investing (PRI) Initiative is an international network of investors working together to put the six Principles for Responsible Investment into practice.

Question 17

Describe the 6 PRI (Principles for Responsible Investment)

Answer 17

• INCORPORATE -
  1: “We will incorporate ESG issues into investment analysis and decision-making processes”
• BE ACTIVE -
  2: “We will be active owners and incorporate ESG issues into our ownership policies and practices”
• SEEK DISCLOSURE -
  3: “We will seek appropriate disclosure on ESG issues by the entities in which we invest”
• PROMOTE -
  4: “We will promote acceptance and implementation of the Principles within the investment industry”
• COLLABORATE -
  5: “We will work together to enhance our effectiveness in implementing the Principles”
• REPORT -
  6: “We will each report on our activities and progress towards implementing the Principles”

Question 18

Describe the Principles for Responsible Banking

Answer 18

1: (STRATEGIC) ALIGNMENT
“We will align our business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks.”

2: IMPACT AND TARGET SETTING
“ We will continuously increase our positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from our activities, products, and services. To this end, we will set and publish targets where we can have the most significant impact.”

3: CLIENTS AND CUSTOMERS
“We will work responsibly with our clients and our customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations.”

4: STAKEHOLDERS
“We will proactively and responsibly consult, engage and partner with relevant stakeholders to achieve society’s goals.”

5: GOVERNANCE AND CULTURE
“We will implement our commitment to these Principles through effective governance and a culture of responsible banking.”

6: TRANSPARENCY AND ACCOUNTABILITY
“We will periodically review our individual and collective implementation of these Principles and be transparent about and accountable for our positive and negative impacts and our contribution to society’s goals.”

Question 19

Describe the SMART framework for impact investment target setting

Answer 19

Targets should be SMART: 
S = Specific
M = Measurable
A = Achievable
R = Relevant
T = Time-bound

Question 20

What are the thematic areas of the Task Force on Climate-related Financial Disclosures’ (TCFD’s) recommendations and guidance?

Answer 20

1) Recommendations
Four widely adoptable recommendations tied to: I) Governance, II) Strategy, III) Risk Management, IV) Metrics and Targets

2) Recommended Disclosures
Specific recommended disclosures organisations should include in their financial filings to provide decision-useful information

3) Guidance for ALL Sectors
Guidance providing context and suggestions for implementing the recommended disclosures for all organisations

4) Supplemental Guidance for Certain Sectors
Guidance that highlights important considerations for certain sectors and provides a fuller picture of potential climate-related financial impacts in those sectors

Question 21

What is the scope of coverage of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations?

Answer 21

To promote more informed investing, lending, and insurance underwriting decisions, the Task Force on Climate-related Financial Disclosures (TCFD) recommends all organisations with public debt or equity implement its recommendations. The TCF believes that [… financial institutions] should implement its recommendations so that their clients and beneficiaries may better understand the performance of their assets, consider the risk of their investments, and make more informed investment choices.

Question 22

What are the Task Force on Climate-related Financial Disclosures’ (TCFD’s) recommendations?

Answer 22

1) Governance:
Disclose the organisation’s governance around climate-related risks and opportunities

2) Strategy:
Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material

3) Risk Management:
Disclose how the organisation identifies, assesses, and manages climate-related risks

4) Metrics and Targets:
Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material

Question 23

What are the financial and non-financial industries for which the Task Force on Climate-related Financial Disclosures’ (TCFD’s) developed supplemental guidance?

Answer 23

FINANCIAL
I) Banks
II) Insurance Companies
III) Asset Owners
IV) Asset Managers

NON-FINANCIAL
I) Energy
II) Transportation
III) Materials and Buildings
IV) Agriculture, Food, and Forest Products

Question 24

What are the Task Force on Climate-related Financial Disclosures’ (TCFD’s) Principles for Disclosures?

Answer 24

1. Disclosures should represent relevant information
2. Disclosures should be specific and complete
3. Disclosures should be clear, balanced, and understandable
4. Disclosures should be consistent over time
5. Disclosures should be comparable among companies within a sector, industry, or portfolio
6. Disclosures should be reliable, verifiable, and objective
7. Disclosures should be provided on a timely basis

Question 25

Describe the 6 Network for Greening the Financial System’s (NGFS’s) recommendations and for whom they apply

Answer 25

Recommendations are for central banks, supervisors, policymakers, and financial institutions to manage environmental and climate-related risks.

1: Integrating climate-related risks into financial stability monitoring and micro-supervision [I) Assessing climate-related risks in the financial system, II) Integrating climate-related risks into prudential supervision]
2: Integrating sustainability factors into own-portfolio management
3: Bridging the data gaps [public authorities to share data of relevance to Climate Risk Assessment and make them publicly available where possible]
4: Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing
5: Achieving robust and internationally consistent climate and environment-related disclosure
6: Supporting the development of a taxonomy of economic activities

Question 26

Define CBFRs and their role

Answer 26

CBFRs := Central Banks and Financial Regulators

Roles include
1) Monetary Policy: Limiting inflation through setting interest rates and reserve requirements, influencing the supply of money and the allocation of credit in the economy

2) Macro-prudential Regulation: Promoting financial system stability
3) Micro-prudential Regulation: Supervising banks and other financial institutions
4) Other roles, including fostering payment safety and consumer protection

Question 27

How can CBFRs (Central Banks and Financial Regulators) reduce climate risk and “green” the financial system?

or:
What are the Climate Bonds Initiative’s (CBI’s) recommended actions for CFBRs?

Answer 27

Regulating transparency:

• Green and brown taxonomies
• • Mandating climate disclosures, scenario tests, and stress tests
• – Standard climate scenarios
• — Climate stress tests

Financial asset purchases by central bank:

• Non-conventional monetary policy, e.g. non-market neutral quantitative easing
• • Staff pension funds
• – Currency stabilisation funds (focus on ESG investments)

Financial asset weightings:

• Capital adequacy and liquidity
• • Collateral framework

Credit guidance & incentives:

• Lending quotas
• • Interest rate discounts
• –
• — Green bond incentives

Question 28

Describe the generally accepted GHG accounting and reporting principles

Answer 28

1: RELEVANCE
Ensure the GHG inventory approriately reflects the GHG emissions of the company and serves the decision-making needs of users - both internal and external to the company.

2: COMPLETENESS
Account for and report on all GHG emissions sources and activities within the chosen inventory boundary. Disclose and justify any specific exclusions.

3: CONSISTENCY
Use consistent methodologies to allow for meaningful comparisons of emissions over time. Transparently document any changes to the data, inventory boundary, methods, or any other relevant factors in the time series.

4: TRANSPARENCY
Address all relevant issues in a factual and coherent manner, based on a clear audit trail. Disclose any relevant assumptions and make appropriate references to the accounting and calculation methodologies and data sources used.

5: ACCURACY
Ensure that the quantification of GHG emissions is systematically neither over nor under actual emissions, as far as can be judged, and that uncertainties are reduced as far as practicable. Achieve sufficient accuracy to enable users to make decisions with reasonable assurance as to the integrity of the reported information.

Question 29

Explain the two distinct approaches that can be used to consolidate GHG emissions

Answer 29

1: EQUITY SHARE APPROACH
Under the equity share approach, a company accounts for GHG emissions from operations according to its share of equity in the operation. The equity share reflects economic interest, which is the extent of rights a company has to the risks and rewards flowing from an operation.

2: CONTROL APPROACH
Under the control approach, a company accounts for 100 per-cent of the GHG emissions from operations over which it has control. Control can be defined in either financial or operational terms:
I) The company has financial control over the operation if the former has the ability to direct the financial and operating policies of the latter with a view to gaining economic benefits from its activities.
II) The company has operational control if it has the full authority to introduce and implement its operating policies at the operation.

Question 30

Explain double counting in GHG accounting

Answer 30

When two or more companies hold interests in the same joint operation and use different consolidation approaches (e.g., Company A follows the equity share approach while Company B uses the financial control approach), emissions from that joint operation could be double counted.
This may not matter for voluntary corporate public reporting. But double counting of emissions needs to be avoided in trading schemes and certain mandatory government reporting programs.

Question 31

Explain the concept of boundaries in operational GHG accounting (i.e., Scopes 1, 2, 3)

Answer 31

To help delineate direct and indirect emission sources, improve transparency, and provide utility for different types of organizations and different types of climate policies and business goals, three “scopes” (scope 1, scope 2, and scope 3) are defined for GHG accounting and reporting purposes. Scopes 1 and 2 are carefully defined in this standard to ensure that two or more companies will not account for emissions in the same scope. This makes the scopes amenable for use in GHG programs where double counting matters.

Scope 1: Direct GHG Emissions (not included but may be reported separately: biomass, CFC, NOx)
Scope 2: Electricity Indirect GHG Emissions
Scope 3: Other indirect GHG emssions (e.g. transport-related acitivites, waste disposal)

Question 32

Explain the 2 main Emissions Trading systems that are used besides a carbon tax

Answer 32

“Cap-and-Trade System”:
Free allowance allocation. Impose a government-established limit on aggregate GHG emission by specified sources, distribute tradable allowances approx. equal to the limit and require regulated emitters to surrender allowances equal to their actual emissions.

“Baseline-and-Credit System”:
Allocation through sum of participants emissions limits. Specify an emissions limit for each participant and allocate tradable credits to emitters whose actual emissions are less than their limit.

Question 33

Define carbon leakage

Answer 33

Carbon leakage occurs when there is an increase in greenhouse gas emissions in one country as a result of an emissions reduction by a second country with a strict climate policy.
This applies to Emissions-Intensive Trade-Exposed (EITE) Companies. Under the EU emissions trading system (EU ETS), especially EITE companies receive special treatment to support their competitiveness.

Question 34

How are trade-offs between the SDGs addressed

Answer 34

Trade-offs are addressed in three ways:
1) some through systems-based approaches that combine potentially antagonistic interventions within a transformation (e.g, agricultural productivity v.s. biodiversity loss)

2) key interventions are consistent with “leave no one behind” principle to ensure investments promote equity
3) natural resource trade-offs are addressed through the principle of circularity and decoupling within a stable earth system.

Question 35

Describe how climate change can be a severe threat to ecosystems, societies, and economies

Answer 35

Ecosystems:
Rising sea levels, storm intensity/floods, droughts, higher temps, etc. as described in prior chapters – fundamentally alter/destroy ecosystems, potentially lead to species loss/mass extinction, accelerated soil erosion (decreases food security/biodiversity) and natural cover changes. Marine systems also threatened (salinity/acidification/temp changes) – coral reef loss on which 25% of marine life depends.

Societies:
Catastrophic and irreversible for human populations. Critical impacts on islands, coastal areas, river deltas (ecological and human impacts), e.g. saltwater intrusion-caused agricultural losses, flooding damage to infrastructure. Displacement of large populations due to water rise/flooding, drought, high temps (already occurring). Crop yields/food supply already impacted, severe water crises, etc.

Economies:
Demand side shocks and Supply side shocks

Question 36

Describe the Redistributive Effects (RE) of climate change

Answer 36

Climate Change has distributional effects between and in countries. Geographical distribution of physical risks affects many poor/middle-income countries. Transition risks can impact carbon-intensive industry and consumption patterns of poor/low-income. Small island states/developing countries have argued undue burden.

Question 37

What is the Network for Greening the Financial System’s (NGFS’s)?

Answer 37

Network for Greening the Financial System (NGFS) is a voluntary network of 83 central banks/financial supervisors aiming to accelerate scaling up of green finance, develop recommendations for central banks’ role in climate change.

Question 38

Describe “The Body Shop” trade-off example between the GHG accounting principles of accuracy vs. completeness

Answer 38

“The Body Shop” could not get exact energy consumption data for some stores, in shopping malls.

1) Stores encouraged to get direct consumption data through disaggregated data or direct monitoring
2) If unable, they were given standardized guidelines for estimating emissions (square footage, usage hours, equipment).

This resulted in more complete accounting, with limitations documented.

Question 39

Assess the differences between GHG accounting and GHG reporting when consolidating GHG data

Answer 39

GHG accounting…
…concerns recognition and consolidation of GHG emissions from operations in which a parent company holds an interest (control or equity) and links data to specific operations, sites, geographies, business processes, and owners.

GHG reporting…
…is the presentation of GHG data in formats tailored to needs of various reporting uses and users.