Transition Planning and Carbon Reporting Flashcards
Give 2 subpoints
What does transition planning mean?
The internal process undertaken by a firm to develop a transition strategy to:
1) deliver climate targets that firms may voluntarily adopt or that are mandataed by legistlation
2) prepare a long-term response to manage the risks
What is a transition plan?
The key product of a transition planning process and are an external-facing output for external audiences
True or false
The NGFS created the first international criteria for transition finance
False
As of 2023, there is still no internationally agreed-upon definition or criteria for transition finance
Which of these parties has played the biggest role in driving companies to undertake transition planning?
1. Regulators
2. Private sector
3. Governments
4. All of the above
(2) Private sector
Financial institutitons have been asking the companies that they invest in/ lend to to prepare and disclose their transition plans. These transition plans are considered an integral part in the investment decision making process
Which of these are NOT considered an objective that transition plans can support?
1. Achieving climate outcomes through corporate action
2. Maintaining market integrity
3. Prevent greenwashing
4. Supporting entities in their transition
- Supporting entities in their transition
The other objective of transition plans is to manage climate-related macro and micro prudential risks
Which of these organisations has created comprehensive guidance on transition plans?
1. TPT
2. NGFS
3. SASB
4. GFANZ
5. 1,4
6. 1,3
7. 2,4
8. 2,3
9. 1,2,
(5) 1,4
Give 3
`What are the overarching principles for good-practice transition planning that the TPT set out?
3A
- Ambition
- Action
- Accountability
They can be further split into 5 dislcosure elements
1) Foundations –> looks at the objectives and priorities
2) Implementation strategy –> looks ta the products, services, activities, decision-making, policies and conditions
3) Engagement strategy –> clients, portfolios, industry, public sector
4) Metrics and targets
5) Governance –> roles, responsibilities and remuneration, skills and culture
Which of these are NOT a main use case that transition plans can support, according to the TPT?
1. Improve the information available to investors and lenders, enabling them to price risk and make capital allocation decisions
2. Support policy makers and regulatory authorities to understand the trajectory of the economy-wide transition
3. Allow supervisors and regulatory authorities to assess whether an entity’s strategy for managing the transition is sufficient given its exposure to climate-related risks and opportunities
4. Act as a reference point for stakeholders to hold entities accountable through their wider capital market ratings
(4) Act as a reference point for stakeholders to hold entities accountable through their wider capital market ratings
Other main use cases include:
1. Set a blueprint for actions within the reporting entity enabling it to direct strategy
2. Help stakeholders hold entities to account for their public climate commitments
3. Act as a reference point for financial instruments and products directed towrads financing the climate transition, helping the marakets for climate and transition finance instruments to scale ith integrity
4. Provide forward-looking strategic informaiton ot the wider capital markets ecosystem, including data services, credit ratings, and other tools to support the mainstreaming of sustianability in finance
True or false
Due to the recent conclusion that we’re not on track ot meet the Paris Agreement goals, it ahs been agreed by guidance developers that private sector’ transition plans need to be consistent with acheiving net-zero by 2050 with low or no overshoot.
True
The TPT recommends going beyond reducing firm-level emissions and acknowledges that only tackling firm-level emissions can result in suboptimal results
What is paper decarbonisation?
The act of only decarbonising balance sheets without resulting in real-world reduction in emissions
This is especially risky for the financial sector by reducing their exposure to hard-to-aboate sectors
Give 2
What are some of the unintended consequences of only reducing firm-level emissions?
- Narrow focus may result in firms ignoring other levers they have to accelerate the transition, such as proactively engaging with governments to call for more-ambitious policy action
- Incentivsed to sell off carbon-intensive assets without having tangible impact on overall emissions –> paper decarbonisation
What approach has the TPT recommended to avoid the issues with only reducing firm-level emissions?
The strategic and rounded approach
What are the channels that the TPT recommends for a strategic and rounded approach?
1. Decarbonising the entity, responding to the entity’s climate-related risks and opportunities, contributing to an economy-wide transition
2. Identifying the gaps, formulating a strategy to mitigate the risks, analysing the impacts
3. Reducing emissions, identifying the entity’s climate-related risks and opportunities, share knowledge with collective
4. Decarbonising the entity, managing the entity’s climate-related risks and opportunities, economy-wide collective sharing
(1) Decarbonising the entity, responding to the entity’s climate-related risks and opportunities, contributing to an economy-wide transition
Which of these are NOT recommendations the TPT has for setting actions in a transition plan?
1. Follow the mitigation hierarchy (ie: prioritise setps to reduce scope 1, 2, 3 emisions over investing in carbon credits
2. Taking concrete steps to provide a plan to achieve their ambition
3. Avoid carbon lock-in when making decisions with long lifespans
4. Be aware of key assumptions they are making and assess the key external factors on which their transition plan depends (eg: policies, demand shifts, technological innovation) and take steps to mitigate potential delivery risks
(2) Taking concrete steps to provide a plan to achieve their ambition
The other recommnedation is to support their actions with appropriate resourcing plans
Give 3
What are the TPT recommendations to ensure that the transition plan has ensured proper accountability?
processes schmocesses. We’re all just roles on the stage, aligning ourselves to the script
- Integrating transition plans through all organisational processes and financial planning
- Clear roles and responsibiltiies for the delivery and oversight of the transition plan
- Align the organisation’s culture and incentives with the ambition of the plan
Give 3 reasons
What sort of items make up the foundational element in a transition plan?
- objectives and priorities
- implications for the business model
- key assumptions
Well-desigend objectives can help institutions maintain their long-term value and enable a shift towards higher-value product strategies
True or false
FIs need to put extra consideration into how their transition plans affect their investment and lending activities
True
This is because most of their emissions will be Scope 3 and that’s also where they have the largest lever to support the economy wide transition
True or false
The SBTi states that FIs are required to cover Scope 1, 2 and 3 emisisons that are related to investment and lending activities
False
The SBTi merely stresses that FI targets need to cover those scopes
Give 4
What are the elements that the SBTi Net-Zero Standard states that a net-zero target should have?
- Interim, 5-10 year targets that are aligned with 1.5C and serve as milestones towards a longer-term target
- Account for residual emissions
- Emissions must be removed or permanently stored
- Investments can be made to mitigate emissions falling outside a company’s value chain
What is Beyond Value Chain Mitigation (BVCM)?
Investments which are made to mitigate the emissions that fall outside a company’s “value chain” to support the transition to net-zero beyond a company’s direct actions
Which of these are NOT assumptions that companies might make relating to the development of their plans?
1. The trajectories in relevant climate models
2. Cost and availabilities of technology alternatives
3. Policy environment
4. Emissions-reduction initiatives implemented by suppliers
(1) The trajectories in relevant climate models
Other assumptions include:
* Supply of RE
* Changes in consumer behvarious
Understanding these assumptions are and the implications if they aren’t met are important for the senior mangement team to manage the delivery of the plan, as well as external stakeholders to assess credibility
True or false
The public sector’s transition plans are essential to furthering a Just Transition
False
It’s the private sector’s transition plans that will play a role as they have a wide range of implications that effects the communities which they operate in, their customers, and their stakeholders
Give 3
What are the key factors that LSE Grantham Research Institute sets out regarding the delivery and design of transition plans?
- 3A social
- Look
- Talk
- Anticipate, assess and address the social risks of the transition
- Identify and enable the social opportunities of the transition
- Ensure meaningful dialogue and participation in net-zero planning
Give 3
What are the different ways that engagement can be incorporated into a transition plan?
- Engagements with companies in the value chain
- Engaging with industry peers
- Engaging with Governments and the public sector
What form of engagement is important for FIs, especially listed equities?
Think November 2020
Voting
Institutions that use fixed-income securities do not enjoy voting rights but they can still engage with issuing entities
Which of these are NOT ways that the Institutional Investors Group on Climate Change suggested building an effective enagagement strategy?
1. Analysing stakeholder’s transition plan and determining whether it aligns with the Paris Agreement
2. Setting time-bound objectives with a subset of priorities and escalation plans
3. Dialogue with priority companies to communicate expectations in line with the investor’s net-zero strategy
4. Progress assessment to determine the efficacy of initial dialogues and escalation (voting or non-voting)
(1) Analysing stakeholder’s transition plan and determining whether it aligns wtih the Paris Agreement
The other recommenation is that compnaies should hold a review at the end of each engagement cycle to assess whether companies have made sufficient progress, and to set new priority companies. THis can help investors set time-bound actions and improve the quality of engagement campaigns
True or false
When using GHG metrics to compare entities, care needs to be taken
True
This is because there are differences in measurement which could result in reducing the comparability of the data
True or false
The use of additional targets can be used to provide a link between overarching emissions-reduction targets and specific opeational targets that relate to the underlying business
True
These targets can further support the operationalisation of a strategy
Give 2
What is the role of the Board and senior management in the design and oversight of the transition plan?
- Establishes the key individuals who are responsible
- Establishes the tone and promotes the allocation of necessary resources for implementation
How can aligning the internal culture to the overarching objectives of the transition plan support delivery?
An engaged and informed workforce can aid senior management in providing ideas and feedback on transition plans
Feedback is critical to have a sustainable and inclusive business
True or false
The content of the transition plan is highly dependent on the type of sector they are in
True
A number of relevant tools and guidance has been made to navigate these nuances. Eg: THe TPT has provided sector summarioes that sets out the decarbonisation levers and metrics and targets for 40 different sectors. Additionally,m the TPT also provides a draft Deep Dive for 7 sectors (asset managers, asset owners, banks, electric utilties and power generators, food and beverages, oil and gas, and metals and mining
Give 2
What are the approaches taken when consolidating GHG emissions?
- Equity Share Approach
- Control Approach
Why are there different types of ways to consolidate GHG emissions?
Particularly helpful in more complex ownership structures, where operations may not be wholly owned by one company
What is the equity share approach?
When the company reports on GHG emissionsf rom operations based on its share of equity in the operation
It aligns the ecnomonic interest in an operation. The equity share approach is particularly relevant when considering the economic risks and and rewards proportional to ownership interest
What is a benefit of using the equity share approach?
1. Easy to calculate and communiate
2. Offers a more accurate reflection of its environmental responsibility based on its level of investment
3. Both 1, 2
4. Neither 1, 2
(3) Both 1, 2
The emissions reporting is proportionate to the economic risk and benefits that the company has
True or false
One of the disadvantages of the equity share approach is that emissions can go unreported as its not granular enough
False
Although emissions might go underreported, it’s because it doesn’t capture the full environmental impact of a company’s operations, especially in cases where the company has significant operational influence but not so much proportional ownership, like joint ventures
What is the control approach when consolidating GHG emissions?
Reporting all of the GHG emissions from operations over which a company has control over
It can be split further into two: operational control and financial control
Operational control - Reports on emissions from any operation which has the authority to implement operating policies
Financial control - Reports on emissions from operations where the company has the ability to direct the financial and operating policies and benefit from these operations. The economic substance of the relationship takes precedence over legal ownership
True or false
The control approach does not account for emissions from operations where the company has financial interest but lacks control
True
This allows comapnies to have a comprehensive view of their direct environmental impact, resulting in more accountability
What are some of the issues with the control approach when it comes to consolidating emissions?
1. Can be hard to calculate
2. Double counting
3. May not fully capture the broader environmental impact of a company’s investments
4. Doesn’t account for more complex ownership structures
5. 1,2
6. 1,3
7. 1,4
8. 2,3
9. 2,4
(8) 2,3
What are financed emissions?
The emissions that are generated from projects or companies that have received financial support from FIs
They are a subset of Scope 3 and will represent the indirect impact of a FI’s activities
True or false
The first step that entities should begin with to calculate GHG emissions is to take stock of their entities’ activities to determine where their emissions are coming from
True
This could be directly measuring the GHG emissions by monitoring their concentration. However, more commonly, this relies heavily on calculated estimates
What equation do you use to calculate the emissions in CO2e?
Activity data x emission factor = Emissions
Emissions x GWP = Emissions in CO2e
3 Step approach
What is the process to calculate GHG emissions?
- Gather data
- Emission factor
- Global Warming Potentials
Give 4
What are the metrics used for financed emissions?
- Absolute emissions
- Economic emission intensity
- Physical emission intensity
- WACI
- Refers to the total GHG emission of an asset class or portfolio
- Absolute emissions divided by loan or investment volumen in EUR or USD
- Absolute emissiosn divided by a physical activity or output
- Portfolio’s exposure to emission-intensive companies
In what way can FIs help to close the funding gap for the transition for hard-to-abate sectors
Allows for the prioritisation of investments in projects, thus allowing a faster transition towards net-zero
Give 3
What are some of the challenges with estimating financed emissions?
- Limited data availability
- Generalised nature of calculations options that rely on assumptions and approximations
- Inconsistent measurement approaches
Limited data particularly impacts smaller banks, whose portfolios are comprised of small, non-listed counterparties . Meanwhile, the use of generalised data means that there are significant discrepancies and variability in emissions data
What are heirarchies of data quality in the context of financed emissions?
The classifications of data based on its reliability and accuracy for emissions reporting
Prioritises reported and verified emissions data first, and then inferred and estimated emissions
True or false
Financial institutions face challenges in the hierarchy of emissions due to the difficulty in accessing high-quality corporate-reported emissions data
True
Therefore, FIs typically rely on alternative data sources, but that can result in inconsistencies and inaccuracies in emissions data
Which organisation as helped to create a standard on estimating financed emissions?
1. NGFS
2. SASB
3. PCAF
4. TPT
(3) PCAF
Stands for Partnership for Carbon Accounting Financials
Which of these asset classes are covered by PCAF financed emissions standard?
1. Listed equity and corporate bonds
2. Business loans and unlisted equity
3. Project finance
4. Commercial real estate
5. Mortgages
6. Motor vehicle loans
7. Sovereign debt
8. All of the above
9. None of the above
(9) All of the above
What is the attribution factor that PCAF created?
The proportion of emissions of the borrower or investee that are allocated to the loan or investments
How do you calculate the attribution factor?
Outstanding amount / Total equity + Debt
How do you calculate financed emissions?
1. Attribution factor / emissions
2. Attribution factor X emissions
3. Emissions X outstanding amount
4. Outstanding amount / Total Equity + debt
(2) Attribution factor X emissions
Remember that (4) is the attribution factor calculation
In the PCAF Data Quality Score, which score refers to a 5-10% error margin?
1. Score 1
2. Score 2
3. Score 3
4. Score 4
(1) Score 1
Represents the most reliable category of audited emisisons data or actual primary energy data
In the PCAF Data Quality Score, what does Score 2 mean?
1. Error margin of 5-10%
2. Proxy data, using regional or country averages
3. Average sector-specific data
4. Without 3rd party audit but still based on primary data
(4) Without 3rd party audit but still based on primary data
(2) refers to Score 4
(3) Refers to Score 3
True or false
In the US, the SEC has leaned towards mandatory reporting of Scope 1, 2 and 3 due to investor demands and frameworks such as TCFD
True
It is part of a growing international trend where mandatory reporting is becoming more pronounced
- UK’s FCA has issued reporting guidelines, including mandatory disclosures of financed emissions for pension funds
- The EU’s SFDR mandates FIs to report their financed emissions by June each year
Which of these organisations have created voluntary reporting requirements?
1. NZBA
2. GFANZ
3. SASB
4. TCFD
5. 1,3
6. 1,2
7. 3,4
8. 2,4
9. 1,4
(6) 1, 2
These frameworks also encompass the development of net-zero transition plans to help portfolios make the transition to net-zero by 2050 and using science-based targets for emissions reduction by 2030. They will align with established frameworks, such as the TCFD, SBTi, and PCAF standards too
