Environmental Factors

The WEF categorises environmental risks into:

1. extreme weather events and temperatures 2. accelerating biodiversity loss 3. pollution of air, soil and water 4. failures of climate change mitigation and adaptation 5. risks linked to the transition to a lower carbon economy

Key environmental issues - key concepts

2009 - The Stockholm Resilience Centre (SRC) - 28 internationally renowned scientists First set of 9 principles relating to human induced change to environment and earth system - Planetary Boundaries within which humans can thrive going forward - Planetary Boundaries and - WEF's Global Risks Interconnections Map 2019 provide useful ways to understand the linkages and systemic relationship between the major environmental issues and how they affect companies and society as a whole. in 2015 (according to Science mag) 4 of the 5 planetary boundaries have now been crossed as a result of human activity:- 1. Climate change 2. loss of biosphere integrity 3. land-system change 4. altered biogeochemical cycles (phosphorous/nitrogen) This syllabus will cover issues 1. climate change 2. pressures on natural resources, incl water, biodiversity, land use and forestry and marine resources 3. pollution and waste linked and have systemic consequences for business activity and vice versa

Pollution and waste and circular economy

AIR POLLUTION clean air is essential to health, the environment, economic prosperity increased air pollution: - adversely affects the environment - negative impact on human health - destroys ecosystems - impoverishes biodiversity - reduces crop harvests due to soil acidification indoor and outdoor pollution is responsible for a tenth of all deaths globally each year - WHO. 90% of the world's population live in areas where air pollution exceeds WHO guidelines Urban air pollution is predicted to worsen - migration and demographic trends drive creation of more mega cities Pollution is the largest environmental cause of disease and premature death today. Lancet Commission 2017 - pollution caused 9 million premature deaths in 2015 - 16% of deaths worldwide - three times more than AIDS, tuberculosis, malaria combined and fifteen times more than from all wars and other forms of violence. WATER POLLUTION water is essential to all living organisms - but water pollution is one of the most serious environmental threats faced. Contaminants eg. harmful chemicals or microorganisms, are introduced to the natural environment via the oceans, rivers, streams, lakes or groundwater. can be caused by spills and leaks from untreated sewage or sanitation systems, industrial waste discharge. Plastic waste also ends up in waterways eg. Flint Water Crisis - Michigan - 2014 state changed to Flint River source to cut costs but water in river failed to be treated properly - lead leeching from old pipes. public health crisis endangered thousands of children and adults and continues to have long term health implications. Dozens of lawsuits against city, state and fed govt. State filed lawsuit against cos involved at time incl Veolia a global utility co. WASTE & WATER MANAGEMENT a bigger priority for policy makers, businesses and citizens recently given growing pressures on natural resources, opposition to pollution increasing consumption and waste levels more pressure on land fill space - rising land fill taxes Tougher regulation on how waste is managed incentivisation for cos to help economies through recycling and adopting a circular economy business model Campaign against plastics esp relating to damage to oceans action from local and national authorities on waste management - more responsibility on businesses Global commitment led by Ellen MacArthur Foundation and UN EP has set benchmark for best practise to address plastic waste and pollution system most countries - waste disposal is funded by national or local taxes - may be related to income or property value commercial and industrial waste typically charged for as a commercial service (often incl a disposal charge) Disposal contractors might be tempted to opt for cheapest option eg. landfill rather than re-usage/recycling Landfill remains most common waste disposal means globally Incineration of waste in some countries - but controversial given pollutant gas from process Recycling is on the increase both in developed and some developing nations - practices vary many consumer products are recyclable eg. metal cans and glass bottles/jars Financial mechanism, growing in popularity, is the use of hypothecated taxes - incl. plastic bag charge - designed to discourage waste and promote recycling CIRCULAR ECONOMY an economic model that aims to avoid waste and to preserve the value of resources (raw mats, energy and water) for as long as possible. effective for cos to assess and manage their operations and resource management Based on three principles :- 1. design out waste and pollution 2. keep products and materials in use 3. regenerate natural systems Netherlands govt has a programme for a circular economy. where new raw mats are needed they are to be sourced sustainably to avoid damaging natural and human environment. Developing a circular economy is fundamental to achieving climate targets (Report from Ellen MacArthur Foundation) it demonstrates how applying circular economy strategies in just five key areas (cement, aluminium, steel, plastics, and food) can eliminate almost half of the remaining emissions from the production of goods 9.3 billion tonnes of CO2 e in 2050 equivalent to cutting all transport emissions to zero.

Kyoto Protocol - 2005

Adopted in 1997 - effective in 2005 First international convention to set targets for emissions of 6 main greenhouse gases:- 1. Carbon Dioxide - CO2 2. Methane - CH4 3. Nitrous Oxide - N2O 4. Hydrofluorocarbons - HFCs 5. Perfluorocarbons - PFCs 6. Sulphur Hexafluoride - SF6 First commitment expired 2012 - extended to 2020 Negotiations at UN Framework Convention on Climate Change (UN FCCC) conferences on measure to be taken after 2020 resulted in 2015 adoption of the Paris Agreement

Apply material environmental factors to financial modelling, ratio analysis, risk assessment and quality of management

Case study - WWF and Cadmus survey 2018 - 20 infrastructure investors and related stakeholders looks at how investors evaluate the sustainability of infrastructure assets can be adapted for evaluating individual cos demonstrates how and where to integrate the results of a comprehensive ESG assessment as input into the key financial ratios and variables of a financial model, focusing on the environmental assessment: 1. consideration of ESG factors may inform the forecasting of financials eg. revenues, operating costs and capital expenditure - which are used in the context of assessing an infrastructure asset 2. these financial ratios or variables form the basis of financial models including discounted cash flow (DCF) models and ultimately asset valuations 3. it provides an illustration as to how investors may benefit from the derived insights by illustrating ways to approximate and quantify and thus linking them to expected revenues, costs, necessary capital expenditures, financing requirements or reserves, which in turn inform the financial model this example focuses on environmental impacts - social and governance factors also need to be considered for a full ESG materiality assessment Case Study over lifetime of an infra project - development to construction, operation and decommissioning - infrastructure assets face all sorts of ESG issues depending on asset type, sector, size, geographic location and stage in life cycle Some may come from outside the asset but could impact its technical ability to operate on its profitability other issue may be caused by the asset itself and impact the surrounding environment and communities - externalities which can affect financial performance through feedback loops (eg. protests) Impact on and impact from the asset - can have financial consequences for investors 2 step process to arrive at shortlist of environment factors with potential impact on financials (some can be more easily quantified than others) 1. long list of widely recognised factors derived. reduced to short list of key factors in the context 2. If and to what extent any of the factors has a material impact on any given infrastructure organisation or asset will be revealed by the asset specific ESG due diligence process.

Approaches to account for material environmental analysis and risk management strategies

Financial tools and models to integrate the analysis of environmental risks into company analysis G20 Green Finance Study - financial institutions need to use two types of approaches to assess:- 1. understanding environmental factors that may pose risks to financial assets and liabilities and how they can evolve over time (eg. the wrong pricing of a pollution liability or natural disaster insurance policy, or probability underestimation) 2. translating environmental risk factors into quantitative measures of financial risk - to inform firms' risk management and investment decisions. the type of tools and metrics largely depend on the asset classes and risk types they are exposed to (eg. fixed income analyst most interested in credit risk) Choice of approach depends on type of direct or indirect exposure to an environmental risk factor eg. probability of physical risks from flooding different to transition risks of moving to a low carbon economy due to policy change. Depending on the investment strategy and objectives, different levels of analysis will likely be performed - at the individual asset level, portfolio level and at the macro or systemic level. important to analyse the extent to which environmental and climate related impacts could affect a company's value chain - supply chain, operation and assets, logistics and market - which would have an impact on financial performance. Important that ESG risk assessments are conducted at: - company or project level - sector level - country level COMPANY/PROJECT LEVEL looking for material risks to inform monitoring of key financial metrics for disclosure in financial statements often analysts and portfolio managers will have their own internal ESG scoring system - using combination of third party data providers and internal analysis Qualitative and quantitative assessments made to determine the materiality of a particular co and how it will affect key efficiency or profitability ratios which might be used to compare cos might adjust PE ratio to reflect competitiveness rel to peers due to higher or lower ESG standards Cost assumptions can be adjusted according to future capital expenditure in environmental spending (mitigation or adaptation). SECTOR LEVEL ESG factors have varying degrees of impact on different sectors - some have higher exposure: - environmental risks - GHG emissions, chemicals, energy, steel/cement, extractives, food/bev, transport - physical risk - natural disasters to eg. buildings, urban infrastructure Companies in these sectors tend to be influenced by an environmental risk premium, which may affect the DISCOUNT RATE used. so sector wide considerations need to be overlaid on the company analysis - remove any sectoral/regional biases that align with the managers investment strategy and process. COUNTRY LEVEL a country's environmental regulations, emission targets and enforcement may vary in emphasis across diff jurisdictions. Often investments may be multi-jurisdictional so several considerations and regulations will need to be factored into the co valuation based on where it or its operation lie. Disclosure and transparency data will vary by region eg. emerging market companies tend to have fewer comprehensive disclosures ANALYSING ENVIRONMENTAL RISKS no one common standard based on combination of independent third party research and data and useful frameworks, practitioners can map out and analyse the environmental risks and costs across different types of asset classes by company and sector - in order to make own qualitative and quantitative risk assessments. Some approaches that are used by investors to assess risks and opps:- a. carbon footprinting b. natural capital approach c. climate scenario analysis a. CARBON FOOTPRINTING one of the most common approaches a portfolio carbon footprint effectively measures carbon emissions and intensity associated with operations of the cos in a portfolio It means that the investor can:- - compare it to global benchmarks - identify priority areas and actions for reducing emissions - track progress in making those reductions TCFD recommends that asset owners and managers report the weighted average carbon intensity associated with their investments Carbon footprinting applies the international accounting tool of the Greenhouse Gas (GHG) Protocol standards. Scopes 1 and 2 cover direct emissions sources eg. fuel used in co vehicles and purchased electricity Scope 3 emissions cover all indirect emissions arising from the activities of an organisation - including emissions from suppliers and consumers Scope 1 - direct eg. fuel combustion, company vehicles, fugitive emissions Scope 2 - direct eg. purchased electricity Scope 3 - indirect eg. purchased goods/services, business travel, employee commuting, waste disposal, use of sold products, transportation and distribution, investments, leased assets and franchises Carbon footprinting does have its limitations and challenges as a risk measure - seen as backward looking and static:- - it is not yet available for unlisted assets - Scope 3 emissions are rarely being included - it uses different estimation methodologies - it does not measure potential investment risks related to the physical impacts of climate change NATURAL CAPITAL APPROACH the relationship between nature and measuring and valuing nature's role in decision making. helps businesses identify, measure, value and prioritise their impacts and dependencies on biodiversity and the ecosystem - and new insights into risks and opportunities Understanding the value of both natural capital impacts and dependencies helps business and financial decision makers assess the significance of these issue to the institution and therefore make more informed decisions The natural capital approach explains the complex ways in which natural, social and economic systems interact, impact and depend upon one another. The Natural Capital Protocol - NCP a decision making framework, enables orgs to identify, measure and value the direct and indirect impacts and dependencies of companies on natural capital Currently provides guidance for the apparel sector, food & beverage sector and forest products sector The protocol allows cos to measure, value and integrate natural capital impacts and dependencies into existing business processes such as risk mitigation, sourcing, supply chain management and product design. CLIMATE SCENARIO ANALYSIS a forward looking approach to assessment of risks and opportunities. A process of evaluating how an org, sector, country or portfolio might perform in different future states - to understand its key drivers and poss outcomes Climate related risk is 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 org's strategy, taking into consideration different climate related scenarios, including a 2⁰C or lower scenario and where relevant to the org scenarios consistent with increased physical climate related risks" Currently, there is no common set of scenario analysis methodology used by investors the types of approaches and models will depend largely on the objectives and scope of the work The Institutional Investors Group on Climate Change (IIGCC) published a practical investors' guide - provides a useful framework to approach climate related scenario analysis. Two objectives for the guide:- 1. Financial Impact - scenario analysis enables assessment and pricing of climate related risk and opps 2. Alignment - aligning the portfolio with a 2⁰C or lower future - typically driven by a set of investment beliefs a. Establish objectives - align values/materiality/internal governance b. Understand & select scenarios - how they can translate to parameters to guide investment analysis c. Apply scenario analysis to investments - top down mapping, identify main risk areas or bottom up in depth analysis to understand magnitude d. Review findings and consider action - Iterative process, range of actions, further analysis, info gathering e. Disclose - reports and communication, internally to portfolio managers, Investment committee, trustees, externally to clients, regulators, other stakeholders f. Ongoing active monitoring - key parameters identified to be monitored over time Overall, there is NO ONE SIZE FITS ALL methodology to determine materiality and they consequently use financial modelling and concepts such as financial ratio analysis. The EU Non-Financial Reporting Directive helps analysts and investors to evaluate the non-financial performance of large companies - sums up the most effective and recommended approach well involves: 1. taking a set of transparent and credible data sources and assumptions, which can be quantitative or qualitative 2. apply recognisable, accepted methodologies, which will prob have the backing of an industry body, government department or multi-lateral institution 3. focusing on materiality - looking in particular at business models, operations and financial performance 4. generating a set of outputs which can be measured in terms of KPIs in order for the financial system to achieve a better appreciation of climate change risks and opportunities there is need for more data, greater disclosure, better analytical toolkits, advanced scenario analysis and new risk management techniques

Pressure on natural resources

Fresh water Biodiversity land use & forestry & marine resources non-renewable - fossil fuels, minerals, metals loss of biodiversity less secure access to natural resources resource scarcity being simultaneously driven by:- - population growth - improvements in healthcare - people living longer - economic growth - increasing consumption in developed and emerging countries companies must find more efficient ways to use natural resources - competitive and sustainable way - for better financial management of resources to spur technological innovation that can benefit bottom line whilst supporting a sustainable resilient economy and society Over consumption of natural resources - UN - 7.6bn world population - will reach - 8.6bn by 2030 - 9.8bn by 2050 - 11.2bn by 2100 Planetary boundaries model plays into this debate Over population tends to be taboo subject - esp in developing countries interlocking trends becoming more prominent - population increase, food production, non-renewable resource depletion and pollution generation - more starting to talk about/address over population risks The Club of Rome - group of global experts (scientists/politicians) focus on this theme - The Limits of Growth 1972 need to redefine growth and address - population, affluence, technology essential to shift towards more stable consumption and production model SDG 12 - Responsible Consumption & Production ie. meet the needs of all whilst using fewer resources (energy, water) and reducing waste and pollution WATER - c70% of planet is covered in water - only 2.5% is fresh water A vital resource for humans, agriculture, industrial, household, energy gen, recreation, environmental activities Critical to many industrial processes - including mineral extraction, cooling in plants. Water demand set to increase in all sectors World Economic Forum - water connects all into a broader economic system that needs to balance social development and environmental interests. Can be a zero sum game - take from one to give to another Water scarcity - lack of freshwater resources to meet water demand. Present on every continent - one of the largest risks over next decade UN Water report states over 2bn people experience high water stress across different countries 4 bn people experience sever water scarcity at least one month of the year SDG 6 - Clean water and sanitation - ensuring availability and sustainable management to all as well as climate change - a lack of investment can exacerbate - major concern - esp for developing and emerging economies. BIODIVERSITY biological diversity, land use etc provide a range of invaluable services to society that underpin human health, well being and economic growth. Ecosystem services - benefits that people/businesses derive from the ecosystem Biological diversity - defined by Convention on Biological Diversity the variability among living organisms form all sources including: terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part - incl: diversity within and between species and of ecosystems IUCN - International Union for Conservation of Nature biodiversity underpins ecosystem services, provides natural resources - our natural capital. Eco services incl: food, clean water, genetic resources, flood protection, nutrient cycling, climate regulation amongst many 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. 2019 report - Intergovernmental Science Policy Platform on Biodiversity & Ecosystem Services (IPBES) showed that nearly 1m animal and plant species are threatened with extinction Scientifically proven findings highlighting the deterioration Humans have impacted over 75% of the Earth's land areas and 66% of the oceans Deterioration is caused by land/sea use change, direct exploitation, climate change and pollution WWF report in 2018 - Living Planet - overall decline of 60% in species populations between 1970 and 2014. exacerbated by global warming major driver of loss is: Loss of habitat linked to overexploitation due to large scale infrastructure and agriculture activity OECD outlook to 2050 projects a further 10% loss in biodiversity by 2050 in business as usual scenario Biodiversity loss is already causing issues for some industries eg. fishing - agriculture - extractive industries - oil gas mining cement - forestry - palm oil and timber - tourism all stand to suffer Transformative change required across economic, social, political, technological LAND USE & FORESTRY AFOLU - Agriculture, Forestry, Other Land Use practises have major impact on natural resources - water, soil, nutrients, plants and animals (IPCC) AFOLU responsible for 23% of total net anthropogenic emissions - from deforestation and livestock emissions, soil and nutrient management. 2019 - IPCC special report on Climate Change and Land highlighted stability of the food supply is to decrease as more extreme weather events take place disrupting food chain Forests cover c 30% of Earth's land surface (C4bn hectares) Forests are vital part of the carbon cycle They convert the CO2 in the air to oxygen through photosynthesis - a natural regulator of carbon dioxide - world's tropical forests important role in sequestering carbon from atmosphere The more trees the less carbon dioxide in the atmosphere and the more oxygen there is. Deforestation and forest degradation account for 10-15% of the world's green house gas emissions IPBES report - 100m hectares of tropical forest were lost between 1980-2000 - mainly due to cattle ranching in Latin America (42m) and plantations in South East Asia (palm oil for food/cosmetics, cleaning products, fuel) 7.5m CDP - say up to $941bn of turnover in publicly listed companies dependent on commodities linked to deforestation - including soy, palm oil, cattle and timber Soft commodity supply chain risks from these industries can impact financial metrics eg. revenues, asset valuation or costs - impacting credit worthiness or market value of the debt or equity of investee companies. Cos with exposure to deforestation in their supply chains may face material financial risks such as - supply disruption - cost volatility - reputational damage Shifting business practises to adopt more sustainable land management approaches contributes to: - agricultural and economic development, locally/globally - health and stability of forests and ecosystems at increasing scale - the reduction of greenhouse gas emissions from deforestation and degradation MARINE RESOURCES The oceans are Earth's largest carbon sink - produce over half the world's oxygen and absorbing 50 times more carbon dioxide than the atmosphere one of the most valuable natural resources - provides seafood and widely used for transportation. SDG 14 - Life below water OECD ests ocean based industries contribute c. €1.3 trillion to global gross value added. Oceans are also mined for minerals (salt, gravel, some manganese, copper, nickel, iron and cobalt - deep sea) and drilled for crude oil. Oceans resources - a source of economic growth - known as the BLUE ECONOMY World Bank - the blue economy - the sustainable use of ocean resources for economic growth, improved livelihoods and jobs while preserving the health of ocean ecosystem Communities closely connected to coastal environments - small islands (incl Small Island Developing States SIDS), polar areas, high mountains are all particularly exposed to ocean change eg. sea level change low lying coastal zones - 680m people (10% of 2010 global population) - projected to 1bn by 2050 Oceans have been overfished due to increase in human population 2015: -33% of marine fish stocks were been harvested at unsustainable levels - 60% were fished to maximum capacity - only 7% harvested at levels lower than what can be sustainably fished. Controversial subject - control of world's fisheries Production is unable to satisfy demand - esp where there aren't enough fish left to breed in a healthy ecosystem

Key MEGATRENDS and DRIVERS influencing environmental change in terms of potential impact on companies and their environmental practices

GROWTH OF ENVIRONMENTAL AND CLIMATE POLICIES a lot of policies formed and adopted over last 10 years. majority from Europe. London School of Economics mapped the global climate change laws in 2017. 1200 of them - a 20 fold increase in 20 years still rising Sept 2019 - European Parliament Committee on the Environment, Public Health & Food Safety (ENVI) published study of EU environmental and climate legislation - a review/state of play/challenges for next 5 years - climate and environmental policies. 3 thematic priorities:- 1. protection and enhancement of natural capital 2. establishment of a resource efficient and green low carbon economy 3. protecting citizens' health and well being INTERNATIONAL CLIMATE AND ENVIRONMENTAL AGREEMENTS AND CONVENTIONS particularly important in times of increasing globalisation, many environmental problems - climate change, loss of biodiversity extending beyond national borders - need international co-operation Kyoto Protocol - 2005 Paris Agreement - 2015

Systemic relationships between business activities and environmental issues we tend to understand key environmental factors in respect of business and investment through specific issues such as climate change and unsustainable natural resource consumption and production and negative impacts that businesses, consumption habits and investment demand are having on the health of natural capital stocks. less understood is how businesses and financial activities depend on natural resources and properly functioning ecosystem services

The cost of pricing externalities - its difficult to value and measure natural resources and often these don't get priced into costs. CLIMATE CHANGE AND OTHER ENVIRONMENTAL ISSUES Physical risks - have become more important to business agenda in last 20 years: - more extreme weather effects (Houston rainfall 2017, drought & bushfires Australia 2018/19) - rising sea levels - melting glaciers (Antarctica, Greenland) and Arctic ice roll back - acidification of oceans and degradation of marine life, coral reefs, plankton ecosystems - impacts on food and crops (World Food Programme WFP sees major risks to availability and access for developing nations. Lower food production could negatively affect incomes and increase prices of major crops in some regions. All these impacts set out in the IPCC's special report: Global Warming of 1.5 ⁰C Growing evidence of direct links between climate derived catastrophes and business risks eg. PG&E filed for chapter 11 bankruptcy in 2019 - after two years of wildfires resulted in liabilities c.$30bn - exceeded insurance cover and assets Transitioning to a lower carbon economy entails policy, legal, technology, market risks risk can be acute for high-emission business and economic activities highly vulnerable to climate change impacts. eg. In UK in 2018 introduced minimum energy efficiency standards - prohibits private landlords from letting residential property if their EPS (Energy Performance Certificate) rating is E or lower - creates stranded assets unless landlord invests in energy efficiency upgrades to their properties in 2019 - some of UKs leading property owners (+11,000 properties globally) signed a ground breaking commitment to tackle climate change through delivery of net zero carbon real estate portfolios by 2050 The UN EP point to policy and regulatory measures backing green finance doubling since 2015. Reporting and disclosure are a focal point for policy and regulatory action (25% of all measures implemented) Multi lateral organisations - as central banks and govts step up efforts to tackle climate change, policy action and demands on disclosure around climate change are expected to increase - a business risk in its own right if not or inadequately addressed RELATIONSHIP BETWEEN NATURAL RESOURCES AND BUSINESS dependence on natural resources and ecosystem services are both direct and indirect The Global Reporting Initiative (GRI) - a global sustainability reporting framework - explains: Direct impact - orgs activities directly affect biodiversity eg. land use or conversion for production, surface water for irrigation, toxic materials released, local species displaced - noise and light Indirect impact - supply chain causes - production chain, infrastructure secondary impact of encouraging settlement or development of more rural areas Indirect impacts can be less easy to predict and manage Impacts can be positive and negative Sectors with potential for negative biodiversity impact: - agriculture, aquaculture, fisheries, food production - extractives, infrastructure, large scale construction - FMCG (raw mats for products) - forestry - pharma (some) - tourism and hospitality (some) - utilities incl hydropower or open cycle power plants generating significant thermal discharges SUPPLY, OPERATIONAL AND RESOURCE MANAGEMENT ISSUES cos need to manage, measure and disclose on their environmental impact - positive and negative - from direct operations. investors need to assess extent cos understand the impact of their ops and manage resources which are material to them Environmental impacts from direct operations include: - toxic waste - water pollution - loss of biodiversity - deforestation - long term damage to ecosystems - water scarcity - hazardous air emissions and high greenhouse gas emissions and energy use Failure to address these will expose businesses to additional risks Working on solutions provides a business an opportunity to develop climate resilient business strengths circular economy is a useful model for cos to assess, manage their ops and resource management UK Govt - updated its Environmental Reporting Guidelines in March 2019 to help cos to measure and report their environmental impacts including greenhouse gas emissions Emphasises use of environmental key performance indicators (KPIs) to capture the link between environmental and financial performance. March 2019 - EU Commission adopted an ambitious Circular Economy Action Plan to address the challenges of climate change and pressures on natural resources and ecosystems 2019 - Vale - deadly tailings dam disaster - 250 people died - share price fell - wiped out c£12bn of mkt cap Sustainalytics downgraded Vale immediately on ESG performance. Vale removed from Brazil's ISE corp sustainability index Feb 2020 - the ICMM (International Council on Mining and Metals) launched the Mining Principles. Define good ESG practise requirements for industry. A comprehensive set of performance expectations, incl self assessments and independent third party assessments and transparent disclosure of outcomes SUPPLY CHAIN TRANSPARENCY & TRACEABILITY supply chain sustainability is the management of ESG impacts and practises (during production and distribution), throughout the lifecycle of goods and services. Supply chains are complex - heavy interdependence Products, services and environmental risks intertwined across sectors and at every level of the chain Cos are increasingly expected to understand, manage and disclose exposure to supply chain ESG risks otherwise exposed to reputational, operational and financial risks investors need to factor understanding of supply chain into their due diligence, and active stewardship addressing emissions in industry and the food system is complex industry - demand for materials growing and adoption rate of renewable electricity and incremental process improvements - making it difficult to bring emissions down to net-zero by 2050. food system - significantly reducing emissions also challenge - requires consumption habits of billions of people to change - change production habits of millions of producers and decarbonising long and complex food chains. Traceability is a useful practice to identify and trace the history, distribution, location and application of products, parts and materials. to ensure the reliability of sustainability claims - in the areas of human rights, labour (health and safety incl), the environment and anti-corruption The CDP's Global Supply Chain Report (2018) showed that greenhouse gas emissions in supply chains are on average four times as high as those from direct operations EG. sectors with particularly complex and/or high risk supply chains include: - oil and gas - mining - beef - cocoa - cotton - fisheries - leather - palm oil - agriculture - forestry Environmental risks due to supply chain factors - main ones:- - material toxicity and chemicals - raw material use - recyclability and end of life products - greenhouse gas emissions - energy use - water use and wastewater treatment - air pollution - biodiversity - deforestation Cos and stakeholders in industries with complex supply chains have joined forces to build global multi-stakeholder initiatives in order to trace commodities collaboratively - eg:- - Forest Stewardship Council (FSC) - Marine Stewardship Council (MSC) - Roundtable for Sustainable Palm Oil (RSPO) - Fairtrade Labelling Organisations International (FLO) Not-for-profit organisations offer measurement frameworks and tools that can help trace critical sustainability issues in supply chains - include:- - The Sustainability Consortium (TSC) - a set of performance indicators and reporting system - highlight hotspots for >110 consumer product categories - cover 80-90% of impact of consumer goods - World Wildlife Fund (WWF) - more than 50 performance indicators for measuring supply chain risks in production of a range of commodities, probability and severity also - CDP and Global Reporting Initiative (GRI) - standards and metrics for comparing diff types of sustainability impact - Sustainability Accounting Standards Board (SASB) developed standards to help public cos across ten sectors, incl consumer goods, to give investors material info about corp sustainability perf along supply chain - 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, forestry, water, waste management etc are compliant with Paris Agreement and more specifically limiting global warming to 2⁰C (3.6⁰F) These and other frameworks keep developing. Greenhouse gas emissions - focus has been on direct emissions from core operations (Scope 1 emissions) and supporting activities (Scope 2 emissions) eg. logistics fleet of retailer. Increasing focus now on how to measure and incorporate indirect emissions from the whole supply chain (Scope 3 emissions) including suppliers and customers. in parallel - a number of organisations (eg. GRI and ICMA) are working on disclosure templates to promote systematic capture of info, streamline measurement scope and methodologies, and facilitate comparisons Investors should assess whether a company in their portfolio has policies and systems in place which: 1. clearly explain the environmental (and social) requirements that suppliers are expected to meet via a procurement policy (eg. supplier code of conduct) 2. enable it to assess environmental (and social) risks throughout its supply chain and discuss whether it has a mechanism in place to improve poor practices. 2019 - coalition of investment firms (with more than$6.5 trillion in AUM - convened by not-for-profit Ceres and FAIRR initiative - called on 6 largest global fast food cos to take more action on climate change and water risks within their supply chains. Meat and dairy supply policies. Animal agriculture is the highest emitting sector without a low-carbon plan achieving full transparency and traceability in all areas of supply chain is complex. multiple factors with different systems and requirements to produce end products - across borders still worth investors collaborating and engaging for more transparency from cos and govts SYSTEMIC IMPACT OF CLIMATE RISK ON THE FINANCIAL SYSTEM Environmental related risks (credit/market/legal/operational) as a result of degradation (air poll, water poll, fresh water scarcity, land contamination, reduced biodiversity, deforestation) on a company or country level are easier to isolate and identify than systemic risks resulting from environmental issues investors, central banks and policy makers more aware of risks of systemic risk for financial sector Physical and transition risk The risks from climate change to the economy have two basic channels but many potential impacts. "Climate risks are far reaching in breadth and scope. They affect all agents in the economy, in all sectors and across all geographies. Their impact will likely be correlated and non linear. They will therefore occur on a much greater scale than other risks" 2016 Grantham Research Institute report - climate value-at-risk of global financial assets reached $2.5 trillion - in a business as usual scenario and $24.2 trillion at the 99th percentile The Economist Intelligence Unit - highlights economic cost to asset management industry from climate change, through weaker growth and lower asset returns Estimates value-at-risk to be between $4.2 trillion and $43 trillion between now and end of century Increased frequency and severity of extreme weather events means a higher number of more costly claims for insurers to deal with. Climate related impacts have most potential relevance for the liability side of general insurance firms balance sheets - with potential for meaningful asset side impacts which could affect both general and life insurers

Paris Agreement - 2015

UN FCCC in Paris in 2015 (COP 21) landmark agreement to mobilise global response to the threat of climate change. long term goal - to keep the increase in global average temperature to well below 2⁰C (3.6⁰F) above pre industrial levels and seek to limit to 1.5⁰C (2.7⁰F) NOT legally binding under international law but serves as a landmark in tackling climate change on global scale. NATIONALLY DETERMINED CONTRIBUTIONS (NDC) at the heart of the agreement Efforts by each country to reduce national emissions and adapt to climate change impact. every signatory (low or high income countries) to determine, plan and report on its NDCs with updates to commitments every 5 years range between cutting 25-30% of 2005 emissions by 2030 Many countries not on track - Climate Action Tracker Progress is insufficient for 2⁰C target globally COP24 in 2018 - three years after Paris - 195 UN FCCC countries signed up - 184 ratified COP24 - 2018 - Katowice, Poland - reaffirmed Paris Agreement on carbon markets - national govts to enhance individual emissions reduction pledge. COP25 - 2019 - Madrid - no consensus on Article 6 of Paris Agreement on carbon markets. COP26 - 2021 - Glasgow - all nations signed up to Paris Agreement will have to reach a binding agreement on Article 6 Policy action at national and international level is both an opportunity and a risk to Asset Managers Transition to a low carbon economy may affect cash flows and profitability. May result in stranded assets, reduced value of assets due to obsolete or non perf Paris Agreement goals are widely recognised and used as aims for cos, investors and govts to deal with climate change impact - to mobilise finance flows consistent with low greenhouse gas emissions and a climate resilient pathway Other international agreements impacting cos practises:- SDGs - sustainable development goals - UN General Assembly agreed 2015 Also used either all together or individually by cos and investors as material to their business planning and ops Kigali Agreement 2016 - global agreement to phase out ozone depleting hydrofluorocarbons HFCs by 80-85% by 2045

Climate change

a change of climate, directly or indirectly attributed to human activity - that alters the composition of the global atmosphere - over and above natural variability over comparable time periods one of most complex issues facing us today - involving: science, economics, society, politics, moral/ethical questions global issue - local manifestations (eg. weather events) global impacts (eg. global warming, sea level rises) Warming of the planet caused by greenhouse gas emissions poses systemic risks to the global economy with far reaching effects 2006 - the Stern Review - concluded climate change is unique challenge for economics and the biggest market failure ever seen. Also said - no one can predict with certainty the consequences of climate change but we know enough to understand the risks evidence since then overwhelming and shows increasing seriousness - risks of irreversible impact from climate change 2018 report - IPCC - Intergovernmental Panel on Climate Change - human activities est already caused approx 1⁰C (1.8⁰F) of global warming above pre industrial levels likely to reach 1.5⁰C (2.7⁰F) between 2030-2052 if continuing at current rate. report also states that a number of outcomes could be avoided if keeping to 1.5⁰C - 2⁰C (3.6⁰F) UN Environment Programme - Emissions Gap Report 2019 - even if all govt commitments under Paris Agreement were implemented we are still on course for a 3.2⁰C (5.8⁰F) rise. To be in line with Paris - need a drop of 7.6% per year from 2020 to 2030 for the 1.5⁰C goal and 2.7% per year for the 2⁰C target. Socioeconomic impacts are exacerbated by climate change IPCC - affirm that impact from 1.5⁰C rise in global temps will disproportionately affect disadvantaged and vulnerable populations through food insecurity, higher food prices, income losses, lost livelihood opps, adverse health impacts, population displacements Climate change is now a major issue for policy makers, businesses and investors alike SDG 13 - Climate action - urgent need for action to combat climate change given systemic nature - mitigation, adaptation, resilience measures can impact and help address the other SDGs - particularly:- SDG2 - zero hunger - sustainable agri /acqua culture SDG3 - good health & wellbeing - pollution control SDG6 - clean water and sanitation SDG7 - affordable clean energy SDG9 - industry, innovation, infrastructure SDG11 - sustainable cities and communities SDG12 - responsible consumption/production - waste SDG14 - life below water - marine conservation etc SDG15 - life on land - forest conservation, agri, forestry Carbon intensive businesses are at risk from climate change High emitting sectors include:- Oil, gas, coal heavy industrial - petrochems, steel, cement Buildings and transport Climate change risk is best known through:- - Transition risks - result of change in climate and energy policy, shift to low carbon tech, liability issues - Physical climate related risks - extreme weather events, acute/chronic risks from longer term shifts in climate patterns eg. higher temps Potential impacts - cross cutting/systemic - Stranded assets - coal, oil, gas, petrochem due to policies to reduce carbon emissions - growing stress on water resources - impact on agriculture - physical impact - rising sea levels on coastal installations - refineries, nuclear plants - also cities, buildings, infrastructure (roads, bridges, water supply, pipelines) Two approaches to respond to climate change:- 1. reduce/stabilise level of heat trapping greenhouse gases in atmosphere - Mitigation 2. adapt to climate change taking place now and increase resilience - Adaptation

Climate change mitigation

a human intervention to reduce the sources of or enhance the sinks of greenhouse gases Goals:- 1. avoid significant human interference with climate system 2. stabilise greenhouse gas levels to allow ecosystems to adapt naturally 3. ensure food production not threatened 4. enable sustainable economic development greater adoption of mitigation strategies and policies to promote sustainability - Energy - renewable sources - wind, solar, geothermal, hydro, biofuels from sustainable source - Buildings - retrofitting for energy efficiency, using less carbon intense materials and equipment - Transport - particularly in cities - EVs, rail, metro, bus - decarbonising shipping, road, rail and air transport - Land use & forestry - improved management and reducing deforestation - Agriculture - improve crop and grazing land management - increase soil carbon storage - Carbon Tax - carbon reduction policies to penalise heavy emitters and promote greenhouse gas emission reductions Industry & manufacturing - develop more energy efficient processes and products, equipment/process to capture carbon, power storage (batteries, pump systems) recycling efficiency etc IPCC report 2013 - Climate Change, Action, Trends & Implications for Business considered 4 potential futures depending on govt policy adopted to cut emissions - Carbon Crossroads. Out to 2100 - RCP (rep concentration pathways) business as usual baseline to diff mitigating scenarios. Impact of climate change versus impact of policy change. Climate change will continue past 2100 and elevated temperatures will remain for many centuries after human CO2 emissions cease Business as usual - emissions continue at current rate - more heatwaves, changes in rainfall patterns, monsoon systems, CO2 concentration 3-4 times higher than preindustrial levels, arctic summer sea ice almost gone, seal level rises by 0.5-1m, more acidic oceans. Aggressive mitigation - emissions halved by 2050 - may require negative emissions - removing CO2 from air before 2100, CO2 concentration falling before end of century, climate impacts generally constrained but not avoided, reduced risk of 'tipping points' and irreversible change

International initiatives

acceleration in last 5 years environment and climate initiatives targeting business and finance sector Paris Agreement has been most instrumental in bringing all nations together to common cause ambitious efforts has helped regulators and policy makers at national levels to take action EU SUSTAINABLE FINANCE ACTION PLAN from the EU Commission's capital markets union (CMU) aims to deepen and further integrate capital markets of EU members through - investing for long term, infrastructure and sustainable investment. Oct 2016 - High-level Expert Group (HLEG) on Sustainable Finance established Final report 2018 recommendations:- - a classification system, or taxonomy, to provide market clarity on what is "sustainable" 2. clarifying duties of investors in achieving sustainable financial system 3. improving disclosure by financial institutions and companies on how sustainability is factored into their decision making 4. an EU-wide label for green investment funds (the Ecolabel) 5. making sustainability part of the mandates of the European Supervisory Authorities (ESAs) 6. a European standard for green bonds EU TAXONOMY hotly debated topic by investment community aim is to eliminate GREEN WASHING of financial products Provides a classification system to determine if an economic activity is environmentally sustainable. Inclusion in the taxonomy depends on activities contributing to at least one of the following objectives: 1. climate change mitigation 2. climate change adaptation 3. sustainable use of water and marine resources 4. transition to a circular economy, waste prevention, recycling 5. pollution prevention and control 6. protection of health ecosystems Inst investors and asset managers offering environmentally sustainable products need to explain whether and how they have used the taxonomy criteria Technical Expert Group (TEG) - June 2019 - reported full details (after public consultation) supplementary report on using the taxonomy provides further guidance and examples End 2019 - EU co-legislators reached common understanding on the taxonomy for green economic activities - approved and adopted by European Parliament and Council in June 2020 CLIMATE BENCHMARKS Another area led by TEG - created for climate resilient risk management Two EU climate benchmarks for equities and bonds adopted in early 2020 - start at -30% and -50% greenhouse gas intensity compared with investible universe 1. EU Paris-aligned Benchmark (EU PAB) - must achieve a 7% yoy reduction in CO2 emissions plus a 1.5⁰C limit to global temp rises by 2050 and exclude fossil fuels 2. EU Climate Transition Benchmark (EU CTB) - similar targets but permits fossil fuel investments as part of transition process Further developments from the EU Commission's SUSTAINABLE ACTION PLAN will drive financial markets towards harmonisation - influencing policy EUROPEAN BANKING AUTHORITY's action plan on sustainable finance - late 2019 outlines EBA's sequenced approach - starting with defining key metrics and strategies, risk management and moving towards scenario analysis and evidence for adjustments to risk weights. Regulator will look into "prudential treatment of green exposures" - impact on a wide variety of instruments Action plan in early 2020 - EU securities markets regulator ESMA set out to increase focus on sustainability by integrating ESG into its work - incl looking at climate stress testing, risks from green bonds, getting credit rating agencies to incorporate ESG factors COUNTRY LEVEL POLICY AND PRUDENTIAL ACTIONS countries and regions leading way and influencing regulatory framework to mainstream climate change and environmental factors. eg. The French Transition Law - Jan 2016 - requires major inst investors and asset management cos to explain how they take ESG criteria into account in risk management and investment policies UK Financial Regulator - FCA - Financial Conduct Authority. published first consultation on climate change in 2018. UK Govt Environmental Audit Committee (EAC) wrote to 25 largest UK pension schemes on climate risk the same year. UK Dept for Work & Pensions also put proposal that corp pension fund trustees should publish a fund statement of investment principles (SIP) - to take account of ESG factors (climate change esp) - Oct 2019 UK Pensions Regulator issued guidance to pension funds on ESG/climate change similar lines - Oct 2020 trustees of DC pensions schemes required to produce and implementation report setting out how they acted on principles set out in the SIP CHINA - another national leader - key player in growing green bonds market China has begun growing leadership position on renewable energy with greater desire for its financial system to address climate change and environment Policy makers increasingly engaging with EU on issues eg. green taxonomy and environmental disclosure. As science on climate change and its impact improves could expect the financial regulator's and policy makers agenda to increase with important implications for economic, financial and business policies CARBON MARKETS growing consensus govts, financial community, businesses on the fundamental role of carbon pricing in the transition to a decarbonised economy. Putting a price on carbon emissions is viewed as one of most effective ways to tackle climate change "the polluter pays" principle Many types of carbon pricing eg. : ETS - emission trading system and carbon tax trade emission units to meet targets Carbon tax - directly sets price on carbon - explicit tax rate on greenhouse gas emissions eg. price per tonne of CO2e Both initially trialled in the UK in early 2000s EU subsequently adopted emissions trading as one of its flagship climate policies with establishing ETS in 2005. The ETS covers the main energy and carbon intensive industries - regulating about half of the European economy with a carbon price Sporadic growth of national schemes since then Schemes in California, Eastern seaboard US, New Zealand, South Korea, some Canadian provinces. Fully fledged scheme expected in China end 2020 beginning 2021 - make biggest carbon market in world Global aviation industry also plans to cap emissions from 2021 via carbon offsets For last 10 years many cos have used shadow carbon pricing to guide decision making (incl energy intensive sectors) Creates a theoretical or assumed cost per ton of carbon emissions. Shadow pricing used to better understand potential impact of external carbon pricing on profitability of a project, new business model or investment it reveals hidden risks and enables businesses to build this factor into future valuations and estimates of capital expenditure where emissions bear a cost in P&L terms, it helps to uncover inefficiencies and incentivise low carbon innovation in depts - cutting energy use and carbon pollution. Investors also use it in their financial analysis. Some govts use internal carbon pricing as a tool in their procurement process, policy design and project assessments in relation to climate change impacts Financial institutions also begun using internal carbon pricing to assess their project portfolio CDP report - over 1300 companies (incl over 100 Fortune Global 500) with total revenue of $7 trillion reported using or plan to use. TASK FORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES - most influential international framework for disclosure of climate change risks and opportunities affecting cos and financial institutions came about after fears of a systemic threat to the stability of the financial system identified by G20 finance ministers and Central Bank governors Financial Stability Board (FSB) review of large scale and long term challenges for the financial sector and how to account for them. December 2015 - Mark Carney - Chair of FSB and Governor of BoE - announced the TCFD He emphasised that :- the risks of inadequate info can lead to the mispricing of assets and misallocation of capital - can potentially give rise to concerns for financial stability since markets can be vulnerable to abrupt corrections also Climate Change is the tragedy of the horizon - don't need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors - imposing a cost on future generations that the current generation has no direct incentive to fix TCFD - set of recommendations and framework for cos 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 opps into their decisions also better info will help investors engage with cos on the resilience of their strategies and capital spending - including more efficient allocation of capital - which should promote a smooth transition to a more sustainable low carbon economy 2017 - TFCD final recommendations published "one of the most significant and perhaps most misunderstood risks that organisations face today relates to climate change" Recommendations around 4 themes:- 1. Governance - around climate related risk/opp 2. Strategy - actual/potential impact of this risk/opp on businesses, strategy and financial planning 3. Risk Management - org's processes to identify, assess/manager climate related risks 4. Metrics & targets - used to measure/assess risks/opps TCFD - Types of risk:- 1. Transition risk - arising from shift to low carbon economy - policy, legal, technology, market change to mitigate, adaptations - posing varying levels of financial or reputational risk 2. Physical risk - from physical impacts of climate change - events (acute) or LT shifts (chronic) in climate patterns - financial implications eg. direct damage to assets, indirect impact from supply chain disruption - floods, droughts, hurricanes, fires TCFD - for more informed financial decisions, investors, lenders and insurance underwriters need to understand how climate related risks and opps are likely to impact an org's future financial position as reflected in its income statement, cash flow and balance sheet IS - revenues and expenditures BS - assets and liabilities, capital and financing OTHER CLIMATE RELATED INITIATIVES Network for Greening the Financial System (NGFS) coalition of central banks seeking to strengthen response to meet goals of Paris Agreement, manage risks in financial system, mobilise capital for green and low carbon investments in context of sustainable development. First comprehensive report 2019 - proposals to facilitate the role of the financial sector to achieve goals of Paris Agreement A significant step for the financial industry - recognises central and supervisory bodies accept importance of climate related risk as a source of financial risk and working collectively for resilience.

Climate change adaptation & resilience

adjusting to actual or expected future climate events faster the change - the more challenging to adapt World Bank - adaptation and resilience - two sides of same coin European Commission - anticipating adverse effects and taking appropriate action to prevent/minimise damage and/or take advantage of opportunities Development plan examples:- 1. protecting coastlines - adapting to sea level rises 2. building flood defences 3. managing land use and forestry practises 4. planning more efficiently for scarce water resources 5. developing drought resistant crops 6. protecting energy and public infrastructure 7. developing clean cooling systems Require location specific assessments of risks and approaches Late 2019 - Climate Bonds Initiative published - first Climate Resilience Principles a framework for location specific measures and financing through green bond market. A Framework and Principles for Climate Resilience Metrics in Financing Operations - group of multilateral development banks put forward provide guidance on how to create effective climate resilience projects and how to measure direct outcomes and wider system impacts. Cities and municipalities at the frontline of adaptation and resilience due to high concentration of people, assets and economic activity. Represent 80% of global GDP - cities heavily exposed through:- - sea level rise - extreme weather events- flooding/drought - increase in spread of tropical diseases all of these have an economic and social cost to city dwellers, businesses, infrastructure/buildings Cities are a major contributor to greenhouse gas emissions at the same time - transport and buildings 2019 report - C40 - outlines best practises of various cities adaptation strategies

Global Risks Report - 2019

by the World Economic Forum (WEF) environmental risks dominated accounting for 3 of top 5 risks by likelihood 4 out of 5 by impact

Range of environmental factors with material financial impact on investments - is broad and far reaching

environmental risks continue to gain prominence are generating heightened concerns amongst scientists, academics, world leaders investors and businesses

environmental factors

looking at some of the key environmental factors and major external drivers that investment analysts and portfolio managers should consider when assessing material environmental risks and opportunities in their portfolios

Opportunities relating to climate change and environmental issues

not only risks involved in neglecting impact of environmental factors on direct and indirect business activities Opportunities too Accelerating search for viable societal and economic solutions to enable a transition to low carbon economy will cost trillions of dollars and the magnitude of change required will be pervasive Global Commission on the Economy & Climate - study found world is expected to spend $90 trillion in infrastructure in next 15 years this capital needs to shift urgently to low-carbon, energy efficient projects. Transformative change is needed now in how we build our cities, produce and use energy, transport people and goods, and manage landscapes no surprise a growing number of investment strategies focusing on the opportunities arising from low carbon transition and green finance. Opportunities for investing in sectors such as technology and resource efficiency, waste management, circular economy and sustainable agriculture and forestry eg. 1. circular economy 2. clean and technological innovation 3. green products 4. the blue economy Clean Technology and innovation will be crucial Investment opportunity in Mitigating and Adapting to the impacts of climate change and environmental degradation Financial products being developed in supporting green considerations in investments FTSE Russell, along with Impax Asset Management developed FTSE Environmental Markets indexes - a classification system that provides a useful overview of the different investible areas of opportunities - ranging between clean tech, renewable energy and green infrastructure FTSE Environmental Markets Overview - Opportunities - Renewable and alternative energy - Energy efficiency - Water infrastructure and technologies - Pollution control - Waste management and technologies - Environmental support services - Food, agriculture and forestry CIRCULAR ECONOMY A circular economy is based on the principles of designing out waste and pollution - keeping products and materials in use - and regenerating natural systems Not a linear approach - Take-make-waste ie. where natural resources are extracted as input materials for manufacture of products which are used then discarded. REPAIR REUSE RECYCLE waste from one industrial process becomes a valued input for another Circular Economy concept is now 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 companies who have put Circular Economy at heart of their models: - Nike - 10 circular design principles - Heineken - Zero Waste Programme - 102 of 165 production units sent zero waste to landfill in 2018 - instead recycled into animal feed, material loops, compost or used for energy recovery Schneider Electric - energy management and automation co - leasing and pay per use - take back schemes into supply chain. circular activities 12% of revenues Stora Enso renewable solutions in packaging, biomaterials, wooden constructions and paper. 2019 - European Investment Bank launched an investment fund to support the circular bioeconomy CLEAN & TECHNOLOGICAL INNOVATION clean tech started to become popular 20 years ago, interest accelerated in early 2000s due to increasing regulations and standard setting by govts eg. - long term subsidy regimes - underpinned rise of solar and wind power eg. German Energiewende - planned transition to low carbon economy (40% of German electricity comes from renewable sources) - A harmonisation of minimum tech standards has also driven - revolution in lighting systems in Europe last 10 years - phasing out of incandescent bulbs for low energy emitting fluorescent bulbs and LED bulbs - International Organisation for Standardisation - set of management system standards Many govts around world incentivise more efficient energy usage in buildings through energy performance certificates (EPCs) - required when buildings built, sold, rented - Real Estate sector seeing many changes developers and owners - energy efficient materials and low carbon tech - regulatory authorities push in Europe driving (EPCs, building codes (Nordics), minimum thresholds). UK (min EPC thresholds legislation for residential lettings - expanding to commercial) Leadership in Energy and Environmental Design (LEED) - international National Australian Built Environment Rating System (NABERS) Comprehensive Assessment System for Build Environment Efficiency (CASBEE) - Japan EnergyStar - USA Green Building - China Lenders and institutional investors benchmarking holdings eg. GRESB Framework Property lenders developed mortgages that reward borrowers for investing in energy efficiency Govt backed initiatives that support retrofits in buildings and production facilities and promote energy efficiency in new construction One of most startling and unpredicted developments of last decade has been the fall in cost for renewable energy International Renewables Energy Agency (IRENA) - say that new solar photovoltaic (PV) and onshore wind power are on verge of costing less than the marginal operating cost of existing coal fired

Assessment of materiality of environmental issues

significant impact both negative and positive - on cos business model and value drivers eg. operating and capital expenditure, revenue growth, margins and risk. environmental factors can clearly affect a co or industry's ability to produce goods/services. impacts can be immediate eg. floods close business or over time eg. increasing costs of doing business in a specific location to point where relocation required. Direct impacts - eg. business interruption, physical damage to assets Indirect impact - public policy, market changes eg. rising demand for flood resilient materials or competition for resources Macroeconomic impacts of such climate related events most significant to insurance industry - but more interest now from project finance, corporate finance, investment institutions. Analytical scope and sophistication growing Considering wider range of environmental factors including policy and technological responses and impact from physical risks Investors need to undertake relevant research and materiality analysis to determine positive/negative impact. Type of analysis and approach will be dependent on the type of assets being assessed - company, sector, geographic location - and on a portfolio level based on both quantitative and qualitative data, environmental analysis will potentially identify adjustments to forecasted financial and ratios, valuation-model variables, valuations multiples, credit assessments and portfolio allocation weightings. Challenge - definitions and classifications of measuring risk in environmental factors vary and the risk is complex to analyse CORPORATE & PROJECT FINANCE need to analyse both quant and qualitative factors to make informed evaluation of the environmental risks embedded. A judgement is required on how material the risks are and whether they are priced in or not. A scoring system is also typically used to benchmark the company against peers Materiality is also highly influenced by the sector/industry, country and jurisdictions where projects located. particularly in infrastructure projects Investors can assess the materiality of specific environmental risks by analysing the rate of a company's utilisation or consumption in critical natural resources eg. energy, water, waste Energy consumption - measure by level of absolute emissions of GHG from fossil fuel combustion & industrial processes - CO2e can include savings in energy and performance relative to a benchmark year and be provided on an annualised or lifetime basis, based on estimates (esp for projects) or actual measurement (operational assets) Water utilisation - calculate as costs generated by water usage efficiency in operations taken directly from the ground, surface waters or purchased. water and wastewater treatment can be assessed against indicators tracking reductions in pollutants and harmful substances in supply areas, incident reports and sanctions Waste utilisation - measured as the costs generated for the disposal of waste in operations eg. landfill, incineration, recycled, hazardous waste. can factor in things like carbon capture and storage, pollution control, waste-to-energy facilities and waste biofuel. At corporate level - Materiality can also be relative within a sector/industry or peer group TPI (Transition Pathway Initiative) - global, asset owner led initiative - assesses cos preparedness for transition to low carbon economy - has developed a tool to benchmark cos against peers in terms of climate policy and maps commitments to a decarbonisation transition trajectory by sector and overall At a project finance level - when assessing project infrastructure initiatives - the IFC (International Finance Corporation) Equator Principles have become globally recognised risk framework - adopted by financial institutions for determining, assessing, managing environmental and social risk in project finance. Performance standards that address environmental factors eg. resource efficiency, biodiversity, land resettlement as well as other social orientated standards IFC's Performance standard - primary objective of risk assessment is to: "identify the potential negative environmental (and social) risks in order to develop the appropriate strategies to address the risks and their potential impacts" Environmental risks eg. - release air pollutants (air emissions) - release of liquid effluents/contaminated wastewater - generating large amounts of solid waste with poor disposal - improper management of hazardous waste - excessive energy use - excessive water use - excessive or high noise levels - improper or excessive land use Another framework to assess materiality - IBAT (Integrated Biodiversity Assessment Tool) a central database for globally recognised biodiversity info including key biodiversity areas and legally protected areas. Interactive mapping too. for easy access to up to date info to identify risks and opps within a project's boundaries PUBLIC FINANCE INITIATIVES as govts raise ambitions in their national environmental and climate plans in line with Paris Agreement - resources are allocated and investments from the public sector are mobilised to implement plans. Public finance is a key policy instrument to incentivise and enable the transition to green growth. Risk exposures can vary from country to country. Lower to middle income countries are typically more vulnerable to physical climate risks. Public sector funds is often mixed with funding from multilateral development finance institutions in developing nations and disbursed through investment vehicles such as green infrastructure funds, (eg. the ASEAN Catalytic Green Finance Facility under the ASEAN Infrastructure Fund), specialised banks (eg. Asian Infrastructure Investment Bank) and funding platforms (eg. Tropical Landscapes Finance Facility) Also emerging - a number of finance initiatives leveraging public sector and development finance for sustainable agriculture, biodiversity conservation, the blue economy - particularly targeting the more vulnerable and developing economies. Climate Policy Initiative (CPI) reported average annual public climate finance totalled $253bn in 2017/18 representing 44% of total commitments - vast majority spent on - transportation other areas: - adaptation & resilience - energy efficiency - land use - infrastructure projects (cross sector impacts) Types of public finance: - export credit - development banks - concessionary lending to SMEs - guarantees - R&D - infrastructure investment Initiatives that usually require public (and private) sector funding - with high environmental impacts: - energy - water & waste - transport - flood defences Stranded assets - investments that lock in high carbon emission pathways eg. fossil fuel power generation and supply infrastructure, would be considered stranded assets Public finances need to align targets to broader regional climate goals and country level NDC (nationally determined contribution UN FCCC) targets, govt regulation, systemic/fiscal risks as result of environmental and climate related policies in LT Govts also need to be aware of increasing climate related litigation risks (study shows climate change cases reported in 28 countries - 75% of which filed in the US) ASSET MANAGEMENT At portfolio level - University of Cambridge Institute for Sustainability Leadership (CISL) compares vulnerability and resilience of different portfolio types to climate change related risks in ST. The info from their study is intended to help investors understand how to hedge risk and invest in assets with the lower potential of being affected by climate change risk. Study reveals - global investment portfolios could lose up to 45% in their equity investment portfolio value (23% for fixed income portfolio) as a consequence of short term shifts in climate change sentiment such as climate change policy, technological change, asset stranding, weather events and longer term physical impacts. SASB (Sustainability Accounting Standards Board) provide guidelines for reporting and disclosure for assessing ESG risks of companies. SASB established 2011 to develop and disseminate sustainability accounting standards. The standards identify financially material issues that are reasonably likely to impact the financial condition or operating performance of a company - therefore most important to investors. SASB - provides an interactive proprietary tool that identifies and compares disclosure topics across different industries and sectors - a Materiality Map Environmental factors incl:- - greenhouse gas emissions - air quality - energy management - water and waste water management - waste and hazardous materials management - ecological impacts Increased frequency and severity of major weather events - increased the risks and costs of insurance Physical impact for insurers is a most complex one to measure and estimate Munich Re loss estimation for natural catastrophes, shows financial materiality can be large. Schroders est the cost of companies insuring for physical impact of climate related events - enterprise value adjustments per industry