ESG course terms
Blue bonds
- A key vehicle for attracting additional capital into ocean financing and investing - Blue bonds aim to raise funds to support projects related to the conservation and restoration of blue carbon ecosystems
Physical risk
- Resources that companies rely on are at threat - Supply chain disruptions - Business interruptions due to the inability to operate - Human health and safety risks
Social bonds
- Similar to green bonds but focus on financing projects with positive social impacts (affordable housing, healthcare, education etc.)
Taxonomy greenwashing
- Taxonomy subject to claims of greenwashing: system to classify which parts of economy can be defined as sustainable, rules for gas and nuclear energy been delayed (EU commission proposed some parts of gas and nuclear energy defined as sustainable) - Of the 6 objectives only the first two (climate change mitigation and climate change adaptation) have been defined
Stakeholder
A person or organization with an interest in a particular place or issue.
shareholder
A person who invests in a corporation by buying stock and is a partial owner
Greenwashing
A practice in which companies promote their products as environmentally friendly when in truth the brand provides little ecological benefit.
Life Cycle Assessment (LCA)
A technique to assess environmental impacts associated with all the stages of a product's life, i.e., from raw material extraction through materials processing, manufacture, distribution, use, repair and maintenance, and disposal or recycling. While typically used to assess environmental impacts, this technique could be used to identify social impacts of a product's life cycle as well.
Stakeholder Theory
A theory that holds that social responsibility is paying attention to the interest of every affected stakeholder in every aspect of a firm's operation
Carbon border adjustment mechanism
A tool to "level the playing field." Importers would be required to purchase carbon emission certificates for imports manufactured below European standards.
Sustainable Development Goals (SDGs)
A universal set of goals, targets and indicators that UN member states are expected to use to frame their agendas and political policies over the next 15 years. UN adopted 17 -
Command and control (laws, environmental standards) Economic or market based tools (taxes, tariffs, cap and trade, incentives, subsidies...) Voluntary and negotiated (labels, certifications, management systems)
Different policies on ESG (3)
Environmental Social Governance
ESG framework - ESG framework useful for investors to reduce investment risk not related to having positive impact on society. But if a company does these things they can use the ESG framework to begin their sustainability performance
Materiality matrix
Is a tool that helps you visualise and establish your CSR (corporate social responsibility) strategy guidelines while integrating your stakeholders' requirements
Anthropocene
Refers to geological epoch that marks the period of significant human impact on the Earth's ecosystems and processes (before was holocene)
Emission standards set by EPA
Regulations for restricting the amounts of air pollutants that can be released from specific point sources
Avoidance projects (carbon credits)
Renewable energy projects, forestry and farming emissions avoidance products
Carbon leakage
When production of goods moves to a location with less strict regulation of emissions
1. Understood facing existential threat (better manage risks arising from climate change, value of company decrease from transition/physical risk) 2. Competition (- understand can attract new customers (esp. younger generation)
Why did finance industry shift towards sustainability?
Science Based Targets Initiative (SBTI)
Will review proposals and give a certification if it meets their standards (- Science-based targets provide a clearly-defined pathway for companies and financial institutions to reduce greenhouse gas (GHG) emissions, helping prevent the worst impacts of climate change and future-proof business growth. - Targets are considered 'science-based' if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement - limiting global warming to 1.5°C above pre-industrial levels.)
Sustainability standards
a set of voluntary pre-defined rules, procedures and methods to systematically assess measure and communicate the social and environmental behaviour of firms (NGOs typically behind them)
SFDR Article 9
funds explicitly aim at a sustainability goal, here can find ESG fund investing in agrobusiness that have a specific goal of reducing the water waste by 50% - specific goals are essential here - A lot of financial institutions are voluntarily degrading themselves from article 9 to article 8 funds to prevent being fined (being defined as article 9 requires 100% sustainable investment)
SFDR Article 8
funds integrate social and environmental aspects but not as a mandate - sustainability is important but not central, here can find an ESG fund which invests in an agrobusiness that decides to report on quantity of water waste and is committed to reduce this figure and employ local people
EU SFDR (Sustainable finance disclosure regulation)
introduces a set of rules aiming at making the sustainability profile of funds more comparable and better understood by end-investors, and to prevent 'greenwashing'
Code of conduct
once suppliers sign the code, commit themselves to do business in a certain way. Then, through a third-party, usually companies audit a sample of their suppliers if they are applying correctly the principles
Ambient standards
A never-exceed level for some pollution in ambient environment
SFDR Article 3-5
- Article : financial institutions must assess environmental risks and possible impacts - Article : need to assess impact of business on environment - Article : financial institutions disclose information on renumeration policies (bonuses for managers and employees to incentivise sustainable management behaviours)
Transition risks
- Associated with the transition to a low-carbon economy and include risks associated with: - New regulations and policies - Technological changes - failing to invest in clean tech - Changes in market dynamics and customer preferences - insurance companies who can no longer continue paying damages - Impacts to the financial performance and stability of companies and industries
Sustainability saves cost of capital
- Being unsustainable leads to higher cost of capital which destroys value - Being sustainable can attract cheaper capital - Businesses drive more than 70 percent of global GDP and are largely responsible for the environmental devastation we are now facing, but they have the skills, knowledge and resources to creatively solve sustainability challenges. Pressure from the government, consumers, public opinion, and investors represent a big opportunity for change
Sustainability bonds
- Combine the features of green and social bonds - proceeds can be used for a combination
Legal / liability risks
- Companies can be liable for damages caused by their contributions to climate change or inadequate response to physical risk - Risk increasing litigations and penalties
Scope 1
- Covers emissions from sources that an organisation owns or controls directly - Example: burning fuel in our fleet of vehicles
Hydrogen
- Current hydrogen production is not green - most hydrogen comes from natural gas or coal - Replacing polluting hydrogen with green hydrogen requires approx. the entire amount of electricity consumed by Europe each year - A potential use for hydrogen is as a tool to store surplus renewable energy
Scope 2
- Emissions that a company causes indirectly and comes from where the energy it purchases and uses is produced - Example: the emissions caused when generating the electricity that we use in our buildings
Scope 3
- Emissions that are not produced by the company itself and are not the result of activities from assets owned or controlled by them, but by those that are indirectly responsible for up and down its value chain - Example: when we buy, use and dispose of products from suppliers
Physical risks
- Extreme weather events will increase - Severity of events also increasing - in the US in 2022 there were 18 weather/climate disasters - losses exceeding 1 billion each, total loss 165 billion dollars - Our health is also at risk - numerous fatalities with heat waves (over the past 20 years deaths related to heat wave deaths has increased by 68%) - Climate change increases transmissibility of pathogens and illnesses - Climate change will increase uncertainty over the availability of food, goods and labour - Arab springs started because of protests over costs of bread - potential future unrest given that climate change will cause major disruption in food sources (RISK MULTIPLIER)
Acting on demand
- Focusing on demand rather than supply to avoid price spikes - Energy efficiency (reducing energy consumption and waste) is the first energy fuel: abundantly available, democratically distributed, economically and environmentally beneficial - So to reduce our energy usage
Supply chain management
- For any type of product (consumer product) most of the impact occur along the supply chain - example of fashion industry, 80% of CO2 emissions occur along the supply chain - Another reason why supply chain matters is that we face a mismatch between the resources needed to fuel our economy and our business - question of costs of raw materials (price spikes) risk of supply shortage, geopolitical risks - In the ESG assessment, procurement is one of the key metrics analysed by rating companies - Case of Sueze canal - blocked and led many companies to realise their dependence on suppliers they were not aware of - not knowing your supplier exposes you to vulnerabilities - Foxxcon factory suicides, Rana plaza collapse
SDG-linked bonds
- Interest rate is linked to a sustainability-related performance target (e.g. improvement in ESG rating, a reduction in greenhouse gas emissions) - Repayment condition linked to fact you achieve sustainability goals - Risky policy as goes against general policy of higher rates for higher risk - Do not specify a specific project - just says if receive funds will contribute them to sustainable goals
EU Taxonomy
- Is a technical document, approved in December 2019, that was developed after consultations with over 200 industry specialists and scientists, to identify what economic activities can be considered sustainable - The framework is designed to direct private capital toward long-term, environmentally sustainable activities and prevent false claims about the environmental nature of an investment product (prevent greenwashing) - It will be impossible to say anymore that a product is sustainable or green if it does not fit into the taxonomy - Must contribute to at least one environmental objective (among 6)
Impact investing
- Is an investment approach that seeks to generate positive social and environmental impacts alongside financial returns - Involves allocating capital to businesses, organizations and projects that aim to address pressing societal and environmental challenges while also delivering a financial return to investors - Offers alignment between investors' values and addressing societal and environmental challenges
Trace vs transparency
- Most importantly is transparency - the possibility to trace all the steps along the supply chain process. Even if trace everything you are not forced to be transparent, not mandatory to disclose findings. - Sometimes data and information are not available because it is difficult to measure or verify them - An example is the sustainability of Nike - everything is on the website (even if not good) - A good measure is fashion transparency index - a lot of information about the companies that decided to be assessed
Lithium
- One of the key implications of the energy transition is the increasing demand for some minerals and metals - How to make mining these materials more sustainable? - Clean technologies require more strategic minerals and metals to build than their fossil fuel based counterparts Example considered by some to be 'new oil', potential for skyrocketing of price due to lack of supply - (supply must match demand)
Incentivising hydrogen
- Renewables are not being built at the rate needed to decarbonise electricity, let alone make hydrogen - A serious subsidy push is needed - US inflation reduction act offers a tax credit - makes cheaper than grey hydrogen - Europe different approach: making hydrogen consumption compulsory, wants 42% of hydrogen used in industry to be renewable by 2030
Potential uses for hydrogen
- There are some sectors in which hydrogen use is still preferable: long-haul flights, refineries, international shipping, steel - Hydrogen for electricity storage: cheaper, longer-duration storage technologies will be required to fully replace fossil-fuelled power plants
Green hydrogen
- This technology is based on the generation of hydrogen - a universal, light and highly reactive fuel - through a chemical process of electrolysis - Method uses an electrical current to separate the hydrogen from the oxygen in water - produce hydrogen without emitting CO2
Four levels of management
- Tier 1 the company can set expectations - Tier 2 the company can do monitoring activity and evaluation of suppliers performance - Tier 3 the company can adopt a system of option for remediation and trainee suppliers - Tier 4 the company can work directly with suppliers
Green loans
- Used to finance green initiatives - Created from green bonds proceeds or under the borrower's framework - Need a green framework with clear definitions
Role of finance
- We will not have any energy transition and decarbonization without the crucial support of finance - it provides capital - An increasing number of financial actors are committing to sustainability by funding companies/activities that have a positive impact and disclosing the risks they are exposed to
Carbon credits
A permit that allows a country or organization to produce a certain amount of carbon emissions and that can be traded if the full allowance is not used. Can divide broadly into 2 categories: avoidance projects and removal projects
Current energy breakdown
- Without the energy transition we will never be able to reach our climate goals - Currently renewables only represent 3% of the current world energy supply - Renewables are attracting a large about of investments - from 2004 onwards we have invested more than 4 trillion dollars in solar and wind - New renewables are used to produce electricity but that is not energy - electricity only 20-25% of all energy uses - This is why renewables only represent 6% of total energy (Hydro 3% + new renewables 3%)
EU corporate sustainability directive proposal
1. Extends scope to all large companies and all companies listed on regulated markets 2. Requires the audit of reported information 3. Introduces more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards 4. Applying double materiality (outside in and inside out) - analyse impact of environment on your business as well as impact of your business on the environment 5. Requires companies to digitally 'tag' the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan, all information available on a QR code - more standardised
Tipping points
16 elements which regulate climate stability (now evidence that 9 of the 16 are showing signs of instability)
SDG Pros
Aims to tackle a broad range of issues related to development: poverty, hunger, right to health, right to education - Every company can start their path towards sustainability by choosing some specific SDGs and deciding to achieve them
Technology standards
Are specifications that establish the compatibility of products and the ability to communicate in a network.
Negative externalities
By-products of production or consumption that impose costs on third parties (for example gas usage - provides society with indispensable goods yet it produces pollution)
Competitive advantage (differentiation, market growth, obtaining economic efficiencies and in the long run contribute to reputation, legitimacy and risk reduction.) First-mover advantages (- In the future, instead, sustainability will not be a differential factor nor a source of competitive advantage any longer but a requirement to «stay into the market». Sustainability will be incorporated into every function (e.g. strategy, finance, logistics, supply chain management, etc.).)
Corporate sustainability advantages (2)
1. Definition of goal and scope 2. Inventory analysis (DNA of product, what are sources, how much water consumed, emissions) 3. Impact assessment (analysis of effect on environment) 4. Interpretation
Four components of LCA
Scope 1, 2, 3
In order to take action to reduce emissions we need to understand and measure where they're sourced from initially. The three scopes are a way of categorizing the different kinds of emissions a company creates in its own operations and in its wider 'value chain' (suppliers and customers) Essentially, scope 1 are those direct emissions that are owned or controlled by a company, whereas scope 2 and 3 indirect emissions are a consequence of the activities of the company but occur from sources not owned or controlled by it
Loss of biodiversity, Plastic and waste, Pollution, Inequalities
Indicators of unsustainable development
1. 100% sustainable (no polluting gases) 2. Storable (hydrogen easy to store, allows to be used subsequently) 3. Versatile (green hydrogen can be transformed into electricity or synthetic gas)
Green hydrogen advantages
1. High cost (energy from renewable sources is more expensive to generate) 2. High energy consumption (the production of hydrogen in general and green hydrogen in particular requires more energy than other fuels) 3. Safety (hydrogen highly volatile and flammable)
Green hydrogen disadvantages
EU Taxonomy regulation
How to define an activity, if it is sustainable or not
Carbon emissions trading system (cap and trade)
In a cap-and-trade system the government sets an emission cap and issues a quantity of emission allowances (permits) consistent with that cap Emitters must hold allowances for every ton of greenhouse gas they emit
Planetary boundaries
Key processes and systems (9) that regulate the stability of the earth. The risk is that once we surpass certain thresholds we put the life of the planet at risk
Does not take into account potential impact of country on environment
Limitation of materiality matrix
Double materiality
M an extension of the key accounting concept of materiality of financial information. Information on a company is material and should therefore be disclosed if "a reasonable person would consider it [the information] important", - The concept of DM takes this notion one step further: it is not just climate-related impacts on the company that can be material but also impacts of a company on the climate - or any other dimension of sustainability, for that matter (often subsumed under the environmental, social and governance, or ESG, label). - Concept of outside in vs inside out
Double Materiality
Materiality has two components: financial materiality, or that which applies to the value of a company; and environmental and social materiality, or that which applies to a company's impacts on broader society.
Removal projects
Nature based ones, using trees, or tech-based using technologies like direct air capture or carbon capture and storage
Shareholder Theory
Overriding purpose of a corporation is to maximize shareholder wealth
Paris agreement and tipping points
Paris agreement agreed to keep global warming below 2 Celsius by the end of the century - even if this is achieved we still risk overcoming some tipping points - coral reefs, Greenland ice sheet and Arctic ice sea
Global indicators
Set of 24 global indicators 'a planetary dashboard' that charts human activity
Risk multiplier
Something that complicates a risk factor, making it worse.
Standards
Sustainability standards and certifications are voluntary guidelines used by producers, manufacturers, traders etc. to demonstrate their commitment to good environmental, social and ethical practices in food safety
EU corporate sustainability directive
Sustainable reporting
Friedman Doctrine
The social responsibility of a business is to increase profits, so long as the company stays within the rules of law
Stranded assets
This term refers to those assets recorded as losses on a company's balance sheet, because they have become nonperforming ahead of their useful life. Notably, in 2014, ExxonMobil began issuing a "Carbon Asset Risk" assessment that led to recording a portion of their oil reserves in this way.