Deck 6: Social and Environmental Risks and Sustainable Finance

Question 1

Henry Paulson, former U.S. Secretary of the Treasury states: his concerns about climate change risks as follows:
"For too many years, we failed to rein in the excesses building up in the nation's financial markets. When the credit bubble burst in 2008, the damage was devastating. Millions suffered. Many still do. We're making the same mistake with climate change. We're starting down a climate bubble that poses enormous risks to both our environment and economy. The warning signs are clear and growing more urgent at the risks go unchecked."
Explain what Henry Paulson means by this statement, and Paulson's arguments for a comparison of the real estate bubble prior to the U.S. Subprime Loan Crisis and a current Climate Bubble.

Answer 1

Henry Paulson points out that just like the U.S. Subprime Crisis, we're making the same mistakes today with climate change by not acting on the problem before it becomes too big to manage. He compares the excesses in building up debt encouraged by government policies prior to the Subprime Loan Crisis to excesses in our use of carbon-based fuels encouraged by government policies that has resulted in greenhouse gas emissions trapping heat in the earth's atmosphere, leading to drastic changes in climate. Paulson points out that global climate change is a more "intractable problem" than the government rescue during the Subprime Loan Crisis, since carbon dioxide sent into the atmosphere remains trapped in the atmosphere for centuries. He points out that a solution is needed today to incentivize a reduction in our carbon dependency and develop new clean energy technologies by setting a price on carbon (i.e. a carbon tax) to encourage development of new clean technologies and innovations, with the added benefit of job creation with this development of new energy products and infrastructure.

Question 2

What are key risks associated with climate change reported in the Intergovernmental Panel on Climate Change (IPCC) in its "Climate Change 2014: Impacts, Adaptation, and Vulnerability" and by the World Economic Forum in 2015?

Answer 2

The Intergovernmental Panel on Climate Change (IPCC) (2014) in its "Climate Change 2014: Impacts, Adaptation, and Vulnerability" assessment report warned of increased risk of flooding and threats to food and water security with the effects of climate change already happening across continents and oceans. Key risks associated with climate change listed include storm surges, flooding on coasts, sea-level rises for communities on coasts, and disruption and flood risks associated with inland flooding for some regions, and extreme weather events that can result in breakdowns of infrastructure networks and critical electricity, water supply, emergency and health services.
The World Economic Forum (WEF 2015) similarly points out, extreme weather events, and natural catastrophes, and failure of climate-change adaptation as three of the top ten global risks, with the lack of proper adaptation leading to the spread of infectious diseases, energy price shock, and biodiversity loss and ecosystem collapse.
Financial institutions face great risks with climate change including huge losses for insurance companies with increasing catastrophic events and health costs associated with climate change and warmer global temperatures creating greater health hazards as well. Depository institutions also face risks associated with environmental liabilities and with defaults on loans associated with effects on borrowers of catastrophic events and borrowers' environmental liabilities. Portfolio managers and banks also face risks of stranded assets with catastrophic climate change risks associated with the burning of fossil fuel reserves by fossil fuel companies that could result in huge valuation downgrades in the valuations of fossil fuel companies.

Question 3

Discuss COP21, the 21^st Climate Change Conference of the United Nations and its goals.

Answer 3

COP21, the conference of parties for the 21^st Climate Change Conference of the United Nations, was a climate change conference held in Paris in December of 2015 whereby 155 countries submitted intended nationally determined contributions (INDCs) to the UN Framework Convention on Climate Change, as climate action plans for lowering global emissions for 155 countries to the UN, representing almost 90 percent of global carbon emissions. The INDCs are noted to be a floor versus a ceiling for action, with additional negotiations and commitments needed to keep temperatures from rising above 2^oC which climate scientists agree would result in catastrophic climate change. The UN Paris Climate Agreement came into force on October 5, 2016, when the 56^th country ratified the agreement. Participating governments have agreed to find ways to reduce greenhouse gas (GHG) emissions to keep global temperatures below 2^oC and ideally no higher than 1.5^oC. Canada, for instance, is initiating a carbon tax to create incentives for companies to reduce their emissions to satisfy Canada's commitment to the Paris Climate Agreement. Other countries will be designing policies to meet their COP21 INDCs. The commitments represent an over a business as usual path that is estimated to result in a rise of greater than 4^oC (UN 2016).

Question 4

Discuss the American Business Climate Pledge and RE100, and roles that financial institutions play in mitigating climate change and accompanying socioeconomic risks.
In the U.S. 75 large corporations joined the original signatories for a total of 154 companies signing up for the American Business Act on Climate Pledge to take aggressive action against climate change including ambitious company-specific goals, with signatory companies having a combined market capitalization of greater than 7 trillion USD. A number of Fortune 500 listed companies including Goldman Sachs, Johnson & Johnson, NIKE, Inc., Procter & Gamble, Salesforce, Starbucks, Steelcase, Voya Financial, and Walmart, among others joined RE100 with a pledge to use 100% renewable energy including 36 major businesses from around the world. RE100 is a global campaign led by the Climate Group , and organization that works with leaders to create a net-zero emissions world, in partnership with CDP, a non-profit that provides a global disclosure system for investors, companies, and city, state, and regional governments to manage their environmental impacts, to engage, support, and showcase businesses that are influential that are committed to 100% renewable electricity.

Question 5

Financial institutions have taken positions on climate change risks.
Give a specific example and the role that financial institution has played in mitigating climate change risk.

Question 6

What are advantages for financial institutions to creating a sustainable culture?

Question 7

What is stranded asset risk? Discuss stranded asset risk for financial institutions and investor engagement as social activists.

Question 8

Discuss concerns for carbon risk in the banking sector for loans.

Question 9

Discuss the Equator Principles (EP) for financial institutions making loans to developing countries.

Question 10

Give a short overview of different non-profit groups that include financial institution to address environmental and social issues including The Carbon Principles (CP), The Climate Principles, the UN Principles of Responsible Investment (UNPRI), the CDP, Wolfsberg's AML Principles, National Capital Declaration, and the Social Capital Protocol.

Question 11

Give an overview of Socially Responsible Investment (SRI) Managers and Mutual Funds and SRI investment strategies.

Question 12

Discuss Sustainability Reporting and the Global Reporting Initiative's (GRI) G3 Guidelines, and the Sustainability Accounting Standards Board (SASB).

Question 13

Discuss social banks, eco banks and credit unions, and the Global Alliance for Banking on Values and environmentally focused depository institutions.

Question 14

Explain how ESG investing is used by specialized and conventional venture capital firms.

Question 15

How are public and private partnerships and Social Impact Bonds and Green Bonds used to finance alternative energy projects?

Question 16

The COP 21 conference of parties for the 21^st Climate Change Conference of the United Nations held in December of 2015 negotiated the Paris Agreement, a global agreement on the reduction of climate change, with climate action plans submitted for lowering global emissions for 155 countries to the UN, representing 90 percent of global carbon emissions.

Question 17

Globally many businesses, including major financial institutions, have been at the forefront of efforts to persuade government leaders to reach a meaningful global climate agreement including 154 companies signing up for the American Business Act on Climate Pledge to take aggressive action against climate change including ambitious company-specific goals with signatories having a combined market capitalization of greater than $ 7 trillion.

Question 18

Financial institutions have significant roles to play in mitigating climate change risks, including accompanying socioeconomic risks including:

A) Providing for sustainable development including funding for new emerging technologies for alternative energy sources and funds to reduce socioeconomic problems for poor communities
B) Evaluating and monitoring companies that they make loans to for both environmental and social risks, as an important fiduciary duty
C) Acting as shareholder activists through both consulting with and negotiating with companies and using shareholder proxy resolutions requesting companies to reduce negative environmental and social impacts
D) Providing insurance and risk management services and new insurance products to protect against catastrophic climate change-related future events
E) Managing sustainably and reducing their own carbon footprints
F) Taking advantage of opportunities to develop innovative new products and services and sustainable financing techniques for the mitigation of environmental and social welfare problems
G) Educating their stakeholders and participating in though leadership and discussions with governments, industry, peers, and non-government organizations to promote policy changes to mitigate climate change risks

Question 19

Which of the following is not a financial risk for a financial institution with climate change:

A) Inefficiencies created by becoming more sustainable
B) Carbon asset or stranded asset risk for investments and loans
C) Catastrophic weather related event losses
D) Environmental health and socioeconomic risk
E) All of the above

Question 20

Pension funds and other large institutional investors have engaged as social activists to try to reduce climate change risks for portfolios by:

A) Divestment Activities for stocks for companies with large carbon
Emissions
B) Engaging in letters and shareholder proxy resolutions targeting
Fossil fuel companies that are the largest carbon emitters
C) Engaging in legal actions and mandating that governmental
Organizations, such as the SEC hold firms more accountable for not disclosing their climate change risk disclosures
D) All of the above
E) None of the above

Question 21

Benefits for financial institutions engaging in sustainable practices do not include which of the following:

A) Providing an evaluation of environmental and social risks
B) Cost efficiency savings by being sustainable
C) Not protecting the planet
D) Identifying and taking advantage of environmental business opportunities
E) Engaging employees and customers and creating a stronger reputation and brand and reducing environmental liabilities

Question 22

The Equator Principles established by financial institutions are principles for keeping the equator as the principle for an imaginary line on the Earth's surface that is equidistant from the North Pole and South Pole, dividing the Earth into the Northern and Southern Hemispheres.

Question 23

Which of the following statements are false concerning the Equator Principles?

A) The Equator Principles (EP) includes agreed guidelines on social and environmental issues for loans made to developing countries including the incorporation of environmental assessments in making loans.
B) Today the Equator Principles encompass all project loans of $10 million or more across different industry sectors and a credit risk management framework for assessing and managing environmental and social risk for project transactions.
C) As of January 2016, 83 EP Financial Institutions (EPFIs) operating in 36 countries officially signed on, which encompasses 70% of International Project Finance debt in emerging markets.
D) EPFIs do not provide loans to projects with clients that will not or are unable to comply with the Equator Principles.
E) None of the above.

Question 24

Which of the following are not sustainability stock indexes:

A) S&P 500 Stock Index
B) Dow Jones Sustainability Indexes (DJSI)
C) FTSE4Good Index
D) Goldman Sachs GS SUSTAIN ESG Index
E) None of the above

Question 25

Which of the following is not a strategy used by SRI companies to create a Socially Responsible Investment Portfolio?

A) Use investment screens based on positive or negative types of screens
B) Impose large fees on firms with negative environmental profiles
C) Best in class screenings
D) Active engagement with companies considered for inclusion

Question 26

CERES and As You Sow Foundation are non-profit shareholder advocate groups that assist shareholders in submitting shareholder proxy resolutions to vote on by shareholders of companies at annual stockholder meetings.

Question 27

Which of the following is false about Climate-Aligned Bonds?

A) Climate-Aligned or Green Bonds are created for financing projects with positive environment and/or climate benefits.
B) Climate Bonds are generally fixed-income bonds that link in some way to climate change solutions, and are issued for this purpose.
C) Most Green Bonds are issued by corporations with poor previous environmental records.
D) Most Green Bonds are based on the use of proceeds and or asset-linked bond, where proceeds are earmarked for green projects, but are backed by an issuer's entire balance sheet.
E) None of the above

Question 28

Which of the following is false about government/private partnerships for financing renewable energy projects?

A) Renewable finance sources of project capital tend to be complex, since with a high cost, government subsidies (often in the form of tax credits) are often needed to attract private investors.
B) Project sponsors often borrow against future energy savings.
C) Often a home second mortgage is used for financing.
D) Partnership groups, such as in the U.S., the U.S. Partnership for Renewable Energy Finance facilitate investments, such as for renewable energy.
E) None of the above.

Question 29

Social Impact Bonds (SIBs) are used to finance social change, whereby social impact donors and other investors supply money to a non-profit organization that has innovative ways to solve a social problem, with SIBs unique by entailing a contract that is performance-based where private and/or philanthropic leaders loan funds to be able to accomplish a specific objective.

Question 30

Private equity firms, such as KKR & Co. LP. provide financial assistance and knowledge to their portfolio companies to become more energy efficient and sustainable under a Green Portfolio program, given the rationale that better environmental performance also results in better business performance.

Question 31

Which of the following is false concerning Sustainability Reporting?

A) Sustainability reporting is an important way for an institution to
Commit to sustainability practices and to report to and engage shareholders and to attract investment from socially responsible investors.
B) Sustainability reporting can help institutions to be on global rankings for sustainability such as the Dow Jones Sustainability Index.
C) The Global Reporting Initiative (GRI) is an independent organization whose reporting standards for sustainability are the most widely used standards for sustainability reporting and disclosure with about 7,500 reports for 90 different countries using the GRI framework.
D) The U.S. Security and Exchange Commission (SEC) does not have a climate risk disclosure requirement.
E) The Sustainability Accounting Standards Board (SASB) is an independent non-profit organization to provide sustainability accounting standards for use by public corporations in their financial statement for disclosing material sustainability issues.

Question 32

Carbon risk in the banking sector for loans does not include which of the following risks:

A) The risk of losing money for U.S. banks for their stock investment for the banks' security portfolios in coal mines.
B) The risk of economic and political uncertainty created by climate change including a transformed environment with new regulations associated with climate change
The risk of inadequate credit risk assessment and loan pricing for loans to companies with environmental risks.
C) The risk of environmental liabilities for loans made by banks.

Question 33

Which of the following are not agreements among banks concerning environmental or climate change resolutions?

A) The Climate Principles
B) The Social Capital Protocol
C) The Carbon Principles (CP)
D) The National Capital Declaration

Question 34

Which of the following is not one of the 6 UN Principles of
Responsible Investment (UNPRI)?

A) Incorporating ESG issues into investment analysis and decision making
B) Being active owners and incorporating ESG issues into ownership policies and practices
C) Not seeking appropriate disclosure on ESG issues for the companies which are invested in
D) Promoting the acceptance and use of the principles within the investment industry and working to enhance their effectiveness and implementation
E) Reporting on activities and progress towards their implementation

Question 35

Stranded asset risk is the risk of a carbon bubble, whereby prices for fossil fuel companies with large unburned fossil fuel reserves may be overvalued, since they may be unburnable to avoid a rise in global temperatures that could lead to catastrophic climate change.