Sustainability and Climate Risk Questions and Answers
A senior advisor from a government agency in Southeast Asia proposes a national framework to classify sustainable economic activities, aligned with the EU Taxonomy. The new framework will limit environmental harm and promote sustainable growth. Which EU Taxonomy requirement will the advisor most likely incorporate into the proposed framework?
To inform climate policy in a European country, a coalition of government scientists prepares a report on future climate conditions. Within the report, the scientists summarize how positive feedback loops accelerate the rate of climate change. Which feedback loop will the scientists most likely include in the coalition report?
Senior management of a sportswear manufacturer will issue a bond to optimize company capital structure, while providing investors with an opportunity to contribute to positive transformation of the fashion industry. Management prefers a bond with a high rate of issuance, and the company sustainability team researches various green and sustainable finance instruments and issuance information over the past 5 years. The team recommends a bond that globally posted the highest growth in issuance between 2019 and 2020.
Which bond did the team recommend?
A global logistics company evaluates how climate change could disrupt its global distribution network. The CSO recommends a scenario analysis exercise to explore long-term risks and opportunities. Which of the following variables should the company include to effectively develop climate scenarios?
A bank assesses lending portfolio alignment with various climate change scenarios. To assist in this process, the risk team applies the Paris Agreement Capital Transition Assessment (PACTA) tool to examine transition risk for power generation, automotive, and steel sectors. The team examines different PACTA metrics for each sector based on data availability and sectoral profile.
For sectors with no clear zero-carbon pathway, what metric will PACTA employ?
At an international finance bank, a lack of staff clarity regarding sustainability, climate, and ESG definitions led to overlapping and inefficient initiatives. To minimize inefficiencies, the sustainability department develops new terminology for use across the bank.
What should the department include in this new terminology?
A multi-industry consortium convenes risk managers from across the globe to discuss climate impacts on global trade and economic growth. A climate modeler leads a discussion on macro-level physical changes in the Earth’s atmosphere and highlights two climatic trends that demonstrate an inverse relationship in recent decades.
What two trends does the modeler highlight?
A recent sustainability report revealed the pension fund of a small European nation is heavily invested in sectors with poor sustainability records. In response to pensioner and other stakeholder requests, the fund joins the PRI.
What strategy must the fund incorporate to comply with the PRI?
A coalition of African central banks reviews member bank prudential policies for alignment with climate-related financial risk mitigation. To shape the coalition’s climate risk and business continuity planning objectives, coalition leaders review key risk metrics. Which of the following metrics will the coalition most likely use to evaluate operational risk due to climate change?
As climate change poses new financial risks to a central bank’s monetary policy operations, the bank decides to adapt operations with NGFS guidelines. Because the central bank does not include climate change in supervision practices, the bank consults subject matter experts (SMEs) to develop a proposal for central bank action on climate change. After completing the risk assessment, SMEs recommend the bank incorporate microprudential and macroprudential measures to embed climate change into supervision practices.
Which action are SMEs likely to recommend?
Leaders of an energy company meet to address physical and transition risks to company operations. At the meeting, the CRO recommends a strategy to mitigate physical climate risk to the company. Which of the following strategies will the CRO most likely recommend?
A large country joins the Paris Agreement and directs the national environmental department to disseminate new policies and goals to relevant federal agencies. Most agencies are familiar with past climate agreement principles and protocols but not those of the Paris Agreement.
The environmental department should educate federal agencies on what feature of the Paris Agreement?
A multinational food and beverage corporation has growing concerns that CO2 and other GHGs in the atmosphere have a negative effect on agricultural productivity. The corporation is subject to higher costs and scarce availability for commodities necessary for its supply chain.
The corporation will disclose this scenario under which climate-related risk type?
To assess potential business implications of climate change, a large manufacturing company implements scenario analysis for the first time. The company hires a consultant to help incorporate climate-related considerations into a model of the company’s potential business outcomes.
What useful scenario analysis information should the consultant make the company aware of?
A federal regulator analyzes how the increasing frequency of natural disasters may impact the banking sector. The regulator reviews and evaluates the potential for widespread climate events to simultaneously affect multiple financial institutions and drive cascading economic disruptions. What risk type is the regulator most likely evaluating?
Senior officials in the environmental ministry of a South American country prepare a briefing for a new minister. The minister questions the usefulness of large international conferences to achieve real progress in GHG reduction. The briefing focuses on COP21 in Paris, which ended with an agreement to address climate change. Which of the following Paris Agreement achievements did the officials most likely note in the briefing?
A climate scientist develops a presentation on modern climate change for a group of policymakers.
What observation does the scientist include in the presentation that provides evidence of human attribution to current climate change?
In response to policy and technology changes, a cement manufacturer looks for new opportunities to raise profits by reducing GHG emissions. Because the cement industry accounts for a considerable percentage of global emissions, the manufacturer joins a coalition of company peers. The coalition lobbies country governments to adhere to the Paris Agreement nationally determined contributions (NDCs).
Which of the following actions does the coalition recommend?
An investment analyst assesses climate-related stranded asset risk for a portfolio of energy companies. The analyst develops a list of companies potentially exhibiting stranded asset risk. After a more granular examination, the analyst summarizes corporate activity in the following table:
The analyst identifies the company with the highest stranded asset exposure for possible divestment. Which company does the analyst recommend for divestment?
A European bank surveyed its most prominent clients to assess interest in sustainability-linked loans (SLLs) and green loans. The survey came after a recent study showed higher profitability rates of SLLs and green products than classical banking products. After positive feedback, the bank decides to introduce SLLs and green loans. The bank’s sustainability loan officer writes a new loan product guideline for corporate clients that explains SLLs and green loans.
How will the bank officer describe these loan types?
A timber products company in the southeastern US plants, manages, and harvests a species of trees with a 30-year growth cycle. Prior to a planting cycle, the risk management team measures company exposure to stranded asset risk. Which of the following will the team most likely use to measure stranded asset exposure risk to the company?
An international report on SDG progress identifies a large south Asian nation as not on track to meet most SDGs. Specifically, the nation’s reduction of infant mortality and adoption of clean energy lag behind regional peers. In response, a government environmental minister creates a memorandum outlining steps the nation can take to advance the 2030 Agenda goals. The office distributes the memorandum to other government agencies.
How will the memorandum describe the 2030 Agenda goals?
Organizers of an upcoming UN Climate Change Conference prepare a document highlighting successes and failures of climate accords over the last 20 years.
The document lists what success from the 2009 Copenhagen Accord?
Which of the following technologies is most likely to be viewed by investors as a strategic solution to the decarbonization of high-temperature processes?
A city planning commissioner consults with climate scientists to assess the impact of sea level rise on strategic infrastructure projects. The scientists discuss several climate model projections and indicate sea level rise has a fundamental relationship to GHG emissions, regardless of a specific warming scenario.
How should the scientists describe this relationship?
A European commercial bank recently became a signatory to the UNEP FI PRB. To fulfill PRB commitments, the bank CRO emphasizes the need to holistically integrate ESG considerations into lending decisions to reduce long-term risk exposure. Which of the following strategies will the bank most likely adopt going forward?
The CRO of an automobile manufacturer in North America prepares a keynote address on risks in the auto sector over the next decade. The CRO highlights the primary technology risks facing its line of internal combustion engine (ICE) vehicles.
At approximately what point will many manufacturers of ICE vehicles experience a significant technology risk?
A climate scientist is invited to a morning news program to discuss human influence on Earth’s climate. Prior to the program, a producer asserts climate change is a natural process, citing Earth’s historical climate shifts. What example does the scientist most likely provide to highlight human influence on climate?
An international hotel chain reviews progress on sustainability goals in preparation for an Earth Day marketing campaign. A sustainability director suggests the hotel highlight how its energy and food sustainability initiatives align with UN SDG targets.
Which of the following correctly describes an SDG target that the hotel could align with?
A climate risk consultant advises an Eastern European central bank. In response to regulatory changes, the bank will incorporate climate-related risks into bank policies. The consultant writes a summary on how central banks incorporated climate-related risks into policies. The summary highlights the Bank of England (BoE) example to demonstrate how the BoE integrated climate-related risks within the bank supervisory scope.
Which of the following BoE practices will the consultant recommend?
Leaders of a small island nation implement a sector-specific carbon reduction policy to address climate change. The policy includes a commitment to reduce country emissions through NDCs under the Paris Agreement. Which of the following emission reduction policies is the nation most likely implementing?
A sustainability analyst at a global energy company assesses trends in the electric power sector for the next 10 years. To inform strategy, the analyst focuses on the interaction among climate risks, advancements in renewable energy, and stranded asset risk for fossil fuels.
According to the analyst, what trend will likely emerge during the next decade?
To improve sustainability, a railroad and transportation services company will revitalize its rail network by installing an operating system that reduces idle time. A reduction in idle time will decrease GHG emissions. To finance this plan, the company will issue green bonds beginning in 2024. The company sustainability director develops sustainability objectives and eligibility criteria to communicate to investors.
The director is fulfilling which core component of the Green Bond Principles?
An economist at a large US state pension fund assesses transition risk and opportunities in response to pensioner requests that the fund increase transparency on climate strategies. The economist uses IAMs to inform this analysis.
Which of the following will the economist most likely demonstrate by using IAMs?
In response to consumer demand for eco-friendly products, a global personal care company develops a net-zero transition plan. The company sustainability team recommends an appropriate carbon accounting method for the plan. Which of the following country-level emission accounting methods is most likely recommended and why?
