Sustainability
A multinational financial services company offers a comprehensive web trading platform for lumber futures on the Chicago Mercantile Exchange. As the primary lumber species have interconnected biodiversity and ecosystem impacts, the financial services company evaluates the potential materiality of SDGs on lumber production.
Which of the following statements correctly highlights the relationship between SDGs and the private sector?
A. Understanding SDG alignment has become increasingly important and relevant for financial institutions analyzing corporate performance.
B. Companies progressively use ESG metrics to benchmark against the spectrum of SDGs for external reports.
C. Typically, SDGs are concerned with the non-financial outcomes for society and the environment without an overtly strong material financial link.
D. Since each SDG does not have a direct relation with material assets in the private sector, the relationship between the two is not directly correlated.
A. Understanding SDG alignment has become increasingly important and relevant for financial institutions analyzing corporate performance.
An investment firm plans to assess the climate risk exposure of their portfolio to high-carbon assets. A junior analyst at the firm identifies a potential impact of physical climate risk on the firm’s portfolio.
Which of the following did the analyst classify as an example of an indirect impact of physical risk?
A. Increased manufactured product costs following a new carbon tax on steel.
B. Increased premiums charged by insurance companies due to frequent extreme weather events
C. Supply chain disruption due to increased hurricane activity
D. Writing down a coal-powered electricity generator before its useful life
C. Supply chain disruption due to increased hurricane activity
A metals and mining company operates in a region that recently announced new carbon pricing regulations. The company establishes a sustainability committee that will focus on reporting emissions and understanding decarbonization pathways. The director of the committee prepares for a risk mitigation strategy meeting by outlining the benefits and drawbacks of carbon pricing policies.
Which of the following is correct for the director to include in the outline?
A. Carbon taxes provide certainty for companies to make longer-term investment decisions since a government cannot change the levels of carbon tax once a timeframe is specified.
B. Carbon taxes sometimes cause volatile carbon pricing since external shocks such as a financial crisis can lead to high tax level increases that decrease the incentives to reduce emissions.
C. Emissions-trading schemes allow sectors that are more effective in reducing emissions to sell excess permits to sectors where emissions reductions are technologically infeasible with current technologies.
D. Emissions-trading schemes are unable to create cash flows to facilitate large and long-term investment decisions since permits tend to be broad.
C. Emissions-trading schemes allow sectors that are more effective in reducing emissions to sell excess permits to sectors where emissions reductions are technologically infeasible with current technologies.
A global automaker issues a press release announcing it will be the most sustainable premium sports car manufacturer by 2030. The automaker will issue its first green bond to finance the development and production of its first fully electric vehicle. The automaker’s chief sustainability officer is responsible for ensuring the green bond aligns with the core components of the Green Bond Principles (GBP).
Which of the following company strategies aligns best with the components of the GBP?
A. The company can use green bond proceeds to finance new eligible green projects but not to refinance existing debt.
B. The company establishes a formal internal process to confirm net green proceeds are credited to a sub-account or moved to a sub-portfolio.
C. The company can refrain from disclosing to investors any eligibility criteria for project selection but must disclose internal processes when issuing the green bond.
D. The company uses internal processes in lieu of second-party external reviews to confirm the use of proceeds information.
B. The company establishes a formal internal process to confirm net green proceeds are credited to a sub-account or moved to a sub-portfolio.
A real estate company operating in Texas wants to better understand its exposure to climate risk after a tropical storm damages one of its properties in the coastal region. A risk manager identifies how physical risk impacts the company's operations and recommends necessary action. As part of this assessment, the risk manager reviews climate models in collaboration with climate scientists. In order to assess the physical risk exposure for the company, how should the risk manager adapt global climate models?
A. Downscale the models in spatial and temporal resolution to give accurate local risk estimates.
B. Keep the models spatial and temporal resolution in order to combine with updated exposure and vulnerability data.
C. Enhance models with additional temporal data to provide adequate time estimates for regional level risks.
D. Maintain detailed exposure mapping while adding data on hazards to provide risk information.
A. Downscale the models in spatial and temporal resolution to give accurate local risk estimates.
A global investment bank discusses comprehensive courses of action before the COP-27 climate meeting in late 2022. As the bank has ESG strategies embedded into their investing, the director of sustainability explains the interrelationship between ESG and climate change to several stakeholders.
A. Climate change and the associated sustainable development issues fall under the larger umbrella of ESG, both at the corporate goal setting level and at the country level.
B. Climate change is not an exclusive ESG issue because a changing climate affects all stakeholders, not just those located within financial institutions.
C. Typically, climate change is viewed as a subset of the “G” portion of ESG because of the enormous governance-based issues within a changing climate.
D. Typically, climate change is viewed as a subset of the “S” portion of ESG due to the vast societal issues within a changing climate.
B. Climate change is not an exclusive ESG issue because a changing climate affects all stakeholders, not just those located within financial institutions.
The board of directors for an investment fund receives a report that analyzes the exposure of the fund’s portfolio to stranded asset risk. As the fund invests heavily in fossil fuel companies within the energy sector, the report will illustrate an increased stranded asset risk.
Which of the following correctly identifies a stranded asset issue the board will likely consider when reviewing the report?
A. Length of time to which stranded assets continue economic growth
B. Possible impact of geopolitics on re-pricing fossil fuel assets
C. Fossil fuel investment strategy to reduce stranded asset risks
D. Applying premature write-downs to increase asset valuations
B. Possible impact of geopolitics on re-pricing fossil fuel assets
A central bank conducts a policy strategy review and identifies climate change as a key component to incorporate into the policy framework. The central bank establishes a climate risk unit to conduct research to help understand climate-related risks and the possible policy actions to address the risks. The climate risk unit recommends both microprudential and macroprudential measures for the central bank to take to incorporate climate change into its supervision practices.
Which recommendation should the unit make?
A. To ensure comprehensive climate change integration, a microprudential measure for the central bank is to sign onto the NGFS and comply with all reporting requirements and any binding agreements.
B. Since climate-related microprudential measures have been standardized worldwide, the central bank should review the scope of its mandate to maintain alignment with TCFD best practices.
C. To help examine climate change risk, a macroprudential measure is for the central bank to develop and conduct climate stress tests with distinct climate and policy scenarios and time horizons.
D. The central bank should implement established, widely adopted macroprudential measures such as carbon cyclical capital buffers or lowering exposure limits to carbon-intensive stranded assets.
C. To help examine climate change risk, a macroprudential measure is for the central bank to develop and conduct climate stress tests with distinct climate and policy scenarios and time horizons.
A credit union announces the launch of a regional green loan program for businesses and individuals to fund commercial and personal projects. Clients who are interested in the program but need more information are provided with new product guidelines that explain green loans and their markets.
Which of the following should be presented in the product guidelines?
A. Green loans generally have use of proceeds requirements, and are at times, governed by different rules in specific jurisdictions.
B. The interest rate on a green loan is linked to the issuer’s achievement of specific sustainability benchmarks.
C. Green loans have seen quicker volume growth globally in the past years than any other green or sustainable financial product.
D. Utilities, real estate, car loans, and fashion and luxury goods companies make up the majority of the global green loan market.
A. Green loans generally have use of proceeds requirements, and are at times, governed by different rules in specific jurisdictions.
The CEO of a large commercial bank from France sets a short-term objective to integrate climate risk into corporate governance. The decision comes after a recent report indicates the world economy might lose $23 trillion annually, and vulnerable portfolios have significantly higher chances of defaulting by 2050 if global temperature rises to 4°C above preindustrial levels. The CEO tasks a bank's senior risk manager to write an integration proposal. The risk manager reviews the ING bank case study to understand climate risk implications on corporate governance and benchmark best practices.
Which of the following ING approaches will the risk manager replicate for climate risk oversight?
A. The supervisory board performs climate risk oversight at the executive level as the third line of defense.
B. Local and regional risk committees perform climate risk oversight at the executive level.
C. Internal and external auditors are responsible for climate risk oversight at all levels.
D. Line managers are responsible for climate risk oversight at a business unit level as the first line of defense.
D. Line managers are responsible for climate risk oversight at a business unit level as the first line of defense.
A climate risk director discusses the Nuveen case study at a climate risk conference and addresses how the company uses SDGs within an investment context. The director notes an ever-increasing number of clients anxious about sustainability-based outcomes. The director summarizes simple metrics Nuveen used to measure portfolio exposure.
Which of the following correctly characterizes a key metric used by Nuveen?
A. Social capital alignment with SDGs
B. Innovation, human capital, and social capital alignment with SDGs
C. Investments found to have material financial effects on SDG alignment
D. Assets under management by primary SDG alignment
D. Assets under management by primary SDG alignment
Italian insurance regulators and community business leaders monitor the aftereffects of another large
Sicilian wildfire. While all parties in the discussion understand climate risk management implications, a
community spokesperson asks the regulators if there is any constructive or possibly positive outcome for
the ever-increasing number of island wildfires.
Which of the following stated by the regulators correctly identifies how a wildfire event showcases the opportunities provided by physical risk?
A. Partnering governments with insurers allows for burden-sharing and profit-sharing through avoidance.
B. Partnering governments with insurers allows insurers to proactively pull coverage by working with communities to encourage sustainable retreat.
C. There are numerous economic and investment opportunities presented by the transition.
D. There are no benefits from physical climate risks as they are inherently only linked to costs and losses.
A. Partnering governments with insurers allows for burden-sharing and profit-sharing through avoidance.
A research team at an international think tank for sustainability, focused on monetary and fiscal policy, prepares a working paper for an upcoming symposium. The paper analyzes how central banks have incorporated climate-related risks into policies and includes the Bank of England (BoE) case study.
Which of the following is an insight from the case study that the team should include in the paper?
A. Governance plays an important role in incorporating climate into microprudential policy and can include the expectation that boards of directors be involved in assessing climate risk.
B. The most straightforward and effective way to incorporate climate risk is into monetary policy, which has seen more integration of climate policy than any other areas of the BoE’s operations.
C. For efficient risk management, banks and insurers should establish separate, climate-specific capital adequacy and solvency assessments to capture material exposures from climate change.
D. The BoE’s efforts for a sound macroprudential policy demonstrate that climate risk stress tests should be conducted with a primary goal of gaining insight exclusively from past policy action scenarios.
A. Governance plays an important role in incorporating climate into microprudential policy and can include the expectation that boards of directors be involved in assessing climate risk.
A European shipping company hires a new sustainability director who prepares a new sustainable finance framework to finance projects. The director writes a report to the executive board and recommends transitioning to a new fuel mix by adding liquid biofuel to the ship fuel mix. The new fuel will receive financing under the new sustainable finance framework. As part of the report, the director describes current regulatory activity concerning sustainable finance.
What does the director describe as an increasing focus of regulatory activity?
A. Simplification of the definitions used for sustainable activities
B. Expansion of sustainable financial products
C. Standardization of financial disclosures
D. Categorization of the underlying economic activity of financed projects
D. Categorization of the underlying economic activity of financed projects
A beverage company considers undertaking scenario analysis for the first time. The company will assess potential implications of climate change on water availability and management due to changing regulations relating to water use and increased water stress. The company engages a consultant for guidance on incorporating climate-related considerations into scenarios. The consultant prepares a high-level overview of transition risk and physical risk climate scenarios.
Which of the following should the consultant include in the overview?
A. Physical scenarios allow organizations to assess historical climate change vulnerabilities to explore facets of past business resiliency.
B. Organizations should use physical scenarios to draw conclusions about energy supply and consumption in the short and medium term.
C. As physical risk impacts a small part of the global economy, organizations should primarily focus on transition scenarios to understand climate change implications.
D. Some transition scenarios use assumptions that achieve a climate-friendly economy that organizations can use in conducting analyses.
D. Some transition scenarios use assumptions that achieve a climate-friendly economy that organizations can use in conducting analyses.