Sustainability and Climate Risk Exam PDF

Sustainability Hf Learning Objectives After completing this reading you should be able to: © Describe the UN SDGs along with associated goals @ Analyze the parameters of sustainability, social responsibility, and various environmental challenges. and targets. @ Identify the key features of sustainab...

Sustainability Hf Learning Objectives After completing this reading you should be able to: © Describe the UN SDGs along with associated goals @ Analyze the parameters of sustainability, social responsibility, and various environmental challenges. and targets. @ Identify the key features of sustainable development and the goals of the 2030 Agenda. @ Describe the global material sustainability issues that each SDG addresses. © Understand the interrelationship between ESG and climate change. @ Explain the relationship and intersection among sustainability, ESG, and climate change. © Describe the likely strategies to reach the SDGs. @ Explain various sustainability-based outcomes from company and organizational case studies. @ Understand SDG materiality and alignment within the private sector. © Explain how sustainability goals and objectives are incorporated into investment guidelines and corporate risk frameworks (e Sustainability Initiatives and Coalitions). 27 often by financial counterparties, sits within sustainability. Climate action falls under sustainability but is not This chapter discusses the broad topic of “sustainability,” particularly as it relates to public policies, corporate actions and financial institutions. The broad examination of sustainability in a policy, corporate, and investment context is important background before examining climate risk analysis (Chapters 3 and 6) and policy frameworks (Chapter 4) in greater detail. This chapter starts by defining sustainability, and dif- necessarily always considered ESG. © The UN's 2030 Agenda, particularly the Sustainable Development Goals at the heart of it, have become an important reference point and benchmark for both policymakers and for the private sector. * from being primarily motivated by corporate social responsibility—that is, branding or moral ferentiating it from the concept of ESG (environmen- tal, social, and governance issues) and from climate risk. This chapter also discusses international goals on sustainability, notably the UN Sustainable Develop- ment Goals. The chapter takes a broad approach, touching on economic development, issues of social justice and equity (e.g., human rights), and environmental protection (e.g., biodiversity), and focusing primarily on concepts and general framing in preparation for later chapters that go into greater detail. Chapter Outline 2.1 Introduction to Sustainability 2.2 ESG, Sustainability, and Climate Risk 2.3 Sustainable Development Goals (SDGs) and Other Policies 2.4 Sustainability for Corporations and Financial Institutions Corporate sustainability practices have evolved considerations—to considerations of financial materiality. ¢ Frameworks and coalitions have been crucial in spreading sustainability practices among private sector actors. SUSTAINABILITY 2.1 Introduction to Sustainability Sustainability is defined as humanity meeting its current needs without overburdening the natural environment or future generations. Most definitions of sustainability place the natural environment and its resources on co-equal footing with social and justice concerns and with economic outcomes. Environmental sustainability means maintaining ecological integrity, preserving biodiversity, and maintain- ing the balance of natural systems (such as the global climate), and it means that natural resources are consumed by 2.5 Private Sector Sustainability Frameworks humans at a rate less than that at which they can be replenished. Social sustainability means that a minimum standard Key Learning Points of basic necessities and human rights is afforded to all * their families, and their communities healthy and secure. Economic sustainability means having economic systems Sustainability refers to humankind meeting its economic needs without overburdening the environment or weak- ening societies. © The modern concept of sustainability originated within the context of sustainable development, that is, that are accessible to everyone and that help to spread and generate prosperity globally. These three elements, then, make up “sustainability” writ large. country-level economic development done in a way that does not overexploit natural resources or overburden society. But sustainability is now applied to governments, corporations, and financial institutions alike, and teenth and nineteenth centuries. These discussions about the value of nature and the debates (and in some cases, to actions by individuals. political movements and even revolutions) around shar- * Sustainability is a broad category; ESG, or grading firms on environmental, social, and governance performance, 28 people, who have sufficient resources to keep themselves, © Sustainability and Climate Risk Exam There have been periodic concerns about the finite nature of natural resources stretching back at least to the eigh- ing wealth and well-being more equitably for the benefit of wider society started almost as soon as the industrial revolution (which brought unprecedented economic growth and wealth) began. people have reduced or eliminated their use of meat and However, the concept of sustainability as applicable to Corporations practice sustainability through their CSR today’s public policy and corporate arenas traces its roots to actions in the 1970s and 1980s. In 1972, the first major United Nations meeting on environmental issues took policies; through adherence to environmental, social, and governance norms (ESG); and through corporate-level com- place. That same year saw the publication of “The Limits to Growth,” a report commissioned by the Club of Rome that argued that there were limits to economic growth due dairy products for environmental reasons. mitments, which range from commitments to eliminate the use of forced labor from a firm's supply chain to the alignment of a firm's business model with Paris Agreement-com- Brundtland Commission a decade later. Unlike the Club pliant emissions reductions goals. Investors and financial institutions, for their part, practice sustainability through the ESG policies they have in place relating to their investing and lending activities, sustainable finance product offerings of Rome report, the Commission's final report, released in (described in more detail in Chapter 5), and various commit- 1987, proclaimed sustainable developmentto be compatible with economic growth and defined it as “development that meets the needs of the present without compromis- ments to align with sustainability goals. to resource constraints. However, neither of these significantly shaped public policy, leading to the creation of the ing the ability of future generations to meet their own 2.2 ESG, Sustainability, and needs” (Brundtland, 1987). This has since become the Climate Risk most cited and widely accepted definition of sustainable Discussions of sustainability can easily get bogged down in development. While the definition was grounded in the development discourse of allowing the world's poorer countries to gain access to better living standards, it later served as a basis for defining what sustainability means for other sorts of entities, such as corporations, financial institutions, and indi- definitional confusion or overlap. Sustainability is the broadest category of all, including actions or activities undertaken in such a way as to not exhaust or exploit resources— human or natural—and to allow for economic activity to continue into the future. Sustainability can and does refer to action by governments, individuals, firms, and financial viduals. For example, from the 1990s, corporations widely pursued corporate social responsibility (CSR), whereby social and environmental awareness, and it seeks to ensure companies undertake social or environmental activities that economic activity does not harm either society or the for the wider benefit of society (see Section 2.4). Around broader environment. These categories are broad in and of themselves; social sustainability can include practices the same time as companies started widely practicing, and communicating about, CSR, investors began pressing investee companies to become more sustainable through shareholder “engagement” (O'Rourke, 2003). Today, sustainability is an important guiding principle for governments, international organizations, individuals, corporations, and financial institutions alike. Governments advocate the merits of sustainability and agree on international sustainability goals through the United Nations, such as the Sustainable Development Goals, covered in Section 2.3. Essentially every organization involved in development, such as multilateral development banks, seeks to align its work with sustainable development principles. Some consumers consider sustainability in making moral and ethical choices in regard to consumption: for instance, many institutions (see diagram, below). Broadly, it encompasses ranging from respecting human rights and ensuring worker protection to fair employment practices and promoting gender equality. Environmental sustainability encompasses considerations such as addressing climate change, striving for clean air and water, protecting oceans, conserving habitats and nature, and preserving biodiversity. The notion of ESG, meanwhile, with “E” referring to envi- ronment, “S” to social, and “G” to governance, began in the financial industry and its surrounding policy discussions involving financial regulation and financial-sector sustain- ability. The term ESG was coined in a 2005 report by the UN Global Compact, which was endorsed by a coterie of investment firms, including ABN Amro, Goldman Sachs, and Westpac. Use of the abbreviation was solidified when it was Chapter 2 Sustainability = 29 embedded into the UN Principles for Responsible Investment, launched in 2006 (see Section 2.5). ESG criteria are used as a set of standards by responsible investors to gauge companies—and sometimes other entities such as governments—on their environmental, social, social policy. Thus, the relationship of ESG to government policy is very one-sided. Climate change-related issues, including climate risk, are sometimes thought of as a subset of ESG. While they and governance performance. Environmental criteria consider a company’s relationship to climate change or to do fall under the “E” (environmental) category, in reality climate is not exclusively an ESG issue. The impacts of climate change, both its physical impacts (e.g., sea level rise, nature: Typical metrics include a company’s carbon dioxide increased incidence of extreme weather) and impacts that emissions, water usage, or its impact on deforestation. are related to the transition to a net-zero emissions econ- Social metrics examine how a company treats its employees and managers relationships with suppliers and communities. omy, affect all stakeholders—from companies and financial Governance deals with a company’s leadership, including board composition, executive compensation, risk management, and other internal procedures. ESG information is sometimes disclosed by companies and is often collected by data firms or by investors. Often, ESG information is condensed into specific scores or ratings institutions to governments and individuals, including those not currently acting in sustainable ways. As for responses to climate change, governments set climate policies to reduce emissions and adapt to climate change, which is considered part of sustainable development but not of ESG per se (see Chapter 4 for more on policies). Corporations set corporate-level climate goals, (see Chapter 5). ESG scores and metrics are then used by financial firms in various ways. One important purpose is their use in screening companies for inclusion in ESG invest- but these can be motivated by bottom-up consumer pressure or government policy just as much as by ESG-related ment funds. Another use is for insight into banks’, insurers’, seeks to map out the overlapping spheres: and investors’ firm-level ESG policies that are integrated into their lending, underwriting, and investment practices. This can mean that certain types of clients or projects are 2.3 Sustainable Development Goals favored over others, and that certain types of projects are pressure from investors or lenders. The following graphic (SDGs) and Other Policies restricted or even fully excluded. For example, coal-fired Sustainability is an area in which policymakers have set power plants are highly emissions-intensive and not compatible with reaching international climate goals. Conse- many goals and concrete policy. A lot of sustainability ini- excluded coal firms from portfolios. tiatives have occurred at the international level through voluntary and aspirational goals or guidelines. Despite the relative lack of strict laws, sustainability goals have become an important focal point for many stakeholders. This is most While non-financial corporations are more focused on notably the case in the United Nations’ Sustainable Devel- quently, many banks have stopped financing them, insurers have stopped insuring them, and investment firms have sustainability than ever, the use of the term “ESG” (as opposed to CSR or sustainability) occurs for them mainly in an investor relations capacity: that is, companies commu- opment Goals (SDGs), launched in 2015 as part of the UN's 2030 Agenda for Sustainable Development. nicating performance to shareholders, lenders, and other 2.3.1 Leading up to the 2030 Agenda financial stakeholders using ESG metrics that have become The UN has a strong interest in promoting sustainable development, as evidenced by the Brundtland report, and it has established multiple frameworks in this area. In 1992, at the Earth Summit in Rio de Janeiro, 178 countries adopted standard in the financial industry. At the country level, investors can and do use ESG metrics for certain purposes, such as sovereign bond portfolios. To give just one example, MSCI, an ESG data provider, provides country-level ESG ratings. However, governments themselves rarely if ever use the language of “ESG" to refer to their own policy actions. They prefer the language of sustainable development or topic-specific language, such as climate policy or 30 © Sustainability and Climate Risk Exam Agenda 21, a plan for a global partnership on sustainable development. The Earth Summit was started by the United Nations Framework Convention on Climate Change (UNFCCC), a major convening body for global climate decisions, and the Convention on Biological Diversity. These GRAPHIC: MAPPING OVERLAPPING DEFINITIONS This graphic seeks to clarify the relationship between Climate policy falls under sustainable development, the sustainability subtypes (sustainable development, but government policies are not typically discussed in sustainable consumption, sustainable business, and sustainable investing) and ESG; climate impacts; and climate responses. Climate change’s impacts are cross-cutting and do not just fall within sustainability. new bodies and the UNFCCC have played a crucial role in coordinating communication regarding the scientific consensus built by the Intergovernmental Panel on Climate Change (IPCC) with governments. All major global-level climate policy agreements, from the 1997 Kyoto Protocol to the 2015 Paris ‘Agreement, have occurred under the aegis of the UNFCCC. In 2000, the UN adopted eight Millennium Development Goals (MDG) to be achieved by 2015, including eradicat- terms of ESG, which is a moniker mainly used by the financial industry and corporations. A firm’s or financial institution’s climate finance and climate risk management can be seen to sit fully within ESG. was not achieved. Also, the MDGs never deeply involved or engaged private-sector stakeholders such as corporations or financial institutions. The 2030 Agenda for Sustainable Development was subsequently developed and launched in 2015. It is mainly a product of the UN, its member countries (i.e., governments), and to an extent, civil society. The Agenda, which ing extreme poverty, achieving universal primary education, reducing child mortality, improving maternal health, specifically set out to “build on the Millennium Development Goals and complete what they did not achieve,” centers on “people, planet, prosperity, and peace.” and ensuring environmental sustainability. While these One might have expected the Agenda, as well as the Sus- MDGs were helpful as benchmarks for generating discus- tainable Development Goals at its heart, to follow a similar sions with governments and civil society, they ultimately trajectory to the MDGs, but the Agenda and the SDGs have fell short: Notably, the flagship goal to eradicate poverty so far proven more impactful and influential. Chapter 2 Sustainability M 31 2.3.2 Sustainable Development Goals (SDGs) and the 2030 Agenda The success of the 2030 Agenda so far is that it manages ‘to be broad, all-encompassing, and detailed. At its heart lie 17 Sustainable Development Goals (SDGs), which cover a much broader set of policies and areas than the MDGs. They range from environmental and economic to social goals. Environmental goals include those on climate action (SDG 13) and nature-related goals to protect life on land and life in the water (SDGs 14 and 15). Social goals include those dedicated to ensuring good health (SDG 3), quality education (SDG 4), and gender equality (SDG 5), among others. Economic goals include those for good jobs (SDG 8), innovation and infrastructure (SDG 9), and responsible consumption (SDG 12) (see full list in box). The 17 goals are some of the goals—whereas the MDGs are more targeted for development in poorer countries and meant for publicsector, multilateral, and civil society stakeholders. Also, the detailed targets allow for better tracking and focus. 2.3.3 Implementing the Goals: Sub-Targets and Cross-Cutting Solutions While the broad goals help bring about a wide span ambition of action, the breakdown of each large lofty goal into smaller, targeted goals and sub-targets helps in concretizing their implementation. This subsection will highlight exam- ples from a few of the goals. Under Goal 4, which relates to education, the more detailed targets include ensuring the free and equitable access of all children to primary and secondary education; access to also subdivided into 169 targets, which provide specificity. early childhood care; access to technical, vocational, and The broad scope of the SDGs have allowed a wide range higher education; and eliminating gender disparities in edu- of stakeholders to find strong agreement about at least cation, as well as a more short-term goal (set for 2020) of SUSTAINABLE DEVELOPMENT GOALS: FULL LIST ALS SUSTAINABLE DEVELOPMENT No POVERTY 7ERO HUNGER 6000 HEALTH AND WELL-BEING. QUALITY EDUCATION AFFORDABLE AND CLEAN ENERGY DECENT WORK AND ECONOMIC GROWTH INDUSTRY, INNOVATION ‘AND INFRASTRUCTURE 102 INEQUALITIES Po uly 13 ACTON CCLEAN WATER ‘AND SANITATION SISHNIRIEGTES FM yo) esPonsoLe AND COMMUNITIES ‘CONSUMPTION ‘AND PRODUCTION (oe) 14. BLOW WATER 1 a (GET GENDER EQUALITY 16 “cease: AND STRONG INsmTUTIONS wv. PARTHERSHIPS FORTHEGONS ly, a NS $ Reprinted with permission of the United Nations Sustainable Development Goals [https:// www.un.org/sustainabledevelopment/]. The content of this publication has not been approved by the United Nations and does not reflect the views of the United Nations or its officials or Member States. 32 Sustainability and Climate Risk Exam Goal 1. End poverty in all its forms everywhere Goal 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture Goal 3. Ensure healthy lives and promote well-being for all at all ages Goal 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all Goal 5. Achieve gender equality and empower all women and girls Goal 6. Ensure availability and sustainable management Goal 12. Ensure sustainable consumption and production patterns Goal 13. Take urgent action to combat climate change and its impacts Goal 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, com- bat desertification, and halt and reverse land degrada- of water and sanitation for all tion and halt biodiversity loss Goal 16. Promote peaceful and inclusive societies for sustain- Goal 7. Ensure access to affordable, reliable, sustainable able development, provide access to justice for all and build and modern energy for all effective, accountable and inclusive institutions at all levels Goal 8. Promote sustained, inclusive and sustainable Goal 17. Strengthen the means of implementation and revitalize the Global Partnership for Sustainable Development economic growth, full and productive employment and decent work for all Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation Goal 10. Reduce inequality within and among countries Goal 11. Make cities and human settlements inclusive, safe, resilient and sustainable “substantially expanding” the number of scholarships available to developing countries. Goal 7, on affordable energy, has detailed targets on energy access, renewable energy, and energy efficiency (see box). Even if these targets are not necessarily quantitative, their specificity nonetheless is helpful in developing targeted metrics and policies to better gauge progress. EXAMPLE 7.1 OF TARGETS UNDER AN By 2030, ensure universal access to affordable, reliable and modern energy services 7.2 By 2030, increase substantially the share of renewable energy in the global energy mix 7.3 By 2030, double the global rate of improvement in energy efficiency 7.a By 2030, enhance international cooperation to facilitate access to clean energy research and technology, including renewable energy, energy Reprinted with permission of the United Nations Sustainable Development Goals [https://www.un.org/sustainabledevelopment/]. The content of this publication has not been approved by the United Nations and does not reflect the views of the United Nations or its officials or Member States. While the original UN formulation is methodical goal by goal, many implementations of the SDGs further several goals at ‘once. Many private sector stakeholders, in particular, have started enumerating which SDGs their activities principally align with (see Section 2.4, including Shell case study). One example of a synergistic action for tackling multiple goals is a nature- based solution for climate change mitigation (see below). SDG: GOAL 7 (AFFORDABLE ENERGY) 7.b By 2030, expand infrastructure and upgrade technology for supplying modern and sustainable energy services for all in developing countries, in particular least developed countries, small island developing States, and land-locked developing countries, in accordance with their respective programmes of support Reprinted with permission of the United Nations Sustainable Development Goals [https://www. efficiency and advanced and cleaner fossil-fuel un.org/sustainabledevelopment/]. The content of this publication has not been approved by the United technology, and promote investment in energy infrastructure and clean energy technology Nations and does not reflect the views of the United Nations or its officials or Member States. Chapter 2 Sustainability = 33 CASE STUDY: NATURE-BASED OF SDGs 13, 14, AND 15 SOLUTIONS Nature-based solutions are defined as actions to protect, TARGETING A COMBINATION For nature-based climate solutions to be viable, the manage, or restore ecosystems that also address societal World Wildlife Fund argues they must and human challenges. Some nature-based solutions 1) address climate change and increase ecosystem are well suited to providing climate change mitigation and adaptation benefits. This case study examines how actions to protect ecosystems such as forests, grasslands, mangroves, and wetlands (SDGs 14 and 15) can also address human-caused climate change (SDG 13). functionality; 2) be science-based; 3) be synergistic; 4) be designed and implemented with local stakeholders Climate change is, after all, caused by excess humangenerated carbon dioxide emissions, as well as emissions of other greenhouse gases. Plants absorb carbon dioxide and indigenous peoples; and 5) be measurable and traceable. In light of these conditions, it is easy to see why one well- from the air and use it in photosynthesis to produce known nature-based climate solution—planting trees—can chemical energy in the form of sugars and as building fail unless done properly. From a carbon sequestration blocks for their structural tissues. The carbon is retained perspective, planting one species of tree in orderly, dense rows may seem optimal, but this does not produce a in plants indefinitely so long as the plants are alive, or in wood products, that is, lumber; but if the plant material functional, biodiverse ecosystem, and thus fails condition 1. burns or decomposes, the carbon dioxide is re-released Many offsetting schemes involving tree-planting only into the atmosphere. In terrestrial forests, microbes ensure that saplings are planted, but they do not have and fungi can absorb and sequester carbon dioxide in the soil. Wetlands, meanwhile, can retain and absorb floodwaters, which can help limit their impact on buildings decades and centuries, rather than being felled or burned; this, then, fails condition 5. Therefore, only tree-planting or infrastructure. Mangrove forests along tropical coasts can substantially attenuate storm surges and provide done in a way to ensure biodiversity and ecosystems are supported, and tree growth is ensured and monitored for important habitats for fish and other marine wildlife (see graphic). ‘SUPPORTING ACTIONS ECOSYSTEMS mechanisms in place to ensure the trees grow and stand for the long term, would actually fulfill the criteria. © 2019 WWF (panda.org). Some rights reserved. CLIMATE-RELATED = ECOSYSTEM SERVICES MEASURABLE CLIMATE-RELATED. OUTCOMES SDG 1, No poverty; SDG 11, Sustainable cities © Renewable energy and climate change — SDG 13, Climate action; SDG 7, Affordable and clean energy © Community and economic development —> SDG 3, Good health; SDG 4, Quality education; SDG 8, Decent work and growth; SDG 9, Industry and innova- tion; SDG 11, Sustainable cities ° Natural resources —> SDG 6, Clean water and sanita- tion; SDG 11, Sustainable cities; SDG 12, Responsible INVESTMENT consumption; SDG CONTEXT—NUVEEN 14, Life in water; SDG 15, Life on land Nuveen has stated that its choice of impact investment priorities predate the SDGs, but that the SDG nonetheless provide a convenient framework for analysis: “We were investing for impact well before the SDGs were created, but many of the areas that the SDGs have identified as being important for investors and stakeholders to consider, are closely aligned with the investment areas we have chosen.” In actually measuring its portfolio exposure, the asset manager opts for two relatively simple metrics: the number of impact holdings aligned with specific SDGs (see left, below), and the assets under management by “primary” SDG alignment (right). Alignment with the United Nations Sustainable Development Goals (SDGs) ‘Number of impact holdings aligned with the SDGs as of 31 Dec 2019 Assets under management Assets under management by primary SDG alignment Number of impact holdings ‘Affordable & clean energy Sustainable cities & communities Climate action Responsible production & consumption Clean water & sanitation No poverty Decent work & economic growth Life on land Peace, justice& strong institutions Industry, innovation & infrastructure Zero hunger Gender equality 7 6 " 1 16 15 13 2 4 3 8 ° 2 14 5 Affordable & clean energy Clean water & sanitation Sustainable cities & communities No poverty Peace, justice & strong institutions Life on land Climate action Responsible production & consumption Quality education Good health and well being Decent work & economic growth Industry, innovation & infrastructure Zero hunger Life below water Gender equality Holdings are subject to change. Impact holdings are tagged based on the types of projects financed, using an evidence-based approach to align with SDG targets ‘An individual holding could be aligned with up to three SDGs. Adapted from Nuveen Global Insights SDG Alignment. 38 © Sustainability and Climate Risk Exam 56% 10% am 4% 4% 4% 3% 39% 2% 2% 1% 19%