www.tcfdhub.org/scenario-analysis/ for more information on how the TCFD has developed a framework to help companies and other organizations more effectively disclose climate-related risks and how scenario analysis is used to explore alternatives that may significantly alter the basis for “business as usual” assumptions.
Clean and green: Energy efficiency
Energy efficiency is most often associated with clean technology companies where green energy businesses are looking to decrease hydrocarbon-sourced energy consumption by displacing it with clean energy sources, or to integrate systems to improve energy usage. Because of the numerous alternatives to working toward and investing in energy efficiency, it’s challenging to classify and define companies based on fields or themes, as some of the world’s historic hydrocarbon energy companies are investing heavily in transitioning away from coal, oil, and gas.
www.msci.com/gics and www.ftserussell.com/data/industry-classification-benchmark-icb.
The International Energy Agency (IEA; visit www.iea.org/) is the global authority for energy efficiency data, analysis, and policy advice. They help governments realize the huge potential of energy efficiency, guiding them on growing, implementing, and quantifying the impacts of policies to alleviate climate change, improve energy security, and develop economies while delivering environmental and social benefits. They track global policy progress in over 200 countries, regions, and states, and global investment in energy efficiency as published in the World Energy Investment report. As of 2016, energy efficiency investment represented 13.6 percent of the US$1.7 trillion invested across the entire energy market.
Such investments are directed into different fields, with approximately 58 percent focused on buildings, 26 percent allocated to transport, and 16 percent assigned to industry. The types of services or infrastructure projects benefitting from alternative fuels and renewable energy include generation, transmission, and distribution of electricity from renewable sources such as wind, solar, geothermal, biomass, wave, and tidal (more information on these investment themes is found in Chapter 10).
A crisis awaits: Conservation of water
The world is facing a global water crisis! However, while the world has increasingly recognized the significance of environmental sustainability, there is less focus on the forthcoming water crisis. This lack of urgency can be attributed to the fact that the water crisis isn’t seen as a global crisis — in the way that climate change is seen as a shared and global problem — but rather a group of local ones. Moreover, observers fail to differentiate between the interdependent facets of the water crisis — namely, water access, pollution, and scarcity.
Water is in focus in Europe, where the vast majority of investors see it as a concern, but perhaps this is driven by the establishment of the European Union (EU) Water Framework Directive. In addition, the World Economic Forum (WEF) has cited water as a driver of global risk, for everything from conflict to health crises and mass migration. And note that water security is one of the United Nations’ Sustainable Development Goals (see Chapter 1). Therefore, water is considered a multi-impact investment because it affects the microclimate, food supply, industrial chain, health, productivity, and the environment overall. This confirms that water is fundamentally linked to other impact themes and has wide applicability to business and the investment community. Water management, technology, distribution, and conservation are some of the issues that organizations face, following years of poor water and waste management practices.
There is increasing pressure for water-themed investments given the huge number of people who lack access to securely managed sanitation and drinking water services. Meanwhile, water-related perils are responsible for 90 percent of natural disasters. However, most firms still lack a water-efficiency policy, and even fewer of them have set targets for water efficiency. The only bright spot is that the momentum appears to be building and institutional investors have noticed, as water now ranks among their top three ESG concerns. Stock index providers are designing more sustainable indexes that explicitly cover water and sanitation companies, while analysis of some of the major global indexes by Ceres (www.ceres.org/) found that 50 percent of component companies face medium to high water risks.
There is no Planet B: Air and water pollution
Pollutant emissions are a major risk for both air and water supplies. Healthy ecosystems rely on a complex web of elements that interact, directly or indirectly, with each other. Damage to any of these elements can create a chain reaction, endangering all kinds of environments due to the air and water pollution created. An unintended benefit of the COVID-19 pandemic is the slowdown in global economic activity, which has led to reduced air and water pollution. However, when the U.S. Environmental Protection Agency (EPA) suspended enforcement of environmental laws during the outbreak, stating that polluting the air or water will be allowable as long as the violations are “caused by” the pandemic, there may be unintended drawbacks as well.
Human behavior has been stressed as the major cause of air pollution, especially in cities. Beijing’s smog cloud has been “clear” for many years, but there have been important developments in air- and water-quality metrics more recently due to social and government attention. Nonetheless, air pollution has caused damage to crops, forests, and waterways. Moreover, the effect of air pollution leads to the formation of acid rain, which harms trees, soils, rivers, and wildlife.
Similarly, human behavior is also to blame for the major cause of water pollution: microplastics. Primary microplastics are tiny particles found in cosmetics or as microfibers shed from clothing and other textiles, such as fishing nets. These microplastics have been specifically produced for commercial use, while secondary microplastics result from the breakdown of larger plastic items, such as water bottles. These microplastics find their way into our rivers, from where they become a major source of plastic waste flowing into the oceans. Estimates suggest that over 1,000 rivers are accountable for 80 percent of global annual emissions, which range between 0.8 and 2.7 million metric tons per year, with small urban rivers being among the most polluted.
These are examples where, to reduce the problems of air and water pollution, companies should be more aware of their impact in these environmental areas. Transition risks can include new regulatory restrictions that increase costs for the most polluting factories, or the withdrawal of licenses to operate due to pollution or poor environmental standards.