Climate Investing flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Radiative forcing

Change in net energy flux at the top of atmosphere, in W/m². Positive forcing warms. CO2 doubling produces roughly 3.7 W/m², which drives equilibrium climate sensitivity estimates.

Equilibrium climate sensitivity

Eventual global mean surface warming from a doubling of atmospheric CO2. IPCC AR6 best estimate is about 3°C, with a likely range of 2.5–4°C.

Acute versus chronic physical risk

Acute risk is event-driven (flood, wildfire, cyclone, heatwave). Chronic risk is gradual (sea-level rise, temperature trend, precipitation shift). They require different modeling approaches.

Scope 3 emissions

Indirect value-chain emissions across 15 GHG Protocol categories, both upstream and downstream. For most sectors they dominate the total footprint, often 70–90% of emissions.

PCAF attribution factor

For corporate lending, outstanding amount divided by total equity plus debt. For listed equity, shares held divided by shares outstanding. Used to allocate financed emissions.

NGFS scenarios

Climate scenarios combining transition and physical risk pathways, including Net Zero 2050, Delayed Transition, Current Policies, Divergent Net Zero, and Hot House World. Used for stress testing.

EU Taxonomy three conditions

An activity must substantially contribute to an environmental objective, do no significant harm to others, and meet minimum social safeguards to qualify as sustainable.

Transition finance definition

Financing for high-emitting or hard-to-abate entities that are not yet aligned but have a credible, time-bound plan to decarbonize, such as steel, cement, shipping, and aviation.

Sustainability-linked bond mechanics

Coupon or margin adjusts if the issuer meets or misses predefined sustainability performance targets tied to KPIs. Step-ups are typically small, often 12.5–25 basis points.

ICMA transition finance elements

Four elements: issuer climate transition strategy and governance, business model environmental materiality, strategy implementation, and transparency. Used to assess transition credibility.

Transition-washing red flags

Targets without interim milestones, flat or rising absolute emissions, capex flowing to carbon-intensive expansion, and KPI step-ups too small to change issuer incentives.

Just transition

Fair treatment of workers and communities affected by decarbonization, including reskilling, community economic dependence, and affordability. Increasingly required in transition finance frameworks.

Blended finance

Structuring that combines concessional or public capital with commercial capital to reduce risk and mobilize private investment in transition projects that would otherwise be unbankable.

Climate-adjusted DCF

Valuation adjusting cash flows for transition costs and revenue shifts, and adjusting terminal value and discount rate for stranded-asset and physical risk.

Carbon beta

Sensitivity of a company's cash flows or valuation to changes in carbon price. Distinct from carbon intensity, which is a screening proxy rather than a risk measure.

Greenium

Yield differential between green and comparable conventional bonds. Empirically small, often 0–5 basis points, and not a reliable proxy for environmental impact.

Stranded asset analysis

Comparing reserves or asset book values against a carbon-budget-consistent demand path to estimate impairment risk under net-zero scenarios.

Materiality mapping

Using SASB or ISSB industry metrics to identify financially material climate factors by sector, rather than applying uniform carbon screens across all holdings.

Scenario-based valuation

Running DCFs under multiple NGFS scenarios, such as Net Zero 2050, Delayed Transition, and Current Policies, then reporting the valuation spread and key drivers.

Sovereign climate credit risk

Climate vulnerability affects sovereign ratings through growth impacts, fiscal exposure to disaster relief, and external balance pressures from commodity and trade shifts.

CRREM stranding risk

Real estate pathway tool comparing a building's energy and carbon performance against decarbonization trajectories, flagging when an asset becomes stranded relative to standards.

Infrastructure climate exposure

Long asset lives of 20–50 years mean chronic physical risk and policy risk compound; concession terms and regulated asset bases determine who bears the cost.

Exit-multiple climate risk

High-carbon assets may face a compressed buyer pool as climate-aware capital withdraws, which should be modeled as a terminal valuation haircut.

Real estate physical risk

Flood-zone designation, insurance premiums, occupancy, and cap rates transmit physical climate risk into property values and financing costs.

Climate tech policy dependence

Venture-stage climate technology valuation depends heavily on subsidies, tax credits, and offtake certainty; policy reversal is a primary downside risk.

Private credit climate covenants

Loan terms can embed climate KPIs, insurance requirements, and capex conditions, giving lenders tools to monitor and price transition risk in illiquid markets.

WACI

Weighted average carbon intensity equals the sum of portfolio weight times issuer carbon intensity. It is backward-looking and sensitive to whether Scope 3 is included.

Implied temperature rise

Metric mapping a portfolio's alignment to a projected warming outcome. It relies on company targets and sector pathways and is highly sensitive to methodology.

Stewardship escalation

A sequence of engagement actions from letters and meetings to public statements and voting against directors, used to press issuers on climate strategy.

Divestment versus engagement

Divestment cuts portfolio exposure but may not reduce real-world emissions. Engagement can influence issuers but has uncertain efficacy. Document the theory of change.

Portfolio carbon footprint

Sum of portfolio weight times issuer emissions divided by enterprise value. A backward-looking exposure metric that depends heavily on data coverage and estimation.

Climate scenario stress test

Applying NGFS or bespoke scenarios to holdings, aggregating P&L or valuation impacts by sector, and disclosing methodology limitations and key sensitivities.