Environmental Factors
Environmental analysis covers climate (physical risks such as floods, heat, and supply disruption; transition risks from policy, technology, and litigation), natural capital (water stress, biodiversity, deforestation), pollution and waste, and resource efficiency. Under TCFD, companies disclose governance, strategy, risk management, and metrics/targets. Candidates must know GHG Protocol scopes: Scope 1 direct emissions; Scope 2 purchased energy; Scope 3 value-chain emissions, usually the largest and least reliable.
Common metrics: carbon footprint (tCO2e per $m invested, using ownership share), WACI (weighted average carbon intensity, tCO2e per $m revenue), and financed emissions under PCAF. Scenario analysis (e.g., net-zero 2050 vs current policies) links climate outcomes to cash flows.
Traps: confusing physical and transition risk; forgetting that intensity metrics change with the denominator (revenue vs GDP vs enterprise value); assuming exclusion solves financed emissions; double counting Scope 3 across portfolios.
Worked example: a holding with weight 2%, revenue $50bn, and 1 MtCO2e Scope 1+2 contributes 0.02 × (1,000,000/50,000) = 0.4 tCO2e per $m revenue to WACI. Sum across holdings for portfolio WACI.