CESGA cheat sheet

Materiality is the gate for ESG integration: an ESG factor enters valuation only if it plausibly affects future cash flows, discount rate, or terminal value.

Three integration routes: (1) risk/return adjustment in forecasts, (2) exclusion or norms-based screening, (3) thematic or impact allocation; each has a different tracking-error profile.

Double materiality has two axes: financial materiality (ESG affects enterprise value) and impact materiality (enterprise affects people/environment); CSRD/ESRS uses both, ISSB uses financial only.

Value-driver map: revenue (demand shift, pricing power), costs (energy, water, carbon price, litigation), capex (transition capex, stranded assets), risk (WACC, beta, cost of debt), and asset life.

Carbon price sensitivity: ΔEBITDA ≈ emissions (tCO2e) × carbon price change; a proxy for transition risk in high-emitting sectors.

ESG ratings disagree: correlation between major providers often sits near 0.4–0.6; differences come from scope, weighting, and indicator choice, so ratings are inputs not verdicts.

Greenwashing red flags: SFDR Article 8/9 misclassification, unverifiable net-zero claims, exclusion lists inconsistent with holdings, and high portfolio turnover versus stated engagement thesis.

Stewardship links to valuation via engagement and voting; escalation ladder runs from dialogue to voting against, then to divestment or public statements.

Physical risk splits into acute (flood, wildfire, storm) and chronic (heat, drought, sea-level rise); transition risk splits into policy, technology, market, and reputational.

Scope 1 = direct emissions; Scope 2 = purchased energy; Scope 3 = value-chain emissions (often 70–90% of a company's footprint in many sectors).

GHG Protocol corporate standard vs product standard; Scope 2 has location-based and market-based methods, and the choice changes reported totals.

PCAF finances emissions: attributed emissions = attribution factor × borrower/ investee emissions; attribution factor for listed equity ≈ outstanding amount / EVIC.

WACI (weighted average carbon intensity) = Σ (portfolio weight × issuer Scope 1+2 intensity / revenue); a flow metric, not a stock footprint.

Implied temperature rise (ITR) maps portfolio emissions to a warming trajectory; depends on carbon budget assumptions and is highly model-sensitive.

TCFD four pillars: Governance, Strategy, Risk Management, Metrics & Targets; ISSB IFRS S2 and ESRS E1 build on this architecture.

Nature and biodiversity: TNFD's LEAP framework (Locate, Evaluate, Assess, Prepare) is the standard entry point; ENCORE is a sector-level dependency/impact database.

Social capital vs human capital: social covers community, customers, supply-chain labour; human covers workforce, health & safety, diversity, and talent retention.

Controversial sourcing: UN Guiding Principles on Business and Human Rights (UNGP) and OECD Guidelines for Multinational Enterprises are the reference standards; due diligence is expected, not optional.

Governance red flags: dual-class share structures with unequal voting, related-party transactions, board independence below one-third, and combined chair/CEO roles.

Board effectiveness metrics: size, independence ratio, tenure diversity, gender diversity, committee structure (audit, remuneration, nomination), and meeting attendance.

Say-on-pay and remuneration alignment: link pay to TSR, ESG metrics, and clawback provisions; misalignment is a common engagement escalation trigger.

Tax transparency and corruption: GRI 207 (tax) and the EU Public Country-by-Country Reporting Directive are the reporting anchors.

Social washing risk: diversity claims without pay-gap disclosure, and supply-chain audits without remediation, are common credibility failures.

Just transition: workforce and community impacts of decarbonisation; ESRS S1–S4 and IFRS S1/S2 social disclosures are the reporting hooks.

SFDR (EU) product classification: Article 6 (no sustainability objective), Article 8 (promotes E/S characteristics), Article 9 (sustainable investment objective); Article 8/9 require pre-contractual and periodic disclosures.

SFDR PAI (principal adverse impacts): 14 mandatory indicators for corporates plus 2 for sovereigns, plus opt-in indicators; reported annually.

CSRD (EU) expands non-financial reporting to large and listed companies, with limited assurance and digital tagging (XBRL); ESRS is the reporting standard set.

EU Taxonomy: four conditions for an activity to be 'environmentally sustainable' - substantial contribution, do-no-significant-harm, minimum social safeguards, technical screening criteria.

EU Green Bond Standard and the Corporate Sustainability Due Diligence Directive (CSDDD) extend the regulatory perimeter to issuance and supply-chain due diligence.

ISSB IFRS S1 (general sustainability) and IFRS S2 (climate) are the global baseline; jurisdictions adopt via local endorsement (e.g., UK, Japan, Australia).

SEC climate disclosure rule (2024) requires Scope 1/2 for large filers and material Scope 3 only where material; litigation and stay risk apply.

Anti-greenwashing: FCA Sustainability Disclosure Requirements (SDR) in the UK, and the EU's proposed Green Claims Directive, target unsubstantiated marketing claims.

ESRS architecture: 2 cross-cutting (ESRS 1 general requirements, ESRS 2 general disclosures), 5 environmental (E1–E5), 4 social (S1–S4), 1 governance (G1).

ESRS 1 double materiality: reporting entity must disclose both financial materiality and impact materiality; materiality assessment is the entry gate for each datapoint.

ESRS E1 climate: requires Scope 1, 2, 3, transition plan, and targets aligned with 1.5°C; Scope 3 is phased in with relief for smaller entities.

ISSB IFRS S1/S2: financial materiality only, four-pillar structure (governance, strategy, risk management, metrics/targets), and industry-based guidance from SASB.

Interoperability: ISSB and ESRS share climate disclosure overlap but differ on materiality lens and datapoint granularity; dual reporting is increasingly common.

Stewardship codes: UK Stewardship Code (2020) requires signatories to report on engagement and voting; EU Shareholder Rights Directive II (SRD II) mandates engagement policy disclosure.

Voting and engagement: proxy voting is a fiduciary duty in many jurisdictions; escalation and collaborative engagement (e.g., Climate Action 100+) are standard tools.

Assurance: limited assurance is the current baseline for CSRD; reasonable assurance is the direction of travel, raising data-quality and controls requirements.