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CESGA: Environmental Factors and Climate Risk

CESGA · Work through your exam, one topic at a time.

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Environmental Factors and Climate Risk

This domain tests climate and environmental risk measurement: distinguishing physical from transition risk, calculating emissions metrics correctly, and applying scenario analysis to investments.

Core rules

  • Physical risk is acute (flood, wildfire, storm) or chronic (heat stress, sea-level rise, water scarcity). Transition risk arises from policy, technology, market and reputational change.
  • GHG accounting. Scope 1 is direct; Scope 2 is purchased energy; Scope 3 is value-chain emissions. Use the GHG Protocol and report tCO2e, not tCO2.
  • Portfolio metrics. Financed emissions attribute company emissions by ownership or lending share (PCAF). WACI is financed emissions divided by portfolio value, expressed per €1m invested. Carbon intensity uses revenue or EVIC as denominator; the choice must be consistent.
  • Scenarios. NGFS and IEA scenarios test transition pathways; RCP/SSP scenarios test physical hazards. TCFD’s four pillars are governance, strategy, risk management, and metrics and targets.
  • Beyond carbon. Water, biodiversity, pollution, waste and deforestation can be material, especially in utilities, food, mining and textiles.

Worked example

A €200m fund holds 5% in a company with 200,000 tCO2e Scope 1+2 emissions and €50m revenue. Financed emissions = 5% × 200,000 = 10,000 tCO2e. WACI contribution = (10,000 ÷ €200m) × €1m = 50 tCO2e per €1m invested. The company’s carbon intensity is 200,000 ÷ 50 = 4,000 tCO2e per €1m revenue. Reasoning: attribution uses the fund’s ownership share; the WACI denominator is portfolio value, not company revenue. If Scope 3 were added, state the boundary and avoid double counting across holdings.

Traps that cost marks

  • Mixing tCO2 and tCO2e, or gross and net emissions.
  • Double-counting Scope 3 across portfolio companies.
  • Using revenue and EVIC denominators interchangeably.
  • Treating a 2030 target as evidence of a 1.5°C-aligned pathway.
  • Ignoring chronic physical risk because it is slow-moving.
  • Reporting avoided emissions without a transparent baseline.