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Extensive lecture summary Sustainable Finance & Investments (grade 7.5)

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Course
Sustainable Finance and Investments

Institution
Vrije Universiteit Amsterdam (VU)

Extensive summary for the course Sustainable Finance and investments at Vrije Universiteit. This summary helped me to get an grade 7.5/10 at the exam. The course is given at VU by F Hamelink.

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Uploaded on September 13, 2023
Number of pages 54
Written in 2022/2023
Type Class notes
Professor(s) F hamelink
Contains All classes

sustainable finance
finance
investments
financial management
master
vrije universiteit

Institution
Vrije Universiteit Amsterdam (VU)
Education
Financial Management
Course
Sustainable Finance and Investments

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Lecture 1: climate risk
Planetary boundaries:
1. Climate change
2. Ocean acidification
3. Ozone layer
4. Forest degradation
5. Agrochemical pollution
6. Freshwater overuse
7. Biodiversity loss
8. Air pollution
9. Toxic waste

Planetary boundaries paper
{Knowledge gaps remain to implement framework. May require combined approach global
and regional boundary estimates. Not enough knowledge on all. No boundary can be
transgressed for long periods without jeopardizing safe operating space (other boundaries).
Current governance and management paradigms are often oblivious or lack mandate on
thee risks. Humanity already has transgressed climate, biodiversity and nitrogen à
uncertainty of huge environmental change???
Complexities of interconnected slow and fast processes and feedbacks in Earth Sytesm
provide humanity with challenging paradox – resilience of Earth staying in state conducive
to human development <-> false state – incremental change can lead to unexpected
crossing of thresholds to catastrophic states. }

Wasteful, Idle, Lopsided, and Dirty model (WILD): problems of our current model à
circularity gap (only 9% resources is recycled material)

WILD economy is dysfunctional and fails to recognise its own self-destructive nature.
Our economy is moving towards escalating climate damage and rampant destruction of
natural capital, our most valuable productive asset. Self-destructive issues:
1. Failure to price carbon à fail to meet climate target
2. Ignore natural capital à annual eco-system flows destroyed à destruction most
basic capital asset

Structural trends
Transformative effect on economies and firms that drive them:
- Demographics
- Natural resources
- Climate change
- Inequality
- Digital revolution
Transition creates great opportunity and great risk
We have to adapt, innovate and rethink our approach to investment

Fundamentally rethink approach to many establish norms
- Transport
- Food system

1

, - Education
- Healthcare
No country, sector, company or asset class will be untouched

Pressure for change
Acceleration of Sustainability Revolution is forcing companies to adapt
- Social consciousness: expressed through consumer preferences and voting patterns
- Political agenda: focus on sustainability results in rapid implementation of new
regulation.
o roadmap for future policy direction (paris agreement)
o Firms affected directly and indirectly
- Investors’ focus: invest along ESG principles and understand driving value and
directing capital flow to sustainable firms

Three key systems
Must transform these systems to remain within planetary boundaries
1. Energy – greening supply and demand, flexibility and demand management –
hydrogen economy
2. Nature – climate smart production, sustainable consumption, enabling tech –
nature-based solutions and service (food and land use)
3. Materials – circularity – circular inputs, optimal material use, waste to value – green
materials and minerals
Carbon – reduce emission – target net zero

From WILD à CLIC (clean, lean, inclusive, circular)
- Policy and regulation: co2 emission costly – new regulation increasingly focused on
circularity, nature equality and net-zero – new and stronger targets
- Consumer demand: real risk for laggards – consumer and employees demand that
firms adopt sustainable solutions and practices – rising awareness
- Market forces: CLIC wins economic battle – technological innovation and economies
of scale are driving down the costs of CLIC solutions and increasing adoption –
cleaner becomes cheaper
- Investors: ability to assess companies – force to report business implications of
transitioning to CLIC and physical risks – redeployment of capital

CLIC:
1. IDLE à LEAN
Waste reduction policies, emergence of sharing-based business models, resilience to
physical climate risk, efficient consumption and rationalisation of physical asstes
2. DIRTY à CLEAN
Net-zero emissions future, reliance on renewable energy and energy efficiency,
electrification, sequestration and pollution controls
3. WASTE à CIRCULAR
Design for repair, re-use and redistribution of products, producer accountability for
end-of-life flows, effective collection and local recycling systems
4. LOPSIDED à INCLUSIVE

2

, Promote upwards movements through education and fair wages, support for
property ladder, planning ahead for changes from AI (DIGITALISATION)

Paris agreement: legally binding international treaty on climate change. Its goal is to limit
global warming.

Lecture 2: implementing sustainability
How companies are operating: ESG Ratings and Metrics
Three lenses:
- HOW – business practices – ESG meet best practice standards – company mindset
- WHAT – business models – is firm transitioning activities to environmental limits
while meeting societal pressures – alignment to transition trajectories
- WHERE – firms assets, or supply chain exposed to physical risks

For comprehensive analytics:
- Conventional (raw and public data)
- Proprietary research: combine business practices and impact, complement missing
information (analysts, reports, big data, AI)
- Multi-year data history allows for back-testing; improving perspective on progressive
action/results over time to determine between ‘talkers’, ‘doers’ and achievers

Sustainable Development Goals (SDGs) - 2015
- SDG to achieve better and more sustainable future for all. Addresses global
challenges including those related to poverty, inequality, environmental
degradation, prosperity and peace and justice.
- All UN members: universal call to action to end poverty, protect planet and ensure
all people enjoy peace and prosperity by 2030 (3Ps)
- 17 SDGs integrated – recognise that action in one will affect outcomes in other and
development must balance social, economic and environmental sustainability.

No poverty Zero hunger Good health and well- Quality education
being
Gender equality Clean water and Affordable and clean Decent work and
sanitation energy economic growth
Climate action Reduced inequality Industry, innovation and Sustainable cities
infrastructure and communities
Life below water Peace and justice Responsible consumption Partnerships to
And on Land strong institutions and production achieve the Goal

Assessment tool set: data and method
- Long-term metric à proprietary ESG scores – rates firm business practise
- Short-term metric à level of controversies – measure of firm perception
- Impact metric à intensity of carbon emission and water consumption

Controversies level
- Levels of incidents from 0 (none) to 5 (crime)
- Levels 4 and 5 is reputation damage

3

, - Level 3 to 5 is financial risk
- Low ESG score higher probability controversies
Mid-Cap, returns become lower and lower especially when scored 4 or 5

Stewardship: active ownership of firms helps them to address risk and transition towards
more sustainable business models
- Document interactions with companies
- Evaluate and record response to concerns (objectives)
- Communicate progress and outcomes to clients (with voting)

What companies are doing: Sustainability business models
- Looking at ESG is skewed and incomplete picture
o Integrate analysis of business models and locations fundamentally
- To meet the target electricity low carbon, electric cars dominance, exiting building
stock retrofitted and CO2 intensity 80% down
- Investments are estimates to have net positive impact on economic growth
Companies have broad-based / environmental / social / governance initiatives

Transition Pathway Initiative (TPI)
- Global, asset-owner led, assessing firm preparedness for transition to low carbon
economy
- ESG integration (align portfolio), active ownership, voting, exclusion, product
creation

Where companies are operating: Physical risk
- Global risks: Economic (disparity, unemployment), environmental (weather, natural
disasters, gas emissions), geopolitical (terrorists, governance, conflicts), societal
(migration, water crises, aging) and technological (cyberattacks, fraud)

Types of physical risk:
- Coastal flood (exacerbated by sea level rise)
- Tropical cyclone (hurricane and typhoon)
- Extreme participation
- Drought
- Wildfire
- Flood
- Extreme heat
- Landslide
- Water scarcity and stress

A changing climate could impact socioeconomic systems:
- Liveability and workability
- Food systems
- Physical assets
- Infrastructure services

4

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