Brainie Series Chapter 3: Environmental Factors

Environmental decision - making requires the navigation of both factual considerations (about what is likely to happen) and normative considerations (about what conditions of the world are desirable or acceptable).

Chapter 3: Environmental Factors

For investors, gaining an appreciation of the evolving policies, technologies, and consumer preferences regarding sustainability can support the pursuit of profitable investments and help prevent losses in investment value. Thus, chapter 3 in the CFA Institute curriculum gives a thorough understanding of environmental factors including systemic relationships, material impacts, megatrends and approaches to environmental analysis at country, sector and company levels.

The chapter starts off by explaining key concepts relating to climate change, including climate change mitigation, climate change adaptation, and resilience measures as well as pressures on natural resources, depletion of natural resources; water; biodiversity loss; land use and marine resources; pollution; waste; and a circular economy.

The chapter then addresses the systemic relationships between business activities and environmental issues and the relationship between natural resources and businesses. Apart from  the characteristics of these relationships, the chapter also looks at climate risks on the financial system.

International climate and environmental policy is particularly important in times of increasing globalization because many environmental problems, particularly climate change and loss of biodiversity, extend beyond national borders and can be solved only through international cooperation. Thus, this chapter assesses how megatrends influence environmental factors; environmental and climate policies; international climate and environmental agreements and conventions; international, regional, and country-level policy and initiatives; carbon pricing.

Other topics tackled in this chapter are approaches to environmental analysis and how to apply material environmental factors to financial modeling, ratio analysis, and risk assessment.

Lastly the chapter closes off by addressing how companies and the investment industry can benefit from opportunities relating to climate change and environmental issues: the circular economy, clean and technological innovation, green and ESG-related products, and the blue economy.

Brainie Series

Check out The Brainie Series, on our YouTube channel which is a series of 9 videos, each covering a chapter of the CFA ESG or CFA Institute Certificate in ESG Investing curriculum. Our goal with these videos is to provide you with additional guidance and help you pass your CFA ESG exam.