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This page contains a suggested solution to a 2013 MCT exam question, together with extracts from an article that appeared in ''The Treasurer'' in February 2015.
''Environmental risk management - Conference of the Parties.''


''With many thanks to Will Spinney and Kerry Attwell-Thomas for providing the suggested solution and other valued advice.''
(CCAC).


'''Author: [https://www.linkedin.com/in/chadofficial/ Charitarth Sindhu]'''', Environmental Sustainability & ESG Consultant.


====Strategic partner====
The Climate and Clean Air Coalition stands as a global initiative combating climate change, formed voluntarily in 2012 by nations such as the United States, Canada, Mexico, Sweden, Ghana, and Bangladesh, in partnership with the United Nations Environment Programme (UNEP). Presently, it comprises more than 160 government and non-state members, united in their mission to combat short-lived climate pollutants, often referred to as '''super pollutants or forcers'''.


To become a good treasurer, you need deep financial understanding and analytical skills, along with the ability to communicate your expert advice to an audience of senior non-specialists.  
Non-CO2 super pollutants, including methane, black carbon, and Hydrofluorocarbons (HFCs), possess a brief lifespan in nature. Although their annual emissions are significantly lower than CO2, they contribute to 40% of the greenhouse effect, resulting in global warming. Due to their substantial impact and short lifespan, reducing the emissions of super pollutants holds the potential to swiftly mitigate global warming.


A great way to improve your ability to explain financial matters is to apply your knowledge to real life scenarios.  This is the unique strength of studying for the ACT’s higher level qualifications.
The CCAC actively works to reduce these potent, short-lived pollutants through immediate actions, aligning with the objectives of the Paris Agreement. Furthermore, it aims to support global economic development, health objectives, and food security goals through the following strategies:


'''Collaboration with major short-lived climate polluters''' and other stakeholders from around the globe to support, empower, and catalyse emission reduction action.


Higher level qualifications progress the knowledge, comprehension and application skills you have already learnt. The focus at this level is on analysis, synthesis, evaluation and effective communication.  
'''Enhancement of technological and administrative capabilities''' to facilitate the exchange of information, experiences, and skills, fostering climate change mitigation actions.


This means looking at everything you already know from another perspective.  
'''Advocacy''' for the inclusion of short-lived climate pollutants in policy discussions at all levels of government, businesses, and civil societies.


You learn to:
'''Mobilization of financial resources''' to facilitate the effective implementation of transformative and replicable actions.


- Formulate, select and justify solutions
'''Advancement of scientific understanding''' to assist decision-makers in scaling up actions and highlighting the numerous benefits of addressing short-lived climate pollutants.


- Communicate effectively, in writing and in person, with colleagues, senior management and other stakeholders
The CCAC's initiatives have yielded notable successes, such as '''the reduction of hydrofluorocarbons (HFCs)''' used in refrigeration and air conditioning. The global warming potential from releasing a single 30-pound HFC tank is equivalent to the CO2 emitted by driving over 14 additional cars annually. The coalition played a crucial role in the Kigali Amendment to the Montreal Protocol, aiming to decrease HFC production and consumption by 80% before 2046.


- Confidently recommend action and change
Additionally, the CCAC serves as the secretariat for the '''Global Methane Pledge''', launched at COP26 in 2021. With member governments representing over 50% of global human-caused methane emissions, these members commit to voluntary national actions, aiming to reduce collective methane emissions by 30% below 2020 levels before 2030. To support this ambitious pledge, the CCAC introduced the Methane Roadmap Action Programme (M-RAP), facilitating coordinated and accelerated progress in identifying and developing relevant methane-targeted measures and supporting policies.


The CCAC stands as a testament to the effectiveness of international collaboration in addressing the intricate challenges posed by climate change. By emphasizing practical and immediate solutions, the coalition significantly contributes to the broader efforts to combat climate change, serving as a model for effective and inclusive climate action.


====MCT taster====


Here is a 2013 MCT question which applies the strategic and tactical financial decision making skills you need to become a trusted adviser at the highest level.
== See also ==
* [[Biodiversity]]
* [[Carbon credits]]
* [[Carbon dioxide]]
* [[CBD COP 15]]
* [[Climate and Clean Air Coalition]]  (CCAC)
* [[Climate change]]
* [[Climate change: testing the resilience of corporates’ creditworthiness to natural catastrophes]]
* [[Climate change adaptation]]
* [[Climate change mitigation]]
* [[Climate finance]]
* [[Climate risk]]
* [[Conference of the Parties]]
* [[Conference of the Parties - historical milestones]]
* [[Convention on Biological Diversity]]
* [[COP27]]
* [[COP28]]
* [[COP29]]
* [[Developing country]]
* [[Ecosystem services]]
* [[Emissions]]
* [[Fossil fuel]]
* [[Fund]]
* [[Global Cooling Pledge]]
* [[Green Climate Fund]]
* [[Greenhouse gas]]
* [[G7]]
* [[Hydrocarbons]]
* [[Kyoto Protocol]]
* [[Loss and damage]] 
* [[Methane]]
* [[Nationally determined contribution]]  (NDC)
* [[Net zero]]
* [[New Collective Quantified Goal]]  (NCQG)
* [[Paris Agreement]]
* [[Ratification]]
* [[REDD+]]
* [[Risk management]]
* [[Super pollutants]]
* [[Transition]]
* [[Transparency]]
* [[Treaty]]
* [[United Nations Conference on Trade and Development]]  (UNCTAD)
* [[United Nations Framework Convention on Climate Change]]  (UNFCCC)
* [[Voluntary carbon markets]]  (VCM)
* [[V20]] 
* [[World Bank]] 


::Your company has just negotiated a £100m 10-year LIBOR linked credit facility to fund a step increase in production capacity. The loan amortises in equal instalments from year 6 to year 10, as for similar loans in the past.


::The company’s policy for interest risk management in these circumstances is to swap to fixed at the outset in order to protect the project return, so the return has been calculated on the basis of hedging at the current 10-year swap rate.
==External Links==
*[https://www.americanprogress.org/article/super-pollutants-101/ Super Pollutants 101]
*[https://www.unep.org/explore-topics/climate-action/climate-and-clean-air-coalition-ccac/ UNEP’s CCAC Page]
*[https://www.ccacoalition.org/sites/default/files/resources/M-RAP%20Roadmap%20Template%20Guidance%20-%20Working%20Final.pdf/ M-RAP Roadmap]


::The finance director believes that interest rates will continue at the current low level for some time to come and therefore is in favour of postponing a fix for the new facility, contrary to past practice.
[[Category:Accounting,_tax_and_regulation]]
[[Category:Identify_and_assess_risks]]
[[Category:Risk_frameworks]]
[[Category:The_business_context]]


::Before sharing this belief with the chief executive the finance director seeks your advice, as treasurer, about how to implement his view without taking undue risk. Of particular concern is the need for a monitoring system to flag when action to hedge might be necessary.
[[Category:Accounting,_tax_and_regulation]]
 
[[Category:Identify_and_assess_risks]]
::Current interest rate data:
[[Category:Risk_frameworks]]
::LIBOR: 3 months = 0.5%
[[Category:The_business_context]]
::Swap rate: 10 year = 2.0%
 
::'''Required:
 
::'''Would you support the finance director in their preference to postpone the hedge? Explain your decision.'''''
 
<div style="text-align: right; direction: ltr; margin-left: 1em;">''(MCT General Exam, October 2013, Q4 extracts)''</div>
 
====Suggested solution====
 
=====Quantum=====
 
The issue seems to be a simple decision around whether interest rates will rise over the period of the loan so that paying a lower floating interest rate now would be cheaper in the long run than fixing now for the period of the loan.
 
The magnitude of the difference is £1.5 million in years one to six, shrinking thereafter until year 10.
=====Other issues=====
 
The issues around this question are, however, wider than this.
*Is this loan part of a larger portfolio of loans? If so, then it would seem that all of those are fixed and so having some floating rate debt would balance the risk better. The overall portfolio risk should be considered rather than the risk on an individual loan. It seems that there are other loans in the portfolio because of the prior policy on fixing.
*Loans are not usually identified with particular projects and it is overall capital structure that should be considered when evaluating projects. If the projects are non-recourse then different approaches may be required.
*Is company profitability affected by interest rates, which are usually set around the economy? If the economy does well, profitability might rise, thus offsetting any rise in cost on this loan and enjoying low cost at a time of low activity.
*What is the appetite for interest rate risk?
*Is the company at risk of breaching covenants so that paying a higher rate may risk a default in a loan? In the same vein are there short term pressures on earnings which should be considered (of course treasurers take a longer term view)?
*Is there any cash on the balance sheet, or might there be over the life of the loan which might attract interest at floating rates, thus offsetting any rises in rates?
 
When those questions are answered then the decision can be properly addressed.
 
=====Interest rates=====
 
Let’s suppose it comes down to a view on interest rates.
In theory, the two interest rates are economically equivalent, so that the market expects rates to rise beyond 2% over the life of the fix to exactly compensate between the two choices. Therefore any decision one way or the other hinges around whether you believe the market is right or wrong.
 
One question that could be posed to the finance director is ‘why do you know better than the market?’ Should anyone in the firm be speculating?
However, the market has not performed well with implied future interest rates over the last few years. The market has consistently predicted rises in interest rate rises which have not transpired. It might be reasonable to suppose that it is also wrong now.
We could consider interest rate options, but these will include a cost beyond interest and will depend on volatility. One possibility is to mimic an option approach, which would be to fix half of the loan. However, in that case, future action to fix more or less over time, should strictly be undertaken.
 
This is a delta hedging approach.
=====Monitoring=====
 
The finance director specifically asks about monitoring and monitoring resembles this delta hedging approach. It anticipates a choice of floating rate. Thus, suppose the yield curve mathematics shows that the market expects rates to rise to 0.75% after one year. So if rates rise to 0.75% before one year then a move should be made to fix, because the market is rising quicker than expected.
 
If on the other hand, rates have not risen that far by then, then floating was the right call.
 
This monitoring and possible changes to hedging are ongoing, difficult and expensive and should be considered in the overall costs of funding.
=====Recommendation=====
 
In conclusion, the wider context of the firm and perhaps peer group should be considered before a decision is taken. 
 
However, all things being equal, a postponement of hedging or partial hedging with subsequent delta hedge adjustments is a preferred course.
 
 
 
 
 
== See also==
* [[MCT]]
* [[Swap]]
* [[LIBOR]]
* [[AMCT]]

Revision as of 16:56, 28 January 2024

Environmental risk management - Conference of the Parties.

(CCAC).

Author: Charitarth Sindhu', Environmental Sustainability & ESG Consultant.

The Climate and Clean Air Coalition stands as a global initiative combating climate change, formed voluntarily in 2012 by nations such as the United States, Canada, Mexico, Sweden, Ghana, and Bangladesh, in partnership with the United Nations Environment Programme (UNEP). Presently, it comprises more than 160 government and non-state members, united in their mission to combat short-lived climate pollutants, often referred to as super pollutants or forcers.

Non-CO2 super pollutants, including methane, black carbon, and Hydrofluorocarbons (HFCs), possess a brief lifespan in nature. Although their annual emissions are significantly lower than CO2, they contribute to 40% of the greenhouse effect, resulting in global warming. Due to their substantial impact and short lifespan, reducing the emissions of super pollutants holds the potential to swiftly mitigate global warming.

The CCAC actively works to reduce these potent, short-lived pollutants through immediate actions, aligning with the objectives of the Paris Agreement. Furthermore, it aims to support global economic development, health objectives, and food security goals through the following strategies:

Collaboration with major short-lived climate polluters and other stakeholders from around the globe to support, empower, and catalyse emission reduction action.

Enhancement of technological and administrative capabilities to facilitate the exchange of information, experiences, and skills, fostering climate change mitigation actions.

Advocacy for the inclusion of short-lived climate pollutants in policy discussions at all levels of government, businesses, and civil societies.

Mobilization of financial resources to facilitate the effective implementation of transformative and replicable actions.

Advancement of scientific understanding to assist decision-makers in scaling up actions and highlighting the numerous benefits of addressing short-lived climate pollutants.

The CCAC's initiatives have yielded notable successes, such as the reduction of hydrofluorocarbons (HFCs) used in refrigeration and air conditioning. The global warming potential from releasing a single 30-pound HFC tank is equivalent to the CO2 emitted by driving over 14 additional cars annually. The coalition played a crucial role in the Kigali Amendment to the Montreal Protocol, aiming to decrease HFC production and consumption by 80% before 2046.

Additionally, the CCAC serves as the secretariat for the Global Methane Pledge, launched at COP26 in 2021. With member governments representing over 50% of global human-caused methane emissions, these members commit to voluntary national actions, aiming to reduce collective methane emissions by 30% below 2020 levels before 2030. To support this ambitious pledge, the CCAC introduced the Methane Roadmap Action Programme (M-RAP), facilitating coordinated and accelerated progress in identifying and developing relevant methane-targeted measures and supporting policies.

The CCAC stands as a testament to the effectiveness of international collaboration in addressing the intricate challenges posed by climate change. By emphasizing practical and immediate solutions, the coalition significantly contributes to the broader efforts to combat climate change, serving as a model for effective and inclusive climate action.


See also


External Links