Ch. 6 Flashcards
What is risk management?
a structured approach to monitoring, measuring, and managing exposures to reduce the potential impacts of uncertain occurrences
What is climate risk at the micro level?
individual firms and households can be impacted by property damage, business interruption, loss of income, changes in demand, and declines in asset valuation through asset stranding.
What is climate risk at the macro level?
shifts in prices, changes in productivity, socioeconomic changes, or labor-market frictions. All of these can then cause financial risks to manifest.
What is credit risk?
the creditworthiness or ability a borrower has to pay back a loan
What are the key metrics for gauging credit risk?
Probability of default (PD) and loss given default (LGD); specifically for banks, exposure at default (EAD)
What are a few ways that climate risk can translate to credit risk (otherwise known as transmission channels)?
operational risk; valuation effets/asset stranding; pricing effects
What is liquidity risk?
losing access to liquidity—the ability to quickly and easily convert assets into cash.
What are the key metrics for liquidity risk?
loan-to-deposit ratios (specifically for banks) and bid-ask spreads (specifically for markets)
What are the key metrics for underwriting risk?
changes in insurance premiums and the availability of insurance
What is a Minsky moment?
a sudden, major collapse of asset values
What are the key metric in market risk?
Value at Risk (VaR), or the climate version thereof, climate VaR (CVaR)
How is VaR measured?
A standard way of calculating VaR is to take an estimated profit-and-loss probability density curve of an investment or portfolio and then look at the lowest 5% of the distribution to estimate tail risk
What are corporate carbon footprints?
carbon emissions data
What is corporate alignment?
the degree to which companies have solid and credible plans to reduce emissions in the future and to ultimately align their corporate emissions trajectories with national and international goals
What are temperature scores in the context of company-level transition risk data?
a shorthand way of understanding what level of warming a company’s plans are aligned with
What are two common metrics for assessing portfolio-level transition risks?
carbon intensity (expressed in tons CO2e/USD mil. revenue) and weighted average carbon intensity (expressed in tons CO2e/USD mil. revenue).
What is enterprise risk management (ERM)?
comprehensive approaches to managing risk across and within an organization, such as a large corporation
What is SWOT analysis?
strengths, weaknesses, opportunities, threats; uses a two-by-two matrix to compare the (internal) strengths and weaknesses, (external) opportunities, and threats an organization is facing, and it is commonly used for strategic planning
What is impact and dependency mapping?
impact and dependencies are described in terms of stock and flow in relation to various types of capital, not only financial capital but also natural, human, and physical capital, among others
What is materiality assessment?
it allows companies to assess the relative importance of various climate risk and other sustainability risk drivers
Who in a financial institution is increasingly tasked with being the first to evaluate climate risk in transactions?
Transaction decision-makers, such as portfolio managers or relationship manager
