Ch. 6

Question 1

What is risk management?

Answer 1

a structured approach to monitoring, measuring, and managing exposures to reduce the potential impacts of uncertain occurrences

Question 2

What is climate risk at the micro level?

Answer 2

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.

Question 3

What is climate risk at the macro level?

Answer 3

shifts in prices, changes in productivity, socioeconomic changes, or labor-market frictions. All of these can then cause financial risks to manifest.

Question 4

What is credit risk?

Answer 4

the creditworthiness or ability a borrower has to pay back a loan

Question 5

What are the key metrics for gauging credit risk?

Answer 5

Probability of default (PD) and loss given default (LGD); specifically for banks, exposure at default (EAD)

Question 6

What are a few ways that climate risk can translate to credit risk (otherwise known as transmission channels)?

Answer 6

operational risk; valuation effets/asset stranding; pricing effects

Question 7

What is liquidity risk?

Answer 7

losing access to liquidity—the ability to quickly and easily convert assets into cash.

Question 8

What are the key metrics for liquidity risk?

Answer 8

loan-to-deposit ratios (specifically for banks) and bid-ask spreads (specifically for markets)

Question 9

What are the key metrics for underwriting risk?

Answer 9

changes in insurance premiums and the availability of insurance

Question 10

What is a Minsky moment?

Answer 10

a sudden, major collapse of asset values

Question 11

What are the key metric in market risk?

Answer 11

Value at Risk (VaR), or the climate version thereof, climate VaR (CVaR)

Question 12

How is VaR measured?

Answer 12

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

Question 13

What are corporate carbon footprints?

Answer 13

carbon emissions data

Question 14

What is corporate alignment?

Answer 14

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

Question 15

What are temperature scores in the context of company-level transition risk data?

Answer 15

a shorthand way of understanding what level of warming a company’s plans are aligned with

Question 16

What are two common metrics for assessing portfolio-level transition risks?

Answer 16

carbon intensity (expressed in tons CO2e/USD mil. revenue) and weighted average carbon intensity (expressed in tons CO2e/USD mil. revenue).

Question 17

What is enterprise risk management (ERM)?

Answer 17

comprehensive approaches to managing risk across and within an organization, such as a large corporation

Question 18

What is SWOT analysis?

Answer 18

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

Question 19

What is impact and dependency mapping?

Answer 19

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

Question 20

What is materiality assessment?

Answer 20

it allows companies to assess the relative importance of various climate risk and other sustainability risk drivers

Question 21

Who in a financial institution is increasingly tasked with being the first to evaluate climate risk in transactions?

Answer 21

Transaction decision-makers, such as portfolio managers or relationship manager