Cheat sheets content 6-10 Flashcards
Operational R def
it reflects
potential losses from inadequate or failed internal
processes, systems, human error, or outside events
Categories of Operational R when analyzing С risk
Legal R
Strategic R
Reputation R
Liquidity R def
Liquidity risk is about losing access to liquidity-the ability to
quickly and easily convert assets into cash
Key metrics for liquidity R
Loan-to-deposit ratio
Bid-ask spreads
cross-subsidizing def
“Cross-subsidize” means they use profits from one part of their business to cover losses in another.
Underwriting risk
Underwriting risk = risk of loss from incorrectly assessing the risk of a client or contract, based on info collected during Client Due Diligence (loan, insurance, etc.).
Client Due Diligence VS underwriting
Due diligence = info gathering & checking.
Underwriting = risk evaluation based on that info.
Climate Minsky Moment
Sudden collapse (drop, but not necessarily to 0) of asset values
2 mech of С risk translating into market risk
Asset repricing and dislocation effects
Asset stranding
Key meteric for Climate Market risk
Climate VaR - estimate of C-related financial losses, from both transition and physical R
Sovereign risk def + ex
Sovereign risk is the risk that a government will default on its debt obligations or fail to honor contracts (e.g. from foreign investors). Example - Argentina defaulted multiple times on its sovereign debt
Stranded nation def
Nations heavily reliant on fossil fuels
exports may turn into stranded nations
Which data is needed to assess transition risks?
GHG data
Policy landscapes
Tech changes
Consumer preferences
What data is needed for physical R assessment?
Cur & future physical hazards from hist data & climate models
Toography / location of assets
Info about vulnerability and adaptive capacity
Metrics for portfolio level analysis
GHG emissions / portfolio market value [tCO2e / mil invested]
WACI [tCO2e / mil of revenue]
COSO ERM + 5 components
Committee of Sponsoring Organizations ERM
- Governance & Culture - oversight responsibilities, values, risk culture.
- Strategy & Objective-Setting - business objectives, R appetite + strategy alignment
- Performance -
- Review & Revision - evaluate performance of ERM
- Information, Communication & Reporting & Disclosure - ensure relevant R is captured, shared + used for decision making
3 components for tracking performance for ESG & С risks
- Risk identification - examining the transmission
channels of climate risk drivers into financial risk and then
identifying which of these are the most relevant for a
particular organization. - Risk assessment - gathering data on the actual
scope of these risks (at counterparty level for fin inst) - Risk prioritization - rank these in order of
importance - by likelihood of occurrence, adaptability and complexity, or severity.
5 Risk responses
- Acceptance
- Avoidance
- Pursuit
- Reduction,
- Sharing
Reference scenarios
a set of agreed-upon projections
of global emissions trajectories, with accompanying socio-
economic narratives and estimates for physical impacts
IPCC what it does
Its scenarios are most widely used and agreed upon
Lagging feature of physical risk
physical
outcomes of climate change are practically the same for
the next few decades (until about 2050) regardless of
emissions
Even if we stopped emitting all GHGs today, the Earth would continue to warm slightly for decades, and seas would keep rising.
Net zero def
Drastically reduce GHG emissions across all sectors + neutralize remaining (residual) emissions with carbon removal (like direct air capture, reforestation) — or, often, carbon credits (but you can’t get off with 100% carbon credits)
How are RCPs named? What does this number mean?
based on the amount of radiative
forcing measured in watts/meter squared (m2)
RCP number = radiative forcing (W/m²) at 2100.
Which RCPs are available and which tempeartures do they correspond to?
RCP2.6 → ~1.5–2°C
RCP4.5 → ~2.4–3°C
RCP6.0 → ~3–4°C
RCP8.5 → ~4.3–5°C (or more)
5 SSPs with description
SSP-1 scenario of
significant focus on sustainability;
SSP-2 is a “business as
usual” scenario
SSP-3 regional rivalry between
countries
SSP-4 has a high degree of inequality;
SSP-5 posits fossil-fuel development
Integrated assessment models
The models that can assess the combination of social,
economic, energy, emissions, and climate factors are
called integrated assessment models (IAM)
RCP vs SSP interaction
Not all RCPs are achievable under all SSPs - a high-mitigation scenario is not feasible under the SSP3 “regional
rivalry” assumptions
For example:
- SSP1 + strong climate policy → emissions pathway → RCP2.6
- SSP3 + no climate policy → high emissions → RCP8.5
They are complementary:
SSP = “how the world works and behaves.”
RCP = “climate outcome of that behavior.”.
PACTA + what it is
Paris Alignment Capital Transition Assessment
Paris Agreement temperature formulation
“hold the increase in global average temperature to well
below 2°C above pre-industrial levels” and pursue “efforts
to limit the temperature increase to 1.5°C.”
Race to Zero
7,500 entities joined the
Race to Zero via one of the member alliances and
submitted their respective commitments
NZIA
Net Zero Insurance Alliance - net-zero initiative for insurers and currently brings together
20 companies that jointly represent 11% of the world
premium volume
Consumption-based accounting
accounting methods, which measure the cumulative
emissions that arise from the production of all goods and
services consumed in that country,
Two GHG reporting standards and who developed them
BASIC & BASIC+, developed by GHG protocol
BASIC
GHG reporting standard by GHG protocol
BASIC level emissions inventories cover scope 1 and 2
emissions from stationary energy and trans port, as well as
scope 1 and 3 emissions from waste
Basic +
GHG reporting standard by GHG protocol.
BASIC+ level inventories are significantly more
comprehensive and cover sources such as scope 3
emissions from transboundary transport and scope 1
emissions from agriculture, forestry, and land use
7 characteristics of a transition plan by TCFD
(a) aligned with overall
corporate strategy
(b) anchored in quantitative metrics and targets
(c) subject to an effective governance process
(d) full of actionable, specific initiatives
(e) credible
(f) periodically reviewed and updated
(g) reported annually to stakeholders
7 attributes of net 0 targets
- Front-loaded emission reductions - to minimize cumulative greenhouse gas concentrations and avoid reliance on future
- Comprehensive approach to emission reductions - addressing all emission sources
- Cautious use of carbon dioxide removal - limited reliance on carbon removal technologies
- Effective regulation of carbon offsets - stringent oversight of carbon offset mechanisms for integrity
- Equitable transition to net zero - ensuring that the low-carbon transition considers the needs of all communities
- Alignment with broader socio-ecological objectives - integrating net-zero strategies with wider environmental and social goals
- Pursuit of economic opportunities
- potential for economic growth and innovation in the transition to net zero
Carbon leakage
Carbon leakage happens when efforts to reduce emissions in one country or region lead to increased emissions elsewhere, often because businesses relocate to places with weaker climate policies.
4 key transition risk
Policy & legal
Market
Reputation
Technology
PAT what it is and example
Portfolio Alignment Tools that help investors set targets and assess how aligned their portfolios are with climate goals like net zero
e.g. MSCI Climate VaR
TCFD and what that is
Organization. Developed TCFD recommendations - reporting standard for climate-related fin R and opportunities
- Govnance
- Strategy
- RM
- Metrics / targets
SASB what that is, what it did
Sustainability Accounting Standards Board - ORGANIZATION, now part of ISSB
Created standards for industry-specific sus disclosure (SASB standards)
ISSB what it is and what it did
Organization under IFRS. Creates standards for global sustainability and climate reporting (e.g., IFRS S1 and S2).
ISSB builds on TCFD, that was decomissioned in 2023. Through IFRS S2 standard, ISSB replaced TCFD
GRI - what it is and what it did
Organization. Produces the GRI Standards — the most widely used for general sustainability reporting.
CSRD what it is what it did
Regulation! Law by EU. Corporate sustainability Reporting Directive.
It requires companies to report using ESRS (European Sustainability Reporting Standards).
Climate Risk Assessment VS Climate Risk measurement
Measurement - quantifying the risk (fin metrics, risk drivers, measures). Ex - sea level rise will cost 50mil by 2050.
Assessment - identify potential hazards, likelihood, consequences, vulnerability & exposure. Ex - “our supply chain in Asia is exposed to flood risk”
NGFS - what is is, what it did
Organization. A coalition of central banks & supervisors. Provides climate scenarios, research, and guidance for managing climate-related financial risks.
IFRS S1, what it is and who made it
ISSB standard for general sustainability-related disclosures — governance, risks, strategy, metrics. Broad scope (not only climate).
IFRS S2, what it is and who made it
ISSB standard for climate-related disclosures. Builds on TCFD, fully integrates it and same pillars (Governance, Strategy, Risk Management, Metrics & Targets). Covers emissions, scenario analysis, transition risks, etc.
TCFD VS NGFS
TCFD develops voluntary guidelines for
climate related financial disclosures; NGFS integrates
climate risk management into the financial sector &
develops scenario analysis framework
TCFD VS ISSB
ISSB develops global baseline for
sustainability reporting. Provides specific standards like
IFRS S1. ISSB has included TCFD recommendations too.
ISO 14091
Standard (doc) About how to understand vulnerability and
develop and implement a sound risk-assessment process.
ISO/TR 14092
Technical report, Offers practical guidance for local governments & communities on developing climate adaptation plans. Builds on 14091.
Steps for Physical Risk Assessment by NGFS
Steps in PRA based on NGFS:
1. Define needs and objectives
2. Identify available data and resources
3. Define the scope and approach
4. Generate climate scenario
5. Estimate impact
6. Present and interpret the results
Nature risk def
risks associated with the loss of
natural assets.
2 key aspects of Nature Risk
the business’s dependencies on nature and
its impacts on nature.
Relation btw nature risk and C risk
distinct but interdependent, they can amplify each other
4 pillars of TNFD
- Governance - How nature-related issues are managed and overseen at the board and executive level, decision-making structures, accountability, roles & responsibilities
- Strategy - integrating Nature R into organizational strategy - short/med/long term plans + resilience
- Risk & Impact Assessment - identify & evaluate N-related R
- Metrics & Targets - Disclose quantitative and qualitative indicators on nature-related impacts + targets. E.g. lang use, water consumption
Funding gap
Insufficiency of funds to meet the goal
Transition planning
Process of developing a transition strategy
Transition plan def
Key product of transition planning; an external-facing output; overall strategy with firm’s targets, actions or resources for its transition.
Transition finance
financial products/services to support counterparties realize alignment with sustainability.
GFANZ what it is what it does
Glasgow Fin Alliance for Net Zero - coalition that Brings together financial institutions committed to net-zero by 2050; provides guidance, frameworks, and sector pathways
TPT what it is what it does + 3 guiding principles
Transition Plan Taskforce. UK - Develops best practice guidance for credible private-sector climate transition plans
Ambition - plan has to be ambitious
Action - lay out concrete steps to achieve ambition (milesones, plans, …)
Accountability - governance, oversight, transparency for credible delivery
4 elements of credible net 0 targets by SBTi
- Near-Term Science-Based Targets - 5–10 year emission reduction targets aligned with 1.5°C.
- Long-Term Science-Based Targets - Reduce emissions by at least 90–95% by 2050 at the latest
- Beyond Value Chain Mitigation (BVCM) - Voluntary action to finance climate solutions outside of a company’s value chain
- Neutralization of resid emissions - Permanent removal of residual emissions (5–10%) that cannot be eliminated.
What plays central role in transition plans?
GHG metrics and targets
Carbon reporting
process of documenting and
disclosing GHG emissions by organizations.
Operational boundaries VS organizational boundaries
Organizational - Which entities (subsidiaries, joint ventures, etc.) are included in your GHG inventory - equity share or control approach.
Operational - Which types of emissions you report — categorized by Scope 1, 2, and 3.
Drawbacks of equity approach GHG accounting and control approach GHG accounting
equity - May not fully capture the environmental
impact of a firm’s operations; Could allow firms to
underreport emissions by strategic investment allocation.
control - can lead to double counting (e.g. A has fin control, B has operational control, both report 100% of emissions)
Financed emissions def and which scope is it?
GHG emissions that are attributed to the loans, investments, & financial services offered by financial institutions.
Scope 3, category 15 (Investments) of GHG protocol’s Corporate Value Chain Accounting & Reporting.
Normalization of financed emissions
Converting emissions -> emission intensity
Financed emissions / mil$ revenue
Financed emissions / loan, invested amount [$]
Financed emissions / enterprise value
Attribution factor + example
Proportion of emissions of the
borrower/investee that are allocated to the loan or investments.
Ex: A bank gives a $20 million loan to a company whose total outstanding debt + equity is $100 million.
The company emits 10,000 tCO₂e per year. The financed emissions are 2,000, bc the attribution factor is 0.2
Data Quality Scores
Categorizes GHG emissions
data quality on a scale from 1 (Best) to 5 (Worst).
Score 5: Error Margin (EM) 5-10%; Estimated data.
Score 4: Proxy data based on regional / country average.
Score 3: Averaged sector-specific data; More uncertain.
Score 2: Based on primary data but not audited
Score 1: Most reliable and audited.
How many SDGs and targets?
17 + 169.
