climate change

Question 1

what is the definition of climate change

Answer 1

Variations in weather conditions from the norm over long period of time

Question 2

physical risk (acute)

Answer 2

extreme weather conditions leading to a loss in bank operations or supply chains that create a financial loss

Question 3

Physical risk (chronic)

Answer 3

long term changes in weather such as changing temperatures and rising sea levels that pose risk to the banks financial loss

Question 4

transnational risk

Answer 4

transitioning into a low carbon economy

Question 5

how can regulators pose a transitional risk

Answer 5

• policies imposed by regulators can affect how companies transitions the can affect profitability of the company - banks may have to adapt balance sheets to mee this criteria

Question 6

how transnational risk occurs through technology changes

Answer 6

• technologies can affect the bank by changing operating methods - companies such as oil companies may have demand fall due to new technologies supplying clean energy

Question 7

how transition risk occurs through market risk

Answer 7

• the affect of climate change on market, making assets more/less valuable can impact a bank. For example the bank could hold securities in certain companies but due to the high carbon emission it may reduce the price of these securities

Question 8

how transitions risk occurs through reputational risk

Answer 8

• if a company has a poor reputation in terms of polluting and the climate change contribution, it may change customer preference affecting their ability to pay back loans

Question 9

how transaction risk occurs through litigation

Answer 9

banks may not follow regulatory policies making them accountable and facing legal trouble - this is the same for businesses as they may face legal trouble for not following certain polices that can affect the companies repayment obligations

Question 10

how physical risk occurs the liability through

Answer 10

• banks offer many types of insurance - if a place that is prone to natural disaster is hit, this could mean big legal pay-outs by the bank

Question 11

how physical risk occurs through operational risk

Answer 11

• physical risk - if hit by a natural disaster this mean the company may not be able to efficiently operate

Question 12

assessing climate risk (step 1)

Answer 12

identifying and recognising potential risk - e.g. physical, transitional, liability, market… and mapping these to relevant banking activities

Question 13

assessing climate risk (step 2)

Answer 13

measuring risk - quantifying risk and exposure by collecting relevant data e.g. geographical, industry, emissions, regulatory compliance

Question 14

assessing climate risk (step 3)

Answer 14

simulate test that demonstrate intense events surrounding the climate to see how the bank withstands the pressure financially - after this it allows you to identify areas of improvement

Question 15

assessing climate risk (step 4)

Answer 15

scenario testing - more for longer term evaluation - this can be exposure to certain occurrences e.g. rising sea levels, temperature rises to see how it affects the banks financials, liquidity and risk profile

Question 15

assessing climate risk (step 5)

Answer 15

carbon foot print analysis - look at the banks portfolio exposure to more high risk investments and seeing if it aligns with their risk profiles

Question 16

assessing climate risk (step 6)

Answer 16

incorporate risk into their overall risk management frameworks, including other affected risk e.g. credit, market, operational, liquidity

Question 17

managing climate risk 1

Answer 17

internal management frameworks

integrate changes into risk management internally by developing governance and addressing issues across the organisation
Establish roles and responsibilities to managers

Question 18

managing climate risk (2)

Answer 18

enhance risk identification

Use robust methods to identify risks and develop geographical and sector specific knowledge to understand risk
Monitor emerging trends that pose risk

Question 19

managing climate change (3)

Answer 19

Reduce exposure to high risk

Assess banks exposure to high risk industries and assets
develop strategies to reduce exposure and move to lower risk industries

Question 20

managing climate change (4)

Answer 20

promote green financing

expand oppitunities for green projects and develop green products such as loans

also help companies to transition to a more green future

Question 21

managing climate change (5)

Answer 21

become more transparent
preform recommendation from regulatory bodies and make these efforts transparent which can lead to investor confidence

Question 22

managing climate change (6)

Answer 22

embed climate change into the culture of the company

encourage climate change efforts to come from the top and encourage employees to adopt sustainable activity into their daily activities

Question 23

Task Force on Climate-related Financial Disclosure (TCFD)

Answer 23

established in 2015 by the Finical Stability Board (FSB) to develop voluntary climate related finical disclosures

Question 24

Network for Greening the Financing System (NGFS)

Answer 24

Launched in 2017 by 8 central banks and regulators to contribute to climate risk management in the finical sector

Question 25

Climate Financial Risk Forum (CFRF)

Answer 25

Established by the BoE and collaborate with the Financial Conduct Authority (FCA)

Question 26

assessing climate rate risk (5)

Answer 26

1. identifying type of risk
   2 measuring the risk
2. simulate the risks
3. scenario analysis
4. carbon print analysis

Question 27

managing climate rate risk (6)

Answer 27

1. Internal management frameworks
2. enhance risk identification
3. reduce exposure to high risk areas
4. promote green financing and sustainability
5. become more transparent
6. embed climate change into the culture of the company