Climate Models And Scenario Analysis

Question 1

What is the definition of a scenario analysis?

Answer 1

Practice of planning by examining potential impacts and outcomes of future events

Scenario analysis can be used to further bolster corporate preparedness in the face of physical and transition risks. It is now becoming integrated into asset allocation and investment decisions

Question 2

Which of these companies are the starting point to understanding the role of scenario analysis?
1. Basel Committee on Banking Supervision
2. Network for Greening the Financial System
3. Taskforce on Climate-related FInancial Disclosures
4. World Resources Institute

Answer 2

(3) TCFD

Question 3

What other situations can scenario analysis be used?

Reference

Answer 3

In reference scenarios, which are customised firm-specific scenarios against a standard, cross-comparable

Question 4

Which body establishes the sector-specific pathways?
1. TCFD
2. IPCC
3. WRI
4. SASB

Answer 4

(2) IPCC

The IPCC is the main body, but there are other bodies such as the IEA and other NGOs that are also widely used

Question 5

Prompt

Give 2 examples

Why are the reference scenarios by the IPCC so useful for companies?

Answer 5

1. Cross comparability
2. Can be used to cover the gaps for a particular time frame, sector, or area of interest

Question 6

True or false

Scenario analysis for both transition risk and physical risk is the same

Answer 6

False

They vary significantly.

For transition risk, scenario analysis will focus on whether their facilities, strategies, and portfolios align with the global projected emissions trajectory. Will also look at the effects of climate policy tightening

For physical risks, will plug in emissions trajectories to produce estimates of temperature rise, precipitation, weather extreme etc

Question 7

How can scenario analysis help companies with physical risks?
1. To identify socioeconomic pathways which they are aligned on
2. To improve the firms’ preparedness and resilience
3. To identify the policy landscape and if there will be any effects from the tightening of policies
4. To establish gaps in their strategy

Answer 7

(2) To improve the firms preparedness and resilience

Question 8

True or false

There is not a big difference for companies and FIs for continued flat (ie: BAU) compared with hitting net-zero goals by 2050

Answer 8

False

There is a massive difference

Question 9

In what way can non-FIs integrate climate scenario analysis?
1. Gauge portfolio alignment with goals
2. Pre-empt or shape new investment decisions
3. Allow for concrete preparedeness actions to be taken regading specific facilities
4. Provide a top-down “stress-test” approach where a portfolio is tested under certain assumptions and conditions

Answer 9

(3) Allow for concrete preparedness actions to be taken regarding specific facilties

1. This is how FIs can use climate scenario analysis
2. This is how FIs can use climate scenario analysis
3. answer
4. This is how FIs can use climate scenario analysis

Another way that climate scenario analsyis can be used by non-FI is by determining capital expenditure investment decisions

Question 10

Why do we need to achieve net-zero by 2050?
1. To stablise the stock of carbon in the atmosphere
2. To stablise the climate at any given temperature
3. Both 1 and 2
4. Neither 1 and 2

Answer 10

(3) Both 1 and 2

This means that carbon emissions need to reach zero in every sector whilst working to extract and sequester carbon from the atmosphere

Question 11

Why will we need to capture and sequester some of the carbon?

Answer 11

Because regardless of how much we reduce by, some industries/ sectors will still have residual emissions that are impossible to stop

Question 12

True or false

Having the physical parameters of a climate simulation is the single most important factor to understand the concentration of GHG in the atmosphere

Answer 12

False

The modelling and predicting of future trajectories GHG is the most important factor

Question 13

What has been the main focus of scenario analysis by the IPCC?
1. Laying out every single future path of emissions
2. Establishing every single scenario to possibly happen
3. Lay out plausible, agreed-upon scenarios
4. Identify the impacts of all scenarios

Answer 13

(3) Lay out plausible, agree-upon scenarios

Question 14

Give 2 examples

Which models are used in combination of each other?

Answer 14

1. Representative Concentration Pathways
2. Socioeconomic Pathways

Question 15

What are the RCPs?
1. A method of calculating emissions trajectories
2. A narrative for socioeconomic scenarios
3. A set of policy options for mitigating climate change
4. A set of projections from various organisations

Answer 15

(1) A method of calculating emisisons trajectories

Question 16

What does RCP 8.5 mean?
1. Reach goal of limiting warming to below 2C
2. Reach goal of limiting warming to below 1.5C
3. Stabilising emissions
4. Business as usual

Answer 16

(4) Business as Usual

Sometimes, it is called the “worst-case scenario”

Question 17

Which of these statements are true?
1. RCP includes a socioeconomic narrative where the emisison trajectories are calculated using certain assumption of energy use
2. The amount of warming corresponding to the RCPs are approximate, not absolute
3. The RCP and SSP were developed separately
4. The higher the number in the RSP scenario, the better the scenario is for the climate

Answer 17

(2) The amount of warming corresponding to the RCPs are approximate, not absolute

PTN:
1. SSP includes a socioeconomic narrative
2. answer
3. RCP and SSP were developed in tandem to be used at the same time
4. The higher the number is on the RSP scenario, the worst off it is for the climate

Question 18

Which of these are represents a BAU scenario for the SSP?
1. SSP1
2. SSP2
3. SSP3
4. SSP4
5. SSP5

It’s reversed from what you think

Answer 18

(2) SSP2

1 - significant focus on sustainability
2 - answer
3 - regional rivalry between countries
4 - high degree of inequality
5 - Emphasises fossil fuel development

Question 19

True or false

SSP base scenarios include climate policies

Answer 19

False

In fact, the SSP scenarios have deliberately left out the climate policies. THis way, SSPs can be combined with different RCPs and explore climate policy options and assumptions with more granularity

Question 20

The SSPs are more useful for which type of scenario analysis?
1. Transition risk
2. Liability risk
3. Physical risk
4. 1,2
5. 2,3
6. 1,3

Answer 20

(4) 1, 2

They are also good for evaluating opportunities

Question 21

Which of these are scenerios developed by the International Energy Agency?
1. Stated Policies Scenario
2. Sustainable Development Scenario
3. Both 1 and 2
4. Neither 1 or 2

Answer 21

(3) Both 1 and 2

1) State Policies Scenario reflects the existing policy frameworks and announced policy intentions
2) Sustainable Development Scenario combines climate and social targets and limits warming to 2*C

Question 22

Which other body has created a relevant set of scenario analysis for the financial sector?
1. Basel Committee on Banking Supervision
2. NGFS
3. Moody’s
4. International Finance Corporation

Not TCFD or IEA

Answer 22

(2) NGFS

Although it was typically meant for central banks and financial supervisions, other private-sector FIs have also made use of it

Question 23

Which of these has the IEA consistently underestimated its growth in its forecasts?
1. Nuclear
2. Wind
3. Solar photovoltaic
4. Hydropower

Answer 23

(3) Solar photovoltaic

Consistently, IEA forecasts on RE uptake has been underestimated, especially for the added annual amount of solar photovoltaic capacity

Question 24

What is the first step in a scenario analysis?

think about what goes into a scenario analysis

Answer 24

Determine common parameters in a scenario

Question 25

How can one determine scope in a scenario analysis?
1. Data availability
2. Policy mapping
3. Impact mapping
4. All of the above

Answer 25

(1) Data availability

Question 26

What are the parameters relating to physical risk scenario analysis?
1. Climate system sensitivity
2. Choice of climate hazards
3. Business interruptions from physical risk
4. All of the above

Answer 26

(4) All of the above

Question 27

What is the impact of cutting emissions on transition risks?
1. Decreases transition risk
2. Increases transition risk
3. Does not affect transition risk
4. Cannot be determined

Answer 27

(2) Increases transition risk

Question 28

What is the main root of IAMs?
1. Climate policy
2. Climate change
3. Energy use
4. Economics

Answer 28

(4) Economics

Integrated Assessment Models are designed to allow analysis on how societeal and economic choices affect each other. They are used extensively by the IPCC. They assume fully functioning markets and competitive market behvaiour

Question 29

What is the most basic form of an IAM?

Answer 29

cost and benefits of avoiding a certain level of warming

They use highly simplified equations

Question 30

True or false

IAMs are calibrated to optimise outcomes as measured by minimising aggregate econonomic costs involved

Answer 30

True

Question 31

What can firms and companies that are exposed to multiple sectors use to gauge their transition risk?

On the path

Answer 31

Sector decarbonisation pathways

These pathways are meant to be constructed to align with the Paris Agreement so it is easier for companies to restrict the question of whether their firm is aligning with the Paris Agreement trajectory

Question 32

Which of these is NOT a bottom-up pathway for scenario analysis?
1. Work forwards from where the sector is today
2. Focus on commercially feasible, scaleable action
3. Consider interlinkages and structural shift
4. Identify technology and policy step changes

Answer 32

(3) Consider interlinkages and structural shift

Question 33

True or false

Top down pathways involve working backwards from global net-zero as well as allocate emissions across sectors and regions

Answer 33

True

Question 34

What is the first step to gauge physical risk in a scenario analysis?
1. Physical climate models
2. Emissions extrapoloations
3. Historical data
4. Geographical and topological data

Answer 34

(1) Physical climate models

Question 35

True or false

Emissions trajectories will play a key role for policymakers, firms and investors in the upcoming decades

Answer 35

False

Because climate system data experiences a lag, it mean that physical impacts until 2050 or so are ‘baked in’, meaning that emissions trajectories will not matter so much

Question 36

Scenario analysis for physical risks are driven by:?
1. Global and sectoral emissions trajectories
2. Policy landscape changes
3. Emisisons reduction
4. Operational preparedness and resilience

Answer 36

(4) Operational preparedness and resilience

Question 37

How do physical climate models and emissions scenarios relate to each other?
1. They don’t relate at all
2. They influence each other both ways
3. Only physical climate models influence emissions scenarios
4. Only emissions scenarios influence physical climate models

Answer 37

(2) They influence each other both ways

Question 38

True or false

With the increasing granularity, this means that it accounts for a greater range of phenomena at a greater accuracy

Answer 38

False

Although it can account for a greater range of phenomena, this means that physical climate models can disagree withi each other on the granularities, from the magnitude to the regions affected

Question 39

What level does physical risk scenario analysis start at?
1. Economy wide
2. Firm wide
3. Facility wide
4. Portfolio wide

Answer 39

(3) Facility wide

Physical impacts affect specific processes and sites and these effects cumulate upward through ownership supply and investment chains

Question 40

True or false

For transition risk, industrial firms can principally examine their won facilities or compare their performance against sectoral benchmarks whilst FIs can use emissions data for a few key emission-intensive sectos to get an estimate of portfolio alignment

Answer 40

True

Question 41

True or false

Physical climate models are meant to draw up every single scenario that might occur and pinpoint the exact regions of vulnerability and the severity of the phenomenon

Answer 41

False

Plausible scenarios of physical impacts can be drawn up to help mitigate the impacts but they can’t be used to predict incidence precisely enough to be used for future planning

Question 42

True or false

An important reason why companies conduct scenario analysis is to help set corporate strategy and to communicate their strategy to other stakeholders. The impetus to use scenario analysis was driven by the SASB.

Answer 42

False

Although it is true that scenario analysis is an important tool to communicate strategies to stakeholders, it was driven by the recommendations from the TCFD. Increasingly, shareholders expect and regulators require to sign onto the TCFD

Question 43

Give 2 reasons

What other reasons do scenario analysis have other than public relations?

Think about the stakeholders opinion if enacted. What happens?
Or the benefits for the firm

Answer 43

1. Gives the company’s plan more credibility and seen as more thorough
2. Self interest –> can help companies determine opportunities and future demand for products

Question 44

Which scenario analysis is best used to address the potential for business disruption?

Think about operation assets and supply chain assets and what happens to them

Answer 44

Sketch out scenarios where crucial operations or supply chain assets will be hit by transition or physical risk-related shocks

• Can use plausible but not yet realised events or even recent true events
• Handy to use because of how both financial firms and non-financial firms both have some physical facilities or rely on some network of suppliers

Question 45

True or false

Stress testing has been taken up by only the financial sector

Answer 45

False

It has been taken up by both the public and private sectors

Question 46

Which of these reasons are why the financial sector has been incorporating scenario analysis more in their strategy?
1. Examine portfolio-level exposures and gauge how these would vary in different climate outcomes
2. Examine supply chain exposures and gauge how they would vary in different climate outcomes
3. Examine firm-level exposure and gauage how they would vary in different climate outcomes
4. None of the above

Answer 46

(1) Examine portfolio-level exposures and gauge how they would vary in different climate outcomes

Question 47

True or false

Results of stress tests are typically kept by the company’s main strategy team and the Board

Answer 47

False

They are publisehd as a way for institutuions to communicate their soundness and solid ERM practices to investors and other stakeholders

Question 48

True or false

In the HSBC scenario analysis, the automotive sector is expected to uptake EVs quicker if it’s in an orderly transition

Answer 48

False

It’s meant to uptake EVs quicker in a disorderly transition due to higher carbon taxes

Question 49

True or false

In the HSBC scenario analysis, oil and gas is expected to have a declining demand for fossil fuels in both an orderly and a disorderly transition, however, the sector appears to do better in the orderly transition

Answer 49

True

This is because gradual increases in carbon taxes and the development of carbon removal technologies allow the sector to adjust more smoothly

Question 50

In the HSBC scenario analysis, why was it expected that the power generation sector would perform better in a disorderly transition scenario?

Answer 50

A disorderly and abrupt transition would increase electricity demand and prices

Question 51

What are ad-hoc analyses?
1. Reporting that occurs prior to investment processes that aims to preemptively predict the returns of the investment
2. Reporting that is designed specifically for a purpose
3. Reporting that looks at the reasoning of something that already took place
4. Reporting on how the investment did vs. how well they planned on doing

Answer 51

(2) Reporting that is desinged specifically for a purpose

The advantages of an ad-hoc analyses is:
* Flexible
* Situational application
* Can be used broadly across the company

Question 52

What is Ex-Ante Investment integration?

Before

Answer 52

The predictions taken beforehand to assess the potential returns of a specific investment

Based on forecasts and predictions rather than concrete answers
anticipatory analysis conducted before an event or action takes place

Question 53

Why can ex-ante investment integration be useful as part of the invesment toolkit?
1. Can identify gaps in the efficiency of the supply chain
2. Can allow companies to react quickly to new situations
3. Can serve as an early indication for where investment firms can focus their engagement efforts
4. All of the above

Answer 53

(3) Can serve as an early indication for where investment firms can focus their engagement efforts