Climate Risk Flashcards
Climate Risk
For organizations, it can be defined in practical terms as the measure of vulnerability to climate-related impacts that have financial consequences, or that may affect various aspects of financial performance. Those consequences could be anything from minor inconvenience to a complete loss of an asset’s value or operability.
Physical climate risk
Physical climate risk describes the potential for physical damage and financial losses as a result of increasing exposure to climate hazards resulting from climate change. It takes into account both the direct physical impacts of climate change (such as floods destroying infrastructure), and direct and indirect socioeconomic responses to climate change (such as losses caused by direct damage to assets which prevents their operability, and the costs of repairing that damage).
Physical risk “results from the interaction of vulnerability, exposure and hazard.”
Acute Physical Risk (Shocks)
Shocks – such as floods, storms or wildfires – are immediate, destructive and relatively short-lived. Climate shocks are “occurring with greater frequency on both a regional and global basis”.
Acute Physical Risk examples (Shocks)
Flooding (including river flooding resulting from excessive rainfall or meltwater, surface water flooding or flash flooding caused by extreme rain, and coastal flooding arising from high tides and strong winds or storm events)
Wildfires
Extreme wind events (including hurricanes, cyclones, typhoons and gales)
Extreme heat events
Extreme cold events
Drought
Chronic Climate Risk (Stresses)
Stresses are slow in their onsets, such as changes in precipitation, rising temperatures and seasonal shifts. These sustained shifts in climate patterns can have long-term effects on supply chains, property value and insurability. Their impact can be gradual, but escalate over time.
Chronic Climate Risk Examples (Stresses)
- Changes to local rainfall patterns over time - increased or decreased rainfall
- Water scarcity
- Sustained shifts in average temperatures and humidity
- Sea-level rise
Physical risk analysis
The methodology to calculate physical climate risk by considering the physical hazards as well as a company’s exposure and vulnerability (1 - resiliency).
Transition climate risk
Transition climate risks are business risks related to the transition away from fossil fuels and other greenhouse gas (GHG)-emitting activities. Cost is one. The rapid transition away from fossil fuel energy sources by mid-century creates transition risks for organizations that produce or rely on them.
Transition climate risk examples
- Stranded assets and depreciation e.g. reduced value of energy inefficient buildings
- Increased capital expenditure e.g. from upgrading equipment or insulating buildings
- Reduced consumer demand
- Loss of market share
- Increased costs e.g. from impacts to supply chain, or the costs of raw materials
- Legal liability from failing to comply with regulatory requirements
- Financial risk e.g. lack of insurability, or lack of access to finance, resulting from failure to comply with more stringent policy
- Adaptation
What is the connection between physical and transition risk?
Owners of a manufacturing plant at high physical risk of heat waves can either adapt their asset, or continue business as usual. If they choose to adapt, the associated costs of relocating and retrofitting the asset represents a transition risk to the business that must be taken into account. If they choose not to respond to their physical risk, they face loss of revenue arising from reduced workability or operability, and the depreciation of their asset as competitors adapt.
Only by considering both the physical and transition risk to their assets across different time periods and climate scenarios can organizations make fully informed decisions about how best to protect their business from inevitable climate-related risk.
Climate Scenarios
Climate scenarios are analytical tools used to explore the potential impacts of climate change under different socioeconomic conditions, as well as to understand how human development and associated emission pathways affect the natural world. They help business leaders to make informed decisions by considering multiple different future climate possibilities and impacts, and allow them to better create strategies to mitigate damage to their assets and adapt.
Different scenarios exist for modeling physical risks and for modeling transition risks. Climate scenarios based on earth systems modeling are used to understand the physical risks posed by both shocks and stresses. Scenarios for exploring transition risk use a simpler climate model that takes energy markets and how they function into account.
Following information from the IPCC, these possibly futures should include:
- Business as usual (Emissions continue to rise throughout the 21st century with no further policy intervention - the worst-case scenario for emissions)
- Emissions peak in 2040 (Emissions that do not increase beyond 2040 - the middle-of-the-road scenario)
- Paris-aligned (Emissions are reduced in line with the Paris Agreement, which aims to keep global temperature increases to well below 2ºC and preferably 1.5ºC - the best-case scenario)
EU Taxonomy
The EU Taxonomy is a classification system for economic activity. It’s a policy response to the subjectivity of different businesses’ ESG claims and widespread “greenwashing” of activities in the marketplace. The EU Taxonomy lays out criteria for various economic activities that companies under its jurisdiction must follow. By doing so, it seeks to give consumers and investors more confidence about the sustainability of assets, activities, and investments carried out by these organizations.
EU Taxonomy’s Environmental Objectives
The six environmental objectives are:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
Sustainable Economic Activity
An economic activity will be considered to be environmentally sustainable if it complies with all four of the following criteria:
- substantially contributes to one or more environmental objectives;
- does not significantly harm (DNSH) any environmental objective;
- complies with minimum safeguards based on certain human rights standards; and
- complies with the Technical Screening Criteria (TSC), which are the detailed conditions for climate change mitigation and adaptation.
SOP
A standard operating procedure is a set of written instructions that describes the step-by-step process that must be taken to properly perform a routine activity.
