Climate Risk

Question 1

OECD estimate on required investment.

Answer 1

OECD estimate that $6.9tn required each year until 2030 to meet Paris Agreement goals on global warming.

Question 2

Climate risk definition

Answer 2

The potential financial impact of climate change on banks operations, investments and loan portfolios. Both physical risk and transition risk

Question 3

What is physical risk element of climate risk

Answer 3

Risk associated with direct and indirect impacts of climate change on a banks operations, investments and loan portfolio. Both acute and chronic risks.

Question 4

Acute physical risk

Answer 4

Extreme weather events that can lead to direct or indirect financial losses. e.g floods causing property damage.

Question 5

Chronic risks

Answer 5

Long term shifts in climate patterns that can affect asset values, economic productivity and creditworthiness of borrowers. e.g rising temperatures or sea levels.

Question 6

Example of recent acute risk

Answer 6

Dubai Floods, April 2024. Floods caused $1bn damage in 1 day. Banks deferred personal car loan instalments for 6 months.

Question 7

What is transition risk

Answer 7

Risks arising from the transition to a low carbon economy, such as changes in policies, technology, markets or consumer preferences related to climate change mitigation and adoption.

Question 8

Policy and legal risks from transition

Answer 8

Regulatory changes can increase operational costs or introduce new taxes. Companies may face lawsuits from environmental damage or non-compliance.

Question 9

Technology risks from transition

Answer 9

Implementation of new technology can be costly for companies.

Question 10

Market risks from transition

Answer 10

Shifts in supply and demand for certain products as consumer preferences change

Question 11

Reputational risks from transition

Answer 11

Reputation may be (damaged)/ enhanced by (non) adoption of sustainable practices.

Question 12

Climate risk spillover on other risk categories:

Answer 12

Credit risk- Borrower exposure to climate risks. Market risk- fluctuations in asset prices due to climate change. Operational risk- disruptions to banking operations. Liability risk- legal exposure to climate-related damages

Question 13

How to assess climate risks in banking sector

Answer 13

1) Identify and measure climate risk exposure 2) Stress testing and scenario analysis

Question 14

How to identify and measure climate risk exposure

Answer 14

Recognise risks and map to relavant bank activities. Quantify financial exposures, incorporating credit risk metrics into existing risk management frameworks.

Question 15

Stress testing and scenario analysis

Answer 15

Stress testing- simulate extreme but plausible climate events, evaluate potential impact on banks capital, liquidity and profitability. Identify vulnerabilities. Scenario analysis- simulate extreme but plausible events, assess potential impact of each scenario on banks business model, strategy and risk profile.

Question 16

Types of climate risk data

Answer 16

1) Climate and environmental data 2) Policy and regulatory data 3) Technological and market data 4) Company and sector specific data 5) Geospatial data

Question 17

Climate Risk data issues

Answer 17

Availability and quality of data. Limited historical data and inconsistency.

Question 18

How to mitigate climate risk: Key points:

Answer 18

1) Integrate climate risk into risk management frameworks 2) Enhance risk identification and assessment 3) Reduce exposure to high risk sectord and assets 4) Promote green financing and sustainable investing 5) Improve climate risk disclosure and transparency 6) Embed sustainability in corporate culture

Question 19

How to integrate climate risk into risk management frameworks

Answer 19

Incorporate into all existing risk mgmt frameworks. Develop policies, procedures and governance structures to address climate risks across organization. Establish clear roles and responsibilities for climate risk manegemtn in bank.

Question 20

How to enhance risk identification and assesment

Answer 20

Use robust data and analytics to identify and assess climate related risks in a banks operations, investments and loan portfolios. Develop sector specific and geographic risk assessments to understand exposure. Monitor emerging risks and trends related to climate change and transition

Question 21

How to reducd exposure to high risk sectors and assets

Answer 21

Assess exposure to high carbon industries and assets that may be at risk from climate change impacts or transition. Develop strategies to reduce exposure to these high risk sectors and assets over time. Consider reallocation capital to lower risk, more sustainable investments and lending opportunities.

Question 22

How to promote green financing and sustainable investing

Answer 22

Expand financing and investment opportunities for green projects. Develop and promote sustainable financial products. Collaborate with clients to support transition.

Question 23

How to improve climate risk disclosure and transparency

Answer 23

Adopt and implement TCFD recommendations or similar frameworks to improve climate risk disclosure. Provide clear, consistent and comparabl einfo on banks climate risk exposures, management practices and performance metrics. Engage with stakeholders to communicate banks approach.

Question 24

How to embed sustainability in corporate culture

Answer 24

Embed into banks corporate values and culture. Ensure commitment to addrssing climate risk comes from top. Encourage employees to consider climate risk and sustainability in daily decision making and activites.

Question 25

Use of derivatives to hedge climate risk

Answer 25

Climate/weather derivatives such as WeatherXchange provide options, futures and forwards to insure industries such as agriculture.

Question 26

Regulatory initiatives to face climate risk

Answer 26

TFCD, NGFS, ECB, BoE and FED

Question 27

TCFD initiatives

Answer 27

Task force on Climate related Financial Disclosures. Develops voluntary, consistent climarte related financial risk disclosures.

Question 28

NGFS initiatives

Answer 28

Network for Greening Financial System. created by 8 CB’s and regulators. Contributes to development of climate risk management in financial sector.

Question 29

How to future proof against climate risk

Answer 29

Adjust risk appetite, create climate risk regisrer, conduct framework gap analysis, quantify and measure climate risks.