Climate Risk Flashcards
what are stranded assets
assets whose value can be lost due to climate-related changes.
how can climate risk be quantified
using scenario analysis to map out a range of outcomes
how does climate stress testing differ from traditional stress testing
o Longer time horizons.
o Scenarios are not necessarily downturns but best guesses of the future.
o Lack of historical data to pull from.
what are examples of short term and long term physical risks
- Short term: hurricanes, floods
- Long term: increased temperature, rising sea levels
what are examples of short term and long term transition risks
- Short term: carbon taxes, efficiency standards
- Long term: wide-scale adoption of electric vehicles
describe the trade-off between physical and transition risk in the medium term
- Less aggressive action leads to more physical and less transition
- More aggressive action leads to more transition and less physical.
what are integrated assessment models
economic models that integrate physical climate modelling
what are 2 components in modelling transition risk
o Costs associated with increased losses.
o Opportunities associated with changing business models.
how can the Merton model be updated to consider climate risk
Shift the borrower’s asset value by their exposure to transition and physical risks.
what needs to change immediately for banks
- Disclosures
- Climate scenario analyses
- Provisioning
- RWA and capital adequacy
- Stress tests that integrate climate risks.
how should disclosure be modified?
by publicly stating exposure to activities with climate risk and lending to polluters.
how should climate scenario analyses be implemented
by modelling the firm’s finances over a 30-50 year time horizon.
how should provisioning be enhanced?
by accounting for climate-related losses today
