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GARP SCR > Climate Risk Measurement & Management > Flashcards

Climate Risk Measurement & Management Flashcards

1
Q

Understanding transition risk requires sold data on…

A
  • GHGs attributable to an asset / firm
  • Understanding of the policy landscape
  • Understanding of technological changes
  • Understanding of consumer and broader societal preferences
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2
Q

Risk metrics for Operational Risk

A

Proportion of facilities exposed to climate risks

Level of preparedness / resilience

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3
Q

Micro level operational risks

Macro level operational risks

A

Micro:

  • physical - weather events disrupt premises / supply chains
  • transition - abrupt policy changes cause shutdowns

Macro:
Only in specific circumstances i.e. geographic concentrations

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4
Q

Credit Risk Metrics

A

PD, LGD, EAD

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5
Q

Credit Risk Micro and Macro level

A

Micro:

  • physical - property damage and business interruption impacts revenue and profits
  • transition - asset stranding can worsen firms position (increasing PD & LGD)

Macro:
Significant, sector wide asset stranding potential

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6
Q

Liquidity Risk Climate Metrics

A

Loan to Deposit Ratio

Liquidity Ratios

Bid Ask Spread

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7
Q

Liquidity Risk Micro & Macro

A

Micro:
Abrupt events can prompt sharp repricing and evaluation of firm viability

Macro:
Significant, Climate ‘Minsky Moment’ could cause widespread repricing

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8
Q

Underwriting / Insurance Climate Metrics

A

Change in insurance premiums

Availability

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9
Q

Underwriting / Insurance Micro & Macro

A

Micro:

  • physical - higher in vulnerable areas, many may no longer afford
  • transition - less availability & some areas may be refused underwriting

Macro:
Significant - number of insurers withdraw or refuse coverage, some firms will be left without

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10
Q

Market Risk Climate Metrics

A

Weighted Average Carbon Intensity

Carbon VaR

Portfolio Risk Scores

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11
Q

Market Climate Risk - Micro & Macro

A

Micro:
Incorporated through asset prices, shifts in asset prices increase risk on FI portfolios.

Macro:
Mixed - countries have diversified economies and geographies.

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12
Q

Impacts to LGDs are likely to be…

A

High sector specific

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13
Q

Explain how asset stranding impacts credit risk

A

Company’s core assets fall in value or become worthless

With less valuable assets, a company’s liabilities weigh heavier on balance sheets

More likely that company will default on future debts given company has less collateral

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14
Q

Explain pricing effects

A

Markets for inputs (raw materials) and outputs (products) may be impacted if raw materials become more $$$ or makes products less valuable

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15
Q

Industry is internalising the link between credit risk and sustainability performance…this can be evidenced through

A

The risk in sustainability linked bonds and loans

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16
Q

How does a loan to deposit ratio increase due to climate?

A

Climate drivers may prompt depositors to draw down deposits
& debtors to draw down credit lines at the same time

I.e. post natural disasters

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17
Q

Liquidity risk only manifests as a consequence of climate risk under specific circumstances -

A

An acute climate related event or imposed authority fines for non-compliance

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18
Q

Which is more gradual credit or liquidity

A

Credit more gradual

Liquidity more abrupt

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19
Q

Whom does underwriting risk directly impact?

A

Only the insurance sector

However many corporations and FIs rely on insurance coverage

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20
Q

Insurance coverage works best when

A

Large pool of participants have small and close to equal change of being stuck by misfortune, when these accidents follow predictable patterns

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21
Q

An 18% probability of occurrence is the same as a return period of ___

A

5.5 years

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22
Q

Hurricane Harvey’s annual probability of occurrence

1980s vs 2010s

A

1% vs 6%

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23
Q

Difference between larger insurers and smaller regional insurers

A

Larger insurers have more diversified exposure and can cross-subsidise to an extent

Smaller, regional insurers without geographic diversity don’t have this luxury

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24
Q

The REPRICING effect occurs through market risk transmission channels…

Define the repricing effect and how it occurs

A

Repricing effects occur where climate risks are anticipated to impact prices, but these risks have not yet been baked into asset prices. Repricing effect have a quicker impact on asset prices.

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25
Q

What is the main concern within market risk?

How is this reflected?

A

Increased volatility -

Reflected in Climate VaR

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26
Q

How is standard VaR calculated?

A

Estimated P&L probability density curve of an investment / portfolio

Then look at the lowest 5% of the distribution to estimate tail risk

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27
Q

+ / - of VaR

A

+ useful due to cross comparability across different types of investments

  • sensitive to the data used to construct it (i.e. if constructed from low volatility period, distribution may be optimistic)
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28
Q

Which sectors are those most exposed to a combination of physical and transition risk according to Climate VaR?

A

Construction

Coal

Electrical Utilities

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29
Q

It is possible that climate risk can lead to a breakdown of typical correlation patterns between assets.

What does this mean?

A

That the effectiveness of hedges and banks abilities to actively manage their risk may be reduced

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30
Q

What does empirical evidence suggest about climate risk and asset prices?

A

Majority suggests that climate risk is yet to be priced into many asset classes yet

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31
Q

What is a reason why repricing due to climate risk has been limited thus far?

A

Inefficiency and insufficiency of governments and companies in reaching commitments such as the 2*c PCA

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32
Q

What does the PRI’s ‘Inevitable Policy Response’ assume?

A

As the realities of climate become more urgent, governments and others will be forced to act more decidedly in quite a rapid, abrupt and disorderly way

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33
Q

According to Moody’s physical risk methodology for sovereigns, who are amongst the most vulnerable?

A 
India
Pakistan
Cambodia
Central America
Sub-Saharan
34
Q

Who suggested that countries with higher exposure to physical climate vulnerability face a higher cost of capital?

What is this higher cost up to?

A

Buhr

C.1.2%

35
Q

Explain how a substantial proportion of national wealth may permanently lose its value

A

Reduced demand for fossil fuel exports may mean fuel reserves become commercially unattractive - stranded assets lose value

36
Q

Define SCOPE 1

A

Emissions resulting directly from a company’s operations

37
Q

Define SCOPE 2

A

Includes upstream emissions from purchased electricity, heating and cooling

38
Q

Define SCOPE 3

A

All other upstream emissions from supply chains, as well as downstream emissions resulting from the use or disposal of products and services sold by the company (excluding energy consumed)

39
Q

Corporate carbon footprints have some shortcomings. Other than coming directly from companies themselves, name another mechanism for quantifying these

A

Annual questionnaire by CDP (Carbon Disclosure Project)

40
Q

Voluntary disclosures are typically audited, however vary in breadth and depth

Name some issues around emissions disclosures

A

Few firms disclose all of Scope 1, 2 & 3

Issues of double counted need to be considered - i.e. Industrial firm’s scope 2, would be counted as part of the electricity utility’s scope 1

41
Q

Suggest some approaches being sought to achieve CORPORATE ALIGNMENT

A

Science based targets

Transition Pathway Initiative

Temperature Scores - shorthand way of understanding

42
Q

Give examples of free open source data bases for the below risks :

  • projected sea level rise
  • water stress
  • wildfire vulnerability
A

Sea level rise - CLIMATE CENTRAL

Water Stress - WORLD RESOURCES INSTITUTE

Wildfire Vulnerability - MAX PANCK INSTITUTE

43
Q

What is the precision like with free data?

What is the comparison to 427 scores?

A

Free data is fairly raw

427 scores allow investors to gain a sense of exposure of assets through overlaying location with physical risks - scores normalised on 0-100 scale, available by hazard or overall score

44
Q

Disadvantages of physical climate risk scores

A

Many are ‘heavily digested’ - proprietary methods remain a ‘black box’ to investors who purchase the scores.

Normalisation of raw data means they are relative, not absolute scores

45
Q

Define CARBON INTENSITY

A

GHG normalised by portfolio market value

Tonnes of CO2 equivalent / millions $ invested

46
Q

Equation for weighted average carbon intensity

A

CO2 / million USD of revenue

47
Q

Why is sensibly aggregating and evaluating portfolio level physical risk difficult for quite and bond portfolios?

A

Exposure is to the entire companies

48
Q

Who is COSO?

What did they do?

A

Committee of Sponsoring Organisations of the Treadyway Commisssion

Most widely used framework for ERMF, released in 2004

49
Q

What does COSO mean by climate is a ‘transversal’ risk?

A

Affects all ‘traditional’ categories of risk in some way at a micro and macro level

50
Q

Name the 5 ERMF categories included by the COSO

A
  1. Governance & Culture
  2. Strategy & Objective Setting
  3. Performance
  4. Review & Revision
  5. Information, Communication & Reporting

Governments - Should - Prioritise - Reviewing - Information

51
Q

ERMF is not a function or department, it is instead

A

‘Culture, capabilities and practices that organisations integrate within strategy setting’

52
Q

Examples of COSO Category: Governance & Culture

A
  • Exercises Board Oversight

- Defines desired culture

53
Q

Examples of COSO Category: Strategy & Obejctives

A
  • Analyse business context

- Define risk appetite

54
Q

Examples of COSO Category: performance

A
  • identify risk

- assess severity & prioritise risk

55
Q

Examples of COSO Category: review and revision

A
  • review risk and performance

- assess substantial changes

56
Q

Examples of COSO Category: Information, Communication & Reporting

A
  • Leverage information and technology

- Reports on risk culture and performance

57
Q

Through what Forum do the UK’s two financial regulators brig together industry representatives?

A

Climate Financial Risk Forum

58
Q

COSO: Risk Governance & Culture

Best governance arrangements …

A

Start at the highest level (board)

Involve multiple layers of employees

59
Q

COSO: Risk Governance & Culture

How is culture defined?

A

Attitudes, behaviours and understanding about risk…influence the decisions of management and reflect the mission, vision and core values of the organisations

60
Q

COSO: Strategy & Target Setting

How is corporate strategy defined?

A

High level decisions on an organisation’s priorities and mission

61
Q

COSO: Strategy & Target Setting

What does the WBCSD recommend?

A

Starting with mega trend analysis and then delving deeper through other risk tools (i.e. SWOT analysis)

62
Q

COSO: Strategy & Target Setting

What is SWOT analysis?

A

Strengths, weaknesses, opportunities, threats

2X2 matrix to compare internal and external - used for strategic planning

63
Q

All organisations face unique challenges - materiality assessments allow companies to assess the relative importance of various risks

Name a framework for assessing

A

SASB Materiality Assessment Framework

64
Q

COSO: Performance

What are the three steps

A

Risk Identification

Risk Assessment & Prioritisation

Implementation of Risk Response

65
Q

COSO: Performance

Define Risk Assessment

A

Gathering of data on the actual scope of these risks - portfolio level analysis done to determine overall risk to the portfolio

66
Q

COSO: Performance

Define Risk Prioritisation

A

Risk Prioritisation based on

Likelihood of occurrence ; adaptability ; complexity ; level of impact vs level of control

67
Q

COSO: Performance

Name the x5 types of risk responses

A
  1. Acceptance
  2. Avoidance
  3. Pursuit
  4. Reduction
  5. Sharing
68
Q

COSO: Performance

Explain what ‘pursuit’ as a risk response is

A

Converting risks into opportunities

69
Q

COSO: Performance

Explain ‘reduction’ as a risk response

A

Improving processes, systems or strategies to reduce risk

70
Q

COSO: Performance

Explain what ‘sharing’ is as a risk response

A

Collaborating as a risk-mitigation strategy with suppliers, regulators, associations etc.

71
Q

COSO: Review & Revision

Comprehensive ERM involves…

A

Having processes in place to monitor the implementation of the ERM and provide checks & balances

Being self critical and responsive with regards to the effectiveness of the ERM

72
Q

COSO: Communication, Reporting & Disclosure

How can disclosures have a systemic effect?

A

Help competing firms an the entire sector to transition to net-zero

73
Q

What is a paleoproxy?

A

Something we can measure that tells us what the climate was in the distant past

74
Q

what sort of board structure Did ING have in their climate risk oversight

A

Two tiered board structure

Supervisory board responsible for the climate risk oversight on the supervisory board level

75
Q

What did local and regional risk committee is formed as part of ING’s climate risk governance structure

A

2LOD

76
Q

What is represented ING’s third line of defence

A

Internal audit

77
Q

Who represented IMGs first line of defence

A

Line manager is responsible for climate risk oversight as a business unit level

78
Q

In the IEA net zero scenario what must happen to unabated Coal

A

Phased out in advanced economies by 2030

79
Q

In the IEA net zero scenario What is the projection for wind electric by 2050

A

70% by 2050

80
Q

In the IEA net zero scenario what must global electric generation be and by when

A

Net zero by 2040

GARP SCR (7 decks)

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