Climate Scenario Analysis Flashcards
What are the 5 necessary characteristics of a (climate-related) scenario?
- Plausible
- Distinctive
- Consistent
- Relevant
- Challenging
What are the 6 process steps in applying scenario analysis?
1: Ensure governance is in place
2: Assess materiality of climate-related risks
- Market and Tech shifts
- Reputation
- Policy and Legal
- Physical Risks
3: Identify and define range of scenarios
4: Evaluate business impacts
5: Identify potential responses
What are the main methodologies that use scenarios to analyse investments?
- Asset liability management / strategic asset allocation
- Portfolio-level tools
- Bottom-up analysis at company or asset level
- Combinations of portfolio-level and bottom-up analysis
- Physical risk analysis
What are the key considerations when reviewing climate scenario outcomes?
- Scale of the impact
- Timeframe for the risks to emerge
- Impact on different asset classes and sectors
- Implications for valuation
- Trends and drivers of the scenarios
What are the 3 main methods of modelling transition risk?
- Top-down: Macroeconomic level modelling
- Top-down: Sector level analysis
- Bottom-up: Borrower-level analysis
What is the formula for expected loss?
EL = PD * LGD * EAD
Expected Loss = Prob. of default * Loss given default * Exposure at default
Describe the integrated approach for transition risk assessment to credit risk
I) Transition risk assessment (economic environment)
- > II) Borrower-level calibration
- > III) Portfolio impact assessment (influence by I and II)
What are the key challenges with bank transition risk assessment?
- Limited empirical data
- Risk analysis over extended time horizons
- Varying sector relationships to risk
- Systematic, consistent, and repeatable
- Bespoke bank requirements
- Improved coordination
How to solve them? Use the integrated approach.
What are the UNEP FI Investor Pilot 5 key components for scenario-based analysis?
1: choosing/designing a range of scenarios
2: Selecting financial modelling methodology
3: Measuring risk at sector/country/asset class level
4: Measuring risk at company level
5: Aggregating risks to portfolio level
Explain how to compute “Climate Value at Risk” at enterprise level
CVar(Enterprise) =
(Present value of future profits+costs)
/
(Market value of enterprise)
Explain how to compute “Equity Climate Value at Risk”
CVar(Equity) =
(Equity value of future profits+costs)
/
(Market value of equity)
Explain how to compute “Debt Climate Value at Risk”
CVar(Debt) =
(Debt value of future profits+costs)
/
(Market value of debt)
