Disclosure and Reporting, Transition Risk, physical risk Flashcards
What are the three major task forces related to financial disclosures?
Taskforce on Climate-Related Financial Disclosures (TCFD)
Taskforce on Nature-Related Financial Disclosures (TNFD)
Taskforce on Inequality and Social-Related Financial Disclosures (TISFD)
What are the key features of TCFD recommendations?
Adoptable by all organizations
Included in financial findings
Designed to provide decision-useful, forward-looking information on financial impacts
Strong focus on risks and opportunities related to transition to a lower-carbon economy
What are the four pillars of TCFD disclosures?
Governance – Disclose the organization’s governance around climate-related risks and opportunities
Strategy – Disclose actual/potential impacts of climate-related risks and opportunities on business strategy & financial planning
Risk Management – Disclose how the organization identifies, assesses, and manages climate-related risks
Metrics & Targets – Disclose metrics and targets used to assess and manage relevant climate-related risks/opportunities
What is the purpose of the International Sustainability Standards Board (ISSB)?
Launches global sustainability reporting standards
Creates a common language for climate-related disclosures worldwide
What does IFRS S2 require
Entities must disclose climate-related risks and opportunities that affect cash flow, access to finance, or cost of capital
Covers physical risks and transition risks
What are the European Sustainability Reporting Standards (ESRS)?
Mandatory reporting standards for sustainability within the EU
Part of the Corporate Sustainability Reporting Directive (CSRD)
Covers environmental, social, and governance (ESG) topics
How has the UK government responded to climate-related financial disclosures?
Formally endorsed the TCFD framework
Mandated TCFD-aligned disclosure for large private sector entities
Bank of England’s climate strategy is structured around five pillars
What is an example of a country implementing climate-related financial disclosure?
New Zealand has integrated climate disclosures into its financial reporting system.
What is transition risk in climate finance?
Risks related to the shift to a low-carbon economy, including policy, legal, technology, and market changes.
How is a carbon footprint measured?
The total amount of CO2 emissions caused by an activity or product life cycle
What are the three scopes of greenhouse gas emissions under the Greenhouse Gas Protocol?
Scope 1: Direct emissions from owned/controlled sources (e.g., company vehicles, boilers)
Scope 2: Indirect emissions from purchased electricity
Scope 3: Other indirect emissions (optional reporting, e.g., supply chain emissions)
What is the Social Cost of Carbon (SCC)?
The economic cost associated with climate damage or benefit resulting from emitting an additional ton of CO2.
What are some limitations of carbon footprints?
Reporting lag
Backward-looking; does not account for asset disposal
Carbon liability estimates may not reflect real financial risks
Limited in capturing demand shifts and sector-wide impacts
Why is transition risk relevant for banks?
Syndicated loan market exceeds $5 trillion annually
Climate risk impacts 12%-13% of US banks’ total assets
Requires microprudential (loan-level) analysis to inform macroprudential (systemic) concerns
How can banks measure climate transition risk exposure?
Historical exposure: Loan-level data & ML predictions on corporate carbon footprints
Climate stress-testing: Assessing future vulnerability using economic models
What is physical risk in climate finance?
isk of climate-related events damaging assets, supply chains, or financial stability.
What are the two types of physical risk?
Acute Risks: Short-term extreme weather events (e.g., hurricanes, floods, wildfires)
Chronic Risks: Long-term climate effects (e.g., sea-level rise, drought, water depletion)
Why is bottom-up stress testing important for banks?
Helps assess geographic-specific asset risks
More relevant for evaluating physical risks than top-down approaches
