Unit 5: Risk Management

Question 1

What are the top 5 risks by Likelihood?

Answer 1

Extreme weather
Climate action failure
Human environmental damage
Infectious diseases
Biodiversity loss

Question 2

What are the top 5 risks by Impact?

Answer 2

Infectious diseases
Climate action failure
Weapons of mass destruction
Biodiversity loss
Natural resource crises

Question 3

What are Physical Risks?

Answer 3

hysical risks arise from the direct impacts of climate-related hazards to human and natural systems, such as droughts, floods and storms.

Physical risks can be divided into ‘acute risks’ (those with severe, short-term impacts such as floods or hurricanes) and ‘chronic risks’ (more gradual, longer-term impacts such as rising sea levels).

Question 4

What are Transition Risks?

Answer 4

Transition risks arise from the transition from a high- to a low- carbon economy, and a more sustainable world.

The Task Force on Climate-related Financial Disclosures (TCFD) divides transition risks into four categories:

1) Risks from developments in climate policy, legislation and regulation
2) Risks from new, lower-carbon technologies which substitute for existing products and services
3) Risks from changing consumer behaviour and investor sentiment
4) Reputational risks where organisations (and, potentially, whole sectors) may suffer from association with high-carbon methods

Question 5

What are liability risks?

Answer 5

Liability risks arise from parties who have suffered loss from the effects of climate change, environmental damage and/or social harms, and who seek compensation from those they hold responsible.

Also referred to as ‘litigation risks’

Question 6

What two ways can climate and environmental risks be treated?

Answer 6

1) as stand-alone risks, that is as risks in their own right (e.g. the direct costs of floods or rising sea level)

2) as cross-cutting (transverse) risks, which impact on many other types of risk faced by organisations, including financial institutions

Question 7

How will climate-related risks affect financial / credit risk?

Answer 7

Loss of collateral/asset value
Borrower’s inability to repay loans
Reduced access to capital/higher cost of capital
Reduced liquidity

Question 8

How will climate-related risks affect market risk?

Answer 8

Reduced competitiveness
Product obsolescence
Missing opportunities for new markets

Question 9

How will climate-related risks affect operational risk?

Answer 9

Higher fossil fuel input costs
Process inefficiencies
Irresponsible product stewardship
Equipment end-of-life obligations

Question 10

How will climate-related risks affect reputational risk?

Answer 10

Licence to operate called into question
Talent acquisition and retention
Consumer action and sentiment

Question 11

How will climate-related risks affect compliance risk?

Answer 11

Increased cost of regulation and regulatory enforcement
Third party civil actions
Lender/investor/insurer liability

Question 12

What is stranded asset risk?

Answer 12

An asset that has suffered from an unanticipated or premature write-down, devaluation or conversion to a liability.

Question 13

What are the three global regulatory bodies taking the lead in co-ordinating and harmonising responses to climate and other environmental and sustainability risks?

Answer 13

1) Financial Stability Board (FSB)

2) Network for Greening Financial System (NGFS)

3) Bank for International Settlements (BIS)

Question 14

What is Regulatory Convergence?

Answer 14

• Climate risk disclosures (aligned with the TCFD’s recommendations)
• Scenario analysis and stress-testing
• Identifying key data sources and metrics that can help measure and monitor risks
• Enhancing risk governance, strategy and management relating to climate risks

Question 15

What is Regulatory Divergence?

Answer 15

• Climate change and climate risk are not considered political priorities in all countries, and therefore not by central banks and regulators
• Definitions of “sustainability”
• The potential for different risk weightings and capital requirements in different jurisdictions, reflecting different financial sectors and risks
• Setting carbon prices and taxes (see below).

Question 16

What are the four thematic areas in the TCFD?

Answer 16

1) Governance

2) Strategy

3) Risk Management

4) Metrics & Targets

Question 17

What is Scenario Analysis?

Answer 17

Scenario analysis – a well-established method used for developing strategic plans that consider a range of possible future states – can be used to try to understand the impact of different assumptions regarding the speed and impacts of climate change and other factors on economic activities and entities, and on financial institutions’ lending and investment portfolios. This helps identify both risks and opportunities.

Question 18

What are the two main approaches to carbon pricing?

Answer 18

1) Carbon Taxes

2) Emission Trading Schemes

Question 19

What are the two significant emission trading schemes?

Answer 19

1) EU Emissions Trading Scheme (EU ETS): Established in 2005, it limits emissions from more than 11,000 major emitters

2) China’s National Emissions Trading Scheme: launching in mid-2021, it is already the world’s largest scheme accounting for roughly 30% of China’s total emissions

Question 20

What is Carbon Leaking?

Answer 20

Carbon leakage’ which occurs when firms responsible for significant levels of greenhouse gas emissions move from jurisdictions with high carbon taxes to ones with much lower taxes. The EU and some others have therefore proposed ‘carbon border taxes’ which would create a level playing field by placing a surcharge on imports according to their carbon footprint.

Question 21

What did the IMF estimate the global carbon tax would be?

Answer 21

Global carbon tax of $75 per tonne would be required by 2030 to reduce emissions to a level consistent with 2°C of global warming.