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Climate Risk Measurement & Management Flashcards

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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
What is the main concern within market risk? How is this reflected?
Increased volatility - Reflected in Climate VaR
26
How is standard VaR calculated?
Estimated P&L probability density curve of an investment / portfolio Then look at the lowest 5% of the distribution to estimate tail risk
27
+ / - of VaR
+ 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)
28
Which sectors are those most exposed to a combination of physical and transition risk according to Climate VaR?
Construction Coal Electrical Utilities
29
It is possible that climate risk can lead to a breakdown of typical correlation patterns between assets. What does this mean?
That the effectiveness of hedges and banks abilities to actively manage their risk may be reduced
30
What does empirical evidence suggest about climate risk and asset prices?
Majority suggests that climate risk is yet to be priced into many asset classes yet
31
What is a reason why repricing due to climate risk has been limited thus far?
Inefficiency and insufficiency of governments and companies in reaching commitments such as the 2*c PCA
32
What does the PRI’s ‘Inevitable Policy Response’ assume?
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
33
According to Moody’s physical risk methodology for sovereigns, who are amongst the most vulnerable?
``` India Pakistan Cambodia Central America Sub-Saharan ```
34
Who suggested that countries with higher exposure to physical climate vulnerability face a higher cost of capital? What is this higher cost up to?
Buhr C.1.2%
35
Explain how a substantial proportion of national wealth may permanently lose its value
Reduced demand for fossil fuel exports may mean fuel reserves become commercially unattractive - stranded assets lose value
36
Define SCOPE 1
Emissions resulting directly from a company’s operations
37
Define SCOPE 2
Includes upstream emissions from purchased electricity, heating and cooling
38
Define SCOPE 3
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
Corporate carbon footprints have some shortcomings. Other than coming directly from companies themselves, name another mechanism for quantifying these
Annual questionnaire by CDP (Carbon Disclosure Project)
40
Voluntary disclosures are typically audited, however vary in breadth and depth Name some issues around emissions disclosures
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
Suggest some approaches being sought to achieve CORPORATE ALIGNMENT
Science based targets Transition Pathway Initiative Temperature Scores - shorthand way of understanding
42
Give examples of free open source data bases for the below risks : - projected sea level rise - water stress - wildfire vulnerability
Sea level rise - CLIMATE CENTRAL Water Stress - WORLD RESOURCES INSTITUTE Wildfire Vulnerability - MAX PANCK INSTITUTE
43
What is the precision like with free data? What is the comparison to 427 scores?
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
Disadvantages of physical climate risk scores
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
Define CARBON INTENSITY
GHG normalised by portfolio market value Tonnes of CO2 equivalent / millions $ invested
46
Equation for weighted average carbon intensity
CO2 / million USD of revenue
47
Why is sensibly aggregating and evaluating portfolio level physical risk difficult for quite and bond portfolios?
Exposure is to the entire companies
48
Who is COSO? What did they do?
Committee of Sponsoring Organisations of the Treadyway Commisssion Most widely used framework for ERMF, released in 2004
49
What does COSO mean by climate is a ‘transversal’ risk?
Affects all ‘traditional’ categories of risk in some way at a micro and macro level
50
Name the 5 ERMF categories included by the COSO
1. Governance & Culture 2. Strategy & Objective Setting 3. Performance 4. Review & Revision 5. Information, Communication & Reporting Governments - Should - Prioritise - Reviewing - Information
51
ERMF is not a function or department, it is instead
‘Culture, capabilities and practices that organisations integrate within strategy setting’
52
Examples of COSO Category: Governance & Culture
- Exercises Board Oversight | - Defines desired culture
53
Examples of COSO Category: Strategy & Obejctives
- Analyse business context | - Define risk appetite
54
Examples of COSO Category: performance
- identify risk | - assess severity & prioritise risk
55
Examples of COSO Category: review and revision
- review risk and performance | - assess substantial changes
56
Examples of COSO Category: Information, Communication & Reporting
- Leverage information and technology | - Reports on risk culture and performance
57
Through what Forum do the UK’s two financial regulators brig together industry representatives?
Climate Financial Risk Forum
58
COSO: Risk Governance & Culture Best governance arrangements …
Start at the highest level (board) Involve multiple layers of employees
59
COSO: Risk Governance & Culture How is culture defined?
Attitudes, behaviours and understanding about risk…influence the decisions of management and reflect the mission, vision and core values of the organisations
60
COSO: Strategy & Target Setting How is corporate strategy defined?
High level decisions on an organisation’s priorities and mission
61
COSO: Strategy & Target Setting What does the WBCSD recommend?
Starting with mega trend analysis and then delving deeper through other risk tools (i.e. SWOT analysis)
62
COSO: Strategy & Target Setting What is SWOT analysis?
Strengths, weaknesses, opportunities, threats 2X2 matrix to compare internal and external - used for strategic planning
63
All organisations face unique challenges - materiality assessments allow companies to assess the relative importance of various risks Name a framework for assessing
SASB Materiality Assessment Framework
64
COSO: Performance What are the three steps
Risk Identification Risk Assessment & Prioritisation Implementation of Risk Response
65
COSO: Performance Define Risk Assessment
Gathering of data on the actual scope of these risks - portfolio level analysis done to determine overall risk to the portfolio
66
COSO: Performance Define Risk Prioritisation
Risk Prioritisation based on Likelihood of occurrence ; adaptability ; complexity ; level of impact vs level of control
67
COSO: Performance Name the x5 types of risk responses
1. Acceptance 2. Avoidance 3. Pursuit 4. Reduction 5. Sharing
68
COSO: Performance Explain what ‘pursuit’ as a risk response is
Converting risks into opportunities
69
COSO: Performance Explain ‘reduction’ as a risk response
Improving processes, systems or strategies to reduce risk
70
COSO: Performance Explain what ‘sharing’ is as a risk response
Collaborating as a risk-mitigation strategy with suppliers, regulators, associations etc.
71
COSO: Review & Revision Comprehensive ERM involves…
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
COSO: Communication, Reporting & Disclosure How can disclosures have a systemic effect?
Help competing firms an the entire sector to transition to net-zero
73
What is a paleoproxy?
Something we can measure that tells us what the climate was in the distant past
74
what sort of board structure Did ING have in their climate risk oversight
Two tiered board structure Supervisory board responsible for the climate risk oversight on the supervisory board level
75
What did local and regional risk committee is formed as part of ING’s climate risk governance structure
2LOD
76
What is represented ING’s third line of defence
Internal audit
77
Who represented IMGs first line of defence
Line manager is responsible for climate risk oversight as a business unit level
78
In the IEA net zero scenario what must happen to unabated Coal
Phased out in advanced economies by 2030
79
In the IEA net zero scenario What is the projection for wind electric by 2050
70% by 2050
80
In the IEA net zero scenario what must global electric generation be and by when
Net zero by 2040

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