Climate Risk Measurement & Management Latest Update 2023/2024

Climate Risk Measurement & Management Latest Update 2023/2024 Chapter 6 Risk Management Structured approach to monitoring, measuring and managing exposures to reduce the potential impacts of uncertain occurrences, and it has long been practiced by non-financial corporations and financial corporations alike. Climate Risk Management When practiced proactively, can help mitigate the impacts of climate change, both from physical impacts and transition impacts, on a financial institution's portfolio or corporations operations. Needs for understanding transition risk Not only 1. solid data on GHG emissions attributable to a company or asset but also an understanding of the 2. evolving climate policy landscape, 3. technological changes, and 4. evolving consumer and broader societal preferences, as well as 5. market sentiment. Needs for understanding physical risk Requires 1. forward-looking climate models and 2. historical weather data, as well as information on 3. physical geography, 4. adaptive infrastructure, 5. market responses, 6. cross-correlations, and 7. Distributions. NGFS economic transmission channels (micro) Businesses - Property damage and business disruption from severe weather, stranded assets and new capital expenditure due to transition, changing demand and costs, legal liability from failure to mitigate or adapt. Households - Loss of income from weather disruption, health, or labour market frictions, property damage. NGFS economic transmission channels (macro) Aggregate impacts on the macroeconomy - capital depreciation and increased investment, shifts in prices, productivity changes, labour market frictions, socioeconomic changes, other impacts on international trade, gov revenue, fiscal space, output, interest rates and exchange rates. Micro (Company-level) climate risks 1. Operational, 2. Credit, 3. Liquidity, 4. Insurance - some of these can also pose a system risk. Operational risk The risk inherent in doing business, and its reflects potential losses from inadequate or failed internal processes, systems, human erorr, or outside events such as extreme weather or terrorist attack. Operational risk metrics