Climate Risk Measurement and Management New With Guarantee Pass

Climate Risk Measurement and Management New With Guarantee Pass Measuring and defining climate risks Company Level Transition Risk Data GHG Protocol : 1. emissions resulting directly from the company's operations 2. upstream emissions from purchased electricity 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. corporate carbon footprint Few firms disclose all 3 scopes of the GHG Protocol Company Level Physical Risk Data General data is provided by global climate models developed by climate scientist for the IPCC report, Systemic Risks Financial Stability Corporate Greenhouse gas emissions Emission trajectories Company Level scores Climate Risk within Enterprise Risk Management A holistic modus operandi across an entire firm Actions and responsibiliites across 5 areas: 1. Governance 2. Strategy 3. Perfomance 4. Review 5. communication Risk Management A structured approach to monitoring, measuring and managing exposures to reduce potential impacts of uncertain occurrences. Climate Risk management helps mitigate the impacts of climate change both physical and transition impacts. Risk Governance The top-down process and guidance that directs risk management activities to align with and support the overall enterprise. Climate risk governance built into the legal and compliance processes - formalize and internal risk management procedures and oversight. climate risk culture 1. Company culture 2. Mission and core values 3. Tone of senior leadership 4. Employee behaviors and initiatives Financial Risks 1. Operational 2.Market 3. Insurance 4. Liquidity 5. Credit 6. Sovereign Microeconomic Effects Affecting individual business and households - this relates to transition risks - households can be impacted by property damage, business interruption, loss of income, changes in demand, and falls in asset valuation through asset stranding Operational Risk The risk inherent in doing business, and it reflects potential losses from inadequate or failed internal processes, systems, human error, or outside events such as extreme weather or terrorist attacks. Micro Physical Risk: severe weather means damage to property and business. Heat will affect worker productivity. Transition Risk: transmit to operational risk with abrupt policy changes = facility shutdown Macro Limited: where there is high geographic concentration there be any effects Legal Risk Related to operational risk Liable for: 1. neglecting to manage climate risks 2. failing to adequety disclose their xposure to such risk 3. contributiong to climate change Credit Risk Measures the creditworthiness, or ability a bor-rower has to pay back a loan. Micro Physical Risk: serve weather leads to business interruption leading to lower profits worsening the firms financial position Transition Risk: asset stranding can worsen a firms financial position Macro Significant: sector wide asset stranding or changes in demand can impact sector revenues meaning higher chance of default posing financial stability risks Credit Risk - Key Metrics 1. Probability of default 2. Loss given default (the proportion of value recovered after a default) Credit Risk Example The asset stranding can be due to physical risk, such as a warehouse in a flood prone area with a much lower resale value, or due to transition risk, if a company's high-emissions factory is hit with a regulatory shutdown mandate or a higher carbon tax. Companies in the mining sector that extract minerals important for mass electrification, such as copper for wiring or lithium for lithium-ion batteries, can benefit from the higher prices of these commodities, make greater revenues and profits, and be more creditworthy than they would have been without climate change. Liquidity Risk is about losing access to liquidity—the abil-ity to quickly and easily convert assets into cash. For banks, liquidity risk means something very specific, as banks’ busi-ness models are based on liquidity transformation: Banks take on short-term deposits and underwrite long-term loan Micro Physical & Transition Risk: natural disasters or abrupt policy changes can prompt sharp price changes. Natural disasters can cause abrupt cash withdrawals raising their loan to deposit ration Macro Limited: abrupt and wide enough repricing and dislocation to constitute a market liquidity shock. Liquidity Risk Metrics Loan to deposit ratios (for banks) Bid-ask-spreads (specifically for market) Underwriting/insurance risk Micro Physical Risk: insurance premiums increase Transition Risk: less insurance available as some insurer swill refuse to underwrite certain risks Macro Significant: leaving companies without insurance and exposed- financial stability Underwriting Risk Metrics Increase in insurance premiums Underwriting Risk Examples One study found that for an extreme rain event in Texas equivalent in size to Hurricane Harvey (which flooded Houston in 2017), the annual proba-bility of occurrence was 1% from 1981 to 2000; 6% by 2017, when Harvey occurred; and 18% by 2081 to 2100 under a worst-case climate scenario (Emanuel, 2017). An 18% prob-ability of annual occurrence is the same as a return period of just 5.5 years. if a company can no longer obtain insur-ance coverage for physical damage, business interruption, or directors' liability, it cannot use insurance as one of its resilience and buffer mechanisms, which further increases operational risk. This, in turn, increases its credit risk from the perspective of a lender. Indeed, it is unsurprising that in many cases, such as home or commercial property mort-gages, lending banks require insurance coverage as a con-dition of issuing a mortgage. Macroeconomic effects Impacts the macroeconomy - this relates to physical risks - an be affected by shifts in prices, changes in productivity, socioeconomic changes, or labor-market frictions Macro Climate Risk Operational: ripple effect through the industry through supply chains, markets, customers and financial counterparties. - Thai floods 2011 affected semiconductor productions Credit Risk: climate drivers that lead to increased credit risk at an individual firm can effect an entire sector Liquidity risk: Issue with financial stability - if enough households, corporations and financial firms abruptly increase their precautionary liquidity it can have the potential to destabilize a bank - 'Climate Minksy moment' sudden major collapse of asset values = financial crisis Insurance Risk: large numbers of insurers suddenly increase premiums or completely withdraw their coverage of certain climate-related risks, this might leave households and firms without coverage, potentially amplifying the resulting risks to financial stability Market Risk: VALUR AT RISK Sovereign Risk: Market Risk Micro Physical & Transition Risk: widely incorporated in asset prices through abrupt repricing. Large-scale shifts in input and product markets affect non-financial corporations. Shifts in asset prices increase the risk of financial institutions’ portfolios. Macro Significant: most asset and commodities will expect price increases Sovereign Risk Micro