GARP Ch 3 - Climate Change Risks
How climate risk can translate to financial risk
Diminished asset valuations, increased loan defaults, increased costs, decreased access to capital
Physical vs. transition risk examples
Physical: climate and weather impacts resulting from cc; Transition: risks from the economic
transformation needed to drastically reduce / eliminate net GHG emissions to reach net-zero emissions
Hazards/drivers, exposure, and vulnerability
Hazards: acute vs. chronic events or transition risks. Exposure: assets or firms in a vulnerable place or
setting. Vulnerability: level of resilience, flexibility and adaptation.
Stranded assets - how it affects different sectors
Assets that have "suffered from unanticipated or premature write-downs, devaluations or conversion to
liabilities". Mainly effects high-emitters (high transition risk): coal mines, coal-fired power plants, steel
plants. High physical risk: ariculture and real estate sectors affected by sea level rise or flooding.
Acute vs. chronic hazards (with examples)
Acute: weather-related or exacerbated events (flood, hurricane, wildfire, heatwaves, droughts); Chronic:
long-term trends (rising average temp, sea level rise, changing precip patterns)
Uncertainty, variability, and accuracy in hazard model predictions (e.g. freq, timeframes)
Varying degrees of accuracy in climte moels for different hazards. Well-understood risks: temperature
rise, sea level rise. Less accuracy on magnitude or frequency of specific hazards, the specific time-frame
of their occurrence, or their specific locations: precipitation patterns, wildfire, flooding. IPCC models are
designed for long-term (2100) global change, less accurate for next 1-2 decades and for smaller / more
granular geographic scales.
Transition Risks
Policy (e.g. to reduce emissions), technological changes (e.g. cheaper renewables make FF-power less
economical); reputation / market (e.g. consumer pressure for sustainable products).
Data challenges / Considerations when interpreting climate risk data
Some hazards (wildfires, floods) should incorporate both climate events and local conditions: i.e.
topography, land cover, and human behavior.
Indirect risks from physical hazards (supply chain, liability / legal, systemic)
Supply chain: physical risk affecting production process; Liability: firms suffer financially if deems
irresponsible / inadequately prepared for physical risks; Systemic: multi-faceted downstream effects;
e.g. heat stress on worker productivity.
