Indirect Risks Stranded Human Capital

SCR Exam • Supply chain risk:This risk is partly a matter of classification • Intangible assets like IP, social networks, & company
• Liability risk: Firms suffer financial considerations after reputation and human skills & expertise can also become
cheat sheet being held legally liable stranded
• Indirect risks can be in the form of insurers pulling out of • Just Transition: Helping people & communities smoothly
coverage in cases of particular severe exposure to physical switch to cleaner & greener ways of doing things, without
Link for Udemy Course on SCR Prep climate risk e.g., wildfire-prone areas leaving anyone behind
• It could also result in no investments in vulnerable areas • This is particularly an issue for developing countries who
Types of Climate Risk e.g., low-lying coastal areas have a right to development and access to affordable
• Climate risk can affect balance sheets & lead to losses • Indirect physical risks are systemic in their propagation energy
through diminished asset valuation & loan defaults effects & their multifaceted nature - e.g., heat stress on • In the energy sector, stranded assets could occur
• Physical risk: arises from physical climate impacts; results worker productivity up/mid/downstream.
from hazards • Physical risks require a large amount to adapt and fortify • The faster the pace of decarbonization, the greater the
• Transition risk: arises from the economic transformation facilities & don’t produce a profit stream chance of stranded assets in different sector
• TCFD > Physical risk types – Acute & Chronic; Acute
includes weather-related or weather-exacerbated events
e.g., floods, hurricanes, and wildfires. Chronic risks are
Transition Risks & Opportunities Transmission into Finance, the Economy & key sectors
gradual, long-term trends e.g., sea level rise,temp increase • Most models/scenarios for reaching 1.5C equilibrium • There are multiple channels through which climate risks
• Transition risk types – policy & legal, technology, market, assume very large amounts of net-negative emissions can affect corporate balance sheets & financial system
& reputation • To reach the scales assumed in these models would
• Risk manifestation = Hazards + Exposure + Vulnerability require massive & extremely rapid rollout techs & practices • Physical risk in real estate: Locations in vulnerable &
• Exposure: assets/firms in a vulnerable place/setting • There is no global carbon tax exposed areas > subject to climate risk. Wildfire & flood
• Vulnerability: How likely a company or asset, is to get hurt risks are acute for real estate. These risks reduce the
when it's exposed to dangers Policy and Legal Risks values of affected properties which results in higher loan-
• Governments are converging on a goal of net-zero emissions by • Classic policy solutions – carbon taxes, price on emissions, to-value ratios for banks and creates issues for insurers too
the year 2050 or cap-and-trade schemes
Stranded Assets • Energy efficiency – for vehicles and residential buildings • Transition risks and electricity generation: Coal-fired
• Govt-mandated closures are also a source of policy risk power plants can be directly affected by transition policy
• Assets that suffered from unanticipated/prematured write-
• Efforts to directly pin legal liability on firms for their risk or technology transition risk
downs, devaluations/conversions to liabilities
• Unburnable carbon – Oil/coal reserves that can’t be fully proportional contribution to the physical impacts of climate
exploited if the goals of limiting warming are to be met
• Transition risk will lead to stranded assets mainly in the Technology Risks
energy and industrial section. But physical risk can occur
• Tech development of renewable energy
across nearly all sectors likely to be geo-concentrated
• The continued cheapening & improvement of battery tech
Direct/Indirect Physical Risks
Reputational Risks
• Direct physical risk – They apply to a specific
asset/company/country • Reputation risk and bottom-up consumer/clients/suppliers
• Understanding direct physical risks is not straightforward /employees pressure can be a source of transition risk
• Certain physical risks require an interaction b/w climate • Consumer influence is most obvious in household goods
events and local conditions e.g., droughts make it more TCFD FRAMEWORK KEY RECOMMENDATIONS
likely for fires to start but wildfires need vegetation to burn • Adoptable by all organisations
• Getting precise data on these hazards is not easy e.g., • Included in financial filings
floods depend on hyper-local topography, and resolution • Designed to solicit decision-useful, forward-looking
matters tremendously information on financial impacts, and
• With climate data availability, mapping exposures is not • Strongly focused on risks and opportunities related to
much difficult, & it only requires precise location data to transition to lower-carbon economy
cross-compare with climate hazards

Chapter III – Climate Risk Change