Climate Change Before Humans
SCR Exam Carbon Dioxide
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Modern Climate Change
• Weather – State of atmosphere at a given time & place
• Climate – Long-term patterns of the weather
• Climate change = Global warming
• 150 years of history indicates human-caused warming
• Warming is not uniform
• 93% of the heat trapped by GHG goes into heating oceans
Climate Change Before Humans
• Extracting climate information:
- Tree Rings - Corals - Speleothems - Ice Cores
• Ice Ages – Long cold periods
• Interglacials – Long warm periods
• Last ice age lasted for 20,000 years and ended 10,000
years ago
Energy Balance
• Earth’s energy source – Sun (Mainly visible radiation –
• 340 W/m sq)
• ~ 30% sunlight gets reflected back
• Net solar energy absorbed by Earth – 238 W/m sq
• Energy Balance: The energy reaching the Earth from the
sun = Energy radiated back by the Earth
• Energy Balance determines the temperature of the
climate system
The Greenhouse Effect
• GHGs are part of atm that absorb infrared radiation
• GHGs reduce the amount of power radiated back by Earth
• More GHG = Warmer Planet
• For the Greenhouse effect, atm needs to have the right
composition
• Water vapor is the most imp GHG in the atm
Chapter 1
Impacts of Modern Climate Change
• A few degrees warming = Enormous changes in env/atm*
• Not every region will be negatively impacted
• CO2 began increasing at the start of 19th century Temperature
• ~50% of what humans emit stays in the atm each year
• Emissions by humans are highly correlated with the • Long-term temp trajectory is towards warmer temperatures
increase in atmospheric CO2 • Warming will not be uniform
• Chemical composition of atm CO2 also shows, the • Temperature extremes can be fatal – Europe heat waves
increase in heating is due to fossil-fuel combustion
• Isotopic composition of CO2 in atm is consistent with CO2
from fossil fuel
Other GHG & Aerosols
• Next most imp GHG, methane, increased from 0.8 ppm
before the industrial revolution toto 1.9 ppm in 2020
• Methane is much powerful GHG than CO2
• Global Warming Potential (GWP) – Heat-trapping power
compared to CO2
• Methane’s GWP is 28
• Humans don’t emit Ozone directly
• Aerosols – Particles so small that they remain suspended
in atm for days or weeks
• Aerosols reflect incoming solar radiation back- Cooling
Effect. Also affects cloud formation & make them more
reflective
Precipitation
• GHGs have caused combined radiative forcing of 3.6
w/m2, aerosols (negative) 1.1 w/m2. Net +ve 2.7 w/m2. • Increase in surface temp = Increase in rate of evaporation
• Wet gets wetter, dry gets drier!
• Evaporation – Main source of water vapors – not humans
• Increase in flood events
• Water availability high in winter, less in summer
Attribution of Modern Warming • Reduced freshwater & hydroelectricity availability
• Natural processes that affect the climate: Sea Level & Ocean Acidification
- Tectonic processes: Continental drifts can lead to climate
• Sea level rise due to ice melting
changes through several mechanisms
• Ocean acidification due to CO2 absorption by oceans
- Sun Output: Sun has changed little over past few 100 years
- Orbital variations: Solar energy reaching the Earth is Extreme Events
determined by Sun-Earth distance
- Unforced Variability: Changes caused by complex internal • Extreme events are stochastic (random in nature)
physics of the climate system • Extreme-event attribution science. EEA uses 3 different
- GHGs: Evidence supports that over the past 2 centuries sources of info: 1. Historical Climate 2. Physics of
GHGs have increased the warming Phenomenon 3. Computer Simulations
Shared Socioeconomic Pathways (SSPs)
• To predict future climate change, first project GHG
emission
• IAM created different future scenarios/pathways:
SSP 1 (Best) – SSP 5 (Worst)
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Impacts of Modern Climate Change
Albedo Effect, Polar Amplification & Positive Feedback
• Albedo – The power of reflecting radiation back
• Ice has a higher albedo than dark oceans or lands
• Albedo Effect: High temp > Less Ice > More dark areas >
Reduction of Earth’s overall Albedo
• Polar Amplification: The Arctic & Antarctic regions are
warming faster than other areas of the Earth. Other polar &
geographic factors amplify this.
• Positive Feedbacks: Self-reinforcing phenomena. It
accelerates a change, e.g., warming.
Impacts on human society & natural systems
Moving towards a cleaner energy system
• Solar energy is the renewable with most potential
• 1 wind turbine generates ~10 MW
• The price of solar & wind renewables has declined
• The primary issue with these is Intermittency – The Sun
shines only in days & non-cloudy atm, and wind speed
varies with weather conditions
• Dispatchable Sources: Can generate energy regardless
of weather conditions: nuclear energy, hydroelectricity,
geothermal and biomass.
• CCUS – Carbon capture, carbon sequestration, a process
of burning fossil fuels without venting CO2 in the atm
Policy Response - Geoengineering
• Geoengineering:
1. Solar Radiation Management – Attempts to reengineer
a reduction in the amount of solar energy absorbed by the
Earth, e.g., Sulfur injection
2. CO2 Removal – Planting trees, direct air capture

• In China, decline of bees > Forced farmers to hire people

for hand-pollination
• Climate Tipping Point: The climate will not warm linearly
as GHGs are added to it linearly. A large & rapid shift.

Policy Response - Adaptation

• Any climate change that’s not avoided must be adapted to.
• Physical adaptations > Human Infra or enhancements of
ecosystem services & functions
• Individuals will adapt without govt. directions
• Leaving adaptations to individuals is a disadvantage
• Rich countries will be able to adapt more effectively

Policy Response - Adaptation

Emissions from the current energy systems

• Carbon Intensity: CO2 produced per unit of energy

generated
• Methane – Coal-to-gas switching
• Methane leakage: Escape of methane during extraction or
transport of natural gas

Chapter 1
 Sustainability at corporations & FIs
SCR Exam • Triple bottom line: placed environment and social impact
on co-equal status with the profits for businesses
cheat sheet • The SDGs are the benchmark against which companies &
investors measure various outcomes
• Many of the SDGs do have material financial effects
Link for Udemy Course on SCR Prep • CSR can create opportunities for greenwashing
• Decoupling: False social claims/empty green claims
Sustainability • Attention deflection: Hiding unsustainable
practices/misleading texts or imagery
• Sustainability: Meeting current needs without • Life Cycle Assessments (LCA): Cradle-to-grave
compromising ruining future aspects
assessment: Goal/Scope>Inventory analysis>Impact
• Environmental Sustainability: Maintaining ecological assessment>Interpretation
integrity, preserving biodiversity, and maintaining the
• Full LCAs can be expensive & time-consuming
balance of natural systems • LCAs are building blocks of a more circular economy
• Social Sustainability: A minimum standard of basic • Sustainability Risks: Reputational risk, Social License to
necessities & human rights
Operate
• CSR: Companies take social/environmental activities for
the wider benefit of society Attribution of Modern Warming
ESG, Sustainability & Climate Change • PRI – Principles of Responsible Investment
• SASB provides cross-comparable sustainability metrics
• Sustainability is the broadest category of all. Sustainability • SASB standard uses 5 main dimensions of sustainability –
> Climate Change > ESG social capital, human capital, governance, business model,
• ESG-Environment, Social, & Governance. Often, ESG info and environment
is condensed into specific scores/ratings • Global Reporting Initiative (GRI) – provides global
standards for sustainability reporting
SDGs & Other Policies
• All major global climate policy agreements have occurred
under the aegis of the UNFCCC
• MDGs – Millennium Development Goals - Failed
• SDGs – Sustainable Development Goals – Broad
approach
• Nature-Based Solutions – Actions to protect, manage, or
restore ecosystems that address societal and human
challenges
Ecosystem Services & Natural Capital
• The MA found that the majority of the world’s 24 ecosystem
services are in decline
• Supporting services: are fundamental conditions that
enable the existence of other services
• Provisioning services: generate resources e.g.food/water
• Regulating services: are much less tangible and harder to
quantify, e.g., wetlands purify water
• Cultural services: The non-material benefits &
enjoyments humans derive from ecosystems
• Natural Capital: Incorporating the total value of all the
world’s natural assets

Chapter II

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Types of Climate Risk
• Climate risk can affect balance sheets & lead to losses
through diminished asset valuation & loan defaults
• Physical risk: arises from physical climate impacts; results
from hazards
• Transition risk: arises from the economic transformation
• TCFD > Physical risk types – Acute & Chronic; Acute
includes weather-related or weather-exacerbated events
e.g., floods, hurricanes, and wildfires. Chronic risks are
gradual, long-term trends e.g., sea level rise,temp increase
• Transition risk types – policy & legal, technology, market,
& reputation
• Risk manifestation = Hazards + Exposure + Vulnerability
• Exposure: assets/firms in a vulnerable place/setting
• Vulnerability: How likely a company or asset, is to get hurt
when it's exposed to dangers
• Governments are converging on a goal of net-zero emissions by
the year 2050
Stranded Assets
• Assets that suffered from unanticipated/prematured write-
downs, devaluations/conversions to liabilities
• Unburnable carbon – Oil/coal reserves that can’t be fully
exploited if the goals of limiting warming are to be met
• Transition risk will lead to stranded assets mainly in the
energy and industrial section. But physical risk can occur
across nearly all sectors likely to be geo-concentrated
Direct/Indirect Physical Risks
• Direct physical risk – They apply to a specific
asset/company/country
• Understanding direct physical risks is not straightforward
• Certain physical risks require an interaction b/w climate
events and local conditions e.g., droughts make it more
likely for fires to start but wildfires need vegetation to burn
• Getting precise data on these hazards is not easy e.g.,
floods depend on hyper-local topography, and resolution
matters tremendously
• With climate data availability, mapping exposures is not
much difficult, & it only requires precise location data to
cross-compare with climate hazards
Chapter III – Climate Risk Change
Indirect Risks Stranded Human Capital
• 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
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
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
e.g., low-lying coastal areas have a right to development and access to affordable
• Indirect physical risks are systemic in their propagation energy
effects & their multifaceted nature - e.g., heat stress on • In the energy sector, stranded assets could occur
worker productivity up/mid/downstream.
• Physical risks require a large amount to adapt and fortify • The faster the pace of decarbonization, the greater the
facilities & don’t produce a profit stream chance of stranded assets in different sector
Transition Risks & Opportunities Transmission into Finance, the Economy & key sectors
• Most models/scenarios for reaching 1.5C equilibrium • There are multiple channels through which climate risks
assume very large amounts of net-negative emissions can affect corporate balance sheets & financial system
• To reach the scales assumed in these models would
require massive & extremely rapid rollout techs & practices • Physical risk in real estate: Locations in vulnerable &
• There is no global carbon tax exposed areas > subject to climate risk. Wildfire & flood
risks are acute for real estate. These risks reduce the
Policy and Legal Risks values of affected properties which results in higher loan-
• Classic policy solutions – carbon taxes, price on emissions, to-value ratios for banks and creates issues for insurers too
or cap-and-trade schemes
• 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
• Efforts to directly pin legal liability on firms for their risk or technology transition risk
proportional contribution to the physical impacts of climate
Technology Risks
• Tech development of renewable energy
• The continued cheapening & improvement of battery tech
Reputational Risks
• Reputation risk and bottom-up consumer/clients/suppliers
/employees pressure can be a source of transition risk
• Consumer influence is most obvious in household goods
TCFD FRAMEWORK KEY RECOMMENDATIONS
• Adoptable by all organisations
• Included in financial filings
• Designed to solicit decision-useful, forward-looking
information on financial impacts, and
• Strongly focused on risks and opportunities related to
transition to lower-carbon economy

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Introduction
• Global efforts to agree on climate policies have faced challenges
like disagreements on emission reductions, collective action
difficulties, and fairness concerns due to different countries'
historical emissions and future growth plans
International Policies
• 1980s – scientific consensus on human influence on climate
• 1988 – Formation of IPCC – UN-convened org of scientists
• UNFCCC – a UN body dedicated to climate change, the first
worldwide climate agreement, the UNFCCC, was established in
1992 at the Rio Summit
• Scientists agreed that even lower levels of warming can lead to
“tipping points” > limit of 2 degrees Celsius agreement
• Allocation of responsibility = Country’s wealth + Historical Emission
• Cumulative CO2 emissions, not current annual emissions are imp
• Major issue: The inherent difficulties of collective action
• Earth’s climate is a global public good
Brief history of int’l climate agreements
• Summits of UNFCCC are called COPs – Conference of Parties
• COP1 – Berlin – 1995
• COP3: The Kyoto Protocol in 1997 required high-income countries
to reduce emissions by 5% from 1990 levels by 2008-2012
• Kyoto Protocol failures – developing countries were not subject to
any kind of obligations; fundamentally, it provided no way to
overcome the collective action problem
• COP21: 2015: The Paris Agreement: Aimed for a 1.5-2°C
temperature reduction, with non-binding plans from all countries,
relying on peer pressure; it also proposed Nationally Determined
Contributions (NDCs) which are to be submitted to UNFCCC –
periodically re-evaluated
• Paris Agreement uses a “ratchet” mechanism, where countries
are expected to tighten their NDCs every 5 years
NDCs & National Climate Policies
• Achieving NDCs requires having a domestic climate policy >
economy-wide (typically a form of carbon tax) or sector-specific
• Carbon Pricing (2 policies): Carbon Taxes: Impose price per ton
of CO2 emitted. Cap-and-Trade: The total amount of emissions is
capped but emissions permits can be traded between participants
• Trading schemes can create credible cash flows but also can
cause volatile carbon pricing
Chapter IV – Sustainability and Climate Policy, Culture, and Governance
• Renewable Standards Portfolio (RSP): is an umbrella term for a
Climate Risk and Supervisions
range of quota-based regulations; requires electricity producers to
source some portion of supply from renewable energy sources
• Central Banks largely incorporated climate change into
their supervision practices
• Feed-in-tariff: offers a guaranteed price/unit of electricity
generated at which producers can sell electricity for a fixed period
• NGFS – Network for Greening the Financial System
• Fuel efficiency standards & emissions standards for cars • Both Micro and Macroprudential supervision are included
• An increasing portion of climate policy is implemented at the • Stress tests are micro- and macroprudential tool
subnational level e.g., States, regions, or cities • Audits and marketing disclosures are being used by
• Some subnational efforts function as networks and advocacy regulators to prevent greenwashing and do enforcement
efforts. C40: A global coalition of cities: currently 97 cities
Private Sector Sustainability Frameworks
GHGs Emissions Accounting
• The Investor Agenda consists of IIGCC & 6 other groups
• GHG protocol was established by the World Resources Institute
(WRI) & WBCSD. GHG protocol focus: Direct & Indirect Emissions
working with investors
• Direct: Emissions from sources that are owned or controlled by • Climate Action 100+: An investor coalition – 575 members
the reporting company & US$ 54 trillion in AUM – Targeting 100 most heavily
• Indirect: Emissions that are a consequence of the activities of emitting publicly listed companies
the reporting company but occur at sources owned or controlled by
another company. Emissions are further divided in Scope 1, 2, & 3 Nature, Biodiversity, & Climate Change
• Scope 1: Direct emissions from owned or controlled sources • As per WEF, more than 50% world’s economic output (US$
• Scope 2: Indirect emissions from the generation of purchased 44 tn) is moderately or highly dependent on nature
electricity
• June 2021 – Task Force on Nature-related Financial
• Scope 3: Indirect emissions that occur in the value chain of the
reporting company including both upstream and downstream Disclosures (TNFD) was established
• Scope 3 emissions are by far the largest part of overall emissions • TNFD Framework – 4 pillars: Governance, Strategy, Risk
for companies’ products and services. It is also most difficult to Management, Metrics & Targets
measure.
• Double Counting Issue: refers to the challenge of accurately
measuring and attributing indirect emissions from a company's
entire supply chain, making it difficult to account for the full
environmental impact. Due to this GHG protocol recommends
that scope 3 emissions should not be aggregated
Climate Risk & Financial Policy
• Government policies, international institutions, and private
investors are driving the transition to a sustainable, green
economy through green finance and sustainability products.
• Multilateral Development Banks (MDBs) e.g., World Bank, are
tasked with supporting public-sector investment in physical &
human capital projects conducive to socioeconomic development
• Financial sector promotion & policymaking around financial
centres have started to include green elements e.g., FC4S
Green Taxonomies & Financial Regulations
• Taxonomies: List of economic activities considered “green”
• EU Taxonomy sets performance thresholds (technical screening
criteria) for economic activities by sector and sub-sector
• It’s very challenging to assess each economic activity
• Green Taxonomy drawbacks: 1. Binary “green” assessment:
Not all assets are simply green or not green, there are some with
“shades of green” 2. Lobbying 3. Asset Bubbles 4. Sub-optimal
targeting 5. Decreased Quality

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Introduction
• Sustainable Finance: Any kind of financial activity that
takes sustainability into account
• Green Finance: Sustainable finance focused on
environment-related risks & opportunities (but not
necessarily climate change)
• Climate Finance: Financial flows relating to climate change
– mitigation and adaptation
• In 2018, sustainable finance stood at US$ 30.7 trillion
Sustainable & Green Financial Products & Instruments
• Sust Fin Products come in 3 broad varieties. 1. Use of
proceeds is earmarked & ring-fenced for sustainable use.
2. Sustainability-linked instruments, the instrument is
linked to sustainability targets. 3. Sustainability acts as a
selection criteria for inclusion.
Green, Social, and Sustainable Bonds
• Green bonds (separately labeled, ring-fenced) are bonds
whose proceeds are earmarked for environmental projects
• Reported both to prospective bondholders ex-ante &
current holders
• Green bond issuance is largely self-defined and self-
policed by industry principles e.g., Green Bond Principles
• GBP has 4 core components: Use of proceeds, Process for
project evaluation and selection, Management of proceeds,
and Reporting
• Social Bonds are bonds with earmarked proceeds for
projects that will bring social benefits
• Sustainability Bonds = Green + Social Bonds
• SDG Bond: Linked to UN SDG
Green Loans
• Green Loans: Loans that have been made for
environmental & climate-related projects
• Governed by Green Loan Principles
• Majority of green loans go to clean transportation & energy
• Green loans are highly concentrated in power sector
Chapter V: Green and Sustainable Finance
Sustainability Linked Loans & Bonds EU Taxonomy Examples
• Sustainability-linked bonds, the coupon paid is linked to the Cement Manufacturing
issuer firm’s achievement of sustainability targets
• Sustainability-linked loans, the interest rate is linked to a • Cement Manufacturing is associated with signification
company’s sustainability benchmarks carbon dioxide emissions.
• SLBP – Sustainability Linked Bond Principles • The eligibility of activity/factory requires the following:
• SLBP has 5 core components: Selection of KPIs, - Cement Clicker: specific emissions of clinker production
Calibration of Sustainability Performance Targets, Bond processes are lower than set EU-ETS benchmarks
characteristics, Reporting, Verification - Cement: Specific emissions of cement production is lower
• Whether an issuing firm counts as sustainable is often than 0.498 tCO2e/t of cement
determined by an ESG Score or Rating
Other sustainable financial products Passenger Rail Transport
• Green car loans – financing environment-friendly cars • Demonstrate substantial GHG emission reduction by:
• Green mortgages – mortgages for energy-efficient homes - Increasing the no. of low and zero emission fleet
• Sustainable Credit Cards – donate a small % of purchases - Improving efficiency of overall transport system
• Zero direct emissions trains are also eligible
ESG and Climate Integration in Investing
• Integrating ESG or climate issues into investing/lending
starts with a metric – a numerical gauge for ESG & climate
risk and exposure
• ESG scores are not standardized in the industry
• ESG ratings are not consistent and hence incomparable
• ESG scores are built up from raw data and turned into
indicators, and then scores, of which weighted averages
are taken in several stages to arrive at an overall score
Shareholder Engagement
• Investor engagement is becoming more influential
• Shareholders now demand adherence to certain targets
e.g., the Paris Agreement
• Companies that do not oblige to these demands are
“named and shamed”
Existing and emerging definitions
• One imp trend is increased disclosure requirements for
companies, usually through regulatory action
• In the UK, listed companies are required to report on GHG
& Diversity
• Exchanges can serve as imp gatekeepers because they’re
the only venues where companies can be publicly listed
Regulatory Trends
• Regulators are excluding clean fossil fuels from green
financing lists
• Regulators are also moving to pin down the definitions of
sustainable activities in even greater detail

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Introduction
• Risk Management is a structured approach to monitoring,
measuring, and managing exposures to reduce the
potential impacts of uncertain occurrences
• To manage climate risk, it’s imp to examine how climate
risk affects various types of financial risk e.g., operational,
market, insurance, liquidity, and credit risk
• “You can only manage what you can measure”
• Climate risk drivers can transmit to financial risk through a
no. of risk types – operational, credit or market
• Many classification schemes of climate risk transmission
channels come from central banks. These schemes
distinguish between micro, macroeconomic & financial
consequences and drivers
Micro(Company level) Climate Risks
Operational Risk
• Op Risk is the risk inherent in doing business, & it reflects
potential losses from inadequate or failed internal
processes, systems, human error, or outside events
• Op Risk is multifaceted and hard to measure
• One of the strongest effects of climate risk on operational
risk is its effect on external risk
• Transmission of climate risk into internal process risk is
similar to that of people risk
• Other categories of Op Risk when analysing climate risk –
Legal Risk, Strategic Risk, Reputation Risk
Credit Risk
• Credit Risk measures the creditworthiness, or ability a
borrower has to pay back a loan
• Key metrics: Probability of default (most general measure
of credit risk), loss given default (LGD is expected to be
highly sector-specific & requires a high level of
customization), and exposure at default
• One important transmission channel from climate to credit
risk runs through operational risk
• Another important channel operates through valuation
effects, that is, asset stranding
Chapter VI: Climate Risk Measurement and Management
• Less valuable assets = Increased weight of liabilities on
balance sheet > More chances of company defaulting >
Greater loss given default
• A final, related channel is that of pricing effects through
markets for inputs (raw materials) and outputs (products)
Firm-specific Liquidity Risk
• Liquidity risk is about losing access to liquidity-the ability to
quickly and easily convert assets into cash
• Key metrics for liquidity risk include loan-to-deposit ratios
(specifically for banks) and bid-ask spreads
• Climate risk drivers can prompt depositors to draw down
deposits and debtors to draw down credit lines at the same
time, dramatically increasing (worsening) loan to-deposit
ratios e.g., after floods people can liquidate all their funds
Underwriting Risk
• This risk only directly affects the insurance sector
• Key metric – Changes in insurance premiums
• Climate risk leads to a concentration of risk due to
underwriting becomes highly risky
• 1-in-100-year events, becoming much more common e.g.,
heatwaves in Europe
• Larger insurers with diversified exposure can cross-
subsidize to an extent but it’s not possible for smaller ones
• Underwriting risk increases can also affect other types of
risk. No Insurance = No Resilience or hedge for firms
Macro Climate Risk
• Thai floods 2011 affected global semiconductor supply &
had ripple effects across supply chain – a good example of
the macro effects of operational risk on a macro level
• Increased counterparty credit risk that results from climate
change can directly transmit into the financial sector
• Climate risks have a wide reach their impact can create
systemic level liquidity risk e.g., liquidity crunch after the
earthquake in Japan in March 2011
• Climate Minsky moment: A Minsky moment is a sudden
major collapse of asset values
• The unavailability of insurance due to climate risk can have
systemic effects
• At the systemic level, climate risk translates into market
risk through repricing and dislocation effects as well as
through asset-stranding
• Key Metric for Climate led Market Risk – Climate Value at
Risk (CVaR) - captures a rough estimate of climate-related
financial losses - it includes both transition and physical
risk as well as economic data and company-level data.
• Climate risk incorporation into asset prices might also
reduce risks to financial stability
• Sovereign Risk: Examining size & sectoral composition of
their economies; capacity to create adaptive policies &
responses to climate change; debt accessibility; and
specific policy decisions
• Stranded Nations: Nations heavily reliant on fossil fuels
exports may turn into stranded nations
Climate Risk Measurement
• Transition risk requires, first & foremost, accurate asset-
level and company-level data on GHGs but also data on
policy landscapes, technological changes, and consumer
preferences to capture the various drivers of transition risk
• Physical risk requires data on current & future physical
hazards, derived from a combination of historical data &
climate models; topographical & locational data of assets;
& information on vulnerability and adaptive capacity
Company level Transition Risk Data
• Corporate Carbon Footprints: These have shortcomings
as most data currently comes from self-reporting. Typically
unaudited & vary in their breadth and detail.
Company level Transition Risk Data
• The basic data for gauging physical hazards is provided by
global climate models by IPCC e.g., CMIP5 and CMIP6
• Only some corporations and financial counterparties have
the ability and desire to bring the specialist knowledge in-
house to make direct use of these models.
• Some firms provide investors with physical climate risk
analysis tools of some kind: Acclimatise, Moody's, WRI
• Company or asset-level physical risk data and scores are
arguably the most easily interpretable approach to physical
risk analysis in a way that is accessible to lenders,
investors, and other stakeholders
• By combining data on climate hazards with the location of
companies' factories and warehouses and an estimate of
vulnerability, the physical climate risk scores can tell
investors about the relative physical risk of investing in,
say, Volkswagen as compared to Ford or Microsoft
• These "heavily digested" scores do have their downsides,
however. The proprietary methods and datasets that they
derive from remain a "black box" to the investors who pur
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Portfolio level analysis
• Most relevant to a financial counterparty, such as a lender
or an investor
• Two common metrics: carbon intensity, or GHG emissions
normalized by portfolio market value (for example, tons of
CO2 equivalent/million USO invested), and weighted
average carbon intensity (tCO2e/million USO of revenues).
Other method ologies pin a temperature or "warming
potential" on an entire portfolio
• Aggregating and evaluating portfolio-level physical risk is
difficult for equity or bond portfolios, where exposure is to
entire companies
Climate Risk within ERM
• One of the most widely used frameworks for ERM was
developed by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO)
• ERM is not considered to simply be a function or a
department, but it consists of "culture, capabilities and
practices that organizations integrate with strategy-setting.”
• ERM is a holistic modus operandi across an entire firm
Risk Governance & Culture
• Successful risk governance starts at the highest level, with
the board and senior executives
• Best practice governance arrangements tend to involve
multiple layers of employees and internal processes
• Culture defined by COSO: Attitudes, behaviors and
understanding about risk[...] that influence the decisions of
management and personnel and reflect the mission, vision
and core values of the organization
Strategy & Setting Goals
• Corporate strategy high-level decisions on an organiza-
tion's priorities and mission
• Understanding the full business context on climate risk
requires understanding the external environment and
megatrends & how the inputs, business activities, and
outputs of that particular company are affected by climate
change
Chapter VI: Climate Risk Measurement and Management
• COSO and WBCSD have recommended starting with
megatrend analysis and then delving deeper through the
use of tools such as SWOT analysis, impact mapping, and
materiality assessment
• Two other key components of strategy with regards to
climate change, and emphasized by the TCFD, are time
horizons and outcome variance by scenario, which can be
addressed through scenario analysis
Performance: Tracking and Measuring Risk
• Tracking performance for ESG & climate risks consists of 3
sub-components: Risk Identification, Risk Assessment, and
Prioritization.
• Risk identification starts with examining the transmission
channels of climate risk drivers into financial risk and then
identifying which of these are the most relevant for a
particular organization.
• Risk assessment involves gathering data on the actual
scope of these risks. A financial institution will tend to do
this sort of analysis at a counterparty level.
• Risk prioritization is especially important in an ERM con
text, as any large enterprise will be exposed to a multitude
of risks, and it is important to rank these in order of
importance. Ranking methods include ranking by likelihood
of occurrence, adaptability and complexity, or severity.
• Risk Responses: Acceptance, avoidance, pursuit,
reduction, and sharing
Review and Revision
• The review and revision portion of the COSO framework
mainly refers to additional checks and balances on the
ERM framework
• It’s about being self-critical
• Can be performed through periodic audit + continuous risk
management activities
Communication, Reporting & Disclosure
• The larger a company, the less straightforward even
internal communication can be
• Communicating to external stakeholders, including
investors and lenders but also credit rating agencies,
employees, suppliers, regulators, and the public at large, is
likewise an important outcome of successful ERM
• Risk management that is practiced fully in private is not
successful risk management. It is imp for shareholders &
lenders to know that a company has solid ERM in place to
ensure continued value creation in the face of the
crystallization of risks such as climate risk

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Introduction
• Scenarios, as well as models (for which scenarios are used
as inputs), are critical tools for climate risk management.
• Scenario analysis is flexible enough to draw together
nearly all the relevant issues, risks, and their
interrelationships in one approach
• Scenario analysis is the practice of planning through
describing and sketching the future using plausible
narrative stories ("scenarios")
• TCFD recommends scenario analysis to "enhance critical
strategic thinking" and challenge conventional wisdom
regarding the future using plausible, distinctive,
consistent, relevant, and challenging scenarios
• Reference scenarios are a set of agreed-upon projections
of global emissions trajectories, with accompanying socio-
economic narratives and estimates for physical impacts
• IPCC scenarios are most widely used & agreed upon
• Due to the lag in the global climate system, the physical
outcomes of climate change are practically the same for
the next few decades (until about 2050) regardless of
emissions
• Scenario analysis is being implemented/mandated by
regulators
• Stress tests are widely adopted by regulators after 2008
financial crisis & now repurposed for climate change risk
• BoE - Climate Biennial Exploratory Scenario
Global Reference Scenarios
• Net zero means reducing global emissions ("sources") to
zero in almost every sector of the global economy and
balancing out any residual emissions that cannot be
eliminated
• All scenarios use some carbon removals to achieve the
"net" in net zero
• Modeling and predicting the future trajectories of the GHGs
in the atmosphere is arguably the single most important
factor to understand
• Current IPCC usage and modeling is based on representa-
tive concentration pathways (RCPs)
Chapter VII: Climate Models and Scenario Analysis
• The RCPs were constructed by back-calculating the
amount of emissions that would result in a given amount of
radiative forcing
• the RCP names are based on the amount of radiative
forcing measured in watts/meter squared (m2)
• RCP 2.6 = Below 2 degrees Celsius
• The five SSP scenarios range from better to worse climate
change outcomes. SSP-1 sketches out a scenario of
significant focus on sustainability; SSP-2 is a "business as
usual" scenario; SSP-3 involves regional rivalry between
countries; SSP-4 has a high degree of inequality; and SSP-
5 posits fossil-fuel development
• The SSP base scenarios deliberately do not include
climate policies
• Shared climate policy assumptions capture key policy
attributes such as the goals, instruments, and obstacles of
mitigation and adaptation measures, and they introduce an
important additional dimension to the scenario matrix
architecture
• Not all RCPs are achievable under all SSPs - a high-
mitigation scenario is not feasible under the SSP3 "regional
rivalry" assumptions
• The models that can assess the combination of social,
economic, energy, emissions, and climate factors are
called integrated assessment models (IAM)
• International Energy Agency: The IEA's two core
scenarios are the 1) Stated Policies Scenario, which
reflects existing policy frameworks and announced policy
intentions, and 2) the Sustainable Development Scenario
(SDS), which combines climate and social targets and
limits warming to 2°C in line with Paris targets
Scenario Parameters and Applications
• The output and usability of global scenarios differs for
transition risk compared to physical risk
• For transition risk, non-financial corporations or financial
institutions typically examine whether their facilities,
strategies, and portfolios align with one of the global
projected emissions trajectories
• For physical risk, emissions trajectories are meaningful to
the extent that, when "plugged in" to a physical climate
model
• there are certain common parameters that any scenario
analysis has to decide on before starting, no matter what
kind of climate risk is being analyzed
Choice of Parameters
• All climate scenarios have a number of built-in parameters,
or assumptions
• Conducting scenario analysis requires analytical choices
on scope and methods, including quantitative versus
qualitative methods
• Climate scenario outputs can range from revenues or costs
to asset valuations, such as from assets becoming
stranded
Use of Scenario Analysis for Transition Risk
• Transition risk scenario analysis is very closely and directly
tied to emissions scenarios
• Transition risk is higher when emissions are cut more
drastically
• IAMs are broad-spectrum models designed to allow
analysis of how societal and economic choices affect each
other and the natural world, including the causes of climate
change
• Most IAMs in use are far more complex, and they include
representations of relevant interactions both among a
number of important human systems (e.g., energy use) &
physical processes (e.g., the carbon cycle)
• Pathways Philosophies: Top-Down – Work backwards
from net-zero globally; Allocate emissions across sectors &
regions; Consider interlinkages across sectors
Bottom-Up – Work forwards from where the sector is
today; Focus on commercially feasible, scalable action;
Identify technology & policy step changes
• Paris Alignment Capital Transition Assessment
(PACTA): Starts with a bank’s financial exposure to
physical assets in the real economy > compares economic
units of output to different climate change scenarios
Use of Scenario Analysis for Physical Risk
• Because the climate system responds on a lag, physical
impacts until about 2050 are largely "baked in" by current
emissions, so emissions trajectories do not matter on the
timescale of the next few decades, which is what the
majority of policymakers, firms, and investors limit
themselves to
• physical climate models can disagree on the particulars of
many hazards when it comes future trends
• Both because of the lag in the Earth's climate system &
because of the way the physical models are designed,
these models give the best accuracy on decadal scale
• Physical risk always starts at the facility level. Physical
impacts affect specific processes & sites - a flooded
factory, a wildfire-ravaged warehouse - and then these
effects cumulate upward through ownership supply and
investment chains
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Scenario Analysis Use Cases: Corporate

• An important reason for firms to engage in scenario
analysis is for setting corporate strategy & communicating
that strategy to investors and other stakeholders
• If companies do not make climate change plans and
conduct analyses that are seen as credible and thorough,
investors can come after companies
• Scenario analysis can help chart opportunities and future
demand for products
• Scenario analysis helps to mitigate operational risk and
improve preparedness and resilience
Scenario Analysis Use Cases: Finance
• An important use case of scenario analysis in the financial
sector is to examine portfolio-level exposures, and gauge
how these would vary in different climate outcomes
• Ex-ante integration of climate scenarios into investment
processes is a newer phenomenon

Chapter VII: Climate Models and Scenario Analysis


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Introduction to Net Zero
• The concept of net-zero emissions originally emerged in
scientific discussions on the link between anthropogenic
emissions and global temperature changes
• In Article 2.1 of the Paris Agreement, negotiators agreed to
"hold the increase in global average temperature to well
below 2°C above pre-industrial levels" and pursue "efforts
to limit the temperature increase to 1.5°C."
• By the end of COP26 - held in November 2021 in Glasgow
- 135 countries representing 88% of global emissions and
90% of global GDP made net-zero commitments
• Within 18 months of its launch, 7,500 entities joined the
Race to Zero via one of the member alliances and
submitted their respective commitments
• The Net-Zero Insurance Alliance (NZIA) is the leading
net-zero initiative for insurers and currently brings together
20 companies that jointly represent 11% of the world
premium volume
• Different countries have different degrees of legal
commitment. E.g., The UK & Germany have embedded
net-zero targets in law but this is only so for ~10%
countries
• Around 20% of countries have pledged to reach net zero
only via public statements made by key officials
• There are great differences regarding the scope of
activities covered by reduction targets. E.g., the net-zero
target published by Apple explicitly includes Scope 1, 2,
and 3 emissions, whereas the pledge submitted by
ExxonMobil covers only Scopes 1 and 2
Implications of Net Zero - Actors
• Following international emission accounting standards,
country-level emissions are usually assigned on a
territorial, or production-based accounting method
• Critics argue that by placing emphasis on the country
where emissions are produced, too little attention is being
paid to the consumption pat terns that drive emission-
intensive production elsewhere
Chapter VIII: Net Zero
• Alternate Approach: Rely on consumption-based
accounting methods, which measure the cumulative
emissions that arise from the production of all goods and
services consumed in that country, regardless of where this
production took place
• There is no globally recognized standard for accounting
emissions at the sub-national level
• A widely recognized best-practice standard is the Protocol
for Community-Scale Greenhouse Gas Emissions
Inventories, published by the GHG Protocol
• The GHG Protocol has developed two GHG reporting
standards for cities and regions - BASIC & BASIC+
• BASIC level emissions inventories cover scope 1 and 2
emissions from stationary energy and trans port, as well as
scope 1 and 3 emissions from waste
• BASIC+ level inventories are significantly more
comprehensive and cover sources such as scope 3
emissions from transboundary transport and scope 1
emissions from agriculture, forestry, and land use
• How the net-zero transition will affect firms in the real
economy differs across sectors
• For firms in energy-intensive industries whose climate
impact is largely driven by Scope 1 emissions, the core
challenge will be to develop alternatives to current
production processes
• In other sectors, firms' individual Scope 1 emissions will
make up a much smaller share of their overall climate
footprint. For example, supermarket chains – their own
emissions are small compared to the emissions arising
across the value chain of their products
Transition Plans
• The CDP defines a transition plan as a "time-bound
action plan that out lines how an organization will pivot its
existing assets, operations, and entire business model
toward a trajectory aligned with the latest and most
ambitious climate science recommendations.
• Net-zero transition plans are a relatively new idea, and it is
therefore unsurprising that there is currently no detailed,
sec toral guidance on how to develop them.
• TCFD: Transition plans should be (a) aligned with overall
corporate strategy, (b) anchored in quantitative metrics and
targets, (c) subject to an effective governance process, (d)
full of actionable, specific initiatives, (e) credible, (f)
periodically reviewed and updated, and (g) reported
annually to stakeholders.
Attributes of Net Zero targets
• 7 attributes that net-zero targets should have:
1. Front-loaded emission reductions
2. Comprehensive approach to emission reductions
3. Cautious use of carbon dioxide removal
4. Effective regulation of carbon offsets
5. Equitable transition to net zero
6. Alignment with broader socio-ecological objectives
7. Pursuit of economic opportunities
• Carbon credit projects face challenges with leakage (i.e.,
displacing rather than avoiding emissions), permanence
(i.e., long-term storage of carbon), and the accurate
measurement of the amounts of carbon stored
• Transition plans can play an important role in
communicating how companies measure, manage, and
reduce transition risks. A transition plan should always
allude to the 4 key transition risks - policy and legal,
technology, market, and reputation risk.
• Writing a transition plan forces decision makers to rethink
how their business model fits into a decarbonized economy
and take appropriate action. Remember that "no decision"
is a decision for the status quo.
• Credibility Gap: Many governments are currently failing to
keep pace with their 2030 interim emissions targets, these
NDCs often do not outline clear and attainable short-term
targets and milestones.
• Less commitment from large companies = Lack of
regulatory pressure + Complexity of understanding what
the net-zero implies for business operations
• Important tools that can help organizations unpack these
complexities are sectoral transition pathways
Use of Metrics
• TCFD recommends to disclose metrics used to/for:
- assess climate risks & opportunities
- Scopes 1, 2 and 3
- Targets used to manage climate risks/performance vs
targets
• Typical ESG ratings lack the depth needed to assess
whether a company is on a net zero by 2050 path
• Portfolio Alignment Tools (PAT) can be used to set
sector-specific targets by financial institutions
• PAT is guided by 3 Core Qs: Binary Measurement,
Benchmark Divergence, and Implied Temperature Rise
(ITR)
• Reporting Standards: TCFD, SASB, ISSB, EU-CSRD and
GRI