Climate change related risks explained
Climate-related risks
The impacts that climate change can have on an economy, sector, industry or an individual business arise from several categories of climate-related risk:
Direct climate change risks, which consist of:
a.
Physical forms of harm, loss and disruption that can be caused by exposure to climate change hazards.
Intangible forms of harm, loss and disruption caused by exposure to the process of transitioning to a lower-carbon economy.
b.
Range of “knock-on” financial risks (and opportunities) that can be caused by exposure to physical and transition risks.
Understanding physical climate risks
Physical climate risks arise when the assets and operations of an organisation are exposed in some way to physical climate hazards. There are two types of climate hazard:
Chronic climate hazards
Long term and permanent climate change induced environmental shifts like: temperature rise, sea-level rise, desertification and ecological shifts.
Higher Temperatures
Sea-level
rise
Desertification
Ecological shifts
Acute climate hazards
Increasingly frequent and intense one-off climate change induced events like: cyclones, wildfires, floods, storm surges and droughts
Cyclones
Wildfires
Floods
Droughts
Physical climate risks that can arise from exposure to these hazards fall into the following categories:
Built environment risks
Natural environment risks
Human environment risks
Food system risks
Infrastructure services risks
Understanding transition climate risks
Transition climate risks arise when the assets and operations of an organisation are exposed to the various adjustments, which the process of transitioning to a low-carbon future will entail.
While the extensive adjustments needed to facilitate a timely transition to a low carbon economy are absolutely necessary, from a risk management perspective they can represent a "transition hazard" (or opportunity), which fall into one of the following four categories:
Policy & legal changes
Market changes
Technology changes
Values shifts
Transition climate risks (and opportunities) that can arise from exposure to the above transition hazards (i.e. transition related adjustments) include:
Supply risks
Demand risks
Business model risks
Reputation risks
Regulatory and other legal risks
Understanding the resulting financial risks
There are a range of "knock-on" financial risks and related consequences, which can also arise as a result of exposure to physical and transition climate risks.
These risks are in addition to the direct financial impacts caused by physical and transition climate risk exposures. While there there is no finite list of climate related financial risk types, they are generally regarded as falling under one of the following categories:
Liquidity risks
Credit risks
Capital risks
Financial market risks
Operational risks
Insurability risks
Liability risks
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