Introduction to Physical and Transition Risks

David Carlin

Head of Climate Risk

In this video, David Carlin introduces the importance of climate risk management. He begins by explaining the difference between physical and transition risks and finally discusses why financial institutions need a better understanding of climate risks and opportunities.

Climate & Biodiversity

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Introduction to Physical and Transition Risks

5 mins 19 secs

Key learning objectives:

Understand what are the two main types of climate risks
Outline why financial institutions need to understand climate risks and opportunities

Overview:

All of us are now aware of the physical risks that climate change brings, but it is important to understand that climate risks are financial risks. Financial institutions need to identify, assess and mitigate these risks. Understanding this can also help them take advantage of opportunities whilst helping transition to a sustainable future.

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Summary

What are the two main types of climate risks?

Climate risks can be categorised broadly into two types:

Physical risks - These encompass the chronic and acute events we witness everyday, such as rising sea levels, floods, and wildfires.
Transition risks - These are linked to the actions we must take to combat climate change, resulting from changes in policies, technologies, markets and legal frameworks.

What are litigation risks?

This is an emerging area, a part of transition risks where people and businesses seek compensation for losses resulting from climate-related events and legal challenges that demand actions to address climate change.

Why should financial institutions care about climate-related risks?

Climate risks are financial risks as they extend beyond environmental concerns and bring about substantial financial implications for real economy companies and financial industries. However, the implications and the changes have not been fully reflected in asset valuations or in the considerations of other traditional financial risks.

Financial institutions are under mounting pressure from different stakeholders to identify, assess, and mitigate climate-related risks.Despite these risks, financial institutions can also find opportunities, build resilience and actively contribute to a sustainable future for all.

What are the benefits of understanding climate risks and opportunities?

1. Understand and quantify the financial impacts of climate change

2. Identify where material impacts, risks, and opportunities may reside

3. Build resilience by aligning portfolios and strategy

4. Formulate robust plans to support the transition

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David Carlin

David Carlin is the Head of Climate Risk and TCFD Programme at UNEP FI where he has worked with over 100 financial institutions to explore the risks and opportunities presented by climate change and the transition to net zero. He also conducts research at the intersection of climate, nature, and finance at Cambridge’s Institute for Sustainability Leadership. David is also an advisor to governments, firms, and solutions providers as he helps them to explore how they can integrate sustainability and climate-readiness into their strategies and operations.

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