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 an acknowledged authority on climate change and its implications for the financial system. He is the founder of D. A. Carlin and Company, an advisor to governments, corporates, and financial institutions on climate and ESG topics. He has authored numerous reports that provide practical tools for financial actors looking to address climate change and has run capacity-building programs for financial institutions and supervisors around the world. David led the creation of UN Environment Programme’s- Finance Initiative (UNEP FI)’s Risk Centre as the head of Risk. Over the past years, he has worked with over 100 global banks, investors, and insurers on climate scenarios, climate risk assessments, and climate governance. He has been an advisor to UNEP FI’s TNFD pilot program on nature and biodiversity related risks, the Net-Zero Banking Alliance (NZBA), and the Glasgow Financial Alliances for Net Zero (GFANZ). David is also a contributor to Forbes and a senior associate at Cambridge’s Institute for Sustainability Leadership (CISL) as well as a visiting fellow at King’s College London. David has worked as a Principal in Finance, Risk, and Public Policy for Oliver Wyman and in Model Risk Management for PNC Bank. His background is in quantitative modeling and decision science.

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