GARP SCR- Chapter 6: Climate Risk Measurement and Management

ayshasathar101
Sep 8
2 min read

Updated: Sep 9

What is Risk Management and how can it be applied in Climate Action?

Risk management is a structured approach to monitoring, measuring, and managing exposures to reduce the potential impacts of uncertain occurrences.

On the other hand, Climate Risk Management, when practiced proactively, can help mitigate the impacts of climate change, both from physical impacts and transition impacts, on a financial institution's portfolio or corporation's operations

Risk Types include:

Operational risk
Credit risk
Liquidity risk
insurance risk
Market risk
Sovereign risk

Explain how a climate-driven ‘Minsky Moment’ could trigger a liquidity crisis in the global financial system.

A Minsky moment, in general, is a sudden, major collapse of asset values. A "climate Minsky moment" could cause abrupt and wide enough repricing and dislocation to constitute a market liquidity shock.

If severe enough, such a climate Minsky moment could provoke a market-wide liquidity crunch.

Example: The Global financial crisis of 2008.

NOTE: Large-scale dislocations and repricings resulting from climate risk are expected to be a problem even if they do not occur suddenly enough to constitute a Minsky moment and a liquidity shock. So, these kinds of market changes are classified under market risk rather than liquidity risk.

How can insurance withdrawals + market repricing reinforce each other to amplify systemic climate risk?

When insurers withdraw or refuse coverage, this might leave firms completely without coverage, potentially amplifying risks to financial stability.

Also, Climate risk is expected to produce sector and market-wide repricing of many, if not most assets and commodities, causing dislocation and potential systemic risk.