Risk Management

How can we deal with the future uncertainty?

Key information

Risk is a measurement of uncertainty, and so it is a crucial factor when considering the unknown future before us. Through analysing the probability of an event occurring, and the resultant financial impact, we can analyse risk and put measures in place to minimise loss.

There are three main categories of risks related to sustainability:

  1. Physical Risk

    • Encapsulates risks related to the physical impact of climate change

    • Examples include extreme heat events, which studies have attributed to human action causing warming of the climate in many studies

  2. Transition Risk

    • Includes risks related to the transition to a low-carbon economy

    • A big aspect of this is stranded assets, which are assets that have suffered from unanticipated write-downs or devaluations due to climate factors

    • For example, nearly 60% of oil and fossil methane gas and 90% of all coal reserves would have to remain unused to keep temperature increase at 1.5°C - the target level set in the 2015 Paris Agreement.

  3. Litigation Risk

    • The chance of legal action being taken in response to company's behaviours relating to climate change

    • Since 2017, the total number of climate litigation cases nearly doubled to 1550

Quick activity: Can you think of which industries could be most susceptible to each of these risks?

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