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:
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
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.
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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