4. Mapping Out When and Where Climate Risk Becomes a Credit Risk

This chapter presents how different types of climate risk, transition risk and physical risk, can be assessed to understand the implications for the creditworthiness of debt issuers. It considers the methods to identify the most financially material issues for different sectors and types of entity, such as corporations and governments. In terms of energy transition risk, this work identifies the primary channels for transmitting risk: (a) policy measures, (b) market dynamics, and (c) technological change. For physical climate risk, it outlines the challenges of both long-term chronic trends and acute event risk. To determine the residual risk levels, potential mitigation measures that reduce the financial impact, such as contractual arrangements, insurance, and investment in adaptation, are discussed. A theme throughout the chapter is the temporal aspect of climate risk, which attempts to forecast the low carbon transition as well as the estimations of financial significance.