By Prof. Lapman Lee, Professor of Practice (ESG, FinTech, Governance), Convenor of the Hong Kong Polytechnic University’s Sustainable Finance Centre of Excellence; Managing Director of Triniton Advisors, a specialist ESG advisory firm; and a Vice Chair of the British Chamber Financial Markets Committee.
The ramifications of climate change Climate change is real, and the clear and present danger it poses indiscriminately dawned on the 7.5 million residents of Hong Kong in early September 2023, when heavy rainfall unseen since 1884 erupted, resulting in severe disruption and images of flooded streets in the Central business district surreal to Asia’s premier International Financial Centre to a submerged ground floor of a usually hustling and bustling Wong Tai Sin shopping mall. It may be worthwhile to briefly touch upon the three types of climate change risk according to the Task Force
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Climate-related
Financial
Disclosures
(TCFD ) supplemental guidance to the insurance sector around 1) governance, 2) strategy, 3) risk management, 4) metrics and targets. The first type of climate risk as described in the above
situation is called physical climate risk, and to be more precise acute physical climate risk or extreme weather events such as droughts, floods, typhoons, and wildfires. There is also chronic physical climate risk, which is due to changing climate conditions such as rising temperatures and sea level rises. Physical climate risk can cause direct damage to physical assets or property, resulting in lower asset values, increased insurance claims, and supply chain disruption. The second type of climate risk, less well-known, is transition climate risk, which is the financial risk on a company’s assets due to the transition from a carbonreliant to a low-carbon or net-zero carbon economy. Policy and regulatory changes (including carbon pricing), but also society’s behavior in terms of consumption and purchasing (including energy), and the pace and scalability of (green) technological innovations, are the key drivers impacting future climate transition pathways and scenarios.
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IFRS S2 climate-related disclosures supersede TCFD and are broadly consistent with TCFD.
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