The CRO at a commercial bank in China examines the negative impact of climate-related physical risk on clothing manufacturer cash flows that subsequently lead to higher credit risk.
The CRO observes which event leading to increased credit risk from climate physical risk?
The negative impact of climate-related physical risk on clothing manufacturer cash flows that subsequently lead to higher credit risk would most likely be due to a decrease in production capacity, as this directly affects the financial stability of the company. Higher labor absenteeism due to climate-induced conditions such as extreme weather events or poor air quality can significantly reduce production capacity, thereby impacting revenue and increasing the credit risk for the bank.
Correct Answer is D (abrupt transition) - SCR Guide states One important transmission channel from climate to credit risk runs through operational risk. A company whose factories, warehouses, or supply chains are particularly vulnerable to extreme weather impacts (physical risk), or indeed to abrupt policy changes (abrupt transition risk), will have greater business interruption, resulting in a loss of revenues and profits.
the question is asking about physical risk not transition risk. D is obviously referring to transition risk which is immediately incorrect
Answer B is wrongly phrased. Disruption "due to climate adaptation" is not a physical risk. More of a transition risk (efforts to reduce C02, self induced). Supply chain disruptions due to Chronic or acute climate events (...) would be physical risks.
Adaptation is all physical risk, not transition risk.