A large real estate investment firm increases resources to understand transition and physical risks as it expands into markets with climate regulations and increasing flooding events. Senior leadership requires the risk team train all business units in understanding how both climate risks can impact operations.
During this process, how should the risk team define commonalities between both risks?
Each risk type can lead to stranded assets of investee companies. Transition risks involve changes in regulations and shifts towards sustainable practices, potentially making certain assets obsolete or redundant. Physical risks, such as flooding, can damage or render properties unusable. Both scenarios can result in assets that cannot perform their intended functions or produce income, leading to stranded assets. This is a commonality that directly affects the firm's investments and operations, making it a crucial point for the risk team to highlight in training sessions.
Use of scenario analysis for physical risks is significantly different from transition risk scenario planning in multiple ways. However, a second important difference is that, because the climate system responds on a lag, physical impacts until about 2050 are largely “baked in” by current emissions, so emissions trajectories do not matter on the timescale of the next few decades, which is what the majority of policymakers, firms, and investors limit themselves to (Four Twenty Seven, 2019).
Correct Answer is A: Unlike stranded assets due to transition risk, which are likely to be more concentrated in the energy and industrial sectors, stranding due to physical risk can occur across nearly all sectors..
correct is D as it says "the majority". A cannot be for sure as to become stranded assets require exposure and vulnerability assessment
A is a better answer. D is vague and not necessarily true.