Sustainability and Climate Risk (SCR) — Question 7

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?

Answer options

• A. Each risk type can lead to stranded assets of investee companies.
• B. Renewable energy investment returns will likely increase as each risk type grows.
• C. The timing of impacts from each risk type will follow similar trajectories.
• D. The majority of impacts from each risk type will manifest after 2050.

Correct answer: A

Explanation

The correct answer is A because both transition and physical risks can lead to stranded assets, which occur when investments are no longer able to generate an economic return. The other options do not accurately represent a commonality; B is speculative about investment returns, C incorrectly assumes a similar timing which may not be true, and D suggests a specific timeline that may not apply universally.