<p>Introduction: Climate Risk and Environmental, Social and Governance Challenges xiii</p> <p><b>Chapter 1 Introduction to Climate Risk 1</b></p> <p>Dimensions of Climate Risk 1</p> <p>Basic Concepts of Climate 2</p> <p>Carbon Dioxide, Greenhouse Gases (GHG), and Air Pollution 5</p> <p>The Science of Climate Change 6</p> <p>Climate Change, the Intergovernmental Panel on Climate Change (IPCC) Reports, and Social Change 10</p> <p>References 12</p> <p><b>Chapter 2 Forces of Nature 15</b></p> <p>The Astronomical Theory of Climate Change 15</p> <p>The Sun 24</p> <p>The Earth 27</p> <p>Air and Wind 30</p> <p>Water and Ice 32</p> <p>The Carbon Cycle 34</p> <p>Note 36</p> <p>References 36</p> <p><b>Chapter 3 A Brief History of Climate Change 39</b></p> <p>Natural Drivers of Climate Change Over the Ages 39</p> <p>Frozen Earth 40</p> <p>Warming and Freezing Cycles and Periodic Glaciations 41</p> <p>The Last Ice Age, Younger Dryas, and Climate Cycles 42</p> <p>Climate Change in Ancient Times 43</p> <p>Roman Warm Period 44</p> <p>The Climate in the Dark Ages 44</p> <p>The Medieval Warm Period 45</p> <p>The Little Ice Age 46</p> <p>The Industrial Revolution and Man-Made Effects 48</p> <p>Today and Tomorrow 52</p> <p>References 52</p> <p><b>Chapter 4 Science, Politics, and Public Policy 55</b></p> <p>Science, Facts, Perception, Social Influence, Misinformation, and Fear 55</p> <p>Behavioral Aspects of Risk Taking and Decision Making 56</p> <p>Perception and Plausibility of Events 59</p> <p>Trust, Deception, Credibility, and Fake News 60</p> <p>Social Pressure, Conformity, and Media Bias 63</p> <p>Social Polarization 65</p> <p>Opinion Polarization under Social Pressure and Media Bias 67</p> <p>Social Pressure, Media Bias, and Perception for Different Groups 70</p> <p>Choice Impact for Different Groups 74</p> <p>What’s Next? Tackling the Climate Change Challenge 76</p> <p>References 78</p> <p><b>Chapter 5 Global Shift in Response to Climate Change 81</b></p> <p>The Shift in the Global Economy in Response to Climate Change 81</p> <p>Technology Change: First Movers, Competitive Landscape, and Economic Environments 87</p> <p>Climate Risk Uncertainty in Competitive Business Environments 90</p> <p>Innovation and Product Dynamics 93</p> <p>Product Adoption 95</p> <p>Product Competition 98</p> <p>Multiple Competitor Environments 100</p> <p>Uncertainty in Competitive Environments 103</p> <p>Notes 107</p> <p>References 107</p> <p><b>Chapter 6 Risk Management for Climate Risk and ESG 111</b></p> <p>Overview, Purpose, Scope of Risk Management, and Governance 111</p> <p>Risk Identification, Measurement, and Management 113</p> <p>Regulatory Environment and Climate Risk 126</p> <p>Operational Readiness and Resilience for Climate-Related Effects 128</p> <p>Risk Monitoring and Reporting 132</p> <p>Risk Reporting and Analysis 133</p> <p>Reshaping the Industry Landscape: Winners, Losers, and Synergies 135</p> <p>Sustainability, Competitive Environment, and a Level Playing Field 138</p> <p>Climate-Related Financial Disclosures 138</p> <p>Climate Risk Financial Disclosures 143</p> <p>Building a Stress-Testing Framework for Climate Risk Using ThreeCorePillars 155</p> <p>References 161</p> <p><b>Chapter 7 Pillar 1: Competitive Landscape and Climate Risk Scenarios for Stress Testing 163</b></p> <p>Assessing the Industry and Regulatory Landscape, Synergies, and Complexities of Competitive Business Environments 163</p> <p>Scenarios for the Global Economy: Economic, Business, and Credit Cycles 164</p> <p>Business Cycles, Credit Supply, and Demand 171</p> <p>Economic Drivers 173</p> <p>Economic Activity and Credit Demand 174</p> <p>The Impact of Local Economic Conditions on Global Obligors 206</p> <p>References 208</p> <p><b>Chapter 8 Pillar 2: Demand for Credit: Modeling Default Risk and Loss Severity 211</b></p> <p>Supply and Demand for Credit: Excess Credit Demand 211</p> <p>Analysis of Economic Activity 216</p> <p>Defining Key Concepts: Default, Loss Likelihood, and Loss Severity 217</p> <p>Credit Correlation 232</p> <p>Note 239</p> <p>References 239</p> <p><b>Chapter 9 Pillar 2: Demand for Credit: Risk Assessment and Credit Risk Ratings 245</b></p> <p>The Path to Business Failure 245</p> <p>Risk Assessment and Credit Risk Ratings 246</p> <p>Credit Risk Ratings 248</p> <p>Default and Loss Concepts and Risk Ratings 259</p> <p>Default Rate Statistics by Rating Category 261</p> <p>Rating Transition Matrices 264</p> <p>Rating Transitions and the Term Structure of Default Rates 265</p> <p>Portfolio Risk Rating 267</p> <p>Portfolio Trend Rating 267</p> <p>Risk Management Rating 267</p> <p>Rating Stability 270</p> <p>Quantifying Analysts’ Perception of Credit Risk: A Behavioral Model 271</p> <p>Notes 295</p> <p>References 295</p> <p><b>Chapter 10 Pillar 2: Demand for Credit: The Value of Financial Information 297</b></p> <p>The Value of Financial Information: Balance Sheet, Income Statement, and Statement of Cash Flows 297</p> <p>The Balance Sheet 298</p> <p>The Income Statement 305</p> <p>The Statement of Cash Flows 309</p> <p>Financial Information and Uncertainty 313</p> <p>Cash Liquidity and Debt Capacity 314</p> <p>Cash Shortfall, Business Uncertainty, and Financial Distress 317</p> <p>Note 321</p> <p>References 321</p> <p><b>Chapter 11 Pillar 2: Demand for Credit: Models of Business Failure 325</b></p> <p>Credit Risk Models of Business Failure 325</p> <p>Model Selection 329</p> <p>Statistical and Econometric Models 330</p> <p>Credit Scoring and Statistical Discriminant Analysis 333</p> <p>Models of Probability of Default 340</p> <p>Nonlinear Models 343</p> <p>Statistical Inference and Bayesian Methods 345</p> <p>Model Selection Criteria: Least Squares and Likelihood Methods 347</p> <p>Information Entropy Methods and Model Selection 348</p> <p>A Primer on Neural Networks 356</p> <p>Validating Statistical Models 361</p> <p>Measuring Model Accuracy 361</p> <p>A Validation Approach for Quantitative Models 363</p> <p>Resampling 368</p> <p>Model Performance and Benchmarking 368</p> <p>References 380</p> <p><b>Chapter 12 Pillar 2: Structural Models 383</b></p> <p>The Role of Market Information in the Pricing of Risky Debt 383</p> <p>Options Pricing, Randomness, and the Notion of Limit 386</p> <p>Options Pricing and Stochastic Calculus 386</p> <p>Ito Stochastic Integrals, Convergence, and the Notion of Limit 389</p> <p>Hedging Portfolio Returns in the Limit vs. Hedging the Limit of Portfolio Changes 391</p> <p>Residual Risk and Volatility Skews 394</p> <p>Hedging Strategies and Residual Risk 395</p> <p>Models and Assumptions 397</p> <p>Asset-Based Models and Market Uncertainty 398</p> <p>Forward-Looking, Singular Perturbation Analysis 400</p> <p>Market Uncertainty and the Valuation of Equity and Debt 408</p> <p>Revisiting the Default Point 412</p> <p>The Role of the Company’s Borrowing Capacity 413</p> <p>Joint Distribution of Assets, Equity, and Debt 415</p> <p>Uncertainty, Arbitrage, and Equity-Debt Relationship 421</p> <p>Notes 424</p> <p>References 424</p> <p><b>Chapter 13 Pillar 3: Supply of Credit: Modeling Lender’s Behavior and Business Strategies 429</b></p> <p>Portfolio Management 429</p> <p>Estimating Portfolio Losses 434</p> <p>References 448</p> <p>Acknowledgments 451</p> <p>About the Author 453</p> <p>Index 455</p>