📦 Contents

Chapter 3. Climate Risk Measurement — TCFD, Scenario Analysis, EU/K-Taxonomy

Climate risk is the most extreme test of the old finance maxim that "what is not measured cannot be managed." Unlike credit, market, or operational risk, climate risk carries a time horizon exceeding fifty years, non-linear tipping points, and "disorderly transitions" in which past data cannot reliably project the future. When the Task Force on Climate-related Financial Disclosures (TCFD) issued its Final Recommendations in 2017, and when the International Sustainability Standards Board (ISSB) brought IFRS S2 "Climate-related Disclosures" into force in 2024, the status of "unmeasured climate risk" shifted to "a climate risk in violation of disclosure obligations." This chapter describes how the WIA-esg-finance standard classifies climate risk, quantifies TCFD, NGFS, and IPCC scenarios, and identifies "green capital" through the EU Taxonomy and K-Taxonomy.

3.1 Classification of Climate Risk — Transition, Physical, Liability, Stranded Asset

The "Climate Risk" area of the WIA-esg-finance simulator (panel-3) defines four primary risk types as ENUM tokens. This classification is grounded in Appendix A of the TCFD Final Recommendations (2017), "Climate-Related Risks, Opportunities, and Financial Impact," with the addition of "Stranded Asset" as an independent type per Carbon Tracker Initiative (2024).

• TRANSITION_RISK — risk arising from policy, technology, and market shifts toward a low-carbon economy. Includes carbon taxation, the EU Carbon Border Adjustment Mechanism (CBAM), internal-combustion-engine phase-out timelines, and value impairment of power-generation assets due to falling renewable-energy levelized cost.
• PHYSICAL_RISK — risk from changes in the climate system itself. Subdivided into chronic risks (rising mean temperature, sea-level rise, shifting precipitation patterns) and acute risks (heatwaves, wildfires, floods, intensified storms). Directly affects insurance loss ratios, real-estate collateral values, and agricultural loan recovery.
• LIABILITY_RISK — risk from lawsuits brought against emitting firms, boards of directors, and pension funds by parties harmed by climate change. As of 2024, the Sabin Center at Columbia Law School records 2,666 cumulative climate cases worldwide, more than 70 percent filed after the 2015 Paris Agreement.
• STRANDED_ASSET — assets whose value is impaired or converted to liability before their economic life concludes, under 1.5°C or 2°C scenarios. Carbon Tracker (2024) estimates that roughly 60 percent of global fossil-fuel reserves may be stranded under a 1.5°C scenario.

The WIA-esg-finance standard requires every asset, loan, and investment to be classified along two axes for each of the four risk types: applicability (applicable / not applicable / unknown) and time horizon (short ≤ 5y, medium 5–15y, long ≥ 15y). The climate_risk_matrix field in the manifest carries 4 × 3 = 12 exposure scores in the 0–100 range.

"Physical risks have long been priced by insurers through premium adjustments. Transition risks are the area the market has yet to price. Liability risks are priced by courts. Stranded assets are priced by accounting standards." — Mark Carney, former Governor of the Bank of England, Lloyd's of London address, 2015

3.2 TCFD Scenario Analysis — Integrating IEA and IPCC SSP/RCP

Of the four pillars of the TCFD Final Recommendations, the "Strategy" pillar requires every reporting institution to disclose "the resilience of the organization's strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario." The WIA-esg-finance standard maps IEA (International Energy Agency) energy scenarios to IPCC AR6 (2021–2023) socioeconomic and physical scenarios to ensure scenario coherence.

3.2.1 IEA World Energy Outlook 2024 — Three Scenarios

IEA WEO 2024 publishes three scenarios distinguished by policy assumptions and technology-deployment speed:

• STEPS (Stated Policies Scenario) — incorporates only officially announced policies. Yields roughly 2.4°C warming by 2100. Treated by market observers as the "realistic baseline."
• APS (Announced Pledges Scenario) — assumes 100 percent delivery of each country's Nationally Determined Contributions and Net Zero pledges. Roughly 1.7°C path by 2100.
• NZE (Net Zero Emissions by 2050) — aligned with the 1.5°C path. Assumes 75 percent reduction in global methane emissions by 2030, no new fossil-fuel project approvals beyond 2024, and OECD electricity-sector net zero by 2035.

In the WIA-esg-finance simulator the STEPS, APS, and NZE labels are preserved verbatim as IEA terminology rather than recast as ENUM. The corresponding temperature paths are represented as ENUM tokens: NET_ZERO_2050 (aligned with 1.5°C), BELOW_2C (at or below 2°C), and DEGREES_1_5 (direct 1.5°C label). The manifest's scenario_alignment field declares one of these three.

3.2.2 IPCC AR6 — The SSP × RCP Scenario Matrix

IPCC AR6 WGI (2021) defines five core scenarios by combining two axes: Shared Socioeconomic Pathways (SSP1–SSP5) and Representative Concentration Pathways (RCP). Each SSP bundles assumptions on population, urbanization, technology, education, and international cooperation, while each RCP specifies the radiative forcing (W/m²) created by atmospheric GHG concentrations in 2100.

For physical-risk assessment the WIA-esg-finance standard designates SSP2-4.5 and SSP5-8.5 as the mandatory analysis pair (MANDATORY_PHYSICAL_PAIR). Every reporting institution must therefore disclose asset-loss estimates under both the "current-trend" and the "high-emission extreme" cases. This aligns with the NGFS (2024) recommendation.

3.3 NGFS Scenarios — Six Reference Pathways for Central Banks and Supervisors

The Network for Greening the Financial System (NGFS), founded in December 2017 under the leadership of the Bank of England, comprises 137 central banks and supervisory authorities as of 2024, including the Bank of Korea and the Financial Supervisory Service. In May 2024 the NGFS released its Phase V "Climate Scenarios for Central Banks and Supervisors" with the following six pathways.

1. Net Zero 2050 (NET_ZERO_2050) — aligned with 1.5°C. Global net zero in 2050. Assumes gradual, orderly transition. CO₂ price in the OECD reaches USD 130 per ton in 2030 and USD 700 in 2050.
2. Below 2°C (BELOW_2C) — below 2°C. Smoother transition than Net Zero 2050. Net zero in 2070. CO₂ price reaches USD 410 per ton in 2050.
3. Delayed Transition — policy delay until 2030, then abrupt transition. The canonical example of a "disorderly transition." Largest shock to transition-risk assets.
4. Fragmented World — regional-bloc scenario. Some countries transition rapidly, others slowly. Global mean warming reaches 1.8°C.
5. Current Policies — extension of current policy. Roughly 3.0°C warming by 2100. Path with the largest realization of physical risk.
6. Hot House World — absent policy effort. Warming exceeds 3.5°C by 2100. Multiple tipping points triggered.

The defining value of NGFS scenarios is that they ship with companion macroeconomic variables — GDP, inflation, unemployment, asset prices — so they can be plugged directly into central-bank stress tests. In 2022 the European Central Bank ran its first climate stress test on 41 large euro-area banks using NGFS Phase II scenarios. The Bank of Korea, in its December 2021 report "Climate Change Scenario Analysis," applied the NGFS "Net Zero 2050" and "Delayed Transition" pathways to portfolio-level shocks at six major Korean commercial banks.

"Under the Delayed Transition scenario, cumulative global GDP loss by 2050 is four percentage points larger than under Net Zero 2050. A late transition is ultimately a more expensive transition." — NGFS Phase V Scenarios Report, May 2024

3.4 EU Taxonomy and K-Taxonomy — Two Systems Defining "Green"

3.4.1 EU Taxonomy Regulation 2020/852

The EU Taxonomy (formally Regulation (EU) 2020/852) is the first legally binding classification of "sustainable activities," intended to block greenwashing and provide the single underlying definition for the EU Sustainable Finance Package (SFDR, CSRD, CBAM). It appears as the ENUM token EU_TAXONOMY in the simulator.

For an activity to be classified as "green" under the EU Taxonomy, four conditions must be satisfied simultaneously:

1. Substantial contribution to one of six environmental objectives — (1) climate-change mitigation, (2) climate-change adaptation, (3) sustainable use of water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, (6) protection of biodiversity and ecosystems.
2. Do No Significant Harm (DNSH) to any of the other five objectives — for example, wind power that contributes to climate-change mitigation but significantly harms avian biodiversity fails the test.
3. Compliance with Minimum Safeguards — including the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, and the ILO Core Conventions.
4. Compliance with Technical Screening Criteria — set out activity-by-activity in the Delegated Acts. For example, cement manufacturing must emit no more than 0.722 tons of CO₂ per ton of product.

The Climate Delegated Act, which entered into force in June 2024, defines screening criteria for thirteen sectors and roughly one hundred economic activities; the Environmental Delegated Act (2023) adds activities for the remaining four environmental objectives. EU-listed companies are obliged under the Corporate Sustainability Reporting Directive (CSRD) to disclose the Taxonomy-aligned proportion of their turnover, CapEx, and OpEx.

3.4.2 K-Taxonomy 2024 — Korea's Green Classification System

K-Taxonomy (formally "Korea's Green Classification System") was first published in draft by the Ministry of Environment in December 2021. A first revision in December 2022 incorporated "transition activities" such as LNG and clean hydrogen, and the system was finalized in the "2024 K-Taxonomy Guideline" of March 2024. It is represented by the simulator ENUM token K_TAXONOMY.

• Six environmental objectives — identical to the EU Taxonomy (mitigation, adaptation, water, circular economy, pollution prevention, biodiversity).
• 64 economic activities — 56 green-sector activities plus 8 transition-sector activities. Including LNG generation (with by-product-gas generation) and blue-hydrogen production as transition activities is the principal divergence from the EU.
• Scope of application — K-Green Bonds, ESG funds, and the green-loan criteria of public policy financiers (Korea Development Bank, Industrial Bank of Korea, Export-Import Bank of Korea).
• DNSH requirement — same four-step test as the EU (objective contribution, DNSH, minimum safeguards, technical criteria).

The introduction of K-Taxonomy has materially shaped the Korean ESG bond market. As of Q1 2024, green-bond issuance with explicit K-Taxonomy alignment reached roughly KRW 6.8 trillion, a 2.3-fold year-on-year increase (Korea Exchange ESG Bond Market). KB Financial Group, Shinhan Financial Group, Woori Financial Group, and the other major financial holding companies disclosed their K-Taxonomy-aligned asset shares for the first time in their 2024 TCFD reports.

3.5 Science Based Targets initiative (SBTi)

SBTi (Science Based Targets initiative) is a verification framework jointly established in 2015 by CDP, the UN Global Compact, WRI, and WWF, which validates whether a company's GHG-reduction targets are consistent with the latest climate science. The Corporate Net-Zero Standard v1.2 entered into force in 2024 and defines four core requirements.

1. Near-term targets — absolute reduction in Scope 1 and Scope 2 emissions within 5–10 years, aligned with 1.5°C (4.2 percent annual absolute reduction, or a more demanding intensity reduction per revenue). Scope 3 must be included where it exceeds 40 percent of revenue.
2. Long-term targets — by 2050 (or earlier) reduce Scope 1, 2, and 3 to residual emissions of no more than 10 percent.
3. Neutralization of residual emissions — the residual 10 percent must be neutralized through permanent carbon removals (direct air capture, biosphere sequestration). Avoidance credits do not satisfy neutralization.
4. Ongoing reporting — annual progress disclosure. Insufficient progress over five years triggers automatic demotion to "Committed" status.

As of September 2024, roughly 5,300 companies globally hold SBTi-validated targets, of which 78 are Korean — including SK hynix, Samsung SDI, LG Energy Solution, and Hyundai Mobis. SBTi validation status is recorded in the manifest's boolean sbti_validated field of the WIA-esg-finance standard.

3.6 Stranded Assets — Carbon Tracker Methodology

The concept of "stranded assets" entered mainstream usage with the 2011 Carbon Tracker Initiative report "Unburnable Carbon." The core logic is straightforward. Achieving a 1.5°C or 2°C scenario requires cumulative post-industrial CO₂ emissions to remain within a finite "carbon budget." Yet burning the totality of global fossil-fuel reserves would overshoot that budget by a factor of six to seven. A substantial share of those reserves is therefore "unburnable carbon," and the assets holding them are inevitably stranded.

Key estimates from Carbon Tracker (2024) "Stranded Assets and the Energy Transition":

• The global carbon budget consistent with a 50-percent probability of staying within 1.5°C stood at roughly 250 Gt CO₂ as of January 2024. At current emission rates (around 40 Gt per year) it will be exhausted within six to seven years.
• Approximately 60 percent of global fossil-fuel reserves are at risk of stranding under a 1.5°C scenario; the share is approximately 33 percent under a 2°C scenario.
• Highest stranding risk: unconventional oil (oil sands, tight oil, deepwater), newly developed coal mines, and unamortized coal-fired generation.
• Up to 30–50 percent of the market capitalization of globally listed fossil-fuel companies could be impaired as stranded assets by 2030 (BloombergNEF "Energy Transition Outlook 2024" scenario analysis).

The WIA-esg-finance standard makes the disclosure of asset-impairment estimates under three scenarios — SSP1+RCP_1_9 (1.5°C), SSP1+RCP_2_6 (2°C), and SSP2+RCP_4_5 (current trend) — mandatory for institutions holding fossil-fuel assets. The reference methodology is a Net Present Value (NPV) model that combines four variables: (1) asset-level levelized cost (LCOE), (2) scenario-specific price paths, (3) residual economic life, and (4) closure and remediation costs.

"The financial system must price stranded assets before regulators force the issue, not after." — Carbon Tracker Initiative, Annual Report 2024

3.7 Note on Korean Edition

The Korean-language edition of this chapter (Chapter 3 of the WIA-esg-finance Korean volume) extends the discussion of section 3.A with a comprehensive mapping of Korea's domestic climate-risk infrastructure. This includes the Ministry of Environment's K-Taxonomy 2024, the Bank of Korea's Climate Change Scenario Analysis, the Financial Supervisory Service Green Finance Handbook 2024, the Korea Adaptation Center for Climate Change, the Korea Environment Institute (KEI), the Korea Meteorological Administration's downscaled SSP/RCP datasets, KOLAS verification accreditation, and the TCFD reporting status of the four major Korean financial groups (KB, Shinhan, Woori, Hana). Readers requiring Korean-market-specific guidance should consult the Korean edition for the full institutional mapping.

3.8 Chapter Summary

Climate risk can be managed only when it is measured. The TCFD Recommendations established the architecture of "measurement" through four pillars — governance, strategy, risk management, and metrics and targets — and IFRS S2 elevated that architecture into the accounting standard. On this foundation the WIA-esg-finance standard codifies, in a machine-readable form: (1) four risk types (TRANSITION_RISK, PHYSICAL_RISK, LIABILITY_RISK, STRANDED_ASSET); (2) scenario ENUMs (SSP1–SSP5, RCP_1_9–RCP_8_5, NET_ZERO_2050, BELOW_2C, DEGREES_1_5); (3) classification systems (EU_TAXONOMY, K_TAXONOMY); and (4) validation frameworks (TCFD, IFRS_S2, NGFS, SBTi).

The core proposition of this chapter can be stated in a single sentence: "An asset whose climate risk has not been measured is mispriced by the unmeasured amount." The longer the market delays in repricing, the larger the shock when stranding occurs. The WIA-esg-finance standard is the interface that allows that shock to be measured ahead of time, consistently, and in the open.

弘益人間 (Hongik Ingan) — Benefit All Humanity