GARP SCR 2026 Exam: How Climate Change Actually Translates Into Financial Risk

GARP SCR 2026 Exam: How Climate Change Actually Translates Into Financial Risk

Climate change becomes financial risk only when it moves through identifiable transmission channels into cash flows, asset values, funding conditions, and ultimately solvency. That “translation step” is precisely why Climate Risk Measurement and Management is heavily tested on the SCR exam: it sits at the intersection of physical risk, transition risk, traditional risk categories (credit, market, liquidity, operational, underwriting), and enterprise risk management (ERM).

The SCR exam format reinforces this applied focus: the exam is 80 multiple-choice questions plus one multi-part case study, completed in four hours, graded pass/fail.  The intended skill is not climate science fluency; it is the ability to map climate drivers to decision-useful risk metrics, and then to risk governance and action.

1) Microeconomic translation: how climate drivers hit a single firm’s risk profile

At the company level, climate risk behaves like a risk amplifier across familiar categories. The exam expects you to recognize the “mechanism,” the relevant metrics, and the second-order effects.

Operational risk (physical + transition): Acute hazards (floods, storms, wildfires) and chronic hazards (heat, sea-level rise, water stress) create downtime, asset damage, and supply chain disruption. Transition shocks can also force operational changes—e.g., abrupt policy or permitting changes leading to shutdowns. The metrics are often exposure and preparedness proxies: proportion of facilities in high-risk geographies, operational resilience, and supply-chain concentration.

Credit risk: Climate stress becomes credit stress when it depresses revenues, raises costs, or impairs collateral value. That feeds directly into probability of default (PD), loss given default (LGD), and exposure at default (EAD). Transition-driven asset stranding is particularly toxic: it can increase PD (weaker business viability) and LGD (lower recovery values).

Liquidity risk: Climate events can create sudden liquidity needs—deposit withdrawals, drawdowns on committed lines, or forced selling. Liquidity risk is therefore tied to metrics like loan-to-deposit ratios (for banks), liquidity ratios, and market bid-ask spreads. Importantly, liquidity is where “slow” climate processes can still create abrupt outcomes via repricing and sentiment shifts. GARP SCR Exam Study Notes 2026 GARP SCR Exam Study Notes 2026

Underwriting/insurance risk: Physical risk can push insurance premiums sharply higher—or make assets uninsurable in concentrated hazard zones. That becomes a balance-sheet issue for corporates and a system issue for insurers. The exam angle is the feedback loop: if coverage becomes unavailable, operational risk and credit risk increase because the insurance buffer disappears.

2) Macroeconomic and systemic translation: when “many micro risks” become financial stability risks

Climate risk becomes systemic when exposures are correlated, concentrated, and transmitted through networks (financial counterparties, supply chains, and common asset holdings).

A practical mental model the exam rewards:

• Geographic concentration → correlated operational losses → sector revenue shock → credit losses at scale. The 2011 Thailand floods are often used to illustrate how geographically concentrated production can ripple through global supply chains.

• Sudden reassessment of climate risk → repricing + funding stress → liquidity crunch. The curriculum explicitly uses the idea of a “climate Minsky moment” to describe a rapid revaluation that triggers system-wide liquidity strain.

• Insurance withdrawal → uncovered losses → cascading defaults and asset sales. If insurers retreat from high-risk regions, households and firms can be left without coverage, amplifying instability.

Sovereigns add another layer: physical exposure (coasts, floodplains, drought regions), economic composition, and adaptive capacity can affect growth and debt sustainability; transition risk can reduce fiscal revenues for fossil-fuel-dependent exporters (a “stranded nation” dynamic).

3) The measurement toolkit: what the exam expects you to do with data

The SCR exam tests how you measure because measurement choices determine whether decisions are defensible.

Transition risk data (company level): Core inputs include Scope 1, 2, and 3 emissions; policy and technology pathways; and consumer preference shifts. The exam also tests practical data problems: voluntary disclosures are uneven; non-disclosers are modeled; and portfolio aggregation can double-count emissions (e.g., one firm’s Scope 2 is another firm’s Scope 1).

Physical risk data (company level): The foundation is climate model output (e.g., CMIP ensembles) that must be downscaled and combined with geolocation, asset characteristics, and vulnerability/adaptive capacity. Many organizations use third-party risk scores; the exam expects you to understand the trade-off: convenience vs. “black box” methodology and limited comparability across providers.

Portfolio-level measurement: Portfolio analysis differs from firm analysis because the question is aggregation, concentration, and risk budgeting. Common transition metrics include carbon intensity and weighted average carbon intensity (WACI), plus portfolio “warming potential” / temperature alignment measures. Physical risk approaches often begin with hazard exposure screens (flood, heat, hurricane, sea-level rise, water stress, wildfire) and can extend to valuation-impact tools.

Climate Value at Risk (Climate VaR / CVaR): Treated as an analogue of VaR that estimates potential climate-related financial losses by combining physical and transition effects; it’s typically used as a portfolio or sector loss gauge and is especially relevant where repricing and stranding risks are material.

4) Integrating climate risk into ERM: what “good” looks like operationally

The exam pushes beyond metrics into management: governance, strategy, performance monitoring, review, and disclosure.

A robust ERM integration approach aligns with:

• Governance and culture: accountability at board/senior levels and clear ownership.

• Strategy and objectives: explicit risk appetite for climate exposures and a defined transition/physical resilience posture.

• Performance: key risk indicators and triggers (e.g., water stress thresholds, facility exposure limits, sector concentration caps).

• Review and revision: iterate as hazards, policy, and data quality evolve—climate risk management is not “set and forget.” GARP SCR 2026 Exam, How Climate Change Actually Translates Into Financial Risk

• Communication and disclosure: credible reporting strengthens stakeholder trust and can raise system-wide discipline.

5) Why candidates say this area feels “hard” on exam day GARP SCR 2026 Exam, How Climate Change Actually Translates Into Financial Risk

This chapter is difficult because questions require multi-step reasoning: identify the climate driver, choose the risk category, select the right metric, and decide what action the firm should take. Candidates who fail often report that this section is where they underperformed, and that questions can feel long and tightly worded—exactly what you’d expect from a topic that blends risk taxonomy with practical measurement and governance.