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【TEJ Dictionary】 What you need to know about the risks in the financial markets! What is “Green Swan”?

In the financial market, people are used to using different animals to represent the impact of various risks. Regarding investment, “Black Swans” and “Gray Rhino” are not popular, and their appearance usually means a crisis in the financial market. In addition to these two, there has been another “Green Swan” in recent years. What is the “Green Swan”? How should we deal with these crises when they occur?

Preface

In a bull market, people often rush into the stock market. The amount of money on the books keeps increasing, and the leverage gets bigger and bigger; they are immersed in the thrill of making money but neglect the hidden risks in the market. As a good investor, understanding the importance of risk and doing a good risk management job is essential. The following article will bring you to understand these intimidating animals, the “risk implications” they represent, the “characteristics” of these different risks, and how to deal with them.

Keywords: Green Swan, Climate Risk, Climate Change

Highlights

📍 Fearful animals!
📍 What is “Green Swan”?
📍 How should the Green Swan respond?
📍 How to reduce the risk from Green Swan?

Fearful animals!

Before introducing “Green Swan,” this article will introduce “Black Swan” and “Grey Rhino.” These two animals are often mentioned in the market and represent risk.

Black Swan
The word “black swan” represents an unexpected and cognitive breakthrough event. During the period of geographic discovery, Europeans discovered the existence of black swans in Australia for the first time, which overturned the previous inherent perception of “swans are white”. Later in the book “The Black Swan”, it was mentioned that a black swan refers to an unpredictable event that can bring about a great impact and heavy setback to the market.

  • Rarity
    The probability of such an event is extremely low, and no similar scenario can be seen in the past history.
  • Unexpectedness
    People do not imagine that such things happen, so it is difficult to predict and prevent them.
  • Significant Impact
    When it happens, it can have a serious impact on the market.
  • Post-facto justification
    Often these events are unpredictable, but people make up reasons for them after the fact, believing that they are explainable and predictable.

Events such as the 9/11 terrorist attacks, the Titanic sinking, and the bankruptcy of Lehman Brothers are events that no one would have expected to happen before they happened. However, this does not mean that these events will not happen, but the chance of them happening is extremely low; or they have never happened before, so it is impossible to anticipate them.

Gray Rhino
The word “Gray Rhino” stands for an event that can be predicted, but often has a huge impact because of the inability to react. The gray rhino is a relatively common creature, seemingly bulky, but always caught off guard when it comes barreling down the road. It symbolizes an event with a high probability of occurrence and a huge potential crisis.

  • High Probability
    A high probability event compared to the Black Swan, and tends to occur in certain contexts.
  • Predictability
    There are obvious signs before the event occurs and can be anticipated.
  • Easy to be ignored
    Events are inherently complex and confusing. People may anticipate an event, but underestimate it or Inertial thinking and ignore the impact of the event.
  • High Impact
    It has a chain reaction character and can have a wide impact on a large scale.

Events such as the Kodak bankruptcy and the subprime mortgage crisis often have obvious warning signs before they occur and have often occurred in the past when there was a similar context. People ignore the impact of these events and only realize when the crisis breaks out that it has had a serious impact.

What is “Green Swan”?

Every year, the World Economic Forum (WEF) produces Global Risk Report. According to the report, environmental-related risks have become the majority in the ranking since 2017, which means that the impact of environmental-related risks is growing, and they even The Bank for International Settlements (BIS) released the “The green swan” in 2020, reminding that climate change may trigger a “Green Swan Event” and that governments will face huge risks if they do not take precautionary measures early.

▲ 2021 Global Risk Report
▲ 2022 Global Risk Report

Green Swan is borrowed from the concept of Black Swan, which refers to the extreme events caused by climate, so it is also called Climate Black Swan. Green Swan has similar characteristics with Black Swan, such as rarity and unpredictability, but still has some differences with Black Swan.

  • Although the effects of climate change are highly uncertain, the risk of climate change is likely to materialize at some point in the future.
  • Climate catastrophes are more severe than most systemic financial crises, and climate scientists are increasingly emphasizing that this could pose an existential threat to humanity.
  • The risk of climate change will trigger a more complex and unpredictable chain reaction.

The 311 earthquake in Japan was a typical Green Swan. Although it was not exactly a climate-induced extreme event, it was quite consistent with the characteristics of a Green Swan event. We all know that earthquakes happen, but no one can predict when they will happen. In addition, the effects of the earthquake not only forced the shutdown of the affected factories, but also caused a chain reaction that affected the production activities of various industrial chains, the most serious of which was the explosion of the nuclear power plant. In addition to the radiation leak, the power supply was also affected. The damage caused by the Green Swan incident was estimated at US$180 billion, and the Nikkei index plunged by 16% for two consecutive days. While there is no way to completely prevent the Green Swan from occurring, taking measures in advance can reduce the damage when it does occur and allow for a more rapid recovery in the future.

How should the Green Swan respond?

As mentioned in the BIS report, if governments do not take corresponding measures to address the risks of climate change, it will definitely lead to systemic financial risks. Taiwan has also introduced corresponding regulations to implement these measures, such as the “Taiwan’s Pathway to Net-Zero Emissions in 2050,” the “Climate Change Adaptation Act,” and the “Green Finance Action Plan 3.0”. These laws and regulations complement each other to achieve sustainable development and mitigate climate change through different aspects, which can be divided into four main aspects.

  1. Energy transformation
    Wind power, solar power system integration and new energy storage.
  2. Industry transformation
    Electrification of transportation equipment and resource recycling.
  3. Life transformation
    Green transportation, electrification environment creation.
  4. Social Transformation
    Just transformation, citizen participation.

【Extended Reading】
” Green Finance Action Plan 3.0 “. Promote sustainable finance through five directions!

▲ National Development Council — Taiwan’s Pathway to Net-Zero Emissions in 2050

Under the government’s regulation, enterprises are gradually improving their “eco-friendly” and “social responsibility”. In addition to the manufacturing industry’s efforts to reduce carbon emissions by improving manufacturing processes and finding alternative energy sources, the financial sector is also assisting the development of green and green energy industries through responsible credit and responsible investment. There are also many international organizations that are helping companies promote sustainable development in order to reach the 2050 net zero carbon emissions goal.

The Carbon Disclosure Project (DCP) and Task Force on Climate-Related Financial Disclosures (TCFD) not only provide advice for companies to implement, but also call on companies to pay attention to the hidden risks of climate change. The DCP and TCFD not only provide recommendations for companies to implement, but also continue to call on companies to take the risks of climate change seriously.

How to reduce the risk from Green Swan?

As an investor, we can reduce the risk of Green Swan by diversifying our investment portfolio, but the impact of Green Swan has a chain reaction and can easily cause systemic risk. When the systemic risk occurs, “When a bird’s nest is overturned, no egg can remain intact.”, so we can only select the companies with higher tolerance to the impact of climate change. Although there is still a lack of information in the market, it is still possible to assess a company’s climate risk management and resilience by looking at its sustainability reports and ESG performance to get a general idea of how well it is transforming.

At present, ESG information is disclosed by each company individually, and there is still a lack of an integrated platform for ESG-related information. Therefore, collecting and organizing the information is very inconvenient; the consistency and comparability of data are also a problem.

TEJ integrates ESG-related sustainability data such as carbon emissions, human rights, and compliance management, overcoming the pain point of difficult and inconsistent data access. Through quantitative analysis technology and the TESG Rating Data Bank, we have developed TESG Rating and will continue to expand the sustainability data set in the future, allowing investors to examine ESG more accurately!

【Extended Reading】
TESG Sustainability Solution

The new product will provide you with complete ESG-related information!
Please look forward to the upcoming launch~

TEJ will soon add “TESG Sustainability Dataset” to its database, which will consolidate ESG-related information disclosed by various companies in the market, allowing investors to obtain more information to analyze according to your investing needs.

  1. The most comprehensive coverage in Taiwan
    We cover all enterprises above the public offering and a wide range of public information sources.
  2. Diversity of data types
    Regarding the SASB, there are over 40 sub-categories containing over 600 subjects.
  3. Analytic Data
    Derivative and additive statistics are performed for different data orientations to facilitate peer analysis and comparison.
  4. As regulations evolve with the times
    Local manufacturers keep pace with Taiwan’s regulations.

If you have questions about this article or want further access to the TEJ Database, feel free to leave a comment or email us.

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TEJ 台灣經濟新報

TEJ 為台灣本土第一大財經資訊公司,成立於 1990 年,提供金融市場基本分析所需資訊,以及信用風險、法遵科技、資產評價、量化分析及 ESG 等解決方案及顧問服務。鑒於財務金融領域日趨多元與複雜,TEJ 結合實務與學術界的精英人才,致力於開發機器學習、人工智慧 AI 及自然語言處理 NLP 等新技術,持續提供創新服務