GARP SCR Practice Test

GARP Sustainability and Climate Risk (SCR) is a route for candidates who need climate-risk, transition-risk, physical-risk, sustainability, scenario-analysis, disclosure, and governance practice.

This page includes 12 original sample questions for initial review. They are not official GARP questions and do not reproduce a live exam; they are designed to preview the climate-risk reasoning and disclosure judgment that a full Finance Prep route would need to support.

What this route should test

• physical vs transition risk and how each affects financial institutions or portfolios
• climate scenario analysis and limitations
• sustainability disclosures, governance, data quality, and model uncertainty
• avoiding greenwashing-style conclusions when risk evidence is incomplete

Sample Exam Questions

These questions focus on the decisions that make SCR practice different from generic ESG vocabulary: risk transmission, scenario limits, disclosure quality, and governance response.

Question 1

Topic: physical versus transition risk

A coastal real-estate lender is reviewing mortgage exposure in areas with increasing flood frequency. Which risk type is most directly highlighted?

• A. Transition risk from carbon taxes
• B. Physical risk from acute and chronic climate hazards
• C. Model risk from option pricing
• D. Settlement risk from delayed securities delivery

Best answer: B

Explanation: Physical risk comes from climate-related hazards such as flood, wildfire, heat, storms, and sea-level change. Transition risk concerns policy, technology, market, and legal changes during the move to a lower-carbon economy.

Question 2

Topic: scenario analysis

A bank uses a climate scenario to estimate long-term credit exposure under delayed policy action. What is the most appropriate interpretation?

• A. The scenario is a precise forecast of the future
• B. The scenario removes uncertainty from climate-risk decisions
• C. The scenario should be ignored if the exact path seems unlikely
• D. The scenario is a structured way to test vulnerability under a plausible set of assumptions

Best answer: D

Explanation: Climate scenarios are not predictions. They help decision-makers test resilience under internally consistent assumptions about policy, technology, temperature, and economic pathways.

Question 3

Topic: carbon pricing

A manufacturer with high emissions operates in a jurisdiction considering a higher carbon price. Which effect is most likely if the policy is adopted?

• A. Operating costs may rise and the firm’s competitive position may change
• B. Physical risk disappears because policy risk has increased
• C. The firm’s credit risk must fall because climate policy is clearer
• D. Disclosure obligations become irrelevant

Best answer: A

Explanation: Carbon pricing can create transition risk by increasing costs for emissions-intensive companies. The impact depends on pass-through ability, substitutes, capital plans, and competitive dynamics.

Question 4

Topic: disclosure quality

A company discloses that it is “aligned with a low-carbon future” but provides no emissions baseline, governance process, targets, or capital plan. What is the main concern?

• A. The company has disclosed too much information
• B. Climate disclosure is only useful for environmental charities
• C. The statement may be too vague to support investor risk assessment
• D. Qualitative statements automatically satisfy risk-disclosure needs

Best answer: C

Explanation: Useful disclosure should help users evaluate risk, strategy, governance, metrics, and progress. Vague claims without evidence can create greenwashing risk and limit decision usefulness.

Question 5

Topic: greenwashing controls

An investment product is marketed as climate-focused, but holdings include issuers with no clear transition plan. What control is most appropriate?

• A. Increase marketing language to explain the product’s ambition
• B. Remove all references to risk from client material
• C. Assume investors will research every issuer themselves
• D. Align marketing claims with the investment process, screening rules, stewardship activity, and evidence

Best answer: D

Explanation: Greenwashing risk is reduced when claims match the actual process and evidence. The key is not to avoid climate products; it is to ensure labels, holdings, methodology, and disclosures are consistent.

Question 6

Topic: stranded assets

An energy company owns reserves that may become uneconomic if regulation and technology shift faster than expected. What concept is most relevant?

• A. Natural hedge
• B. Stranded asset risk
• C. Settlement finality
• D. Positive convexity

Best answer: B

Explanation: Stranded assets are assets whose economic value may fall because of policy, technology, demand, or market changes. Climate transition can make some reserves, infrastructure, or business models less valuable.

Question 7

Topic: financed emissions

A bank wants to understand emissions associated with its lending portfolio. Which measurement focus is most relevant?

• A. Financed emissions linked to borrowers and exposures
• B. Only emissions from the bank’s office electricity use
• C. The number of branches owned by competitors
• D. The bank’s daily settlement volume

Best answer: A

Explanation: Financial institutions often need to evaluate emissions connected to financing activity, not only direct operational emissions. Financed-emissions estimates can be useful but depend on data quality and methodology.

Question 8

Topic: climate governance

A firm’s climate-risk analysis is produced by one sustainability analyst and never reviewed by risk, finance, or the board. What is the strongest governance issue?

• A. Climate risk should not be reviewed by finance
• B. Climate risk becomes irrelevant if one analyst owns it
• C. Climate-risk responsibilities, review, and escalation may not be embedded in governance
• D. Board involvement automatically guarantees accuracy

Best answer: C

Explanation: Climate risk should connect to governance, risk management, strategy, metrics, and controls. A single analyst can contribute expertise, but ownership and escalation should be clear across the organization.

Question 9

Topic: adaptation

A municipal bond issuer plans flood defences for critical infrastructure after updated hazard modelling. Which term best describes this response?

• A. Greenwashing
• B. Carbon offsetting
• C. Basis trading
• D. Climate adaptation

Best answer: D

Explanation: Adaptation refers to actions that reduce vulnerability to climate impacts. It differs from mitigation, which focuses on reducing greenhouse gas emissions.

Question 10

Topic: climate stress testing

A supervisor asks banks to test portfolios under a disorderly transition scenario. What is the main purpose?

• A. To predict the exact date of each policy change
• B. To assess vulnerability if policy, technology, and market adjustments occur abruptly or late
• C. To prove that all low-carbon assets are risk-free
• D. To replace capital planning with a sustainability slogan

Best answer: B

Explanation: A disorderly transition scenario tests stress from delayed or abrupt adjustment. It can reveal credit, market, operational, and strategic vulnerabilities that are not visible in normal-period analysis.

Question 11

Topic: sustainable finance instruments

A bond’s proceeds are ring-fenced for eligible environmental projects, with reporting on allocation and impact. Which instrument is most likely described?

• A. A green bond
• B. A margin loan
• C. A futures spread
• D. A callable preferred share

Best answer: A

Explanation: Green bonds typically finance eligible environmental projects and include use-of-proceeds and reporting expectations. The label should still be assessed against the issuer’s framework, verification, and reporting quality.

Question 12

Topic: data uncertainty

A climate-risk model relies on incomplete emissions data and sector averages for many private borrowers. What should the analyst do?

• A. Treat the output as precise because a model was used
• B. Suppress the uncertainty to avoid confusing management
• C. Disclose data limitations, test sensitivity, and avoid overconfident conclusions
• D. Remove all private borrowers from risk analysis

Best answer: C

Explanation: Climate-risk analysis often involves imperfect data. The professional response is to explain limitations, test sensitivity, improve data over time, and avoid overstating precision.

SCR quick checklist

• Can you separate physical risk, transition risk, liability risk, and greenwashing risk in one scenario?
• Can you explain why scenario analysis is useful without treating it as a forecast?
• Can you connect sustainability claims to governance, evidence, metrics, and disclosure quality?

Related GARP pages

• FRM Part I
• FRM Part II
• GARP certification updates