Martin Massey, Clive Thompson - Climate Change Enterprise Risk Management - A Practical Guide To Reaching Net Zero Goals-Kogan Page (2022)

i
PRAISE FOR CLIMATE CHANGE ENTERPRISE

RISK MANAGEMENT
“A must-read for anyone managing climate risk. The book is insightful, informative
and a great one-stop shop among a plethora of thought leadership out there on the
topic. Most importantly, the book contains excellent practical guidance on how to
incorporate climate risk management into existing risk management frameworks
and, equally, how to start from scratch. I will certainly be consulting it.”
Susan Young, CRO, R&Q
“Building on the existing tools and techniques of risk management, Martin Massey
methodically shows the reader how to encompass and embrace the challenges that
climate change will bring to us all. The book is readily accessible for those new to
risk management but will also bring fresh insight to those familiar with the concepts”
Roy Boukins, Group Risk Officer, Accelerant Holdings
“Finally, here is a book which provides risk and financial professionals with a road-
map for implementing climate risk into their thinking. The book contains a host of
comprehensive detail to equip readers with everything they need to achieve the busi-
ness transformation that is required.”
Rachel Johnson, ACCA Global
“This book provides great insight for risk managers needing to navigate the chal-
lenges of climate change, particularly during this early exploratory stage as firms start
to ramp up their expertise to improve understanding of risks and opportunities.”
Judith Ellison, Business Development Manager, JBA Risk Management
“This book explains in a very clear and methodically way how to integrate climate
risks into an existing ERM and Governance Framework.”
Alfa Falconi, Director Enterprise Risk | Governance, Risk & Compliance (GRC), NEOM
‘Martin Massey has written a book which will be welcomed by the risk management
community, but more importantly by their children and grandchildren as we wrestle
with the changes required for a net zero future. I am confident that the book will
greatly help the reader to bring climate risk into their thinking including the oppor-
tunities that climate change presents to us all.’
Paul Mahon, Head of Technical Development, Cornish Mutual
ii
“Addressing the overarching issue of how we inhabit the planet, Martin Massey’s
book informs and equips us superbly to develop a culture that unites everyone’s posi-
tive efforts around a core consensus on climate risk. He draws together a superb
array of expert insights, shows us all how to take reassuringly practical steps, and
finds new opportunities for enterprise even as we engage with an existential threat.”
Roger Miles, Head of Faculty, UK Finance: Conduct Leaders Academy
“Building on existing tools and techniques of risk management, Martin Massey

methodically shows the reader how to encompass and embrace the challenges that
climate change will bring to us all. The book is readily accessible for those new to
risk management but I am sure it will also bring fresh insight to those familiar with
the concepts.”
Derek Thrumble, Head of Analytics, Gallagher Specialty
iii
Climate Change Enterprise

Risk Management
A practical guide to reaching
net zero goals
Martin Massey
iv
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v
To my wonderful children, Sebastian and Francesca.
I hope that this book helps in some small way to protect their futures
from the impacts of a worsening climate.
vi
THIS PAGE IS INTENTIONALLY LEFT BLANK

vii
CONTENTS
Acknowledgments xii
Foreword xiii
Introduction 1
01 Climate change risk landscape and ERM maturity 6

Introduction 7
1.1 Climate change risk management enablers 8
1.2 Climate change and ESG integration 9
1.3 Global macro risk and climate change 10
1.4 Key drivers and expectations for organizations 16
1.5 Developing a climate change risk taxonomy 21
1.6 Climate change integration into an existing ERM framework 24
1.7 Developing a climate change risk maturity model 26
Conclusion 28
Notes 29
02 Climate strategic positioning and risk appetite integration 30

Introduction 31
2.1 Corporate strategy and purpose 31
2.2 Developing a climate risk strategy 32
2.3 Core dimensions of climate strategy 36
2.4 Developing a climate risk strategy plan and road map 39
2.5 Risk appetite strategy 42
2.6 Integration of climate change into risk appetite 44
2.7 Climate change risk appetite reporting 54
Conclusion 54
Notes 55
03 Developing an effective climate governance framework 56

Introduction 57
3.1 Role of the board in risk management 57
3.2 Alignment to stakeholder expectations 59
3.3 Climate change governance risk framework 61
viii CONTENTS
3.4 Building a good risk culture 82

3.5 Integrated risk culture model 86
Conclusion 92
Notes 92
04 Climate change risk identification techniques, including stakeholder

mapping 94
Introduction 95
4.1 Risk identification process 95
4.2 Risk articulation 97
4.3 Risk universe and risk taxonomy – definitions and importance 100
4.4 Risk identification processes, techniques and enablers 102
4.5 Stakeholder analysis and mapping 108
4.6 Framework to prioritize climate stakeholders 120
Conclusion 121
Notes 122
05 Managing transition risks 124

Introduction 125
5.1 Global perspective on carbon emissions 126
5.2 Sources of greenhouse gas (GHG) emissions 127
5.3 Setting and achieving net zero targets – society’s responses 129
5.4 Global drivers of change 133
5.5 Global mitigation concerns and options 139
5.6 Carbon/sustainability risk management framework 143
5.7 Carbon assessment process – use and availability of tools 149
5.8 The carbon hierarchy 150
5.9 Monitoring and reporting carbon emissions and targets 154
5.10 Setting milestones of progress 159
Conclusion 159
Notes 160
06 Building climate resilience 162

Introduction 163
6.1 Key climate drivers and industry impacts 164
6.2 Building climate resilience 166
6.3 Developing a climate resilience framework 170
6.4 Climate resilience guidance and frameworks 177
6.5 Organizational climate resilience process 179
6.6 S pecific risk management controls to improve operational climate
resilience 185
Contents ix
6.7 Building financial resilience 196

Conclusion 199
Notes 199
07 Climate physical risks – data sources, uses and challenges 202

Introduction 203
7.1 Applications of weather and climate data 203
7.2 Climate data and global projections 205
7.3 Evolution of climate data, meteorology and climate models 208
7.4 The climate data value chain 211
7.5 Main climate data variables, data types and availability 216
7.6 Climate data sources 220
7.7 Climate data modelling tools and techniques 223
7.8 Catastrophe risk modelling 225
7.9 Parametric index solutions 230
Conclusion 234
Notes 234
08 Designing an effective emerging climate risk management

process 236
Introduction 236
8.1 Forecasting and the role of risk management 238
8.2 Emerging risk definitions 239
8.3 Traits and characteristics of emerging risks 241
8.4 The role of a formal emerging risk management process 242
8.5 Uses and benefits of emerging risk management 243
8.6 Key objectives of developing a framework for managing emerging
risks 245
8.7 Current risk management guidance and standards 247
8.8 Emerging risk tools and techniques 250
8.9 Emerging risk management process 254
8.10 Emerging climate risk reporting 259
Conclusion 263
Notes 264
09 Emerging climate trends, issues and challenges 266

Introduction 266
9.1 Global macro trends 267
9.2 Physical risks – emerging trends 271
9.3 Transition risks – high-level overview 282
x CONTENTS
9.4 Climate and ESG reporting and ‘greenwashing’ 284

9.5 Emerging technologies to meet net zero targets 287
9.6 Liability risks – emerging climate change litigation 292
Conclusion 295
Notes 296
10 Climate stress and scenario testing 300

Introduction 300
10.1 Evolution of stress and scenario analysis – impact of financial crisis 301
10.2 Developing a formal stress and scenario framework 302
10.3 Design of climate scenario considerations and benefits 303
10.4 Regulatory guidance and expectations 304
10.5 Setting the baseline 308
10.6 Climate scenario analysis framework 309
10.7 Types of qualitative and quantitative tools 318
Conclusion 332
Notes 332
11 Climate risk integration into specific business processes 334

Introduction 334
11.1 Alignment with business strategy 335
11.2 Mapping the risk profile to business activities 343
11.3 Operational risk processes 344
11.4 Credit risk management 350
11.5 Development of a sustainable investment strategy 351
11.6 Investment strategy of investors 357
Conclusion 362
Notes 363
12 Financial reporting and climate disclosures 365

Introduction 365
12.1 Climate change’s evolutionary effect on how to account for risk 366
12.2 The purpose of climate disclosures 369
12.3 The evolution and future direction of climate-related financial
disclosures 370
12.4 TCFD – main disclosure requirements 372
12.5 TCFD summary of recommendations and benefits for organizations 379
Contents xi
12.6 Current main disclosure observations and trends 384

12.7 Reporting disclosure information and alignment to TCFD
recommendations 388
12.8 Use of sensitivity analysis for transition scenarios in reporting 391
12.9 Alignment with financial reporting 392
Conclusion 394
Notes 395
Glossary 398
Index 402
xii
ACKNOWLEDGEMENTS
I’d like to thank the Institute of Risk Management (IRM) for their trust and support,
and in particular Clive Thompson (Technical Adviser, IRM) who provided signifi-
cant guidance in structuring and reviewing the book.
I have received considerable support from a number of my fellow risk profession-
als and organizations, including several major risk companies such as Aon, Swiss Re
and S&P.
Specific thanks to those who have provided me with either contributions or
specific case studies to the book, including Roger Miles, Judith Ellison, Luke Watts,
Simon Ashworth, Bogdan Pletea, Andrew Smith, Oliver Schelske, Patrick Saner,
Thanasis Chasapis, Peter Moar, Rebecca Marra, Laurent Sabatie, Mark Heath,
Graham Findlater, Paul Mahon, Gregory Hutton-Squire, Derek Thrumble, Samuel
Lucas, Chris Ewing, Susan Young, Shiva Keihaninejad, Rachael Johnson and Tom
Osborne.
One of the main challenges in producing the book was developing the risk
management frameworks for this new and rapidly evolving field. Therefore, I want
to give special thanks to Iain Felstead for his significant technical assistance and
support, also Vishakha Joshi my research assistant and Cherish Hewes my graphics
designer, for helping to develop a range of visual risk management frameworks used
in the book.
I’d like to recognize the importance of a number of mentors that have guided me
in my career who have truly inspired me, particularly in the early part of my career.
These include Derek Thrumble, Crawford Paul, Pauline Margrett and David Scott,
who I consider to have been visionaries in the risk management profession.
I’d like to dedicate this book to my wonderful children, Sebastian and Francesca.
I hope that this book helps in some small way to protect their futures from the
impacts of a worsening climate.
xiii
FOREWORD
Climate change and the route to net zero

The key to success for people and organizations in the 21st century will be their
ability to adapt to and navigate through complexity, uncertainty, and disruption.
Climate change is now recognized as an existential crisis of humanity and addressing
this huge adaptive challenge will require a transformation in how we live and work.
The first step is to understand and assess current and future risks and accurately
price external costs. Decarbonizing our economy and learning to live sustainably
will open up extraordinary new opportunities for entrepreneurs and organizations.
A massive overhaul of everything we do and the systems that support our lives is
required over the next decade to pivot towards net zero and the upside this offers.
The route to net zero is also a route to net benefit.
Together we have the knowledge and ability to address the climate crisis, but we
desperately lack understanding, will, and active leadership at every level. It therefore falls
to us all to do extraordinary things. In some ways this book is a call to duty for risk
professionals, an opportunity for them to step up and lead. After all, there is no Planet B.
The fundamental nature of climate risk affecting every organization is the reason
the Institute of Risk Management (IRM) commissioned this book and worked with
our members and the wider community to explore how climate change risks can be
identified and managed.
For risk managers this call to leadership means a call to create a successful climate
change Enterprise Risk Management (ERM) perspective to energize and focus their
organization, large or small, on its journey to reduce carbon and achieve sustainabil-
ity based on transparent, ethical, and socially responsible behaviours.
The IRM has long supported the development of ERM to enable and deliver
successful business strategy. This book follows on from the climate change risk
management training programme developed with the Grantham Institute at Imperial
College, and, combined with the qualifications offered by the IRM, enables risk
professionals and others to support their employer or clients in taking the first step,
no matter how small, on their journeys to net zero.
This book outlines approaches to achieving successful climate change ERM that
will support any type of organization in its efforts to address the climate crisis and
create sustainable growth. I hope it will be a valuable resource for everyone commit-
ted to addressing climate change through risk management leadership in action.
xiv FOREWORD
Stephen Sidebottom
Stephen Sidebottom is Chair of the Institute of Risk Management, risk manage-
ment’s leading worldwide professional education, training and knowledge body.
Further information about the Institute and its training and qualifications is available
from the IRM website, www.theirm.org.
1
Introduction
Climate change enterprise risk management in context
This book is intended for all who want a comprehensive introduction to current and
new enterprise risk management practices aimed at integrating climate change into
the risk strategy of organizations. The main objective is to provide guidance to risk
management professionals in supporting their organizations in the transition to a
sustainable future through explaining a range of practical risk frameworks as well as
tools and techniques.
The book provides examples and ‘best practice’ methodology for all organiza-
tions and geographies. It has been informed through consultation across different
sectors as to their current practices and the reader will find that case studies and
illustrative examples have been drawn from both public and private sector, primary,
tertiary and consumer-facing industries.
The book builds on the work undertaken by the Institute of Risk Management
(IRM). It expands the work of the original guidance documents issued by the Climate
Change Special Interest Group (SIG), which has, for example, identified key enablers
that would require the most attention to facilitate the development and execution of
a climate change risk management strategy.
The reader will find that many of the examples have been drawn from the financial
services industry. This is only because the sector has been leading some of the main
developments of risk management practices in this field, driven mainly by regulatory
requirements. We have used the learnings from those examples to apply to wider fields.
For example, the categorization of climate risks into physical, transition and liability
risk was initially developed by the Financial Stability Board but has been taken up
widely and is accepted as the taxonomy to address these issues. These and other exam-
ples will equip the reader with models they can apply to their own specific context.
The book focuses on two foundational components of climate change risk
management, namely ‘resilience’, and ‘sustainability’. It provides insights into how to
integrate climate change into an existing risk appetite and emerging risk manage-
ment framework. It also explains some of the complexities in the design of stress and
2 INTRODUCTION
scenario tests through risk modelling tools and techniques. These are particularly
important in the context of management and mitigation of climate change risks.
Vision and philosophy

The management of climate risks includes both threats and opportunities. It is now
perceived to be crucial to most organizations. The main purpose and vision of the
book is to provide practical insights to enable the development and execution of a
climate change risk management strategy in any organization.
Climate change and wider environmental, social and governance (ESG) issues are
becoming the single most important business driver of the decade. Although it has
been an emerging issue for many organizations, there is currently little formal risk
management guidance on this topic. This book therefore aims to address this and we
hope it will provide insight and intelligence for all key stakeholders concerned with
the challenge of climate change facing organizations:
●● Boards require assurance that significant risks have been identified and appropriate
controls put in place. In order to ensure that correct business decisions are taken,
risk management activity is undertaken to provide structured information to assist
business decision-making. Risk managers need to enhance existing practices to inte-
grate climate risks so that boards can make those decisions in the context of the
most challenging issue facing society, climate change. Members of boards may find
this book useful to identify and inform their climate change journey.
●● Regulators will increasingly impose net zero ambitions on their sectors and
require the organizations operating within that sector to demonstrate a transition
to a more sustainable low-carbon economy through transparent disclosures.
●● Wider society is calling for organizations to embrace the green agenda, creating
the enhanced need for environmental, social and governance goals or sustain
ability targets. This book should help engaged citizens to increase their under-
standing of the issues and provide constructive ways to increase pressure on any
‘errant’ organization that needs to contribute more to a carbon-free future.
The specific goals of climate risk management include:
●● Ensuring that there is a robust framework in place to identify and manage climate
risks and opportunities
●● Ensuring that there is adequate visibility of risk management activities at the
board level
●● Enabling strategic discussions to support the right risk/reward decisions
●● Integrating climate change into existing risk frameworks in order to become
business as usual (BAU)
Introduction 3
One of the objectives of this book is to develop the use of consistent approaches and
methodologies for climate risk management. Its aim is to promote, within context,
an established way of identifying, assessing and managing climate risks. The reader
should be equipped after reading this to formalize the integration of these techniques
within their existing ERM framework.
Book structure and key features

The book focuses on existing risk management tools and techniques and explains
how they can be tailored for managing climate change. For example, the reader will
find discussions of how established techniques such as risk radars, ‘bow tie’ analysis,
stress and scenario testing, risk maturity models, risk reporting dashboards, etc can
be easily modified to encompass climate-related issues. It also includes new risk
management theory and concepts such as ‘stakeholder mapping’, which are often
perceived to be strategic management tools.
The book is presented in 12 chapters, focusing on developing the integration of
climate change into an existing ERM framework to support decision making:
●● Chapter 1 sets the scene by outlining the main components and enablers that
organizations need to develop and embed within their existing ERM framework
and introduces the development of a climate risk taxonomy and a climate risk
maturity model.
●● Chapter 2 builds on this to discuss the development of a climate risk strategy,
which will typically be a subset of corporate strategy. It also includes how organ-
izations can achieve their strategic goals in a sustainable and climate-friendly way.
●● Chapter 3 discusses how to build a strong and documented governance approach
within organizations to help manage climate change risks.
●● Chapter 4 explores stakeholder expectations, particularly in the context of the
Paris Agreement, and highlights the importance of stakeholder analysis and
mapping as a key risk identification tool for organizations to utilize. This also
includes discussion of a climate change risk radar as a key tool to enhance the
resilience of organizations.
●● Chapter 5 covers transition risks, providing a global perspective on carbon emis-
sions and mitigation strategies and what government and regulators are doing to
meet their net zero targets.
●● Chapter 6 then delves into how organizations can build improved resilience from
an operational, financial and strategic perspective due to the increased uncertainty
of future weather patterns.
4 INTRODUCTION
●● Chapter 7 provides an overview of climate risk data sources and how they are
used to help organizations and businesses in climate-related risk management.
This chapter focuses on the opportunities and challenges linked to data and how
the data and tools/models can be best used in a changing climate.
●● Chapter 8 examines global economic climate trends and consequences in detail in
light of the fact that ‘climate action failure’ has been identified by the World
Economic Forum as the risk with potential to inflict the most damage at a global
scale over the next decade.
●● Chapter 9 provides examples of some of the main emerging climate trends across
physical, transition and liability risks, including legal cases that are important for
organizations to consider in the context of climate change.
●● Chapter 10 explains how organizations can assess the materiality of the climate
risks and opportunities that they have identified, through the use of stress and
scenario analysis.
●● Chapter 11 aims to bring the previous topics together and discusses taking the
methods discussed into a BAU context. This includes consideration of customer
requirements, third-party procurement processes, and financial and investment
planning.
●● Chapter 12 scrutinizes how governments and regulators worldwide are introduc-
ing requirements for transparent disclosures. These will become mandatory soon
in the UK and this is expected to be the route many countries will follow.
In order to bring the subject to life and provide context to the ideas and concepts
that are described, short illustrative examples are used throughout the text. In addi-
tion to these general examples, real-life situations and examples are also used. It
should be noted that while some references to individual organizations’ annual
reports have been cited in this book, the requirement for companies to disclose detail
is changing so fast that the reader is encouraged to investigate topical reports on
high-profile companies to increase their understanding further.
Climate change risk management in the future

The world is facing an increasingly volatile and uncertain future; the Covid-19
pandemic, war in Ukraine and rapid changes in the way work is conducted have
introduced change at an ever-faster pace. These pressures combine with the need for
all of us, in whatever field, to contribute to a more sustainable future. The conse-
quences of failure to adequately manage climate change risk will be disastrous and
are potentially existential.
Introduction 5
Whenever change occurs at a rapid pace there are increased risks. These may be
seen as threats but for those with the foresight to implement risk management tech-
niques in full they present a world of opportunity. The transition to a carbon-neutral
and sustainable future is full of opportunity.
Achieving those opportunities is a key feature of this book. By setting out an inte-
grated approach to climate change risk management, this book provides a description
of the fundamental components of successful management of the transition to a net
zero future. It describes a wealth of risk management tools and techniques and
provides information on successful delivery of an integrated and enterprise-wide
approach to climate change risk management.
6
Climate change risk landscape

and ERM maturity
This chapter sets the scene for the book in that it outlines the main enterprise risk
management (ERM) framework components and enablers for climate change that
organizations need to develop and embed within their existing ERM framework. We
start with the development of a climate risk taxonomy and a climate risk maturity model.
The main learning outcomes from this chapter are to:
●● Understand the key areas that require attention to enable the development and
execution of a climate change risk management strategy in any organization.
●● Be aware of the relationship between climate change and the wider set of environ-
mental, social and governance (ESG) criteria that are increasingly prominent
features of regulation and supervision globally.
●● Recognize the main causes and consequences of climate change including the
natural catastrophe losses and trends across different perils
●● Provide an overview of the main global drivers and expectations for organiza-
tions, including the Paris Agreement and Task Force on Climate-related Financial
Disclosures (TCFD)
●● Appreciate the importance of developing a climate risk taxonomy that includes
physical and transition risks.
●● Acknowledge the conditions and benefits of embedding climate change into an
existing ERM framework.
●● Understand how to develop a climate change risk maturity model to support the
assessment of the current maturity status and to set targets across a range of key
criteria that will be covered within the book.
The chapter provides an overview of why organizations need to address climate

change and integrate the risk within their ERM framework. In order to do so an
organization should develop a climate change taxonomy that can be discussed exter-
nally and used internally to ensure that all risks and opportunities are addressed and
that there is a consistent approach and understanding.
CLIMATE CHANGE RISK LANDSCAPE AND ERM MATURITY 7
Introduction
Climate change is unlike any other environmental or public policy problem and is
characterized by a combination of four unique issues:
●● Its global nature

●● Its long-term nature
●● The fact that it is potentially irreversible
●● The almost overwhelming uncertainty surrounding its progression and effects
Climate change is a global trend as temperature and sea levels rise and contribute to
amplifying certain global risks such as extreme weather events and altering the rela-
tionship between them. The leading cause of climate change has been the increase in
the concentration of atmospheric greenhouse gas (GHG) emissions, including carbon
dioxide, which has led to a range of major impacts including an increase in storms
and floods, heatwaves and droughts, as well as impacts on human health, biodiver-
sity, ocean acidification and global food supplies.
In recent years, climate change risk has shifted from being an emerging risk to a
public risk that all firms are expected to manage and mitigate.
The recent Covid-19 pandemic crisis provides us with an indication of what a
fully-fledged climate crisis could entail. Both can be considered ‘grey swans’. Experts
have been warning about these threats for years and both indicate that the world at
large is generally ill-prepared to deal with either. What has been encouraging is how
scientists and health professionals have been collaborating and reinventing how they
work. Integration of scientific knowledge into risk management is also crucial to
building resilience to climate risk.
Climate risk management is complex and there is a difference between thinking
you know your risks and fully understanding the potential magnitude and their
implications. Given the ongoing changing climate and associated risks, organizations
need to continually seek to identify, assess, mitigate, monitor and report climate risks
in a formal way using the latest tools and techniques where appropriate.
A famous quotation on risk came from Theodore Roosevelt, the former US
President, who stated that ‘Risk is like fire: if controlled it will help you; if uncon-
trolled it will rise up and destroy you.’1 The point here is that he recognized the
opportunity angle to risk and being able to exploit risk situations. This is particularly
valid for climate change risks given the transition risks and opportunities to gain
competitive advantage through, for example, being an industry leader or first mover
in areas such as product innovation.
The impact of climate change also poses a financial stability risk to the global
financial system. Various international, national and industry bodies, driven by the
Financial Stability Board representing the G20 countries, are working together to
achieve long-term regulatory alignment. Although it is easy to feel overwhelmed by
the complexity of the problem there are a range of solutions available including the
need to replace fossil fuels with cleaner, renewable energy like wind and solar power.
8 CLIMATE CHANGE ENTERPRISE RISK MANAGEMENT
Companies therefore need to integrate climate change within their existing ERM
framework. The tools and techniques covered in this book can also be adopted or
adapted in order to cover some of the wider risks and issues across an organization’s
risk profile. To do this it is important to establish a climate change risk taxonomy,
which is discussed in section 1.5 of this chapter. This taxonomy, which covers climate
physical, transition and liability risks, will be the focus and content of this book.
During the Covid-19 pandemic, there has been discussion of a ‘tilt to the green’ in
future investments. It is argued that organizations that are ‘front-runners’ – that
adjust to future structural changes and put sustainability at the heart of their strate-
gies more rapidly – will be able to reap the potential benefits that it will bring. These
will include enhanced brand image, heightened employee engagement, enhanced
innovation, new sources of revenue, improved relationships with stakeholders and
greater operational resilience.
1.1 Climate change risk management enablers

Climate change presents several distinctive elements (which are non-linear, irrevers-
ible and occur over extended time horizons), which, when considered together,
present firms with unique challenges.
The dynamic and interconnected nature of climate risk, in addition to limitations
in data sets and methodologies, will require firms to adopt an iterative approach.
Perhaps one of the most important considerations will be the adoption of a proactive
approach to assessing the resilience of a firm’s business strategy and to be able to
adapt quickly to climate change.
The design of a climate change strategy should therefore align to an existing
enterprise risk management (ERM) framework and the wider group business and
strategic objectives. In terms of being able to evidence successful implementation,
risk managers need to integrate and embed climate change into existing business
processes and protocols.
Figure 1.1 outlines the themes of the 12 chapters of the book, each of which is a
key and distinct area, and can be considered a key enabler that requires attention to
enable the development and execution of a climate change risk management strategy
in any organization.
This chapter focuses on the use and articulation of a consistent climate risk taxon-
omy that can be discussed externally and used internally within organizations to
ensure that all risks and opportunities are addressed and that there is a consistent
approach and understanding.
Chapter 4 provides further insights into how the risk taxonomy can be devel-
oped into a climate change risk radar across the organization’s risk profile that
describes the risk landscape for climate-related risks covering both threats and
opportunities.
FIGURE 1.1 Climate change enterprise risk management – key enablers
2a. Strategic
positioning & risk
appetite integration
2b. Operationalize
risk appetite and 3. Developing an
12. Financial
targets effective
reporting &
governance
disclosures
framework
11. Risk integration 4. Stakeholder

into business insights and
processes research
1. Climate change
enterprise risk
10. Stress and
management 5. Managing
scenario analysis transition risk
9. Emerging risk
6. Building climate
issues and
resilience
challenges
8. Emerging risk
7. Climate data
management
value chain
process
SOURCE © OneRisk Consulting. All rights reserved, 2022
1.2 Climate change and ESG integration

Although this book will be focusing on climate change it is important to understand
the relationship and relevance to the wider environmental, social and governance
(ESG) agenda that is becoming an increasingly prominent feature of regulation and
conducting business.
Sustainability issues are becoming core considerations in business. ESG criteria
are increasingly valued by shareholders, employees and customers. In recent years
there has been an increasing number of corporate pledges on mitigating climate
change: on average one new company joined the Science Based Targets initiative
each day and committed to emission reduction goals.2
This momentum raises the bar for corporate governance. The growing focus on
climate change also extends to corporate disclosure, and there has been significant
progress on this front. Europe is taking the lead on climate-related financial disclo-
sures, and other jurisdictions are following suit. Figure 1.2 outlines the main ESG
factors used by S&P’s Global Ratings agency.
FIGURE 1.2 Environmental, social and governance criteria
Environmental Social Governance

factors factors factors
x
Climate Health and Governance
o o
transition risks safety structure
x
Risk management,
Physical risks Social capital culture, and
oversight
Transparency
Natural capital Human capital
and reporting
Waste and Other social Other governance

pollution factors factors
Other
environmental
factors
SOURCE S&P Global Ratings © 2021 by Standard & Poor’s Financial Services LLC. All rights reserved
1.2.1 Use of ESG factors

ESG factors that are applied across all three components of ESG are generally used to
support the assessment of compliance and performance against a set of risk i ndicators,
typically used in the context of benchmarking, in areas such as investment strategy
and supplier procurement processes, which are discussed in more detail in Chapter 11.
From a credit ratings perspective, S&P use ESG rating factors to provide an opin-
ion on the exposure and management in respect of any material and relevant impact
on the company’s creditworthiness. More details of the influence and importance of
credit rating agencies in respect to climate change are provided in Chapter 4 under
stakeholder analysis and mapping.
1.3 Global macro risk and climate change

It is important to remember that climate change is a set of global trends. One of the
best publications on emerging risks is the Global Risks Report published by the
World Economic Forum.
In recent years, the World Economic Forum’s top risks have been dominated by
environmental risks. In their most recent report (2022), climate change accounted
for the top three global risks:
●● Climate action failure

●● Extreme weather
●● Biodiversity loss
‘Climate action failure’ is the risk with potential to inflict the most damage at a
global scale over the next decade and climate change therefore continues to be
perceived as the gravest threat to humanity.
Global economic climate trends and consequences are discussed in more detail in
Chapter 9.
1.3.1 The main causes of climate change

The effects of the dramatic intensification of human activity are clearly visible in an array
of indicators that monitor the Earth’s living systems. This intensification has been the
main cause of climate change over the last half century, leading to increases in concentra-
tion of atmospheric greenhouse gas (GHG) emissions, including carbon dioxide.
Scientists state that to avoid dangerous climate change we need to keep concen-
tration of CO2 below 350 parts per million. ‘It is over 400 ppm and still rising,
pushing us towards a hotter, drier and more hostile climate along with a rise in sea
levels that threaten the future of islands and coastal cities worldwide.’3
According to the UN Environment Programme (UNEP) report, global greenhouse
gas emissions need to fall by 7.6 per cent each year between 2020 and 2030, to stay
on track towards the 1.5°C temperature goal of the Paris Agreement, and the world
is not meeting these targets.4
1.3.2 The main impacts of climate change

The main effects of climate change include an increase in storms, floods, wildfires,
heatwaves and droughts, as well as impacts on human health, biodiversity, ocean acid-
ification and food supply. The increase in storms, floods and wildfiresin the last decade,
according to Swiss Re, have been responsible for 75 per cent of all global catastrophe
losses insured by the insurance industry, with wildfires becoming a particular concern.
The historical information is a valuable indicator of future climate trends in respect to
events and types of hazards from a global perspective set out in Figure 1.3.
In July 2020, in the Swiss Re sigma 1/2021 report ‘Natural Catastrophes in 2020’,
the Group Chief Economist of Swiss Re, Jerome Haegeli, stated that ‘climate change
is a systemic risk for the whole world. Unlike the COVID-19 crisis, it does not have
an expiry date’.
Figure 1.3 highlights the increasing cost of weather-related losses that are twice as
high now than ten years ago. In a 2021 Swiss Re Report, it states that ‘severe floods
in Australia, ice storms in Texas and wildfires in California – the latest series of natu-
ral catastrophes point to a world increasingly at risk from extreme weather and
climate change.’5
12
FIGURE 1.3 Global insured natural catastrophe losses by peril
180
2017 Hurricanes Harvey, Irma, Maria
160
2011 Japan & NZ earthquakes, Thailand flood
2005 Hurricanes Katrina, Rita, Wilma
140
120
100
80
60
40
20
0
1
76
01
06
11
16
21
7
20
20
19
20
19
19
19
19
19
20
20
Earthquakes/tsunami Weather-related Man-made 10-year moving average total insured losses
SOURCE Swiss Re Institute
It also points out that secondary perils have been rising steadily, driven by urban
sprawl and climate change that include localized weather events such as thunder-
storms, flooding and wildfires which are pushing up insurance losses.
In 2005, Hurricane Katrina cost the US economy $105 billion. There is an ongo-
ing progression of climate change effects that will occur without adequate adaptation
and mitigation by organizations. An extreme example of this was in 2020 when
Pacific Gas & Electric, a US energy company, was heralded as the first ‘climate
change bankruptcy’ when it filed for bankruptcy in the face of liabilities from wild-
fires, which reportedly amounted to $30 billion.
1.3.3 Climate change and weather distribution

Climate change from a statistical perspective can be simplified and defined as a
change in the weather distribution curve, with extreme weather events reflecting the
tails of the distribution curve.
Figure 1.4 provides a simplistic explanation of how small shifts in average temper-
ature can create greater extremes in the tail of the distribution of temperature that
are leading to, for example, hotter and longer heatwaves.
F IGURE 1.4 Climate change and weather distribution
Probability
New climate
Previous climate
More hot
weather
Less cold Extreme hot

weather weather
Cold Average Hot
SOURCE US Environmental Protection Agency (EPA

REVIEW OF 2021 DIRECT ECONOMIC LOSSES FROM NATURAL

CATASTROPHE – AON
Direct economic losses and physical damage resulting from natural disasters are
increasing and estimated at $343 billion in 2021. It is important to recognize that events
from weather and climate-related events, which are defined as events caused by
atmospheric-driven phenomena, totalled $329 billion. This represents over 95 per cent of
total economic losses, and is 45 per cent higher than the average and 52 per cent higher
than the median in the last century. This clearly highlights an alarming upward trend.
The most notable takeaway from the economic costs of natural disasters in 2021 was
the frequency of large-scale and highly impactful events. Four individual events topped
the $20 billion economic loss threshold: Hurricane Ida, July flooding in Europe (Bernd),
summer seasonal flooding in China and the February polar vortex in North America (US/
Mexico). This was just the second time on record in which four $20+ billion events had
been registered in a calendar year, but the first time that four events were weather/
climate related.
Figure 1.5 provides an overview of the events in 2021 split by hazard and highlights
the four events that generated economic losses above $20 billion.
FIGURE 1.5 Significant economic loss events in 2021 – > $1 billion
Europe floods
$46 billion China floods
$30 billion
Winter weather Hurricane Ida
$25 billion $75 billion
Flooding
Tropical cyclone
Winter weather
Severe weather
Drought
Earthquake
Wildfire
Other
SOURCE Data: Aon (Catastrophe Insight)
When viewing economic losses on an aggregate basis since the start of the 21st century,
tropical cyclone is the costliest global hazard. It is worth noting that 41 per cent of
tropical cyclone losses in this century occurred within the last five years (2017–2021).
FIGURE 1.6 Cumulative economic losses split by peril
Economic losses (2021 USD billion) Tropical cyclone Count of billion-dollar events
Flooding
1,717
201
Tropical cyclone
182
Flooding Severe weather
1,401 175
Earthquake Drought
910 114
Severe weather
724
Drought Earthquake
715 59
Winter weather
Winter weather 46
Wildfire
239 41
Wildfire EU windstorm
198 17
EU windstorm Other
104 3
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020
SOURCE Data: Aon (Catastrophe Insight)
15
FIGURE 1.7 The top six areas of physical climate change risks in the UK
Flooding and coastal change risks to communities, businesses and

infrastructure
Risks to health, well-being and productivity from high temperatures.
More
Risk of shortages in the public water supply, and for agriculture, energy action
generation and industry needed
Risks to natural capital, including terrestrial, coastal, marine and

freshwater ecosystems, soils, and biodiversity
Risks to domestic and international food production and trade
New and emerging pests and diseases, and invasive non-native species, Research
affecting people, plants and animals priority
NOW RISK MAGNITUDE FUTURE LOW MEDIUM HIGH
SOURCE Committee on Climate Change (2016) UK Climate Change Risk Assessment 2017 synthesis report
If we get more localized a different set of specific risks are applicable. A good exam-
ple is from the UK’s Climate Risk Assessment report, which highlights the top six
physical climate risks outlined in Figure 1.7 from a government perspective.6
1.4 Key drivers and expectations for organizations

There has been a significant shift in recent years from governments and organiza-
tions to tackle climate change and manage risks as both threats and opportunities.
This is due to many external drivers, expectations and pressures.
Organizations must therefore address a growing number of critical drivers of
change and expectations, including new international and national legislation and
regulation and the voluntary disclosure approach led by the Task Force on Climate-
related Disclosures (TCFD). Other major drivers include increasing public concerns
and pressure from lobby groups, activists, regulators and investors.
1.4.1 The Paris Agreement 2015

The main change driver is the Paris Agreement , which was adopted by 196 parties
at COP21 in Paris in 2015 and came into force in 2016. The agreement sets out with
long-term goals to keep the increase in global average temperature to well below 2°C
above pre-industrial levels and to pursue efforts to limit the rise to 1.5°C. The climate
ambition alliance was set up by United Nations Framework Convention on Climate
Change to achieve net-zero CO2 emissions by 2050 at the latest.
FIGURE 1.8 Ambition mechanism and targets in the Paris Agreement

Net-zero emissions &
climate resilience
Global Stocktake
2050
Global Stocktake 2030
Secretary-General’s 2028
Climate Summit
Talanoa
2025
Dialogue
2023
2020
2019
2018 Communicate new
or updated NDCs
Communicate new
Adoption of the Communicate new or updated NDCs
Paris Rulebook or updated NDCs
SOURCE World Resources Institute
We heard at COP26 in 2021 that we are now on course for global temperatures to
reach 2.4°C above pre-industrial levels by the end of the century. This is concerning
for governments and policy makers. The key question is how societies worldwide put
in place the steps outlined under the agreed global action plan.
The Paris Agreement sets out energy pathways consistent with nationally deter-
mined contributions (NDCs) from signatory countries that need to report on their
efforts and progress to the international community. Every five years the interna-
tional community will take stock of collective progress towards the Paris Agreement’s
long-term goals (‘ambition mechanism’). Chapter 4 explores stakeholder expecta-
tions in more detail and highlights the importance of stakeholder analysis and
mapping as a key risk identification tool for organizations to utilize.
The two main outcomes from COP26 were the signing of the Glasgow Climate
Pact and agreeing the Paris Rulebook. The Glasgow Climate Pact is a ‘series of deci-
sions and resolutions that build on the Paris accord’, setting out what needs to be
done to tackle climate change. However, it does not stipulate what each country
must do and is not legally binding.
The Paris Rulebook7 provides guidelines on how the Paris Agreement is delivered.
A focus of COP26 was to secure agreement between all the Paris signatories on how
they would set out their NDCs to reduce emissions. The finalized Rulebook includes
agreements on:
●● An enhanced transparency framework for reporting emissions

●● Common timeframes for emissions reductions targets
●● Mechanisms and standards for international carbon markets
It is important to note that the economic overhang of the Covid-19 crisis and weak-
ened social cohesion – in advanced and developing economies alike – may further
limit the financial and political capital available for stronger climate action. China
and India, for example, lobbied at COP26 to change the Pact’s wording from ‘phase
out’ to ‘phase down’ of ‘unabated coal power and inefficient fossil fuel subsidies’.
1.4.2 Intergovernmental Panel on Climate Change (IPCC)

There are many excellent reports on climate change and the United Nations
Intergovernmental Panel on Climate Change (IPCC) released the ‘The Physical
Science Basis Report’ in 2021 in advance of COP26, which the UN chief has stated
‘is a code red for humanity’. The report states that human activity is changing the
climate in unprecedented and sometimes irreversible ways.
The landmark study warns of increasingly extreme heatwaves, droughts and
flooding, and a key temperature limit being broken in just over a decade.
1.4.3 Global regulators (including the Bank of England)

Supervisory and regulatory authorities have many aims but they typically include
protecting customers, ensuring market stability and supporting market development.
Climate-related changes threaten each of these aims.
The speed of this change has meant best practice and regulation have evolved very
rapidly and are continuing to develop, particularly in the financial sector. We have
witnessed a significant change and improvement in best practices in recent years that
can be largely attributed to the development of regulatory expectations and guidance.
In July 2020 the Prudential Regulation Authority (PRA) sent a letter to all CEOs
in the UK across all financial institutions, which stated that ‘Climate change repre-
sents a material financial risk to regulated firms in the financial system’.
The letter stated that organizations need to consider the far-reaching breadth and
magnitude that climate change represents, distinguishing between financial and non-
financial risk management, corporate responsibility (particularly in respect to
reputational risk), customers’ behaviours and legal risk.
Regulation is evolving quite rapidly and there has been a shift in emphases in
recent years to adaption and the need to reduce carbon emissions to reach net-zero
targets for organizations to align their strategies to meet government targets.
Evidence of this shift can be seen through the Bank of England’s climate change
adaptation report issued in October 2021 entitled ‘Climate-related financial risk
management and the role of capital requirements’ in which it stated ‘a proactive
response is needed to ensure financial institutions are resilient to the financial risks
from climate change and able to support an economy-wide transition to net-zero
emissions’.
Government guidance has been helpful to organizations. For example, the PRA
set out four key pillars for financial organizations. Each of these pillars has sub-
themes, and these components are covered in various chapters in this book so that
regulatory best practice expectations are addressed. Some of the most important
requirements set out by the regulator that organizations can seek to develop under
each pillar are as follows:
Under Governance
99 Appoint a ‘Senior Management Function’ to take lead responsibility for
climate change risks.
Under Risk management

99 Formally consider climate change within an organization’s risk
management framework.
For Scenario analysis

99 Conduct regular scenario analysis covering a range of timescales to
different transition paths.
For Disclosures
99 Ensure that they reflect the firm’s evolving understanding of the financial
risks.
The PRA expectations are that organizations should have developed a robust frame-
work to manage climate-related financial risks by the of end of 2021. But for risk
practitioners that implement best practice ERM it’s a journey and it is important to
design a robust road map for implementation.
1.4.4 Task Force on Climate-related Financial Disclosures (TCFD)

Organizations increasingly need to meet new international and national legislation
and regulations including the voluntary approach led by the Task Force on Climate-
related Financial Disclosures (TCFD). These disclosures are becoming mandatory in
many countries such as the UK from 2023 for certain organizations. Reporting and
disclosures will be covered in detail in Chapter 12.
These key drivers and increased public pressure have led to a step change in
momentum and action by governments and organizations around the world.
The Task Force encourages organizations to undertake both historical and
forward-looking analyses when considering the potential financial impacts of climate
change, with a greater focus on forward-looking analyses as the efforts to mitigate
and adapt to climate change are without historical precedent.8 Its assessment frame-
work is set out in Figure 1.9 and we will cover scenario analysis in more detail in
Chapter 10.
FIGURE 1.9 TCFD guidance
Climate-related risks, opportunities, and financial impact
Transition risks Opportunities

Policy & legal
Resource efficiency
Technology Energy source
Market Risks Opportunities
Products/services
Reputation Markets
Resilience
Physical risks
Strategic planning
Acute
risk management
Chronic
Financial impact
Revenues Income Cash flow Balance Assets & liabilities

Expenditures statement statement sheet Capital & financing
SOURCE TCFD Final Report, 2017
1.4.5 Climate change and society’s responses

These drivers and expectations have led to a step change in momentum and action
by governments and organizations worldwide. There is a growing recognition that
climate change is not just a matter for the future and in order to fully understand
risks faced now and in the future, we need to understand the history and develop-
ment of those risks.
This has led government and corporations to set emissions targets, which are
becoming central to organizations’ strategic objectives and included within their risk
appetite metrics to manage and monitor.
For example, Microsoft hit the headlines recently with its pledge to become
‘carbon negative’ by 2030, and to remove all carbon emitted since the company was
founded in 1974 by 2050. They have set up a new $1 billion Climate Innovation
Fund to stimulate and accelerate development of carbon removal technology.
With respect to the energy sector, BP’s CEO Bernard Looney has pledged net zero
emissions by 2050. In the words of this CEO, ‘the world’s carbon budget is finite and
running out fast’.9 To meet the targets, energy companies need to reduce existing
production over time, develop technologies to capture carbon and invest more heav-
ily in renewables such as wind farms and solar power.
Chapter 5 covers management of transition risks, providing a global perspective

on carbon emissions and mitigation strategies and what government and regulators
are doing to meet their net zero targets. A sample of organizational responses and
targets are set out in Figure 1.10.
Companies need a robust framework in place to identify and manage both climate
risks and opportunities across different risk types.
Climate plans and associated management information should be communicated
regularly to the board, which will allow for strategic discussions that support deci-
sion making in terms of evaluating risk and rewards tradeoffs.
ERM integration considerations should include risk policies, risk mitigation strat-
egies, and improvements in monitoring capabilities and design of risk appetite
metrics and targets.
1.5 Developing a climate change risk taxonomy

While it is important to treat climate-related risks as drivers of existing risks and
map them to their existing risk categories, it is also important to develop a consistent
taxonomy that can be discussed externally and used internally within organizations
FIGURE 1.10 Organizational responses – examples to meet net zero emissions goals
2025 2030 2035 2040 2050
Bloomberg Pricewaterhouse American Express Vodafone Microsoft

Coopers (PwC)
Achieve net zero Greenhouse gas Net-zero carbon Fully abate scope 3 Remove all carbon
carbon emissions emissions emissions. (already emissions emitted since 1975
carbon neutral since
2018)
Johnson & Johnson Siemens Sainsbury A.P. Muller - Maersk BP
Source 100% Net-zero carbon Make own Net-zero emission Net-zero carbon
electricity needs footprint operations emission
from renewable net-zero
sources

to ensure that all risks and opportunities are addressed and that there is a consistent
approach and understanding.
A new climate risk taxonomy developed initially by the Financial Stability Board
and adopted by many regulators such as the Australian Prudential Regulatory
Authority (APRA), is shown in Figure 1.11.10 It provides a clear delineation of the
financial risks associated with climate change, namely physical, transition and
liability risks.
Physical risks include direct damage to assets and indirect impacts of supply chain
disruption. Physical risks can be event-driven (acute) or longer-term shifts (chronic).
Specific examples include:
●● Acute physical risks, which arise from particular events, especially weather-related
events such as storms, floods, fires or heatwaves that may damage production
facilities and disrupt value chains.
●● Chronic physical risks, which arise from longer-term changes in the climate, such
as temperature changes, rising sea levels, reduced water availability, biodiversity
loss and changes in land and soil productivity.
For example, the intensity and frequency of wildfires, often driven by drought, are
becoming an increasing concern particularly for Australia, southern Europe and
parts of the US, including California. Other noted examples relate to property port-
folios for banks and insurers that will become increasingly susceptible to climate risk
from acute or chronic perils: flooding; storms; mudslides; water-level rise.
Transition risks relate to financial risks that arise as a consequence of transitioning to
a lower-carbon or ‘green’ economy. These risks arise from related transformations
FIGURE 1.11 Climate change risk taxonomy
Physical risks Transition risks Liability risks
Changing climate conditions Policy changes Stakeholder litigation and

extreme weather events technological innovations regulatory enforcement
social adaptation
Disruption from
Direct damage to Disruption from
adjustment to low-
assets or property event impact
carbon economy
• Lower asset values • Impacts on pricing and • Business disruption

• Increased insurance claims demand resulting from litigation
• Supply chain disruption • Stranded assets • Penalties resulting from
• Defaults on loans litigation
SOURCE Australian Prudential Regulatory Authority (APRA)

including regulatory policy such as carbon taxes, technology and market disruption that
will include innovation in renewable energy.
Transition risks are developing as governments support and subsidize low-carbon
industries and regulate and tax high-carbon ones. They are also developing as public
attitudes and preferences change. They can include legal risk as well, but for some
organizations it may make sense to treat liability risks separately, since they may be
exposed to liability risks from past activities that are not directly related to the tran-
sition itself.
Liability risks stem from the potential for litigation if entities and boards do not
adequately consider or respond to the impacts of climate change, as well as stakehold-
ers that are seeking compensation from past climate inactivity or misrepresentation.
This may include the potential breaching of directors’ duties. In February 2020,
the UK Government’s decision to allow plans for a third runway at Heathrow airport
was ruled unlawful by the UK Court of Appeal because it did not take climate
commitments into account. This was the first judgment in the world to be based on
the Paris Agreement and will have an impact both in the UK and globally by inspir-
ing challenges against other high-carbon projects.
Some of the main legal challenges can arise from:
●● Failure to mitigate GHG emissions

●● Failure to adapt to the physical impacts of climate change
●● Failure to adapt investment strategies
Chapter 9 outlines some of the latest emerging liability risks and legal cases that are
important for organizations to consider.
1.5.1 Other climate risk taxonomies

It is important to recognize that there are other climate taxonomies being used that
cover the wider scope of environment risks such as waste and pollution. Other risk
descriptors that are being used by credit rating agencies, for example, include ‘natural
capital’ risks, which relate to the stock or availability of renewable and non-renewable
resources available in the world. These are made up of elements such as animals, water
and air, and biodiversity, which are all features of natural capital.
Throughout the book the main focus is to cover the broad risk taxonomy of
physical and transition risks, including some reference to emerging liability risks in
Chapter 9. However, the main objective is to explain how the climate-related risks
can be integrated into an organization’s existing ERM framework as well as
business-as-usual practices.
1.6 Climate change integration into an existing ERM framework

To successfully embed climate risk management within an organization and to align
the climate risk strategy to the wider group business and strategic objectives, it
makes sense to leverage the various facets of the enterprise risk management frame-
work that already exist and to incorporate and align climate risk considerations
whenever appropriate.
A robust ERM framework should ensure that an organization meets the follow-
ing three key goals:
99 Provide a framework to ensure that corporate risks are managed and
mitigated.
99 Grow shareholder value through making smart risk–return-based decisions.
99 Enhance the company’s reputation across a wide range of stakeholders.
ccording to the most recent COSO (Committee of Sponsoring Organizations – a

A
body founded in 1985 focused on the design and implementation of internal controls)
framework, ‘Enterprise risk management is no longer focused principally on prevent-
ing the erosion of value and minimizing risk to an acceptable level. Rather, it is
viewed as integral to strategy setting and the identification of opportunities to create
and maintain value.’
So how can risk managers integrate climate change into their ERM frameworks?
The design of a climate change strategy should align to the existing ERM framework
and wider group business and strategic objectives
1.6.1 Specific integration challenges and benefits

Risk managers, through collaboration with a range of stakeholders, will need to play
an increasing role in supporting organizations in identifying, assessing and managing
their climate-related risks and opportunities and integrating them within existing
ERM frameworks.
This integration of emerging risk information and analysis will provide a number
of benefits, including an improved risk appetite framework and risk mitigation strat-
egies across most areas considered within an organization’s risk profile.
One of the biggest challenges and focus areas for organizations is how to develop
a climate change risk appetite strategy with supporting qualitative statements and
quantitative metrics, to manage and monitor risk in line with risk tolerances. This is
set out in more detail in Chapter 2.
It is essential, therefore, that a centralized ERM approach with a robust govern-
ance structure be utilized at all levels throughout the organization in managing risks
and opportunities. This will enable the organization to be in a stronger position to
make more informed decisions, deliver on its objectives and meet strategic climate
ambitions such as net zero targets.
FIGURE 1.12 Conditions and outcomes of embedding climate change into an ERM framework
The set of conditions The event we want to The positive

for achieving a goal happen: ‘the goal’ outcomes
Embedding CC into
ERM and strategic
business planning
Embedding CC into Manage threats
ERM framework and opportunities
Adapt business
Improve business
strategies and Goal decision making
processes
Reduce carbon Enhance

footprint reputation
The overall goal should be to embed the various actions into business as usual (BAU)
and to support business decision-making. The conditions and positive outcomes of
doing so are illustrated at a high level in Figure 1.12.
With these steps in place, the development of a climate risk strategy can begin.
This is typically a subset of the corporate strategy (but not always – for some firms
it will be the corporate strategy). This should be complemented by outlining how the
company achieves the corporate strategy in a sustainable and climate-friendly way.
Climate strategic positioning and risk appetite integration is covered in Chapter 2.
The benefits of such an approach are that it fits within the existing risk management
infrastructure, which is already understood and used by the business. It also prevents
duplication of effort, minimizes unnecessary reporting and saves time. This will:
●● ensure that there is a robust framework in place to identify and manage climate
risks and opportunities across different risk types
●● ensure that the climate plan, actions and associated management information,
which allow for strategic discussions that support decision making in terms of
evaluating risk and rewards trade-offs, are communicated regularly to the board
●● integrate ERM considerations, which should include policies, thresholds, mitiga-
tion strategies, monitoring capabilities, and risk appetite metrics and targets
The discipline of climate risk management should be considered an extension of

standard enterprise risk management and align with the risk frameworks, policies
and taxonomies. It should also integrate with the key risk management tools such as
risk appetite statements, risk policies, scenario analysis, etc. Developing risk mitiga-
tion plans and improving the control environment is also critical and organizations
need to align them with stakeholder expectations and to their strategic objectives,
core operations and processes.
This approach to risk management will support the company’s integration of risk
management within the business processes, including:
●● Sustainability strategy including management of carbon footprint (Chapter 5)

●● Business continuity and disaster recovery planning (Chapter 6)
●● Financial and investment planning (Chapter 11)
●● Third-party procurement processes including suppliers and customers (Chapter 11)
●● Performance management (Chapter 3)
●● Insurance procurement (Chapter 6)
●● Product innovation (Chapter 9; Chapter 11)
●● Risk modelling and concentration management (Chapter 7)
●● Capital management (Chapter 6)
●● Credit risk management (Chapter 2; Chapter 11)
●● Human resources and employee benefits (Chapter 3)
●● Litigation risk (Chapter 9)
1.7 Developing a climate change risk maturity model

In setting ambition and targets in respect to climate change and integration into an
existing ERM framework, an organization should consider developing or adapting a
risk maturity model for climate change.
As well as deciding on its level of climate ambition and strategic positioning, it is
also important to consider the level of long-term climate risk maturity and goals that
the organization wants to achieve against specific criteria that are set out in
Figure 1.13.
There are various risk maturity models that have been designed to assist organiza-
tions in assessing their maturity against a set of best practice criteria in the form of
ERM components.
Risk maturity models typically have an assessment level of between 1 and 5,
which helps to determine where the organization is and set a target level for each of
the main components within the model.
The descriptions of the five levels to determine the performance and capabilities
of an organization’s enterprise risk management maturity vary. An example is
outlined here with key descriptors:
1 Ad hoc or underdeveloped
2 Initial or formalized
3 Repeatable or established
4 Managed or embedded
5 Leadership or optimized
Example definitions for Levels 4 and 5, which are the most aspirational, would
constitute the following:
●● Embedded – The ‘embedded’ level is defined as measuring and managing risks

quantitively and on an aggregated basis throughout the organization. Essentially
this entails a proactive approach to the management of risk at all levels of the
organization with management having a clear understanding of the risks and the
process.
●● Optimized – The optimized level states that risk management is a source of
competitive advantage for the organization and that the organization undertakes
continuous risk improvement. This level implies that the risk is integral to strate-
gic and business decision-making and capital optimization and that ERM is
backed by a single IT platform and knowledge management system.
In order to successfully achieve an organization’s desired ERM target state, a full

review of the current status against maturity models should be undertaken.
The main steps in developing a formalized process would be to:
●● Agree maturity model categories

●● Review of current framework/infrastructure
●● Discussion with key stakeholders
●● Review regulatory requirements
●● Rate the current maturity on a scale of 1–5
●● Develop a future state vision for each category/sub-category
ILLUSTRATIVE EXAMPLE
Climate risk maturity model
An approach that can be adapted to specifically evaluate the maturity of an

organization’s climate change enterprise risk management programme is outlined in
Figure 1.13.
This approach can seek to ascertain the organization’s existing and target levels of
climate risk ambition and target climate maturity. The process can be benchmarked
against, for example, TCFD and other regulatory requirements and standards including
best practice risk management standards.
The process provides a basis for risk professionals to engage with management and
agree on a set of management action and mitigation plans to support areas that need
most attention and build a road map for improvements in order to reach the target risk
maturity level for each criteria.
FIGURE 1.13 Climate risk maturity model illustration
‘BEST PRACTICE’ UNDER

CRITERIA DEVELOPED FORMALIZED ESTABLISHED EMBEDDED OPTIMIZED
CLIMATE GOVERNANCE
INCLUDING RISK
TRAINING
CLIMATE RISK
IDENTIFICATION AND
STAKEHOLDER MAPPING
CLIMATE MATERIALITY
ASSESSMENT THROUGH
SCENARIO ANALYSIS
RISK MITIGATION AND

RESILIENCE PLANS
CLIMATE RISK
APPETITE AND
TARGETS
CLIMATE DISCLOSURE
CURRENT STATUS TARGET STATUS
This book addresses and discusses each of the main criteria shown in Figure 1.13, which
represent the most important climate ERM framework components. For example,
developing an effective climate governance framework is outlined in Chapter 3, and
climate risk identification and stakeholder mapping is included in Chapter 4.
Conclusion
Climate change continues to be perceived as the gravest threat to humanity and in
the latest Global Risks Report (2022) respondents rated ‘climate action failure’ as
the risk with potential to inflict the most damage at a global scale over the next
decade.
Risk managers, through collaboration with a range of stakeholders, will need to
play an increasing role in supporting organizations in identifying, assessing and
managing their climate-related risks and opportunities and integrating them within
existing ERM frameworks in order to support strategic business decisions.
This chapter has set the scene for the rest of the book in outlining the main
components of a climate risk management framework, which can be developed into
a risk maturity model to support the implementation of climate change plans within
an organization. Specific case studies and examples of best practice processes and
tools and techniques will be used throughout the book to provide additional detail
on each of these aspects.
Notes
1 R J Chapman (2012) Monitoring and review: Stage 6, in Simple Tools and Techniques
for Enterprise Risk Management, 2nd edn, 233–40. doi:10.1002/9781118467206
(archived at https://perma.cc/8EC9-36T3), Ch 13
2 Swiss Re Institute. Sigma 4/2021 – More risk: the changing nature of P&C insurance
opportunities to 2040, 2021. www.swissre.com/institute/research/sigma-research/
sigma-2021-04.html (archived at https://perma.cc/8ALG-APKS)
3 K Raworth (2018) Doughnut Economics: Seven ways to think like a 21st-century
economist, Random House Business Books, London
4 UN Environment Programme. Cut global emissions by 7.6 percent every year for next
decade to meet 1.5°C Paris target, 2019. www.unep.org/news-and-stories/press-release/
cut-global-emissions-76-percent-every-year-next-decade-meet-15degc (archived at
https://perma.cc/42DE-K5WC)
5 Swiss Re. In 5 charts: natural catastrophes in a changing climate, 2021. www.swissre.
com/risk-knowledge/mitigating-climate-risk/sigma-in-5-charts.html (archived at https://
perma.cc/CAP6-RAHZ)
6 HM Government. UK Climate Change Risk Assessment 2017. https://assets.publishing.
service.gov.uk/government/uploads/system/uploads/attachment_data/file/584281/uk-
climate-change-risk-assess-2017.pdf (archived at https://perma.cc/J4JT-3WZA)
7 UN Climate Change Conference UK 2021. COP26 keeps 1.5C alive and finalises Paris
Agreement, 2021. https://ukcop26.org/cop26-keeps-1-5c-alive-and-finalises-paris-
agreement/ (archived at https://perma.cc/2TRM-5BY9)
8 TCFD. Recommendations of the Task Force on Climate-related Financial Disclosures.
Final Report, 2017. https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-
TCFD-Report-11052018.pdf (archived at https://perma.cc/AA65-E8GQ)
9 BP. BP sets ambition for net zero by 2050, fundamentally changing organisation to
deliver, 2020. www.bp.com/en/global/corporate/news-and-insights/press-releases/
bernard-looney-announces-new-ambition-for-bp.html (archived at https://perma.cc/
HU4U-PCZH)
10 APRA. Information Paper: Climate change: Awareness to action, 2019. www.apra.gov.
au/sites/default/files/climate_change_awareness_to_action_march_2019.pdf (archived at
https://perma.cc/A72G-9KW7)
30
Climate strategic positioning

and risk appetite integration
This chapter explains the importance of developing a stand-alone climate change

strategy, including the setting of the ambition for change for the organization, which
should be aligned to the overall corporate strategy. As well as covering the need to
develop a strategy focused on both sustainability and resilience, the chapter provides
a detailed insight into how an organization should develop its climate risk appetite
strategy, supporting both qualitative and quantitative metrics and targets.
●● Explain how organizations can set their strategic positioning and ambition in
respect to climate change.
●● Recognize the importance of the influence that risk leaders can exert in their
boards and board risk committees in developing and supporting a climate change
strategy for the organization with an impact on wider society.
●● Understand the four levels of ambition that an organization can adopt in terms of
its strategic positioning that is dictated by the board.
●● Appreciate the key dimensions of establishing a climate strategy that will be under-
pinned by the two foundation components, namely resilience and sustainability.
●● Understand the importance of developing a climate change plan and road map
that allocates and prioritizes actions to specific workstreams with timelines to
completion.
●● Be able to design and implement an organization’s risk appetite strategy that can
help to articulate and shape its overall strategy, including the development of
climate risk principles and objectives.
●● Be able to design and embed key climate change risk indicators across the organ-
ization’s risk profile, to help to measure and monitor its climate change-related
exposures.
CLIMATE STRATEGIC POSITIONING AND RISK APPETITE INTEGRATION 31
Introduction
Upon the establishment of the consistent climate risk taxonomy that was discussed in
Chapter 1, the next step is to align this with the climate risk strategy, determine prior-
ities and develop a detailed plan in order to meet the climate risk objectives. In the
context of aligning risk management with strategic planning, Norman Marks states:
Businesses should set objectives and strategies only after thinking carefully about
where you are, what is happening around you, and what may happen in the future.
These objectives and strategies should then be executed on, with an eye kept on what is
happening as you progress on that may affect the success of your journey.1
In almost all recent risk surveys, climate risk features in the top 10 risks facing
organizations (this includes surveys from the CRO Forum, WEF, Swiss Re, Zurich
and McKinsey). Many organizations now have climate change as a strategic or prin-
cipal risk with an assigned owner and are developing associated risk appetite
strategies, including key risk indicators, to manage the risks.
It is reasonable to say that climate risk has now emerged and needs addressing
now (as opposed to requiring mitigation in the future). It is indisputable that climate
risk is a strategic risk facing almost all businesses. Consequently, it requires executive
ownership, governance arrangements that support the management of climate risk
and for there to be appropriate resourcing.
In terms of alignment to strategy and the positioning of climate change within
that strategy it is important to remember that missed organizational goals often
result from ineffectively managed risk(s) or from taking the wrong amount of risk.
Risk professionals can support the climate ambitions of an organization by apply-
ing their expertise in providing a structured approach (that helps the business manage
the risk) and aligning the overall corporate ambition with the enterprise risk manage-
ment framework.
The CRO of BHP (an Australian multinational mining, metals and petroleum
company) stated in an interview for this book that ‘Competent people don’t take
undue risks’. In this chapter we explore how organizations need to develop their
climate risk appetite strategy across different dimensions to enable them to better
manage and mitigate the risks from climate change. It can be argued that the level of
ambition and risk maturity of an organization is linked to the competence and long-
term reputation of the organization. This is being played out with climate-related
disclosures, which are discussed in Chapter 12.
2.1 Corporate strategy and purpose

Most organizations have a defined corporate strategy, which outlines the goals and
ambitions of the organization (i.e., what they do and why they do it), the markets
and industry in which they operate, their competitive positioning and goals for the
future. This provides a direction of travel for the firm and its employees and should
significantly influence decision making. The corporate strategy needs to align with an
organization climate strategy.
It is important at the outset that risk leaders discuss the genuine role and purpose
of the firm in society with their boards and board risk committees.2 Risk leaders
must facilitate a dialogue that focuses on the WHY and avoid the temptation to
immediately focus on the HOW. Purpose can be described simply as why you exist.
2.1.1 Alignment of climate strategy with corporate strategy

Designing a climate strategy involves the actual and potential impacts on the
organization’s strategy, business and financial planning, while climate risk manage-
ment deals with the processes used by the organization to identify, assess and manage
climate-related risks. It can be argued that the ‘glue’ between the corporate strategy
and the ERM strategy is the risk appetite of the organization.
Figure 2.1 sets out the main components of designing climate strategy that will be
covered in this chapter.
2.2 Developing a climate risk strategy

The risk management function can play a critical role in designing the overall climate
change risk appetite of the organization and ensure that it aligns with the overall
corporate strategy of the organization.
The breadth of climate change presents firms with challenges when assessing
the actual and potential impacts on the strategic position of the firm. This may
require firms to repurpose and re-evaluate business strategy and financial planning
FIGURE 2.1 Climate change strategy – the three core components
Corporate
strategy
Climate risk
strategy
Climate
change plan
SOURCE OneRisk Consulting

over the short, medium and long term. This will likely have negative impacts in terms
of, for example, increases in operational costs but it also provides positive implica-
tions for the firm’s existing business and operating models.
It is important for risk leaders to consider the uncertainties associated with each
strategic option. As the awareness of climate change risk increases, business strategy
cannot be fully developed without factoring in climate change opportunities.
Some of the most important questions that need to be considered in developing
the strategy include the following:
●● Does the board consider the actual and potential impacts of climate-related risks
and opportunities on the firm’s business, strategy and financial planning?3
●● Has the board positioned evaluating and addressing climate change implications
as a priority?4
In developing a climate strategy and broader ESG strategy, recent experience indi-
cates that while the climate strategy needs to align with the corporate strategy, the
climate strategy itself supports and develops the corporate strategy. Effectively the
alignment of these components enables the development of a sustainability strategy.
In order to align a combination of corporate, ESG, climate and sustainability
strategy (the balance and importance of these will differ from firm to firm), a set of
additional strategic questions for senior management to consider are set out here:
●● How could climate change risk affect the strategic plan or the company’s mission?
●● Have you developed a climate change plan that meets regular expectations about
the impacts across your operations?
●● What is the board’s role in this?
●● Has your organization defined and communicated its beliefs relating to climate
change risk?
●● How does the company integrate climate-related risks into its risk policies and
overall approach to risk management?
●● Has the company conducted an assessment of its stated climate positions and
benchmarked itself against its trade and industry associations and other industry
sectors?
●● What are your climate risk objectives?
●● Within what time frame will this be achieved?
2.2.1 Strategic positioning and levels of ambition

In terms of strategy, firms will need to decide on their level of ambition with regard
to climate risk. The level of ambition should align with the target level of climate risk
maturity that was discussed in Chapter 1. Firms will need to decide whether to take
a passive role in managing the risks and effecting change, or if the ambition is to
make active changes to the way the business is run in response to climate change and
be a ‘force for good’ that leads the industry and supports the wider society in which
it operates.
By creating a climate risk ambition, executives become accountable for its deliv-
ery and senior management have an informed view of what they are trying to achieve.
This then infuses the decision making in the business with regard to the options for
how it can be achieved, and the actual and potential impacts of climate-related risks
on the business processes, strategic objectives and financial plans of the firm. This
then influences the work required to achieve those goals, the understanding the rela-
tive priorities of these actions, and to formulate plans to address gaps or areas of
weakness.
In terms of climate ambition, there are generally four levels of ambition that
organizations are adopting for the strategic positioning that should be set by the
board. These ambitions need to be proportionate and will be influenced by the prof-
itability of the firm, the industry sector in which it operates (which will require peer
comparison and benchmarking), the size of the organization and the expectations of
other stakeholder groups.
These ambitions are generally termed as follows:
●● Follower – reactive to requirements

●● Adapter – proactively adopts new standards
●● Champion – advocate for industry
●● Leader – climate is core to strategy
These categories generally reflect the amount of investment and resource the organiza-
tion can allocate to climate change. For example, having an aggressive net zero ambition
that requires the organization to quickly adapt its business models will put that organi-
zation into the ‘leader’ category. This may require it to invest in product innovation in
order to gain competitive advantage and be seen to be an early adopter of change.
Many organizations have the ambition to be a ‘leader’ but do not have the ability
in terms of resources and capabilities. Often their ambition will be limited to being
an ‘adapter’ to make sure that they adhere to minimum stakeholder expectations.
This will often include meeting regulatory requirements, which can be quite onerous.
Organizations are often described in the context of climate change ambition and
position, as noted above, for example from industry ‘leaders’ to industry ‘followers’.
This clearly has implications in respect to the reputational risk perspective if an
organization is, for example, being a follower and effectively playing a ‘wait and see
game’ and this means that it could lose competitiveness in its respective marketplace.
In order to develop an organization positioning strategy, there are a number of

steps and implementation options to be considered. These include:
●● Define the level of ambition your firm wants to achieve.

●● nderstand what ‘net zero’ means for your firm and set appropriate targets and
U
metrics.
●● Develop a clear strategic response to the financial risks of climate change and
tools that help to inform business decisions.
●● Less complex firms may adopt a qualitative ‘walk-through’ that considers a possi-
ble sequence of events (shocks and responses) as a basis for developing the climate
change strategy.
●● More complex firms may need to adopt quantitative metrics to substantiate the
risk appetite statement.
2.2.2 Types of strategic integration

Before beginning the integration of climate change ambitions, organizations should
ask themselves ‘Is your chosen approach to climate risks and opportunities manage-
ment responsible, responsive or strategic?’
●● Responsible – the approach driven primarily by corporate social responsibility

(that focuses on reputational risks).
●● Responsive – an approach that views climate change as a financial risk, albeit
from a relatively narrow, short-term perspective.
●● Strategic – a more comprehensive approach adopted that takes a long-term view
of the financial risks, with board engagement.
It is important that the risk function works with senior leaders to consider the uncer-
tainties associated with each option. As the awareness of the climate change risk
increases, business strategy cannot be fully developed without factoring in climate
change risks and opportunities. It is important to note that climate-related opportu-
nities are expected to have more significant impact on business strategies going
forward than climate-related threats.
A good example is the automotive industry in moving to electric and hybrid vehi-
cles, driven to some extent by transition risks, due to regulatory changes and all the
organizations that are involved in the supply chain. If the organization decides to
take a ‘strategic’ approach, for example, they may be able to harness suppliers that
can repair electric vehicles, while their competitors may not, given the potential lack
of specialist suppliers of spare parts for electric vehicles.
2.3 Core dimensions of climate strategy

The development of a climate risk strategy is contingent on understanding the c orporate
strategy, the wide array of climate risk terminology, the drivers of climate change and
how it can affect your organization (i.e., the outcomes, both positive and negative).
As a climate risk strategy is developed there are three dimensions that most organ-
izations will need to consider, covering different aspects of the ‘challenge’ that is
shown in Figure 2.2.
In isolation, the principle of ‘climate change ambition’ will be underpinned by the
two foundational components ‘resilience’, and ‘sustainability’. Sustainability is the
focus on how the organization operates (i.e. the ‘business as usual’) in reducing emis-
sions and is more aligned to transition risks. Resilience is the ability of the
organization to survive and continue to operate (with regard to physical risks) and
this has both financial and operational considerations. In isolation, these will not
ensure success in achieving the strategic aims. However, when aligned they comple-
ment each other and provide a robust foundation for achieving both strategic and
climate risk objectives.
2.3.1 Sustainability strategy

Developing a sustainable strategy for most organizations relates to the need to decar-
bonize and manage and mitigate transition risks, a broad risk type that affects
FIGURE 2.2 The main dimensions underpinning climate change strategy
Climate change ambition

To evolve and thrive in
dynamic markets
Sustainability strategy Resilience strategy

To reduce carbon footprint To be financially and
operationally resilient

organizations across all industries, and relates to a range of risks as a consequence of

transitioning to a lower-carbon or ‘green’ economy.
The sustainability strategy in respect to climate action plans should include an
inventory of existing emissions, reduction goals or targets, and analysed and prioritized
reduction actions. Ideally, a climate action plan should also include an implementa-
tion strategy that identifies required resources and funding mechanisms.
Factors that influence this include adjusting to climate-related developments in
policy and regulation, emergence of disruptive technology or business models, shift-
ing sentiment and societal preferences and evolving evidence, frameworks and legal
interpretations. Managing transition risks is covered in detail in Chapter 5.
There are many questions that organizations need to address, including how
much to invest, what to invest in and over what time horizon, in terms of meeting
climate net zero targets, such as the development of new technologies.
Organizations that are ‘front-runners’, that adjust to future structural changes
and put sustainability at the heart of their strategies more rapidly, should be well
positioned to reap the potential benefits, such as enhanced brand image, that it will
bring.
2.3.1.1 PRACTICALITIES – ESTABLISHING A BASELINE FOR CHANGE

One of the first practical steps is the need to establish a baseline. This means that
firms will need to think about the different types of emissions being generated:
●● Scope 1 emissions – these are direct emissions from owned or controlled sources.
●● Scope 2 emissions – these are indirect emissions from the generation of purchased
electricity, steam, heating and cooling consumed by the firm.
●● Scope 3 emissions – these are all other indirect emissions that occur in a company’s
value chain.
At the outset, organizations will need to understand the factors that contribute to
their carbon footprint before they can define their level of ambition and then set
targets and plans. Currently many organizations are seeking to understand their
carbon footprint and the options available to them, prior to formulating a climate
risk strategy. Agreement on a climate risk strategy will influence the establishment of
targets and metrics (against which the business can be managed going forward).
There are various levels of ambition ranging from becoming fully carbon negative
to achieving carbon neutrality. This will depend on a number of factors such as:
●● The corporate culture and the extent to which carbon considerations are incorpo-
rated into how the organization operates
●● Expectations of the various stakeholder groups
●● The industry in which they operate
●● Timeframes established
●● Work required to achieve these goals (while accepting this can change over time)
Sustainability plans should encompass a broader scope and address environmental,

economic and social considerations beyond those directly related to climate change.
The climate crisis is changing the competitive landscape and existing business
models will need to adapt if an organization is to survive and to thrive. This repre-
sents an opportunity for organizations to create competitive advantage and
differentiate themselves from competitors through, for example, product innovation.
It is important for risk leaders to consider the uncertainties associated with each
strategic option. As awareness of the climate change risk increases, business strategy
cannot be fully developed without factoring in climate change risks and opportuni-
ties. Climate-related opportunities are expected to have more significant impact on
business strategy than climate-related risks.
2.3.1.2 SUSTAINABILITY STRATEGY – DEVELOPING A ROAD MAP

In order to develop the risk appetite statement (and incorporate its stated climate
risk ambitions into the organization’s strategy) it is important to develop a compre-
hensive long-term road map.
The plan should have a variety of interim targets and workstreams.
Chapter Zero (the community of business leaders focused on climate change)
proposes the approach shown in Figure 2.3,where the initiatives identified are
sequenced and grouped into planning horizons on a road map.5 The figure breaks
down actions by emission types (i.e. Scopes 1, 2 and 3) and by the differing time
frames (near term, medium term and longer term).
Some of the concepts and terminology raised in this chapter link to further detail
in subsequent chapters, for example Chapter 5 provides a global perspective on
carbon emissions and mitigation strategies. Chapter 11 will cover examples of inte-
gration reduction strategies within existing ‘business as usual’ processes.
FIGURE 2.3 Carbon footprint – illustrative road map
Time to impact Under 2 years 2–5 years 5+ years

Scope 1 emissions Drive low
emissions, etc
Scope 2 emissions
Scope 3 emissions
Competitive Game-changing
Good business practice
differentiation innovation
SOURCE Principles and frameworks for climate change strategy and action, Chapter Zero
2.3.2 Business resilience strategy

At the highest level, in order to grow and operate profitably organizations need to be
built on solid foundations. These foundations include an underlying ability to
respond to adversity by building operational and financial resilience to climate
change impacts.
Operational resilience is defined as the ability of an organization to deliver critical
operations through disruption. Reactive resilience is most commonly managed
through business continuity, incident response management and crisis/recovery plan-
ning, which are backward-looking and focus on recovery from specific individual
high-impact risk events. For example, a flood event driven by climate change can
impact on the supply chain of an organization.
From a financial resilience viewpoint, organizations need to consider how climate
scenarios could impact on the financial position and design appropriate control such
as pre-and post-loss financing mechanisms through, for example, insurance and
hedging strategies. These risk transfer techniques typically seek to reduce volatility
of earnings within the risk appetite of the organization. This will be covered in more
detail in Chapter 6.
2.4 Developing a climate risk strategy plan and road map

For most organizations, in order to implement their climate change strategy they
need to develop a formalized strategic climate change plan and associated road map
that may be over a 3–5-year period. This is partly covered in section 2.3, with respect
to developing a sustainability strategy. However, organizations need to build out a
more comprehensive strategy and plan, covering both ERM integration and BAU
integration.
This should allocate prioritized actions to specific workstreams with timelines to
completion, actions owners who should be involved, and regular status updates to
risk committee and boards.
2.4.1 Establishing a working group

Establishing a working group is often the best governance approach to support the
implementation and monitoring of the progress of the plan. They can help generate
healthy discussions with a wide range of stakeholders, both internal and external, to
provide external opinion and subject-matter expertise.
As firms develop their approach to climate change risk management, the complex-
ity and scale of the exercise will become apparent. This will need to be proportionate
to the size of the organization, the jurisdictions in which it operates, the regulatory
environment and the organization’s operating model, and its approach to project
management (which may necessitate multiple project workstreams progressing
simultaneously).
Feedback from industry participants indicates that an approach that works well
is to set out specific workstreams that cover, for example, ERM core components
such as governance, risk management integration and scenario analysis. It is also
important to recognize the need to develop additional plans to manage an organiza-
tion’s carbon footprint as well as ensuring compliance with reporting and disclosure
requirements such as TCFD.
From a practical perspective these workstreams can then develop stand-alone
plans that can be broken down into specific actions along with timelines to comple-
tion and allocation of action owners.
An example output is shown in Table 2.1 – it can be a good way to summarize the
actions in order to report back internally to risk committees, and ultimately to
boards, on progress. It is important to rate the actions as high/medium/low to assist
in prioritization.
To be effective this will benefit from executive ownership and sponsorship, the
setting of appropriate time frames, the allocation of project resources including
senior management from the relevant business areas, and appropriate budget being
available to support the plans.
2.4.2 Alignment with regulatory expectations

Many organizations are developing their plans in line with regulatory expectation in
order to review gaps and develop mitigation plans against specific criteria.
In designing strategic plans it is important to incorporate some of the general
sound guidance and advice from regulators. For example, as stated in the PRA’s
Supervisory Statement SS3/19, ‘The PRA expects a firm’s response to the financial
risks from climate change to be proportionate to the nature, scale, and complexity of
its business. As a firm’s expertise develops, the PRA expects the firm’s approach to
managing the financial risks from climate change to mature over time.’6
The implementation and embedding of the recommendations will take time.
Organizations need to make sure that recommended mitigation actions, controls and
measures are integrated into their high-level climate change plans.
The plans should also align with the TCFD requirements. The idea of disclosures
is that they will help companies prepare for climate change impacts, and help inves-
tors understand risks so that they can make more informed investment decisions.
Chapter 12 covers financial disclosure requirements in detail.
TABLE 2.1 Indicative action plan output
Workstream Treatment Timeline to Action

component Summary of completed actions initiative Treatment actions completion owner Priority
✓✓ The board has allocated SMF ●● Board training ●● Create suitable training material to be TBA CRO High
responsibility for managing presented to the board to ensure that
climate change financial risks to they understand the risks and how it
its chief risk officer. might impact the company and strategic
✓✓ The company has established a decision making
cross functional climate change ●● Climate risk ●● Create a risk appetite statement TBA CRO High
working group who have appetite ●● Update risk appetite policy seek
Governance identified a comprehensive set strategy management risk committee
of key climate related financial
●● Approval for statement & policy
risks, the details of which was
amendments
shared with the board risk
●● Seek board approval for risk appetite
committee.
✓✓ The company established initial ●● other
plan to meet regulatory
requirements.
41
2.5 Risk appetite strategy

Organizations acknowledge that the delivery of their vision and mission and the
achievement of their strategic objectives cannot be achieved without taking risk.
Therefore, the importance of defining the company’s risk appetite is recognized as
the foundation of a robust ERM framework.
The board should set the risk appetite of the organization, determine those risks
that could threaten the company’s business objectives, and define risk tolerance
levels. The governance framework, including risk committees, should then examine
and monitor all aspects of risk in sufficient detail to advise the board appropriately.
The risk appetite strategy should be a clear articulation of the amount and type of
risk the company will accept in the pursuit of its strategic goals. The risk appetite strat-
egy lays out aggregate enterprise risk tolerances and appetites for specific risk-taking
activities and different risk types. Additionally, the strategy provides principles and
guidelines for linking risk appetite to risk tolerances and for a risk limit management
system.
A risk appetite strategy should specifically aim to:
●● Avoid financial distress and provide comfort to policyholders, counterparties,

regulators and rating agencies
●● or a private company, optimize profitability by allocating capital and risk-taking
F
capacity to areas where the organization has competitive advantages
●● Improve transparency of goals and authorities that can be understood and
executed at all levels of the organization through actionable limits, processes and
procedures
The risk appetite strategy helps to inform all the company’s stakeholders that the
company has clearly established boundaries for overall risk taking and decision making.
The role of the ERM function is to ensure that an organization’s risk appetite is
clearly communicated, understood by all stakeholders and consistently applied by all
involved within the risk management process. Enterprise risk tolerance and risk
appetite for specific risk types needs to be flexible and reactive to the changing
market conditions, the company’s financial strength and the competitive landscape.
2.5.1 Risk appetite definitions

Risk appetite is the total value of the corporate resources that the board of directors
of the organization is willing to put at risk at any given point in time. It is important
to understand and distinguish between related definitions that are applicable to the
design of a climate risk appetite strategy.
●● Risk appetite is the overall framework that establishes the risks that the
organization wishes to acquire, avoid, retain and/or reduce.
●● Risk preferences are qualitative risk appetite statements that guide the insurer in
the selection of risks.
●● Risk tolerances are quantitative risk appetite statements that guide the organiza-
tion in the selection of risks. These statements typically specify maximum accept-
able losses. They help the organization to translate the qualitative risk preferences
into actions by constraining the insurer’s exposures to risks.
2.5.2 Climate risk appetite guidance from regulators

Governments set the overall parameters with regard to climate change aims and
regulators are responsible for determining the accompanying framework(s), rules
and principles. This provides the basis on which firms can operate in a coherent and
efficient manner and highlights how the public and private sectors have complemen-
tary roles to play in the management of climate risks.
Supervisory and regulatory authorities have many aims but they typically include
protecting customers, ensuring market stability and supporting market development,
and climate-related changes threaten each of these aims.
The Prudential Regulation Authority (PRA), through its supervisory statement
SS3/19 issued in April 2019, has provided specific guidance in respect to risk appetite
strategy. It states that where appropriate it would expect to see evidence of how a
firm monitors and manages the financial risks from climate change in line with its
risk appetite statement.
Furthermore, it states that a risk appetite statement should include the risk expo-
sure limits and thresholds for the financial risks that the firm is willing to bear, and
should take into account factors such as:
●● Long-term financial interests of the firm, and how decisions today affect future
financial risks
●● Results of stress and scenario testing, for shorter and longer time horizons
●● Uncertainty around the timing and the channels through which the financial risks
from climate change may materialize
●● Sensitivity of the balance sheet to changes in key risk drivers and external
conditions
Under the section on risk management the PRA specifies the needs in respect to risk
monitoring and the development of key risk indicators and states that ‘Firms should
also use these metrics to monitor progress against their overall business strategy and
risk appetite.’
It must be pointed out that many have not built out key risk indicators to monitor
for climate risks, given the lack of both design of metrics and data availability. The
PRA acknowledges in its own statement that these metrics and tools will evolve and
mature over time as firms gain experience.
2.6 Integration of climate change into risk appetite

The implementation of an organization’s risk appetite strategy is perhaps the most
complex and challenging component of an ERM framework. In respect of climate
change it is proving quite difficult for some organizations to design specific metrics
and targets. This is partly driven by the lack of data to track and monitor exposures.
This is a common concern raised by risk managers.
Some organizations are developing stand-alone risk appetite statements (RAS) for
climate change, which can cover, for example, the ambition of reducing their own
GHG emissions to net zero.
Figure 2.4 contains one of the results from a survey conducted by the Institute of
Risk Management (IRM) in February 2022. The survey included the question ‘Are
climate risks explicitly reflected in your organization’s risk appetite framework?’
The survey shows that only 6 per cent of the IRM Special Interest Group (SIG)
respondents have fully embedded their climate risk within their existing risk appetite
framework and nearly half of respondents are either in the early stages of discussions
or have not addressed the issue to date, highlighting the complexity and time it takes
to fully embed the process, including risk metrics. It can be assumed that this is a
representative sample.
FIGURE 2.4 Climate risk appetite integration maturity
50.00%
45.00% 47.00%
40.00%
35.00%
30.00%
25.00%
23.00%
20.00%
18.00%
15.00%
10.00%
5.00% 6.00% 6.00%
0.00%
Yes – fully Yes – integrated No – not at this No – not at this I don’t know
integrated and and continuing stage but plans stage
operating to develop are being
developed
SOURCE IRM Climate Change Special Interest Group (SIG) survey results
2.6.1 Risk appetite components

The risk appetite strategy should document the risks organizations wish to seek,
minimize or avoid and should define the boundaries within which risk taking can
occur. These metrics and guidelines provide a central view on risk taking with which
the whole organization can agree.
The four main components of an organization’s risk appetite strategy that can
help an organization to articulate and shape its overall strategy are as follows:
1 Risk principles: overarching climate risk philosophy (see section 2.6.2).

2 Strategic risk metrics: the primary set of risk metrics aligned to stakeholder
expectations (section 2.6.3).
3 Risk preferences: qualitative statements that guide the company in the selection of
risks it seeks versus those it wishes to minimize or avoid (section 2.6.4).
4 Risk tolerances/limits: quantitative risk appetite statements that guide the company
in the selection of risks. These statements may typically specify maximum acceptable
losses or exposure. They will help the company to translate the qualitative risk
preferences into action by constraining its exposure to risks (section 2.6.5).
Climate risk appetite can be integrated into the main components of the prevailing
risk appetite framework of the organization, which will be covered in this section.
In respect to climate change, organizations should design relevant metrics and set
risk indicators across the different risk profiles, and it is important to consider
metrics that manage physical risks from those that manage transition risks.
2.6.2 Component 1: Risk principles – overarching climate risk objectives

The high-level specific climate risk principles (or a ‘climate risk philosophy’) that
determine how an organization responds to climate risk are set out here. Some of
these are general principles that can be applicable to climate change integration
while others are climate change specific to help differentiate between them:
●● Example of general principles

●● Play an important role in society and take responsibility for acting in a fair
and honest manner towards all our stakeholders, enhancing our reputation
by acting as a role model in our industry.
●● Business activities and risk taking are consistent with our strategy and
expectations from stakeholders including shareholders, regulators and rating
agencies.
●● Recognize the importance of a robust risk culture and strive to continually

improve risk awareness across the business.
●● Example of climate-specific principles
●● Our organization supports scientific consensus that climate change is a reality
of increasing global concern and that it is a key strategic risk to our
organization and we are therefore seeking to play our part in tackling the
climate crisis that we all face.
●● In transitioning to a net zero economy, we recognize the vital importance of
industry collaboration and coordination and seek ways to transition away
from fossil fuels to more sustainable sources of energy across our value chain.
●● Our organization is taking a proportionate approach to climate risk relative
to the nature, scale and complexity of our business and is committed to
managing climate change risk through integration into its existing risk
management and governance framework.
2.6.3 Component 2: Primary strategic risk metrics – risk appetite dimensions

It is important that an organization sets out a primary set of strategic risk metrics
that align to stakeholder expectations. For financial services companies these would
typically include capital adequacy, earnings volatility, liquidity and franchise (or
brand) value metrics.
Organizations will need to consider the amount of climate volatility they are willing
to accept on earnings in respect to, say, an acute physical risk such as a major hurricane
or flood event. Chapter 7 provides a case study of setting earnings risk appetite against
a mild winter for a utility company. This analysis will also then need to consider future
time horizons and possible adjustments to the risk appetite for any potential future
increases in volatility in respect of physical risk on a like-for-like basis.
This would include the need to limit the impact on specific financial metrics of the
organization such as capital adequacy and earnings volatility to an acceptable level.
Examples of natural catastrophe key risk indicators are given in section 2.6.5.2.
Financial resilience will be covered in more detail in Chapter 6.
The franchise value encapsulates the desire to build and sustain a business in the
medium to long term. It can be seen in terms of brand and reputation of its key
stakeholders in order to ensure people remain satisfied to do business with the
organization. Managing and mitigating climate change is very much aligned to
protecting the reputation in, for example, managing transition and liability risks in
respect to key stakeholders such as:
●● Public and media

●● Regulators
●● Policymakers
●● Third-party suppliers
●● Customers
Organizations in their statements would seek to monitor and manage the elements
that impact these risk appetite dimensions, through the direct linkage of these dimen-
sions to the company’s performance targets and objectives, so that the company is in
effect monitoring and managing the drivers of key performance objectives.
Stakeholder analysis and mapping of climate risk is covered in detail in Chapter 4.
2.6.3.1 SETTING SPECIFIC METRICS AND TARGETS FOR CLIMATE EMISSIONS

Setting the ambition and targets for emissions is one of the key strategic risk appetite
metrics that many organizations are including as a new metric to manage their risk
appetite in respect to climate change.
An example of how this could practicably be applied would be:
1 Operational net zero carbon (for Scopes 1 and 2) by 2030 with carbon offsets
being applied for any residual emissions (this is in part due to the availability and
quality of Scope 3 emission data being limited currently)
2 Getting to the point of net zero carbon (for Scope 1, 2 and 3) by 2050
An example of how this has been applied in industry is provided by Cornish Mutual
(a UK insurer of the agricultural sector) (see case study).
C ASE STUDY
Cornish Mutual: Level 1 risk appetite strategy – statement
●● Our ambition is to be a net zero company by 2050 (interim targets to 2050 will be
developed in due course).
●● We will determine the carbon footprint of our investments and will reduce them with
the aim to transition all assets to be net zero by 2050.
●● We will determine the carbon footprint of our insurance portfolio and will support
members with the aim to transition the portfolio to be net zero by 2050.
●● We are working to minimize our directly controlled emissions (Scopes 1 and 2) (annual
targets to 2025 have been developed).
●● We will offset any remaining emissions (Scopes 1 and 2) by supporting credible local
projects.
●● As a measure of staff climate risk awareness and ‘buy in’ we are seeking an average score
of at least ‘7’ (scale of 1 to 10) to the following two questions as per our annual staff survey:
To what extent do you feel Cornish Mutual is:
●● Aware of our responsibilities as a business in relation to climate change?

●● Taking appropriate action in relation to climate change?
2.6.4 Component 3: Risk preferences

Risk preferences are a set of qualitative risk appetite statements that guide an organ-
ization in the selection of risks. One of the best ways to do this is to define a set of
risk preferences that specifies the types of risk an organization seeks versus those it
would like to minimize or avoid as described below:
●● Seek – Our organization actively seeks this risk type as a consequence of the prod-
ucts we choose to sell and our investment decisions. We retain this risk type on
our book and do not actively transfer or hedge it.
●● Minimize – Our organization must take on this risk as part of its day-to-day
operations. We actively minimize this risk subject to cost–benefit trade-off of
implementing appropriate policies, processes and controls to do so. These prefer-
ences generally relate to the management of operational risks.
●● Avoid – Our organization actively avoids having exposure to this risk. However,
should we become exposed to this risk as a consequence of our strategy and busi-
ness model, we will actively transfer or hedge it.
I n line with best practice organizations should seek to develop risk preferences across
all the main risk types such as investment, credit and operational risks. More details
of how an organization manages these risks should then be included within separate
risk policies for managing major risk types.
Some examples of risk preferences in respect to ‘Seek’, to help guide an organiza-
tion in the selection of climate-related risks are set out in Table 2.2.
2.6.5 Component 4: Risk tolerances and limits

The quantitative risk appetite metrics help to translate the qualitative risk preferences
into actions by constraining the company’s exposures to risks in terms of agreeing
specific metrics to manage and monitor. Risk metrics levels called key risk indicators
(KRIs) are typically set using a red/amber/green (RAG) assignment for each.
Essentially KRIs provide metrics around risks and their potential impact on busi-
ness performance and objectives. They act as early warnings to ultimately support
management in making business decisions.
The RAG status typically drives the process of escalation. An amber rating should
act as an early warning while a red would imply the activity is outside of risk toler-
ance. If this is agreed, then there needs to be immediate action to bring the rating
TABLE 2.2 Climate risk preferences – examples of ‘Seek’
Risk grouping Risk Description
Legal and Failure to observe legal and We seek to observe all legal and regulatory climate
regulatory regulatory requirements requirements, monitoring developments through
the Climate Change Strategy Committee and via
our trade bodies.
We seek full and transparent disclosures in our
annual report aligned with the recommendations
of the Financial Stability Board’s Task Force on
Climate-related Financial Disclosures (TCFD) and
will monitor development of industry best practice
disclosures.
Operational Vendor risk management We seek to use suppliers who are climate change
active, aligned with our own plans and meeting
regulatory standards through a robust supplier
procurement process and proactive relationship
management.
Operational Business disruption through We will maintain contingency plans including the
systems failure, natural ability for employees to work from home.
disaster or unexpected We will seek to review the appropriateness of
events our head office being on the side of a river in view
of the operational impact should the office flood
(the operational risk is mitigated by flood defences,
a second office, duplicate servers, and physical
damage and business interruption insurance
placed with another insurer).
People Failure to attract and retain We seek to attract and upskill our people to ensure
employees with appropriate they are climate risk aware and have the
skills capabilities to innovate and develop products and
services that integrate consideration of long-term
sustainability issues and cater for members’
requirements.
We seek to fully engage our people in how we
are playing our part in tackling the climate crisis
that we all face including reduction of the
company’s carbon footprint.
We seek to support our employees in their
transition to a low-carbon economy (e.g. availability
of ‘green’ pension investment options).
Prudential Market (investment) risk We seek to be in a position where we have a
sustainable investment approach and where we
can determine whether we have an excessive
accumulation of financial risks from climate change
in our investment portfolio.
back to amber and then green. Mechanisms need to be in place to communicate and
report both amber and red issues so management, including the risk function, can
agree appropriate mitigation actions to rectify the underlying issue.
Amber threshold breaches should be reported to the board, typically at the next
scheduled meeting, together with a summary of the agreed action plan. Red thresh-
old breaches that are perceived to be of high importance should ideally be
communicated directly to the board, within a certain number of days (typically a
week) to raise awareness at an early stage.
KRIs should be forward looking in nature to assist with providing guidance to
operating or business units to monitor potential breaches and support escalation
processes to be able to present updates at risk committees. It is important to consider
contingency plans that have been agreed up front with stakeholders in advance of
breaches to help ensure mitigation actions can be taken more quickly.
2.6.5.1 DESIGNING AND INTEGRATING CLIMATE CHANGE KRIS

Organizations need to review their risk profile carefully and consider ways to meas-
ure and monitor their climate change-related exposures.
The principles of designing KRIs are similar for most risk types. For investment strat-
egy for example, it is important to consider setting limits in high carbon risk industries
or setting targets to invest in sustainable funds within the asset portfolio. Organizations
are often using external organizations to help manage and monitor their exposures.
Accountability for the implementation, monitoring and oversight of risk appetite should
be aligned with individual owners and facilitated by the risk function.
For monitoring and reporting of KRIs to be effective they need to be specific and
measurable, available on a regular frequency, reportable and ideally based on
forward-looking assumptions. KRIs should be quantifiable and one of the key
challenges particular to climate change is to collect the relevant data, so internal IT
systems and processes may need to be changed.
When monitoring and reporting, organizations should seek to align the metrics to
the overall high ‘level 1’ strategic principles that have been discussed in section 2.6.2.
They should take into account the stakeholder interests of customers and sharehold-
ers as well as investors and regulatory requirements.
In developing KRIs risk professionals can play a vital role in designing bespoke
KRIs that can be developed and cascaded across the organization. It is important in
developing the KRIs to consider the following factors that could form part of an
internal project:
●● To set at a level to constrain risk taking within risk appetite, taking into account
the interests of stakeholders such as customers to meet capital and regulatory
requirements.
●● A mix of hard and soft boundaries constraining the risk-taking activities. Soft
boundaries are used as early warning signs to avoid breaking hard boundaries.
●● Limits should be defined on indicators that can be controlled.
●● Be established for business lines and legal entities as relevant, and generally
expressed relative to specific metrics such as earnings, capital, liquidity or other
relevant measures (e.g. growth, volatility).
●● Include material risk concentrations at the institution or group-wide, business line
and legal entity levels as relevant (e.g. counterparty, industry, country/region,
collateral type, product).
●● Although referenced to market best practices and benchmarks, should not be
strictly based on comparison to peers or default to regulatory limits.
●● Not be overly complicated, ambiguous or subjective.
●● Be monitored regularly.
2.6.5.2 DESIGN OF KRIS FOR BAU PROCESSES – EXAMPLE FOR SUPPLIER DUE DILIGENCE
Risk tolerances and associated KRIs are typically aligned to the business processes
and risk preference that will have been identified and outlined in Component 3.
A good example of this is the integration of KRIs into supplier due diligence
processes. With this approach most organizations are seeking to integrate automated
processes to develop KRIs against climate-related questions that link to a score that
equates to a target level of acceptance.
The target itself can also then be linked to, say, the percentage of suppliers that
align with the organization’s climate risk appetite.
There also needs to be a mechanism to review suppliers that do not align with the
organization’s criteria, through a RAG scoring system, with the first step often being
to develop a bespoke mitigation plan. This is a helpful process that supports the
engagement with suppliers to discuss climate-related issues.
As outlined in the risk preferences section, this process should help to ensure that
suppliers used by the company are ‘climate change active’ and demonstrate that the
supplier has a good rating against set criteria.
Chapter 11 provides a detailed plan of how organizations should approach inte-
grating a climate due diligence process.
Two specific examples are provided here to explain the process for designing KRIs
across natural catastrophe and/or credit risk in loan portfolios to help illustrate the
principles that can then be applied across other risk types.
EXAMPLE 1
Risk aggregation exposures to natural catastrophe
Many organizations have exposures to natural catastrophes caused by climate change

such as floods or windstorm.
Risk aggregation in this context refers to the aggregation of exposures to a single loss
event. So a flood event for example, might impact an organization across multiple
assets such as properties or motor vehicles across a geographical area or zone.
In designing a KRI, it should generally be set to track the probable maximum loss
(PML) at a set return period, for example 1 in 100 years, against a specific metric. For
financial institutions this would typically be capital at risk on the legal entity’s balance
sheet that in turn should relate to the risk appetite for natural catastrophe perils.
The approach can be tailored for all natural or man-made catastrophe events so that
an organization can make sure there is consistency of approach in managing and
mitigating risks from catastrophe events.
In developing KRIs for climate change in this context organizations should consider
the following:
1 The inclusion of new or emerging material perils such as wildfire that have not yet
been considered or modelled.
2 Multiple events in the same year due to the increased frequency of events linked to
climate change. The point here is that two or three medium-size events may have
much more material impact on the organization than a single loss event and could be
more likely to breach the risk appetite of an organization.
3 The impact of future climate change should support future financial planning, which
may in turn lead to the need to change the risk appetite metrics themselves.
In respect to the third point, organizations can seek to adjust their net natural peril
tolerance thresholds in light of future climate change. Adjustment factors can be linked
to the future predicted aggregate loss forecasts of the specific geographic area or
country or region.
A key risk indicators metric would typically be stated as ‘Net exposure to a single
natural catastrophe hazard not to exceed X at the 1 in 100 return period’ and a RAG
status would be developed to signify if the organization was below, close to or above the
target. For financial institutions the target metric would typically be a percentage of
capital. With climate change integration the prevailing metric may be adjusted to reflect
future increase in the 1 in 100 loss event, so that the organization readjusts to the future
exposure levels, for example a flood event whose 1 in 100 return period impact may be
calculated to be X per cent greater in 2030.
EXAMPLE 2
Designing credit risk management metrics and KRIs
When considering the loan books of an organization that lends to purchase a property, it
is possible that flood risks will affect the loan portfolios as house prices devalue and
that can lead to negative equity for homeowners. Chapter 10 provides a specific example
of a flood risk scenario for a bank.
Credit risk management policies need to be revised to explicitly reference and
consider climate risk (or as part of a wider ‘responsible lending policy’). Climate risk is
becoming a standing agenda item at credit risk committees (and included in meeting
papers) and the monitoring of credit portfolios is being expanded to cover a variety of
additional variables. Examples of metrics for monitoring include:
TABLE 2.3 Credit portfolio risk metrics examples for mortgage lenders
Physical risk considerations Metrics
Assessment of an organization’s exposure to Percentage of mortgage credit exposure linked

mortgages in high-risk flood areas. to properties in high-risk flood areas.
Assessment of an organization’s corporate Percentage of corporate credit exposure in
credit exposure to companies in sectors sectors affected by extreme weather events.
affected by extreme weather events.
Assessment of any collateral provided that is Percentage of collateral provided (assets or
in a high-risk flood area or of heightened property) that is linked to high-risk flood areas
likelihood of being affected by extreme or is of heightened likelihood of being affected
weather events. by extreme weather events.
Transition risk considerations Metrics
Assessment of an organization’s exposure to Percentage of mortgage book linked to low
mortgages with low energy performance. energy performance properties.
Assessment of an organization’s corporate Percentage of corporate credit exposure in
credit risk exposure to companies/sectors sectors affected by transition risk.
sensitive to transition risk.
A relatively recent development among some mortgage providers has been the offering
of discounted-rate mortgages for those properties with a higher energy performance
certificate (EPC) rating (thus promoting the purchase of more energy-efficient
properties). An example of this in the UK mortgage market is Tandem Bank, which offers
discounts of up to 0.5% on mortgages for the most energy-efficient properties.7
Alternatively, if real estate is provided as collateral for a loan, the approach to valuing
such collateral can also influence behaviours over time (i.e if properties with higher EPC
rating are valued more competitively).
Another consideration is the realization among mortgage lenders that as climate

change risk worsens, the likelihood of extreme weather events occurring increases. This
could lead to asset prices falling (in this instance the value of the property), which may
mean that the value of an asset at the end of the mortgage term is less than the value of
the outstanding loan and hence the mortgage cannot be repaid.
All of these factors will influence the level of credit risk the lending organizations are
exposed to and consequently these variables will need to be factored into the overall
credit risk management policy and the pricing methodology.
2.7 Climate change risk appetite reporting

While all of the work discussed here focuses on developing and aligning the corpo-
rate and climate risk strategies with a set of cohesive relevant risk appetite statements,
it is important that an appropriate mechanism is in place to be able to report this
effectively to senior management and the board.
The reporting of risk exposure against risk appetite typically comprises:
●● High-level summary – A one page overview of the risk appetite strategic risk
metrics designed to give a clear snapshot of the current red/amber/green (RAG)
rating of the constituent KRIs’ status to the audit and risk committee.
●● Individual KRI dashboards – A more detailed overview of the KRIs by risk types
that can be presented at corporate risk committee meetings. Individual risk owners
should seek to provide comments, particularly in relation to any red or amber
ratings, together with the response. A remediation plan can then be developed and
escalated for all amber and red KRIs.
Conclusion
This chapter has outlined how risk professionals can support the climate ambitions
of an organization by applying their expertise in aligning the overall corporate ambi-
tion with the enterprise risk management framework. The strategy needs to be
underpinned by the two foundational components, resilience and sustainability.
One of the most important roles of the risk function is to design the overall climate
change risk appetite strategy of the organization and ensure that it aligns with the
overall corporate strategy, which is generally best designed and articulated through
a risk appetite policy or statement that drives the company’s overall risk taking and
mitigating behaviours.
In designing a risk appetite strategy, it is important to set out a set of risk principles,
review and agree additional strategy risk metrics such as stating the company’s ambi-
tion in alignment to the government’s net zero emissions targets.
The risk appetite strategy should also include a set of qualitative risk preferences
across risk types as well as a set of quantitative key risk indictors that it can measure
and monitor that align to the interests of key stakeholders and that typically would
constrain the company’s exposure to risks.
Accountability for the implementation, monitoring and oversight or risk appetite
should be aligned with individual owners and facilitated by the risk function.
Notes
1 N Marks. Uniting risk management with strategic planning, CMSWire, 18 October 2018.
www.cmswire.com/information-management/uniting-risk-management-with-strategic-
planning/ (archived at https://perma.cc/LZD6-PRSL)
2 The Risk Coalition. Guidance: Raising the bar, 2019. www.riskcoalition.org.uk/
the-guidance (archived at https://perma.cc/HY5U-PAWM)
3 Chapter Zero. Chapter Zero: A climate change boardroom toolkit, 2019, p 35. www.
chapterzero.org.uk/wp-content/uploads/2021/09/Chapter-Zero-Board-Toolkit-2020.pdf
(archived at https://perma.cc/RAC3-EQS4)
4 Chapter Zero. Principles and frameworks for climate change strategy and action:
Executive summary, 2020, p 3. www.chapterzero.org.uk/wp-content/uploads/2021/09/
Chapter-Zero-Change-Management-Toolkit-Summary.pdf (archived at https://perma.cc/
PAG3-L52X)
5 Chapter Zero. Principles and frameworks for climate change strategy and action:
Executive summary, 2020, p 22. www.chapterzero.org.uk/wp-content/uploads/2021/09/
Chapter-Zero-Change-Management-Toolkit-Summary.pdf (archived at https://perma.cc/
NL4H-T886)
6 Bank of England Prudential Regulation Authority. Enhancing banks’ and insurers’
approaches to managing the financial risks from climate change, 2019. www.
bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2019/
ss319 (archived at https://perma.cc/D4J2-TMH8)
7 Tandem. New 2nd charge mortgage feature offers rate reductions based on EPC rating,
3 May 2022, https://www.tandem.co.uk/newsroom/new-2nd-charge-mortgage-feature-
offers-rate-reductions-based-on-epc-rating (archived at https://perma.cc/L77H-85AZ)
56
Developing an effective climate

governance framework
Governance is one of the main pillars that organizations need to develop to assist in
the development of a robust climate action plan and road map. This chapter will
cover how organizations should develop an effective climate governance framework
by explaining how they can incorporate climate risk considerations into their exist-
ing corporate governance framework.
●● Understand and appreciate the importance and role of the board in developing
and overseeing a robust governance framework.
●● Explain the importance of developing a strong climate governance framework for
managing and mitigating climate change risks.
●● Outline the main foundational components and underlying enablers of develop-
ing an effective climate change governance framework through explaining each of
core best practice components, which include risk ownership and accountability
and risk reporting and communication.
●● Explain how climate governance activities and responsibilities fall under the three
lines of the defence model.
●● Explain how organizations manage and report climate risks through their govern-
ance structures by providing some practical examples.
●● Evaluate the importance of developing a good organizational and risk culture
framework, to support effective risk management.
The chapter will discuss the key climate components that organizations need to
consider across five core governance pillars in order to make sure that climate risk is
effectively embedded.
DEVELOPING AN EFFECTIVE CLIMATE GOVERNANCE FRAMEWORK 57
Introduction
Risk governance is sometimes referred to as the ‘risk architecture’. Within an organ-
ization it specifies the roles, responsibilities, communication and risk reporting
structures (including the individuals and committees) that support the risk manage-
ment process throughout the organization.
An effective and efficient corporate governance framework should focus on
accountability and responsibility, create the conditions for value creation and encour-
age ethical behaviour. Contributing to the organizational culture, the leadership
should create a positive working environment for all employees, from executive level
to front-line staff, helping them to undertake their day-to-day duties and achieve
their objectives. From an external perspective, corporate governance should provide
assurance to all stakeholders in the ability of the organization to deliver its objectives
and meet their expectations.
Corporate governance should focus primarily on the responsibilities and authori-
ties of senior management in the context of the organizational reporting structures
that should seek to encourage open communication, and stimulate integrity and
accountability in decision making. In achieving an organization’s strategic objectives,
risk management plays a critical role in the overall corporate governance structure.
To have a common understanding of climate-related risks, their particularities
and potential impact on an organization, an effective governance approach should
ensure that it has a full oversight and top-down accountability for the materiality of
climate-related risks. The board has the ultimate accountability to deliver the long-
term objectives, financial stability and resilience of the organization. From this
perspective, it is critical for the board to have a deep understanding and clear over-
view of the organization’s exposure to climate-related risks.
Having a full oversight of the management of all interconnected risks will create
the foundation to embed effective governance in the entire organization. A top-down
approach to how climate-related risks are integrated into the risk management
process and a comprehensive perspective of them will allow a common understand-
ing of these risks, a clear allocation of responsibilities, and effective tools and
processes to identify, assess and manage them at the right levels.
3.1 Role of the board in risk management

Mainly due to the rising moral, societal and fiduciary as well as regulatory responsi-
bilities to integrate climate change into the strategic plans and business management
of an organization, it is becoming increasingly important that management of climate
change risk (and the associated opportunities) becomes central to the roles and
responsibilities of directors who lead the organization.
A board of directors must ensure that the organization is making decisions with
regard to the interests of all its relevant stakeholders and is not driven by the inter-
ests of senior management or a dominant individual.
A company looks to develop and grow a business in a way that balances the
expectations, risks and rewards of all stakeholders through taking opportunities for
which the outcome will have a level of uncertainty in a marketplace that continu-
ously evolves and changes. The board’s role is to ensure it is in a position in which it
can provide confidence and assurance to investors and other stakeholders that these
uncertainties are understood and are being managed – that is, that the business has
an effective risk management capability.
3.1.1 Corporate governance and climate change

One of the main challenges for organizations and risk managers is how to integrate
climate change and wider ESG risks within the existing governance framework. Most
of the guidance that is available is directed at corporate boards, with one of most help-
ful guides being the World Economic Forum’s publication ‘How to Set Up Effective
Climate Governance on Corporate Boards: Guiding principles and questions’.
This publication states that it ‘seeks to provide useful guidance to boards,
acknowledging that climate governance is both integral to basic good governance
and fraught with complexity. The result is a set of principles and questions to guide
the development of good climate governance – designed to help the reader practi-
cally assess and debate their organization’s approach to climate governance and
frame their thinking about how the latter could be made more robust.’1
The publication sets out eight climate governance principles:
Principle 1 – Climate accountability on boards

Principle 2 – Command of the subject
Principle 3 – Board structure
Principle 4 – Material risk and opportunity assessment
Principle 5 – Strategic integration
Principle 6 – Incentivization
Principle 7 – Reporting and disclosure
Principle 8 – Exchange
hese governance principles are designed to increase directors’ climate awareness,

T
embed climate considerations into board structures and processes and improve
navigation of the risks and opportunities that climate change poses to businesses.
Because the role of the board is to hold management accountable for the resilience
of the company and the long-term value creation for its shareholders, directors need
to be able to articulate the climate change strategy, how climate change risks are
being managed, how compliant the company is today, and what the path to full
compliance looks like.
In Chapter 4 we will cover external drivers and expectations, including stake-
holder analysis and mapping. It is becoming increasingly important to consider and
factor in the wider interests of stakeholders (including customers, employees and the
wider community).
From a wider society perspective, as we transition into a low-carbon economy,
boards will also need to reassess their role and purpose, and we covered this in
Chapter 2.
3.1.2 Duty of care

Directors need to exercise ‘reasonable care, skill and diligence’ when conducting
their duties and they therefore must find the most effective way of integrating climate
change into governance. Failure to do so may subject some directors to liability for
breaching their duty of care and we will cover some of the latest legal cases in
Chapter 9.
Directors also need to exercise independent judgement when assessing the impact
of climate change within their organizations. They should take a proactive approach
and have an open mind to considering how climate change threats and opportunities
can be managed.
They will also need to embrace any potential material risks that may be emerging
on the horizon and will need to investigate these issues to support their decision
making. Odgers Berndtson have said that ‘given the widespread availability of
knowledge about climate change’s current and anticipated impact on people, coun-
tries and businesses, directors can no longer plead ignorance about the topic and the
risks it poses for their company.’2
3.2 Alignment to stakeholder expectations

Organizations need to align their governance to meet external stakeholder expec-
tations. Companies will need to understand the regulatory expectations as well
as the recommendations of the G20 Financial Stability Board’s Task Force on
Climate-related Financial Disclosures (TCFD). These are a recognized bench-
mark against which companies can assess their strategic approach to managing
climate change risk.
3.2.1 Task Force on Climate-related Financial Disclosures (TCFD)

Although we provide a comprehensive overview of climate disclosures and regula-
tory requirements in Chapter 12 it is important to note that the TCFD highlights
governance as a building block for effective climate-related risk and opportunity
management. Without effective climate-related governance structures in place, a
company will not be able to make informed strategic decisions or appropriately
manage the risks.
Investors, regulators and other stakeholders increasingly expect the TCFD recom-
mendations to be used to navigate the physical, economic transition and liability risk
exposures relevant to their organizations. In addition, disclosure in accordance with
the TCFD recommendations could in fact be used as a strategy to publicly demon-
strate compliance with directors’ duties and disclosure obligations and to highlight
your corporate climate credentials.
TCFD state that, in respect to governance, disclosures should:
●● Describe the board’s oversight of climate-related risks and opportunities.

●● Describe management’s role in assessing and managing climate-related risks and
opportunities.
3.2.2 Regulatory requirements and expectations

The Prudential Regulation Authority (PRA) in the UK, in its ground-breaking super-
visory statement issued in April 2019 for financial services organizations, states that
in respect of governance they expect:
a firm’s board to understand and assess the financial risks from climate change that
affect the firm, and to be able to address and oversee these risks within the firm’s overall
business strategy and risk appetite. The approach should demonstrate an understanding
of the distinctive elements of the financial risks from climate change and a sufficiently
long-term view of the financial risks that can arise beyond standard business planning
horizons.3
One of the most important aspects of the statement above was to require all regu-
lated financial services firms to request that the board assign a senior management
function holder (SMF) to take responsibility for identifying and managing financial
risks from climate change and to ensure that these responsibilities are included in the
SMF’s statement of responsibilities.
This change has helped to ensure that climate change is seen as a key strategic risk
for organizations to manage.
3.3 Climate change governance risk framework

The governance structure should include a robust risk management process in order
to be able to anticipate, respond and adapt to any event or situation that might
impact its objectives in delivering and meeting shareholder expectations. This is how
it delivers value to its shareholders.
The main foundational components of a robust corporate governance framework
are equally applicable for managing climate change and include the following:
●● Board oversight
●● Risk ownership and accountability
●● Risk reporting and communication
●● Performance and incentive compensation management
●● Training and education accountability
In order to manage climate risks effectively, it is vital that organizations establish a

clear governance framework in terms of establishing clear accountability, appropri-
ate structures and the allocation of sufficient resources. We discuss the components
of a climate governance framework that align with the five core pillars in detail in
this section.
In respect to developing an effective climate governance framework it is impor-
tant to address some best practice questions. Some examples from leading authorities
are provided below.
The Australian Institute of Company Directors suggests organizations need to
address the following questions:4
●● How are issues associated with climate change integrated within our board govern-
ance (strategic and oversight) responsibilities? Is this issue receiving adequate time
and focus within the board/committee agenda?
●● Who is responsible and accountable for this issue within management? Are we
satisfied that relevant staff (or experts that they consult) have the appropriate
competence and resources?
●● How do we as a board, and senior management (including legal, governance,
finance and risk teams), ensure that we are staying up to date in this dynamic
area?
●● Are our remuneration structures aligned with our strategic approach to climate
change?
62
FIGURE 3.1 Climate change governance risk framework
Climate change
governance risk framework
Board Senior Key

Climate change Board and
awareness and management performance
strategic plans management
communication ownership indicators
Allocation of
Board-approved Emerging risk Incentivized Risk team and
appropriate
risk appetite updates compensation front-line staff
resources
External
Appropriate Internal financial Employee
Qualifications
structures projects reporting and benefits
disclosures
Board Risk ownership Risk reporting Performance and Training and

oversight and accountability and incentive education
communication compensation
management
Risk culture and ethical values

The National Audit Office in the UK in its report on good practice guidance for audit
and risk assurance committees states that boards will need to be able to provide
assurance in respect to the following:5
●● Assessing the organization’s approach to managing climate-related risks

●● Reviewing board briefings on relevant climate change matters including results of
climate risk ‘deep dives’
●● Assessing management’s use of data and consideration of data integrity to gain
assurance over any potential impact
In respect to climate governance and integration within an ERM framework, the

following is a climate change governance framework that covers the main compo-
nents that risk leaders should seek to review and embed, which will support the
organization in integrating climate change within its governance framework. The
components are split into five areas of focus that align with regulatory expectations
and best practices, which are reflected in Figure 3.1.
This section provides insights into each of these focus areas.
3.3.1 Board oversight

Boards are expected to understand and assess climate change risks that affect the
organization and be able to address and oversee these risks. Therefore, one of the
critical areas of focus is to make sure that the board and its relevant sub-committees
exercise effective oversight of risk management and controls.
Boards should ensure that the right depth of oversight is given to climate change.
Often a separate committee may be needed, a committee that can fully discuss the
material aspects and elevate discussions about climate and other ESG issues to the
general board agenda.
On an important and practical point, climate change strategic plans and updates
and associated management information should be communicated regularly to the
board in order to allow for strategic discussions and to support decision making in
terms of evaluating risk and rewards.
Advisory boards An advisory board can provide a dynamic perspective, counsel

and guidance in climate and wider ESG matters. Before making long-term strategy
decisions, boards and executives need to have a detailed understanding of the impacts
that climate change will have on the business model of the company, its product and
its assets. Advisory boards can serve this function. Additionally, it’s important
to monitor foreseeable policy changes related to climate change to anticipate both
risks and opportunities.
Board oversight themes and expectations Three key governance themes relating
to boards oversight are:
a. Board awareness and communication
b. Board approved risk appetite
c. Appropriate structures
One of the World Economic Forum’s principles of climate governance is that direc-
tors have ‘command of the subject’. Regulators also expect that boards will receive
ongoing awareness training. The risk function can therefore play an important role
in developing and facilitating ongoing training and communication to the board to
increase their awareness of climate change risks, impacts and possible responses.
3.3.1.1 BOARD AWARENESS AND COMMUNICATION

A firm’s board needs to understand and assess the risks from climate change that
affect the firm, and be able to address and oversee these risks within the firm’s over-
all business strategy and risk appetite.
It is important that there is adequate time and focus to discuss climate change
risks within board and sub-committees and that the board themselves have appro-
priate training that addresses objectives such as:
●● Increase board awareness of climate change risks, impacts and possible responses.
●● Ensure understanding of regulatory expectations and limitations thereof.
●● Prompt discussion of appropriate strategy re risk, investments, disclosure, et al.
●● Define objectives to be achieved by the organization’s climate implementation
strategic plan.
The outcome of such training should provide:
●● Increased board awareness of breadth and magnitude of climate change risks, the
potential impacts and the opportunities it may present.
●● Appreciation of the importance of climate change risk management and under-
standing of relevant regulatory requirements.
●● Defined parameters and constraints within which the organization’s climate change
strategy can be developed.
I NDUSTRY FEEDBACK AND OBSERVATIONS
It is important that organizations don’t simply provide a one-off awareness training to

their boards, as the risk landscape is fast changing, with new regulations coming into
focus on a regular basis. It is vital that boards receive ongoing training as well as regular
communications to increase board awareness of climate change risks, impacts and
possible responses.
Learning and development teams/departments can support in developing a more
structured range of training to the board, using, for example, external subject-matter
experts across different climate-related themes and topics such as product innovation.
3.3.1.2 BOARD-APPROVED RISK APPETITE

Organizations need an approved climate risk appetite strategy and a board-approved
climate risk appetite statement that considers a combination of quantitative and
qualitative risk appetite guidelines that cover both risk preferences and risk toler-
ances across the risk profile. Chapter 2 provides details of how to operationalize an
organization’s climate risk appetite strategy.
INDUSTRY FEEDBACK AND OBSERVATIONS
Many organizations are in the process of developing their risk appetite strategies. One of
the main components for many companies has been to set their carbon emissions
ambition to align with the Paris Agreement’s objective of limiting global warming to
below 2°C (relative to pre-industrial times).
3.3.1.3 APPROPRIATE STRUCTURES

Organizations should set up relevant structures including sub-committees and work-
ing groups that can exercise effective oversight. Given the importance and complexity
of managing climate-related risks many organizations have decided to establish a
stand-alone climate risk committee or steering group, with many also establishing
separate committees to cover the wider corporate social responsibility risks.
The alternative approach is using the existing committee structures and setting up
a central working group and sub-working groups that report back to the pre-exist-
ing committees to coordinate activities and implement climate plans.
It is critical that in respect to setting up a new climate governance structure,
organizations seek to:
●● Define the role and terms of reference for the committee

●● Define the decision-making process
●● Agree the terms on which the climate risk committee contributes to other
committees
Two alternative approaches and examples are highlighted in the following sections.
In the first example the organization set up a stand-alone climate strategy committee
and in the second example climate change has been developed and coordinated
through the organization’s pre-existing emerging risk committee.
EXAMPLE 1
Structure: establishment of a new climate change strategy group (CCSG)
This institution recognized that the changing climate would impact their operations in
both physical and transition risks. Its aim was to create an effective climate risk
management strategy supported by climate awareness across the organization. It was
cognizant of needing to take a proportionate approach to climate risk relative to the
nature, scale and complexity of its business.
Governance structure
Responsibility for managing climate risk was allocated to a ‘senior management function’
being the chief risk officer (CRO). They have been set climate change-related
performance objectives.
The organization formed a climate change strategy group (CCSG), which drew from a
wide representation from across the business, outlined in Figure 3.2. This group reports
through the CRO to the audit and risk committee and then to the board specifically on
climate change as a formal matter, which must be considered at every meeting.
The organization provided climate risk training to all employees and ensured it had
provided board awareness training to its leadership.
Climate change strategy group – purpose
The climate change strategy group (CCSG) whose members are appointed by, and are
accountable to, the CRO has as its purpose to enable the CRO to:
●● Assist the board and risk and audit committee to understand the possible impacts of
climate change on the company.
●● Communicate progress made across the company and report matters arising from
committee deliberations to the risk and audit committee (RAC) and board as
appropriate.
●● Ensure all business decisions take climate change into account including:
●● Engagement with board and executive committees
●● Training – help to identify requirements and provide content where needed
●● Maintain an awareness of and feed into climate change-related investment
discussions.
FIGURE 3.2 Climate change strategy group (CCSG) – structure
Board
Risk & audit

committee
CRO
risk management
function
Climate change
strategy/working
shop
Claims Compliance Finance
Reinsurance/
Underwriting Sales
pricing
●● Develop a carbon footprint reduction plan and monitor and communicate progress
against the plan.
Specifically relating to risk management this group will:
●● Ensure that the approach to financial risks from climate change is embedded within
the risk management framework.
●● Confirm compliance with climate-related legal and regulatory obligations.
●● Highlight, identify and where appropriate develop climate-related product and service
opportunities.
●● Implement effective scenario analysis over short- and long-term time horizons to help
determine all material exposures.
Working methods
●● The CCSG will meet at least six times per year.
●● Minutes of the CCSG meetings will be circulated promptly.
●● The CCSG chair will report on the meeting to the RAC and board.
Standing agenda – schedule of matters

The committee developed a list of standing agenda items for each meeting:
●● Review of the previous CCSG minutes and action points

●● Carbon footprint plan progression
●● Scenario analysis
●● Risk management
●● Disclosures
●● Training
●● Communication
●●Internal to board/board committees
●● External
EXAMPLE 2
Structure: pre-existing emerging risk focus group (ERFG)
This organization decided to use its pre-existing emerging risk committee as a structure
that best suited its needs in order to develop its strategy and plans in respect to
climate change.
Table 3.1 outlines the development and milestones as to how the focus group has
operated since its formation in 2019. Its main purpose has been to identify, manage and
monitor its emerging risks, in its words, where it sees ‘a risk that is evolving in areas and
ways where the body of available knowledge is weak, and one of the most significant of
these in recent years, and arguably still emerging, is climate change’.
The focus group undertook a number of ‘deep dives’ on climate change in 2021 that
have been instrumental in harnessing the wider emerging risks framework to develop
a holistic, enterprise-wide approach to managing its climate risks.
Owners, actions and timescales for each of these have been identified and progress is
monitored by the risk management function and the ERFG, with oversight by the
organization’s group- and subsidiary-level risk and compliance committees. This activity
has also underpinned the organization’s sustainability efforts and facilitated ongoing
compliance with the variety of climate-related regulatory requirements.
TABLE 3.1 Development and milestones of the emerging risk focus group
Pre 2019 Q2 2019 2020 2021 2022 and beyond
●● Process was largely informal ●● Established a groupwide, ●● ERFG met twice, in ●● ERFG met twice, in ●● First ERFG meeting held
multidisciplinary emerging January and July January and July in January
risks focus group (ERFG)
●● Risk management function ●● Initial meeting comprised ●● Identified new risks and ●● Membership of the ●● Action plan for
conducted horizon scanning a workshop to consider reprioritized others group reviewed and addressing risks of
from external sources the whole emerging risks amended climate change including
universe and identify commensurate with owners and timescales
prioritize those top changes to
emerging risks relevant to organization’s risk
the organization profile
●● Emerging risks identified ●● Established a ●● Reported to group risk ●● Conducted climate ●● Development of climate
from quarterly meetings methodology for committee majoring on change ‘deep dive’ change and other
with senior management, assessing emerging risks those emerging risks area of focus in emerging risks stress and
functional heads and risks based on anticipated identified as key (climate 2021 scenario testing
and control owners, as well velocity/timeline to change, emerging cyber
as incident reporting crystallization and pandemic fallout)
process
●● Emerging risks were ●● Biannual report to the ●● Incorporated/formalized ●● More formal horizon ●● Formal deep dive
reported by exception to group risk committee approach into group risk scanning as part of workshops on other
the group risk committee policy, processes and the ERFG process emerging risks such as
where deemed material procedures emerging cyber planned
for H2 2022
(continued)
69
70
TABLE 3.1 (Continued)
Pre 2019 Q2 2019 2020 2021 2022 and beyond
●● Education of Board ●● Formally cascaded ●● Ongoing education

members (general emerging risks programme under the
approach) assessment to key auspices of the ESG
operating subsidiaries framework
●● Workshopped TCFD
requirements and
dovetailed into
outputs of earlier
deep dive
●● Developed a plan for
specific consideration
of the requirements
of TCFD and the need
for strategic approach
●● Continued education
of Board members on
specific emerging
risks
●● Facilitated alignment
with the
organization’s
Environmental, Social
and Governance (ESG)
framework
Emerging risk management is covered in Chapter 8, and specifically emerging climate

risks and opportunities are covered in Chapter 9.
3.3.2 Risk ownership and accountability

The main role of the risk function is to help embed risk management within its busi-
ness’s activities and it seeks to promote a culture of risk awareness across the
organization. All employees have a responsibility for the management of risk; as
such, each employee should take due care to ensure compliance with the risk manage-
ment policy and procedures and work to help the organization manage risk effectively.
It’s not enough that risk and control functions exist, it’s equally important to assign
specific roles, define clear responsibilities and coordinate efficiently and effectively
among the groups to avoid duplication or gaps.
Three key governance themes relating to risk ownership, accountability and
assurance include:
●● Senior management ownership

●● Allocation of appropriate resources
●● Internal projects
Before discussing the specific themes here in more detail, it is important to discuss
the three lines of defence operating model and outline how climate change can be
allocated between the three lines. While there are other approaches this is a best
practice approach that we recommend.
Three lines of defence operating model The three lines of defence model (3LOD)
provides a simple and effective way to enhance communication on embedding risk
management and controls by defining roles and responsibilities. Each of the three lines
plays a distinct role within the organization’s overall governance framework. The three
lines of defence are illustrated in Figure 3.3 together with the main areas of responsibility.
First line of defence The first line of defence (1LOD) is where the risks are taken
and the controls performed within the business. Risk management is the day-to-day
management of risk exposures in accordance with frameworks, policies, standards
and risk appetite (as agreed upon by the board and on advice from the risk function).
Second line of defence The second line (2LOD) comprises the risk function that is
responsible for developing an enterprise risk management framework within which
authority can be delegated from the board to the front-line staff to enable them
to deliver on the strategy efficiently and effectively. This comprises setting the policy,
issuing minimum requirements and providing guidance and challenge. These are
then left to the 1LOD on a day-to-day basis to operate, albeit within boundaries and
limits that have been established.
FIGURE 3.3 Risk management – three lines of defence and main climate responsibilities
Board/risk committee/audit committee

Risk strategy
Risk appetite Senior management/management risk committee
First line of Second line of Third line of

defence defence defence
Ownership and Establishing a policy Independent review
Governance &
management
management of risks framework that supports of risks and controls

the risk appetite
Three lines of Identifying and Reporting to
defence managing risks in their Creating risk frameworks management on key
area of operations and providing tools that areas of risk and control
help line management weakness
Ongoing assessment deliver on their
and monitoring of risks responsibilities Tracking of audit issues
through to closure
Implementation of Carry out initial climate
effective controls to risk assessment and due Developing and
mitigate risks diligence for onboarding maintaining risk appetite
third parties such as for board approval
suppliers and customers
Execution
Develop climate
scenarios and develop
stress testing, etc
Integration of effective climate change governance
While the 2LOD supports the business in risk-based activities, to ensure independent
oversight and challenge is possible, the team does not own risks. The main role is to
help ensure the 1LOD business functions appropriately manage their risks and that
their own self assessments of the organization’s exposures to risk are accurate.
The compliance and risk functions may have their own management and govern-
ance committees that are part of the ERM framework, or they may have direct
reporting lines into appropriate ERM framework structures.
Third line of defence The third line is the internal audit function who provide
assurance that the people, processes and controls within the organization are appro-
priately designed and operating effectively (and as represented to the board). Boards
set risk appetite and oversight whereas audit provides independent and objective
assurance on the overall effectiveness of risk governance.
Three lines of defence and main climate change responsibilities Figure 3.3
was developed from the Orange Book, which sets out the main principles under-
lying effective risk management in all government departments and arm’s length
public bodies with responsibility derived from central government for public
funds.6
Applying the 3LOD principles to climate change, Table 3.2 provides a breakdown
of responsibilities across the 1LOD and 2LOD. The 3LOD would be largely unchanged
by the incorporation of climate change into the risk framework.
3.3.2.1 SENIOR MANAGEMENT OWNERSHIP AND ACCOUNTABILITY

The board should seek to appoint someone from senior management to take owner-
ship for managing and mitigating climate change financial risks. For financial services
organizations this should be an SMF.
TABLE 3.2 First line and second line climate change responsibilities
First line of defence identification, Second line of defence policy, oversight and
measuring and mitigation reporting
A Manage the business in accordance with the 1 Develop climate risk policies, frameworks and
policies (Links to 3) risk appetite statements
B Identification and assessment of risks 2 Integrate climate risk policies and frameworks
(Links to 4) into existing erm framework (follows from 1)
C Design and operation of controls (Links to 4) 3 Oversee adherence of Climate Risk policies/
Frameworks (Links to A)
D Manage climate risk exposures within 4 Oversight of risks managed in 1LOD
agreed limits/thresholds (Links to 5) (Follows B & C)
E Sourcing and management of relevant 5 Develop climate risk limits/thresholds
climate risk data (Precedes D)
F Collation and submission of regulatory 6 Monitor breaches of limits/thresholds
reporting/disclosures
G Management and escalation of risk events 7 Develop reporting requirements for Risk
Committee
H Development of new products with 8 Review and approval of new products
consideration for climate risk (Links to 8) (Links to H)
FIGURE 3.4 Senior management accountability for climate risks
Financial risk from CC Responsibility Responsible SMF
Operational Oversee operational SMF: 24

impact of CC risks Chief operating officer
Credit Oversee potential for CC SMF: 2

related financial losses Chief financial officer
stemming from
counterpart default
The responsibility for the
identification, management and Liquidity, reserving Oversee impacts of CC SMF: 2
oversight of the financial risks and solvency risks that might Chief finance
from CC is overseen by the Chief jeopardize our reserving
Risk Officer (CRO), with day-to- approach solvency of
day management of the risks liquidity
carried out by the relevant
individuals in the business Legal and Oversee CC risks SMF: 16
compliance stemming from legal and Compliance oversight
compliance issues
Reputational Oversee actual/potential SMF: 1

for reputational damage Chief executive
stemming from CC risks
Market (investment) Oversee impacts that CC SMF: 2

risks may have on the Chief finance
investment portfolio
The day-to-day management of the risks are carried out by the relevant senior indi-
viduals in the business. An example is shown in Figure 3.4.
Many companies have allocated overall responsibility to a member of the executive team
given the strategic importance of managing climate change, but it is also important that
responsibilities are allocated throughout the organization across the risk profile for
day-to-day management of the risks.
As per the survey conducted by the IRM Climate Change Special Interest Group
(February 2022), the main executive responsible for climate change was the CRO or the
CEO of an organization. However, the responses were surprisingly wide ranging and
included the finance director, facilities director, chief impact officer and chief human
resources officer under the auspices of ESG.
3.3.2.2 ALLOCATION OF APPROPRIATE RESOURCES

Organizations will need to allocate adequate resources and sufficient skills and
expertise devoted to managing climate change as it becomes established as a compo-
nent of the overall risk universe. It is important that organizations review whether
they have adequate resources from both a capacity and capability perspective
among existing staff and plan accordingly with regard to future positions and
headcount.
In designing and implementing climate change plans the organization needs to carefully
consider whether there are adequate ongoing internal resources available and if not,
consider using external subject-matter expertise. There is a general view that insufficient
resources are being allocated to deal with the wide range of threats and opportunities that
need to be managed. This is partly related to the lack of adequate skills and experience.
3.3.2.3 INTERNAL PROJECTS

As the business integrates emerging climate risks into the corporate strategy, initiates
projects to incorporate climate risk considerations into existing processes, and intro-
duces new processes and procedures, the risk function is well positioned to support
the successful implementation of these changes due to their visibility across the entire
organization.
This can ensure the leveraging of the existing infrastructure (both operational and
with regard to governance), the establishment of a robust internal control environ-
ment and the transfer of knowledge across the end-to-end process. This will deliver
far-reaching benefits (ranging from product design to regulatory reporting, and busi-
ness planning to the management of their own emissions).
In order to gain traction and buy-in from key stakeholders it is clear that formal working
groups supplemented by questionnaires, interviews and workshops can really assist
organizations in knowledge transfer, and help to embed climate change into their ERM
framework and support meeting business objectives.
3.3.3 Risk reporting and communication

Three key governance themes relating to risk reporting and communication are:
a Climate change strategic plans
b Emerging risk updates (which will include climate change risks)
c Reporting and disclosures (both internal and external)
3.3.3.1 CLIMATE CHANGE STRATEGIC PLANS

Climate change plans and status progress updates need to be regularly reported and
communicated within the organization’s governance framework and ultimately be
presented to the board.
Risk practitioners should also seek to design risk dashboards that can present
updates on short-, medium- and long-term climate risks and opportunities that can
then be presented to their risk committee.
3.3.3.2 EMERGING RISK UPDATES

In Chapter 8 we will discuss the importance of developing a formal emerging risk
management framework to support an organization in understanding its future risk
profile and for organizations to have an early warning system in place to improve
their resilience. In Chapter 9 we discuss the main emerging climate trends, issues and
challenges in climate change, as well as interconnected risks related to climate change
and then, in Chapter 10 we discuss the importance of scenario analysis that can be
used to assess emerging climate risks.
It is clearly important for risk practitioners to provide updates on emerging
climate risk themes to risk committees and ultimately to the board on those that
have a direct or indirect impact on future strategic and business planning. This
should include deep-dive research on emerging risks and opportunities across physi-
cal, transition and liability risks.
3.3.3.3 REPORTING AND DISCLOSURES (BOTH INTERNAL AND EXTERNAL)

Internal reporting The risk function should seek to design an internal climate
reporting process such as using the climate risk radar that will be discussed
in Chapter 4. It is also helpful to develop a bespoke risk-reporting dashboard that
can be updated and presented to the board on a regular basis. This could be devel-
oped to cover different time horizons covering short-, medium- and long-term
climate risk and opportunities that are then presented to the risk committee and
board.
Here is an excerpt from a case study provided by North of England P&I club
(NEPIA) (from within the insurance industry) that includes how they developed and
designed their internal reporting dashboard for climate change.
C ASE STUDY
North of England P&I Club (NEPIA) – design of climate reporting dashboard
At NEPIA cross-cutting approach demanded that risk owners would need to regularly report on
CC risk. Our approach (on a quarterly basis) asked risk owners a set of questions alongside
their other risk components to assess their exposure to CC risks, covering product, market
and operational risks.
FIGURE 3.5 Dashboard example – long-term risk examples (10+ years)
Physical risks - the impact of more regular and more severe extreme weather events
Underwriting/claims/operational *Rising sea levels and changes in storm patterns and their severity result in changes
A to current voyageroutes, increased claims (including increased incidents at ports)
*Fishing stock migrate to areas inaccessible to fishing
*Potential decrease in property values if considered to be within an area of increased
flood risk
Y Underwriting/claims The use of different technologies and fuel types may result in different claims which
may increase in value if not subject to appropriate underwriting discipline (policy
terms and limitations)
Transition risks - the impact of adjustment to a low carbon economy
R Underwriting/claims Coal and oil sector will change significantly and the current levels of
transportation will be significantly reduced and may not be replaced with
another energy commodity
Opportunities Threats or new liabilities

B Offshore carbon storage transportation market A What was previously not considered a pollutant
becomes a pollutant, causing claims
BRAYG impact assessment (expert judgement with limited data) possible increase in claims
and costs/reduction in premium/reduction in investment asset values
B Positive gains or potential opportunities Y Moderate between w% and x%
R High above y% G Low up to w%

A Medium between x% and y%
SOURCE North of England P&I Club
77
Risk owner reporting question examples:
●● Underwriting
●● Have any climate-related developments occurred in the last reporting period relevant to
pricing risks underwritten by us?
●● Have any new potential opportunities arisen from CC over the last reporting period?
●● Claims
●● Have business lines in the last reporting period been exposed to changes in claim
liability, in relation to the type, frequency and severity stemming from climate risks?
●● Market investments
●● During the last reporting period, have investment advisors flagged any climate-related
issues which, for example, could have an adverse effect on the value of our investment
assets?
Risk-owner responses to questions rated moderate to high impact would then go on to be

reported in the risk reporting dashboard. Given the long-term nature of climate change risk we
recognized that we needed to incorporate a new reporting tool in the Risk Management
Framework to capture medium and long-term climate change risks. We decided that the initial
assessment CC dashboard covering short-, medium- and long-term risks should be updated
annually and presented to the risk committee. This would provide guidance and reference to
the sustainability strategy, stress testing scenarios and risk appetite statements.
An example of the dashboard follows in Figure 3.5.
External reporting including disclosures The board should ensure that material
climate-related risks, opportunities and strategic decisions are consistently and trans-
parently disclosed to all stakeholders. A number of the disclosures also need to be
included in documents such as the annual reports and accounts.
Disclosure reporting consists primarily of four core elements: governance, strat-
egy, risk management, and metrics and targets, which we also cover in different
chapters within this book.
In Chapter 12 we provide details of how organizations increasingly need to
provide detailed and insightful disclosures to meet both the evolving current and
future disclosure requirements.
As organizations build and implement their climate change strategies and as their
climate risk maturity develops, they can concurrently provide improved disclosures
(in line with requirements from regulators and other stakeholder groups).
3.3.4 Performance and incentive compensation management

Organizations should seek to ensure that performance against climate-related objec-
tives is incorporated into variable remuneration for specific executives accountable
for implementing and integrating the climate change strategy.
Three key governance themes relating to performance and incentive compensa-
tion management are:
●● Key performance indicators

●● Incentivized compensation for executives
●● Employee benefits
3.3.4.1 KEY PERFORMANCE INDICATORS

Organizations should seek to develop climate change strategic objectives and then
align them with individual performance management objectives.
These should incorporate specific environmental key performance indicators
(KPIs) that can cover the move towards sustainable consumption, the monitoring of
emissions and any production efficiencies (all of which can facilitate the shift towards
lower impacts on the environment).
3.3.4.2 INCENTIVIZED COMPENSATION FOR EXECUTIVES

Once a set of specific KPIs has been developed, these should be integrated into short-
and long-term pay and incentives, in particular for senior executives.
Regulators such as the Prudential Regulation Authority (PRA – one of the primary
financial services regulators in the UK) state that the performance of the senior
management functions should be monitored against these objectives and reflected in
variable remuneration.
The board should therefore seek to set climate-related targets as part of its execu-
tive incentive schemes where appropriate.
3.3.4.3 EMPLOYEE BENEFITS

Employee benefits can also provide a win–win for both employers and their work-
force in helping promote a base from which to provide a positive impact on the
environment.
Clear reporting of an organization’s efforts to manage its environmental perfor-
mance helps to attract high-calibre employees, as good environmental reputation
and performance can be an important factor influencing an employee’s choice of
employer.
In respect to employee benefits, organizations should seek to add a greater range
of flexible benefits aligned to reducing carbon emissions.
Some specific examples are shown in Table 3.3:
TABLE 3.3 Examples of employee benefits for staff supporting net zero targets
Staff benefits Details
Company cars Organizations can promote the use of electric vehicles (as a company car
option)
Tax schemes Employers can participate in a variety of tax-efficient schemes that offer tax
breaks to staff to purchase bicycles (‘Bike to Work’ scheme) or promote
electric vehicles via various lease-back schemes
Interest-free season Companies can offer interest-free season ticket loans to cover the costs of
ticket loans commuting to work on public transport. This reduces the overall cost of
travel and encourages the use of more environmentally friendly modes of
transportation (rather than driving to work)
Car-pooling initiatives Some companies arrange car-pooling schemes to reduce transportation
cost for staff and to reduce overall emissions
3.3.5 Training and education

There are three key governance approaches relating to training and education (all of
which are intended to raise awareness):
●● Board and senior management-focused development

●● Training for risk and compliance functions (in order to enhance oversight) and
staff on the front line (in order to support embedding it into business as usual)
●● Complementing the in-house training with support for professional/academic
qualifications
3 .3.5.1 BOARD AND MANAGEMENT

One of the World Economic Forum’s climate governance principles is that directors
have command of the subject. Regulators also expect that boards receive ongoing
awareness training.
The risk function can therefore play an important role in developing and facilitat-
ing ongoing training and communication to the board to increase awareness of
climate change risks, impacts and possible responses.
3.3.5.2 RISK TEAMS AND FRONT-LINE STAFF

The focus for many organizations has been to train the board initially, and regulators
such as the PRA advocate providing awareness training on an ongoing basis, but it
is also very important to facilitate training and brainstorming sessions across the risk
and compliance functions, senior management and ultimately across all employees.
For front-line staff some base-level training is important, and it is important to
provide some form of introductory training for all staff.
Increased demand for training There is an increasing demand for training

as evidenced from the IRM’s Climate Change SIG Survey undertaken in 2020, in
which 64 per cent of attendees at their first event stated an interest in training. This
is driven primarily by the increasing pressure from stakeholders (which include regu-
lators) for organizations to act and meet global emissions targets and use risk
management techniques to help their organizations to achieve this.
IRM’S CLIMATE CHANGE TRAINING COURSE
IRM’s training started in 2021 in conjunction with Imperial College and Grantham
Institute.
The course was designed primarily for risk managers and risk professionals who need
to adapt to changing standards and guidelines of climate change risk management and
ensure they remain up to date and are able to apply best practice principles within
their organizations.
The course is also applicable to all senior managers who have accountability for
managing climate change risk as well as risk champions and coordinators that have risk
management responsibility.
Overall course objectives
The main course objective is to help equip risk managers with knowledge and the latest
tools and techniques to help translate the complexity and uncertainty of climate
change to inform key internal and external stakeholders.
The course also aims to balance theory with practical real-life examples covering case
studies across different industry sectors, and increase awareness of climate change
threats and opportunities.
3.3.5.3 QUALIFICATIONS
Recognizing the strategic importance of this subject there are a number of organiza-
tions, including training companies, that are developing qualifications in climate
change, including the IRM who plan to launch a qualification in 2023. The Chartered
Body Alliance and the Global Association of Risk Professionals (GARP) have both
developed a Certificate in Climate Risk. These are aimed primarily at the financial
service industry with a focus on sustainable finance.
Overall, there is a recognition that qualifications will become more important,

especially for those that are considering careers in related fields or already have roles
in their organizations for managing and mitigating climate change.
3.4 Building a good risk culture

In this section of the chapter, we provide some additional thoughts in respect to the
development of a good risk culture, focusing on aspects that are specifically relevant
for climate change.
The development of a risk culture throughout the firm is perhaps the most funda-
mental tool for effective risk management.7 Therefore, developing a good risk culture
is a key enabler and prerequisite to enable a firm to embed enterprise risk manage-
ment, including climate risks, into its business practices.
Risk culture is now referred to in most risk management standards and regula-
tions and is a key focus of rating agencies. Examples are the ISO 31000 risk
management standard that refers several times to the need for managing risk to be
integrated into the organization’s culture. A much greater emphasis has been placed
on the development of a good risk culture since the global financial crisis and driven
by increased regulation that has been aligned with the development of conduct risk
management practices.
In supporting the development of a good risk culture many organizations have set
out a code of ethics outlining the behaviours that they expect employees to uphold,
and this should include the need to treat others with fairness, dignity and respect,
free from harassment (verbal and physical) and discrimination.
Before outlining some standard approaches and components that help support
the development of a good risk culture, many organizations as we have stated, need
to refocus their business strategies and objectives in implementing their climate
change plans and that will often need senior management support and buy-in.
A very helpful approach has been developed by Australian mining company BHP
that can support the implementation of strategic changes such as climate change
through the acronym ‘RSVP’. The components and explanation of how it is applied
are described by Robb Eadie, the CRO who was interviewed.
3.4.1 Change management – use of ‘RSVP’ approach

Implementing change in an organization is often challenging unless behaviour and
incentives are aligned. Robb Eadie, the CRO of BHP, uses this acronym and says that
‘unless you deal with RSVP nothing will ever change’.
He has applied this across the risk spectrum within BHP and especially for its
climate change strategic plans. The acronym stands for rewards, structure, values
and process:
●● R = Rewards (mechanisms need to be in place to reward the desired behaviours)

●● S = Structure (the structure or architecture of how risks are managed within an
organization, i.e., architecture, accountabilities, authorities and limitations)
●● V = Values (staff need to live your values)
●● P = Process (the policies, processes, procedures and practices that the organization
adopts)
With regard to climate at BHP this is achieved as follows:

In terms of the reward component, this is defined by the global scorecard for the
group, which focuses on desired outcomes in the areas of greatest risk to the group.
Included here are specific metrics relating to delivery against climate change targets.
In terms of structure, the material risks related to climate change are defined as a
group risk in their own right, categorized under the group risk category ‘Environment,
climate change & community’, monitored and measured through the risk appetite
(three KRIs) and the accountability of a senior member of the executive leadership
team (chief external affairs officer).
In terms of values, climate change is implicit in BHP’s purpose and charter values:
●● Purpose: To bring people and resources together to build a better world.

●● Our Values: Putting health and safety first, being environmentally responsible and
supporting our communities.
It is also explicitly detailed in BHP’s Charter, where BHP details the requirement to
demonstrate its environmental responsibility by minimizing impacts through every
stage of its operations and contributing to resilience of the natural environment.
And finally, processes – BHP manages its highest risks through mandates processes
called ‘Our requirements’, and ‘Our requirements for the environment & climate
change’ is one of 30 or so specific mandated processes that apply enterprise-wide.
3.4.2 Why is risk culture important in the board room?

All organizations need to take risks to achieve their objectives. The prevailing risk
culture within an organization can make it significantly better or worse at managing
these risks. Risk culture significantly affects the capability to take strategic risk deci-
sions and deliver on performance promises.
Organizations with inappropriate risk cultures will inadvertently find themselves
allowing activities that are at odds with stated policies and procedures or operating
completely outside these policies. An inappropriate risk culture means not only that
certain individuals or teams will undertake these inappropriate activities but that the
rest of the organization ignores, condones or does not see what is going on. At best
this will hamper the achievement of strategic, tactical and operational goals. At
worst it will lead to serious reputational and financial damage.
Some of the main examples that are often cited are the abilities of an organization
to seek out risk information in supporting business decisions and thus it is critical
that leaders support those actively seeking to understand and manage risks. One of
the main tools is performance management, which needs to be aligned to risk-taking
activities.
The Financial Stability Board (FSB) in their report framework for assessing risk
culture (2014) said that risk culture is important because it ensures that:8
●● an appropriate risk-reward balance consistent with the organization’s risk appe-

tite is achieved when taking on risks
●● an effective system of controls commensurate with the scale and complexity of the
financial institution is properly put in place
●● the quality of risk models, data accuracy, capability of available tools to accu-
rately measure risks, and justifications for risk taking can be challenged; and
●● all limit breaches, deviations from established policies, and operational incidents are
thoroughly followed up with proportionate disciplinary actions when necessary
All these components are important in the context of climate change. The establish-
ment of a robust risk appetite strategy was explained in Chapter 2 and the quality of
risk models and model risk are covered in Chapter 7.
3.4.3 Organizational culture – definitions and behaviours

It is important to first understand organizational culture and then explain the inter-
relationship to risk culture. Culture is the combination of repeated behaviours of
people in the organization that drives the way decisions are taken at all levels in the
organization. The goal is to become like driving a car – ultimately doing the right
thing without having to think about it.
Two important definitions are shown below:
A system of shared values (that define what is important) and norms that define
appropriate attitudes and behaviours for organizational members (how to feel and
behave).9
An organization’s culture is reflected by what is valued, the dominant leadership styles,

the language and symbols, the procedures and routines, and the definitions of success that
make an organization unique.10
Cameron and Quinn state ‘it is difficult to name even a single highly successful
company, one that is a recognized leader in its industry, that does not have a distinc-
tive, readily identifiable organizational culture’.11 Personal beliefs and values of staff
that underpin culture cannot be changed by senior management directly; management
must rely on influence, which we discuss in the next section.
In the context of climate change, we are seeing a shift in the purpose of an
organization, which we discussed in Chapter 2, through, for example, setting the
organization’s ambition to be a net zero company by 2040.
3.4.4 Organizational culture and risk culture

Much of the literature written on this subject does not fully explain or explore the
link between organizational culture and risk culture. ‘Risk culture refines the concept
of organizational culture to focus particularly on the collective ability to take
managed risk and to minimize threats but the organizational culture itself is an
active backstop determining, and itself influenced by, risk culture.’12
This is one of the main intentions of this chapter, to explain the importance of
developing a strong climate governance framework for managing and mitigating
climate change risks.
The linkage between organizational and risk culture is the behaviours and atti-
tudes of the staff, as set out in Figure 3.6. It is critical for an organization to direct
the right attitudes and behaviours of most employees to focus on risk taking and risk
control activities, which we now explore in more detail.
3.4.5 Developing a good risk culture

A risk culture manifests itself through the way things are done, that is, how employ-
ees behave in identifying, understanding and acting on the risks the organization
FIGURE 3.6 Organizational and risk culture
Organizational culture Risk culture
Values, beliefs,
Attitude & Focus on risk taking &
customs & symbols of behaviours risk control activities
an organization

confronts on a day-to-day basis. The sign of a good risk culture is that the sense of
responding by ‘doing the right thing’ is valued and encouraged more than ‘doing
whatever it takes to get on’.
Having understood the difference between organization and risk culture above,
organizations can seek to develop and use a risk culture model.
3.5 Integrated risk culture model

In respect to the development of a good risk culture there appear to be three separate
but specific drivers that make up a risk culture and that can ultimately change it:
1 Employees
2 Management
3 The ERM function
A risk culture model is illustrated in Figure 3.7 and uses the analogy of a bicycle. This
analogy has been designed first to reflect the importance of all employees working
FIGURE 3.7 Integrated risk culture model
* Regard for rules & laws

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* Social conscience
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collectively with a common purpose and set of values, and second to reflect the need
for the organization to become sustainable and to reduce its carbon footprint.
Let’s explore each of these three components in turn, starting with people.
3.5.1 Components: 1 Individuals’ core attributes

Each employee has a set of core values, beliefs and ambitions, whether these are
dominated by integrity and security or money and position. These in turn affect an
employee’s attitudes, behaviours and perceptions towards the working environment.
Equally, aspects of the working environment impact employees’ attitudes, behaviours
and perceptions.
Management needs to recruit those individuals who possess the preferred values, beliefs
and ambitions, and seek to evidence that the working environment mutually reinforces their
attitudes, behaviours and perceptions. Motivating changes in employees’ attitudes, behav-
iours and perceptions requires investment in demonstrating what the company values.
Therefore, organizations should seek ways to recruit and retain employees that
align with values, and support sustainability with the employees’ daily work and the
company’s operation.
In an article entitled ‘Engaging employees to create a sustainable future’ Polman
and Bhattacharya (2016) explain that successfully integrating sustainability into a
business requires management to reconcile the gap between personal and corporate
values in three dimensions:13
In the formal dimension, employees observe whether sustainability is integrated into

job descriptions and training programs and whether sustainability targets are tied
to employees’ variable compensation.
In the psychological dimension, employees observe whether sustainability performance
is rewarded and recognized and whether superiors set performance expectations that
align with sustainability.
And in the social dimension, which is key, employees observe whether there is
consistency between what the company says about its values in its mission statement and
what it practices.
3.5.2 Components: 2 Management – the front wheel

What drives the risk culture is the attitudes and behaviours of management. Most of
the current models, such as the IRM’s model, focus on the organizational compo-
nents. The Financial Stability Board as part of their risk culture framework set out
four key components as outlined in Figure 3.8.
3.5.2.1 TONE FROM THE TOP

The key influence on the culture of an organization comes from the top because staff
will reflect the signals they receive from their leaders in order to secure and advance
FIGURE 3.8 Financial Stability Board – risk culture framework
Foundational elements
Risk
Effective
governance –
Accountability communication Incentives
tone from the
and challenge
top
SOURCE Financial Stability Board. A Framework for Assessing Risk Culture, Climate Disclosure Standards Board
their ambitions, which is often referred to as the ‘tone from the top’. Management
must therefore rely on influence to change the way culture manifests itself.
It is critical that the board and senior management demonstrate adherence to
sound risk management. Examples in practice include the board and senior manage-
ment being committed to establishing, monitoring, and adhering to an effective risk
appetite framework, which is supported by appropriate risk appetite statement(s)
that underpin the financial institution’s risk management strategy, and is integrated
with the overall business strategy.
Indicators of ‘tone from the top’ include the promotion, through behaviours,
actions and words, of a risk culture that displays integrity and a sound approach to
risk management, as well as embracing an open exchange of views, challenge and
debate. It is critical to provide alternative views and opinions, which will often result
in better decision-making.
3.5.2.2 ACCOUNTABILITY AND ESCALATION OF RISK

Accountability is one of the most difficult issues for risk managers to embed and this
often relates to the lack of a good risk culture.
In developing a good culture, the board and senior management need to establish
a policy of ownership of risk where employees are held accountable for their actions
and are aware of the consequences for not adhering to the desired behaviours
towards risk. In particular, business lines, the risk management function, compliance,
internal audit and other control functions have clearly delineated responsibilities
with regard to monitoring, identification, management and mitigation of risk.
One of the most important risk management processes is designing appropriate
escalation processes. In the context of climate change many organizations are look-
ing at, for example, their incident reporting processes or onboarding and ongoing
monitoring of customers, suppliers and counterparties, to make sure that they adhere
to their risk appetite and tolerance levels for managing climate and wider ESG issues.
It is important to develop and design effective escalation processes using risk trig-
gers that allow management to review and agree effective management actions and
develop risk mitigation plans.
Integrating climate change into BAU practices and processes is discussed in detail
in Chapter 11.
3.5.2.3 EFFECTIVE COMMUNICATION AND CHALLENGE

A culture of open communication and collaboration is constantly promoted to
ensure each employee’s view is valued to strengthen risk-related decision-making.
One way to accomplish this is through strong control functions. Control func-
tions should share the same stature as the business lines, actively participating in
committees and relevant risk decisions and activities. They need to also operate
independently and have appropriate direct access to the board.
Organizations need to review and improve their control environment to manage
and mitigate climate risks.
3.5.2.4 REMUNERATION AND PERFORMANCE

It is important that reward systems are evaluated to make sure that they promote the
greater good and long-term interests of the company and its clients, including
sustained profitability as opposed to short-term revenue generation.
An objective-setting process should be linked to core values and risk culture
including treatment of customers, cooperation with internal control functions,
respect of risk limits, etc. It would be beneficial to promote the development of indi-
viduals through a talent management programme that embraces risk management as
a core skill (and a critical skill set for senior management).
Only when good corporate culture and the incentive system align with each other will
there be sustainable impact that helps reduce misconduct risks, a crucial element in
gaining the trust of customers in the long run. (Norman Chan, Chief Executive of the
Hong Kong Monetary Authority (Sept 2007))
There is a lot of literature on the topic and it is important to recognize that while
rewards can be used to influence risk culture, they have their limitations.
Rewards do drive behaviour, particularly variable compensation. However, they
won’t always drive the right behaviours, as we have seen in areas such as customer
sales where bad practices can and often do lead to mis-selling in industries such as
financial services and consumer goods.
One of the controls that can be undertaken by ERM is to review the incentive
programmes by making an inventory and reviewing the design, and assessing any
weaknesses and potential impacts using a traditional risk-assessment approach.
3.5.3 Components: 3 ERM function – the back wheel

The ERM function can support the implementation of a good risk culture but needs
support from the organization and this is particularly important for managing strate-
gic risks such as climate change. The main components that an organization needs to
develop are set out in Figure 3.9, from Standard & Poor’s ERM evaluation criteria.
FIGURE 3.9 ERM evaluation criteria
Enterprise risk management
Risk
Risk reporting Incentive
governance and Risk appetite
and compensation
organization framework
communication structure
structure
3.5.3.1 RISK GOVERNANCE AND ORGANIZATION STRUCTURE

The fundamental component that drives a risk culture is risk governance. The COSO
(Committee of Sponsoring Organizations) Framework is a system used to establish
internal controls to be integrated into business processes.
In 2017, the committee introduced their COSO Enterprise Risk Management
Framework. The COSO ERM framework aims to help organizations understand
and prioritize risks and create a strong link between risk, strategy and how a busi-
ness performs.
As per the new COSO standard, the first main component or pillar is entitled
‘Governance and culture’. It states that governance sets the tone for the organization
and establishes oversight responsibilities for ERM. It also states that culture relates
to ethical values, desired behaviours and understanding of risk.
The COSO ERM framework states that the board also needs to make sure that all
decisions made, in the interests of all stakeholders, include consideration of risk and
reward including the appointment of the CEO.
The focus of the CRO is moving away from the compliance role to a business
advisory role. In terms of governance this means more closely aligning the role to the
business needs and business decisions. To do this ERM must act analogously to a
football team, and play more as an attacking midfield supporting the front line in
passing on information in order for the front line to make better decisions. The point
here is that the ERM function needs to be part of the decision-making team that
drives a better risk culture.
3.5.3.2 RISK APPETITE FRAMEWORK

The COSO ERM framework states that the organization needs to define risk appe-
tite in the context of creating, preserving and realizing value. The framework explains
the importance of designing a risk appetite statement that considers the strategic
setting that is then communicated by management, embraced by the board and inte-
grated across the organization.
3.5.3.3 RISK REPORTING AND COMMUNICATION

Risk reporting and communication is covered in more detail in Chapter 12. The new
COSO framework covers this within the fifth main pillar of the new standard,
entitled ‘Information, communication and reporting’.
To develop a good risk culture, it is critical to share information. The COSO
framework states that the information should flow up, down and across the organi-
zation and provide insight to key stakeholders. The COSO framework states that
ERM should report not only on risk but also on culture directly, as well as perfor-
mance, which is a real directional development. As the saying goes, ‘what gets
measured gets done’.
3.5.3.4 RISK TRAINING

The COSO standard states that management must define the knowledge, skills and
experience needed to execute strategy; set appropriate performance targets; attract,
develop and retain appropriate personal and strategic partners; and arrange for
succession.
The standard does not implicitly refer to training of staff in risk management. In our
experience, risk training is one of the fundamental objectives of an ERM department.
3.5.3.5 RISK ATTITUDES AND JOB ROLES

What is perhaps overlooked by organizations is that risk attitudes can be a good
indication as to whether an employee is a good fit for a particular role in the organ-
ization. For example, it is known that a person with a risk-averse attitude typically
makes a good middle manager or administrator or an engineer. Risk-seeking atti-
tudes typically make good entrepreneurs and negotiators. Risk-neutral attitudes tend
to make good executives and group leaders. Thus, risk tolerances should in theory
align to an individual’s role in an organization in respect to risk taking.
There is an obvious and wide perception divide between the risk manager and the
strategist. It is important to note the perception of risk as a tactical function with a
low tolerance for risk. Does the CFO’s (and by extension, the organization’s) percep-
tion of enterprise risk roles create any obstacles to communicating about and acting
on risks?
As stated already, climate change is now a key strategic risk for many organiza-
tions to manage and the understanding of the concept of risk perception outlined
above is important in the context of accountability and having the right level of
leadership that is required to develop and implement the climate change strategic
plans and associated mitigation strategies.
Conclusion
In this chapter we have explained the importance of having a robust and effective
climate governance framework that is critical to the role of risk practitioners in inte-
grating climate change risk and opportunities into an existing ERM framework.
We have explored the main ingredients and components that can support the
design of a robust climate governance framework and also explained the relevance
and importance of having a good corporate and risk culture that requires specific
behaviours and processes from the board, management team, risk function and indi-
viduals to make a mature risk culture.
The main requirement is that the board and the CRO clearly articulate a balanced,
business-oriented view of climate risk as a basis for educating and advising the rest
of the business as well as having effective ongoing communication and reporting
processes and an education programme involving operational first-line management.
The ERM function can play a major role in developing a good governance
framework and associated risk culture but is reliant on the underlying cultural
characteristics, which are difficult to change and are often intangible items but need
to be carefully considered, particularly in managing the complexity of climate
change risk.
Notes
1 World Economic Forum. How to Set Up Effective Climate Governance on Corporate
Boards: Guiding principles and questions, January 2019. www3.weforum.org/docs/
WEF_Creating_effective_climate_governance_on_corporate_boards.pdf (archived at
https://perma.cc/UV9Z-L8K7)
2 Odgers Berndtson. Corporate governance and climate change, 19 August 2020. www.
odgersberndtson.com/en-us/insights/corporate-governance-climate-change (archived at
https://perma.cc/ZR3Q-NWGL)
bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2019/
ss319 (archived at https://perma.cc/9TTY-HN3Q)
4 Australian Institute of Company Directors. Climate Risk Governance Guide, 2021. www.
aicd.com.au/risk-management/framework/climate/climate-risk-governance-guide.html
(archived at https://perma.cc/3DTS-SEL8)
5 The National Audit Office. Climate change risk: a good practice guide for Audit and Risk
Assurance Committees, 2021. www.nao.org.uk/insights/climate-change-risk-a-good-
practice-guide-for-audit-and-risk-assurance-committees/ (archived at https://perma.
cc/6DKJ-L7FV)
6 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/866117/6.6266_HMT_Orange_Book_Update_v6_WEB.PDF (archived at
https://perma.cc/7KBD-29XW)
7 Institute of International Finance. Final Report of the IIF Committee on Market Best
Practices: Principles of conduct and best practice recommendations. Financial Services
Industry Response to the Market Turmoil of 2007-2008, p 38. https://www.iif.com/
portals/0/Files/private/iif_final_report_of_the_committee_on_market_best_practices.pdf
(archived at https://perma.cc/4XYU-Z949)
8 Financial Stability Board. Guidance on Supervisory Interaction with Financial
Institutions on Risk Culture, 7 April 2014. www.fsb.org/wp-content/uploads/140407.
pdf (archived at https://perma.cc/FE9T-MVEP)
9 C A O’Reilly and J Chatman. Organizational commitment and psychological attachment:
the effects of compliance, identification, and internalization on prosocial behavior,
Journal of Applied Psychology, 1986, 71 (3), pp 492–499. https://doi.org/10.1037/0021-
9010.71.3.492 (archived at https://perma.cc/TV2S-BU3B)
10 K S Cameron and R E Quinn (2005). Diagnosing and Changing Organizational
Culture: Based on the Competing Values Framework, revised edition, Chapter 1, Jossey
Bass, San Francisco
11 K S Cameron and R E Quinn (2005). Diagnosing and Changing Organizational
Culture: Based on the Competing Values Framework, revised edition, Chapter 1, Jossey
Bass, San Francisco
12 The Institute of Risk Management. Risk Culture: Under the Microscope Guidance for
Boards, 2012. https://www.theirm.org/media/4703/risk_culture_a5_web15_oct_2012.
pdf (archived at https://perma.cc/4LDH-FKZU)
13 P Polman and C B Bhattacharya. Engaging Employees to Create a Sustainable Business.
Stanford Social Innovation Review, 2016, Fall. https://ssir.org/articles/entry/engaging_
employees_to_create_a_sustainable_business (archived at https://perma.cc/BTS8-R52M)
94
Climate change risk

identification techniques,
including stakeholder mapping
This chapter covers the way an organization can develop a climate risk radar to map
its climate risks into its existing risk profile through a range of best practice risk
identification processes, techniques and risk management tools.
This chapter focuses on the use of stakeholder analysis and mapping for all the
main climate-related stakeholders across the organization’s value chain that should
be considered when identifying climate risks (both threats and opportunities).
●● Evaluate the practical processes and techniques involved in the identification of

climate risks.
●● Establish an understanding of different approaches and the benefits and chal-
lenges of risk identification.
●● Understand how to develop a climate ‘risk radar’ that maps out a climate risk
taxonomy to an organization’s risk categories.
●● Compare specific risk identification techniques that include a risk review process
that can be tailored to focus on climate risk through the use of risk questionnaires
and workshops.
●● Understand the use of stakeholder analysis and mapping, which is a key
management tool for identifying and addressing climate change risks and
opportunities.
In Chapters 8 and 10 we provide further detailed insights into using specific risk
identification techniques, including the use of horizon scanning and stress and
scenario analysis which assist in addressing emerging climate risks and in the design
of climate scenarios (which are covered in chapter 10).
CLIMATE CHANGE RISK IDENTIFICATION TECHNIQUES 95
Introduction
By identifying and proactively addressing risks and opportunities, all enterprises
endeavour to protect and create value for their stakeholders, including owners,
employees, customers, regulators and society overall.
The rationale is that one of the greatest dangers to any organization is not recog-
nizing a threat until it is too late. It is no longer acceptable for an organization to find
itself in a position whereby unexpected events or trends that could have been antici-
pated cause financial loss, disruption to normal operations, damage to reputation,
regulatory censure, loss of market presence or adverse human impacts.
The purpose of risk identification is to generate a comprehensive inventory of
risks based on those events that might create, prevent, accelerate or delay the achieve-
ment of an organization’s objectives. When identifying risks, an organization needs
to consider not only its processes and systems, but also its relationships with its
clients, the nature of its products and the wider business environment.
Based on the context and understanding of the business environment, risk manag-
ers need to translate external trends and drivers into identified risks and assess the
impact and severity to the organization. Effective risk identification is critically
important because it underpins the risk management process and determines those
risks to which management will seek to allocate resources.
In the context of climate change and the risk taxonomy that was described in
Chapter 1 organizations need to identify physical, transition and liability risks, both
threats and opportunities, across the risk profile. The process needs to make sure that
both strategic climate-related risks as well as the risks facing each department or busi-
ness area are captured to ensure a complete risk profile of the organization is built.
It is also important to separately identify and manage emerging climate risks and
trends, such as government legislation and technology shifts, which can be better
controlled through an enterprise risk management framework based on future time
horizons.
The risk identification process can be a difficult exercise due to the diverse nature
of risks and the difficulty in distinguishing cause and effect.
4.1 Risk identification process

An adequate risk identification and assessment process for climate risks should
address key portfolios and geographic areas related to products and services of the
organization, but will need to be tailored depending on the size, nature and complex-
ity of the organization involved. It is important to understand the importance of the
risk identification process and the various techniques and tools that are available for
risk managers.
Risk identification is the process of finding, recognizing and describing risks. A

risk identification process should include the following:
●● Identify risk sources, events, their causes and their potential consequences.
●● Utilize historical data, theoretical analysis, informed and expert opinions, and
stakeholder’s needs.
A comprehensive risk identification process should consider the following:
●● Involve all relevant stakeholders in the process. This ensures:

●● Risks are comprehensively assessed
●● A group-wide perspective and ownership of the risks
●● Risks should be properly articulated in order to ensure:
●● Everyone understands the risk, its causes and consequences
●● Effective controls can be put in place
●● Risks are appropriately recorded in a risk register (or equivalent)
●● Attitudes, behaviours and risk perceptions
●● Consider the risks of major decisions, projects, investments, functions, etc
●● Think about ‘grey swan’ and ‘black swan’ events
4.1.1 Main benefits of risk identification

The main benefits of developing a formal risk identification process include the
following:
●● Provides information to management on which decisions to make, which can be

actioned on to ensure a controlled environment
●● Provides a basis for risk measurement and assessment, which may, for example,
be used for capital allocation purposes
●● Sets boundaries to differentiate between risk types and assign ownership for their
mitigation
●● Helps develop a common language for discussing, assessing and managing risks that
allows clear and transparent communication, which will support decision making
4.1.2 Risk identification – common observations and issues

Some of the main practical issues for risk managers to consider include the following:
●● The amount of time required of the risk function, senior management and staff to
develop a comprehensive profile of the risks (it is an iterative process at the outset)
●● Getting buy-in throughout the firm (which comes from quality communication)
●● The environment in which you operate, the operating model and the activities
undertaken
●● Ongoing changes that occur that hinder the identification of risks (i.e. regulatory
environment, technological and system developments, client-led requirements and
new products and markets)
●● Availability of historical risk data (i.e. availability, consistency of the formats and
completeness of the data)
●● The existence of appropriate frameworks, policies, taxonomies, categorizations
and procedures
●● The prevailing awareness of and appetites for risk (i.e. are they consistent?)
●● Engagement of staff and how their opinions are captured
4.2 Risk articulation

A common issue that many organizations have is not articulating the risks correctly.
Quite simply, if an organization is unable to describe the risks they face, this is an
immediate impediment to managing and mitigating the risk.
Some common examples are highlighted here:
●● Poor risk descriptions that fail to identify the cause and therefore prevent effective
mitigation (which can be achieved by addressing the cause)
●● An inability to make the distinction between issues of the day and the risks facing
the business on an ongoing basis
●● Risk descriptions being too generic (e.g. failure of strategy) and lacking sufficient
detail
●● Risks focused towards one particular business discipline (e.g. financial, legal,
operational) depending on the influence of senior executives, project sponsors or
coordinator
●● Risk descriptions that focus on a control failure rather than a specific risk (e.g.
lack of business continuity plan, poor staff induction)
In respect to effective risk articulation, it is important that a consistent risk language

is developed within the organization to help describe risks. Some examples of risks
or threats descriptors are shown in Table 4.1.
Risk events do not occur in isolation; there is an order that results in the adverse
outcome. This starts with the root cause, then the risk event and the subsequent
impact (i.e. root cause – risk event – effect). The root causes (and their triggers) are
a useful way to identify risk events and Table 4.2 provides some useful descriptors of
these triggers.
TABLE 4.1 Examples of risk trigger descriptors
Examples of risk trigger descriptors

Failure to… Reduction of…
Loss of… Disruption to…
Inability to… Increase in…
Inappropriate… Lack of…
TABLE 4.2 Risk events and risk descriptors – climate change examples
Root cause Risk event (scenario of concern) Risk impact(s)

Define the underlying root cause of Describe concisely what the risk is What impacts would
the risk event the risk occurring have?
Examples Examples Examples
●● Failure to identify impact of trends ●● Our offices are affected by ●● Reduced
in long-term weather patterns climate change, e.g., major profitability
●● Inability to respond to climate- flood, meaning they cannot be ●● Increased earnings
related risks causes damage to the used or can only be used in a volatility
brand (insurance of polluting limited way ●● Regulatory fines/
vehicles, use of plastic, company ●● Inadequate insurance cover in penalties
and insured fleet carbon footprint, the light of more frequent ●● Major business
failure to use energy efficient flooding events in a calendar interruption
technology). year
●● Reputational/brand
●● Reduction in the creditworthiness ●● Stranded assets in the damage
of our investments portfolio due to investment portfolio
●● Reduced investment
over-exposure to sectors adversely Products and services are performance
●●
revalued as a consequence of mispriced

climate change ●● Loss of market
share
●● Inappropriate use of services from
suppliers who are climate change ●● Failure to meet net
inactive, e.g. have poor climate/ zero targets
ESG ratings
Risk practitioners should be cognizant of the danger of mistaking a cause or trigger

as a risk event. If this occurs, attention may be focused on introducing additional
controls whereas it may be more effective to focus on addressing the underlying root
cause (and why any associated controls failed).
Consequently, when the triggers have been identified, if these can be prevented,
the risk event may not actually occur.
Preventative controls operate to prevent the risk event occurring (thus reducing
the likelihood).
Detective controls operate after the risk event has occurred and are there primar-
ily to minimize/reduce the impact. Earlier detection of the risk event is key in order
to minimize the severity. Figure 4.1 provides a visualization of the process.
This approach is akin to the commonly used risk management tool of bow tie
analysis, which aims to depict a series of threats or causes, the undesirable or hazard-
ous event and the negative effects or consequence. However, as mentioned elsewhere
in this book, it is important not to overlook the flip side of risks and to consider the
opportunities that may arise as a consequence of events occurring.
The management consultant Peter Moar has developed an approach in this
regard, which aims to accentuate the positive and leverages a more positive mindset
that looks at the bow tie method through a different lens.1 If the root causes are
instead thought of as conditions and the more positive risk event is considered as an
organizational goal, this can switch the focus on positive effects for an organization.
This can be depicted as shown in Figure 4.2.
FIGURE 4.1 Risk events and risk descriptors
Preventative controls Detective controls
Risk
Root cause Impact
event
Likelihood (%) Impact (£)
SOURCE © OneRisk Consulting. All rights reserved 2022
FIGURE 4.2 Negative and positive conceptual risk identification processes
NEGATIVE OR DOWNSIDE RISK POSITIVE OR UPSIDE RISK

Modelling bad events Modelling good events
Minimizing negative outcomes Maximizing positive outcomes
Negative Positive
Cause RESISTANCE Condition MOMENTUM effect
effect
BAD Negative GOOD Positive

Cause Condition effect
EVENT effect EVENT
Negative Positive
Cause Condition effect
effect
Bowtie Diagram Moar Diagram
SOURCE Peter Moar Accentuate the positive. RMIA Year Book 2016
This can be particularly useful when applied within a context of climate change,
where both physical risks and transition risks will generate significant upheaval in
corporate value chains, consumer demands and the competitive landscape.
Consequently, this is where the opportunities present themselves for organizations.
A few examples that are relevant to climate change include:
●● Organizations planning and restructuring their supply chains to ensure continuity of

supply (of both the raw materials they need and the supply of their own products).
●● Companies being early adopters of changes in consumer patterns borne out of
environmental concerns (e.g. the production of electric vehicles but also the subse-
quent maintenance and insurance of these vehicles).
●● Firms reviewing their disaster recovery arrangements in response to concerns
about floods and moving to the cloud or remote working arrangements.
This change in perspective and the subsequent forward planning provides an oppor-
tunity for organizations to gain a competitive advantage, can reduce costs in the long
run, ensures resilience and can potentially change the dynamics of the marketplace
by seizing the momentum from the uncertainty created by climate change.
4.3 Risk universe and risk taxonomy – definitions and importance

Let’s begin this section with an understanding of what a risk universe and a risk
taxonomy are.
4.3.1 Risk universe

The risk universe includes all risks that could affect an organization. These can be
categorized into different risk types to aid in the understanding and appropriate
actioning of risks. Once these high-level classifications are established, a lower level
of granularity is required and this is where they can be allocated to appropriate areas
of the business in order to assign ownership and the design of controls (as required).
This will be influenced by the risk appetite of the organization and how the risk(s)
are to be treated (i.e., avoided, managed, transferred, etc).
4.3.2 Risk taxonomy

Establishing a consistent and well understood risk taxonomy provides a foundation
for defining and categorizing the risks faced by the organization. Once established
this helps ensure a consistent approach to the treatment of certain risk types (as per
the risk framework and risk appetite of the firm) and all employees can follow the
risk management process in place. Chapter 1 provided an overview of how to

describe climate risk in terms of physical, transition and liability risks.
The importance of developing a consistent risk taxonomy is to make sure that
whatever is decided upon is well communicated throughout the organization to
ensure that the focus is on the risks and how they are managed and time is not
wasted discussing how they are categorized.
4.3.3 Developing an organizational climate change risk radar

Developing a ‘risk radar’ is one of the key objectives of risk management and a
fundamental principle of resilience. The ability to anticipate problems and see things
differently will help an organization develop an early warning system and seize new
opportunities.
The risk radar is a key diagnostic tool used to help identify an organization’s key
risks.2 It can be easily updated on an ongoing basis to facilitate discussion and help
management prioritize risk remediation activity and the allocation of resources.
In developing an organization’s climate risk radar, it is important to seek out
information from outside the organization, for example by using PESTLE analysis
covering political, economic, sociological, technological, legal and environmental
issues. A PESTLE analysis describes a framework of macro-environmental factors
used in the environmental scanning component of strategic management, to gain
insights in respect of global trends such as climate change. One of the main benefits
of doing this is to build consensus among a range of stakeholders about future
threats and opportunities and how to tackle or profit from them.
Threats: What is emerging on the horizon that could adversely affect future commercial
or other defined success factors?
Opportunities: What trends and directions do data and information gathering reveal
and indicate as areas of potential competitive advantage in the future marketplace?
The schematic in Figure 4.3 provides a climate change risk radar that seeks to align
some of the main physical, transition and liability risks and opportunities associated
with climate change and adapt it with a traditional risk management risk radar. The
development of such a schematic can help enable risk managers to better articulate
and inform senior management about the risks of climate change that pervade many
organizations’ entire risk profiles and risk categories.
FIGURE 4.3 Climate change risk radar framework
External
Brand/image STRATEGIC
FINANCIAL
Competitive
landscapes
Carbon taxes /
subsidies Internal Customer needs
New products
Reduced asset and services
values
Employee Laws and

engagement regulatory
Changing climate
changes
conditions/patterns
(chronic) Regulatory
enforcement
Extreme weather
Key: events (acute) Litigation OPERATIONAL/
HAZARD
LEGAL
Physical ‘direct’ risks
Transition ‘indirect’ risk
Liability risks
An organization will need to align climate risks and opportunities to its own risk
categories that cover the risk profile of the organization. The above highlights the
risks and opportunities aligned to the three main climate risk types and split between
strategic, financial, operational/legal and hazard.
4.4 Risk identification processes, techniques and enablers

Organizations need to consider a variety of processes and techniques to identify and
capture relevant climate risks. Risk identification should be an ongoing process that
can be supported through employees identifying and communicating risks to the risk
function and through regular quarterly risk management committee and working
group meetings.
However, it is important to recognize and develop formal risk identification
processes and use of specific techniques that are underpinned by specific enablers or
tools that can assist in the process.
FIGURE 4.4 Risk identification processes and techniques
Internal External
Risk and control self Stakeholder STEEPLE/PESTLE

assessment mapping Regulatory updates
Annual risk review/ Horizon scanning Industry publication/
audit Stress and scenario conference
Loss event and root analysis
cause analysis Professional trade bodies
Deep-dive research
External emerging risk
HAZOP SWOT reports
White = most relevant
Figure 4.4 provides a summary of some of the risk identification processes and tech-
niques for organizations to consider, some of which are focused primarily on an
internal scan or risk; others focus on the external environment and then there are
some that can be used for both purposes.
In the diagram we highlight those techniques in white that are considered to be
most relevant for identifying climate change risks. While some are covered in this
chapter, specifically stakeholder mapping, other techniques such as horizon scanning
and stress and scenario analysis are included in other chapters.
While Figure 4.4 provides a range of processes and techniques it does not provide
details of specific risk management tools or enablers that risk professionals can use
to implement the techniques, as well as recording and reporting them. The tradi-
tional risk identification tools or enablers include the following.3
Internal interviewing and discussion:

●● Interviews
●● Questionnaires
●● Brainstorming
●● Self-assessment and other facilitated workshops
●● SWOT analysis (strengths, weaknesses, opportunities and threats)
External sources:
●● Comparison with other organizations
●● Discussion with peers
●● Benchmarking
●● Risk consultants
Tools, diagnostics and processes:

●● Checklists
●● Flowcharts
●● Scenario analysis
●● Value chain analysis
●● Business process analysis
●● Systems engineering
●● Process mapping
The most widely used reporting tool is a risk register that is often part of a risk
management system and as this is a standard risk management process this will not
be covered in this book (we suggest readers refer to the IRM Fundamentals of Risk
Management.4)
The following is a summary of each of the main internal risk identification
processes and techniques.
4.4.1 Internal identification techniques

Referring back to Figure 4.4, the main internal risk identification techniques are as
follows.
4.4.1.1 RISK AND CONTROL SELF-ASSESSMENT (RCSA)

This process captures and assesses the risks and controls of a given activity or process
with the personnel involved in the day-to-day operation of the activity or process. It
can also be applied at a strategic level. This is most useful when aligned to the objec-
tives of the strategy, process or activity. An additional benefit is that the RCSA process
can be expanded to encompass an entire end-to-end process spanning multiple teams.
4.4.1.2 ANNUAL RISK REVIEW – TYPICALLY CORPORATE OR STRATEGIC RISKS

An annual review is facilitated by the risk function where the risk expert will work
together with management and staff in order to produce a risk profile that can be
used in the risk measurement or assessment phase. This review is often supported
through the development of a risk questionnaire and structured interviews with key
stakeholders. These are discussed in more detail in section 4.4.3.2.
A review will typically consider the following:
●● Clarity of risk ownership

●● Adequacy of the existing controls
●● Any material changes to the internal control environment
●● Potential impact to the organization of losses or control failures
●● Changes in the business model
●● Any significant audit or compliance reviews
●● Key projects delivered in the previous year
●● Existence of a suitable mechanism for monitoring the risk
4.4.1.3 LOSS EVENT AND ROOT CAUSE ANALYSIS

After a particular loss event has occurred within an organization it can be analysed
by key staff to help to identify the reasons and root causes for the occurrence and
how future loss events can be avoided. The organization may learn more about the
way it operates and question its own practices to help develop its risk policy further.
Additionally, if there are any recurring themes arising over a prolonged period with
regard to smaller risk events, this provides an opportunity for an organization to
learn from these and introduce improvements to the internal control environment
and to make any necessary adjustments to the overall risk profile.
4.4.1.4 HAZOP (HAZARD AND OPERABILITY ANALYSIS)

HAZOP is often used as a technique for identifying potential hazards in a system
and identifying operability problems likely to lead to nonconforming products.
4.4.2 External identification/scanning processes

External risk identification processes and techniques are particularly appropriate for
the identification of emerging risks, which we discuss in more detail in Chapter 8
when we cover designing an effective emerging climate risk management process.
Chapter 8 will also cover the use of horizon scanning.
4.4.3 Internal and external risk identification processes

Some of the most important risk identification techniques for climate change risk involve
the use of processes that need to consider both internal and external environments.
4.4.3.1 SCENARIO ANALYSIS
Scenario analysis is a process of identifying and assessing several plausible future
events or ‘what if’ scenarios by considering alternative possible outcomes (some-
times called alternative worlds).
Risk managers need to play an increasing role in driving the identification of
scenario selection and design decisions to assess future climate scenarios in a rapidly
changing world. In Chapter 10 we will discuss the use and design of climate stress
and scenarios.
In this chapter we will now focus and provide more details of two of the other
best techniques for identifying climate risks:
1 Risk review using risk questionnaires and workshops

2 Stakeholder analysis and mapping
4.4.3.2 ANNUAL RISK REVIEW/AUDIT USING RISK QUESTIONNAIRES AND WORKSHOPS

Risk professionals often undertake an annual review of their risk registers in order
to reflect the revised risk profile, which is often focused on updating existing and
including new risks that can then be used in the risk measurement or assessment
phases.
As part of this process and in order to identify a list of climate risks that can
lead to scenarios to be used within, for example, workshops, the design of bespoke
risk questionnaires is an important risk management tool that can support various
techniques.
The questionnaire from a risk management perspective should seek to understand
the business strategy, objectives and process, and activities of the business areas and
then ask the question: What climate risks (threats and opportunities) could prevent
or support your department in achieving its objectives, and individual business
processes in functioning effectively, i.e. what are the key climate risks? (Referring to
the organization’s climate risk taxonomy and climate risk radar.)
Through the questionnaire and workshop process, the aim should be to develop
and agree a number of potential risks, threats and scenarios for each department.
The questionnaire needs to be completed in advance of planned workshops where
responses will be validated, and loss scenarios developed.
This process affords an opportunity to provide input and direction for senior
management that will help shape how the company deals with climate risks and risk
management in the future.
Senior executives It is important to differentiate the approach and design of risk

questionnaires for internal purposes. The approach for senior management is to set
out a high-level set of questions that align with the business strategy and objectives.
The involvement of senior management in both the risk questionnaire and workshop
process is critical as they can provide valuable insights in identifying climate risks
that can impact on the organization’s objectives.
Senior management (responsible for climate risks) A second, more detailed ques-
tionnaire that generates more in-depth responses can be designed and sent out for
those employees that have greater knowledge or accountability for managing
climate risks.
This type of questionnaire would be used as part of an annual risk identification
exercise but can be used as a one-off exercise for identifying climate risks.
The questionnaire and workshop processes should be designed to explore:
●● The main climate risks, threats and opportunities in relation to an individual’s

own function/directorate or specialist area
●● The factors that could cause these risks to materialize
●● The probability of these risks materializing
●● The impact if the risks did materialize in terms of financial impact, and/or reputa-
tion with stakeholders, etc
●● The current control environment to manage these risks, their effectiveness and if
not fully effective, the reasons why this may be the case
An example of a simple questionnaire approach that can be used and adapted is

provided here.
RISK IDENTIFICATION
Risk questionnaire for selected department – development of scenario synopsis
Using the template in Table 4.3 (physical risks only):
1 Provide risk description of the top three climate scenarios of most concern both for
the organization as a whole and for your area of responsibility
2 Provide initial risk impact/business process impacted
Additional questions can be designed, adapted and tailored to cover other climate risks
such as transition and liability, and to cover details of risk treatment improvements/
action plans. In addition, the questions can be developed to explore relevant time
horizons.
TABLE 4.3 Sample risk identification template (to be completed) – climate physical risks
Name & job title:
Examples Risk cause/key Risk impact/business

Please refer to climate risk driver Scenario description process impacted
taxonomy.
1. Extreme weather
event (acute), or
2. Changing climate
conditions/
patterns (chronic)
Examples: Major
flood event,
prolonged heatwave,
extended wildfire,
etc.
What are the top three climate risks (physical threats) facing the organization as a whole?
1
2
3
What are the top three climate risks (physical threats) affecting your area of organization, i.e.
risk pillar?
1
2
3
This process of identification is very helpful in the design of climate scenarios that
we discuss in detail in Chapter 10. The outputs of this process can be used to prior-
itize the design of climate scenarios. Now let’s look at stakeholder analysis and
mapping.
4.5 Stakeholder analysis and mapping

In this section we discuss one of the main risk identification techniques for climate
change risks that can help support the development of a climate ‘risk radar’ for iden-
tifying both risks and opportunities through the use of stakeholder mapping.
Organizations will need to identify risks and opportunities that emanate from
stakeholder expectations and then align them with their strategic objectives, core
operations and processes.
4.5.1 Developing a stakeholder map (internal and external stakeholders)

Stakeholder analysis is often considered the first step in strategic planning activities
on an organizational level. The concept of stakeholder awareness and the need for
analysis is prevalent among project management principles.5 This is equally applica-
ble to climate change risk management but with a differing set of requirements/
expectations.
An approach to climate change-related risk based on stakeholder expectations
has many advantages. It facilitates a full and thorough validation of the core processes
of the organization (strategic, operations and compliance) while considering the
environment/climate change expectations that each stakeholder places on each core
process.
Stakeholder expectations are shifting and there is a strong customer and investor
focus today on corporate purpose, fulfilling regulatory requirements and pledging to
meet emissions targets. It is becoming increasingly apparent that, as well as profit,
non-financial key performance indicators such as ESG ratings, customer satisfaction,
etc, are also going to be important drivers for stakeholders (including lenders, pension
funds, insurers, shareholders, regulators and consumers).
4.5.2 Range of stakeholders

Organizations will have a wide range of stakeholders, some of whom may indeed be
unwanted as far as the organization is concerned. ISO Guide 836 suggests that the
term ‘interested party’ is preferred, but stakeholder is an acceptable, all-encompass-
ing and a commonly understood alternative. ISO Guide 737 defines a stakeholder as
a ‘person or group concerned with, affected by, or perceiving themselves to be
affected by an organization’. ISO Guides are documents that provide advice to:
●● Standards writers on how to deal with specific issues when drafting standards; or
●● National Standards Bodies on how to deal with issues specific to standardization
principles
For organizations in different sectors, the range of stakeholders will be different.

For government agencies, the general public will be a major stakeholder. Specific
groups within the general public will be stakeholders in different agencies, depend-
ing on the purpose of each particular agency. For organizations that have significant
environmental interests or exposures, a different range of stakeholders would need
110
FIGURE 4.5 Climate change stakeholder map
Investors and shareholders

Evaluate the shifts in capital and investment
strategies to the lower carbon future
£ £
Competitors 1
Employees
3 2
Evaluate the competitive landscape and assess the Evaluate employees’ expectations to take
advantages of being a first mover and becoming 8 2 action on environmental issues in the
more agile and resilient 1 workplace
Community and society Climate Suppliers and channel partners

.
Understand the wider impacts and changes on 7 change 3 Review ways to build longer-term supply
connected communities society including stakeholders
chain resilience aligned to decarbonization
demands of activities
5
Government and regulators 6 4 Customers
Evaluate ongoing changes in international and Understand and allay your customer’s
national laws and climate-related regulatory fears about environmental footprint
frameworks and related disclosure requirements
Credit rating agencies
Evaluate the changing risk assessment
methodology and factors for creditworthiness
used by credit rating agencies
to be considered. For energy or mining companies, environmental pressure groups

are higher-profile key stakeholders.
Figure 4.5 provides a depiction of the main stakeholder groups who may have
requirements/expectations with regard to climate change. It is not a definitive list
and will differ depending on the industry in which your organization operates, the
size and ownership structure of the firm, the value chain of your service/product
offering and the strategic objectives.
Let’s take a look at each of these groups in more detail.
4.5.3 Investors and shareholders

Organizations need to evaluate the impact of shifts in capital and investment strategies
on the lower-carbon future. In early 2021, Larry Fink, the CEO of BlackRock, one of
the world’s largest asset managers, expressed a clear conviction that climate change
will drive a fundamental reshaping of finance and, therefore, BlackRock’s strategy.8
Despite the pandemic, 2020 proved to be a landmark year for investor action on
climate change and investments pouring into sustainable funds. With regulators and
clients increasingly calling for change, asset managers are broadening their remit
beyond energy/carbon-intensive industries such as oil.
The pandemic has served to raise awareness of corporate fragilities. As Mirza Baig
noted, ‘Rather than drive investor attention away from climate change, the pandemic
has cemented interest, with many investors fearing the economic fallout seen during
the pandemic could be replicated if the world fails to halt global warming.’9
Regulators such as Mark Carney, former head of the Bank of England, have also
warned of significant investment risk from ‘stranded assets’, where investors have
holdings that become unsellable because of climate change.
There have been many groups established, such as the Net-Zero Asset Owner
Alliance, which have set out asset portfolio decarbonization targets and exert influ-
ence by becoming vocal shareholders in these listed organizations.
‘The Alliance sees engagement as potentially the most important mechanism asset
owners must contribute to a net-zero transformation.’10 One of the most recent
developments is that all members are required to set engagement targets.
The members’ approach to engagement varies but includes: corporate, sector and
value chain, alliance position paper contribution, and asset manager engagement.
Their desired outcome of any engagement type is alignment with 1.5°C no/low over-
shoot trajectories.
4.5.4 Employees
Addressing social issues like climate change is increasingly becoming an employee
expectation. Gen Z have grown up amid an unending litany of social and political
unrest, and place a high value on the ethics, authenticity and social impact of
employers today.11
Employers need to evaluate the expectations of employees, particularly younger
generations, concerning climate change. It is important to acknowledge that employ-
ees may be at a point where there is a blurring of the lines between the E and S of
ESG. Organizations must consider the increased risk of not being able to attract and
retain employees if, for example, they are not seen to be aligning with their values
and any expectations of greening their operations, as well as being more proactive in
complying with climate change regulations. Other significant and related risks could
also extend to strikes and reputational damage leading to lost business.
There have been some specific recent examples. In 2021, thousands of cleaning
workers in Minneapolis marched in what’s believed to have been the first union-
authorized climate strike in the United States.12 Their demands ranged from a
guarantee of more environmentally friendly cleaning products to funding for a ‘green
technician janitorial training program’, which could help them push for more
substantial changes during their day-to-day operations rather than wait for top-
down measures.
4.5.4.1 HR POLICIES AND RESKILLING

The Covid-19 pandemic has led to significant changes in respect of shifting HR poli-
cies to better meet the needs of employees and can be viewed as a ‘practice run’ for
climate change. Employers will need to focus on looking at the impact of their remote
and flexible working policies as one example.
Some of the additional HR policies for HR departments to consider include
‘adjustments to indoor workplaces (cooling, additional breaks, supply of refresh-
ments, adjusted dress code etc) and to outdoor workplaces (adapted working times
to avoid high heat for those in the construction and agriculture industries etc).’13
Other areas of focus are changes to employee benefits, and training and reskilling of
staff, which we cover in more detail in Chapter 3 under governance and in Chapter 11
under climate integration.
4.5.4.2 MIGRATION AND TALENT ATTRACTION AND RETENTION

Climate-induced migration is also now a rising concern for organizations, with
employees increasingly expected to move away from high-risk zones. Recruitment,
working practices and retention policies may need to be adjusted to reflect these
challenges, otherwise talent could become increasingly concentrated in certain juris-
dictions or business sectors.
Additionally, employees are starting to focus more on working for organizations
that align with their own values as well as traditional employee concerns around pay,
benefits and working conditions. Employers that are high profile and have positive
climate change credentials will be more appealing to candidates and it can be a
differentiator in the market for talent.
The role of employees in mitigating climate risk (i.e. reducing carbon emissions)
should also not be underestimated. Promoting environmental awareness and align-
ing this with a clear corporate climate risk strategy can be a powerful tool in the
management of this risk, and can contribute to marked reduction in emissions while
also increasing employee engagement. Examples of how organizations have
attempted to address this include:14
●● Aviva – Initiated weekly internal climate change updates to inform employees

about climate change developments for the insurance sector and globally. This
was complemented by ‘snapbriefs’ for staff, where specific details were provided
about what Aviva is doing about climate change and within the domain of influ-
encing public policy.
●● Allianz – Runs an annual group-wide sustainability forum for all staff to attend
and launched an app that allows staff to track their emissions and carbon savings.
These then feed into an offset process.
Such initiatives are vital to increase engagement, to raise the profile of climate change
risk and to empower and enable staff to think about how climate risk emissions can
be reduced, the risks can be better mitigated or operational processes can be made
more efficient.
4.5.5 Suppliers and channel partners

Organizations need to review ways to build sustainable supply chain resilience
aligned to decarbonization.
In terms of risk and opportunity, businesses should be accelerating efforts to
reduce the carbon intensity of their operations and that of their supply chains, to
manage their climate-related investment risks, and innovate to refocus their business
models for growth in a decarbonized world. This is equally applicable to outsourced
providers. Practical steps can include an evaluation of the vulnerability of suppliers
that may be affected, for example, by emission regulations and also an assessment of
the geographical distribution of the supplier network.
Additionally, climate change considerations are becoming increasingly important
criteria when undertaking due diligence of suppliers, channel partners, service provid-
ers or outsourcers. This can be at the initial selection stage, during ongoing service
reviews or as part of periodic views (which are typically linked to contract renewals).
Climate change also raises the potential for significant supply and demand shocks.
One of the main impacts will be a shrinking, or shorter, supply chain footprint as
companies seek a different cost/resilience trade-off and look to localize production
and sourcing. We will also see changes in outsourcing arrangements. The supply
chain disruptions in the food supply are opening up other potential risks such as
food security concerns and safety breaches.
4.5.5.1 SUPPLIER DUE DILIGENCE PROCESSES

Many organizations are now focusing on the development of robust supplier
procurement processes, which include assessing the climate change and wider ESG
credentials of the key suppliers in order to meet certain regulatory standards, to align
with their own corporate values and in order to track their Scope 3 emissions (which
may form part of their own strategic net zero goals/emission targets).
A detailed outline of how to develop an end-to-end process is provided in Chapter 11
when we discuss how to integrate climate change into business processes.
It is important to recognize that this is a circular process and that your own
organization becomes part of the process. This could mean that your own organiza-
tion could be dropped from a preferred supplier or tender list if you don’t meet your
customer expectations, which we discuss in more detail in the next section.
4.5.6 Clients and customers

One of the key strategic challenges that climate change poses is to understand chang-
ing customer behaviours and the potential for reduced or increased demand for
goods and services due to shifts in consumer preferences. This creates opportunities,
and many organizations are seeking to meet these demand shifts through developing
greener products, for example shifting to electric cars in the automotive sector.
There are related risks to disclosure and information sharing with customers on
specific products where legal challenges may arise in the future. As an example, from
the property loan sector, climate change will impact properties in future flood-related
zones and there will be increasing potential for customers who are given long-term
loans to sue lenders if they suffer financial loss and information known to the lender
about the property’s potential flood risk exposure was withheld. On the flipside,
there is the risk that the underlying asset loses all of its value and does not cover the
value of the loan at the end of its term.
A national survey commissioned by sustainability charity WRAP in the UK in
2021 states ‘a majority of consumers believe companies across industry need to do
more when it comes to tackling emissions to help the UK meet tough, binding envi-
ronmental targets for 2050’.15
Dr David Moon, Director of Collaboration & Change at WRAP, commented:
People are making it clear that they expect businesses to lead the way on tackling
climate change and are prepared to walk away from brands if they don’t change. It’s
also apparent that there is a willingness and desire for business to collaborate and work
together on the best ways of combating climate change and guiding the UK along the
path to ‘Net Zero’. Bringing down emissions and adapting to the concerns of customers
should now be at the forefront of business thinking. Time is running out for companies
to act.
There are also wider strategic issues that organizations need to address in terms of
clients and customers that they want to deal with (and vice versa). This also extends
to engagement and a good example is in the insurance industry where insurers are
developing ‘responsible underwriting strategies’ across their client base.
4.5.7 Rating agencies

The world’s efforts to hit emissions targets will pose a threat to many more indus-
tries’ creditworthiness, including some that do not directly emit much carbon,
according to the top rating agencies. Moody’s Investor Services in its environmental
heat map states that thirteen sectors with a combined $3.4 trillion in debt have ‘very
high’ or ‘high’ environmental credit risk as the transition to a low-carbon economy
gathers pace.16
This stakeholder group will not be applicable to all because it is primarily
(although not exclusively) relevant to larger publicly traded firms that are looking to
raise capital in global markets. It is nevertheless relevant to a significant percentage
of organizations and thus exerts a large amount of influence and is key in promoting
a consistency of approach.
Typically, they ask questions around the performance of the ERM framework and
embedding of the framework within the respective organization that include:
●● Give an update on developments in your risk management framework in the past

12 months.
●● Explain your risk appetite and tolerances, the key risk controls you have in place
and how these are monitored.
●● What do you consider to be the strengths and weaknesses of your organization’s
risk management programme?
Managing climate change is increasingly being seen as an important risk to manage

and mitigate along with other key risks. What is different with climate change is the
fact that rating agencies have already signalled that the rating of certain industries
will decline because climate change will drive a move to a low-carbon economy.
Organizations that take a long time to adjust could experience a decline in cred-
itworthiness. This ‘transition risk’ is particularly high for financial institutions with
high exposure to carbon-intensive sectors such as automotive, oil and energy as they
are vulnerable to climate policies and restrictions. Yet the Moody’s rating agency’s
heat map report states that transition towards a low-carbon economy may also
present business opportunities for the financial sector.
4.5.7.1 CLIMATE ESG RATINGS

Many rating agencies are developing their own approach to the assessment of climate
change as part of a wider assessment of ESG factors that they consider to have an
impact on the company’s overall rating and consequently it may affect their assessed
creditworthiness.
4.5.7.2 INTERSECTION OF ESG FACTORS AND CREDIT RISK

According to S&P:
ESG factors typically incorporate an entity’s effect on and impact from the natural and social
environment and the quality of its governance. ESG credit factors are those ESG factors that
can materially influence the creditworthiness of a rated entity or issue and for which we have
sufficient visibility and certainty to include in our credit rating analysis. Importantly, not all
ESG factors materially influence creditworthiness, and thus credit ratings.17
Figure 4.6 is an output from S&P that outlines the current ESG factors that have the
most influence on global ratings of insurers.
The most important ESG factor for insurance companies is environmental factors
associated with physical risks. According to S&P they represent over 50 per cent of
the total rating due mainly to non-life re/insurers that are exposed to natural disas-
ters, which can impact upon both their capital and earnings.
S&P also set out and explain the importance for organizations to consider their
entire value chain, as we discussed earlier. They state that organizations need to
FIGURE 4.6 Rating factors that have the most influence
G - Transparency
S - Health and safety and reporting
1% E - Climate
1% transition risk
G - Governance 1%
structure
5%
S - Social
capital
10%
E - Physical risks
G - Risk management, 56%
culture and oversight
26%
SOURCE S&P Global Ratings. Copyright © 2021 by Standard & Poor’s Financial Services LLC. All rights reserved
consider the companies and individuals they do business with, such as brokers,
cedants, policyholders and investee companies, which they refer to collectively as the
‘value chain’. While this is insurance-specific, the rating process is applicable to other
sectors.
4.5.8 Government and regulators

The role of governments is integral with regard to the management of climate change
risk. This covers a complex and diverse range of influence but can include:
●● Improving awareness and knowledge of the impacts of climate change risk (by
financing research and the distribution of information/education to heighten
awareness).
●● Enacting policies that are in place that encourage a transition to clean energy
(thus reducing the emissions side of the equation).
●● Establishing an appropriate regulatory framework (by establishing laws, setting
standards and appointing regulators) and ensuring that this is appropriately
monitored and enforced.
●● Providing the regulatory framework for insurance markets (which can cushion
the impact of natural disasters through insurance markets or by making disaster
insurance mandatory).
●● Developing an infrastructure that supports stakeholders, which reaches across
national, regional and local government but which is focused on the reduction of
barriers that prevent the consideration of climate change risk management.
●● Controlling the appropriation of funds (by offering subsidies and/or incentives)
but also by cutting subsidies/support to polluters.
●● Creating an environment for investment (via the tax system) and influencing posi-
tive behaviours via tax initiatives (an example being the charge for plastic bags in
the UK, which overnight reduced the use of single-use plastic bags by 85%).
●● Providing public services when there are gaps in provision by the private sector
Governments cannot be expected to manage climate change risk in isolation but they
are a critical component and contribute positively by establishing robust founda-
tions that can support and complement the initiatives undertaken by the other
stakeholder groups.
4.5.8.1 REGULATORY OVERSIGHT

Organizations need to evaluate ongoing changes and trends in a combination of
regulatory oversight (covering international and national laws) and climate-related
regulatory frameworks.
Global regulatory forums have been established to support national prudential

oversight bodies for climate change and the systemic risks posed. The key ones are
TCFD, NGFS and CFRF, each of which is explained next.
4.5.8.2 TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES ( TCFD)

Recognizing the risks that climate change may pose to the financial system, the
Financial Stability Board (FSB) at the request of the G20 launched the industry-led
Task Force on Climate-related Financial Disclosures (TCFD) to develop recommen-
dations on climate-related financial disclosures. The TCFD has developed a
framework to help public companies and other organizations more effectively
disclose climate-related risks and opportunities through their existing reporting
processes.18
The recommendations are structured around four main pillars: governance, strat-
egy, risk management, and metrics and targets. The recommendations provide clear
guidance for risk managers and boards and the requirements for reporting are
discussed in detail in Chapter 12.
4.5.8.3 NETWORK FOR GREENING THE FINANCIAL SYSTEM (NGFS)

A group of central banks and supervisors formed the NGFS to exchange experiences,
share best practices, and contribute to the development of environmental and climate
risk management in the financial sector. They produce regular reports that guide key
climate-related topics. A recent publication was on the macroeconomic and financial
stability impacts of climate change and research priorities.19
4.5.8.4 THE PRA AND CLIMATE FINANCIAL RISK FORUM (CFRF)

At a country level, regulators work with industry to establish best practices for
climate risk management, conduct surveys and field-test for examples of national
requirements. In 2019, the UK’s PRA and FCA established the Climate Financial
Risk Forum (CFRF). On 29 June 2020, the CFRF published their guide to climate-
related financial risk management.20
To embed climate risk management recommendations by the TCFD in financial
decision-making, the PRA has become the first regulator to publish supervisory
expectations over the management specifically for financial risks that include expec-
tations for risk management:21
●● Governance, where firms will be expected to embed fully the consideration of

climate risks into governance frameworks, including at the board level, and assign
responsibility for oversight of these risks to specific senior role holders.
●● Risk management, where firms will need to consider climate change in line with
their board-approved risk appetite.
●● The regular use of scenario analysis to test strategic resilience.
●● Developing and maintaining an appropriate disclosure of climate risks.
4.5.9 Communities and societies

Organizations need to understand the wider impacts and changes that climate
change is bringing to communities and society, including the demands of activists.
Global public concern increases year on year and can be expected to increase further
as the physical effects become increasingly apparent.
In 2019, millions of people took to the streets uniting across time zones, cultures
and generations to demand urgent action on the escalating ecological emergency. It
should be expected that increased public engagement will drive action by elected
representatives and governments. The Paris Agreement ‘ratchet mechanism’ will help
enable this to be incorporated into global action plans pledged by individual coun-
tries, and reputational risks will increase for organizations whose public positions or
lack of public positions don’t align with these concerns or where their business activ-
ities don’t align with public concerns.
New influential movements are forming such as Extinction Rebellion (abbrevi-
ated as XR), a global environmental movement with the stated aim of using
non-violent civil disobedience to compel government action to avoid tipping points
in the climate system and biodiversity loss. These environmental groups and move-
ments aimed at forcing businesses and politicians to act on climate change are
increasingly exerting pressure on governments and businesses to do more.
4.5.10 Competitors
Climate change affects almost all industries and thus their competitive landscape.
Addressing climate risks is sometimes perceived by boards and senior management
purely as a cost, or a trade-off with other priorities, but it is now generally recognized
that companies that manage and mitigate their exposure to climate change risks while
seeking new profit opportunities can generate a competitive advantage over rivals in
a carbon-constrained future (where the profile and demands of other stakeholder
groups have evolved and the market dynamic changes). It’s not enough to do some-
thing; you have to do it better – and more quickly – than your competitors.22
Therefore, it is critical to evaluate the competitive landscape because this can
influence the organization’s risk profile particularly in areas such as ongoing and
future product strategies. This has been seen across many industries but most nota-
bly in the automotive industry. Consumer concerns about national energy security,
climate change, local air pollution and the cost of filling up at the pump have been
shaping the competitive dynamics within the industry.
Companies in all sectors can reduce their emission intensity at little or no cost by
accelerating the switch to renewable energy, improving energy and process efficiency
in their operations, and leveraging their buying power to ensure that their suppliers
decarbonize.
Companies with the technology and vision to provide products and services that
address climate and other pressing issues will enjoy a competitive advantage.
Additionally, companies that quantify their footprints send a strong message that they
recognize the importance of climate change as a business risk and an opportunity.
Calculating the impact of climate risk on cash flows and the cost of capital is
critical to understanding an organization’s ability to compete in a carbon-constrained
(reduced) future. These moves will help to future-proof businesses against growing
external pressure from the public, regulators and investors.
One simple technique that organizations can use to assess their position is to map
or plot their climate competitiveness against peers using two variables – positioning
against risks and preparedness to seize opportunities. In doing so you are likely to
uncover ideas on how to move to a position of competitive advantage.
4.6 Framework to prioritize climate stakeholders

In order to assist in assessing the stakeholders of the organization relative to each
other and the action required (and by whom), we outline in Figure 4.7 a simple two-
by-two matrix. This matrix can be used to map stakeholders in terms of priority to
the organization (i.e. low/high) and influence or controllability by the organization
(i.e. the influence/control the organization has over that stakeholder group).
This acknowledges that all stakeholders are important but recognizes that
depending on a number of variables their relative importance will differ across
organizations (i.e., variables could include the size of firm, the industry in which it
operates, the ownership structure, the point in the business cycle and the regulatory
environment). Stakeholders may move between these boxes depending on these
variables over time.
FIGURE 4.7 Prioritization of climate stakeholders
High
Plan and deliver Immediate focus –

internally deal with internally
Influence/
control
Watching Immediate focus –

brief external assistance
Low
Low Priority High

For example, a high-priority stakeholder over which a firm has more influence at a
point in time could be employees that have developed an innovative new low-carbon
product. In an ideal world, this could be dealt with immediately using in-house
resources.
Alternatively, a high-priority stakeholder that the organization has less influence
over could be a regulatory body or the actions of competitors. These would still require
immediate focus but there needs to be recognition that the relationship dynamic and
levels of information may differ and there may be instances where external expertise
would be beneficial (examples being external legal counsel ahead of a significant regu-
latory change relating to climate change, or the use of external consultancy to
understand changes in consumer demands within the wider competitive landscape).
A lower-priority stakeholder over which an organization has a higher degree of
influence or control would be in the top left box where less immediate focus is
required but where it can be dealt with in-house. An example of this could be
‘employees’, where there may be perceived scope for management to plan and deliver
in order to maintain high employee engagement.
A lower-priority stakeholder over which there is less direct influence could be
‘community/society’; if there are no particular issues at that particular point in time,
it will be sufficient to maintain a watching brief and focus some resources on other
stakeholder requirements. This is not to be complacent in any way; if any initiatives
that the organization is involved with present a potential negative impact on the
local community (e.g. the building of a nuclear power station or an inland wind
farm) it can move around the matrix at an alarming pace.
Conclusion
This chapter has highlighted the need for organizations to develop a robust identifi-
cation process, which is really important in respect of identifying wide-ranging
climate risks, both threats and opportunities.
Organizations need to consider a variety of processes and techniques to identify
and capture material climate risks. Risk identification should therefore be an ongo-
ing process that can be supported through employees identifying and communicating
risks to the risk function and through regular quarterly risk management committee
and working group meetings.
An adequate risk identification and assessment process for climate risks should
address key portfolios and geographic areas related to products and services of the
organization but will need to be tailored depending on the size, nature and complex-
ity of the organization involved.
The chapter has outlined a range of different approaches and the benefits and chal-
lenges of risk identification, with one of the main goals being to develop a climate ‘risk
radar’ that maps out a climate risk taxonomy to an organization’s risk categories.
As explained in detail in this chapter, stakeholder analysis should be considered as

one of the key first steps in strategic planning activities and developing an overall
climate strategy and ongoing implementation plans. Organizations therefore need to
.
research and understand the internal and external expectations of key stakeholders
such as regulators, and factor these into their risk management and decision-making
processes.
Notes
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2 Airmic. Roads to Resilience, 2014, www.airmic.com/sites/default/files/technical-
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QT5A-5MHA)
3 G Rubasundram. Fraud risk assessment: A tool for SME’s to identify effective internal
controls, Research Journal of Finance and Accounting, 2014, 5 (15), https://core.ac.uk/
download/pdf/234630083.pdf (archived at https://perma.cc/68HM-UGFJ)
4 P Hopkin and C Thompson (2021) Fundamentals of Risk Management, 6th edn, Kogan
Page, London
5 L W Smith. Stakeholder analysis: A pivotal practice of successful projects, 2000. Project
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6 ISO. ISO/DGUIDE 83: High level structure and identical text for management system
standards and common core management system terms and definitions. www.iso.org/
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7 ISO. ISO GUIDE 73:2009 Risk management – Vocabulary. https://www.iso.org/obp/
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8 L Fink. The Power of Capitalism, BlackRock, 2022, www.blackrock.com/corporate/
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9 M Baig, quoted in A Mooney and P Temple-West. Climate change: asset managers join
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78167e0b-fdc5-461b-9d95-d8e068971364 (archived at https://perma.cc/2LZM-ANA7)
10 UNEPFI. Target Setting Protocol Second Edition, nd. www.unepfi.org/net-zero-alliance/
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11 T Barrett. UK employees ‘speaking up’ on climate change in the workplace,
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13 Freshfields Bruckhaus Deringer. Climate change and the workplace: What do global
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124
Managing transition risks
This chapter explains in more depth the backdrop to why governments and regula-
tors have been focusing on developing net zero targets and the role that organizations
can play in reducing their own carbon footprints and meet net zero targets. The
chapter also discusses the range of knock-on risks that organizations are facing as a
consequence of transitioning to a lower-carbon or ‘green’ economy.
By focusing on how organizations can calculate, manage, mitigate and monitor
their CO2e emissions across emission types (commonly known as Scope 1–3, which
are referred to later in the chapter), the reader will gain an understanding of how
organizations can meet their net zero targets and support the wider societal and
global goals.
●● Provide an overview of the main transition risks facing organizations, including

the influence of global structural changes and risk drivers and specific industry
vulnerabilities.
●● Provide a global perspective on carbon emissions and mitigation strategies, and
what government and regulators are doing to meet their net zero targets.
●● Outline the main sources of greenhouse gas (GHG) emissions.
●● Explain the emissions types and how organizations can seek to use or develop
tools and techniques to measure carbon footprints (including Scope 1, 2 and 3
emissions), consider calculation tools, methodologies and the use of models, and
outline the underlying data requirements (including the associated challenges).
●● Illustrate and explain the main transition risks that organizations need to consider,
highlighting a top-down approach from leading global drivers through to struc-
tural changes and risk drivers to a broad range of threats and opportunities.
●● Outline a six-step risk management framework for calculating, managing and
mitigating carbon emissions, including how to develop a carbon risk appetite
strategy and reduction plan, how to calculate an organization’s emissions, how to
design mitigation strategies for reducing carbon emissions and the concept of
‘carbon hierarchy’ and control mechanisms.
MANAGING TRANSITION RISKS 125
Chapter 11 will provide further detailed insights into how organizations can inte-
grate and manage their carbon emissions within specific business processes (such as
investment strategy, third-party processes and supplier due diligence).
Introduction
Between 1950 and 2010 the global population almost trebled in size and the real-
world GDP increased sevenfold. The effects of this dramatic intensification of human
activity are clearly visible in an array of indicators that monitor the Earth’s living
systems.1
Since 1950 there has been an accompanying surge in ecological impacts, from the
build-up of greenhouse gases in the atmosphere to ocean acidification and biodiver-
sity loss.
Scientists state that to avoid dangerous climate change we need to keep concen-
tration of CO2 below 350 parts per million but we are now above 400 parts
per million, which is pushing us towards a hotter, drier and more hostile climate,
along with a rise in sea levels that threatens the future of islands and coastal cities
worldwide.
‘For over 60 years economic thinking told us that GDP growth was a good enough
proxy for progress and that it looked like an ever-rising line. But this century calls
for quite a different shape and direction of progress. . . . That calls for a profound
shift in our metaphors: from “good is forward-and-up” to “good is in-balance”.’2 In
summary, this can be referred to as sustainable development and the recognition that
we all have a role to play.
Climate risk management is complex. There are a multitude of participants all with
a range of important roles to play and which place a degree of reliance on the others
to undertake their activities. These include multinational government organizations
(i.e., the United Nations), national governments, the public sector (i.e., the civil services,
lawmakers and regulators in each country), the private sector (across both small and
large organizations) and the activities and behaviours of individuals.
One of the leading authorities on climate change research is the United Nations
Intergovernmental Panel on Climate Change (IPCC) who released ‘The Physical
Science Basis’ report in 2021, in which the UN chief has stated ‘the climate crisis is a
code red for humanity’.3 The report states that human activity is changing the climate
in unprecedented and sometimes irreversible ways. The landmark study warns of
increasingly extreme heatwaves, droughts and flooding, and the key temperature
limit of 1.5°C being broken in just over a decade.
This is the backdrop to why governments and regulators have particularly in
recent years been focusing and increasing their efforts to develop and tackle climate
change through setting net zero emissions targets. Organizations have their own role
to play in supporting and meeting these global, regional and local targets by setting
and reporting their own emissions targets.
Mark Carney, the former Governor of the Bank of England and now the United
Nations Special Envoy for Climate Action and Finance, recently stated ‘Managing
climate-related financial risks requires that disclosure go beyond the static (a compa-
ny’s carbon footprint today) to the strategic (their plans to manage down their
emissions). Risk management means assessing such forward-looking disclosures to
judge the resilience of firms’ strategies to the transition.’4 Consequently, companies
will continually need to adapt due to changes in legislation, technology and changing
customer behaviours.
Stakeholder expectations are also shifting (this was detailed in Chapter 4) and
customers and investors focus on corporate purpose, fulfilling regulatory require-
ments and pledging to meet emissions targets. It is becoming increasingly apparent
that, as well as profit, environmental, social and governance (ESG) ratings are also
going to be an important driver for stakeholders including lenders, pension funds,
insurers, shareholders, regulators and, increasingly, consumers.
5.1 Global perspective on carbon emissions

The leading cause of climate change over the last half century is the increase in
concentration of atmospheric greenhouse gas (GHG) emissions including carbon
dioxide.
According to the UN Environment Programme (UNEP) report, global greenhouse
gas emissions need to fall by 7.6 per cent each year between 2020 and 2030 to stay
on track towards the 1.5°C temperature goal of the Paris Agreement and the world
is not meeting these targets.
It is important that organizations understand the global impacts and ways that
governments are seeking to tackle climate change through various mitigation strate-
gies that then can, to some degree, be cascaded to organizations to mitigate climate
change in meeting government targets. They key is that governments and organiza-
tions cannot do this independently as there is an explicit reliance by both sides to
support each other. Governments can provide the rules, regulations and frameworks
and coordinate the bigger initiatives; whilst organization’s responsibility rest primar-
ily at the implementation level.
Figure 5.1 provides a simple high-level illustration of the global problem of
climate change as a global disrupter.
According to Swiss Re, global economic losses from natural catastrophe events in
2020 amounted to $190 billion of which $81 million were insured, the fifth highest
on record. We explore the role of climate data and climate and catastrophe models
in Chapter 7 in respect of the physical risks from climate change.
F IGURE 5.1 The great disrupter – global climate change
Root causes: Consequences: Adaptation:

Emissions Increased extreme Mitigation strategies
weather events
• 7.6% reduction in • US$190bn – Annual • 7 gigatonnes –

emissions needed cost of weather related Potential for energy
every year 2020–2030 losses (twice as high efficiency by 2040
• Source: UN Climate as 10 years previously) (equivalent to the
Gap Report 20202 • Source: Swiss Re impact of renewables)
• UN Emissions Gap • Source: Economist
Report 2019 Climate Report
The Group Chief Economist of Swiss Re, Jerome Haegeli, recently stated that ‘climate
change is a systemic risk for the whole world. Unlike the Covid-19 crisis, it does not
have an expiry date.’5
Figure 5.1 highlights the increasing cost of weather-related losses that are twice as
high now as they were 10 years ago. The Swiss Re Institute stated in 2021 that
‘Severe floods in Australia, ice storms in Texas, wildfires in California – the latest
series of natural catastrophes point to a world increasingly at risk from extreme
weather and climate change.’6
The report also points out that secondary perils have been rising steadily, driven
by urban sprawl and climate change, and include localized weather events such as
thunderstorms, flooding and wildfires, which are making certain parts of the world
less habitable, more volatile (from a weather perspective) and which are pushing up
insurance losses (which could mean some hazards will not be insurable or the premi-
ums will be prohibitive).
As well as moving to renewable energy, most observers believe that if firms (as an
example) can increase their energy efficiency by 10–20 per cent, that would be the
equivalent of 7 gigatonnes of CO2 by 2040 and have the same impact as a move to
renewables. Nevertheless, this may not be achievable for all firms and there is reali-
zation that there will be discrepancies in approach across geographies and the
respective wealth of nations.
5.2 Sources of greenhouse gas (GHG) emissions

This section provides further context and definitions in order to develop greater
understanding about the sources of emissions and related metrics that can be devel-
oped to measure and monitor emissions. These metrics help to better understand the
risk mitigation strategies that organizations can ultimately adopt across their own
businesses and value chains through setting targets.
At a high level this can be broken down by types of greenhouse gases and the larg-
est emitters by industry and by country.
FIGURE 5.2 Carbon emissions by gas
F-gases 2%
Nitrous
oxide
6%
Methane
16%
Carbon dioxide
(fossil fuel and industrial
Carbon dioxide processes)
(forestry and other 65%
land use)
11%
SOURCE IPCC (2014); US EPA
5.2.1 Types of GHGs

There are a number of different GHGs that are being emitted into the atmosphere
and causing climate change through the greenhouse effect. The four main types of
GHGs are:
1 Carbon dioxide (CO2) – The most well-known of the GHGs (which is frequently
used as a generic term when referring to the need for a ‘carbon reduction strategy’).
CO2 relates to 76 per cent of all GHG emissions. This is due to it being generated
when we burn fossil fuels to generate power or manufacture cement (and other
common, large-scale activities).
2 Methane (CH4) – This is generated by livestock (as well as other farming activities)
and landfill decay. Methane makes up around 16 per cent of the GHGs.
3 Nitrous oxide (N2O) – Generated through various agricultural activities, fossil
fuel combustion and water treatment processes. Nitrous oxide makes up around
6 per cent of the GHGs.
4 Fluorinated gases – This is a range of gases (including hydrofluorocarbons,
perfluorocarbons, sulphur hexafluoride and nitrogen trifluoride). These make up
around 2 per cent of emissions but are the most potent from a global warming
perspective.
Carbon emission targets on their own are not enough to curb temperature rising; they
are part of the solution but a comprehensive transition plan needs to be developed
across all types of greenhouse gases. In particular, focusing and cutting methane emis-
sions, given its high impact, is very important for addressing future climate change.
The Global Methane Pledge aiming to reduce methane emission by 30 per cent by
2030 is an example of a specific focus on particular gases.
5.2.2 CO2 equivalent (CO2e)

To aid measurement and comparability of carbon footprints, all emissions are
converted into a single measure known as the ‘carbon dioxide equivalent’ which is
written as ‘CO2e’. So, when people or companies simplify and declare ‘our carbon
footprint is X tonnes’ or ‘our carbon footprint is Y tonnes of CO2’ what they are
actually referring to is CO2e.
Comparisons are made possible by using CO2 equivalent emissions via the notion
of global warming potential (GWP): contribution to global warming over a fixed
time horizon, say 100 years.
Using the GWP comparison, it is evident that although CO2 is the most common
GHG it is not the most powerful from a global warming perspective. One tonne of
methane is estimated to be the equivalent of around 25 tonnes of CO2 in terms of its
impact as a greenhouse gas (but will remain in the atmosphere for a different period
of time) and it is estimated that 1 tonne of hydrofluorocarbons (HFCs) is the equiv-
alent to over 1,800 tonnes of CO2. It is fair to assess that not all GHGs are equal and
that is why when calculating the overall carbon footprint, it is important to consider
GHGs in their entirety.
The pie charts in 5.3 are provided as context in relation to the breakdown of
emissions by sector and geography in order to understand the sources of emissions
and as a guide to where there is most scope for improvement.
5.3 Setting and achieving net zero targets – society’s responses

To meet the global challenges that we face, the Paris Agreement set ambitious targets
to cut emissions significantly year-on-year in order to reach net zero CO2 emissions
by 2050.
These drivers and expectations have led to a step change in momentum and action
by governments and organizations worldwide. There is a recognition and realization
that the management of climate change for the future is reliant on understanding the
actions of the past and the present-day risks being faced. Some countries, such as the
UK, have now embraced these targets and set national legal obligations to achieve net
zero carbon emissions by 2050, which are being cascaded to organizations in both the
130
FIGURE 5.3 Global emissions by economic sector and by country
Direct
industrial
processes
5.2%
Waste
3.2%
Energy -
Agriculture, used in industry Other countries China 31%
forestry and land 24.2% 27%
use
18.4%
Energy -
Energy - used in buildings
other 17.5%
15% Japan United States
3% 14%
Energy -
transport India
Russia EU
16.2% 7%
5% 13%

public and private sectors. Many large multinational organizations such as Microsoft
have made bold pledges, in Microsoft’s case to become ‘carbon negative’ by 2030, and
to remove all carbon emitted since the company was founded in 1974 by 2050.
They have set up a new $1 billion Climate Innovation Fund to stimulate and
accelerate the development of carbon removal technology. In the energy sector, BP’s
boss Bernard Looney has pledged net zero emissions by 2050. In his words, ‘the
world’s carbon budget is finite and running out fast’.7
To meet the targets, energy companies need to reduce existing production over
time, develop technologies to capture carbon and invest more heavily in renewables
(such as wind farms and solar power). They should see this as an opportunity to
review their entire processes, the benefits of which could include: improved effi-
ciency, enhanced profitability, reduced emissions and improved competitive
positioning. A sample of organizational responses and targets are set out in
Figure 1.10 in Chapter 1.
Other examples include associations such as the Association of British Insurers
(ABI), which has set a net zero commitment for the sector of 2050, which is in line
with the Paris Agreement. The UK’s National Farmers Union (NFU), which repre-
sents the whole of the agricultural sector in England and Wales has set net zero
greenhouse gas emissions targets by 2040 in its report, ‘Achieving Net Zero: Farming’s
2040 goal’.
Many of these targets are high level and require further consideration of the gran-
ular details. The ABI for example refers to ‘financed emissions’ across insurers’
investment and underwriting portfolios. They confirm that much of the wider think-
ing in this area has been developed primarily with investment/banking in mind and
that its application to general insurance underwriting will need to be worked
through.
Before describing a carbon risk framework that is often interchangeable with a
sustainable risk framework it is important to clarify some of the prevailing carbon
definitions.
5.3.1 The carbon budget

Carbon budget is an important concept and represents the total amount of carbon
dioxide that can still be pumped into the atmosphere before a certain amount of
warming is likely. For example, the IPCC says that ‘for a 50% chance of limiting
warming to 1.5°C by 2100, no more than 500bn tonnes of CO2 can be emitted
beyond 2020, equivalent to little more than a decade of emissions at current rates.’8
The IPCC estimates that approximately 75 per cent of the carbon budget has
already been used if we want to limit the temperature by 2°C . This is illustrated in
Figure 5.4.
FIGURE 5.4 The Remaining Carbon Budget to limit to 2°C
2012–2020
364 GtCo2
8.3%
Remaining
1870–2011 carbon budget
1990 GtCo2 611 GtCo2
67.1% 24.6%
SOURCE One Risk Consulting
There are a number of additional definitions that are referenced in this chapter. These
include net zero, carbon neutral/neutrality, carbon negative and climate positive.
5.3.2 The Greenhouse Gas Protocol – Scope 1, 2 and 3

When developing a climate risk framework (or sustainability framework), there is a
need to understand the different types of emissions. The Greenhouse Gas Protocol,
the most widely used international accounting tool for GHG emissions, classifies a
company’s direct and indirect emissions throughout the supply chain into three
‘Scopes’ that we will discuss in detail in this chapter.
CO2e emissions can be broken down into emission types (commonly known as
Scope 1–3) in order to understand the source. These are defined as:
Scope 1 – all direct emissions – The generation of GHGs directly from the activities
of an organization, or under their control. This includes fuel combustion on site
(i.e. gas boilers, generators or furnaces), the fleet of company vehicles and
air-conditioning leaks.
Scope 2 – indirect emissions – These are indirect emissions from purchased or
acquired electricity, steam, heat and cooling (although electricity will be the
primary consideration for most businesses). Unlike Scope 1 emissions, Scope 2
are indirect emissions because the company is not directly creating the
greenhouse gases by burning fossil fuels in this case (unless they are an energy
company). Instead, they are indirect emissions caused by the purchase of
electricity from the national grid. It is also worth noting that if any organization
is using a 100 per cent renewable energy provider, their Scope 2 emissions can
be recorded as zero.
Scope 3 – all other indirect emissions – These are indirect emissions. Scope 3 emissions
occur in the value chain of the reporting company, including both downstream
and upstream processes, and are the residual of all other emissions generated by
an organization that aren’t covered in Scopes 1 and 2 (and can be the largest
emission group for some firms).
Scope 3 emissions are much more likely to evolve and develop and are much less
clear cut. It may be a reason why most reporting is currently focusing just on Scopes
1 and 2.
5.4 Global drivers of change

There are a number of global drivers that are leading to structural changes across
economies and industries and leading to what can be termed transition drivers. For
ease of understanding it’s important to distinguish drivers from risks, which are so
often misrepresented or misunderstood.
The main change, as we have acknowledged, is the Paris Agreement, to cut emis-
sions significantly year on year to reach net zero CO2 emissions by 2050. The key
question is how societies worldwide put in place the steps outlined under the agreed
global action plan.
Climate change also poses a financial stability risk to the global financial system
and as such, various national and international and industry bodies, driven by the
Financial Stability Board (which represents the G20 countries), are working together
to achieve long-term regulatory alignment. Although it is easy to feel overwhelmed
by the complexity of the problem there are a range of solutions, including the need
to replace fossil fuels with cleaner, renewable energy like wind and solar power that
we will explore in more detail in this chapter.
5.4.1 Transition risks – structural changes and risk drivers

Transition risk is a broad risk type that affects organizations across all industries,
and relates to a range of risks as a consequence of transitioning to a lower-carbon or
‘green’ economy. Factors that influence this include adjusting to climate-related
developments in policy and regulation, emergence of disruptive technology or busi-
ness models, shifting sentiment and societal preferences and evolving evidence,
frameworks and legal interpretations.
Transition risk (which in some ways is forward-looking in nature, due to it being

associated with the journey to low carbon) can be proactively managed. In compar-
ison, the management of physical risks (which have wider impact that no one can
manage in isolation), tend to be more reactive in nature and focused on minimizing
the impacts.
Transition risks constitute a range of threats and opportunities and many of the
risks can act as either a threat or an opportunity to an organization depending on
how the risk is perceived and acted upon from a strategic or operational perspective.
5.4.2 Exposure and vulnerabilities of sectors and organizations

It is also important to be aware that economic sectors will be impacted differently by
transition risk depending in part on the intensity of their emissions and ability to
adapt their business strategies and models.
In the context of climate change, transition risk is the risk that organizations face
through changing strategies, policies or investments by society and industry as they
work in tandem to reduce reliance on carbon and the impacts of climate risk.
For example, some sectors are very energy intensive and there are very few
economically viable low-carbon alternatives at present. These include sectors such as
petrochemicals, aluminium, steel, cement and fertilizers, and extractive industries
such as mining that provide the raw materials.
Organizations that are ‘front-runners’, that adjust to future structural changes
and put sustainability at the heart of their strategies more rapidly, will be well posi-
tioned to reap the potential benefits that it will bring. These will include enhanced
brand image, employee engagement, innovation, new sources of revenue, enhanced
relationships with stakeholders and operational resilience.
Transition drivers arise primarily from transformations, namely in regulatory
policy changes such as carbon taxes, technology advances and market shifts that
include innovation in, for example, renewable energy. Recent government and regu-
latory changes in legislation and pressure for improved reporting and disclosures
have also led to many new risks that organizations need to manage.
The main transition risks identified by global regulators were set out in the TCFD
report in 2017.9 Table 5.1 summarizes the main threats.
These are not specific risks but highlight strategic changes and risk drivers that
organizations need to evaluate and understand in order to ascertain the impact
across their risk profile.
5.4.2.1 RECOGNIZING OPPORTUNITIES

The focus of risk managers is often on identifying and managing the downside of
these risks. However, what is equally important is for organizations to also grasp the
TABLE 5.1 Main transitional threats to organizations
Threats Description
Policy risk Risks as a result of energy efficiency requirements, carbon pricing mechanisms
that increase the price of fossil fuels, or policies to encourage sustainable land
use
Legal risk The risk of litigation for failing to avoid or minimize adverse impacts on the
climate, or failing to adapt to climate change
Technology risk When a technology with a less damaging impact on the climate replaces a
technology that is more damaging to the climate
Market sentiment When the choices of consumers and business customers shift towards
risk products and services that are less damaging to the climate. This may leave the
owner of carbon-intensive assets with no alternative but to write down their
value (potentially to write off their value) in what has been termed ‘stranded
assets’
Reputational risk The difficulty of attracting and retaining customers, employees, business
partners and investors if a company has a reputation for damaging the climate
SOURCE Climate Disclosure Standards Board
opportunities that transition risks present, particularly given the vast amount of
investment and support from government and private businesses that are investing
in new technologies, products and services.
The TCFD framework outlines the following opportunities linked to the perceived
threats.
The TFCD report highlights the importance of innovation in helping organiza-
tions to improve efficiency across a range of new technologies including advances in
LED lighting technology and industrial motor technology, retrofitting buildings,
employing geothermal power, offering water usage and treatment solutions, and
developing electric vehicles.
The use of clean energy sources (such as renewables) is increasing in part due to
reducing costs and improved storage capabilities. Consequently, organizations that
shift their energy usage towards low-emission energy sources should save on annual
energy costs.
Organizations that innovate and develop new low-emission products and services
should improve their competitive position and capitalize on shifting consumer and
producer preferences. Organizations that proactively seek opportunities in new
markets or types of assets may be able to diversify their activities and better position
themselves for the transition to a lower-carbon economy.
The TFCD report states that:
opportunities exist for organizations to access new markets through collaborating with
governments, development banks, small-scale local entrepreneurs, and community groups
TABLE 5.2 Main transitional opportunities for organizations
Threats Description
Resource The opportunity to reduce operating costs by improving efficiency across an

efficiency organization’s production and distribution processes, buildings, machinery/appliances
and transport/mobility – in particular in relation to energy efficiency but also including
broader materials, water and waste management
Energy The opportunity to shift an organization’s energy usage towards low-emission energy
source sources such as renewables could potentially save on annual energy costs
Products Organizations that innovate and develop new low-emission products and services may
and services improve their competitive position and capitalize on shifting consumer and producer
preferences
Markets Organizations that proactively seek opportunities in new markets or types of assets
may be able to diversify their activities and better position themselves for the
transition to a lower-carbon economy
Resilience This is a general concept of climate resilience that involves organizations developing
adaptive capacity to respond to climate change to better manage the associated risks
and seize opportunities, including the ability to respond to transition risks and physical
risks
SOURCE Climate Disclosure Standards Board
in developed and developing countries as they work to shift to a lower-carbon economy.

New opportunities can also be captured through underwriting or financing green
bonds and infrastructure (e.g., low-emission energy production, energy efficiency, grid
connectivity, or transport networks).
5.4.3 Transitional drivers – options available for reducing emissions

The UN IPCC report issued in 2022 ‘Climate Change 2022: Impacts, Adaptation
and Vulnerability’ provides a list of options that focus on reducing emissions for
both governments and organizations that will be discussed later in this chapter.10
To illustrate and explain the main transition risks that organizations need to
consider, Figure 5.5 highlights a top-down approach from leading global drivers
through to structural changes and risk drivers to a specific broad range of threats
and opportunities. Organizations will ultimately need to agree on a set of transition
risks (both threats and opportunities) that should be translated into specific transi-
tion scenarios and a list of these is provided in Table 5.3 to provide clarity on the
process and to support the design of concrete mitigation strategies.
In 2017, an article from International Investment.net provided a useful definition of
transition risk and what this means for companies which remains valid today: ‘Transition
FIGURE 5.5 Transition drivers, threats and opportunities
Global transition drivers - Paris Agreement and TCFD
Structural changes and risk drivers
1. Policy and legal 2. Technology and 3. Shifts in consumer and 4. Market changes in
changes energy advances investment sentiment products & services
Threats Opportunities
Carbon pricing Consumer shifts into Reduce climate footprint

‘climate-friendly’ products
Reporting obligations Resource efficiency
Investors shift to greener
Asset price deterioration companies Use of clean energy
New competitors New fuel & renewables Design low-emission

products and services
Increase in climate-related Hydrogen economy
litigation Digital platform solutions
Precision tools (drones/

satellites)
risks relate to the impacts and costs of policy, legal, technology and market changes that
will be required to mitigate and adapt to climate change. In concrete terms this will result
in a higher carbon price associated with carbon emissions.’11
Chapter 9 outlines some of the emerging or longer-term transition threats and
opportunities in more detail including the growth in the hydrogen economy and
increase in climate-related litigation.
Companies that fail to respond to the impacts of the transition to a lower-carbon
economy face financial and reputational risks, potentially harming their credit
ratings and share price. How they respond and adapt their business strategies and
models will be critical, and there will be winners and losers. However, the conse-
quences of a failure to transition are far greater.
Transition risks are therefore developing rapidly as governments support and
subsidize low-carbon industries and regulate and tax high-carbon ones.
When it comes to shifting focus to address climate, broad transition risks might
include:
●● Changed land-use policies or water conservation practices impacting the agricultural

sector
●● The costs the energy industry faces in developing low-carbon technologies

●● A reduction in the value of investments in carbon-heavy industries
●● The requirements of additional regulation and reporting
Table 5.3 provides a sample list of risks/threats and opportunities that are relevant
to many organizations.
The risks outlined (it is not an exhaustive list) highlight the interconnectedness of
the risks and the opportunities. These will have operational, investment, financial
TABLE 5.3 An indicative list of specific transition risks and the associated opportunities
Threats (manage the downside) Opportunities (strategic initiatives)

●● Reduction in investment returns due to ●● Increase in investment in ‘green’
overexposure in sectors that are overpriced infrastructure spending
(stranded assets)
●● Increase in operational costs due to stricter ●● Switch electricity use away from fossil fuels to
‘green’ legislation to improve building renewables
efficiency
●● Failure to comply with TCFD disclosures ●● Use the data requirements for TCFD disclosure
including mandatory reporting requirements as a catalyst to improve your data
management practices (from an analysis and
efficiency perspective)
●● Potential legal disputes due to accusations of ●● Make a conscious decision to be a leader in
‘greenwashing’ your industry with regard to sustainability and
adhere to (and help develop) higher industry
standards
●● Increase in carbon taxes for externalities such ●● Opportunity to reduce emissions (in order to
as pollution associated with fossil fuels minimize carbon taxes)
●● Increase in the carbon pricing and ●● Introduce internal carbon pricing in order to
approaches – the carbon price is the explicit prioritize internal investments and to instil a
price on GHG emissions, i.e., a price focus on innovation/carbon reduction
expressed as a value per tonne of carbon
dioxide equivalent (tCO2e).
●● Unsuccessful investment in new technology ●● Successful investment in new technology that
enhances operational efficiency and improves
the cost base
●● Increase in cost base of raw materials ●● Opportunity to source raw materials from
alternative providers, to reduce waste and/or
find cheaper alternative inputs
(continued)
TABLE 5.3 ( Continued)
Threats (manage the downside) Opportunities (strategic initiatives)

●● Lack of understanding of requirements at ●● Opportunity to develop a company-wide
executive level learning culture
●● Lack of understanding of changing societal ●● Design of product and marketing strategies to
demands meet changing consumer demand for
‘climate-friendly’ products
SOURCE: Climate Disclosure Standards Board!]
and competitive consequences. Nevertheless, they are some of the items that should
be at the forefront of the minds of management (and stakeholders) as they attempt
to navigate the move towards a low-carbon economy.
Using Cambridge City Council again as an example, while acknowledging that
climate change represents a range of challenges, the council did identify a number of
opportunities to respond with greater impact. These included building on the
increased public awareness and acceptance that climate change is occurring, sustain-
ing the low-carbon impacts of changes in behaviour that arose during the Covid-19
lockdown, leveraging the increased appreciation of the green spaces, trees and other
green infrastructure and undertaking initiatives to maintain lower levels of emissions
from changes in travel arrangements.
5.5 Global mitigation concerns and options

The IPCC report ‘Climate Change 2022 – Impacts, Adaptation and Vulnerability’
provides a comprehensive list of options for how the world can help to stabilize the
climate and avoid catastrophic global warming while fulfilling the commitments
made in the 2015 Paris Agreement.12
The report provides an assessment of global emissions by 2050 that uses four
different scenarios, with each scenario affecting the projected global GHG emissions
by the year 2050.
The projected global GHG emissions data is based on assuming:
1 current trend from implemented policies

2 effects after high overshoot and then reducing the emission
3 immediate action taken after 2020 to limit temperature increase to 2°C
4 the consequence after limited or no overshoot after the limit of 1.5°C increase
he IPCC report highlights 45 different options for emission reductions across differ-
T
ent categories. The IPCC analysis further provides the estimated cost (net lifetime cost)
to achieve the goal of emission reduction for each specific sector and each sector’s
potential contribution to reduce the GHG emissions by the year 2030. This acts as a
ranking of relative effectiveness that is helpful in terms of prioritization, which is
focused on policy makers for government but is also very helpful for businesses.
Moreover, what is helpful is to see the potential and relative contribution of each
option to reduce emissions. The Economist commented on the report and stated that
‘Its 278 authors have gone to great pains to offer a smorgasbord of opportunities to
reduce emissions and stabilise the climate, and to point out that not all are eye-
wateringly expensive. There is just one catch. In order to meet Paris goals, humanity
must order just about everything on the menu, and fast.’13
An organization can use Table 5.4 as a helpful guide to consider options for how
its own organization and value chain can seek to reduce its own carbon emissions
and build a more sustainable business. The options can help in looking at reducing
organizations’ carbon footprint as well as in the development of strategic options.
One of the most important and impactful solutions is ‘fuel switching’, which
involves replacing inefficient fuels with cleaner and economical alternatives, such as
substituting coal or kerosene for natural gas. Complemented by modern equipment
upgrades, fuel switching is a simple approach to reducing energy consumption and
costs for end users, while also curbing carbon emissions.
TABLE 5.4 IPCC report – most important mitigation options by industry sector
INDUSTRY SECTOR MITIGATION OPTIONS

Wind energy
Energy
Solar energy
AFOLU (Agriculture, Carbon sequestration in agriculture

Forestry and Reduced conversion of forests and other
Other Land Use) ecosystems
New buildings with high energy performance
Buildings
Efficient lighting, appliances and equipment
Electric light duty vehicles
Transport
Shift to public transportation
Fuel switching (natural gas, bioenergy, H2)
Industry
Energy efficiency
Reduce emission of fluorinated gas
Other
Reduce CH4 emissions from solid waste
5.5.1 UK Government’s green strategy

Governments have also been publishing some helpful reports in this regard and the
UK Government issued an insightful booklet in November 2020, ‘The Ten Point Plan
for a Green Industrial Revolution: Building back better, supporting green jobs, and
accelerating our path to net zero’.14 The UK plan set out how the UK Government
plans to mobilize £12 billion of government investment, and potentially three times
as much from the private sector, to create and support up to 250,000 green jobs.
The plan covers a wide range of technologies, including a quadrupling of offshore
wind capacity, accelerating the uptake of electric vehicles, expanding low-carbon
hydrogen production and use, advancing nuclear power, and aiming to become a
FIGURE 5.6 The UK’s Ten Point Plan for a Green Industrial Revolution
Offshore
wind
Green finance Low carbon
/ innovation hydrogen
Environment New nuclear

protection power
Carbon Zero
capture emission
vehicles
Green Green public

buildings transport
Net zero &
green ships
SOURCE The Ten Point Plan for a Green Industrial Revolution (HM Government)
world-leader in carbon capture and storage. The development of new technologies is

explored further in Chapter 9.
The breadth of green technologies mentioned in the UK Government’s Ten Point
Plan illustrates the sheer complexity and size of the challenge ahead. While there is
acknowledgement that there is no quick-fix solution to decarbonize the economy,
instead the UK’s future energy strategy will consist of a combination of low-carbon
and renewable energy technologies, which complement each other to enable the
targets to be met. At this stage, it remains unclear on the precise mixture of the
components.
The Russian war with Ukraine has highlighted the dependency, particularly for
Europe (including the UK) on Russian oil and gas. Russia is the second largest gas
producer (17 per cent of global output in 2020) and at the time of writing the war is
starting to impact on the international gas markets (which in turn impacts the UK).
Consequently, this could act as a catalyst for investment in and the use of renewable
energy (in the longer term) and also lead to a reduction in consumption (in the near
term).
Greater energy efficiency is now a key focus of government. In risk management
terminology it is a preventative control to restrict the use and demand for gas through,
for example, greater house insulation and use of heat pumps and renewables.
In the UK, like many countries, there is increasing use of energy performance
certificates in homes. With the rise in benchmarking, this heightened transparency
highlights that ‘If all homes that were band D were upgraded to band C [the most
common band], the UK’s total gas demand would be cut by 7%, and net imports
by 15%.’15
Two other important and perhaps less well understood of the initiatives in the plan
are investing in carbon capture, usage and storage and green finance and innovation.
5.5.2 Investing in carbon capture, usage and storage (CCUS)

CCUS technology captures carbon dioxide from power generation, low-carbon
hydrogen production and industrial processes, and stores it deep underground where
it cannot enter the atmosphere.
This technology will need to be applied globally, but no one country has yet devel-
oped a market-leading position in the development and utilization of this technology.
The UK’s ambition is to capture 10Mt of carbon dioxide a year by 2030, the
equivalent of 4 million cars’ worth of annual emissions, by investing £1 billion to
support the establishment of CCUS in four industrial clusters. The UK plans to store
the captured carbon under the seabed in the North Sea.
5.5.3 Green finance and innovation

In order to support these ambitions, the UK Government is developing and investing
in innovation, and new sources of finance are fundamental for further developing the
green technologies for net zero. In July 2020 the UK Government published the UK
Research and Development Roadmap and have committed to raising total R&D
investment to 2.4 per cent of GDP by 2027.
The UK plan is to help bring down the cost of the net zero transition, nurture the
development of better products and new business models, and influence consumer
behaviour. Part of the country’s ambition is to be the first country in the world to
commercialize fusion energy technology, enabling low-carbon and continuous power
generation. The UK is providing funding for the visionary STEP programme
(Spherical Tokamak for Energy Production), which aims to build the world’s first
commercially viable fusion power plant in the UK by 2040.
To further help develop and support these initiatives the UK government has also
launched the Green Jobs Taskforce, working in partnership with business, skills
providers and unions, to help develop plans for new long-term good quality, green
jobs by 2030 and advise what support is needed for people in transitioning indus-
tries. This is crucial and often overlooked as a key enabler as employees need to
reskill and this aligns with improved awareness training for all staff.
5.6 Carbon/sustainability risk management framework

Many organizations are developing ways to ensure that their own carbon footprints
can be measured and monitored to track progress. Most organizations are seeking to
reduce their carbon footprint by implementing practices that reduce the environmen-
tal impact across their business.
Many organizations are also seeking to improve their emissions tracking and
reporting infrastructure to put in place more comprehensive emissions reporting
across their value chain in order to define a baseline, perform trend analysis and set
targets to reduce its emissions.
With the intention of reducing the organization’s carbon footprint, the steps
required include obtaining the required emission data (relating to Scope 1, 2 and 3
emissions, i.e. both direct and indirect emissions) across all parts of the organization
(note: this will not be without challenge) and determining the calculation methodol-
ogy for deriving the emission figures.
5.6.1 Stages for assessing and measuring emissions

It is important to develop an overall framework for managing and mitigating the
carbon emissions that are depicted in Figure 5.7. It is important to note that the main
FIGURE 5.7 Framework for calculating, managing and mitigating carbon emissions
Step 1:
Carbon risk appetite strategy and reduction planning
Step 6: Step 2:
Reporting and monitoring of Define scope and organizational
carbon emissions and targets boundary
A framework for calculation

of carbon emissions scope
Step 5: Step 3:
Design mitigation strategies Map the data sources for each
using the carbon hierarchy emissions category
Step 4:
Calculation of carbon emissions
steps in the process are not necessarily sequential (with one stage needing to be
complete before the next one can commence) but that they are complementary and
make the framework stronger by working cohesively together. This requires organi-
zations to continue to evolve and improve and reinforces the circularity of the
process. It also facilitates the integration into the existing enterprise risk manage-
ment (ERM) framework.
Notwithstanding the assessment and measurement of a company’s emissions, it is an
ongoing process and actions will need to be taken once measurement is complete and
disclosures made in order to maintain minimum standards and to continue to improve.
The overall process is summarized in Figure 5.7.
There are a number of stages required to assess and measure the emissions from
an organization. These are:
1 Carbon risk appetite strategy including net zero targets

2 Determine scope of what needs to be calculated (Scope 1, 2 and 3)
3 Identify the sources of the information required (i.e., the data inputs) to undertake
the calculation; clarify the range of data characteristics (i.e., sources, structure,
parameters, frequency)
4 Develop the calculation methodology (i.e. assumptions, simple versus advanced)

5 Ascertain the tools or models available to support the calculation (note: different
tools will have differing data requirements)
6 Reporting and disclosure
Depending on the size of the organization and the complexity of the emissions, this
may require the need to consider the most appropriate calculation methodology and
tools/models to be used. Once the process of calculation is established, this then
requires management identifying actions to reduce the emissions, on-going monitor-
ing and reporting to various stakeholders (as appropriate).
5.6.1.1 STEP 1: CARBON RISK APPETITE STRATEGY AND REDUCTION PLANNING

Organizations need to develop their climate risk strategy and as part of that consider
their carbon footprint and define the level of ambition, which was discussed in detail
in Chapter 2.
Organizations are generally committed to reducing their global carbon footprint
and implementing practices that reduce the environmental impact of their business,
and integrating net zero targets within their long-term business strategy. Key ques-
tions to address include: what actions are being considered to support efforts to
reduce GHG emissions across the value chain, such as with suppliers and customers?
An example from the public sector of developing a carbon risk appetite strategy
is seen in Cambridge City Council’s Climate Change Strategy 2021–2026.16 The
council worked with researchers from the University of Manchester’s Tyndall Centre
to set ambitious targets to reduce the council’s direct carbon emissions from its
corporate buildings (including swimming pools, office buildings, car parks, sheltered
housing schemes, community centres, arts venues and the crematorium), its fleet
vehicles (including vans, trucks and refuse vehicles), and business travel to net zero
carbon emissions by 2030. This forms the basis for spending decisions and priorities
with regard to all facets of the work undertaken by the council in the coming years.
It is important that the council’s new climate change strategy shows ambition and
leadership, however it recognizes its sphere of influence and the role that other
organizations and individuals need to play. The council itself is only directly respon-
sible for 1.1 per cent of carbon emissions in Cambridge, so it is working with central
government, other tiers of local government, businesses, organizations and residents
to reduce city-wide carbon emissions, including in the context of the Cambridgeshire
& Peterborough Independent Commission on Climate’s reports and the UK
Government’s work in preparation for the COP26 inter-governmental conference in
December 2021. The importance of stakeholders is covered in Chapter 4.
Many organizations are also currently seeking to understand what ‘net zero’
means for their firm and set targets and metrics. This will require organizations
FIGURE 5.8 CO2 reductions pathways in Cambridge proposed by the Tyndall Centre
< Historical > < Recommended >

0.8
0.7
0.6
0.5
Mt CO2
0.4
0.3
0.2
0.1
2010 2015 2020 2025 2030 2035 2040 2045 2050
SOURCE Tyndall Centre, 2021, Setting Climate Commitments for Cambridge
reviewing their risk appetite strategy and guidelines in respect to climate change,
including their position in respect to supporting wider government targets of achiev-
ing net zero emissions targets by 2050. This was discussed in Chapter 2.
Organizations are often seeking to set targets that relate to specific scopes. Some
organizations, for example, are setting science-based targets for commitments to the
achievement of net zero by 2025 on directly controlled emissions (Scopes 1 and 2)
and then setting other targets for Scope 3 (with a later target date) once they have a
better understanding of how they are going to achieve their targets. This ultimately
means first measuring their carbon emissions, and then taking steps to reduce the
emissions of their organization in the future.
The feedback from risk professionals with respect to risk appetite statements are
that they are evolving, and according to Will Monelle, the CRO of Canopius, ‘organ-
izations need to set both realistic and achievable targets which will also help to avoid
greenwashing’, which we discuss further in Chapter 9. Organizations also need to
develop key risk indicators to assist in measuring and monitoring their climate expo-
sures on an ongoing basis and this is one of the most difficult areas for risk managers
given the lack of data and agreed metrics.
5.6.1.2 STEP 2: DEFINE SCOPE AND ORGANIZATIONAL BOUNDARY

Organizations need to get a clear picture of their emissions through determining the
quantity and geographic locations of both direct and indirect CO2 emissions.
This will include defining what emissions are included in each option so that the
organizations can understand the pros and cons. Organizations need to consider the
emissions from owned, leased or directly controlled vehicles or equipment that use
fossil fuels; emissions from the generation of purchased electricity, heat, and cooling;
and emissions from waste and business travel.
5.6.1.3 STEP 3 MAP THE DATA SOURCES FOR EACH EMISSIONS CATEGORY

Calculate carbon: The basis for climate protection is always your carbon balance. All
emissions are recorded in it, caused, for example, by:
●● heating
●● steam
●● business trips
●● employee approach
●● paper consumption
●● . . . and other factors
The data is often captured and stored through cloud-based software. It can be used
to map complex corporate structures, such as several locations at home and abroad.
5.6.1.4 STEP 4: CALCULATE AN ORGANIZATION’S CARBON FOOTPRINT

It is important to calculate carbon emissions in an accurate and conservative manner.
The carbon balance shows which greenhouse gas emissions you can most easily
reduce and which you can be avoid in the long term. A few examples include conver-
sion to renewable electricity, video conferences instead of business trips, the use of
rail instead of domestic flights, etc. Often these changes can lead to reductions in
both operating costs and emissions.
FIGURE 5.9 Scope 1, 2 and 3 emissions
UPSTREAM ACTIVITIES ACTIVITIES DOWNSTREAM ACTIVITIES
SCOPE 2 INDIRECT
Purchased electricity, steam,
heating and cooling for own use SCOPE 3 INDIRECT
Investments
Reporting company Franchises
Leased assets
SCOPE 1 DIRECT End of life treatments
Use of sold products
SCOPE 3 INDIRECT Company facilities Processing of sold materials
Lease assets Company vehicles Transport and distribution
Employee commuting
Business travel
Transport and distribution
Fuel and energy related activities
Capital goods
Purchased goods and services
SOURCE The Greenhouse Gas Protocol (Corporate Value Chain (Scope 3) Accounting and Reporting Standard)
From a reporting perspective, which we discuss in more detail in Chapter 12, Scope 1
and 2 emissions are increasingly being reported by organizations. However, most
companies are yet to include Scope 3 in their disclosures, although arguably these
potentially have the largest impact.
Figure 5.9 illustrates the differences between the scope emissions, some of the main
contributors and where in the production cycle they originate in the value chain.
5.6.1.5 STEP 5: DESIGN MITIGATION STRATEGIES

Mitigation strategies are complex and multidimensional and a range of actions will
need to be undertaken simultaneously in order to reduce emissions (across Scope 1, 2
TABLE 5.5 Examples of actions that can be taken to reduce different emission types while
addressing transition risk
Scope emissions reduced

1. All direct emissions 2. Indirect emissions 3. Indirect emissions that
from activities under from purchased occur in the wider value
the control of the energy chain (both upstream and
organization downstream)
i. Moving from high-risk i. Moving from i. Moving from high-risk area
area to a lower-risk area high-risk area to a to a lower-risk area nearer to
in premises that have lower risk area nearer your suppliers
Physical
more energy efficient to your customers (and
boilers or require fewer thus requiring less
air-conditioners energy)
i. Investment in i. Introduction of i. Selecting suppliers based
technology to improve working-from-home on emissions
productivity practices ii. Consciously reducing
ii. Replacing own ii Undertaking business travel
Risk type addressed
transport fleet with EV renovations to existing iii. Encouraging homeworkers

iii. Utilizing internal premises to reduce to source electricity from
carbon pricing in capital energy consumption sustainable providers
allocation decisions/ iii. Changing energy iv. Investment managers
investment decisions providers and selecting actively engaging with
Transition (which provides a a more sustainable investee companies to be
catalyst for reducing provider more aggressive in meeting
own emissions) iv. Reviewing internal their emission targets
processes, looking for v. Credit providers offering
improvements, preferential rates to ‘green’ or
reducing waste and more energy efficient
embracing the ‘circular initiatives
economy’ vi. Reducing credit exposure
to companies more sensitive
to transition risk
and 3) and to mitigate against physical and transition risks. There is no ‘silver bullet’
to solve this issue once and for all; the key is that these actions complement and
support each other, and collectively they can make a significant contribution to the
reduction in emissions and the achievement of stated corporate emissions targets.
Table 5.5 provides examples of this in a matrix that considers emission and risk types.
5.7. Carbon assessment process – use and availability of tools

There is a wide range of modelling tools available for companies to calculate their
carbon footprint. Each model has different calculation methodologies, data require-
ments, degrees of integration with existing systems and will vary across industry
sectors. However, as specific expertise is often required, many organizations are
using niche external consultancies that have developed external expertise.
Before deciding on a model, the key is to assess the pros and cons of each and
evaluate which one is the best fit for your organization.
A number of examples are provided below (it is not an exhaustive list but is
provided for illustrative purposes). These range in complexity, data requirements
and some will be more appropriate than others (depending on your organization size
and relative maturity in this area).
Many organizations are using the Greenhouse Gas Protocol approach
(ghgprotocol.org), which is the UK Government standard.
1 Carbon Trust – SME Carbon Footprint Calculator

This carbon footprint calculator is from the Carbon Trust (a UK-based global
climate consultancy, which has been focused for 20+ years on pioneering
decarbonization for businesses, governments and organizations around the world,
with 300 sustainability experts including engineers, financiers and policy
specialists). The calculator provided is publicly available on its website and is
suitable for small- and medium-sized businesses.
The calculator is designed to help UK-based SMEs measure their corporate
emission footprint following GHG Protocol guidance and includes direct
emissions (Scope 1) from fuel and processes and Scope 2 emissions from purchased
electricity for assets operated. It is not a definitive solution (due to it excluding
Scope 3) but this is typical for SMEs and provides a reasonable basis for
calculations at the outset of the calculation exercise.
Key data requirements for this tool are: fuel consumption (from sites and
owned vehicles), energy consumption (based on utility bills/meter readings) and
top-ups to air-conditioning, refrigeration and fire protection units (which contain
fluorinated gases, and which are high CO2e and contribute significantly to the
carbon footprint).
This tool allows smaller firms to determine their carbon footprint (for Scope 1
and 2 emissions), to assess their energy use relative to firms in their chosen sector
and it can assist in the building of a business case for introducing carbon-saving
initiatives.
2 Carbon Footprint
Provides a free tool (which may be better for smaller, less complex businesses)
looking to begin the process of calculating their carbon footprint.17
3 GHG Protocol and Quantis Scope 3 Emissions calculator
Due to the challenges of quantifying Scope 3 emissions, the GHG Protocol and
Quantis have collaborated to provide a Scope 3 Evaluator tool in order to help
calculate a comprehensive assessment of the Scope 3 carbon emissions.18
There are acknowledged limitations with the model and it is stressed that this
tool has not been assured for adherence to Scope 3 standards, but it does
nevertheless provide a tool to help develop an internal calculation approach. It
provides a useful structure and also informs future efforts by highlighting the
various data collection points across all of the key categories (as mentioned earlier
in this chapter).
4 Carbon Calculator – GOV.UK
The MacKay Carbon Calculator is available on the UK Government website, and
provides a model of the UK energy system that allows an organization to explore
pathways to decarbonization, including net zero by 2050. It identifies a range of
key factors that influence the overall carbon emissions of the economy and
provides a range of options (with varying levels of ambition – and details of the
actions required to meet those ambitions). Decisions can be made and ambitions
revised and the contribution to meeting net zero targets is assessed. This will be a
useful tool for organizations so that they can identify which changes in behaviour,
transportation, building and energy usage will have most impact on emission
levels.
5.8 The carbon hierarchy

The concept of carbon hierarchy provides a useful framework for understanding the
prioritization of efforts to decarbonize and achieve absolute reductions in green-
house gas emissions throughout global value chains.
Figure 5.10 illustrates the carbon hierarchy approach that outlines the most
favoured options such as avoid (avoid activities that generate emissions) to the least
favoured option of offset (offset remaining emissions that cannot be eliminated), the
full hierarchy being avoid, reduce, replace, sequester and offset, which will be
explained subsequently in further detail.
FIGURE 5.10 The carbon hierarchy
Most favoured Avoid

option Avoid activities that
11 generate emissions
Reduce Reduce emissions by

changing/improving processes
2 and systems
Replace
Replace high-carbon energy sources
3 with low-carbon alternatives
Sequester
Directly sequester carbon from activities
4 where feasible (e.g. CCS)
Offset
Least favoured
option Offset remaining residual emissions that
5 cannot be eliminated
SOURCE University of Cambridge Institute for Sustainability Leadership, insurers in Paris-aligned climate transi-
tion: practical actions towards net zero underwriting
5.8.1 Avoid
In short, this option results in the cessation of an activity due to the volume of emis-
sions it generates. This may not be an option in the short term – the ongoing burning
of fossil fuels is an example of this. These activities are becoming increasingly unac-
ceptable from a political and societal perspective; however, it is not always
practicable for the activity to be stopped with immediate effect. This may be influ-
enced by the interests of various stakeholder and lobby groups.
As an example, if the burning of fossil fuels was to be immediately banned, this
would cause immediate energy shortfalls, substantially reduce the value of assets
involved in certain activities, or push the activity underground, which could then
lead to the advancement in technology or reductions in activity being hampered.
5.8.2 Reduce
To reduce their emissions, organizations need to review their business processes in
order to understand where the emissions are generated and the level of those emis-
sions. This then provides the opportunity to challenge and reconsider the processes
in order to determine whether there are efficiency gains or where automation can
reduce the carbon footprint.
Organizations can demonstrate their commitments by increasing the efficiencies
of internal company operations and physical assets under the company’s control and
reducing their energy consumption.
Examples of mitigation options to reduce an organization’s emissions include:
●● Replacement of inefficient machinery with more efficient lower-emitting machinery

●● Investigating options for reducing waste in production processes
●● Utilizing by-products from the production process
●● Reducing packaging (e.g. pasta packaging or removal of plastic around fruit and
vegetables in French supermarkets)
●● Replacing car fleets with electric vehicles
●● Using renewable energy providers across all of your premises
●● Encouraging working from home (thus reducing carbon footprint relating to
commuting)
●● Premises – improving insulation of existing buildings, replacing lighting with
energy-efficient LED lighting options
●● Promoting behavioural changes
5.8.3 Replace
As old infrastructure or machinery reaches end of life and as capital investment deci-
sions are made, rather than replace like-for-like, companies will be looking to source
replacements that help mitigate against climate risks relating to sustained higher
emissions. This naturally facilitates a reduction in emissions.
This will be further augmented by the incorporation of carbon pricing into invest-
ment decision-making (where the internal cost of carbon is considered and feeds into
the return-on-investment criteria). Examples are arising across a multitude of indus-
tries where new technologies are being introduced that reduce emissions while also
improving operating efficiencies – these include heat pumps replacing gas or electric
heating, development of hydrogen planes, delivery firms using electric vehicles or
sails being added to container ships.
As companies look at the options for replacing infrastructure, an approach gain-
ing favour is the establishment of an internal carbon price (ICP) (which is a
theoretical price that companies can use to place a monetary value on each tonne of
carbon emitted) in order to capture and put a monetary value on the costs/impacts
of their activities in climate change terms. This approach allows for companies to
more comprehensively consider the operational costs, the costs of compliance and
adhering to future regulations as they make strategic decisions. In summary, the
benefits of adopting such an approach are threefold:
1 to support decision making with regard to capital investments (and so project

assessments explicitly evaluate climate change/carbon factors and disclose
supporting assumptions)
2 to measure, model and manage the risks (both financial and regulatory) associated
with existing and future government policies; and
3 to help identify risks and opportunities and to provide the chance to adapt
strategy.
An alternative application of ICPs is when a company imposes a fee on each business

per unit of emission. This money is then pooled and can be used to reward those that
have the best emission reduction performance over a specified time. This approach
incentivizes the reduction in emissions and promotes the investment in carbon-
friendly initiatives (i.e operational efficiency initiatives, green projects or low-carbon
product development) and reinforces a carbon reduction mindset.
As a consequence, ICP (or alternative approaches) are becoming more main-
stream such that companies in more carbon-intensive sectors are likely to
incorporate climate considerations into their capital investment and financial plan-
ning decisions.
In his 2022 Letter to CEOs, Larry Fink (CEO of Blackrock – the world’s largest
asset manager) reinforces this when he accepts that organizations cannot address
climate change (and the associated risks) in isolation, that there is a need for
governments to provide clear pathways and a consistent taxonomy for sustainability
policy, regulation and disclosure across markets.19 Governments must also support
communities affected by the transition, help catalyse capital for the emerging
markets, and invest in the innovation and technology that will be essential to decar-
bonizing the global economy.
With governments setting the parameters and regulators determining the accom-
panying framework(s), rules and principles, this provides the basis by which firms
can operate in a coherent and efficient manner and highlights how the public and
private sectors have complementary roles to play in the management of climate risk.
5.8.4 Sequester
Carbon sequestration is the process of capturing and storing atmospheric carbon
dioxide. There are two main types of processes, namely geologic and biologic.
The US Geological Survey (USGS) defines carbon sequestration as Geologic
carbon sequestration is the process of storing carbon dioxide (CO2) in underground
geologic formations. The CO2 is usually pressurized until it becomes a liquid, and
then it is injected into porous rock formations in geologic basins.
Biologic carbon sequestration refers to storage of atmospheric carbon in vegeta-
tion, soils, woody products, and aquatic environments. For example, by encouraging
the growth of plants—particularly larger plants like trees—advocates of biologic
sequestration hope to help remove CO2 from the atmosphere.20
5.8.5 Offset
Once emissions have been measured and assessed (based on an approved carbon
calculator), one of the options available is participation in carbon offset projects.
Examples include:
●● Certified emission reductions (CERs)

●● Clean energy-verified carbon standard projects
●● Tree-planting projects (where a number of trees are planted for every tonne of
carbon)
As with the independent validation of any carbon footprint calculations, companies

looking to offset their emissions will need to undertake due diligence on their offset
partner and gain assurance that the provider selected is operating an accredited
scheme and is undertaking what is required of them in an appropriate manner.
5.9 Monitoring and reporting carbon emissions and targets

In striving to meet their carbon net zero targets, organizations need to be able to
measure and then monitor their emissions. One of the issues that organizations face
is how to monitor emissions on a scale relative to the size of the business.
In monitoring and reporting of environmental performance there are many good
guidance documents with one of the most comprehensive and insightful being from
DEFRA which is part of the UK Government.
They set out two distinct types of targets:
●● An absolute reduction target, which compares absolute figures in the target year
to the base year
●● An intensity target based on an appropriate normalizing factor (e.g. CO2e emis-
sions per full-time equivalent staff member)
Clearly an absolute target is designed to achieve actual reductions in environmental

impact, and organizational growth needs to be decoupled from the environmental
impact in order to achieve an absolute target. Whereas the DEFRA guidance points
out that ‘In contrast, an intensity target can drive resource efficiency and relative
environmental impact, but the total resource use/impact may actually increase even
if an intensity target has been reached due to increases in organizational activity e.g.
production’.21 These targets both have a role to play and their relative importance
may vary over time.
In the private sector investors are starting to develop and use carbon footprint
analysis to understand the exposure of companies to the potential effects of carbon
pricing and as a simple proxy for gauging climate-related transition risks, both as a
standalone tool and in combination with a carbon target, as part of an investment
strategy. The assessment and monitoring of an organization’s carbon footprint
becomes more and more important.
5.9.1 Independent assurance of GHG emissions reported

Organizations globally will be collecting and using emissions data in order to quan-
tify their emissions across their entire value chain and so that they can manage and
report their climate risk exposure/GHG emission. This will in turn influence carbon-
related costs, their corporate reputation and determine whether they need to
undertake any offset activities. Consequently, in order to avoid detriment, organiza-
tions will be looking to independent bodies to validate and provide independent
assurance with regard to the GHG emissions reported.
In the UK, the QAS (formerly known as the Quality Assurance Scheme) is a not-
for-profit organization that provides independent verification of carbon emission
calculation methodologies (which are subject to audit standards). This accreditation
enables organizations to participate in carbon offsetting projects or carbon retire-
ment (as per carbon emission permits – which can be retired at appropriate carbon
registries).
In summary, by following a structured and incremental approach (similar to the
one outlined above), companies can both reduce their emissions and reap other asso-
ciated benefits. The key is to determine the full range of sources of the organization’s
emissions, make informed calculations and then identify options for reducing your
emissions (across Scopes 1, 2 and 3). Depending on your business, the industry in
which you operate and the operating model, this will influence the size of your reduc-
tions and from which Scope savings can be made.
CASE STUDY 1
Cornish Mutual
Here is an example of the process followed by Cornish Mutual (a British insurer) for carbon
reduction and how it measures the full carbon impact of its operations across its organization
as accurately as possible.
Carbon reduction
Cornish Mutual has explained that, in part through internal climate change training, it has
generated a range of ideas for areas that it considers it can most easily target to reduce its
footprint, and that it continuously seeks to engage staff by discussing how they can help the
organization with its mission to become net zero. Specific considerations are around
commuting behaviour, office energy-saving approaches and how it can engage with its
members and supply chain to become greener. Some of the examples that it is considering are
quite generic so many other organizations could consider them too, as outlined here:
●● Continue to replace internal and supplier face-to-face meetings with video conferencing
where appropriate (balancing this with the need to maintain a strong culture and
relationships within the business) and minimize foreign travel.
●● Choose smaller, hybrid or electric hire cars to reduce emissions. Avoid or combine
car-based journeys and replace journeys with video conferencing. Choose rail journeys
where possible.
●● Continue the staff commuter survey and incentivize car sharing, and active travel.
●● Explore electric car leasing and installing electric car charging stations in the main offices.
●● Consider replacing the gas used in the air-conditioning system.
●● Consider improving insulation and auditing hot water and heating settings on office
buildings.
●● Migrate customers to paperless transactions.
●● onsider purchasing only recycled office supplies and paper, reducing the amount of paper
C
sent out and encouraging members to recycle anything that is sent.
●● Consider water-saving devices in bathrooms and install water meters.
FIGURE 5.11 Cornish Mutual – example of carbon emissions
Global emissions by area

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Measurement
●● Cornish Mutual has included Scope 3 data where it is available and is considering whether
it can (or how it can) integrate customer and supplier information into its carbon footprint
assessment going forward.
●● The example provided by Cornish Mutual highlights how companies can provide a
breakdown of its carbon footprint by area.
It has stated that it hopes to recognize some of the benefits from the Covid-19 pandemic such
as reduced commuting and business travel in its plans for reducing its emissions, but will also
be conducting an office energy audit and considering software solutions for better monitoring
of fleet vehicle miles and emissions.
CASE STUDY 2
Cambridge City Council – monitoring of carbon emissions
The Department for Business, Energy & Industrial Strategy in the UK (by combining the data
from UK’s greenhouse gas inventory) has developed a basis to monitor emissions that uses
per capita emissions, which is shown in Figure 5.12. In the example shown for Cambridge
City Council, you can see how the per capita emissions have reduced by 38 per cent over the
same period in Cambridge, from 6.6 ktCO2 to 4.1 ktCO2. On an absolute scale the total
carbon emissions reduced by 33 per cent from 779.7ktCO2 to 521.5 ktCO2 over the same
period.
Both measures (total terms and per capita) are equally applicable within the private
sector. Organizations need to continue to endeavour to meet reductions in both metrics. To
focus on one risks a focus on the wrong thing if the organization (be that a firm or a city
council) is undergoing a period of growth or a contraction. Notwithstanding this, the per
capita metric may provide a suitable benchmark for comparison with appropriate peer
groups.
The reduction in emissions from Cambridge (and other cities) in more recent years has
been driven primarily by the reduced use of coal in electricity generation and the increased
use of renewable energy generation at a national level. By 2019, 48.5 per cent of electricity in
the national grid was generated from zero-carbon sources (wind, solar, hydro and nuclear),
and this share is expected to increase further given planned investments in North Sea
offshore wind and the Government’s commitment to turn off all UK coal-fired power stations
by 2024.
FIGURE 5.12 Carbon emissions in Cambridge 2005–2018 (ktCO2) per capita and in absolute
terms
900
800
700
600
500
KT CO2
400
300
200
100
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
7
6.8
6.6 6.8 6.7
6.2 6.1
6 6.1 5.9
5.6
KT CO2 PER CAPITA
5.1
5 4.8
4.5 4.2
4 4.1
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
SOURCE Cambridge City Council22

5.10 Setting milestones of progress

Organizations need to consider how they set milestones for progress, which can be
done annually or on a periodic basis incrementally (e.g. 3- or 5-year time horizons).
As the scientific evidence on greenhouse gas emissions progresses (and best practice
evolves) and as regulatory expectations increase, organizations can seek to provide
their risk committees with an annual update on their progress.
It is often helpful to develop a realistic operational carbon footprint that can be
plotted over time, including a comparison to highlight against a worst-case scenario
if the organization takes no action on reductions.
Conclusion
This chapter has outlined the main sources of greenhouse gas (GHG) emissions and
the main transition risks that organizations need to consider, highlighting a top-
down approach from leading global drivers through structural changes and risk
drivers to a broad range of threats and opportunities.
Stakeholder expectations are shifting as regulators, customers and investors, etc
focus on corporate purpose, fulfilling regulatory requirements and pledging to meet
emissions targets in line with the Paris Agreement, and providing a global perspec-
tive on carbon emissions and mitigation strategies for how government and regulators
are going to meet their net zero targets.
The chapter has focused on explaining the emissions types and how organizations
can seek to use or develop the six-step risk management framework for calculating,
managing and mitigating carbon emissions across the entire value chain in order to
reduce their carbon emissions and build a more sustainable organization.
The chapter has highlighted the need for organizations to assess the tools or
models available to calculate their emissions and then to develop a strategic plan
that should follow a structured and incremental approach to reduce their emissions
and reap other associated benefits.
In summary, the chapter has highlighted the importance of developing a carbon
risk appetite strategy and reduction plan and to design mitigation strategies for
reducing carbon emissions through the concept of ‘carbon hierarchy’ and control
mechanisms, and to consider how they set milestones for progress that can provide
a basis for project planning and enable ongoing improvements, which will have envi-
ronmental and commercial benefits to organizations.
Notes
economist, Random House Business, London
economist, Random House Business, London
3 IPCC. IPCC Sixth Assessment Report: The Physical Science Basis, 9 August 2021.
https://www.ipcc.ch/report/ar6/wg1/ (archived at https://perma.cc/CA6F-CZR7)
4 M Carney. Memo to the Financial Stability Board on supporting the transition to net
zero carbon emissions. PIIE, December 15 2020. www.piie.com/blogs/realtime-
economic-issues-watch/memo-financial-stability-board-supporting-transition-net-zero
(archived at https://perma.cc/Z627-LHSY)
5 L Bevere and A Weigel. sigma 1/2021 – Natural catastrophes in 2020, Swiss Re
Institute, 30 March 2021, www.swissre.com/institute/research/sigma-research/sigma-
2021-01.html (archived at https://perma.cc/7RVY-9GFJ)
6 Swiss Re Group. In 5 charts: natural catastrophes in a changing climate, 30 March
2021, www.swissre.com/risk-knowledge/mitigating-climate-risk/sigma-in-5-charts.html
(archived at https://perma.cc/AF7F-4SFH)
7 BP. BP sets ambition for net zero by 2050, fundamentally changing organisation to
deliver, 12 February 2020, www.bp.com/en/global/corporate/news-and-insights/
press-releases/bernard-looney-announces-new-ambition-for-bp.html (archived at https://
perma.cc/B8HG-MKCE)
8 The Economist. The latest IPCC report argues that stabilising the climate will require
fast action, 9 April 2022, www.economist.com/science-and-technology/2022/04/09/
the-latest-ipcc-report-argues-that-stabilising-the-climate-will-require-fast-action
(archived at https://perma.cc/28MC-5MWP)
9 TCFD. Final Report: Recommendations of the Task Force on Climate-related Financial
Disclosures, June 2017. https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-
TCFD-Report-11052018.pdf (archived at https://perma.cc/J4JK-3GL8)
10 IPCC. Climate Change 2022: Impacts, Adaptation and Vulnerability, 2022. www.ipcc.
ch/report/ar6/wg2/ (archived at https://perma.cc/QS7Q-LQF9)
11 J Boyd. Understanding climate risk: how carbon footprinting can help, International
Investment, 10 November 2017, www.internationalinvestment.net/
internationalinvestment/opinion/3719969/understanding-climate-risk-carbon-
footprinting-help (archived at https://perma.cc/A6KA-N7Q9)
12 IPCC. Climate Change 2022: Impacts, Adaptation and Vulnerability, 2022. https://
www.ipcc.ch/report/ar6/wg2/ (archived at https://perma.cc/U7F5-JWEP)
13 The Economist. The latest IPCC report argues that stabilising the climate will require fast
action, 9th April 2022, https://www.economist.com/science-and-technology/2022/04/09/
the-latest-ipcc-report-argues-that-stabilising-the-climate-will-require-fast-action (archived
at https://perma.cc/24E4-E5XB)
14 HM Government. The Ten Point Plan for a Green Industrial Revolution, November
2020. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/936567/10_POINT_PLAN_BOOKLET.pdf (archived at https://
perma.cc/QC65-AZDC)
15 J Ralston. Ukraine conflict and impacts on UK energy. Energy & Climate Intelligence
Unit, 2022. https://eciu.net/analysis/briefings/uk-energy-policies-and-prices/briefing-
ukraine-conflict-and-impacts-on-uk-energy (archived at https://perma.cc/W32N-MFQB)
16 Cambridge City Council. Climate Change Strategy 2021–2026, nd. www.cambridge.
gov.uk/media/9581/climate-change-strategy-2021-2026.pdf
17 Carbon Footprint. Business Calculators, nd. www.carbonfootprint.com/small_business_
calculator.html (archived at https://perma.cc/V7F7-LQ9Z)
18 Quantis. Greenhouse Gas Protocol, nd. https://quantis-suite.com/Scope-3-Evaluator/
(archived at https://perma.cc/ZAS2-WY7V)
19 L Fink. Letter to CEOs: The power of capitalism, BlackRock, 2022, www.blackrock.
com/corporate/investor-relations/larry-fink-ceo-letter (archived at https://perma.cc/
H87A-V43A)
20 USGS. What is carbon sequestration? nd. www.usgs.gov/faqs/what-carbon-sequestration
(archived at https://perma.cc/LFA7-TBRR)
21 Gov.uk. Environmental reporting guidelines: including streamlined energy and carbon
reporting guidance, March 2019, www.gov.uk/government/publications/environmental-
reporting-guidelines-including-mandatory-greenhouse-gas-emissions-reporting-guidance
(archived at https://perma.cc/PSJ4-MNAS)
22 Cambridge City Council. Climate Change Strategy 2021–2026. www.cambridge.gov.uk/
media/9581/climate-change-strategy-2021-2026.pdf (archived at https://perma.cc/
VG8P-JA3L)
162
Building climate resilience
This chapter will cover how organizations can build improved resilience from an
operational, financial and strategic perspective in respect to climate change. This is
mainly driven by increased uncertainty as future weather patterns can no longer be
expected to reflect the past and organizations will need to be more agile and resilient
to these ongoing changes.
Climate resilience is the ability to anticipate, prepare for and respond to hazard-
ous events, trends or disturbances related to climate. So, in this chapter we will be
focusing on the physical impacts of climate change and how organizations can
improve their resilience to their impact.
●● Understand the main types of resilience that can be used to build climate resilience
covering operational, financial and strategic
●● Appreciate the variety of acute and chronic physical climate risks that can impact
upon different industry sectors
●● Explain how specific risk management tools and techniques can help organiza-
tions to improve their resilience
●● Appreciate the importance and use of a bow tie analysis to help improve risk
controls across different profiles to assess the impact of a climate event on the
organization
●● Understand how to integrate climate change into existing control processes, espe-
cially business continuity management, supply chain risk management and insur-
ance procurement
●● Understand the concept of compounded or connected extreme events, highlight-
ing the fact that climate change can be connected and cause other extreme events
such as blackouts
The chapter will focus primarily on how organizations need to build both opera-
tional and financial resilience with respect to climate change and provide examples
of some of the tools and techniques, as well as discussing some specific controls that
BUILDING CLIMATE RESILIENCE 163
can help build improved resilience. This is supplemented through some practical and
insightful industry case studies.
Introduction
‘Most of the world’s homes, businesses, and infrastructure were built to meet the
needs for a 20th Century climate. As the effects of climate change accelerate, the
need to prepare for the more intense events of tomorrow becomes more urgent with
each passing day.’1
The business case for building resilience to the changing climate can be made
primarily in terms of avoiding unexpected costs, managing risks and making the
most of opportunities, although the focus is on the former. Organizations will ulti-
mately need to improve their control environment by designing improved risk
mitigation plans.
The reasons for this include the fact that weather events can be very costly with
regard to lives, money, security, internal morale and reputation. Good risk manage-
ment practices should allow for early recognition of threats so as to empower the
organization to classify and highlight the risks. The organization can then deal with
the threats in an effective and timely way.
In the context of disaster risk reduction, the UN defines resilience as ‘the ability of
a system, community or society exposed to hazards to resist, absorb, accommodate,
adapt to, transform and recover from the effects of a hazard in a timely and efficient
manner, including through the preservation and restoration of its essential basic
structures and functions through risk management.’2
This chapter explores in detail the growing importance of risk management as a
way to help build a more resilient organization. Risk management often achieves this
through the promotion and facilitation of improved communication between employ-
ees, management board and stakeholders concerning how the threats are being
managed.
The changing climatic conditions are leading to a wide range of threats. It is
important for organizations to recognize and assess the associated volatility of phys-
ical risks. Understanding these threats can also present opportunities with a positive
impact on business performance.
There is general consensus that physical risks of climate change that are associ-
ated with natural events, such as storms or floods, can inflict both direct damage and
indirect impacts to businesses. We can generally split these into two main risk types:
●● Acute – extreme weather events – floods, windstorms, wildfires, etc

●● Chronic – changing climate conditions/patterns – droughts, heatwaves, coastal
erosion, etc
This split is very important in the context of building resilience as organizations will
need to develop different approaches and solutions for each type of physical risk.
While no one has yet discovered how to play God, there are a range of both
preventive and reactive risk management controls and solutions that can be devel-
oped to reduce the impact on business. These are often referred to as pre- and
post-loss mitigation strategies, such as business continuity plans and insurance,
which seek to protect income affected by unfavourable weather conditions.
Another consideration is that while identifying and assessing climate change risks
for most organizations, these may change depending on their respective geographical
locations. Companies with global operations therefore need to assess their risk
profile across each territory and region of their respective activities.
6.1 Key climate drivers and industry impacts

In building resilience, it is important to recognize the specific changes to the risk
profile that an organization is evaluating. The next chapter discusses climate data
sources, their use and the challenges in providing climate forecasting and projections.
A good example is from DEFRA that highlights some of the main climate condi-
tions or key drivers of risks in the UK that organizations should take into consideration
when building improved resilience.3
Changes in annual/seasonal averages
●● Higher average temperatures, particularly in summer and winter

●● Changes in seasonal rainfall patterns
●● Rising sea levels
Changes in extremes
●● More very hot days and heatwaves

●● More intense downpours of rain
●● Higher-intensity storms
6.1.1 Physical weather risks and climate change

Many industries are at risk of the effects of normal weather fluctuations, as well as
the acute and chronic types of physical risks that were outlined earlier.
Table 6.1 summarizes some of the key industries and the reasons why they have
exposure to different climate risks. The table provides details of the risk event and
impact on the industry concerned and provides a basis for an organization to develop
climate scenarios that can be assessed and mitigated (covered further in Chapter 10).
Perhaps surprisingly, even organizations involved in producing new types of renew-
able forms of energy, such as solar and wind, are themselves vulnerable to physical
climate risks, such as hail and lack of wind respectively.
The analysis highlights the range of physical climate risks and the fact that organ-
izations need to carefully consider both acute and chronic types, which can also be
classified as catastrophic and non-catastrophic types of exposures.
TABLE 6.1 Identification of physical climate risks and impacts by industry
Generic climate
Industry threats (cause) Risk event Impact/consequence
Construction Precipitation or Operational – disruption in Regulatory and legal – delays

snowfall construction in completion lead to fines
Financial – potential delays and penalties
in completion
Agriculture/ Extreme Operational – significant Financial – reduction in
agrochemical temperatures loss of quantity and quality revenues from sales
and heat stress of milk for dairy farmers
from livestock
Gas utility Mild winter Operational – reduction in Financial – reduced earnings
demand for gas and profitability
Restaurant/ Precipitation Operational – reduced Financial – reduced earnings;
hospitality demand for outdoor seating additional expense on
Financial – damage of refurbishing and repairs
outdoor furnishing and decor
Food/beverage Cooler summer Operational – reduced Financial – loss of revenue
demand for cold beverages due to sales reduction and
futile stock on product
expiration
Strategic – lack of storage
capacity for additional unsold
stock
Retail companies Precipitation Operational – reduced store Financial – reduced earnings
traffic overall and profitability on
season collection
Natural gas Precipitation Operational – obstruction of Operational – delay in
gas pipeline (e.g. due to completion of project
precipitation-led mudslide) Reputational – inefficiency
towards supplier commitments
(continued)
Generic climate
Industry threats (cause) Risk event Impact/consequence
Renewable – hydro Drought Operational – reduced Operational – reduced

volume and flow of water generation of electricity
Financial – scarcity of
generated electricity for sales
Renewable – solar Hail Operational – disruption in Financial – loss of revenue
functionality and efficiency from sales and damage of
Financial – destruction of asset
solar panels
Renewable – wind Critical low wind Operational – turbines Operational – reduced power
unable to rotate fast enough output
6.2 Building climate resilience

When building operational resilience, developing pre- and post-loss event opera-
tional controls is important in the context of reducing the severity or financial impact
of physical risks due to climate change.
It is important to first understand the context of what is meant by resilience and
then to consider what controls can be designed to help organizations improve their
resilience to climate change physical risks. Resilience can be grouped into different
areas of focus. This chapter will focus on three broad categories, namely operational,
financial and strategic resilience.
6.2.1 Operational resilience

The primary objective of operational resilience is the ability of the organization to
continue to deliver critical operations, i.e. products and services, throughout a
disruption. Operational resilience is really linked to the ability of an organization to
prevent, adapt, respond to, recover and learn from operational disruptions.
A business service is defined as ‘a service that an organization provides to an exter-
nal end user’. It is deemed ‘important’ if its disruption would materially impact an
organization’s (financial or operational) viability, cause significant harm to customers
or impact a firm’s ability to deliver the board’s approved strategy.
Regulators’ expectations also extend to the fact that building operational resil-
ience is necessary to protect the wider society and consumers. Financial regulators,
for example, state that ‘Operational resilience is also about changing your organiza-
tion’s mindset. Instead of thinking about operational disruption as something that
could happen, firms should assume it will happen. This shift in attitude should propel
your organization to make operational resilience a priority and will help to drive
cultural change within the industry.’4
The key components or control mechanisms that will be covered in this chapter
include:
●● Business continuity and crisis management

●● Supply chain risk management
6.2.2 Financial resilience

Financial resilience is the ability of an organization to withstand events that affect its
capital structure, liquidity, revenue and assets.
Organizations can design pre- and post-loss controls that they can use through
risk financing mechanisms. This will be either pre-financing of losses from climate
events or through insurance and hedging strategies. Both arrangements will seek to
reduce volatility of earnings that can in turn help to provide other financial benefits
and targets, such as:
●● Stronger credit ratings

●● Lower cost of debt
●● Improved access to funding
Furthermore, eliminating or reducing the uncertainty generated by different non-

core risks allows management to concentrate on executing core business strategies.
Physical risk from climate change is mainly linked to the uncertainty in cash flow
and earnings caused by volumetric risk (which is variability in supply and/or demand
caused primarily by variability in the climate conditions).
With growing awareness of the impact of weather risk due to, for example,
temperature changes and associated volatility, stakeholders and analysts can view
physical risks from climate change as a non-core operating risk that needs to be
addressed through the use of insurance or other risk financial techniques such as
hedging instruments.
As awareness of climate risk increases among shareholders, chief executives are
no longer able to use the climate as an excuse for lower profits. As a result, a growing
number of companies are developing risk financing solutions to hedge specific expo-
sures. In section 6.7 we expand on some of the risk financing mechanisms available
for companies, including the use of captive insurance companies and of innovative
solutions such as parametric or index solutions.
include:
●● Risk financing
●● Strategic insurance risk gap analysis
●● Financial planning and capital management
6.2.3 Strategic resilience

Strategic resilience considers the implications of the strategic and organizational
choices a firm has to make, and the potential implications for long-term stability.
One of the most important techniques is to develop an emerging risk management
framework (outlined in Chapter 8) and using tools and techniques such as horizon
scanning. Emerging risks are those that you can see approaching but are not yet
sufficiently clear to enable a formal impact and likelihood risk assessment. However,
the key is to understand emerging risks as best as possible. Consider monitoring
them to ensure they don’t arise unexpectedly and consider any possible cost-effective
actions that can be taken now to prepare for when the risk materializes.
The emerging risk management framework should feed into strategic and opera-
tional planning processes to support strategic decisions that need to be made and
consider the funding of any mitigating actions or steps needed. From a climate
change perspective this is likely to centre on the potential for customers’ needs or
markets to change due to climatic changes or transitional influences, geographical
footprint, supply chain transformation over time and/or access to capital, especially
for those impacted by transition. The following example helps to illustrate the
importance of developing strategic resilience.
include:
●● Emerging risk management framework

●● Strategic planning
GLOBAL EXAMPLE
The wine industry
A pre-emptive example of how physical risks relating to climate change are being
managed can be evidenced by the impact that projected temperature increases will have
on wine producers.
As temperatures rise these impact grape yields and the taste of the wine. This will
mean that at a point in the future, large swathes of land in certain parts of the world may
become too hot to produce wine. One of the consequences of this (and how we witness
horizon scanning in response to this emerging risk) is the purchase of land for wine
production in Belgium, northern Germany and England by French wine producers (e.g.
Taittinger – one of France’s most prestigious champagne producers – buying 120 acres of
grapes near Canterbury in south-east England).5 In the southern hemisphere we are
witnessing Tasmania developing as a wine producer. This is an example of climate
change risk management being applied in a sector that has existed for thousands of
years, and which is requiring all aspects of the value chain be reassessed.
6.2.3.1 EMERGING INNOVATIVE OPPORTUNITIES TO GAIN COMPETITIVE ADVANTAGE

There is a growing realization that for many physical risks, such as flooding and
wildfires, organizations can gain competitive advantage by developing new innova-
tive customer communications. The case study below sees a property insurer use
technology to alert the customer to increased surface flooding so they can take
action, the benefits being the customer can take action to ‘de-risk’ their own risks
while reducing losses to the insurer.
CASE STUDY
Acies MGU & Previsico – flood warning service – alert systems embedded within
insurance policies
Background
In England, the surface water flood risk puts over 3 million properties at risk, which is even
more than the risk from river and sea combined that affects 2.4 million properties collectively.
Currently, there aren’t enough credible and reliable weather forecast technologies that can
prevent the damage and loss caused to buildings, stocks, contents and business interruption
due to surface water flooding. The greater delay in responding to flood damage increases the
insurance claims settlement process as well as the financial risk to small and medium
enterprises (SMEs).
Action taken
Flood forecasting systems are valuable and essential for flood risk management. The solution
was to design and provide a customized surface water flooding alert system to provide a
pre-warning of impending flood within 24 hours to the specific location via an email or directly
to mobiles, which allows businesses to act in a timely manner to reduce the impact of losses.
FIGURE 6.1 Flood warning service
FLOOD WARNING
SOURCE Acies
Results
The use of the alert system has been embedded within the insurance policy for the customer
to provide real-time flood warnings. The SMEs receive personalized warnings in their
immediate areas allowing them to take action to protect their premises from flood water.
The use of technology and data insights in this case study addresses the current gaps in
flood forecasting in surface water and ordinary watercourse flooding while improving the
warning systems accuracy, which in turn reduces false alarms.
The overall benefits are that the alert system allows the ‘de-risking’ of the risk for
customers and for the insurance companies to reduce losses.
6.3 Developing a climate resilience framework

Figure 6.2 provides a broad outline of a climate resilience framework that can be
used to improve resilience across operational, financial and strategic dimensions.
The framework helps to explain the main controls that organizations should seek
to develop and the associated tools and techniques. Some of the traditional controls
for building operational risk will be covered in this chapter, such as the use of busi-
ness continuity planning and insurance.
6.3.1 Stress and scenario planning

A number of tools are available within the risk manager’s ‘toolkit’, to enable them to
assess and control risks facing an organization.
One of the most important tools for building climate resilience is stress and
scenario testing, which is covered in Chapter 10. However, it is important to note the
importance of stress testing and scenario analysis to climate resilience both in under-
standing the nature of potential events and the steps needed to build operational,
financial or strategic resilience. The techniques vary slightly but the principles apply
equally across all three. Operational resilience relies on stress testing to challenge the
impact tolerance assessments. Financial resilience relies on it to test sensitivities to
FIGURE 6.2 Climate resilience framework
Climate resilience
Risk strategy and risk appetite
Operational resilience Financial resilience Strategic resilience
Business Supply chain Risk Financial planning Emerging Strategic and

continuity & management financing and capital risk operational
crisis management management planning
management framework
Bow tie analysis (Chapters 4 and 6)
Horizon scanning (Chapter 8)
Stakeholder mapping (Chapter 4)
PESTLE analysis (Chapter 8)

Tools and
techniques
Stress testing & scenario planning (Chapter 10)
Root cause analysis (Chapter 6)
Incident reporting (Chapter 6)
key financial shocks. Strategic resilience utilizes the technique to ‘war game’ future
scenarios.
6.3.2 Use of the bow tie analysis

One of the best risk management tools is the bow tie analysis, which helps to docu-
ment, monitor and communicate the risk environment of an undesirable event such
as acute climate physical risk. The use of the tool also helps to draw the attention of
controls in the prevention and mitigation of negative risk events. For climate change,
it can be used to assess a specific event across different risk categories in the risk
profile.
It is particularly useful in assessing not only root causes, but also possible
outcomes, and provides a basis for debate regarding key controls that could be
implemented. Bow tie analysis is also a simple and effective tool for communicating
risk assessment results to employees at all levels.
The bow tie itself is formed of five key components:
1 The event –the centre of the bow tie describes the risk event that an organization
could face.
2 Causes – the root cause of the event, which could include earlier catalyst events.
172
FIGURE 6.3 Bow tie analysis – flood event for a bank
Cau es
ses com
Out
Operational risk
Pre rols
ven
tion e cont
con ctiv
trol Rea Inability to access
s
premises
Staff homes
impacted
Operational risk Credit risk Operational risk Credit risk
Environmental
policy Flood Credit risk
Land use Building selection Flood mapping Continuity plans
Rising sea levels events Forbearance
Flood mapping Flood defences insurance Facility amendments
Flash floods Flood defences Credit policies insurance/ Reduced collateral
Extreme weather BCPs/DRPs reinsurance/captive base
insurance Increased levels
of default
Extreme ‘negative
equity’
Clients unable to
insure

3 Outcomes – the eventual results of an event materializing.

4 Prevention controls – controls that an organization could use to stop the event
from occurring.
5 Reactive controls – actions to be taken should the event materialize, to minimize
or mitigate possible outcomes.
By working through these steps, and accounting for varying teams’ views and
perspectives, a full picture of the event can be gained. Figure 6.3 is an example of
how the bow tie can be applied to the physical effects of climate change, from the
perspective of a flood event for a bank, which in this case would have most impact
on the operational and credit risk profile.
The main objective of the tool is to help evaluate whether the existing controls are
effective in meeting the organization’s target risk appetite for the specific climate
scenario.
The outputs of any bow tie process should be assessed against the overarching
risk appetite of an organization. For example, while an event could cause negative
consequences for a business, it may be that controls are either too expensive or the
residual risk level is deemed small enough that ‘no action’ is deemed to be the best
approach. Above all, the bow tie acts as a tool for debating the best approach, rather
than necessarily providing a miracle answer.
A specific industry case study using the bow tie analysis is provided below from
Southern Water plc in the UK. Southern Water UK define resilience as ‘the ability
of a water source to cope with and/or recover from lack of rain to continue
providing the same water quality while protecting the environment’. One of the
main climate-related risks linked to meeting this operational objective is different
levels of ‘droughts’ and the case study below highlights how the utility company
is adapting business processes and developing ongoing mitigation stages and
plans.
CASE STUDY
Southern Water 6
Building operational resilience for a future drought event

Background
According to the UK Climate Change Risk Assessment 2017 Evidence Report, the risk of
shortages in the public water supply stands within the top six areas of climate risks in the UK.7
In this context, we define resilience as the ability of a water source to cope with and/or
recover from lack of rain to continue providing the same water quality while protecting the
environment.
Risk identification process
The main causes of a drought are:
●● Absence of or reduced rainfall particularly during winter. Aquifers are an important

characteristic of South East England, considering the recharge period given.
●● High water demand, in the spirit that there is great need to balance demand against supply
to satisfy customer needs.
●● Climate change alters large-scale atmospheric circulation patterns, which can shift storm
tracks off their typical paths. Rising temperatures make wet regions wetter and dry regions
drier.
Categorize the risk
Drought vulnerability assessment: The company carried out a high-level screening against a
set of criteria to identify water resource zones that are ‘drought vulnerable’. Furthermore,
Southern Water has identified various stages of droughts that may have different duration,
intensity and geographical extent.
The main risks identified across our risk profile are as follows:
●● Operational risk – Uncertainty about a company’s operations, including delivery of its

products or services.
●● Strategic risk – Risks that pose a threat to a company’s ability to set and execute its
overall strategy.
●● Environmental and legal risk – Uncertainty related to lawsuits or the freedom to operate.
Potential environmental liabilities or the impact of changes in the environment.
Assumptions
●● The higher the drought severity, the higher the cost in relation to our drought response.
●● Our drought response will rely on:
●● How we reduce leakage
●● How we encourage customers to reduce water use
●● How we implement restrictions on water use when necessary
●● How we maintain water supplies during the drought
●● How we ensured our water sources are protected
●● How we monitor and mitigate for any impacts upon the environment
●● Preventative barriers are more likely to alleviate the drought’s symptoms rather than fully
mitigate it with respect to climate change.
FIGURE 6.4 Drought event – bow tie analysis
Cau es
ses om
O utc
Operational risk
Pre ols
v ent contr
ion
con ctive Less drinking
trol
s Rea water
Increased
demand
Operational risk Strategic risk Operational risk Strategic risk
Target 100 Regional & national Continuity plans Enhanced regional Strategic risk
Absence or
reduced Rainfall Leakage activity collaboration & national
Excess water
efficiency campaigns Drought collaboration
demand events efficiency campaigns Customer
climate change complaints
Increased
Legal & environmental risk Legal & environmental risk
drought costs
Abstraction licence Water resources
drought permit order Legal &
environmental
risk
Financial
penalties
175
Mitigation plans to improve resilience
Southern Water has developed or is in the process of developing/optimizing mitigation plans

to reduce the impact of a drought to meet our objectives:
●● If the drought is severe in some areas, we will consider imposing water restrictions in order
to reduce demand.
●● Depending on the drought severity, we have developed a robust planning procedure to
anticipate drought events and protect our resources.
●● The company intends to undertake proactive and reactive water efficiency campaigns to
raise public awareness that can be carried out using a variety of ways and media. The key
message is to encourage customers to consume less water during a dry period.
●● Active member of the Water Resources South East (WRSE), in order to facilitate dry
weather meetings, which focus on the risk of potential drought events and regional
collaboration (e.g. joint communications).
●● The company has a number of supply agreements with neighbouring water companies that
include imports and exports.
Next steps/ongoing steps
●● We plan to be less reliant on drought permits and orders, in accordance with our regulator,
to ensure greater resilience to droughts and reduce our impact on the environment
(Regional Plan Development, 2040).
●● From a demand management perspective, we have committed to reducing leakage by 15
per cent over Asset Management Plan7 (2020–2025) and by 50 per cent by 2050.
●● By implementing our ‘Target 100’ plan, we pledge to help our customers reduce their
personal consumption to an average of 100 litres per day by 2040.
●● Leakage may increase during a drought – a result of soil drying out, resulting in ground
movement and different pipe work movement. Additional leakage detection and repair
sources are needed to ensure that leakage won’t be increased during a drought event.
●● Water Resources Management Plans (WRMP) to protect and sustain water sources and
promote water network interconnectivity.
6.3.3 Impact on property assets

As already outlined, one of the major issues impacting both governments and organ-
izations is the protection of property from physical risk and developing greater
resilience to, for example, flood events. More intense physical risk events impact on
residential and commercial properties or infrastructure.
In terms of building resilience it is essential to limit damage potential and protect

assets in the future. Even in the most developed parts of the world there remains a
critical need to retrofit properties that reside in known high-risk locations.
Other solutions being developed are more stringent building code requirements in
addition to further growing insurance take-up where gaps exist.
6.4 Climate resilience guidance and frameworks

From an enterprise risk perspective in managing and mitigating physical risks and in
the context of climate change (and any other strategic risk), organizations need to
embrace a helicopter view across the whole risk profile of the organization.
Before explaining a formal process that organizations can adopt it is important to
recognize how governments are addressing the problem from a more long-term
perspective in project planning.
6.4.1 Government guidance in respect of climate resilience

For risk professionals it is important to recognize that governments have been
providing some excellent guidance on how to build resilience against climate change
in the context of their policies, programmes and projects.
The Department for Environment, Food and Rural Affairs (DEFRA) in the UK
has provided guidance specifically addressing climate change. Its report sets out to
provide analysts and policymakers with information on how to design adaption
measures in respect of climate risks and challenges to improve resilience in, for
example, infrastructure projects.
One of the most important and helpful guides in the context of building resilience
is the Green Book issued by HM Treasury in 2020 on how to appraise policies,
programmes and projects.8
Within the report, Section 5.49 sets out good risk management practice guidance
on the appraisal, monitoring and evaluation of projects that include the need for
how specific risks may be avoided, minimized or managed. They recommend, for
example, that a risk register is created and maintained through implementation and
owned by those responsible for operational delivery.
One of the insights that governments use is ‘optimum bias’, which is in effect a
built-in contingency that helps to reduce false expectations, for example that a larger
project could have been delivered at a lower cost. It also includes an appendix enti-
tled ‘Uncertainty, Optimism Bias and Risk’ in which it outlines real option analysis
and illustrates a proposal for investing in infrastructure protecting against the
impacts of river flooding due to climate change, which was undertaken by the
178
FIGURE 6.5 UK Government guidance on climate integration to improve resilience
Policy
rationale
Make decision based on:

Develop Appraisal of costs
options Flexibility
and benefits
Available information
Adaptation
Adaptation
Climate risk Climate scenario(s) must be
assessment incorporated into baseline
Costs and benefits of options Monitor and evaluate
reflect those expected in chosen option
relevant climate scenarios
1. Identify climate risks and adapting options 2. Incorporating climate risks into 3. Valuing flexibility and adapting accordingly
appraisal of options
SOURCE DEFRA – Supplementary Green Book Guidance (2020)
Department for Environment, Food and Rural Affairs. The details of the assessment
are set out in the Green Book (2022) – Guidance.9
Its approach to climate resilience appraisal builds on the Green Book approach
and helps to ensure that decisions are resilient to future climate change risks. The
process is summarized in Figure 6.5.
This approach can be adapted to all organizations as they consider the threats to
their existence from physical risks.
6.5 Organizational climate resilience process

In terms of developing a generic high-level strategic process to build increased resil-
ience for climate change, it is important that risk professionals within their respective
organizations develop a methodology like the four-step process described below and
in Figure 6.6 that can be adopted for any areas of risk, but can be tailored for the
assessment of physical risks.
FIGURE 6.6 Climate resilience framework process
Identify climate risks

that can impact on
organizational
objectives
Design climate Building Describe climate

resilience climate scenarios that can
action plan resilience impact on objectives
Review of reactive
and preventive
controls

1 Identify climate risks that can impact on an organization’s objectives (e.g. KPIs
and risk tolerance levels).
2 Build out climate scenario descriptions that relate to physical climate risks.
3 Review the reactive and preventive controls environment through an assessment
of available risk mitigation techniques that can improve resilience.
4 Design a formalized climate resilience action plan.
6.5.1 Identify climate risks that can impact on organizational objectives

Organizations should first identify the physical climate risks that impact on meeting
their objectives, including key performance indicators (KPIs). These are typically
articulated as causes that can impact on the risk profile, which will be primarily on
the operational and/or financial risk profile across specific business activities and
processes.
The overall objective of the process will be to assess the existing control environ-
ment and either identify any gaps in either existing controls or see whether new
controls and mitigation plans can be developed to build improved resilience in the
organization.
There are some helpful climate physical tools that can be used to help, such as the
climate impact assessment tool (BACILAT) developed by the environmental agency
and used by the UK Climate Impacts Programme (UKCIP), which is based at the
Environmental Change Institute at the University of Oxford.10
Its framework sets out a set of six generic business functions and has been designed
to be applicable to any type of business or sector.
Whilst it is a helpful tool and the business areas are important to focus on, a more
structured approach is required from a risk management perspective. This is provided
through understanding the risk profile of the organization and the related activities
and objectives, and ultimately identifying climate scenarios that could prevent the
organization from meeting its objectives, or indeed enhancing its objectives.
In order to better understand the organization’s risk profile there are generally
two areas that risk professionals need to focus on:
●● Review of existing internal documentation including business and risk information.

●● Understanding the risk profile and business activities and developing risk ques-
tionnaires, structured interviews and workshops that will assist in identifying the
climate threats that will impinge on the organization meeting its key performance
and thus from achieving its overall organizational goals and objectives.
In developing key performance indicators and tolerance levels it is important to note

due to climate change some of the existing metrics will need to be recalibrated or
new ones developed as part of the wider design of a climate risk appetite strategy,
which we covered in Chapter 2.
The impacts are the ones that should align with the organization’s own risk
assessment criteria, which can be developed through workshops in developing
climate scenarios that we will discuss in Chapter 10.
6.5.1.1 MAPPING THE RISK PROFILE TO BUSINESS ACTIVITIES

As part of this first phase it is helpful to map out climate threats that could impact
on the specific business processes and risk assessment criteria (RAC) or KPIs.
Ultimately it is important to map out how physical risk impacts on the existing
risk profile and how that can be developed and matured over time. This approach
helps to identify the key areas of focus and prioritize those that are most likely to be
impacted by physical climate risks. This is equally applicable to transition risks but
we will focus our discussion on physical risks.
The main output of this review process should integrate into internal business
and risk information gathered, such as prevailing risk registers, and then be supple-
mented by expert judgement and feedback and discussion through risk
questionnaires, structured interview and workshops. This will help to build a list
of risks and threats aligned to specific divisional or departmental risk assessment
criteria or KPIs.
TABLE 6.2 Example of physical risk from a water and electricity utility company
Relevant risk
Risk Business assessment Generic climate
category activity criteria or KPI Risk event of concern threats (cause)
Operational Supply of Revenue service Partial or complete Algal bloom

desalinated disruption, health outage of water
water network and safety, production
environment,
corporate objectives
and reputation
Financial GL and statutory RAC – revenue, Seasonal temperature Seasonal volatility
reporting results absolute deviation volatility (against
(profit and loss) from approved expectation/budget)
budgeted revenues
Operational Customer Revenue, service Failure to accurately Underlying forecast
demand disruption forecast future water factors incorrectly
forecasting and electricity demand estimated –
may result in including trends in
insufficient or excess weather-related
capacity factors
(continued)
Relevant risk
Risk Business assessment Generic climate
category activity criteria or KPI Risk event of concern threats (cause)
Operational Business Reputation Lack of formal internal Lack of formalized

continuity crisis management plan documented and
management/ communicated crisis
crisis management policy
management
Operational Project Revenue, service Inventory shortage to Natural catastrophe
management disruption, meet project event such as major
corporate objectives requirements flooding
and reputation
Some specific examples that organizations need to consider are highlighted in Table
6.2, which comes from the utility sector. Many of the examples are generic and can
be applicable to many other industry sectors.
6.5.2 Build out climate scenario descriptions that relate to physical climate risks
Having identified the physical risks and threats it is important to then build out
specific ‘scenarios of concern’. According the BSI Group report, as we have discussed
it is important to:
●● Understand the timescales of relevant decisions

●● Use information about the future rather than the past11
Risk managers can support the process by assessing the risk of each threat or bene-
fit and considering how far into the climate future it is necessary to look or predict.
This will depend on the lifetime of decisions associated with it. For example, when
assessing threats or benefits associated with large-scale fixed assets or long-term
contracts it will be important to assess their likelihood by thinking about what the
climate will be like at the end of their life. In addition, it is important to remember
that the climate is not the only thing that is changing. Any changes to other external
or internal factors, such as changes in locations or technologies, should also be
considered.
TABLE 6.3 Climate scenario descriptions
Generic climate
Department threats (cause) Scenario description
Water and civil Algal bloom Natural process due to change in weather conditions,
e.g. temperature/climate change leads to algae
blocking the intake of water to desalination plant
causing partial or complete outage
Finance Seasonal volatility ‘Mild summer’ leads to reduced temperatures that are
directly correlated to reduced demand and revenues
Power and planning Underlying forecast Due to lack of planning, inability to determine trends
factors incorrectly and causations between consumer demand and
estimated – including supply for extreme weather factors including a mild
trends in weather- summer
related factors
Marketing and Area-wide flood event Area-wide flood event that leads to financial losses to
corporate businesses within the vicinity, and damage and loss
communications of assets that lead to service disruption and
reputational damage
Distribution Natural catastrophe A global flood event impacts the global supply chain
event such as major and as a result leads to delaying the supply of key
flood event inventory, e.g. transformers for installation at project
site
6.5.3. Review of reactive and preventive controls

Having developed a set of physical risk climate scenarios that can impact upon the
objectives of the organization, the next step is to review the current control environ-
ment and risk mitigation options available.
One of the fundamental roles of a risk manager is to identify and assess critical
risks and then develop appropriate risk controls that help to move risks from an
inherent risk perspective (assuming no controls) to a target level of risk or risk appe-
tite as set out in Figure 6.7 below. At a high level, a traditional approach could be
used such as the 4Ts of risk management: tolerate, treat, transfer and terminate.
It is important to understand the different types of controls that can be utilized. A
control is a measure or action that should seek to modify the risk, either through
reducing its likelihood, severity or both. Controls should already exist and can
include:
●● Policies
●● Practices
184
FIGURE 6.7 Review of risk mitigation options
Refers to the extent to

which this action can
reduce the risk's impact,
likelihood, or both
Also known as the 4Ts
Effect of Acceptance involves willingly or knowingly

Accept the risk
treatment on taking a risk in order to pursue an opportunity
(tolerate) or making an informed decision to retain the risk
impact and/or
likelihood
Mitigate/manage Elimination or reduction involves reducing the

Climate scenario
the risk extent of exposure to a risk and/or the
(threat) likelihood of its occurrence
Cost vs benefit
of treatment Transfer involves sharing the risk with another
Transfer the risk
option party or parties (i.e. via contractual agreements,
(transfer) risk financing and insurance)
Avoid the risk Avoidance involves deciding not to start or

Refers to whether (terminate) continue with activity that gives rise to a risk
the benefit generated
is greater than cost

●● Processes
●● Technologies
●● Methods
●● Devices
Organizations should therefore either seek to improve the existing control environ-
ment or introduce new controls to help align the risk to an acceptable level to meet
the risk appetite or target score of the board.
6.5.4. Design risk mitigation strategies

Developing risk mitigation plans and improving the control environment is critical
and organizations need to align them with stakeholder expectations and then align
them with their strategic objectives, core operations and processes.
As shown in Figure 6.5, organizations should seek to evaluate and develop risk
mitigation plans that need to:
1 Reduce the impact and/or likelihood of the climate scenario of concern.

2 Ensure the long-term benefits of implementing the control or risk mitigation
initiative are greater than its cost. It is important to consider conducting cost/
benefit analysis to optimize the risk and reward trade off.
The risk mitigation plans should be formalized as part of ongoing climate change
plans in line with risk appetite strategy, as discussed in Chapter 2.
6.6 Specific risk management controls to

improve operational climate resilience
As discussed in section 6.2.1 two of the main of the operational resilience compo-
nents include business continuity and crisis management, and supply chain risk
management.
6.6.1 Integration of climate change into business continuity management

One of the most important controls with respect to developing operational resilience
is business continuity management (BCM). In the context of climate change risk, this
requires management to give consideration to how the business can continue to
operate in the face of a major weather event (which can be direct, or indirect via
disruption to the wider supply chain). This risk can present both financial and
operational challenges for organizations.
One of the most important elements of BCM is to identify mission-critical systems,

ensure they can still operate during a business disruption and make sure that the
plans are tested on a regular basis.
It is important to recognize that the challenge of initializing a business continuity
process and preparing for a business disruption is daunting, and it is important to
seek external advice often, particularly with respect to independent evaluation.
The options available to organizations are to:
1 Reduce the likelihood of a physical risk disruption

2 Reduce the period of disruption
3 Reduce the impact of a disruption
This will result in a range of specific actions to change either the likelihood, impact
or both and will involve a combination of changing location (or increasing the secu-
rity of the physical infrastructure), utilizing technology, developing operational
arrangements (with suppliers or similar firms) or building flexibility (or additional
capacity) into existing processes.
Organizations should seek to integrate specific actions into the existing BCM
plans. These actions can be simplified into a four-step process as shown in Figure 6.8.
Organizations should follow the four key steps outlined in Figure 6.8:
1 Identify their important business services by considering how disruption to the

business services they provide can have impacts beyond their own commercial
interests.
FIGURE 6.8 Business continuity process
1.
Identify business
services
4. 2.
Operational
planning and
Exercise control
Business impact
programme assessment
Evaluation
3.
Business
continuity, plans
and procedures

2 Set a tolerance for disruption for each important business service (an impact
tolerance).
3 Ensure they can continue to deliver their important business services and are able
to remain within their impact tolerances during severe but realistic scenarios.
4 Conduct the exercise programme with a broad set of stakeholders to help test the
procedures that can be used to assess the level of preparedness.
Therefore, in respect of climate change threats it will be important that organiza-

tions review and revise the business continuity policy and strategy. This will involve
revisiting and updating the business impact analyses (BIAs). It will also require the
organizations to review the wider supply chains (and those of partners, suppliers and
third-party providers) in order to identify weaknesses. Integration into the supply
chain risk management is discussed in section 6.6.2 below.
EXAMPLE
Climate change and data centres
Many organizations are concerned about the location of their data centres, for example
in current or future flood zones.
In terms of implementing improved controls to build greater resilience to future
floods, an organization should consider relocating its data centre to a new location that is
less prone to flooding. Other related controls include installing uninterrupted power
supply (UPS) at the new location or having a real-time back-up of data in the cloud, so
that even if the adverse outcome was to occur, the impact would be minimized. The
reduction in impact and likelihood will depend on the investment made to improve the
control environment.
6.6.1.1 CRISIS MANAGEMENT

As well as effective planning for an event it is essential to build out a plan for how
to respond in a crisis. This could involve the governance around an event (who is
involved, at what level and when), the communication plans for various stakeholders
and any pre-determined steps around how to walk through the crisis from start to
finish. War gaming and scenario planning may help inform knowledge and under-
standing of how to respond in a crisis. Any learnings from these exercises should feed
into an updated crisis management plan.
Tone and drive from the top will be key as well as a good understanding of the
plan across the senior executive team. Acting as one unit and moving in the same
direction at the same time will simplify the response enormously.
For the more extreme shocks that relate directly to your organization, the public
communications made during the crisis can make a significant difference to the way
the customer perceives the company and its reputation moving forward. Even if the
right actions are taken, if these are poorly communicated the customer may not
recognize the strength in the response.
In climate change terms, responding to a weather or natural catastrophic event is
likely to be industry wide, although a failure to plan can sometimes turn an industry-
wide shock into a company-specific crisis. The longer-term ‘slow burn’ risks are not
likely to trip an individual company up unless there is a lack of recognition that a
crisis is happening.
GLOBAL EXAMPLE
Lessons learnt from Hurricane or ‘Superstorm’ Sandy, 2012
Hurricane Sandy is an interesting example that can be associated with climate change.
The hurricane called ‘Superstorm Sandy’ caused an estimated $70 billion in damage and
killed 233 people across eight countries. It flooded downtown Manhattan and caused
major disruption to transportation.
Organizations spend a lot of senior management time and money creating their
business continuity plans. In this example, however, many of the plans did not respond
adequately as they had not factored in such an extreme event. It was more difficult to
find alternative office space to accommodate staff than the plans envisaged and there
were associated issues with IT connectivity.
GLOBAL EXAMPLE
Hurricane Katrina, 2005
Hurricane Katrina in 2005 was the third most intense US storm at the time, but the
costliest with total property damage that was estimated at $108 billion. The event helped
to change the way businesses and governments manage disasters arising from natural
catastrophe events and climate change.
The event highlighted the important of crisis management in building operational
resilience.
The main reason why the storm caused so much destruction along the Gulf Coast
from central Florida to Texas was due to the storm surge and levee failure. The hurricane
surge forces breached protective levees in New Orleans and resulted in catastrophic
flooding in the City and 1.3 million residents of the greater New Orleans metropolitan
area were evacuated. The main causes and consequences are illustrated in Figure 6.9.
FIGURE 6.9 2005: Katrina – common causes and impact on ERM
Causes Impact on ERM
‘Hurricane Katrina has taught us that

disaster risk reduction must be people-
centred and engage all sectors of society.’
System design and construction flaw Raised the bar for disaster risk
in the levees management worldwide
Delayed emergency response Improved natural catastrophe

modelling
Inaccurate insurance/re CAT models Improve operational resilience
189
Criticism focused on the delayed response to the flooding of New Orleans, and the
subsequent state of chaos. The emergency evacuation order was left until 19 hours
before landfall, which led to the deaths of hundreds of people who could not find any
way out of the city.
This incident ultimately led to the need to improve disaster risk management
worldwide. Hurricane Katrina has taught us that disaster risk reduction must be people-
centred and engage all sectors of society.
6.6.1.2 MANAGING CONNECTED EXTREMES

An emerging topic in the discussion of climate change is the concept of compounded
or connected extremes. We explore this here as it is relevant when considering the
risks across the various approaches to climate resilience.
Combinations of extreme events are often termed ‘connected’, to convey the
complexity of interacting physical and societal mechanisms that cause their
impacts to be amplified relative to the impacts from those same events occurring
separately.
EXAMPLE
Climate change and blackouts
One of the major risks facing many organizations, particularly the power industry sector,
is ‘blackout’ with an outage of say, more than 10 hours, which can be perceived to be a
‘catastrophic event’. While short-term power blackouts are experienced frequently on a
local or regional level around the world (e.g. caused by natural catastrophe events like
storms, floods or heatwaves), societies are not familiar with large-scale, long-lasting,
disruptive power blackouts. Traditional scenarios assume blackouts for only a few days
and losses seem to be moderate, but if we are considering longer-lasting blackouts, the
impact on society and economy might be significant.
Typically, power blackouts are not caused by a single event but by a combination of
several deficiencies. The following preconditions are the basis for a higher power-outage
risk:
●● High grid utilization or high power demand

●● High power plant utilization
●● Multiple power line failures
●● Defects due to material ageing
FIGURE 6.10 Causes of blackouts
Climate change
Economic upswing
Mega cities
• Ice storms Heatwaves
• Snow storm
• Wind storm Increased demand
• Lightning
• Flood
• Lack of cooling water
Blackout • Lack of hydro capacity
Failure of transmission Failure of production
Solar storm Lack of investment,

ageing infrastructure • Terrorism
• Earthquake
• Construction
defects
• Operating errors
Increased volatility due
to solar & wind power
191
If the following events occur in combination with the above-mentioned conditions there is
a very high likelihood of a power blackout occurring that can be linked to climate change,
such as:
●● Power plant shutdown for revision or due to supply failures (e.g. cooling water
shortage during heat waves)
●● Unforeseen simultaneous interruptions of several power plants
●● Sudden simultaneous high power demand (e.g. simultaneous usage of air
conditioners during hot summers, power line collapse or electrical equipment
breakdown due to natural hazards)
Figure 6.10 flags how climate change can be a key factor in this and how connected
extremes can add to the existing risks and amplify the impact. The challenge now is not
only limiting the further impact people have on the atmosphere but also adapting to
and tackling the extremes we are already facing.
Consequences of blackouts
Direct costs of blackouts are lost production, idle labour and facilities, damage to
electronic data, spoiled food and damaged products, damage to equipment, or customer
refunds. Indirect costs are looting, accidental injuries, legal costs or loss of water supply.
In general, indirect costs exceed direct ones by up to five times.
The well-known ‘Northeast blackout of 2003’ in the US and Canada that affected
55 million people seems to have caused the highest economic loss ever during an
outage, with an estimated total cost between $4billion and $8 billion. But even short
blackouts, which occur several times during a year in the EU, add up to an annual
economic loss of between $104 billion and $164 billion.
6.6.2 Supply chain risk management

Interruptions to supply chains are regular and costly occurrences. Climate change is
likely to make managing global supply disruptions more challenging. The main
climate change risks that can impact supply chain include:
●● An increase in the frequency, magnitude and scope of acute supply chain disrup-
tions. This will require companies to invest more time and money in their supply
chain risk management programmes.
●● It will create chronic changes to supply chains that companies will need to
adapt to.
●● It will create new types of risks that have not typically been addressed by supply
chain risk management programmes.
In seeking to improve supply chain resilience to manage climate change risks it is

important to incorporate climate change risks as part of the supply chain risk
management strategy. The main risks that organizations need to address include:
●● Lack of available supply

●● Delay of supply
●● Lower quality of supply
●● Increased cost of production
The consequences can lead to serious repercussions for an organization’s reputation,

cash flow and revenue.
In terms of solutions The Sustainability Consortium in conjunction with HSBC
state in their report that ‘a company has two strategies to enhance supply chain resil-
ience: bridging and buffering. Bridging strategies enhance the capability of a supplier
to withstand risk events and recover more quickly from a disruption… Buffering
strategies protect the company from inevitable supplier failures and supply disrup-
tions.’12
In terms of specific mitigation strategies:
●● Bridging strategies – Bridging strategies should seek to engage in collaborative

planning and control with suppliers, providing suppliers with financial support
and developing strong supplier relationships.
●● Buffering strategies – Companies can use inventory buffers, lead time buffers,
capacity buffers, liability buffers and cost buffers to make their supply chain more
resilient. A supply chain organization can also intentionally work to develop the
culture, processes and discipline of a high-reliability organization to provide the
foundation for a resilient supply chain. Attention to climate change risks will not
only make the company’s supply chain more resilient but may make the company
more attractive to its employees, customers and investors.
●● De-risking the supply chain – With respect to concentration of exposure, consider
de-risking the supply chain by re-engineering where possible, managing risk and
assessing the role of contracts and agreements as a tool for risk management. This
can include removing dependencies on sole suppliers or multiple suppliers based
in the same geographical region.
6.6.2.1 INTERCONNECTED SECONDARY RISKS FOR SUPPLY CHAINS

An emerging topic in the discussion of climate change is the concept of compounded
or connected extremes. Much has been written on the concerns around multiple
large-scale disasters happening concurrently that put major strain on governmental
agencies, emergency managers and the insurance industry in responding to these
events in real-time.
What have become more prevalent are the secondary or tertiary effects seen across
the commercial sector. The most obvious effects to the commercial sector due to
climate change come via the global supply chain. Many of these effects have already
been observed and are likely to occur with increased frequency if strategic planning
is not done to limit disruptions in the future. There are multiple components to how
supply chains can be disrupted by climate change:
1 More intense events damage critical infrastructure to minimize shipping avenues

2 Direct damage to manufacturing facilities or equipment
3 Reduction in employee productivity
4 Increased market prices for labour, energy and logistics (such as transport)
6.6.2.2 GLOBAL EVENTS IMPACTING SUPPLY CHAINS – THAILAND FLOODS 2011

In Thailand, floods in 2011 resulted in a total of 815 deaths and 13.6 million people
being affected. 65 of Thailand’s 76 provinces were declared flood disaster zones, and
over 20,000 square kilometres (7,700 square miles) of farmland was damaged.13
The World Bank estimated $46.5 billion in economic damages and losses due to
flooding, as of 1 December 2011.14 Most of this was due to the manufacturing indus-
try, as seven major industrial estates were inundated by water as much as 3 metres
(10 feet) deep during the floods.15 Disruptions to manufacturing supply chains
affected regional automobile production and caused a global shortage of hard disk
drives, which lasted throughout 2012.
The World Bank’s estimate for this disaster meant at the time that it ranked as the
world’s fourth costliest disaster as of 2011, surpassed only by the 2011 To –hoku
earthquake and tsunami in Japan, the Great Hanshin earthquake in 1995 Hurricane
Katrina in 2005.16
The Thailand floods helped propel flood risk to the top of the policy and business
agenda in Asia and other parts of the world. It has provided more focus on e nhancing
relevant infrastructure, expertise and data capabilities.
6.6.2.3 ALIGNMENT WITH FINANCIAL RESILIENCE

Section 6.7 provides more details of how an organization can develop financial resil-
ience. In managing supply chain risks it is important to recognize that an organization
can also improve existing supply chain processes and procurement operations
through risk transfer solutions.
Organizations should consider traditional and non-traditional solutions such as
self-insurance through captive insurance company and innovative insurance solu-
tions such as parametric or index solutions that can provide protection against
business interruption and contingent business interruption exposures.
CASE STUDY
Skyline Partners: Heat stress solution for livestock
Hot summers have negative impacts on dairy herds and, in aggregate, on the short- and
long-term output of the dairy industry. This problem is worsening not only due to
global average temperature increases, but also due to intensive selection for production
among dairy herds in temperate climates.17
In conjunction with SCOR and ITK, Skyline Partners have developed a parametric product
that aims at mitigating this ever-growing concern, thanks to a specifically designed heat stress
index, taking the best of the scientific literature on the matter.
This innovative parametric insurance solution allows farmers and companies involved in
the dairy supply chain to protect themselves against all economic losses related to heat stress,
including:
●● Milk yield loss

●● Quality losses due to loss in protein and fat content impacting price
●● Increase in operating costs such as additive feed and ventilation, etc
Moreover, it can also provide protection against intangibles such as loss of reputation and
long-term health-related losses through protection against short-term (lower production,
reduced quality) and long-term (chronic effects on animal health) perils of heat stress.
The solution involves the automatic collection of third-party weather data at a granular level,
and a calibration of the triggers to align with farming practices and their estimated economic
losses. The compensation for farmers is triggered at the end of the season, where applicable.
FIGURE 6.11 INSDEX visual data

Both the terms of the guarantee and the compensations are automatically calculated using
Skyline Partners’ INSDEX® parametric calculation engine, allowing for at-scale
deployment while preserving the local link between conditions and payout for individual farms.
6.6.3 Incident reporting

Reflecting and learning from an incident or event after it has occurred is essential to
building a resilient organization. Utilizing the experience to build understanding,
skills and capabilities should significantly enhance the ability of the firm to respond
to future events. The key to understanding an incident is some form of root cause
analysis using techniques like the bow tie approach described earlier. If properly
executed and considered the responses to one incident may well improve control
over several other similar incidents. The art is to be open to the underlying root
causes and aim to avoid overly defensive responses or creating any sense of blame
for an event. To run an effective root cause analysis requires everyone to be open to
discuss the event with as little emotion as possible. The success is to define strategies
to avoid such incidents in the future.
6.7. Building financial resilience

As discussed in section 6.2.2, key components or control mechanisms that are
covered in this chapter include:
●● Risk financing
●● Strategic insurance risk gap analysis
●● Financial planning and capital management
6.7.1 Risk financing

Financing of risk using an insurance company is a process that most organizations
undertake and insurance is a useful tool for dealing with the financing of climate-
related hazard risks such as flood, to protect property.
While insurance provides a near perfect hedge against the financial effect of a loss
covered by a policy, by protecting a policyholder’s balance sheet and its revenues, it
also brings an additional contingent risk – the credit risk of the insurers.
Organizations need to optimize their risk transfer decisions between risk reten-
tion and risk transfer in terms of cost of risk and volatility, for example to contain
external premium spend.
Consequently risk-financing programmes should consider the following features,

which will vary dependent on the size and risks faced by the organization.
●● Local policy deductibles sufficient to energize subsidiaries in risk management

matters but not large enough to threaten stability or demotivate local management.
●● Establishing a self-retained layer commensurate with the consolidated organiza-
tion’s risk appetite/tolerance.
●● Establishing a captive insurance company that bridges the gap between the risk
tolerance of subsidiaries and the attachment point of insurance with third-party
insurers. Captives can play a key role in building up surplus funds to pay for more
catastrophic risks such as hurricanes, as they help organizations reduce cash flow
volatility and decrease budget uncertainty.
The next chapter discusses how climate data can be used to model and finance
climate risks, including some innovative new solutions using parametric index and
financial hedging solutions.
6.7.2 Strategic insurance risk gap analysis

Section 6.5 set out the importance of building out climate scenario descriptions that
relate to physical climate risks.
Once the threats and scenarios have been identified a risk mapping exercise can
be undertaken to both existing insurance coverage and against alternative or new
coverage. The main objective of the exercise is to determine whether there are any
gaps in coverage when mapped against the business processes and activities of the
organization.
The focus of the deliverables is to align the core activities of each area of the busi-
ness with the coverage availability.
This strategic exercise or internal project should ideally be undertaken with
support from technical insurance experts to review the insurability of the scenarios.
The review should take into consideration:
●● Existing insurance policies

●● Potential coverage extensions
●● Alternative insurance policies including new insurance products
Once the insurability options are exhausted, the scenarios are considered uninsura-
ble and alternative risk mitigation solutions are then required. This process allows an
organization to support the justification for buying insurance, including new types
of insurance, and a better understanding of the financial and reputational benefits of
risk transfer. This process can also support:
●● Ability to assess the impact of an event across multiple jurisdictions and business
functions
●● Improving the internal risk registers

●● Improved communication and leverage of the ERM internal function
The methodology can be used to focus on specific areas of risk such as supply chain
risks.
Typically, it is best to undertake this process using a gap analysis comparing the
risks against coverage availability across the businesses and develop an RAG status
that will lead to recommendations to the organization with regard to prioritizing its
cost of risk spend.
Ultimately this process is an important risk management tool that can help assess
and understand what risks are insured, uninsured and uninsurable. It addresses the
question of mapping the risks aligned to an organization’s insurance policies and
against the threats in the organization and therefore is very effective in the context
of climate change risk.
6.7.3 Financial planning and capital management

Financial planning and capital management ensures the organization has the cash
and capital needed to support both the short-term liquidity demands of the business
plus any longer-term capital demands that may be placed on the business. Ensuring
this is in place increases flexibility in the event of a resilience demand, ensuring the
predicted/known liabilities can be met. This is particularly important where you
have customers dependent on the cash being available to support them, like financial
services, or where the business is dependent on a functioning supply chain.
These activities may utilize a wide range of the tools listed within this chapter and
some covered elsewhere. Understanding your climate resilience abilities will help, as
will using stress and scenario testing to draw out the key sensitivities. Formal capital
modelling is employed within financial services and so a form of modelling may be
useful for your organization. In financial services this is all about modelling the
future assets and liabilities so the right funds are available at the right time in line
with expected customer demands.
Many regulators of financial services companies have issued rules on capital
management and operational resilience.
The primary resilience mechanism utilized by the financial regulators is to set
capital rules that are risk-based and run specific scenarios to test firms’ own resil-
ience and the financial markets’ resilience. Solvency II regulations are in place for
insurers and BASEL III regulations for banks, which provide detailed guidance for
managing the solvency of the organization. Annual stress testing is run by the regula-
tor with scenarios specific to each industry. The UK regulators recently ran their
Climate Biennial Exploratory Stress Test (CBES). Other financial regulators are
running similar tests. These tests have been insightful into the ramifications of climate
change on asset values and how physical risks may manifest. Their design can be a
helpful source for others consider the design of their own climate resilience tests.
One key part of Solvency II is the Own Risk and Capital Assessment (ORSA) process.
This regulatory driven process defines how the evaluation of risk in the capital planning
process is performed. It results in a formal report that brings together the understanding
of the risks facing the organization and how the capital assessment ensures adequate
coverage of these risks. The process and reporting are a useful part of presenting the
current and future status of how the organization is improving its control environment
to provide greater resilience to climate change. Climate change risk needs to be a key
consideration within this process, either being considered as a ‘stand-alone’ risk or inte-
grated into the organization’s existing principal risks as appropriate.
Conclusion
Organizations are increasingly hard-pressed to remain agile in today’s environment
and need to understand both their current and possible future risk exposures, includ-
ing the influence of climate change. It is increasingly important to anticipate key
events from emerging trends, constantly adapt to change and rapidly bounce back
from adversity.
It is important to first understand the context of what is meant by resilience to the
organization and then to consider what existing or new risk mitigation plans can be
designed to help improve resilience to climate change.
It is clear that management need to prepare better for global systemic events and
have fully prepared agile contingency plans in place for such events.
Businesses ultimately need to understand their exposure to climate conditions and
translate these to specific scenarios that can have an impact on the business from an
operational, financial or strategic perspective. It is important to consider the range of
scenarios and articulate them.
As companies deal with physical changes and a transition to a more sustainable
business, they need to align the impacts of climate change to balance sheet solutions
that can reduce volatility. Climate change requires a forward-looking approach and
the assessment of the ‘more intangible’ transition risks.
This chapter has highlighted the need for risk management to be more fully inte-
grated into the DNA of the business, elevated as a critical process that supports both
strategy and financial planning.
Notes
1 Aon. 2021 Weather, Climate and Catastrophe Insight, 2021. www.aon.com/weather-
climate-catastrophe/index.html (archived at https://perma.cc/357W-JCWL)
2 United Nations General Assembly. Report of the open-ended intergovernmental expert

working group on indicators and terminology relating to disaster risk reduction, 2016.
www.preventionweb.net/files/50683_oiewgreportenglish.pdf (archived at https://perma.
cc/W2AL-KMW7)
3 J M Murphy et al. UK Climate Projections Science Report: Climate change projections,
2009. http://cedadocs.ceda.ac.uk/1320/1/climate_projections_full_report.pdf (archived
at https://perma.cc/F4HQ-FRVR)
4 P Walsh. Operational and technological resilience, Treliant, 23 March 2022, www.
treliant.com/knowledge-center/operational-and-technological-resilience/ (archived at
https://perma.cc/6D9M-C3VK)
5 Abacela. SOU professor says climate change impacts wine-making, Abacela.com, 29
January 2022, www.abacela.com/blog/SOU-professor-says-climate-change-impacts-
wine-making (archived at https://perma.cc/944L-FBAS)
6 Thanasis Chasapis, Southern Water
7 HM Government. UK Climate Change Risk Assessment 2017, January 2017. https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/584281/uk-climate-change-risk-assess-2017.pdf (archived at https://perma.cc/XWB9-
N6XL)
8 HM Treasury. The Green Book: Central Government Guidance on appraisal and
evaluation, 2022. https://assets.publishing.service.gov.uk/government/uploads/system/
uploads/attachment_data/file/1063330/Green_Book_2022.pdf (archived at https://
perma.cc/6M97-CJNX)
9 GOV.UK. Guidance: The Green Book. 2022. www.gov.uk/government/publications/
the-green-book-appraisal-and-evaluation-in-central-governent/the-green-book-2020#a5-
uncertainty-optimism-bias-and-risk (archived at https://perma.cc/K665-B867)
10 Climate Just. BACLIAT, nd. www.climatejust.org.uk/resources/bacliat (archived at
https://perma.cc/ZG47-HL2T)
11 BSI Group. Adapting to Climate Change using your Business Continuity Management
System, Smart Guide, nd. www.bsigroup.com/localfiles/en-gb/iso-22301/resources/
bsi-sustainability-report-adapting-to-climate-change-using-your-business-continuity-
management-system-uk-en.pdf (archived at https://perma.cc/449U-C35E)
12 C Slay and K Dooley. Improving Supply Chain Resilience to Manage Climate Change
Risks, 2020. The Sustainability Consortium/HSBC. https://sustainabilityconsortium.org/
download/35952/ (archived at https://perma.cc/AZZ7-G7V4)
13 Wikipedia. 2011 Thailand floods. https://en.wikipedia.org/wiki/2011_Thailand_
floods#cite_note-EOC_report_17_Jan-1 (archived at https://perma.cc/FT3V-QCTH)
14 The World Bank. The World Bank supports Thailand’s post-floods recovery effort, 13
December 2011, www.worldbank.org/en/news/feature/2011/12/13/world-bank-
supports-thailands-post-floods-recovery-effort (archived at https://perma.cc/23Z4-TAL4)
15 S Mydans. Thai Prime Minister to take command of flood control efforts, New York
Times, 21 October 2011, www.nytimes.com/2011/10/22/world/asia/bangkok-opens-
floodgates-as-government-response-is-criticized.html#:~:text=BANGKOK%20
%E2%80%94%20Prime%20Minister%20Yingluck%20Shinawatra (archived at
https://perma.cc/6GHD-8ULD)
16 Accuweather. Top 5 most expensive natural disasters in history, Accuweather.com,

30 March 2011, www.accuweather.com/en/weather-news/top-5-most-expensive-natural-
disasters-in-history/192022 (archived at https://perma.cc/A4UJ-NCG4)
17 O Ravagnolo, I Misztal and G Hoogenboom (2000). Genetic component of heat stress
in dairy cattle, development of heat index function, Journal of Dairy Science, 2000,
83 (9), pp 2120–5. doi:10.3168/jds.S0022-0302(00)75094-6 (archived at https://perma.
cc/LL9U-3JV3)
202
Climate physical risks – data

sources, uses and challenges
In this chapter we will provide an overview of climate risk data sources and how
they are used to help organizations and businesses in climate-related risk manage-
ment, with a focus on the opportunities and challenges of how the data and data
tools/models can be best used in a changing climate.
●● Provide an understanding of the climate data value chain in the context of how
physical data inputs such as data from weather stations and satellites are used in
various tools to support business uses and decision making
●● Outline the evolution of climate data, meteorology and climate models focusing
on the use of weather stations and satellite data that can be used to determine
trends and help predict the future changes of the Earth’s climate system
●● Understand the importance of the concept of ‘climatological normals’, which is an
important method of identifying changes in global, regional or local climate
patterns
●● Outline the main global climate data providers (governmental, academic and
private) such as NASA and NOAA that provide ‘open data’ sources
●● Appreciate the main uses of climate data including weather forecasting and
longer-term climate projections, catastrophe risk modelling and design of index-
based insurance solutions
●● Provide an overview of how companies are developing historical databases and
event sets to help to improve forecasting through techniques such as reanalysis
and loss development
With respect to the application of climate data, Chapter 6 provides more practical
insights and risk management guidance on how organizations can build and improve
resilience to physical threats from climate change.
CLIMATE PHYSICAL RISKS 203
Chapter 10 provides a more in-depth review of how organizations can design

future climate stress and scenario tests to support strategic decisions and business
planning.
Introduction
Weather and climate are essential to our own lives and human civilization. In many
situations, people tend to mix up these two concepts. It is important to distinguish
between them when it comes to risk management. According to the World
Meteorological Society, ‘The difference between weather and climate is a measure of
time. Weather is what conditions of the atmosphere are over a short period of time,
and climate is how the atmosphere “behaves” over relatively long periods of time.’1
In other words, weather is the current atmospheric conditions, which includes
parameters such as temperature, rainfall, wind and humidity. Climate is the usual
weather conditions based on many years of averaged weather data for a location.
In the context of managing climate change physical risks there will be a range of
data requirements for organizations to source, and in this chapter, we will be focus-
ing primarily on climate hazard parameters such as temperature, rainfall and wind.
Clearly the data needs to be aligned with the business purpose and use, and for many
organizations this is to assist in understanding the current and future projections of
mean and volatility of climate statistics to support projections of future demand or
supply of products or services.
7.1 Applications of weather and climate data

Weather and climate data are used in a wide range of applications, from public
finance, assets management (such as electricity grids and infrastructure) and trans-
port systems, to emergency response, and so on. Weather data are mostly used for
short-term planning and emergency responses to specific weather-related risks, e.g.
flood events. Climate data are used for longer-term impacts, for example sea-level
rise and higher frequency of wind storms in specific areas due to climate change.
‘Both private and public sector decision-makers need accessible, credible and rele-
vant climate information to increase resilience to the more intense and frequent
weather extremes scientists foresee as a potential consequence of climate change.’2
Past assumptions about how the weather and climate will act no longer hold true,
which means our ability to make decisions is challenging. Poor decisions can lead to
greater risk to property and lives. Risk practitioners need to be aware of the availabil-
ity and accessibility of climate risk related data within and outside their organizations
and understand how to best use the data they can obtain to support improved
decision-making for their risk management practices.
7.1.1 Climate data and model risk

One of the common risks that companies are facing is model risk. Most organiza-
tions will be aware of the risk of natural catastrophes in the locations in which they
operate, as they rely on catastrophe modelling to feed their risk management deci-
sion-making.
Most catastrophe (CAT) models are based primarily on historical hazard event
sets, not compatible with climate change scenarios. Although a wide range of future
hazard event sets are simulated in CAT models, they are more useful for short-term
analysis and predictions. They have less applicability when considering longer terms,
such as 10–15 years from now, where careful adjustments are needed. Model risk
can lead to risk managers being unaware of the likelihood of losses and allow unac-
ceptable concentration of risk to build up.
To avoid this problem, risk managers need to consider:
●● What data is available?

●● What is it appropriate for?
●● Which time period is it appropriate for?
●● What should it not be used for?
●● What is the veracity of the data?
7.1.2 Evolution of ERM best practices and use of climate data

Enterprise risk management (ERM) as a process today is largely a result of evolu-
tion. It has developed incrementally either as a reaction to events or as a result of
regulation. Included in this evolution of best practice standards is the assessment and
monitoring of both man-made and natural catastrophe events.
In chapter 6, we discussed Hurricane Katrina which was the third most intense US
Storm. This impact changed the way businesses and governments manage disasters
arising from natural catastrophe events and climate change.3 The importance of
having assessable climate data became a much higher priority.
The insurance industry used catastrophic risk models long before Hurricane
Katrina, but Katrina challenged the standards of these models.
Specific learnings from Katrina from a data and modelling perspective were that
Katrina as an event challenged the standards and performance of these prevailing
models. It called into question the quality of exposure data, how the models were
used and their suitability for various business applications. It has ultimately led to
improvements in the development, use and interpretation of catastrophe models.
The importance of having accessible climate data subsequently became a much
higher priority.
Katrina also paved the way for enhancements in the way storm surge and flooding
in general is modelled. There is also now much closer scrutiny of the assumptions
and science behind natural catastrophic risk models, resulting in better-informed
decisions. There is also a greater emphasis on understanding and assessing the ‘knock
on effects’ and interconnectedness of risks following major events that was discussed
in more detail in Chapter 6.
However, there is a word of caution here in relation to climate change. Capturing
climate data is seen as a significant challenge and models need to develop to capture
the changing risk landscape caused by climate change. Model risk is an important
consideration for organizations that develop the models and for those that rely on
and use models for decision making. These concerns and limitations are explained in
more detail in later sections of this chapter.
7.2 Climate data and global projections

One of the main issues facing local, regional and national governments, as well as
businesses, is that it is important to factor in climate changes, for example tempera-
ture rises, to derive best estimate projections of the future. One of the techniques to
do this is to detrend data sets through the use of econometric modelling techniques.
Although we tend to focus on the aggregate impacts of change it is important to
better understand the changes in terms of both frequency and severity of climate-
related events and the underlying distribution and associated data that can support
this understanding.
The importance of climate data and projections were mentioned throughout
COP26 to indicate the impact of future global temperatures. The latest climate
projections are shown in Figure 7.1.4 The most comprehensive projections come
from the IPCC reports.5
Figure 7.1 illustrates the potential timeframes of global warming (April 2022
experts’ prediction), a 1.5˚C temperature rise is anticipated to happen between 2030
and the early 2050s.
Organizations need to carefully consider the impact of the changing average temper-
atures and associated volatility and the various knock-on effects. Chapter 9 provides
detailed insights into some of the emerging physical climate risk such as extended
wildfire seasons, prolonged heatwaves and a discussion on potential future climate
‘tipping points’.
206
FIGURE 7.1 Global temperature projections for reaching 1.5°C
The approximate month and year The approximate level of

that the 1.5°C limit will be reached if global warming at the date
warming continues at the rate of the selected on the sliding scale
point in time selected using the scale underneath the graph.
underneath the graph.
Global warming reached an estimated 1.18oC in December 2020.

If the 30-year warming trend leading up to then continued, 2oC
global warming would reach 1.5oC by January 2034.
January 2034
December 2020
1.5oC
1.18oC
1oC
0.5oC
0oC
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060
Generated using Copernicus Climate Change Service information 2020.
2000 2003 2006 2009 2012 2015 2018 Feb 2020 May 2020 Aug 2020 Nov 2020
Temperature trend Observed temperature change since pre-industrial times IPCC ‘likely’ estimate
If another date is chosen, the approximate

level of warming at that date changes, as
does the approximate month and year that
the limit will be reached.
SOURCE Illustration from Copernicus Climate Change Services

7.2.1 UK Met Office – UK Climate Projections 2018 (UKCP18)

There are many sources of climate data and projections. One of the best sources is
the UK Climate Projections (UKCP) 2018.6 The UKCP18 produced by Defra and the
Met Office provides the most up-to-date assessment of how the UK climate may
change in the future. It forecasts that temperatures and rainfall are likely to increase
in the future due to greenhouse gas emitted by human activities. The information
available consists of historical observations and future projections for the UK, cover-
ing both its land and marine environments. The marine projections, for example,
include updated projections of time-average sea level rise around the UK coastline,
and new projections of extreme water levels, including storm surges and tides. The
UKCP have been developed to support government, businesses and other interested
parties to assess the challenges and opportunities that they face from a changing
climate. The general climate change trends projected over UK land for the 21st
century in UKCP18 is broadly consistent with earlier projections (UKCP09) showing
an increased chance of warmer, wetter winters and hotter, drier summers along with
an increase in the frequency and intensity of extremes.
Data modellers typically run several thousand future weather simulations,
stochastically generating predictions under low, medium and high emissions scenar-
ios, to give a range of estimates. The outputs show the present day, and three different
climate scenarios in three future epochs as follows:
●● Present-day flood risk

●● 2020s – low (RCP 2.6), medium (RCP 6.0) and high (RCP 8.5) emissions scenarios
IPCC scenarios based on ‘representative concentration pathways’ (RCPs) are exam-

ples of physical climate change scenarios adopted by the IPCC in its fifth assessment
report (AR5).7 The model results are frequently ‘downscaled’ to derive potential
local-level changes in climate, which are then used to generate scenarios of impacts
from climate change (first-order impacts such as flooding or drought, second-order
impacts such as loss of crop production and third-order impacts such as famine).
RCPs are discussed more in the context of design climate stress and scenarios tests in
Chapter 10.
The importance of this type of information is that modelling firms are able to take
the information and project low, medium and high emission scenarios, for example
for flood models, to support the incremental impacts of climate change. These can
then be superimposed on an organization’s asset portfolio. This is important when
finance is required for an asset. We will discuss this further through use of an example
of UK flood modelling using flood-mapping techniques.
Before we discuss the main uses of climate data it is important to recognize how
historical natural catastrophe events have helped to shape the risk management
profession and enterprise risk management practices. The learning outcomes from
them have helped to enhance the use of improved climate data.
Businesses ultimately need to understand their exposure to climate conditions and
obtain a range of exposure-related data (e.g. asset valuations across their portfolios,
and areas of land where they are exposed to climate risks such as wildfire or
heatwaves).
7.3 Evolution of climate data, meteorology

and climate models
Climate data and associated climate models and forecasting have evolved signifi-
cantly in recent decades primarily with the introduction of Earth observation data
from satellites in the 1960s.
The first era of meteorological observations started around 1600 when Galileo
Galilei constructed a thermoscope. However, as there was no standard measurement
at the time they were of little use until the work of Daniel Gabriel Fahrenheit and
Anders Celsius in the 18th century.
Figure 7.2 below provides a high-level summary of the evolution of climate data,
models and forecasting capabilities.
FIGURE 7.2 Evolution of climate data, models and forecasting capabilities
Data sources
low resolution high resolution

Satellites
low frequency high frequency
Stations manual automatic
Models reanalysis forecasts scenarios
Past Present Future
•shading = certainty
7.3.1 Weather stations

The Met Office was founded in 1854 under the leadership of Robert FitzRoy. Given
his naval background FitzRoy understood the importance of the weather to the lives
of those at sea. The Met Office started to collect daily weather data in 1860 at set
locations, known as stations, around the British and Irish coasts and sent to the
Meteorological Office in London by the new telegraph system, the cutting-edge tech-
nology of its day.
This information consisted of pressure, temperature, wind direction and force,
cloud amount, weather conditions, for example rain, thunder, fog and sea distur-
bance for each location.8 The observations were collated into Daily Weather Reports
and these, renamed the Daily Weather Summary from 1980, form the longest contin-
uous series of data in the National Meteorological Archive.
Interestingly, in recent years these early weather observations in the UK from the
1800s have been digitized using a crowdsourced solution led by Reading University
though Ed Hawkins.
Weather stations have advanced considerably and are now automated. As defined by
Bertrand D Tanner, ‘An automated weather station is an integrated system of compo-
nents that are used to measure, record, and often transmit weather parameters such as
temperature, wind speed and direction, solar radiation, and precipitation. Weather
stations are used on land and sea for a variety of operational and research purposes.’9
7.3.1.1 THE TECHNOLOGY OF WEATHER STATIONS

It is easy to visualize weather data being measured at a weather station where a
traditional mercury bulb thermometer measures the temperature of the air, a barom-
eter measures the air pressure, an anemometer measures wind speed and direction,
and a rain gauge measures the amount of rainfall.
The technology of weather stations has evolved from requiring human observers
to regularly check the instruments and note the readings to current automatic
weather stations where the data is continually logged by computer. Alas, the network
of such weather stations is not uniform and of a high enough density to allow for a
comprehensive view of weather and climate. Globally, there is a paucity of stations
in developing countries and where there is a high density currently, that has not
always been the case so we have less confidence looking further back in time.
These shortcomings of station observations means that we have to rely on alternative
technologies to provide historical data on climate variables across much of the world.
7.3.2 Weather satellites

The first successful weather satellite, TIROS-1 (Television Infrared Observation
Satellite), was launched on 1 April 1960 from Cape Canaveral, Florida by the
National Aeronautics and Space Administration (NASA) with the participation of

the US Army Signal Research and Development Lab, RCA, the US Weather Bureau
and the US Naval Photographic Center.
During its 78-day mission, it relayed thousands of pictures showing the structure
of large-scale cloud regimes, and proved that satellites can provide useful surveil-
lance of global weather conditions from space. TIROS paved the way for the Nimbus
program, whose technology and findings are the heritage of most of the Earth-
observing satellites NASA and NOAA (National Oceanic and Atmospheric
Administration) that have launched since then. These provide data sources that we
will explain in more depth later.
A major breakthrough for these technologies occurred with the satellite era in the late
1970s. For the first time, we had access to sensing technologies that could span wide
geographic areas, regularly, and at a fine enough resolution to be able to provide local
information. The technology and capabilities have advanced to the extent that today there
are coordinated missions providing high-quality, high-resolution data, as well as private
enterprises sending satellites into space to measure the Earth’s atmosphere.
7.3.3 Models of Earth’s climate system

Computer models that solve mathematical equations to predict the future of the
Earth’s climate are called climate models, and consist of three main types:
●● Earth balance models (EBMs)

●● Earth models of intermediate complexity (EMICs)
●● General circulation models (GCMs)
Climate scientists around the world are contributing to simulation models of the
future climate. Their aim is to produce critical information to assist decision makers
struggling to plan effectively for the future, but much of their output remains beyond
the understanding of end users, thus cannot be integrated into policies. However, the
WMO-led Global Framework for Climate Services (GFCS) and its partners are
advancing the production of tailored local, regional and national climate informa-
tion services for users in both public and private sectors.
Through the use of satellites, climate models have evolved that use computers to
simulate the Earth’s climate system, including the atmosphere, ocean, land and ice.
They can be used to recreate the past climate or predict the future climate.
Climate modelling is to some extent just an extension of weather forecasting but
focusing on changes over decades rather than hours.
Climate models separate the Earth’s ocean, surface and atmosphere into three-
dimensional grids of cells in order to solve the equations of motion, fluid dynamics,
physics and thermodynamics that govern the evolution of the climate systems. As
computing power has increased the grid length (i.e. resolution) has reduced resulting
in a more granular simulation, which is particularly beneficial for considering climate
impacts which are mostly felt at the local scale.
7.4 The climate data value chain

The climate data value chain is a process of data generation, collection and use, from
identifying data needs to its application and potential reuse. Along the process, data
value increases. The climate data value chain has five major stages: primary data
collection, tools application, actionable information, knowledge and outcomes.
It explains how physical data inputs, for example data from weather stations, are
analysed and used in various tools (e.g. catastrophe models), to support business
uses. Following this value chain can bring benefits for organizations, such as increas-
ing their shareholder value and meeting stakeholder expectations. Figure 7.3 provides
an overview of a climate data value chain.
Figure 7.3 highlights the data value chain from obtaining primary data, through
the use of tools that provide actionable information. This leads to knowledge and
business uses, which in turn provides outcomes and benefits though improved
decision-making. There are many examples of models being used to assess the impact
FIGURE 7.3 Climate data value chain – five key stages
Primary data/ Tools Actionable Knowledge Outcome

(business uses/
observations (provides structure) information outputs)
(benefits)
Historical Risk pricing More predictable

events revenue streams
Risk transfer/
hedging Increased
Climate Weather resilience
Product design
data forecasting Forecasts
Improved access
Business
Statistical Scenarios to funding
planning
models Footprints Stronger credit
Hazards/Perils Crisis
Climate Return-periods ratings
management
models Support risk
Organizational Event Business
Catastrophe probabilities appetite strategy
data continuity
models planning Limit risk
• Financial Econometric concentrations
• Geographical Risk aggregation
models Optimize risk
location Concentration
• Vulnerability retention/
management
transfer
Model assumptions - Data quality - Data gaps - Model limitations - Climate-adjusted models

of climate change without providing clear explanation of how the outputs can be
used for specific decision-making. We cover this in more detail through various case
studies. The list of outcomes is a helpful guide to explain why organizations are
undertaking climate risk modelling.
The availability of relevant and high-quality climate data is linked to the evolu-
tion of improved ERM and has been an area of focus for organizations for decades.
One of the main uses of obtaining data, which still holds true today, is to assist in
pricing insurance and capital market solutions to hedge climate risks. This was
discussed in the last chapter.
One of the main uses has been the improvement of the calibration and validation
of catastrophic risk models. The use of improved quality data to improve their accu-
racy has led to better disaster risk management and recovery, which we will also
explore more in this chapter.
To illustrate the five stages of the value chain, an anonymized case study is
provided that explains how an organization can seek to utilize climate data to ulti-
mately improve access to funds and smooth its revenue streams through designing a
hedging strategy. The tool used is econometric modelling which is able to produce
forecasts of projected revenue aligned to a climate index that could be hedged in the
capital markets using underlying temperature data.
It outlines how the climate data value chain can be applied in practice from using
primary climate data that can be used to support an organization in building greater
financial resilience to climate change. The project highlights some of the key princi-
ples that organizations should consider in the context of designing a hedging strategy
that aligns with its risk appetite.
CASE STUDY
Hedging a mild winter for a utility company
Background and research problem
The organization had identified that seasonal volatility in temperature, specifically a ‘mild
winter’, was one of their top risks as it impacted on their revenue and profitability. It also had
knock-on effects on sales targets that could negatively impact on performance incentives.
The project attempted to address the following questions: How should the company
quantify its risk exposure to climate risk? Would they benefit from hedging the risk? What
would be the most appropriate hedging solution to the company?’ Other considerations
included: What time frame should the solution cover, for example a single season? How much
of the exposure needs to be transferred and at what level; that is, how much should be
retained?
Stage 1: Primary data
The climate data used in the case study was as follows:
●● Daily temperature data – The organization had its own primary climate data sets from
weather stations. The data provided in this case by the utility company was daily
temperature data that was based on a composite weather variable (CWV) that the company
had developed, which was a function of actual daily temperature, wind speed, effective
temperature and seasonal normal effective temperature. The data was provided for over 70
years for over 20 weather stations across the UK.
●● Heating degree days (HDD) – Heating degree days were provided by an external
consultancy specifically in capital market solutions to help price the risk transfer solution
against a specified (HDD) index.
Additional exposure information and organizational data included the following:

●● Annual demand and revenue data – Demand data was provided by the company, which
was broken down into load bands aligned to business customers, primarily small and large.
The company also provided revenue data.
Through interviews and discussions it was agreed to structure a solution for the period
November to March, often termed the ‘winter’ period in the UK, reflecting the most volatile
months in temperature.
In terms of exposure the most volatility was derived from ‘small’ or household customers
and so it was agreed to develop a solution for household customers only.
Stage 2: Tools applied – quantitative analysis and econometric modelling
As well as structured interviews one of the main aspects of the project was to analyse the data
sets provided. Given the fact that there was over 70 years’ worth of temperature data, a good
sample size was provided to assess both the mean and volatility (standard deviation) of
temperature for each month. This is shown in Figure 7.4.
From Figure 7.4 we note:
●● December appears to have the highest volatility and July the lowest.
●● The volatility per month appears higher for the period from October through to April, i.e.
around the winter period.
One of the main aspects of the analysis was to use econometric modelling techniques, using
software to develop a dynamic regression model to assess the relationship between
temperature and demand. This is the equivalent of assessing the relationship between
temperature and revenue. The main quantitative analysis included a number of statistical
procedures using hypothesis testing, including correlation analysis.
A regression model was developed for a specific data set and detrended to take account of
climate change, which would allow the model to predict future revenue more accurately. Some
FIGURE 7.4 Mean and standard deviation for each month (illustrative purposes)
16
14
Degrees Centigrade Equivalent
12
10
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Average Mean Average St Dev
TABLE 7.1 Likelihood and amount of potential lost revenue in future years
Probability Likelihood Revenue reduction Percentage

Scenario percentile Once in: (Volatility measure) of revenue
<1% 20,000 years £50,000,000 20.0%

1% 100 years £30,000,000 12.0%
2% 50 years £25,000,000 10.0%
5% 20 years £20,000,000 8.0%
10% 10 years £16,000,000 6.0%
20% 5 years £10,000,000 4.0%
observations included the fact that price is assumed to be fixed, therefore inelastic. There was
a statistically significant correlation between temperature volatility and demand.
Stage 3: Actionable information – forecast of revenue reduction
The dynamic regression model outputs were able to predict revenue from the underlying HDD
and therefore match the loss of revenue for the company. A simulation model was used to
run 20,000 iterations of the likely future HDD index, providing a solid basis upon which to
understand the likelihood and amount of potential lost revenue in future years. This is shown
in Table 7.1.
The forecast provided some important outputs:
●● The worst-case scenario generates a loss of £50 million per annum.

●● The likely revenue volatility over a 10-year horizon is more likely to be between £10 million
and £16 million (1 in 5 years and 1 in 10 years forecasts).
●● The volatility represents up to 20 per cent of small customer revenue during a winter
period.
Observation: The level of impact of temperature volatility and climate change was far higher
than the company had realized.
Stage 4: Knowledge – business uses – risk transfer solution
The typical winter period as used within the capital markets, namely November to March, has
a significantly higher volatility in terms of temperature than over an annual period. This has
important repercussions in terms of developing a risk financing solution, as the company
needed not to hedge the annual exposure but concentrate on a winter period. In fact, the
winter period represented over 80 per cent of the annual volatility and therefore a risk
financial structure was developed to hedge the risk in line with the company’s risk appetite.
In terms of risk transfer solution, the recommendation was to adopt a symmetrical strategy
that was to hedge only the downside in line with the company’s risk appetite strategy. The
most cost-effective strategy for most companies is to retain a layer of risk within the
FIGURE 7.5 Illustrative impact of a put option strategy on revenues
300 2390
UK’s coldest 2290

275 winter in 1962
2190
250
Revenues in £ million
2090
225 1990
HDD
200 1890
1790
175
Risk tolerance of 1690
an organization
150
1590
125 1490
1959 1964 1969 1974 1979 1984 1989 1994 1999
Revenue HDD trend line HDD -100 trend line
company’s risk tolerance and then hedge a layer of risk that would take out the historical
peaks.
Quotations were provided for a number of options from the capital markets. Figure 7.5
illustrates the main output of the case study. The dotted line represents the company’s risk
tolerance (or maximum amount of acceptable volatility) to help smooth its revenue, which
equated to 100 HDDs. This was used to set the level of risk transfer to stricture the
solution through a put option.
In producing the output, primary consideration had been given to developing a derivative
‘put’ option solution rather than insurance. However, there are a number of alternatives that
the company could have considered, including the use of its own captive insurance
company and other derivatives instruments including swaps.
Stage 5: Outcomes – more predictable revenue streams
Alternative option and pricing terms were provided to the company and a historical analysis of
the potential payments was illustrated to highlight the value of the structure if the company
had purchased the put option, illustrating the strategic benefits of smoothing cash-flow
volatility and other associate benefits.
The overriding conclusion at the time of the case study was that the company should
give serious consideration to the establishment of a risk-financing solution to hedge
its weather exposures due to temperature volatility.
There is now a relatively mature weather risk market and these products can
create a more predictable earnings stream, providing lenders with greater comfort
and investors with greater returns. Implementing weather risk management tech-
niques is about financial responsibility and it is universally acknowledged that strong
results from beneficial weather patterns are not rewarded by the same amount that
poor results are punished. Guarding against a mild winter, in particular, would allow
the company to focus on its core business.
The use of index (now commonly termed parametric) insurance solutions is grow-
ing fast and details are provided in Section 7.9. They are a powerful financial tool,
based on the same approach as the case study but that can cover a wider range
of risks.
7.5 Main climate data variables, data types and availability

When we think of climate data, we tend to think of those that link to physical risks
and hazards. Climate data is a measured parameter or variable that is collected
and recorded at weather stations. Short-term climate data is used for weather
forecasts whereas a record of climate data over a longer period can be used to
build up a picture of climate. The climate data helps to specify the climate of a
region and may be used to build up a picture of seasons and determine longer term
climate activity.
The most common climate variables include:
●● Temperature
●● Precipitation (rainfall, snow)
●● Wind speed
●● Sea-level rise
Other climate variables include pressure, humidity, sunlight and other phenomena
such as fog, frost and ice/hail storms. The examples above can be extended to other
variables of interest such as changes in glaciers/icecaps, etc.
It is important to use past data that can be used to extrapolate to forecast the
future, with the caveat that climate future trends need to be captured in those fore-
casts. Organizations should seek to use different types of data such as daily, monthly
and seasonal data that can be used for decision making.
It is important to provide a brief overview of the evolution of climate data that is
based on the development of meteorology and climate science.
The main types of climate data that we have today comes from three main
sources:
●● Weather station data

●● Earth observation data
●● Climate projections
Before we discuss these climate data types it is important to provide an overview of

the evolution of meteorology and how climate data has developed and is being
used.
7.5.1 Other types of climate data

Climate data in the context of managing and mitigating physical risks for organiza-
tions should encompass a much broader set of data infrastructure to help manage
their exposures. Some of the other main categories include the following:
●● Asset-level data (location data, asset-specific area, land surface dynamics)

●● Geospatial data (land usage, elevation)
●● Environmental data
Climate data that is required for catastrophe models is outlined later, in section 7.8.
7.5.2 Climate data availability and data platforms

There are an increasing number of data platforms available now, providing a good
source of climate data. Some organizations have been working on open, transparent
data platforms to help provide environmental, climate change and catastrophe risk
information to business and wider society, which encourages collaboration and
crossover around data and services.
It is also important to distinguish different types of data with respect to sourcing
of information types. Figure 7.6 provides a high-level summary of open data, shared
data and closed data types.
●● Open data – This can be used by anyone for any purpose for free.
●● Shared data – Can be licensed by a data owner for conditional usage by another
party. Its users are also most often in the private sector. Data licensing is done on
one-to-one contract basis and is often complex.
●● Closed data – Is not shared outside an organization and may only be used by a
single legal owner.
7.5.3 Climatological normal – research provided by Aon Impact Forecasting

An important method of identifying changes in global, regional or local weather/
climate patterns is found in what are known as ‘climatological normals’.
Put simply, ‘normals’ are an average that is computed based on 30 years of daily
weather readings. They serve as a point of reference to the climatology of a specific
location and are used as a benchmark against present-day weather.
FIGURE 7.6 Open, shared and closed data sources
Highest friction
High
CLOSED DATA
Not shared, or custom licence
SHARED DATA
Pre-emptive licence
Controls
OPEN DATA
Open licence
Low Risk High
SOURCE IcebreakerOne.org
The World Meteorological Organization (WMO) defines the climatological standard

normal as the most recent 30-year period that is updated with the conclusion of
every decade. The most recent WMO 30-year baseline – 1991 to 2020 – was enacted
in 2021.
Governmental agencies are requested by the WMO to implement and use the
current baseline to affirm consistent points of comparison around the world. For
modern historical reference periods, the WMO retains the 1961–1990 period as a
standard reference for modern-era climate change assessments. The main challenge
using the 1961–1990 baseline for climate change is that it does not account for
changes to temperature and precipitation since the start of the Industrial Revolution
(1850–1900).
Using the 1850–1900 baseline provides a more robust view of how the global
climate has accelerated rates of change since carbon dioxide emissions from human
activity have dramatically increased. Looking at changes between the two most
recent baselines (1981–2010 and 1991–2020) provides useful guidance on how
quickly the climate is evolving. It helps identify areas showing climate change effects
at a faster or slower pace. In many locations, the rates of change are increasing nota-
bly with each passing decade. This highlights the urgency of passing meaningful
legislation and developing investment strategic planning to slow down climate
change and improve mitigation/adaptation practices.
Decadal changes to climate normals vary by geographical region, season and time
frame. Though as already mentioned, some of the more recent trends in normals
indicate an accelerated rate of change in the warming of average temperatures.
A NOAA study of the global climate in 2020 found that combined land and
ocean temperatures have increased at an average rate of 0.08°C (0.13°F) per
decade since 1880. However, this rate of increase has more than doubled to 0.18°C
(0.32°F) since 1981.
While extreme heat continues to set new maximum temperature records in recent
years, it may come as a surprise to realize that the biggest driver in global warming
has resulted from a significant shift in minimum temperatures. This means tempera-
tures are not cooling as much overnight as they did in the past. This is particularly
concerning during the warm season, as it inhibits the ability of people and ‘stuff’ to
cool down overnight, putting vulnerable populations at a greater risk for heat-related
stress and illness.
Care should be taken when considering regions with dry baseline conditions; rela-
tively small absolute changes appear as large percentage changes here. For example,
the Sahara region and the Arabian Peninsula are two areas with the highest observed
‘relative’ change between climate normals. Figures 7.7 and 7.8 both show climate
change impacts that are in relatively good agreement with the long-term climate
projections released in the IPCC’s Sixth Assessment Report (AR6).
FIGURE 7.7 Global climate impacts of annual average temperature
Difference (ºC)
<0
0 – 0.25
0.25 – 0.5
0.5 – 0.75
0.75 – 1.0
1.0+
SOURCE Data: ERA5/Copernicus/ECMWF. Graphic: Aon (Catastrophe Insight)
FIGURE 7.8 Global climate impacts of annual precipitation
Difference (%)
< –20
–20 to –10
–10 to –5
–5 to 0
0 to +5
+5 to +10
+10 to +20
> +20
SOURCE Data: ERA5/Copernicus/ECMWF. Graphic: Aon (Catastrophe Insight)
7.6 Climate data sources

There is a plethora of sources for climate risk data and information. National mete-
orological agencies, such as the UK Met Office and the National Ocean and
Atmospheric Administration (NOAA) in the US, collect weather observations. These
run weather and climate models and are, therefore, the primary source of data avail-
ability. However, the data is typically provided in raw, un-processed formats and so
can be difficult to access and make use of for the non-technical end user. Therefore,
data platforms and private enterprises exist and offer easier access to a range of data,
in some instances for a commercial fee. Two examples are given below.
EXAMPLE 1
ERA5
The core mission of the European Centre for Medium-Range Weather Forecasts (ECMWF)
is to:
●● Produce numerical weather forecasts and monitor the Earth system

●● Carry out scientific and technical research to improve forecast skill
●● Maintain an archive of meteorological data
As part of the Copernicus programme, ECMWF provides access to their fifth-generation

reanalysis product, ERA5, which includes hourly estimates of a large number of
atmospheric, land and oceanic climate variables. The data cover the Earth on a 30km grid
and resolve the atmosphere using 137 levels from the surface up to a height of 80km.
ERA5 includes information about uncertainties for all variables at reduced spatial
and temporal resolutions.
EXAMPLE 2
Oasis Hub
The Oasis Hub was launched in June 2017 as an aggregator of catastrophe, extreme
weather and environmental risk data, tools and services. An example is given in Table 7.2,
which highlights commercial data that is available to model various global flood
scenarios. There is consistency in methodology that is being applied by aligning, for
example, the scenarios with future RCP scenarios. Representative concentration pathway
(RCP) is a greenhouse gas concentration (not emissions) trajectory adopted by the
Intergovernmental Panel on Climate Change. Four pathways have been selected for
climate modelling, which describe different climate futures. The four RCPs are labelled
after a possible range of radiative forcing values in the year 2100 relative to
pre-industrial values (+2.6, +4.5, +6.0 and +8.5).
Global flood modelling scenarios and commercial data availability via Oasis
TABLE 7.2
Hub
Flood
Commercial Data
Name Res. Scenarios Release Processing Extent
American 10m RCP4.5 (2035–2050) Mid 2020 2–3 Month USA

Flood Hazard
(continued)
TABLE 7.2 (Continued)
Flood
Commercial Data
Name Res. Scenarios Release Processing Extent
Global Flood 90m RCP4.5 (8.5) Late 2020 2–3 Month Global
Hazard Model
Climate 30m RCP 2.6/ AOR 2–3 Month Global
Indicators & RCP4.5/RCP8.5
Full CAT
model
Global Storm 1.5km Historical (1979– Available Global
Surge Model 2018) & RCP 2.6, RCP
4.5 (2070–2100) &
RCP 8.5 (2040–2070)
Central & Up to 5m RCP 2.6, 4.5 & 8.5 Requires 2–3 Month Central
Eastern processing Europe
European (Global
Flood Model on req.)
UK Flood 5m RCP4.5 /RCP8.5/ Available 3–6 Month UK
UKCP18
European 25m All RCPs On req. TBC Europe
flood hazard
risk
SOURCE Oasis Hub
7.6.1 Climate data gaps and reanalysis

Climate model reanalysis is a great solution for filling in gaps in our observation
systems while also being able to retrospectively extrapolate to past dates. Reanalysis
is a technique of running state-of-the-art weather simulation models for past years
and using mathematical data assimilation methods to ensure that the model outputs
are consistent with true observations. However, they cannot magic data out of
nowhere and so their quality is still dependent on the quality and availability of the
true observations that are assimilated.
Models are also useful for providing data on weather variables that have a devas-
tating impact on humanity but the short observational record does not provide us
with enough of a sample to make confident risk-based decisions. The most obvious
examples are for atmospheric disturbances such as wind storms, tropical cyclones
and hurricanes. Here, use of historical information only would provide a precise but
overly confident view of the risk (i.e., is the strongest storm recorded in a 50-year
historical time series really a 1-in-50-year event?). This shortcoming has led to the
development of catastrophe models which, when provided with a set of external
conditions, can simulate atmospheric conditions thousands of times.
An obvious shortcoming of using historical data is that it is difficult to make infer-
ences about future climate from it. If you need to understand the origination’s
exposure to a certain weather variable/event over the next 5–10 years then you need
to ask:
●● What data should I use?

●● How should I use it and what are the limitations?
Climate models are used to provide data on future climates but are typically consid-
ered scenarios rather than forecasts because they rely on assumptions about how key
climate drivers (e.g. how greenhouse gas concentrations will vary in the coming
years). Considering the more immediate timescale, there are seasonal forecast models
projected for several months that give an indication of whether we can expect major
anomalies.
Equally, from a risk perspective a thorough analysis of historical data for a loca-
tion will likely give a good indication of expected variability, and trends to date.
7.7 Climate data modelling tools and techniques

It is important for organizations to understand the impact of climate variables in
terms of historical variability and future trends.
There are a range of modelling tools that can use climate data, and the use of
econometric modelling was discussed in the earlier case study. The following section
covers some of the most important modelling techniques:
●● Weather forecasting and projections (used by industry sectors)

●● Catastrophe risk modelling (used by the insurance sector)
●● Parametric climate index solutions
●● Climate scenario analysis (will be discussed specifically in Chapter 10)
7.7.1 Weather forecasting and projections

Weather forecasting and climate predictions are central to an understanding of near-
and long-term climate events and associated risk and contingency planning. Weather
forecasting focuses on shorter-maturity weather events while climate prediction
centres on longer-term phenomena. Weather forecasting accuracy has improved
considerably over the past few decades. However, it is important to understand the
limitations.
FIGURE 7.9 Time and event spectrum of weather forecasting
Forecast Time Typical

category horizon event
‘Nowcast’ <2 hours Tornado strike
Very short-range
12 hours Severe storm
forecast
Short-range Developing cold

12–72 hours
forecast front
Developing
Medium-range
3–10 days high/low pressure
forecast
zone
Extended-range Anticipated rain

1 month
climate forecast shortfall
Deviations in
Long-range
Season/1–2 years regional
climate forecast
temperature range
Developing global
Climate prediction 2+ years
warming patterns
SOURCE Element Re – Weather Risk Management
For example, forecasts of droughts are generally better than predicting extreme wind
gusts. The location where a tropical cyclone makes landfall can sometimes be
predicted days in advance, but sometimes the forecast is not accurate. The exchange
of basic observational data is critical for improved weather forecasts and
climate services.
Weather forecasting is typically divided into several distinct stages. Very short-
term weather forecasting spans 0–12 hours; long-term climate forecasts extend into
the seasonal and inter-annual periods. Figure 7.9 provides a good summary of the
time and event spectrum of weather forecasting.
EXAMPLE
NOAA – weather forecasting
The National Oceanic and Atmospheric Administration’s (NOAA) National Weather

Service Forecast Offices and National Centers for Environmental Prediction evaluate the
latest observational and numerical data to disseminate outlooks, watches and warnings.
The organization has for over 50 years used climate and related environmental data
to provide data services to a range of stakeholders, including the fishing industry.
Weather and climate forecasting services help in areas such as forecasting impending
weather hazards such as extreme rainfall, tornadoes, high winds and extreme
temperatures. These are provided all year round and the information is critical to
resilience building, national security, and the protection of life and property
Challenges and opportunities in weather forecasting
One of the greatest challenges of weather forecasting according to NOAA is the need to
improve precipitation forecasts across timescales. As we shift from ‘day-to-day’ weather
to longer-term climate patterns, there is a critical need for improved projections of
how the climate will change on more granular, regional scales and over the next several
decades.
More accurate climate projections will work to better inform regional and local
adaptation and resiliency planning for infrastructure, natural resource management, food
production, finance, national security and other sectors.
NOAA is focused, for example, on improving fire weather forecasting as wildfires are
influenced by the weather and climate, and equally the weather and climate are
influenced by wildfires. One of the key challenges is to be able to improve short-term
predictions of fire behaviour and the longer-term modelling of interactions between
climate variability, climate change and the likelihood of hazardous wildfire conditions.
7.8 Catastrophe risk modelling

Catastrophe modelling firms were founded in the late 1980s and have developed
quite sophisticated approaches, from a single statistical model to more calibrated
probabilistic models. The focus has been to build models for earthquake, hurricane
and flood models across specific jurisdictions with the latter obviously linked to
climate change.
The importance of climate change is that it exposes the future assumptions that
lie behind physical catastrophe risk models. This can change the accuracy of predict-
ing catastrophe risk, particularly if the frequency and severity of catastrophic events
such as hurricanes, tornadoes, floods, wildfires and windstorms, and other natural
disasters continue to increase.
7.8.1 Catastrophe model components

Catastrophe models require substantial amounts of data for model construction and
validation, and the main components are set out in Figure 7.10.
FIGURE 7.10 Catastrophe model components – example flood model
Validations & uncertainty
Rainfall data
Historical events
Flow data
Event set Downscaling methods
Terrain
Land-use – land-type
River network
Hazard 1-D/2-D hydraulics
Building inventory
Engineering knowledge
Expert knowledge
Claims data
Vulnerability
7.8.2 Catastrophe modelling data requirements

Catastrophe models need organizational data inputs as outlined in Figure 7.10. Like
most models that rely on the accuracy of the data input, the main organizational
input information required includes the following:
●● Location
●● Types of risk – commercial, residential
●● Sums insured by building, contents, loss of profits
●● Line of business
●● Geographical location – geocode
●● Perils, windstorm, flood
●● Construction, occupancy, height, age
●● Insurance conditions– deductible/limits
7.8.3 Data challenges

For climate events such as flood and windstorm models, these require details such as
property location data and other related data linked to construction, occupancy,
protection and exposure (COPE). Specific information to improve the models’
outputs include construction (age, height, method/material), occupancy and size
(floor area). Typically catastrophe models will provide the data inputs that are of
most importance. If there is missing information assumptions will have to be made

for the models.
The process of geocoding risk locations introduces additional challenges. This
often requires the translation of address information into a precise latitude and
longitude, for which there are a multitude of approaches that can result in different
outcomes.
The concern for risk managers is to recognize the importance of providing accu-
rate data and also to understand how the data assumptions drive the results that in
turn would lead to different decisions, such as risk transfer decisions, being made in
the organization.
Data issues can lead to under- or over-estimates in the outputs and therefore it is
important to focus on providing complete datasets and agree acceptable levels of
granularity.
7.8.4 Model vendor providers

There are a number of catastrophe modelling providers listed below, many of which
provide products and services to the property and casualty insurance, reinsurance
and financial markets globally:
●● RMS
●● AIR
●● EQECAT
●● ERN
●● EigenPrism
●● Aon Impact Forecasting
●● Oasis
Proprietary models have also been designed by global insurance brokers such as
Willis Towers Watson, Aon and Marsh.
These can be for general or client-specific use, or be part of an integrated catastro-
phe modelling platform.
The current trend for large organizations is to consider the results from several
different models to take into account the different approaches and methodology
across vendors and their level of expertise with the specific peril and/or territory.
Some of the main perils that insurers and vendors are focusing on in terms of
current and ongoing research include the following:
●● Cyclones/typhoons/hurricanes
●● Storm surge
●● Flooding
●● Severe convective storms
●● Wildfires
●● Extratropical storms
The main focus by the industry has generally been to utilize internal and external
sources of information including the most recent climate change assessment reports
published by the Intergovernmental Panel on Climate Change (IPCC) as well as peer-
reviewed scientific literature that supports the IPCC’s view.
Vendors are also seeking to redesign their models to adjust for alternative time
horizons and representative concentration pathways (RCPs) to assess the impacts
and uncertainties associated with different climate change scenarios.
This helps to shape the degree to which they can then modify their overall view of
the risk due to climate change. Most large (re)insurers have a comprehensive meth-
odology for calculating their exposures to climate-related peril risk. This typically
would include near-term, intermediate and long-term perspectives on the evolving
nature of climate change.
In respect of model risk, insurers plan to update their catastrophe models to
accommodate the changing climate, which will often include a road map to
consider new and emerging risks such as wildfires and other perils/regions that
may need to be incorporated into existing models. We discuss emerging physical
risk in Chapter 9.
From a risk perspective, since natural catastrophe related risk exposures are
generally underwritten and renewed annually, it affords an opportunity for the insur-
ance industry to regularly re-underwrite and re-price exposures.
7.8.5 Catastrophe modelling outputs and interpretation

Model outputs from catastrophe models will often provide gross and net losses after
(re)insurance at different return periods. The outputs will typically provide both
occurrence exceedance probability (OEP) and aggregate exceedance probability
(AEP) outputs, which represent individual loss and aggregate loss amounts in a
single year.
Examples for windstorm and flood outputs are shown in Tables 7.3 and 7.4.
Many organizations use a 1-in-100 or 1-in-200 return period as a base to set
risk appetite on a net loss basis for exposures to catastrophe losses (discussed in
Chapter 2).
It is important to recognize that the results are often opaque. Understanding the
specific loss scenario is challenging; for example, what scenarios are a 1-in-100-year
event for the organization? Risk managers should seek to understand and interpret
TABLE 7.3 Example catastrophe modelling outputs – windstorm
Windstorm Gross aggregate Net aggregate Gross single loss Net single loss
10 4,728,000 3,000,000 3,500,000 2,250,000

50 18,000,000 4,500,000 1,600,000 3,000,000
200 43,50,0000 7,000,000 40,000,00 3,250,000
500 63,000,000 9,300,000 60,000,000 3,500,000
1000 77,000,000 1,650,0000 75,000,000 1,500,000
Annual Avg Loss 2,400,000 1,300,000 2,500,000 1,500,000
TABLE 7.4 Example catastrophe modelling outputs – flood
Flood Gross aggregate Net aggregate Gross single loss Net single loss
10 3,00,000 2,500,000 2,500,000 1,880,000

50 9,00,000 7,300,000 7,300,000 2,600,000
200 18,500,000 16,200,000 16,200,000 3,150,000
500 25,500,000 21,500,000 21,500,000 3,300,000
1000 30,000,000 28,600,000 28,600,000 3,500,000
Annual Avg Loss 1,350,000 1,350,000 1,350,000 900,000
the results and, for example, look to calibrate the results against historical loss
events. One technique is to simply look at the largest historical losses, estimate return
period for those events and compare them against the model outputs.
Key questions to ask with respect to the tables shown:
●● What specific scenario(s) are driving, say, the 1-in-10 and extreme 1-in-200 flood
and windstorm events?
●● What are the differences in the assumptions that derive the variance in the loss
estimates?
●● What internal data help to improve the modelled outputs?
It is also important to consider individual loss events of most concern and also multi-
ple events in the same year. Organizations can also seek to supplement the analysis
with use of bespoke scenarios, which are covered in Chapter 10.
In terms of uses, it is important to recognize the need to develop appropriate risk
management controls to manage the risks, including ongoing management actions
and contingency plans.
7.8.6 Climate model risk – research from S&P

Reinsurers have increased their efforts to incorporate climate change in their
decision-making process, particularly in risk management, exposure management
and pricing.
However, this is still nascent across the industry, and many companies are facing
difficulties in implementing climate change considerations robustly. Their scenario
analysis suggests that reinsurers’ estimates of their exposure to natural catastrophe
risk – and therefore physical climate risk – could be underestimated significantly,
which could lead to some insolvencies in the future.10
While not their base case, this scenario illustrates significant potential for volatil-
ity in earnings and capital. Unmodelled risks and the inherent difficulties in
attributing extreme events to climate change create the risk that climate change may
not be fully reflected in catastrophe modelling, particularly in the short term.
7.9 Parametric index solutions

The last chapter provided an outline of how organizations can build financial resil-
ience to climate change. This section provides details of a growing development of
use of parametric or index solutions that can help to transfer risk for specific climate-
related hazards.
The parametric market has existed for around 20 years, with an initial major
focus on weather risks. However, it is immature with only a few experienced niche
providers, risk carriers and buyers (utilities, energy companies, governments) trans-
acting ‘over-the-counter’ derivatives or large (re)insurance transactions.
With the rise of new datasets, satellites and Internet of Things (IOT) sensors, para-
metric or index-based insurance solutions are expanding fast and becoming an
alternative or, in many cases, the only option to transfer risks to provide organiza-
tions with improved resilience. It works particularly well where traditional insurance
struggles, such as non-physical property damage related losses.
7.9.1 Parametric insurance vs traditional indemnity insurance

A traditional loss or liability contract insures a policyholder against financial loss,
usually within a 12-month period. If a loss occurs, the insurance company is notified,
and the loss will be ‘adjusted’ according to the terms of the policy. Any compensatory
payout is determined on an indemnity basis.
Parametric policies are in general for 12 months but can be structured on a multi-
year basis: renewable energy products can be for up to 10 years, and natural disaster
products up to 3–5 years.
These solutions cover the probability of a defined index exceeding a given

loss-correlated trigger (rather than requiring a specific financial loss). They pay
out if the index goes beyond the limits that have already been specified. The
contract dispenses with the requirement for assessment, adjustment or proving
any related expenses.
7.9.2 Structuring a parametric solution

To function in a way that meets a policyholder’s requirements, a parametric solution
should meet particular criteria (see Figure 7.11):
1 The index and trigger on which the policy hinges should be clearly defined; to
construct a parametric solution dependent on the occurrence of a hurricane,
policyholder and insurer need an agreed and objective definition of ‘hurricane’.
2 The index on which the policy hinges should be objectively measurable; like the
above, if a policy is structured to pay out upon a certain amount of rainfall, a
method and geography of observation should be agreed upon. Usually this will
rely on independent third-party data and monitoring.
FIGURE 7.11 Risk financing solution structuring process
Trigger
Pre-agreed, measurable event
Monitoring and reporting
Trigger conditions are monitored and assessed to

determine whether they have been met
Insurer
Pays an agreed amount to the policyholder when

the trigger conditions are met
Premiums Payout
Policyholder
A well-structured parametric solution should:
●● Be flexible for the policyholder: the level of optionality in definition of index,

trigger, modes of measurement and payout structure allows for bespoke, tailored
solutions.
●● Provide a seamless transition from event to payout: in obviating the need for loss
assessment and potential points of disagreement over loss incurred, parametric
solutions allow for faster and smoother realization of payouts based on verifiable
and clear-cut triggers.
●● Expand insurability: parametric solutions may be appropriate in many cases
where traditional insurance is unavailable or prohibitively expensive.
It is worth noting that a trigger need not be a single event or peril; many solutions
involve a series of marginal triggers with associated payouts at each threshold.
Therefore, trigger points may be based on an accumulation of chronic conditions
over a given time frame such as total amount of rainfall or average temperature over
one year or say, a summer or winter seasonal period.
The index should also, of course, be independent of the actions of either the
insurer or the policyholder – if the index can be influenced by either party, it ceases
to be a fair and objective benchmark on which to base a policy.
7.9.3 Payment of claims

When the index diverges from the agreed range, coverage kicks in and payout is
determined according to a pre-agreed mechanism. However, premiums for a para-
metric policy tend to exceed premiums associated with a traditional insurance policy.
This is mostly in order to compensate insurers for commensurate benefits offered to
policyholders by these policies.
The payout is agreed in advance and cannot be adjusted downwards as a result of
loss assessment, and the insurer may need to pay out a range of highly covariant
policies almost simultaneously, if they are linked to highly correlated indices.
CASE STUDY
Skyline Partners: Hurricane natural catastrophe protection for loan defaults in the
Caribbean
Background
Natural disasters and loan defaults are strongly correlated particularly for financial institutions
in highly exposed areas such as the Caribbean, which are susceptible to hurricanes. This is
compounded by the reduction in credit insurance capacity, which has been driven by factors
such as the Covid-19 crisis.
The Jamaican Co-operative Credit Union League ( JCCUL) is relied upon for loans by
100,000 smallholder farmers to cover the cost of essentials, such as seeds, day-old chicks and
farming equipment. Farming is the main source of income for around 18 per cent of the
Jamaican population. Adverse weather events could lead to farmers being unable to repay
their loans, putting the JCCUL’s ability to continue to offer financial support at risk.
Actions taken
A collaboration between Howden, the international insurance broker, Skyline Partners and
Munich Re has developed a product that protects the JCCUL against non-repayment of
micro-loans by farmers in the event of extreme weather.
The insurance product, which is based on a parametric trigger, replaces funds lost as a
result of farmers defaulting on loans in the event of an extreme hurricane. This is designed to
trigger for the full limit when the hurricane wind field of category 3 and above covers the
whole of Jamaica.
The methodology has been developed through dividing Jamaica into tiles to ensure that
they are able to accurately pay out the areas that have been affected. The policy also provides
protection for hurricanes where the eye doesn’t directly hit the island but payment will still
be made for any of the resulting hurricane winds (cat 1+) hitting Jamaica (based on the
hurricane wind field hitting the various tiles across Jamaica).
Results
The solution comes with dedicated risk visualization software to monitor events to assist the
client with the risk awareness and the settlement of claims in line with the policy terms. The
tool comes with history of hurricanes since 1850, as well as 10,000 years of simulated (also
termed synthetic) storms. This type of solution can be tailored for other natural catastrophe
perils, including earthquakes, flood, wildfire and winter storms anywhere in the world.
Parametric solutions offer new ways of protecting against risks that are otherwise not
sufficiently covered, and the market is growing significantly.
FIGURE 7.12 Illustration of hurricane wind path in the Caribbean

Conclusion
In this chapter we have seen that organizations have always been aware of the
weather and, in the longer term, have assumed that the climate in the locations in
which they operate will be largely static. This is now changing and the climate in
those areas is changing; sometimes beneficially, often with increased threat of damage
to life and property.
Over time society has collected many datasets around the weather and what the
climate (or the longer-term weather pattern) was in the past. Clearly, climate change
is affecting the ability to use these past records to forecast the future. In order to do
that, use must be made of models and forecasts, which technology can provide in the
form of satellite data, automatic and more detailed weather records, and processing
capability to enable multiple iterations of possible outcomes.
From these models we can develop insights into the possible future climate and
plan accordingly. This is where we can introduce risk management processes such as
mitigating potential losses, avoiding then by relocating, or transferring the financial
effects of loss through hedging strategies.
Notes
1 R Gutro. NASA – what’s the difference between weather and climate? NASA, 1 February
2005, https://www.nasa.gov/mission_pages/noaa-n/climate/climate_weather.html
(archived at https://perma.cc/C5L9-BCKJ)
2 K Bell-Pasht and D Krechowicz. Why does access to good climate data matter? World
Meteorological Organization, 2015, https://public.wmo.int/en/resources/bulletin/
why-does-access-good-climate-data-matter (archived at https://perma.cc/A4DA-BA38)
3 R Marsooli and N Lin. Numerical modeling of historical storm tides and waves and their
interactions along the U.S. East and Gulf Coasts, Journal of Geophysical Research:
Oceans, 2018, 123 (5), pp 3844–74, doi:10.1029/2017jc013434 (archived at https://
perma.cc/D9KR-EFLK)
4 Copernicus Climate Change Services. Global temperature trend monitor, nd. https://cds.
climate.copernicus.eu/apps/c3s/app-c3s-global-temperature-trend-monitor?month:float=
3&year:float=2022 (archived at https://perma.cc/B2YU-JT92)
5 IPCC. AR6 Climate Change 2022: Impacts, Adaptation and Vulnerability. https://www.
ipcc.ch/report/sixth-assessment-report-working-group-ii/ (archived at https://perma.cc/
EK7T-VZDA)
6 Met Office. UK Climate Projections: Headline Findings, 2019. https://www.metoffice.gov.
uk/binaries/content/assets/metofficegovuk/pdf/research/ukcp/ukcp-headline-findings-v2.
pdf (archived at https://perma.cc/FK2W-B747)
7 IPCC. AR5 Climate Change 2014: Mitigation of Climate Change, 2014. https://www.
ipcc.ch/report/ar5/wg3/ (archived at https://perma.cc/3EKJ-STMQ)
8 Met Office. Robert FitzRoy and the early Met Office, https://www.metoffice.gov.uk/
research/library-and-archive/archive-hidden-treasures/robert-fitzroy (archived at https://
perma.cc/MY5Z-RM5E)
9 B D Tanner. Automated weather stations, Remote Sensing Reviews, 2009, 5 (1),
pp 73–98, doi:10.1080/02757259009532123 (archived at https://perma.cc/MU6F-
U6UR)
10 S&P Global Ratings. Global reinsurers grapple with climate change risks, 23 September
2021, https://www.spglobal.com/ratings/en/research/articles/210923-global-reinsurers-
grapple-with-climate-change-risks-12116706 (archived at https://perma.cc/KA9A-4GWN)
236
Designing an effective emerging

climate risk management process
This chapter will cover the role and design of an emerging risk management process,
a key element in the toolkit of the risk function and very important in managing
climate-related risks.
The main leaning outcomes from this chapter are to:
●● Define and explain the characteristics of emerging risks.

●● Explain the process and benefits of having a formal emerging risk management
process to support the identification of risk by serving as an early warning system.
●● Provide an overview of some of the risk management tools and techniques that
can be used to manage emerging risks, focusing on horizon scanning.
●● Guide on how to prioritize and make assessments.
●● Highlight the challenges in managing emerging risks.
●● Discuss treatment options.
●● Provide examples of how good reporting can influence senior executive decision-
making.
While this chapter focuses on designing an emerging risk management framework

that can incorporate climate change, in the next chapter we will explain specific
emerging climate trends, issues and challenges, providing details of some specific
physical and transition examples as well as interconnected risks.
Introduction
Emerging risk management has become a critical component of enterprise risk
management (ERM) in supporting an organization’s understanding of its future risk
profile, for an organization to have an early warning system in place to improve its
DESIGNING AN EFFECTIVE EMERGING CLIMATE RISK MANAGEMENT PROCESS 237
FIGURE 8.1 Examples of emerging risks
Climate change Resource shortages Cyber attack Supply chain interruption
Geopolitical change Pandemic Emerging technology Regulatory environment
resilience, and to identify any derailers of its corporate strategy. The key word here
is ‘future’ and it can be argued that one of the most important roles of risk managers
is to help anticipate the future, to avoid surprises (such as unanticipated earnings
volatility) and to prepare for future changes in business strategy in line with the
organization’s changing risk profile.
Emerging risks can originate from a multitude of sources, are driven by a range of
factors and can have both financial and non-financial impacts. They are typically
difficult to predict and not fully understood. Figure 8.1 highlights some of the
prevailing emerging risk that most organizations have on their emerging risk radars.
If we were to take the quote from Donald Rumsfeld, ‘… there are known knowns;
there are things we know we know. We also know there are known unknowns; that
is to say we know there are some things we do not know. But there are also unknown
unknowns – the ones we don’t know we don't know.’
In risk management parlance, black swans are the ‘unknown unknowns’ (i.e.,
risks that may not be on anyone’s radar), whereas grey swans are the ‘known
unknowns’ (i.e., risks that may not be well known or fully understood). The art of
emerging risk management aims to help organizations manage these black and grey
swan events (as and when they occur), while recognizing that the risk may not mani-
fest itself in the precise way originally predicted but possibly in a variant of the
emerging risk identified. The essential point here is risk managers need to support
their organizations by raising awareness of emerging issues and trends.
Organizations, the ecosystem in which they operate and the risks that need to be
managed are becoming increasingly interconnected. Decision makers often have
limited time to think about risk on the horizon and so risk managers need to develop
a process so that they can pick up the warning signals (while ignoring unnecessary
‘noise’) that can help translate the emerging issues, and provide improved risk infor-
mation that can change the focus of management, while also providing advice and
guidance on appropriate options.
8.1 Forecasting and the role of risk management

This forward-looking predictive aspect of risk management is well-defined as:
We are all forecasters. When we think about changing jobs, getting married, buying a
home, making an investment, launching a product, or retiring, we decide based on how
we expect the future will unfold.… But when big events happen – markets crash, wars
loom, leaders tremble – we run to the experts, those in the know.
These experts are often risk managers or chief risk officers of organizations and this is
one of the main areas in which risk management creates value.1
This illustrates how the identification of future/emerging risks is an area where risk
management professionals can add value by collaborating with and enabling
management to scan the horizon and to consider what extraneous factors can desta-
bilize the business and prevent it from achieving its strategic objectives.
With respect to climate change, one of the most critical aspects of forecasting is
the projection of global temperature, often referred to now as ‘future climate path-
ways’, which will be discussed next.
8.1.1 Climate forecasts – United Nations Intergovernmental Panel on Climate

Change (IPCC)
The leading authority on climate predictions is the Intergovernmental Panel on
Climate Change (IPCC). In July 2001, the IPCC, comprising hundreds of the world’s
top climate scientists, published a report stating that the planet is warming faster
than they had previously predicted, as a result of industrial pollution, and that the
human consequences are likely to be catastrophic.
The IPCC’s most recent report, issued in 2022, predicts that increases in global
mean temperature will range from 1–3°C above 1990 levels, which can lead to
beneficial impacts in some regions but primarily harmful ones in others. Net annual
costs will increase over time as global temperatures increase. The report, ‘Climate
Change 2022: Impacts, Adaptation and Vulnerability’ provides details of global
impacts.2
The report states that:
risks are projected for the near-term (2021–2040), the mid (2041–2060) and long term
(2081–2100), at different global warming levels and for pathways that overshoot 1.5°C
global warming level for multiple decades. Complex risks result from multiple climate
hazards occurring concurrently, and from multiple risks interacting, compounding
overall risk and resulting in risks transmitting through interconnected systems and across
regions.
Many climate models attempt to project increases in global mean surface air temper-
ature (SAT) continuing over the 21st century, driven mainly by increases in
anthropogenic greenhouse gas concentrations, with the warming proportional to the
associated radiative forcing.3 Climate models were discussed in Chapter 6 and
climate pathways and projections will be discussed in detail in the climate scenario
section in Chapter 10.
From a risk management perspective, the important issue here is to recognize the
fact that these examples represent three alternative but discrete future states or
outcomes of the future macro environment. In making projections risk managers
need to support the business by making best estimates through, for example, assess-
ing weighted averages of the outcomes that can be accomplished by assigning
probabilities to each forecasted future state.
This will ultimately assist in future strategic planning and in a range of business
decisions such as improvements to financial reporting (covered in Chapter 12) by
making sure, for example, that organizations hold sufficient capital and reserves to
account for the impending future levels of anticipated volatility.
8.2 Emerging risk definitions

There are differing views within risk management circles as to the definition of
emerging risks. Some simplified views on emerging risks are that they represent ‘new
risks’ or ‘events that have not yet happened’. This is true to a point but not entirely
accurate.
Some key words that stand out from the many definitions that we cite include
unexpected/shock event and trends/changing risk factors. Emerging risk manage-
ment does not necessarily mean a specific scenario or event but also a trend that is
linked to a specific risk. If we take climate change as an example, it is different
because it is a known risk that is changing and continually evolving, and it also has
a velocity or speed, which we will discuss in more detail later in this chapter.
Leading risk management definitions include one from RIMS (the Risk
Management Society, based in the United States):
●● Emerging risks are those issues that have not manifested themselves sufficiently to
be managed using the tools commonly applied to more developed exposures.
They are ‘those risks an organization has not yet recognized or those which are
known to exist but are not well understood’.4
ORIC International states that emerging risks are:
●● A material, previously unconsidered or changing risk factor that has the potential
to significantly alter the firm’s risk profile.
Many definitions have evolved from the insurance industry, given the importance to
the industry of managing emerging risks. Munich Reinsurance uses the following
definition:
●● Emerging risks are either new or developing or changing risks. They include
trends as well as potential shock events and are characterized by a high degree of
uncertainty in terms of occurrence probability and loss amounts, and with a sub-
stantial potential impact on the company’s insurance lines and balance sheet.
The following considerations are helpful in establishing whether a risk is emerging

or not:5
●● A risk that did not exist before appears as a result of the emergence of a new
technology or a change in lifestyle and/or mode of production.
●● The existence of a risk that previously was undetectable is brought to the surface
thanks to breakthroughs in scientific knowledge.
●● An issue is transformed into a new risk as a result of changes in the perception of
society.
A good overall summary of emerging risks comes from Swiss Re: ‘We define emerg-
ing risks as newly developing or changing risks that are difficult to quantify and
could have a major impact on society and industry.’
Swiss Re note in their 2021 SONAR Report that ‘New risks do not emerge during
times of crisis alone. To regularly profile and think through new or changing risks,
and their associated uncertainties, helps build societal preparedness for the future.’6
8.2.1 Emerging risk definitions – climate change and global warming

In risk management it is important to make sure that risks are well articulated and
this is often a key challenge for risk professionals.
An example of this is that when people refer to climate change they mainly
mean global warming, which is more specific in nature (i.e. it refers to a long-term
rise in the average temperature of the Earth’s climate system). Global warming
more specifically relates to worldwide surface temperature increases, while climate
change is any regional or global statistically identifiable persistent change in the
state of climate which lasts for decades or longer, including warming or cooling.7
Climate change is somewhat anomalous when talking about emerging risks (and in
many ways similar to cyber risk). To some extent it is now an existing risk but
simultaneously it is an emerging risk that continues to evolve (with an increasing

number of disparate drivers and outcomes) and consequently it presents a chal-
lenge with regard to managing it. Any loss event data that may be relevant can be
rapidly obsolete due to technological and process changes within firms (which
inhibit comparability between the present and the past).
8.3 Traits and characteristics of emerging risks

One of the main characteristics of emerging risks is that they are difficult to identify
and assess. This is due to the fact that they may appear slowly, may not be fully
understood and have dependencies; conventional approaches may not be effective,
are typically outside the organization’s control and may not have arisen before.
The main characteristics of risks that are well suited for managing in an emerging
risk framework or risk register using horizon scanning are typically those that are:
●● Highly uncertain – either in outcomes or timing or both.

●● Typically external – they arise from outside of the organization.
●● Wide breadth – impacting on multiple organizations, industries or even geographic
areas.
●● Foreseeable – horizon scanning is not about predicting the future.
●● Longer term – stretch beyond traditional business planning cycles.
If these characteristics are present, it is then possible to drill down on these emerging
risks when applying them in an organizational context. Emerging risks possess a
variety of additional (and more specific) traits that differ from traditional existing
risks. These may make it more challenging to convince senior management to focus
attention and resource on them when there are finite resources, the full nature of the
risk is not defined (or understood) and the risk can feel abstract in a world where
value is attached to facts and supporting data.
Figure 8.2 illustrates some of the key traits.
Climate change as an ongoing emerging risk has historically had most of these
traits and that is mainly why it is a very complex risk to manage and mitigate.
At an IRM SIG event in 2020, in discussing climate change risk Giorgis Hadzilacos
from the PRA stated ‘As an industry it is not the first time we have dealt with a
complex problem – asbestos, cyber, GDPR are some examples from the recent past.
Take a complex problem and break it down and communicate it to your stakehold-
ers – it can gain traction and become more manageable.’8
There are some broad categories of emerging risks that are also helpful to consider
when an organization undertakes a horizon scan, which we explain later in this
FIGURE 8.2 Emerging risk traits
Ambiguous - risk not

Difficult to identify Difficult to communicate
fully understood/defined
Outside of Lack of consensus

organizational control among stakeholders
Emerging risk
traits
Uncertainty - relevance,
Lack of burden of proof
impact, timeframe
Causality may not Systematic or ‘op model’ Difficult to assign

be established issues ownership
SOURCE © Onerisk consulting. All rights reserved, 2022
chapter. As mentioned previously, it is important to note that emerging risks can be

both new and/or developing risks.
Additionally, it is also important to focus on areas that can be considered as
threats and opportunities to the organization.
Threats: What is coming over the horizon that could adversely affect your future
commercial or other success?
Opportunities: What does the information gathered suggest might be a new direction
for you to take that would give you an advantage in the future marketplace?
One of the critical issues for risk practitioners is to consider the opportunities and
threats as they communicate the risk and raise awareness, which we now explore in
more detail.
8.4 The role of a formal emerging risk management process

With a successful ERM framework that includes an emerging risk process, organiza-
tions can learn to anticipate and successfully manage critical risks that have not yet
occurred or manifested themselves. By recognizing and responding to uncertainties
before they erupt, organizations can help to avoid losses, improve allocation of
resources and stay ahead of competitors. Some of the main reasons that emerging
risk management is important include the following:
●● Establishes a process to uncover the unknown or poorly understood threats to the

business
●● Brings stakeholders together to facilitate consensus and prioritization of risks
●● Serves as an early warning system in order not to catch an insurer by surprise
●● Addresses a multitude of possible threats and opportunities aligned to changing
risk profile
●● Leverages emerging risk processes for competitive advantage
●● Aids operational resilience by encouraging contingency planning
●● Reduces uncertainty in business results
Enterprise risk management, therefore, needs to be able to develop a process that is

comprehensive and integrated within the organization. The main objective of having
a formal emerging risk management process is to ensure that risks that could impact
the organization’s future are identified on a forward-looking basis so that they can
be appropriately tracked and treated. The trick is to know how to minimize the
shocks and manage the risks in order to profit from them.
What differentiates the management of emerging risks is primarily the time frame
within which organizations should develop formal mechanisms to identify, assess,
evaluate and treat emerging risks. This may include the need for a separate emerging
risk register, with associated risk owners, separately from existing ‘managed’ risks.
Emerging risks often lead to the need for more research to assist in making more
informed decisions with respect to business planning and strategy.
In developing a formal emerging risk process, it is important for organizations to
capture emerging risk information that is relevant in the context of the risk profile of
the organization. This could include (but is not limited to):
●● Risk categorization
●● Legal entity
●● Time horizon
●● Weak and strong signals
These important factors will be covered later in the chapter.
8.5 Uses and benefits of emerging risk management

Managing emerging risks can support a range of business processes, which we will
explore in more detail through the book.
Emerging risk management can play a major role in supporting and challenging
the business in understanding both risk accumulations such as geographical and
market sector, and also in calculating the impact or financial consequences at differ-
ent confidence levels/return periods.
This understanding is becoming more and more critical in strategic decision-
making such as risk pricing in transactions and in determining what risk exposures
to accept and transfer.
The following is a list of some of the benefits of having a formal emerging risk
management process:
●● Alignment of emerging risk management with strategic planning

●● Challenging corporate strategic plans
●● Enhancing risk reporting
●● Improved risk maturity and risk culture
●● Improved credit rating – emerging risk is one of the five pillars for S&P’s ERM
rating assessments
●● As an input into risk appetite statements
●● Capital setting and allocation
●● Better understanding of risk aggregation and concentration risks across business
units and geographies
●● Supports stress and scenario analyses (which improves the process for capital reserves)
●● Improved risk-based decision-making
●● Improved management information
●● Product development – opportunity risk management
●● Improves crisis management and business continuity plans
●● Improved operational and financial resilience
The Institute of Actuaries focus on firms needing to understand their vulnerability to

highly uncertain tail risks. Interestingly it states that its emerging risk management
process can enhance the risk culture of a firm, as it can alert decision makers to
potentially inconvenient truths and provide a framework to enable firms to base
their business strategies and risk mitigation activities on a range of forecasts rather
than a single best-estimate projected result or an average of stochastic results. It is
worth adding that by enhancing the risk culture, this enables organizations:
●● To deepen the understanding of the driving forces affecting future development of

a policy or strategic plan
●● To identify gaps in understanding and bring into focus new areas of research
required to understand emerging risks better
●● To build consensus among a range of stakeholders about the issues and to develop
options on how to tackle them
●● To identify and make explicit some of the difficult policy choices and trade-offs
that may need to be made in the future
●● To create a new strategy (or revise the existing strategy) so that it is resilient by
being more adaptable to changing external conditions
8.6 Key objectives of developing a framework

for managing emerging risks
One of the main developments in enterprise risk management, particularly since the
global financial crisis, has been for larger organizations to develop a formal stand-
alone process for managing emerging risks. There is widespread consensus that
emerging risk management provides an early-warning system in order to prevent
organizations being caught by surprise and helps focus more on external risks.
The ability to support such an approach will naturally depend on the size and
profitability of organizations, the industries and markets in which they operate, the
relative risk maturity of their firm, the risk appetite and the resources that can be
allocated to it. Nevertheless, it is an important forward-looking component of the
risk management toolkit. It can provide a competitive advantage and allow an
organization to take advantage of opportunities that arise when emerging risks do
materialize. An effective enterprise risk management framework should seek to
contribute to the identification and management of emerging risks and to meet the
following key objectives:
●● The early identification of potential threats and opportunities, allowing more

timely analytics and potential treatment
●● More dynamic and ongoing management of the full risk register and the addition
of new risks as and when appropriate
●● Continued strengthening of the risk culture and awareness of the organization’s
risk profile through ongoing discussions about potential emerging risks
8.6.1 Emerging risk identification and sources of information

Risk professionals should first seek to identify inputs and sources of emerging risks
(including relevant climate risks) from a broad diaspora of sources. Specifically, these
can include:
●● Review of industry journals and articles

●● Industry publications
●● Research surveys/questionnaires
●● Structured interviews (with internal and external stakeholders)
●● Working groups and workshops
●● Internal and external loss events and near misses
●● External emerging risk publications
●● Regulatory updates
●● Thought-leadership papers from the consultancy firms
●● Annual emerging risk reports from global think tanks
●● External vendors that provide AI and analytics
●● Industry conferences
●● Professional trade bodies (e.g. Institute of Internal Auditors, ACCA, CFA, CISI,
IRM)
●● Stakeholder mapping
External publications are a great source for identifying emerging risk themes, with a
comprehensive source being the Global Risks Report published by the World
Economic Forum. It includes a list of the top risks and the trends that drive them.
Partnering with risk institutions and universities can provide valuable insights for
understanding emerging risks.
Internal and external industry loss data is a good source of information to under-
stand underlying trends and causes of losses. However, probably the most effective
approach for identifying emerging risks is through internal brainstorming and work-
shops that identify specific threats and scenarios.
Swiss Re identifies emerging risks by gathering input and feedback from under-
writers, client managers, risk experts and others across the company, and also from
external experts and research institutions. However, a similar approach can be
adopted with the relevant experts from the sector in which you are operating.
ACCOUNTABILITY FOR MANAGING EMERGING RISKS

Boards and committees throughout an organization are ultimately responsible for
reviewing and reporting on emerging risks and providing oversight of any proposed
management and mitigation plans. The risk management function should seek to
maintain an emerging risk register and undertake separate reporting of the risks. Chapter
3 provides more details of governance through a best practice case study.
8.7 Current risk management guidance and standards

There is currently no formal guidance on how to manage emerging risks within the
traditional enterprise risk management (ERM) standards that we covered briefly in
Chapter 1. However, managing emerging risks now forms a critical component of
ERM. Although sometimes difficult to define explicitly, the management of them
needs to be considered in the here and now, and planning must be undertaken for
those that will happen in the future, such as a regulatory change, and also for those
that may not happen at all, which may form part of a business continuity plan.
Standard and Poor’s (the rating agency) as part of its ERM evaluation criteria, has
enterprise risk emerging risk management as one of its five key criteria within the
evaluation of risk exposure management. It states:
We evaluate [the] ability to determine the likelihood, impact or severity, and velocity
of the risk (speed of potential change), as well as its ability and willingness to
mitigate the risk such that it does not significantly affect the company or its ability to
opportunistically take advantage of the risk (level of preparedness if those emerging risks
materialize)’.9
Climate change risk (and the various emerging derivatives of it) is increasing in profile
and is becoming recognized as integral to the success of organizations and their stra-
tegic plans. Failure to manage these risks in a systematic, structured and
forward-looking way will hamper the execution of strategic plans and may contribute
to the failure to identify any strategic derailers. That is not to say this is an easy disci-
pline to master; there are challenges in doing this well and we will cover these now.
8.7.1 Emerging risk management challenges

Emerging risk management has many challenges. These include finite time and
resources, determining ownership and accountability, the complexity and nature of
emerging risks and the issues with categorization.
Black swans, in terms of the events, are by definition impossible to predict; for
example, the global pandemic, which no one saw coming, is an event that is still
emerging and the ERM function can play an important role in mitigating the ongo-
ing impact. Emerging risks generally have a high degree of uncertainty due in part to
few statistical benchmarks.
This is also linked to the Cassandra ‘syndrome’ or ‘dilemma’, where valid warn-
ings or concerns are raised but dismissed or disbelieved. The financial crisis was a
good example where the banks, governments and rating agencies refused to acknowl-
edge the emerging problem. Climate change is now an ongoing example where
scientists have been providing repeated warnings to governments over the last
decades but they have been very slow to act and heed the warnings.
However, some emerging risks, such as changing climate legislation, are going to
happen so it is important to be prepared. By developing a range of scenarios and
knock-on effects companies can improve their crisis management and business conti-
nuity plans.
It is a challenge but it is important, particularly in respect of climate change, to
create a sense of urgency to attract the attention of stakeholders. Gaining consensus
from various stakeholders is difficult and hampers the ability to make decisions (due
to a lack of precision with regard to the threats and scenarios that need to be captured
and modelled – this is also affected by interconnectedness). There is often confusion
around the root cause. ERM facilitation through brainstorming is a useful tool to
reach consensus and is one of the best ways to highlight the value of the function in
support of improved decision-making.
Looking at some of the challenges in turn, we will provide some additional detail
on the challenges faced.
8.7.1.1 TIME AND RESOURCES

Most risk functions and business owners don’t have the time and resources to
adequately assess the emerging risk exposures. This is partly due to the perception
that emerging risks are remote and never going to happen. The risk function can do
some of the heavy lifting in researching the risks prior to raising them with the busi-
ness and also when supporting senior management.
8.7.1.2 OWNERSHIP AND ACCOUNTABILITY

It is often difficult to agree ownership and accountability because emerging risks can
cut across a range of stakeholders and costs can be prohibitive to managing and
mitigating the risks. Again, the priority is to agree ownership and accountability for
risks, which we cover in Chapter 3 under governance.
8.7.1.3 EMERGING RISK CATEGORIZATION

To capture emerging risks, it is important to develop a framework to categorize them
in terms of risk types. There is increasing consensus to using PESTEL as a global
basis to categorize macro emerging risks. Alternatively, they could just be aligned to
the prevailing risk categories within the risk framework.
The Global Risks Report categorization The Global Risks Report published by the
World Economic Forum uses five risk categories. These are:
●● Economic risks
●● Technological risks
●● Social risks
●● Geopolitical risks
●● Environmental risks
These are used to form a basis for identifying themes, prioritizing actions and for
coordinating responses.
Swiss Re Institute – SONAR report categorization Another of the leading publica-

tions on emerging risks is from the Swiss Re Institute, who since 2013 have developed
their SONAR report that focuses on global emerging risk themes and trends.
By identifying and monitoring macro trends it helps understanding of the risk
landscape of the future. Based on internal surveys and workshops, Swiss Re curate a
set of macro trends deemed to be of high importance for the reinsurance sector in the
next decade.
They categorize macro risks into four main headings (which are similar to
PESTEL) but highlight the fact that companies should seek to develop their own risk
categorization:
a Demographic and social environment

b Political and economic environment
c Technological and natural environment
d Competitive and business environment
What is of particular interest in their 2021 report is that there are a few emerging
risks that relate to climate change that impact across a number of the nine emerging
risk themes and six emerging trends that they spotlight, although they don’t have a
specific category for either environmental or climate risk. The emerging risk themes
outlined are based on early signals collected over the course of a year. Relevant
trends and themes identified include:
Climate risk trends
1 Mass migration and urbanization (links to a in the SONAR categories above)

2 Low-yield environment and risk of inflation (links to b)
3 Addressing the physical risk of climate change (links to c)
4 Transition to a low-carbon economy (links to c)
5 Rising importance of biodiversity and ecosystem services (BES) (links to c)
6 Data as an asset (links to c)
7 Increasing digital customer interaction (links to d)
8 Increasingly litigious environment (links to d)
9 Rising importance of ESG (links to d)
The importance of these global trends is that they identify a trend from a long-term
pattern that is currently taking place and that could contribute to amplifying global
risks and/or altering the relationships between them.
We will explore some of these specific climate risk related trends and challenges
in the next chapter.
Alignment to the risk profile categories Alternatively, organizations can seek to

develop their own internal risk categories and have related risk policies. They can
seek to review and design their own ways to categorize aligning risks tailored to their
needs. Here is an example set of generic categories that are commonly used that can
be expanded to suit the organization’s risk profile:
●● Strategic
●● Financial
●● Operational
●● Regulatory
8.8 Emerging risk tools and techniques

The most traditional management technique used by organizations and taught at busi-
ness schools is the use of SWOT and PESTLE. Organizations should use this process
to better understand the threats and opportunities from emerging risks and to assist in
making more informed decisions with respect to strategic and business planning.
The most important developments in emerging risk management in recent years
have been the development of more formal tools and techniques that help identify
and assess emerging risks, which are becoming critical components of the toolbox
for risk practitioners in addressing how to identify and assess new and evolving
risks. These tools and techniques can be applied to emerging risk management and
can assist key stakeholders to identify emerging risks, focusing ‘deep-dive’ analysis
and as a powerful tool in emerging risk workshops when looking to build out
consensus on emerging threats and opportunities.
The risk function should not be operating in isolation and needs to work collabo-
ratively with experts across the organization including risk champions, who act as
listening posts in the business.
One good technique is to send out a risk questionnaire and follow up with work-
shops across all business areas. Use of external experts to help facilitate the workshops
is also very helpful.
Partnering with risk institutions and universities is another way to understand
emerging risks (good examples, among many others, are the Willis Research Network
and ClimateWise). Internal and external industry loss data is an additional source of
information to help understand the underlying trends.
8.8.1 Horizon scanning and stress and scenario testing

In terms of specific approaches that can help risk managers, there are two main tech-
niques that many organizations are using and that are advocated by stakeholders
(such as regulators) to both capture and quantify emerging risk:
1 Horizon scanning
2 Stress and scenario testing
Stress and scenario testing (SST) frameworks have been a huge revolution in ERM
since the financial crisis. In Chapter 10 we shall provide an in-depth look at how
organizations should design an SST framework and develop climate scenarios high-
lighting different methodologies. It is important, at this point, to highlight the
importance of distinguishing between:
●● Scenario (analyses) planning – Looking at possible future states on the basis of

different starting states.
●● Stress testing – Testing how the organization copes in the face of a range of poten-
tial situations.
There are also other techniques that we won’t be covering in detail, such as:
●● Forecasting – Using qualitative and quantitative techniques, including historical

data and statistics, individual and collective judgement, and environmental moni-
toring.
●● Driver mapping – Using analytical tools such as STEEPLE (societal, technological,
economic, environmental, political, legal, ethical) to consider a wide range of
future risks. The main difference from PESTLE is the inclusion of ethical consid-
erations and a focus on social/demographic as opposed to sociocultural drivers.
●● Trend analysis – using mathematical techniques on historical data to predict
future trends.
Let’s take a closer look at horizon scanning.
8.8.1.1 HORIZON SCANNING

Horizon scanning is a formal process to help to explore what the future might look
like, to understand uncertainties better and to analyse whether the organization is
adequately prepared for potential opportunities and threats.
The horizon effectively adds another dimension by capturing when the event may
(or may not, of course) appear on the horizon.
The Institute of Risk Management published a guide on horizon scanning in
2018, which serves as a good reference. As stated in the guide:10
[H]orizon scanning can be a good technique for people to look at complexity, challenge
assumptions and review multiple ways that events could unfurl, in order to increase the
resilience and reliability of their organizations. It is not about trying to predict the future
but rather to review options so that evidence-based decisions can be made
The IRM guide refers to the UK Government paper on futures, which, in the opinion
of the IRM Innovation SIG, comprises best practice to follow if undertaking a detailed
horizon scanning exercise. The UK Futures document describes a three horizons
model, shown in Figure 8.3, which is now being commonly used by practitioners as a
basis to map out their future climate change risks and opportunities:
●● Horizon 1: where you are currently taking action

●● Horizon 2: visible trends for strategic consideration
●● Horizon 3: little trend information today but planning needed
In developing an emerging risk management process an organization should seek to

develop a stand-alone process to ensure emerging risks are identified and assessed on
a forward-looking basis so that they can be appropriately tracked, prioritized and
treated.
To implement a horizon scanning approach within an organization is an iterative
approach that involves the identification of key stakeholders, communication of the
approach and the objectives, research, reporting, debate and challenge, and then
monitoring and reviewing (in order to determine priorities at any given point in
time).
Assessing climate risks over different time horizons It is a natural extension of the
horizon scanning approach to apply it to a specific subset of emerging risks (in this
instance climate risk); however, the consideration of time horizons is not without
challenges. One of the most challenging aspects to assessing the impact of climate
FIGURE 8.3 Horizon scanning – three horizons model
H
Horizon 3
will grow in importance
in the long term
Horizon 2
M
trends in the short to
medium term
Horizon 1
Impacts today and
tomorrow
L
Now Short term Medium term Long term
SOURCE Future Toolkits, Waverley Consultants (Open Source)

change is the time horizon and it is important to distinguish between existing risks
that will change over time due to climate change, and new emerging climate risks
that may impact the organization in the future.
One of the most complex aspects of climate scenario analysis is to understand the
incremental impacts over time. Climate change in respect of physical risks, for exam-
ple, is expected to lead to an increase in the frequency and severity of ‘acute’
weather-related events, such as floods and droughts, as well as longer-term ‘chronic’
shifts in climate, such as increases in average temperatures and sea-level rise.
Mark Carney, in his famous Lloyds of London address in 2015, stated that
‘Climate change is the Tragedy of the Horizon’ and that ‘once climate change
becomes a defining issue for financial stability, it may already be too late’.11
When identifying risks one main consideration is therefore the use of different
time horizons or time frames over which the risk could crystallize and thus the
window to respond and adapt. The design of climate scenarios is discussed in
Chapter 10, including tools and techniques that can model different time horizons.
Regulators, such as the PRA, provide comprehensive guidance and explain that
the scenario analysis should include short-term assessments, covering the existing
planning horizon and longer-term assessments of a firm’s exposures based on its
current business model.
The Climate Financial Risk Forum scenario guide issued in June 2020 helps to
explain the requirements of scenario assessment by stating that ‘This requires lever-
aging historical data and providing a forward-looking assessment over an extended
time horizon, whilst also evaluating the likelihood that extreme climate-related
events will become more frequent and severe.’12
Emerging risk assessment – an extra dimension Traditional risk assessment

criteria enable the risks to be assessed in respect of the consequence (or impact/
severity) based on agreed upon risk appetite level and likelihood (probability) of
occurrence.
As discussed, one of the main objectives of managing emerging risks is to identify
and assess them on a forward-looking basis so they can be appropriately tracked and
treated, and thus risk managers need to consider a third key criterion, which is speed
or time to impact.
Speed refers to the time it takes for an emerging risk event to manifest itself or, in
other words, the time anticipated for such an emerging risk to impact the group/
entity.
Speed should not be used as a proxy for when action should be taken, as some
emerging risks may require an action plan that is implemented well in advance of the
risk crystallizing.
8.9 Emerging risk management process

Organizations (as mentioned previously) need to develop a formal process that
should include both internal and external scanning for the identification of risks over
alternative time horizons.
As a central function, the risk management function should seek to collate infor-
mation about trends and events in both an internal and external context by adopting
‘always on’ sensing that monitors changes in the firm’s strategic assets, systems,
culture and knowledge, etc.
Perhaps the most important step to identify emerging risks is to conduct detailed
research through a ‘deep-dive’ exercise (which is particularly helpful for climate
change given its complexity).
Figure 8.4 provides a high-level overview of the formal emerging risk manage-
ment process that organizations should seek to develop.
The process highlights an assessment process that we will expand on in the next
section from the point of identifying new emerging risks, through the prioritization
stage (and determining the levels of analysis to be undertaken) to the categorization
stage and then how they will be reported and monitored going forward.
These are therefore the things more likely to unexpectedly and adversely affect a
firm in the future, which we can be aware of but may perhaps miss if they have not
been considered. Figure 8.4 outlines a flexible approach that looks at new emerging
risks (or extensions of already identified emerging risks), and categorizes and prior-
itizes these risks (and determines the additional analysis required). Depending on the
outcomes, weak signals can be tracked via an emerging risk tracker on a SharePoint
site or an intranet that only the risk and compliance team have access to. Emerging
risks once evaluated can be added to either the emerging risk register or the watch
list, according to the following criteria:
Emerging risk register: This listing is to comprise those emerging risks that are judged
as having a higher than 25 per cent potential of crystallizing into a risk that
should ultimately be added to the risk register. The emerging risk register is to be
subject to a quantitative oversight and monitoring regime overseen by the
management risk committee (MRC) and other local committees as appropriate.
Watch list: This is to comprise those emerging risks that are judged as having a lower
than 25 per cent potential of crystallizing into risk that should be added to the
risk register, or where the emerging risk is assessed as having a low impact on a
time horizon greater than three years. The watch list is to be subject to an annual
monitoring regime overseen by the MRC and other local committees as
appropriate.
They can also become part of the existing risk reporting if it is considered that the
risk has emerged and that there are sufficient indicators to enable management to
FIGURE 8.4 Emerging risk management process
1. Internal and external

Risk register horizon scan to
identify new emerging
or extensions of
Emerging risk emerging risk
register
Emerging risk
watchlist
4. Report either Categorize and 2a. If new, conduct
through risk register, prioritize into 4 analysis (PESTEL,
emerging risk register
Emerging groups based on time SWOT and what-if
or watchlist risk horizon/speed and scenario analysis)
management likelihood/signal
process
Categorize based on
PESTEL of internal
categorization and
Further
then assess the analysis
impact base on low,
medium and high
255
form an ongoing assessment of the risk. These could include management informa-
tion, key risk/performance/control indicators and loss event data (both internal and
external).
8.9.1 Emerging risk assessment – an alternative approach

The IRM Charities SIG outlined a flexible approach to emerging risk assessment in
2018, which is relevant with regard to this chapter.
The assessment approach chosen is likely to differ due to both the size and risk
maturity of the organization, which in turn relate to the internal resources available,
and leadership and management preferences.
This means that when looking at climate change as an example for an interna-
tional wildlife charity, this risk’s proximity is immediate as the climate crisis is
already impacting on species survival. However, for a national health charity, the
impact of this risk might not be felt for a few years. In the advanced approach, you
can assess the concepts of proximity and velocity using simple scales and definitions
(e.g. ‘fast or slow’ for velocity, ‘near or far’ for proximity) or more complex scales
(e.g. very fast, fast, slow, very slow, etc.). Consequently, it is important to choose the
scale that you think will work best for your organization.
8.9.2 Evaluation and prioritization of emerging risks

Emerging risks can be expected to move between the emerging risk register, the
watch list or an entity/entities risk register (as and when additional information
becomes available to better quantify the overall impact on the business). Not all
emerging risks are likely to warrant the development of an immediate risk treatment
strategy, however in certain instances it may be appropriate to develop a risk treat-
ment plan in the near term given that some emerging risks may require longer
adaptation/treatment periods. Where treatment plans are developed a project lead
should be assigned responsibility for completing; this may be the emerging risk
owner (ERO) but in all instances the ERO will have overall responsibility for moni-
toring and reporting on progress of the treatment plan.
Once an emerging risk is identified the risk function should then assess the risk
using an assessment process like the one in Figure 8.5, distinguishing between time
horizon and/or speed, and likelihood and/or ‘signal’. The figure illustrates how an
initial prioritization decision of emerging climate risks can be made in order to deter-
mine relative priorities and how these can be treated (depending on the assessment).
8.9.2.1 VELOCITY AND SPEED OF RISKS – ‘STRONG’ AND ‘WEAK’ SIGNALS

The key is identifying whether something is a ‘weak signal’ or not, that is, whether it
is something that is expected to impact an organization (i.e., a ‘strong signal’) or if it
FIGURE 8.5 Emerging climate risk evaluation and prioritization
Emerging risk Likelihood and/or ‘signal’

prioritization
Low/weak High/strong
Medium risk - monitor and focus High priority - requires immediate

on the connections to existing risks active management
Near-term/fast
and impacts on business
resilience
Time horizon and/or ‘speed’
Add to ‘emerging risk register’ and Add to ‘risk register’ as:

revisit in three months (1) New risk; and
(2) Consider impacts on and other
existing risks
Low risk High risk - undertake:

• SWOT and PESTLE analysis;
Long-term/slow
• Deep-drive review
• Develop insights (market, legal
and regulatory)
Add to ‘emerging risk watchlist’ Add to ‘emerging risk register’ and

and revisit in 12 months revisit every three months
SOURCE © Onerisk consulting. All rights reserved, 2022
is something that currently isn’t expected to have an impact but that could in the
future (i.e., a ‘weak signal’). These are normally things that are occurring in:
●● Other geographical markets – e.g. regulation change in Europe or the United

States that the United Kingdom could possibly look to replicate in the future or
demand changes in those areas leading to new business models or practices that
again may be replicated in the United Kingdom.
●● Other industries – e.g. something happening in the energy sector that could be
replicated in the insurance sector in the future (an example of this being pricing
fairness).
●● Other regulatory bodies – e.g. something happening with a regulator that does
not yet have a direct impact on the insurance sector but that could be replicated
in the future.
Recent events provide an example of an emerging risk that has arisen at a great
velocity. In January 2022, most political and economic commentators would have
said that there was no expectation of a war unfolding in Ukraine; by the end of
March 2022, this unexpected emerging risk (which may have been on an emerging
risk tracker as a generic ‘political instability risk’) had materialized and become a
real risk, fast-tracked to the main risk register. Another example for most organiza-
tions was the global Covid-19 pandemic, where companies were underprepared.
Emerging risks are expected to move between the emerging risk register, the
watch list or an entities risk register as and when additional information becomes
available to better quantify the overall impact on the business. Not all emerging
risks are likely to warrant the development of an immediate risk treatment strategy.
However, in certain circumstances it may be appropriate to develop a risk treatment
plan in the near term given that some emerging risks may require longer adaptation/
treatment periods. Where treatment plans are developed a project lead will be
assigned responsibility for completing; this may be the ERO but in all instances the
ERO will have the overall responsibility for monitoring and reporting on progress
of the treatment plan.
8.9.2.2 EMERGING RISK TREATMENT

In 2021, the IRM’s Charities SIG released a practitioner guidance paper entitled
‘How to assess and treat emerging risks’, which outlines how the treatment of emerg-
ing risks should involve considering options such as using the 4Ts approach (see
Chapter 6).
Given the paucity of information around some emerging risks, you could choose
to monitor how the risk develops, then modify and adjust your organizational plans
and priorities to respond to the risk. For example, reduced resources may require
you to accelerate the delivery of services using technological solutions rather than
face-to-face methods of service delivery.
8.9.3 Emerging risk evaluation – governance process

It is important to assign ownership for managing the ongoing monitoring of and
reporting on emerging risks. One approach is to assign accountability to an emerg-
ing risk owner (ERO) within the business. Ideally quarterly updates should be
provided and documented. Risk management should help facilitate the collection
and consolidation of the emerging risk register and watch list and report to manage-
ment and/or board committees as appropriate. From time to time, deep-dive analysis
should be developed on an ad hoc basis.
The ERO is normally responsible for ensuring that any actions (e.g. undertaking
deeper-dive workshops) arising from the local committees’ oversight are performed
on a timely basis.
The risk management function should seek to ensure that emerging risk assess-
ments, along with the current status of any associated actions are appropriately
included within the risk reports and other associated risk-based reporting presented
to committees, boards and/or other stakeholders. Emerging risks should be linked
to the design and inputs during stress and scenario testing that are discussed in
Chapter 10.
If the assessment suggests that the risk can be adequately assessed in accordance
with the ERM framework then the emerging risk should be considered to be moved
to the existing risk registers.
It is helpful to have a separate emerging risk register to document the initial anal-
ysis and ongoing updates within the organization’s internal risk management system.
8.9.3.1 EMERGING RISK ASSESSMENT CRITERIA – IMPACT ASSESSMENT

The next step in the process should be to assess the overall impact of an emerging
risk as an indicator of the potential financial, reputational and/or regulatory effect
on the organization.
One of the main approaches that is typically used is to assign qualitative assess-
ment from low to high, subject to incremental increases (i.e., minor, moderate and
severe or low, medium and high).
Swiss Re use the following definitions in their SONAR analysis:
High, medium, low
●● High/Severe – Potentially high financial, reputational and/or regulatory impact or

significant stakeholder concern.
●● Medium/Moderate – Potentially medium financial, reputational and/or regula-
tory impact or moderate stakeholder concern.
●● Low/Minor – Potentially low financial, reputational and/or regulatory impact, or
low stakeholder concern. Therefore, concern is minimal and hence no action is
required – can be accommodated within the existing control environment.
Time horizon – speed (time to impact)
●● 0–3 years – near term – The emerging risk can be expected to occur within a three-
year time horizon.
●● +3 years – mid term/long term – The emerging risk can be expected to occur
within a greater than three-year time horizon.
●● TBA likelihood – This indicates the probability of the risk crystallizing. It is
assessed in two categories (<25 per cent chance of occurring, and >25 per cent
chance of occurring).
8.10 Emerging climate risk reporting

Emerging risk reporting can come in many forms. Due to the breadth of the emerg-
ing risk universe, it can be high-level and generic or distilled down to specific
granular-level risks applicable to individual parts of a business or product line. The
variety of reporting available affords risk managers the chance to adapt to the needs
of their senior management/boards and to enable them a way to determine relative

urgency and impacts, so that finite resources can be allocated accordingly.
The key is that the risks are well articulated (and categorized), that there is senior
management ownership, that the assessment considers time horizons (i.e., urgency),
the velocity/speed of the risk occurring, the relative potential impacts and that it
enables senior management to make informed prioritization decisions and that miti-
gating actions are tracked and monitored to completion.
8.10.1 Overall risk visualization – emerging risk radar

Organizations should also seek to develop a stand-alone emerging risk radar visu-
alization of climate change emerging risks. Many organizations use an output that
uses specific time periods that are typically broken down into four or five PESTEL
risk categories.
Figure 8.6 makes the distinction between physical risks and transition risks but
also considers these with much longer time horizons. This is a useful depiction of
how different underlying causes can have differing time frames and impacts when
considered with regard to physical or transition risks.
8.10.2 Emerging climate risk radar – mapping of business decisions

Another way of presenting emerging risk information is to map the risk to business
decisions that align with the future climate strategic plan. This can help the risk
manager to present the range of emerging climate threats and opportunities inter-
nally at senior risk management and board risk committees, based on a high-level
initial evaluation that can act as a good basis for discussion and to agree areas that
need to be assessed further in terms of better understanding the impact on the organ-
ization. Some threats and opportunities will be difficult to model but still important
to contextualize in terms of initial impact and velocity.
The approach maps out the risk and opportunities against a specific business deci-
sion, which in turn is evaluated against an initial intuitive qualitative materiality
assessment of low, medium or high impact. This is not a straightforward exercise but
it can really help to filter out the most important areas, which the organization
should then take to the next stage of analysis (a more detailed risk assessment process
and design of scenarios, which we cover in Chapter 10).
Figure 8.7 highlights the types of output that will be very helpful to risk managers
to articulate regular updates to management. This will help with prioritizing
resources to undertake more detailed research and ‘deep dives’. Analysis of climate
scenarios can be used as a dynamic reporting tool that can be updated to integrate
with both new climate threats and opportunities, or changes in the perceived threats
or opportunity level. As already discussed, the horizon effectively adds another
FIGURE 8.6 Initial emerging climate risk framework – physical and transition risks
Physical risks
Wildfires Increased flood risk
Extreme weather events:

increased frequency and severity
Supply chain: distribution
Legal: class actions

Stranded assets:
underwriting
Process:
changes to operating model to
meet climate change targets Stranded assets:
investments
Transition risks (including liability risks)
Risk impact Timeframe Priority and action required

Impact in short term Prioritize and take action
High: high impact on strategy and objectives/risk of material disruption to business model Impact in medium term Consider options and plan
Impact in long term Monitor periodically
Medium: moderate impact on strategy and objectives/may require change in strategic direction
Low: some impact on strategy and objectives/remediate effort will be required
261
262
FIGURE 8.7 Initial emerging climate risk framework – mapping to business decisions over alternative time horizons
Counter party credit risk

(default on loans)
TCFD reporting Investment strategy

(failure to adequately disclose) (stranded assets)
Supply chain Consumer demand

(optimize cost/resilience) (shifts in consumer
lin rs
demand)
ng ea
e)
(lo 0+ Y
1
Business planning
Green products (new carbon taxes) Human resources
(use of hydrogen fuel cells) (employee retention gen z)
)
te s
rm
m ar
Provisioning/reserving
iu Ye
ed 10
(under reserving)
(m 3-
Product pricing Risk transfer
on
(underpricing) (inadequate protection)
riz
ho
Business continuity management
e
m
(inadequate crisis management plans)
Ti
te s
)
rt ear
rm
Capital management
ho Y
(s 0-3
(insufficient capital
Business decision - Key: Potential impact (TBA):
buffer)
risk profile
Strategic Threats Low
Financial Opportunities Medium
Operation/legal
Regularity High

dimension by capturing when the event is predicted to happen on the horizon (which
is typically chosen with respect to set periods, i.e., short, medium and long term).
8.10.3 Frequency and nature of reporting

Depending on whether you manage the emerging risk process through your normal
risk management reporting cycle, as a stand-alone exercise or as part of another
process (e.g. strategic and business planning), this will determine the frequency and
nature of the reporting to be provided. Options for reporting when you manage
emerging risk through your normal risk management cycle include:
●● Integrating emerging risks into your normal risk report, with or without special
indicators or commentary to identify and draw attention to certain risks as
‘emerging’.
●● Carving out a separate section in your normal risk reports (e.g. a stand-alone
appendix) to identify and draw attention to emerging risks. This could be in the
form of a summary ‘watch list’ to ensure risks are on the radar without providing
too much detail.
●● Creating a separate stand-alone risk report focused on emerging risk, with a fuller
analysis and commentary than the summary ‘watch list’ approach.
This aligns with the prioritization section earlier in this chapter where, depending on
the assessment of the emerging risk, it would be incorporated into the existing risk
reporting, be part of the emerging risk register or be monitored on a periodic basis
on the ‘watch list’.
Conclusion
In this chapter we have explained the process and benefits of having a formal emerg-
ing risk management process to support the identification of climate risks by serving
as an early warning system, and it is clearly important to leverage both internal and
external informational resources across multiple functions to support the develop-
ment and implementation of a robust process.
Emerging risks by their nature are ambiguous and it is impossible to quantify
impacts and likelihoods with any degree of certainty. Nevertheless, it is critical that
emerging risks are identified, assessed, managed and reported on if an organization
wants to build and maintain resilience in the face of uncertainty.
Climate risk is a subset of emerging risk but its effects can be felt in all aspects of
what an organization does across its value chain (i.e. operational processes, opera-
tional resilience, sourcing of materials, emissions, client demands and expectations,
product design, adherence to regulatory requirements, selection of partners or service

providers) and consequently needs to be embedded within existing risk management
practices so that it is an integral part of how the organization is run.
In the next chapter we will provide more specific details of climate change-related
emerging risks, both threats and opportunities.
Notes
1 P E Tetlock and D Gardner (2015) Superforecasting: The art and science of prediction,
Crown Publishers, New York
2 IPCC. Climate Change 2022: Impacts, Adaptation, and Vulnerability, Contribution of
Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on
Climate Change. Eds H.-O. Pörtner et al, 2022, Cambridge University Press
3 G A Meehl et al (2007) Global Climate Projections. In eds S Solomon et al, Climate
Change 2007: The physical science basis, Contribution of Working Group I to the
Fourth Assessment Report of the Intergovernmental Panel on Climate Change,
Cambridge University Press, Cambridge and New York. www.ipcc.ch/site/assets/
uploads/2018/02/ar4-wg1-chapter10-1.pdf (archived at https://perma.cc/PS8U-VDYV)
4 RIMS. Emerging Risks and Enterprise Risk Management, RIMS, 2010. www.rims.org/
resources/risk-knowledge/white-paper/emerging-risks-and-enterprise-risk-management
(archived at https://perma.cc/8HJH-KJ4W)
5 A Barr and C Raimbault (2012) Emerging Risks: A strategic management guide,
Routledge, Abingdon
6 Swiss Re. Swiss Re SONAR: New emerging risk insights, 2021. www.swissre.com/dam/
jcr:5a8d21b6-3dff-4178-9f10-525850e7b3db/swiss-re-institute-sonar-report-2021-final.
pdf (archived at https://perma.cc/TZY5-K5GU)
7 P U Zacharia, T M Najmudeen and L Wilson. Climate change impacts on Indian marine
fisheries and adaptation strategies. In Training Manual on Advances in Marine Fisheries
in India. eprints.cmfri.org.in (archived at https://perma.cc/KH9R-952F). Available at:
http://eprints.cmfri.org.in/14038/ (archived at https://perma.cc/6MUE-MRJB)
8 M Massey et al. Climate Change Risk Management Guidance: IRM Climate Change
Special Interest Group Report, Institute of Risk Management. www.theirmindia.org/
uploads/thought-leadership/publications/climate-change-risk-management-guidance-
report.pdf (archived at https://perma.cc/ST4S-RSMQ)
9 S&P Global Ratings. Enterprise risk management evaluation framework, 22 July 2019,
www.spglobal.com/ratings/en/research/articles/190722-enterprise-risk-management-
evaluation-framework-11070561 (archived at https://perma.cc/9P5Y-53DF)
10 Institute of Risk Management. Horizon Scanning: A Practitioner’s Guide, nd. www.
theirm.org/media/7340/horizon-scanning_final2.pdf (archived at https://perma.cc/
DME9-MFVD)
11 Bank of England. Breaking the Tragedy of the Horizon -climate change and financial
stability, 2015, www.bankofengland.co.uk/-/media/boe/files/speech/2015/breaking-the-
tragedy-of-the-horizon-climate-change-and-financial-stability.pdf (archived at https://
perma.cc/5KFN-LGW6)
12 CFRF. Climate Financial Risk Forum Guide 2020: Scenario analysis chapter, 2020.
www.fca.org.uk/publication/corporate/climate-financial-risk-forum-guide-2020-
scenario-analysis-chapter.pdf (archived at https://perma.cc/SGC6-ZSMG)
266
Emerging climate trends,

issues and challenges
This chapter will cover some of the main emerging climate trends, issues and
challenges related to climate change across physical, transition and liability risks.
●● Understand the main global macro and micro trends relating to climate change
including the outcomes of future environmental global risks from the World
Economic Forum’s global survey.
●● Recognize the increasing importance of understanding the impacts of physical
emerging risks such as heatwaves, wildfires and ‘tipping points’ and how organi-
zations can seek to mitigate them.
●● Explore the emerging transition risks including ‘greenwashing’ and examine the
different approaches than can lead to critical damage to an organization and its
brand.
●● Provide an overview of how new technologies can help businesses to change their
business models and practices to support their own and the wider society’s net
zero strategies.
●● Recognize the growing emerging liability risks through a range of specific litiga-
tion cases and the important impact on the reputation of an organization.
Introduction
In the last chapter we discussed the importance of developing a formal emerging risk
management framework to support an organization to understand its future risk
profile and for organizations to have an early warning system in place to improve
their resilience.
In this chapter we will cover some of the main emerging climate trends, issues and
challenges relating to climate change, including climate global trends and risks on
EMERGING CLIMATE TRENDS, ISSUES AND CHALLENGES 267
both a macro and micro economic level, affecting countries, regions, organizations
and people.
The chapter will provide an overview and some more detailed insights into specific
emerging risks emanating from physical, transition and liability risks. Specific physi-
cal emerging risks will include both acute and chronic risks covering extended
wildfire seasons, and prolonged heatwaves, as well as climate tipping points.
In looking into transition risks some of the emerging concerns such as ‘green-
washing’ will be explored in more detail, as well as explaining how emerging
technologies are supporting the drive to meet net zero targets and can provide
competitor advantage to organizations that act as first movers. In the last section, the
latest insights into emerging climate change litigation highlight how litigation is a
key driver of change that is supporting the climate agenda through providing some
recent and ongoing legal court cases.
9.1 Global macro trends

Economic challenges flowing from both the Covid-19 pandemic and the war in
Ukraine are persisting and will continue beyond 2022 with market risks such as
financial market volatility and interest rate uncertainty being a major area of focus
in the years ahead. Human capital risks will continue as organizations need to verify
their work-from-home policies that seek to maintain staff retention rates
Global regulatory changes and policies outlined in Chapter 1 will ultimately
cascade down to organizations in helping to meet the various targets, goals and
expectations.
Geopolitical tensions and nation-first postures will also complicate climate action.
Brazil, for example, joined the other 140 countries responsible for 91 per cent of the
Earth’s forests in endorsing the Glasgow Leaders’ Declaration on Forests and Land
Use, even as deforestation in the Amazon accelerated to a 15-year high in 2021.
The economic crisis created by the Covid-19 pandemic risks and the ongoing
Ukraine war are also delaying efforts to tackle climate change by encouraging coun-
tries to prioritize short-term measures to restore economic growth, regardless of
their impact on the climate, over pursuing green transitions.
Societal concerns have now mobilized under the new banner of ‘ESG reporting’.
Thanks to scrutiny through higher standards of audit, greater transparency in risk
reporting, news media reporting of corporate abuses, and increased mobilization by
citizens in social media spaces, the general visibility of organizational misconduct
has raised public expectations of better future controls.
Some of these drivers are bringing about a significant change in the way organiza-
tions operate and provide a platform for a more ‘purpose driven’ organization that
is explored in more detail in this chapter.
9.1.1 Global Risks Report – World Economic Forum

It is important to remember that climate change is a set of global trends. One of the
best publications on emerging risks is the Global Risks Report published by the World
Economic Forum. The report provides an oversight on global risks that are broken
down between the five key categories.
Their 2021 report stated that a shift towards greener economies cannot be delayed
until the shocks of the Covid-19 pandemic subside. These global risks and trends in
turn are leading to other knock-on effects in socio-economic development, human
health, migration and food security. The report clearly implies that organizations need
to understand the direct and indirect effects of climate change and their interaction.
Climate change continues to be perceived as an existential threat to humanity and
in the latest Global Risks Report (2022) respondents rated ‘climate action failure’ as
the risk with potential to inflict the most damage at a global scale over the next
decade.
The report states that:
over a 10-year horizon, the health of the planet dominates concerns: environmental risks
are perceived to be the five of the top 10 most critical long-term threats to the world as
well as the most potentially damaging to people and planet, with “climate action failure”,
“extreme weather”, and “biodiversity loss” ranking as the top three most severe risks.1
The report provides some specific examples of global impacts including droughts,
fires, floods, resource scarcity and species loss. The results of its survey of the global
risks over the next decade are shown in Table 9.1 below.
TABLE 9.1 Global Risks Report 2022 survey – the most severe global risks over the next decade
Rank Type Risk
1 Environmental Climate action failure

2 Environmental Extreme weather
3 Environmental Biodiversity loss
4 Societal Social cohesion erosion
5 Societal Livelihood crisis
6 Societal Infectious diseases
7 Environmental Human environmental damage
8 Environmental Natural resource crisis
9 Economic Debt crisis
10 Geopolitical Geo-economic confrontation
SOURCE World Economic Forum Global Risks Perception Survey 2021–2022
The Global Risks Report highlights the increasing concern in respect to ‘climate
action failure’. It reveals the respondents’ lack of faith in the world’s ability to
contain climate change, not least because of the societal fractures and economic risks
that have deepened in recent months.
Before discussing some of the more recent emerging risk themes and trends it is
important to emphasize that it is vital not to get complacent in identifying emerging
risks and trends. The point here is that organizations can easily dismiss risks that are
now in ‘fashion’. For example, financial risks facing the world are still critical as we
look at the global growth outlook and rising debt levels that are now becoming an
increasing concern due to the Ukraine war – so global risks can shift very quickly.
The main macroeconomic impacts that are already being felt across the world are
increasingly higher inflation expectations, fuelled primarily by elevated commodity
prices.
9.1.2 Global economic climate trend and consequences

Climate change will have an impact on the economy and this needs to be factored
into new and emerging trends. For example, it is likely that the supply of both
finished and intermediate goods will be affected through property damage to prem-
ises from flood, wind or heat, which disrupts production processes. In addition,
interruption of energy supplies and disruption of global supply chains will probably
impact the way manufactured goods are distributed.
At the primary end of production, in agriculture, this sector will be most exposed
to flood, heat and drought changes, which will reduce crop yields and disturb the
way pricing has previously been established. Increased incidence of pests and weeds,
and reduced availability of water and groundwater will probably lead to reduced
supplies, which will increase prices for consumers. This will in turn widen inequali-
ties in society without governmental intervention, since food is a basic consumable
taking a higher percentage of the income of the poorest in society.
Further down the production line, infrastructure will also be at risk from, for
example, flooding. Transport and energy infrastructure will in all likelihood need to
have significant upgrades if the lights are to stay on and people can still get to work.
Our modern ‘hyper-connected’ world will find itself exposed in data centres,
which need increased cooling against higher temperatures or need to cater for
greater instability in fixed interconnections (fibre optics). For example, sub-sea
cabling, which enables rapid transfer of data across the globe, may be at risk from
sea-level rise.
The potential impact on human health needs to be considered also. Deaths from
heat spikes will be worse in cities, increased heat and humidity will cause more
waterborne disease, vulnerable populations, such as the elderly and low-income
communities, will be visibly more at risk and as these concerns become more evident
the impact on mental health will be aggravated.
If these dystopian images seem far-fetched, consideration will at least need to be
given to impacts on more prosaic activities in the daily life of the population in first-
world economies: tourism will be affected as established ski resorts suffer from lack
of snow, island resorts could disappear as water levels rise and water sports will be
affected through more intense algae blooms.
9.1.2.1 EMERGING TRENDS IN BUSINESS AND THE FINANCIAL MARKETS

Climate change, as is commonly known, has a range of impacts across the globe
that will threaten the bottom lines of businesses in a variety of ways. The frequency
and intensity of extreme weather can damage factories, supply-chain operations
and other infrastructure, and disrupt transport. Increase in drought conditions will
make water more expensive, which will likely affect the cost of raw materials and
production.
Climate volatility may force companies to deal with uncertainty in the price of
resources for production, energy, transport and insurance. And some products could
become obsolete or lose their market, such as equipment related to coal mining, or
wood-burning stoves releasing carbon and particulates.
New regulations such as carbon pricing and subsidies that favour a competitor
may also affect a business’s bottom line. A company’s reputation could suffer if it’s
seen as doing something that hurts the environment. Investors and stakeholders are
increasingly worried about the potential for ‘stranded assets’ – those that become
prematurely obsolete or fall out of favour and must be recorded as a loss using ‘mark
to market’ principles of accounting. This includes fossil fuels that many believe
should stay in the ground or real estate in a newly designated flood plain. Clearly this
move away from a carbon economy will impact financial structures that presup-
posed continuing revenue from the fossil fuel industry.
9.1.3 Climate change and opportunity

Climate change also presents business opportunities. The Carbon Disclosure Project
reported that 225 of the world’s 500 biggest companies believe climate change could
generate over $2.1 trillion in new business prospects.2
There will be more opportunity in clean energy, resilient and green buildings, and
energy efficiency. Hybrid and electric vehicle production and the electric public tran-
sit sector are expected to grow. Construction of green infrastructure and more
resilient coastal infrastructure could create many new jobs. Carbon capture, seques-
tration and uses of captured CO2 present opportunities, especially if these are coupled
with public policy such as tax incentives.
A newly warming world with less sea ice in the Arctic should provide new trade
routes that will cut time and cost of global shipping.
There will be opportunities to develop more efficient goods and services such as
cooling technologies to help transform the energy use so that AC units consume less
power. Other new scientific techniques should help develop drought resistance and
vertical farming.
Opportunities will become available to both keep people alive and keep them in
check. There is likely to be increased demand for drugs to fight existing and new
diseases, such as zoonotic disease, as regions of biodiversity collapse. What has been
described above may also give rise to civil unrest as the reality of a world with scarce
resources becomes clearer. The opportunities for private security and military equip-
ment manufacturers will be much greater.
9.1.4 What businesses can do to protect themselves

How much climate change will hurt the economy depends on what measures organ-
izations take to adapt to and prepare for it.
‘There’s a groundswell towards the view that any companies that fail to study
their exposure to extreme weather and fail to disclose the types of vulnerabilities,
including indirect ones, are going to have a hard time in the future.’3 Businesses need
to scrutinize their operations carefully. Their plans need to take into account the new
landscape that will emerge; more electric vehicles will mean garage and car repairers
will need to address the services they supply.
Asset managers are already scrutinizing their portfolios to assess if they are
exposed to coastal properties, the agricultural sector or carbon-intensive operations.
The sustainable investment market has continued to grow and evolve globally. While
each region’s approach to sustainable investment is slightly different, some trends
have had a global reach. Every region again saw a rise in ESG integration and
sustainability themed investing.4 With BlackRock’s announcement of its commit-
ment to sustainable investment those numbers will have increased exponentially.
9.2 Physical risks – emerging trends

Extended wildfire seasons and prolonged heatwaves are two of the major trends that
we have seen. Wildfires in California and Australia have been in the news for the last
few years but in 2021 there were many intense wildfires across some previously
unaffected regions of the world including southern Europe and Siberia. In August
2021 wildfires broke out in the Mediterranean, where the Greek Prime Minister
described them as the country’s ‘greatest ecological disaster in decades’. One of the
main related concerns is that in some countries, such as India, the summer heat is
starting earlier and is more intense for longer periods of time.
In 2022 extreme flood also hit certain countries and regions that included Spain
and parts of eastern Australia. In a period of just six days Brisbane saw almost
80 per cent of its annual rainfall pour down. Sydney recorded more than its average
rainfall for the year in a little over three months.
In a BBC report it was stated that with respect to 2022: ‘In the Southern Hemisphere,
Argentina, Uruguay, Paraguay and Brazil all saw an historic heatwave in January,
and many areas reported their hottest day on record. In the same month, Onslow in
Western Australia hit 50.7C, the joint-highest temperature ever reliably recorded in
the Southern Hemisphere.’5
The continued extreme weather events such as heatwaves increase healthcare
services’ strain on water, energy and transportation resulting in power shortages and
even blackouts. Indirect impacts on food and livelihood security impact people who
lose their crops or livestock due to extreme heat. Interconnected extreme events that
can be attributed to climate change are discussed in more detail in Chapter 6 in
terms of techniques that can assist in building greater resilience to physical risks.
9.2.1 Specific physical emerging risks and opportunities

This section provides specific examples and more details of the physical risks. Some
of the main emerging threats as well as opportunities split between acute and chronic
risks are shown in Figure 9.1.
FIGURE 9.1 Physical emerging risks and opportunities
Key physical risks Emerging threats Emerging opportunities
• Extended wildfire seasons

• Prolonged heatwaves
! • Surface water flooding • Development of risk
(localized flooding) adaptation solutions
Acute: extreme weather • Interconnected extreme
events events, e.g. blackouts • Predictive alert/
communication services to
customers
• Droughts
• Tipping points e.g. • Sustainable and resilient
permafrost thawing insurance/risk transfer
Chronic: changing weather • Reduced water availability solutions
patterns and rising mean • Biodiversity loss
temperatures and sea levels
SOURCE OneRisk Consulting. All rights reserved, 2022

To highlight some of the emerging trends, this chapter focuses on providing more
detail of some of the specific emerging threats and opportunities outlined in Figure 9.1:
1 Acute risk – extended wildfire seasons

2 Acute risk – prolonged heatwaves
3 Chronic risk – climate tipping points
Chapter 6 provided more insights into the some of the opportunities for improved
resilience against physical risks, including interconnected extreme events such as
blackouts that can be caused by climate change.
9.2.2 Acute physical risks – extended wildfire seasons

One of the main threats that is often linked to global warming is wildfire. Wildfires
are not new and in fact in some regions the frequency is reducing, due to improved
risk management practices. High temperatures and drier conditions are, however,
creating ideal conditions for wildfires that are becoming increasingly extreme in
terms of intensity due in part to the effects of climate change.
2016 and 2020 have been the warmest years on record to date and new scientific
evidence points to a lengthening in the average time of fire seasons.6,7 Therefore,
climate change is a cause of the growing scale of wildfire events in different regions
of the world even in regions where fires have historically happened only rarely.
One of the other major concerns in respect of wildfires is that they release more
carbon into the atmosphere, which exacerbates the problem by effectively turning
carbon sinks into carbon sources.
Since the mid-1980s, earlier snowmelt and associated warming has also been
associated with an increase in length and severity of the wildfire season in the Western
United States.8 A 2015 study indicates that the increase in fire risk in California may
be attributable to human-induced climate change.9 A study of alluvial sediment
deposits going back over 8,000 years found warmer climate periods experienced
severe droughts and stand-replacing fires and concluded climate was such a power-
ful influence on wildfire that trying to recreate resettlement forest structure is likely
impossible in a warmer future.
It is important to note that the intensity of wildfires is also linked to other socio-
economic trends such as population density and movement of people to underdeveloped
natural areas (the so-called ‘wildland–urban interface’) and sub-optimal fire manage-
ment strategies that may have led to an increasing availability of natural biomass
fuels.10
In summary, climate change is leading to drought conditions with enhanced
conditions for fire, namely high temperatures, low humidity and strong winds. In
many areas this is leading to more intense and frequent wildfire, which in turn is
leading to greater loss of property and lives.
9.2.2.1 ROOT CAUSES – IGNITION SOURCES OF A FIRE

In managing risks, it is always important to understand the underlying root causes
of loss events. In Chapter 6 we provide an overview of developing processes for
discovering the root causes of problems in order to identify appropriate solutions,
including post-loss incident reporting and use of bow tie analysis.
Stages of a wildfire are outlined in Figure 9.2. The process is taken from an RMS
report that provides more detail and insights.11 Typically, after ignition fire spreads
by wind through available fuels. Then the actual damage from wildfire comes from
radiant heat (flames), embers (burning chunks of fuel) and smoke. The fourth stage
is ignition of structures.
The next stage of the wildfire in terms of damage will be linked to what is called
‘urban configuration’, when the fire reaches a neighbourhood. The last stage is the
smoke damage, which can lead to business interruption risks as businesses may need
to close for evaluation and related damages.
Further insights are provided next that help to explain the root causes in more detail.
Stage 1: Wildfire ignition There are many ignition types that are important to
understand in the context of developing risk management improvements to prevent
wildfires from happening in the first place. These can be split between natural and
man-made and are set out in Figure 9.3. According to the RMS report, ‘wildfire igni-
tions often occur in proximity to humans – in towns or along roads.’
Stage 4: Sources of ignition for structures The RMS report provides the three main
sources of ignition for structures stemming from the wildfire hazard:
i Direct – flame in direct contact with a structure or accumulated embers on a
structure;
ii Indirect – flying embers ignite materials close to a home; and
iii Radiant heat – heat from the fire causes materials to ignite.
The two examples above highlight the complexity of understanding the root causes, in
this case the ignition sources, both for the wildfire and for properties that can be impacted.
FIGURE 9.2 Stages of a wildfire
1. Wildfire ignition 2. Fire spread
4. lgnition of 3. Source of fire

structures damage
5. Urban
6. Smoke damage
conflagration
FIGURE 9.3 Stage 1:Wildfire ignition
Climate
Major cause Specific cause change impact
Natural Dry climate Yes

Lightning No
Volcanic eruption No
Man-made
Arson No
Discarding cigarettes No
Power line - ARC No
Sparks from equipment No
Camp fires No
SOURCE OneRisk Consulting. All rights reserved, 2022
BACKGROUND RESEARCH AND EVIDENCE FOR BUILDING BUSINESS CASES
When building a case to management about an emerging risk issue (discussed in detail in
Chapter 8) it is very helpful to provide examples and undertake research on the subject.
In respect of wildfires many organizations will be susceptible to property and related
losses that are linked to, for example, their building locations and vulnerabilities.
It is important that organizations seek to undertake background research and collate
evidence on example historical losses and trends relevant to their risk profile or footprint
that will ultimately lead to better decision-making in risk control measures, whether
that’s pre- or post-loss mitigation. In the context of climate change this can help to
support the design of future climate scenarios outlined in Chapter 10, use of natural
catastrophe models that we discuss in more detail in Chapter 7 and in building resilience
that we discuss in detail in Chapter 6.
Historical global loss information and trends
Wildfires have increased in prominence from a financial loss and humanitarian

perspective around the world in recent years. The United States, Australia, Portugal,
Greece, Spain, Brazil and Russia – among many others – reported significant and historic
fire activity in the past decade alone.
Here are some of the recent examples in the last few years.
Australian bushfires 2019

Australia’s average temperatures have increased by 1.44°C since 1910, with 2019 being
the hottest year on record.12 In 2019 Australia suffered its largest drought and against
this backdrop several climate drivers aligned to create conditions conducive to fire (high
temperatures, low humidity and strong winds). This led to large destructive blazes
spreading rapidly through dry vegetation in drought-affected lands.
North America including California 2021

Wildfires burned across western parts of North America for a significant period from the
end of June to late August. The worst affected areas included several provinces in
Canada, as well as California and the states in the Pacific Northwest of the United States.
Among the fires was also the largest recorded fire in Californian state history, dubbed the
Dixie Fire after the road in which it started. The Dixie Fire managed to burn through
almost a million acres, before it was finally contained.13
No region of the world has seen more dramatic impacts of worsening fire conditions
and resultant damage than the state of California in the United States. While large fires
have been recorded in California for more than 100 years, there is a noticeable shift in
the seasonality of fire events, the intensity of the fires themselves, and surface
conditions fuelling the more unusual activity.
A 2018 study sponsored by the California Natural Resources Agency estimated that
the average acres burned annually in the California Sierra Foothills could significantly
increase in the coming decades.14 Such increased acreage burnt could increase the
number of postal codes ‘at risk’ by mid-century.
Mediterranean 2021
Many countries around the eastern and central Mediterranean suffered several days of
high-intensity wildfires in summer months, leading to high concentrations of fire particle
matter and degraded air quality. The particularly dry and hot conditions throughout the
summer months provided the ideal environment for intense and long-lasting wildfires.
Turkey was the worst hit in July, with data showing daily fire intensity at very high
levels that were well above average for the region. Other countries also affected by the
devastating wildfires included Greece, Italy, Albania, North Macedonia, Algeria and
Tunisia.
9.2.2.2 IMPACT OF WILDFIRES ON THE ENVIRONMENT AND CO 2 LEVELS

One of the related concerns about wildfires is the fact that wildfires can also have an
effect on climate change itself, increasing the amount of carbon released into the
atmosphere and inhibiting vegetation growth, which affects overall carbon uptake
by plants. The Copernicus Atmosphere Monitoring Service (CAMS) keeps track of
global wildfires and their emissions.
The fires in North America in 2021 released estimated total carbon emissions of
approximately 83 megatonnes into the atmosphere.15 The high intensity and
persistence of the wildfire emissions could be seen in CAMS global forecasts as a

large plume of smoke that crossed the North Atlantic and, mixing with wildfires
from Siberia, reached western parts of the British Isles and northwest Europe in late
August before travelling across large parts of Europe.
Therefore, it is important that decision makers have access to current, accurate
information on atmospheric conditions, such as that produced by CAMS, so they
can take the necessary steps to protect people from the effects of degraded air quality
and smoke pollution
9.2.2.3 GROWING SCALE OF INSURED GLOBAL WILDFIRE LOSSES

According to Swiss Re, in 2020, wildfires triggered the third highest annual insured
losses from this peril ever, after record seasons in 2017 and 2018. It states that from
its analysis ‘over 2016–2020, almost a quarter of all secondary peril insurance losses
worldwide can be attributed to wildfire’.16
Most of the losses were in California. In recent years, annual losses from wildfire
have been rising rapidly. This is unprecedented: before 2016, the share of this peril
in losses averaged just above 3 per cent and rarely exceeded 5–10 per cent (see
Figure 9.4). Rating agencies for insurers have had to reassess their risk appetites and
as a result their pricing for these risks, which also suggests that reinsurance capital
providers will be likely to do the same. The number of acres burned in 2018 was, for
example, nearly double that seen in 2017, the rating agency notes.
According to Aon’s report, ‘Prior to 2015, the world recorded just four years in
which aggregated wildfire-related insured losses had topped $2 billion (2021 USD).’17
The report states that there have been 21 individual billion-dollar insured fires glob-
ally with 16 of these occurring since 2015, and all but two of those events were in
the United States. The peak insurance industry loss years have totalled $18 billion
(2017), $17 billion (2018) and $14 billion (2020).
FIGURE 9.4 Increasing trend in global insured losses from wildfires
Global insured losses from wildfires, in USD billion at 2020 prices
60
*% of natcat insured losses
50 2020
12.4%
40 2019 1.7%
2018 1981–2015 2016–2020

30
20
2017 *% of insured losses from secondary perils
10 23.3%
2016
0 2011–2015 3.3%
1981–1990 1991–2000 2001–2010 2011–2020 1981–2015 2016–2020

Insured losses from wildfires
SOURCE Swiss Re Institute

One of the most important issues for an organization to recognize is that the insur-
ance industry ultimately needs to make profits and the insurance market is now
seeking to either increase its prices; reduce capacity; pull out of providing markets or
seek to develop new innovative solutions.
This may lead to significant increases in premiums or unavailability of coverage
and organizations to covers such as their property insurance covers, unless there are
improved risk management practices.
9.2.2.4 RISK MITIGATION OPTIONS AND MEASURES

As climate change makes wildfire activity more challenging in the future, it is essen-
tial for strategic planning to include mitigation measures for homes and businesses
that insist on living in these high-risk areas. This could include:18
●● Enforcing or mandating defensible space between vegetation and a structure

●● Installing fire-resistant or less-flammable material for roofing, siding and/or
decking
●● Maximizing distance between properties
●● Vastly improved wildfire risk mapping
●● Enhancing infrastructure to improve evacuation and firefighting efforts
Mitigating wildfire risk can involve several activities, including: enhanced building
codes; land-use planning; environmental regulation; enhanced infrastructure; adop-
tion of wildfire sensors; fire-resistant individual property modifications; and
community-wide abatement.
Understanding the relative value of each of these mitigation measures is critical
towards their implementation.
Businesses have started to respond to the need for more homeowner risk reduc-
tion activities to take place as well as improved communication strategies.
9.2.3 Acute physical risks – prolonged heatwaves

‘Extreme heat events do occur within natural climate variations due to changes in
global weather patterns. However, the increase in the frequency, duration, and inten-
sity of these events over recent decades is clearly linked to the observed warming of
the planet and can be attributed to human activity.’19
Many all-time or monthly extreme heat records continue to be broken and popu-
lation exposure to heat is increasing due to climate change.
According to the CRO forums report:20
Heatwaves are likely to increase, particularly in mid-latitudes on land, with the increase
in peak temperatures being 2-3 times higher than global average increase. The strongest
change is found in Central and Eastern North America, Central and Southern Europe,
the Mediterranean, Western and Central Asia, and Southern Africa. These regions all
have a strong soil-moisture-temperature coupling leading to increased dryness.
9.2.3.1 HISTORICAL GLOBAL LOSS INFORMATION AND TRENDS

One of the most extraordinary and powerful heatwaves ever experienced by North
America hit the west coast in June 2021. This was caused by what meteorologists
called a ‘dome of high pressure’. The heatwave extended from California – worsen-
ing the drought even as the first wildfires of the season began – and extended all the
way up to Canada, where temperatures rose up to 121.28°F (49.6°C), shattering all
previous records. ‘This is the beginning of a permanent emergency’, the Governor of
Washington state said.
According to NOAA this was a 1-in-1,000-year occurrence; or having a
0.1 per cent chance of happening in any given year. A weather station in Lytton,
British Columbia set a new Canadian national heat record on three consecutive
days: peaking at 121°F (49.6°C) on 29 June 2021. The next day, 90 per cent of the
village of Lytton was destroyed by a major wildfire. This highlights the linkage
and connectiveness that can be drawn from the previous section in this chapter on
wildfires.
9.2.3.2 IMPACTS OF EXTREME HEAT

As many as 1.2 billion people around the world could face heat stress conditions by
2100 if current levels of global warming continue, according to a study from Rutgers
University in the United States. That is at least four times more than those affected today.
Heat stress will be a major challenge in less-affluent countries where more vulner-
able populations handle more dangerous jobs. The UN cites that accumulated direct
and indirect losses due to heat stress could reach $2.4 trillion by 2030 if nothing is
done to mitigate climate change risk.
Heatwaves, or heat and hot weather that can last for several days, can have a
significant impact on society, including a rise in heat-related deaths.
Heatwaves are among the most dangerous of natural hazards, but rarely receive
adequate attention because their death tolls and destruction are not always immedi-
ately obvious. From 1998 to 2017, more than 166,000 people died due to heatwaves,
including more than 70,000 who died during the 2003 heatwave in Europe.
The number of extremely hot days every year when the temperature reaches 50°C
has doubled since the 1980s according to a global BBC analysis.21 They also now
happen in more areas of the world than before, presenting unprecedented challenges
to human health and to how we live.
While the effects of heat may be exacerbated in cities, due to the urban heat island
(UHI) effect, the livelihoods and wellbeing of non-urban communities can also be
severely disrupted during and after periods of unusually hot weather.
Heatwaves can burden health and emergency services and also increase strain on
water, energy and transportation resulting in power shortages or even blackouts.
Food and livelihood security may also be strained if people lose their crops or live-
stock due to extreme heat.22 Extreme events, including a discussion on blackouts,
were discussed in Chapter 6.
People are also facing difficult choices as the landscape around them changes, as
extreme heat makes drought and wildfires more likely.
9.2.3.3 SPECIFIC IMPACTS ON THE AGRICULTURAL SECTOR

Heatwaves can also cause heat stress in both animals and plants and have a negative
impact on food production. Extreme periods of high temperature are particularly
harmful for crop production if they occur when the plants are flowering – if this
single, critical stage is disrupted, there may be no seeds at all.
Temperature is a key factor in plant growth and development. Along with the
levels of light, carbon dioxide, air humidity, water and nutrients, temperature influ-
ences plant growth and ultimately crop yields. Hot summers also have a negative
impact on, for example, dairy herds and, on aggregate, the short- and long-term
output of the dairy industry. This problem could be worsening not only due to global
average temperature increases, but also due to intensive selection for production
among dairy herds in temperate climates.23
Some insurers are developing a specialist parametric product that can be used to
design unique heat stress indices to provide protection for farmers. They can be used
for intangible risks such as loss of reputation and long-term health-related losses
through protection against short-term (lower production, reduced quality) and long-
term (chronic effects on animal health) perils of heat stress.
Chapter 6 provides more specific details of new financial risk transfer solutions
that can build resilience to climate-related perils such as heat stress.
Higher night-time temperatures may increase respiration at night, causing declines
in yield (e.g. rice) and flowering or reproduction (e.g. beans). Most crops can tolerate
higher daytime temperatures during vegetative growth, with photosynthesis reach-
ing an optimum at between 20°C and 30°C.24
In Aon’s report referred to earlier, in the US in 2021 it stated that ‘The physical
and financial toll due to prolonged drought and above-average temperatures left a
major strain on the agricultural and agribusiness sectors as direct economic losses
were anticipated to exceed $9 billion.’
9.2.4 Physical tipping points

One of the greatest concerns and emerging threats in relation to physical risks is the
concept of tipping points, the threats of abrupt irreversible climate changes, which
were introduced by the Intergovernmental Panel on Climate Change (IPCC) in their

report in 2018.25
Evidence is mounting that tipping points such as the loss of the Amazon rainforest
or the West Antarctic ice sheet could be more likely than was previously thought, and
according to many scientists and economists would have significant impacts on
biophysical systems, which could lead to long-term irreversible changes across the
world.
According to Dr James Hansen, Climate Science, Awareness and Solutions
Program, Earth Institute, Columbia University ‘Tipping points are so dangerous
because if you pass them, the climate is out of humanity’s control: if an ice-sheet
disintegrates and starts to slide into the ocean, there’s nothing we can do about
that.’
Table 9.2 highlights some of the main tipping points concerns and potential
impacts on the planet. These highlight the need for organizations to conduct research
into future climate scenarios in a wider and deeper context in order to assess the
impact on their business.
TABLE 9.2 Examples of the main global climate tipping points and potential impacts
Tipping point
concern Potential impact on the planet
Reduction of Decreases the albedo effect and amplifies regional warming, as is already
northern hemisphere seen in higher latitudes
spring snow cover
Arctic winter sea ice It is linked to potential changes in thermohaline circulation (Gulf Stream and
jet stream included) and rising sea levels.
Greenland sea ice It is linked to weather anomalies in North America and Europe with potential
loss to change thermohaline circulation linked to the Gulf Stream.
Ice sheet dynamics Raising sea levels over the long term and potentially slowing down Atlantic
(Greenland and thermohaline circulation
West-Antarctica)
Permafrost thawing Releasing CO2 (under aerobic conditions) and/or methane (under anaerobic
conditions). Note that IPCC have ‘high confidence’ permafrost will thaw and
release carbon but ‘low confidence’ in how much will be emitted how soon
El Niño – Southern Increasing and changing in amplitude, changing patterns of hurricanes,
Oscillation (ENSO) precipitation and drought.
Collapsing marine Impacting fishing, biodiversity and coastal protection from storms or storm
ecosystems and surges
dissolving coral reefs
(continued)
Tipping point
concern Potential impact on the planet
Dying boreal forests Reducing rainfall and wildfire, thereby reducing CO2 uptake
and Amazon
rainforest due to
heat stress
Reduced West Increased risk of drought and a greening of the Sahel
African monsoon
Interference in Increasing drought frequency
Indian summer
monsoon
Prolonged SW North Leading to desertification, as is already being experienced
American droughts
SOURCE CRO Forum. The heat is on: Insurability and resilience in a changing climate emerging risk initiative –
position paper26
9.3 Transition risks – high-level overview

Transition risks relating to the consequence of transitioning to a lower carbon or
‘green’ economy are resulting in a range of both global risks and opportunities facing
organizations, which were covered in detail in Chapter 5.
To illustrate and explain the main transition risks that organizations need to
consider, Figure 5.5 highlighted a top-down approach from leading global drivers
through to structural changes and risk drivers to a broad range of specific threats
and opportunities. Many of these are long-term emerging trends.
These include carbon emissions targets and plans, investment in green infrastruc-
ture, greenwashing, ‘green’ energy inflation, organizations’ purpose, global flow of
information, digital platforms and changing societal expectations.
9.3.1 Corporate pledges and climate-related financial disclosures

Perhaps the most important trends in recent years have been the increasing number
of corporate pledges and climate-related financial disclosures. Climate change aware-
ness and adaptation and wider ESG criteria are increasingly valued by shareholders
including investors, employees and customers. We are continuing to see record
numbers of corporate pledges, especially net zero targets on mitigating climate
change, which is raising the bar for corporate governance.
The growing focus on climate change also extends to corporate disclosure, and
there has been significant progress on this front with improvement in global flow of
information and continued regulatory pressure that is leading some countries to

introduce mandatory climate and wider ESG-related reporting. Continued global
activism will also contribute to capturing global attention. Climate reporting and
disclosure are covered in Chapter 12.
There has been a marked increase in global sustainable investment. The global
Sustainability Investment Alliance’s latest investment review shows that global
sustainable investment now tops $25 trillion – up 15 per cent in two years – and in
total equates to 36 per cent of all professionally managed assets. More than 70 asset
managers, including BlackRock and Vanguard, have also recently signed a pledge
with the New Zero Investors Initiative, which has been formed to help achieve net
zero greenhouse gas emissions by 2050.
Changing societal expectations are leading to the increasing demand for sustain-
able products, as consumers want to purchase products that they view as sustainable
across the entire value chain. Consumers are increasingly changing their consump-
tion habits so that they don’t negatively affect the environment and many are fearful
of the overall impact of climate change. Unfortunately, this is also leading to a major
risk issue, namely ‘greenwashing’. This is primarily a marketing tactic where consum-
ers or investors are misled into believing that an organization or brand is sustainable.
Section 9.4 provides more detail around the emerging risks of greenwashing.
As the world begins to decarbonize, new market opportunities are available for
organizations to create products and services for a low-carbon world that uses less
energy and natural resources, emits fewer greenhouse gases and can help mitigate
climate damage and regenerate natural systems. On the flip side there are opportunities
to help organizations improve resilience, which in turn is leading to product innovation
such as the electric and hydrogen economies and a range of new technologies.
9.3.2 Impact of wider societal issues

Overall, organizations are continuing to realize that modifying existing internal
business activities to address climate change and wider social issues can protect the
reputation of the organization in the long run.
People constantly adjust how they make sense of the world; perspectives change
as a result of age and in response to changing surroundings (‘social proof’). An
important reference point for this ‘mental modelling’ process is the demographic
with which one is associated giving a good indication of social and geopolitical
awareness.
The change in outlook is also defined by the inequity between generations.
Millennials are materially worse off than their previous generations through being
saddled with tuition fees and unaffordable housing, and suffer living on a degraded
planet through their parents’ appetite for burning fossil fuels. The heart of their
new outlook is less about concern for material wealth, more about seeking out a
socially purposeful way of living – and challenging any organizations that fail to
support this.
One of the important issues linked to this is that many Millennials are joining
climate action groups such as the Climate Coalition, who are striving to make sure
the public voice is heard and whose goals are focused on striving for cleaner and
greener future. These organizations are putting pressure on governments around to
world to take greater action and are themselves changing the mindsets of individu-
als, and this in turn is creating the need for organizational changes.
The global flow of information is significantly helping to raise the awareness of
ecological and social crises around the world. The global and local activism that we
saw in 2021 including ‘Insulate’, which blocked the M25 in England, has captured
global attention and galvanized opinions.
9.3.3 Governments and regulators

Government and regulators are now stepping in to push further change, faster and
with more consistency across the economy than the market alone could do. Europe
is taking the lead on climate-related financial disclosures, and other jurisdictions are
following suit, including the United States.
This has led to sustainability issues becoming core considerations in business. To
be able to distinguish between companies, and investment opportunities, investors
need high-quality, comparable data, and this is driving the call for global sustainabil-
ity standards and the regulatory interest in mandatory climate reporting.
To highlight some of the emerging trends, the next section focuses on providing
more detail of some of the specific emerging threats and opportunities.
9.4 Climate and ESG reporting and ‘greenwashing’

Prompted by the global climate crisis all too clearly evident during recent years’
news reports of corporate abuses and ecological emergencies – such as wildfires,
flash floods, melting glaciers, islands disappearing under rising seas and heat-driven
human migrations – there has been a public call for greater business transparency in
reporting potential social and environmental harms. Investors and members of the
public (including, of course, organizations’ own staff) openly call on organized inter-
ests to report transparently how their activities affect the societies, and natural
world, that they operate in.
An increasingly sharp strain of public criticism from public, NGO and media
observers is focused on the claims made by businesses that make a highly-publicized
virtue of conducting themselves well with regard to their social and environmental
responsibilities. Where these claims have been shown to be unproven or unprova-
ble, critics use the term ‘greenwashing’ to describe such misleading information.
These critics now include a growing number of regulators who have shown a will-
ingness to impose swift and severe penalties on organizations that indulge in
greenwashing.
The critics are united in calling for business interests, in particular, to demonstrate
how in practice they really do adhere to claims of probity. To be effective and cred-
ible, this proof is seen as requiring broadly agreed, comparable and easy-to-read
reporting standards capable of decoding (making plain sense of) any organization’s
claims. By popular agreement, such proof is required under three broad category
headings: environmental responsibility, social responsibility and good governance,
collectively abbreviated to the term ‘ESG reporting’.
Regulators, and in particular, financial and professional conduct regulators, have
responded vigorously to these public concerns. Many, if not all, are working to
assess, publish and roll out new standards.
Conduct regulators are concerned, for example, that asset managers are overstat-
ing ESG assets, which could lead to a ‘green valuation bubble’ and subsequent crash
as and when the bubble bursts. New EU rules from the Sustainable Finance Disclosure
Regulation (SFDR) will soon address this concern by forcing firms to disclose how
environmentally sustainable their activities are. Asset managers will soon have to
evaluate and transparently report how their funds fulfil universal standards of envi-
ronmental, social and governance (ESG) responsibility.
Other jurisdictions, including the United States and United Kingdom, have yet to
produce equivalent standards. However, the Securities and Exchange Commission,
the US securities regulator, set up a task force in 2021 in its enforcement division to
identify misconduct in ESG claims. Its first action was to collaborate with the
German banking regulator BaFin to challenge Deutsche Bank’s asset management
subsidiary on their statement of environmental credentials.27
FINANCIAL CONDUCT REGULATORS LEAD THE CHARGE
In financial markets, the new regime of ‘behavioural regulation’ – aimed at preventing

both financial and non-financial misconduct – has stepped up quickly to challenge a
range of businesses.
Asset managers have been charged with ‘overstating ESG assets’. The regulators’
concern is that inflated claims to ‘green asset’ values could in turn inflate a valuation
bubble, creating preconditions for a subsequent crash as the bubble bursts.
9.4.1 Universal standards for ESG: no time soon

At the Glasgow COP26 World Climate Conference in 2021, world leaders were
outnumbered by representatives of the financial sector who presented a commercial
version of the agenda for change; this asserted that financial incentives work faster
than central government initiatives to achieve change, so financial markets should
lead ESG standard-setting. This commercial intervention at a world leaders’ event
indicates how seriously institutional investors are committed to driving public policy
recognition of an ‘ESG agenda’.
Simultaneously with COP26, 168 asset managers from 28 countries, with a collec-
tive $17 trillion of assets under management, announced the Carbon Disclosure
Project (CDP) aimed at standardizing corporate indicators for climate and social
impact reporting. As a statement of intent, CDP called out over 1,000 brands, includ-
ing such ‘stars’ as Alibaba, Amazon, Berkshire Hathaway, Chipotle, Facebook, Roche
and Tesla. CDP’s analysis announced that ‘the tide was turning against companies
that don’t respond to investor demands for better disclosures of environmental
risks’.28 Specific concerns were raised in respect of the world’s banks, insurers and
asset managers. It also noted that (in mid-2021) more than half of all major financial
brands had not yet produced any plausible evidence of a commitment to disinvest
from global climate change activities.
The financial sector’s response was a ‘net-zero pledge’ in November 2021: a coali-
tion representing $130 trillion of funds committed to ‘a virtuous cycle of innovation
and investment for Net Zero’ climate impact.29
New global standards of ESG and green finance reporting are proposed, though
not yet fully developed or generally adopted. Examples are outlined in the following
sections.
9.4.2 New ‘anti-greenwashing’ rules

Much of the early action is among the financial market community. Parallel pro-ESG
anti-greenwashing initiatives are being cheered on by regulators (on grounds of
‘social goods’) and institutional investors (on grounds of ‘protecting business resil-
ience and long-term value’).
In the EU, a suite of Sustainable Finance Disclosure Regulation (SFDR) is address-
ing this concern. SFDR will compel businesses to disclose how environmentally
sustainable their activities are. For example, under SFDR Article 8, asset managers
can claim a ‘light green’ or the higher ‘dark green’ status, depending on how far they
‘actively promote environmental or social characteristics’ of funds under their
management. Other jurisdictions such as the United States and United Kingdom may
be expected to produce similar or even equivalent standards.
9.4.3 Example forms of ‘greenwashing’

The following activities give a warning sign that ‘ESG misconduct’ (greenwashing) is
occurring:
●● Misdirection – Where firms cynically divert public attention away from, say, a
polluting activity, by running high-profile programmes of ‘public good works’.
They market a forceful message about social awareness or renewable energy, for
example, while still investing in carbon-producing technologies.
●● Loose ‘commitment’ – Announcing an intention or plan to comply, or conform to
standard, that lacks any timescale or calibration. (Example: India announced its
intention to ‘phase down’ rather than ‘phase out’ coal use by 2070.)30
●● Covert lobbying – Setting up and funding ‘pseudo-science’ research groups who
are briefed to blur the edges of any science debate around public policy, or the
true extent of social harms resulting from certain products, investments or
employment practices. This technique has been used, for example, by fossil fuel
companies to cast doubt on the extent of global warming. (Example: Edelman
called out for undeclared pro-fossil fuel lobbying for ExxonMobil.)31
It is important for organizations’ risk managers to be aware of the desire among staff
generally to be part of an enterprise that promotes an ESG-positive agenda. Ignoring
this could quickly harm business value, eroding the retention rate of employees and
degrading the quality of available human talent. For a firm not to acknowledge this
agenda may even present an existential threat.
This leads to the forecast that in the near future risk managers must be aware of
the reputational impact of explosions of public outrage as leaked disclosures over-
take the efforts of regulators to focus firms’ attention on genuine ESG initiatives.
9.5 Emerging technologies to meet net zero targets

The IRM’s energy and renewables group stated in its 2022 Risk Prediction report
‘Whether the economy recovers or fails, expect to see continuing investment in
advanced and emerging technologies which support the impetus for Net Zero and
the low carbon economy.’
There are four main areas of transition risk that were highlighted in Figure 5.5 (in
Chapter 5) and one of the main types is technology risks, which is a now a major
way that organizations can seek to reduce their carbon footprint and meet their
emissions targets.
Technology risks can generally be categorized as either:
1 Substitution or replacement of existing technology/machinery across the value

chain.
2 Substitution or replacement of existing products and services with lower emissions

options.
3 Unsuccessful investment in new technologies.
Examples of mitigation options that are aligned to the use of new technologies to
reduce an organization’s emissions include the following:
●● Replacement of inefficient machinery with more efficient lower-emitting machinery

●● Renewable energy – procuring energy from Renewable Energy Guarantee of
Origin (REGO) backed sources (which is independently verified)
●● Investigating options for reducing waste in production processes
●● Utilizing by-products from the production process
●● Reduction of packaging for products (e.g. one example is the removal of plastic
around fruit and vegetables in French supermarkets)
●● Replacing car fleets with electric vehicles
●● Using renewable energy providers across all of your premises
●● Premises – improving insulation of existing buildings or replacing lighting with
energy-efficient LED lighting options
Some specific examples of potential long-term solutions are highlighted in Table 9.3.
TABLE 9.3 Sustainable technologies that are supporting the drive to net zero
Emerging
technological
innovations and
concepts Description and objective Example
Carbon capture A process to capture CO2 from the air A machine traps and then heats CO2 to
and storage and permanently bury it underground a high temperature, then mixes it with
in geological formation. water and pumps it underground. Thus
eventually, by natural mineralization, it
automatically mixes with basalt rock
and turns into stone permanently.
Technology example – bioenergy with
carbon capture and storage (BECCS).
(continued)
Emerging
technological
innovations and
concepts Description and objective Example
Fusion reactor Fusion reactors are devices that A machine called a tokamak that heats
produce electricity from heat generated the light-weight elements like
by nuclear fusion reactions. This hydrogen atoms and releases helium,
process results in release of helium, which results in release of large
thus it is completely harmless to the amount of energy.
environment and produces clean
energy like the Sun.
Electric vehicle Vehicles that run on rechargeable EVs become a part of every industrial
(EV) batteries that are powered by electricity sector to reduce their carbon footprint
are termed EVs. EVs do not emit any by utilizing them for supply chain or
GHG in the air. commuting, etc.
Biomass Biomass is referred to as and includes Sustainable aviation fuel is a fuel
woods, plants, animals or waste. The produced from biomass.
energy from these organisms or waste Biomass energy is utilized for heating,
can be burnt to create heat or cooking, etc.
converted into electricity. It generates
far fewer air emissions than fossil fuels
and reduces the amount of waste sent
to landfills.32
Smart glass Smart glass is an energy-efficient glass Electrochromic glass windows use
technology that can be used in buildings. During electricity to change the tint and
summer, the glass blocks any heating reflectiveness of the glass.33
wavelength and during winter the glass
allows sunlight to aid heating.
Unmanned aerial UAVs can carry cameras (for video and Farmers can use UAVs to monitor the
vehicle (UAV) still pictures) and sensors (including health of crops and detect damage
radiation sensors and weather sensors). done by drought, floods, hailstorms.
Researchers can use UAVs underwater
to measure ocean heat.34
Digital monitoring Digital innovations that analyse the Energy management solutions are
solutions energy and water usage pattern, being developed by several companies
provide energy wastage information, to monitor the required aspects to
track energy usage performance and reduce their carbon footprint.
identify inefficient operations without
requiring an expert. They help in
reducing energy wastage thereby
reducing the cost of energy for the
company.
© OneRisk Consulting, All rights reserved, 2022
9.5.1 Hydrogen economy – fossil fuel alternatives

New technologies curbing the carbon emissions to drive decarbonization are being
developed as substitutes for fossil fuels. This will be a major emerging trend and
opportunity for organizations in their respective markets.
Section 301 (2) of the Energy Policy Act, 1992, states that hydrogen is an alterna-
tive fuel.35 Hydrogen produced by the process of electrolysis is clean and usage of
hydrogen in various devices/equipment results in emission of water, which is envi-
ronmentally friendly.
It is pertinent to note the growing recognition of hydrogen in various industrial
sectors like transportation, shipping, utilities/energy, aviation, etc.
Many companies are replacing their traditional technologies with hydrogen tech-
nology to reduce their carbon footprint and overall GHG reduction since hydrogen
is a clean substitute for fossil fuels.
According to the International Energy Agency (IEA), in its report produced at the
request of the Government of Japan under its G20 presidency, clean hydrogen is
currently enjoying unprecedented political and business momentum, with the
number of policies and projects around the world expanding rapidly.36
9.5.1.1 ‘GREEN’ HYDROGEN

There is a growing demand for hydrogen that is produced with renewables. Green
hydrogen is the hydrogen produced without jeopardizing the climate change, as
there are other types that are less carbon-friendly such as grey and blue hydrogen.
Green hydrogen is the only type produced in a climate-neutral manner, and it is
also easy to store and transport, making it critical to reaching net zero by 2050.37 It
can help to achieve net-zero carbon dioxide (CO2) emissions in energy-intensive,
hard-to-decarbonize sectors like steel, chemicals, long-haul transport, shipping and
aviation.38 Hydrogen is a gas at normal temperature and pressure, and condenses
and forms into liquid at extreme cool temperatures.
The current main drawbacks are that the production process is expensive and
complex and will require increased future investment in R&D to support efficiencies
in the production prices to help reduce the cost. It is pertinent to note that the Green
Hydrogen Catapult, a United Nations initiative to bring down the cost of green
hydrogen, announced that it is almost doubling its goal for green electrolysers from
25 gigawatts to 45 gigawatts by 2027.39
9.5.1.2 SPECIFIC USES TO REDUCE CARBON EMISSIONS

Table 9.4 provides a summary of the main uses of hydrogen that will help to reduce
carbon emissions in industry settings.
Substituting green hydrogen for fossil fuel is a favourable option for organiza-
tions to consider. Green hydrogen can be advantageous to every industrial sector
because of its versatility.
TABLE 9.4 Hydrogen economy – main uses and challenges
Type of
hydrogen Technology Sector Description/main use Challenges
Hydrogen gas Hydrogen-fired Utilities/Energy A hydrogen-fired-boiler is a home heating technology that is

boiler currently replacing natural gas boilers. These boilers are key to
decarbonizing home heating and hot water since the by-product of
burning hydrogen gas is water and it is therefore a carbon-free fuel
source. Using hydrogen is also beneficial for energy systems
because it offers one of the most attractive means of providing
large-scale energy storage
Hydrogen liquid Hydrogen Aviation Hydrogen-fuelled aircraft are gradually developing and in progress The energy density of liquid
(fuel) aircraft to improve further. The benefit is that hydrogen packs a lot of hydrogen is only about a quarter of
energy per unit of mass, i.e. three times more than conventional jet that of jet fuel, so it requires storage
fuel, and more than a hundred times that of lithium-ion batteries tanks four times the size40
Hydrogen car Transportation Hydrogen-fuelled vehicles do not need charging – they have fuel High cost
tanks like petrol/diesel vehicles. Hydrogen fuel is made from the
process of electrolysis from water and thus the vehicle’s tailpipe
emission is water, which is harmless, making it a zero-emission
vehicle
Hydrogen ship Shipping Hydrogen fuel is an alternative to bunker fuel (diesel, etc) to power Does not work in existing engines;
the marine boat/vessel. The newly introduced ships contain a requires a new engine/ship that can
hybrid-engine for the boat/vessel that allows it to be powered by facilitate the usage of hydrogen fuel
conventional fuel as well as hydrogen fuel. Thus, this innovation
certainly leads to powering the ship with zero emissions with
hydrogen fuel
© OneRisk Consulting, All rights reserved, 2022
291
Many organizations consider utilizing hydrogen-fuelled vehicles because they emit

water, which is an environmentally friendly emission and thus it reduces the overall
carbon footprint of the organization.
Aircrafts and ships can be fuelled by hydrogen too and various companies have
already commenced its development, setting it to be a long-term investment strat-
egy, which eventually adheres to the policies that are formed to mitigate climate
change.
Hydrogen is not only limited to usage by industries, but also can be utilized in
products and equipment used for residential purposes. Boilers that are installed in
homes for heating can be fuelled by hydrogen instead of natural gas and it has the
same efficiency as natural gas. Hydrogen is gradually evolving to be a valuable and
sustainable option to be used in technologies by organizations to support their busi-
ness strategies and reduce their carbon footprint.
9.6 Liability risks – emerging

climate change litigation
It is generally agreed within the legal fraternity that the field of corporate account-
ability, human rights, the environment or future climate litigation are areas that will
develop at great speed in coming years as climate change continues to ‘bite’ and
science allows the attribution of responsibility more clearly.
Climate change litigation has gained momentum since the adoption of the Paris
Agreement in 2015, increasing in volume, scope and geographical coverage. Of the
1727 cases documented worldwide between 1986 and 2020, more than half have
been brought since 2015. The majority of these cases are in the United States, where
some of the biggest oil and gas companies are embroiled in legal disputes with cities
and states over the industry’s role in global warming.
Awareness of climate risks and the growing perception that courts can be a forum
to advance climate goals are two main drivers of climate change litigation. New
developments in attribution science, where the relationship between emissions and
climate change-related impacts is quantified, have also encouraged efforts to attrib-
ute emissions to specific companies.
As climate change litigation grows, its complexity does also. Another legal
approach has gained considerable traction especially in Europe: lawsuits against
governments and corporations, seeking injunctions ordering alignment with the
Paris Agreement. These are increasing the risk that states and corporations can be
found negligent in their duty to protect the public from the harmful effects of
climate change.
FIGURE 9.5 Historical legal cases shaping the climate agenda
Class action Exxon Legal case against Pacific Legal case against Shell
2015 Gas & Electric 2018 in 26 may 2021
Class action for Failure to mitigate GHG

Corporate failure
compensation emissions
Two states have
launched fraud
investigations into A California utility has On 26 May 2021, the
Exxon over climate pleaded guilty to the Hague District Court
change and sued deaths of 84 people in a ordered Royal Dutch
(one went to trial in wildfire, the deadliest US Shell plc (Shell) to
2019, and the attorney corporate crime ever reduce its worldwide
general lost.) Nine successfully prosecuted CO2 emissions by
cities and counties, 45% by 2030
from New York to (compared to 2019
San Francisco, levels)
have sued major
fossil fuel companies,
seeking compensation
for climate change
damages
9.6.1 Legal cases are shaping the climate change agenda

Major climate-related events are shaping the climate agenda and helping to improve
risk management practices. Figure 9.5 highlights three important but different legal
cases that highlight the growing trends in litigation.
9.6.1.1 CLASS ACTION LAWSUITS AGAINST POLLUTERS

In the first case, two US states have launched fraud investigations into Exxon over
climate change and sued. The litigation, reinforced by science, has the potential to
reshape the way the world thinks about energy production and the consequences of
global warming.
Two specific examples of ongoing actions against Exxon are summarized below.
RAMIREZ V EXXONMOBIL CORP – LAWSUIT FILED: 2016
A man who invested in Exxon stock during 2016 filed a securities fraud class action
against Exxon and three Exxon officers in the federal court for the Northern District of
Texas. The action was filed on behalf of purchasers of Exxon common stock between
19 February 2016 and 27 October 2016. The complaint alleged that Exxon’s public
statements during that period were materially false and misleading because they failed
to disclose that internally generated reports concerning climate change recognized the
environmental risks caused by global warming and climate change; that due to risk
associated with climate change Exxon would not be able to extract existing hydrocarbon
reserves it claimed to have; and that Exxon had used an inaccurate price of carbon to
calculate the value of certain oil and gas prospects. The complaint alleged that as a result
of positive statements Exxon made during the class period, the common stock price
was artificially inflated, and that Exxon’s release of its third-quarter financial results on
28 October 2016, in which it disclosed it might have to write down 20 per cent of its oil
and gas assets, resulted in the stock price falling by more than $2 per share.
COMMONWEALTH V EXXONMOBIL
10/10/2019: Letter sent to Exxon Mobil Corporation by the Massachusetts Office of the
Attorney General providing notice that the Attorney General intended to commence an
enforcement action against ExxonMobil – asserting that Exxon systematically and
intentionally misled investors and consumers about climate change by failing to disclose
climate change risks, misrepresenting its business practices related to use of proxy costs
of carbon, misleadingly advertising its products, failing to disclose its products’ impacts
on climate change, and engaging in greenwashing campaigns – and thereafter launched
enforcement action. (Challenged by Exxon.)
These two cases highlight the growing concerns in respect of historical and ongoing
public statements provided by organizations that are alleged to have provided false
and misleading information that is material in respect to some specific concerns,
such as the potential to both artificially inflate the stock price and impact the cost of
carbon for their products
9.6.1.2 LITIGATION FOR NEGLIGENCE

The second case relates to the Californian wildfires in 2018, which led to the corpo-
rate failure of the Pacific Gas and Electric Company (P&GE) due to litigation for
negligence – now a key risk for many organizations to consider.
The proceeding against PG&E was for neglecting its infrastructure, which caused
the deadliest and most destructive ‘2018 Camp Fire’ because of its faulty equipment.
PG&E admitted that it did not properly maintain the power line, which ignited in a
forested area known for strong winds.41 This event resulted in loss of lives of 85
people and destroyed more than 18,000 buildings, including 14,000 homes. The
CEO of PG&E pleaded guilty and agreed to pay $25.5 billion for losses from the
2018 fire, and a maximum fine of $3.5 million for its crimes in addition to $500,000
for the cost of the investigation.42
9.6.1.3 SHAREHOLDER LITIGATION TO REDUCE GHG EMISSIONS – STANDARDS OF CARE

The third and most recent case is Shell – highlighting the need for leading energy
companies to cut their emissions due to increased stakeholder litigation.
Standards of care are also evolving, increasing the risk that states and corpora-
tions can be found negligent in their duty to protect the public from the harmful
effects of climate change. These trends have led to a number of new legal cases
including the District Court in The Hague ruling in May 2021 that Shell must reduce
its global net carbon emissions by 45 per cent by the end of 2030 from 2019 levels.
Insurers are increasingly concerned about the impacts on state financial lines
classes of business including directors’ and officers’ insurance policies, and consider-
ing ways to adapt to increased litigation through, for example, more improved
pricing and reserving practices. On a broader note, many companies that we speak
to, including banks, are increasingly concerned about the cost and availability of
future insurance to protect their business.
Conclusion
As can be seen from this review, while it is easy to view climate change risk through
the lens of the growing physical effects of a warming planet, and the inevitable natu-
ral catastrophes that will arise with the impact of a changing climate – heat spikes,
flooding, windstorms, etc – risk management needs to address the wider aspects of
transition and legal risk too. Categorizing risk into these three broad areas is a key
consideration in bringing the risk into manageable realms.
In this chapter we have reviewed some aspects of the physical damage that will
inevitably occur as the climate changes. These physical risks are broadly capable of
being forecast and having some element of mitigation provided for, whether that be
through reconfiguration of premises to enhance resilience or a wholesale relocation
to premises that offer greater protection against the likely forecasts.
The second area of risk that we have reviewed is that associated with the transi-
tion to a decarbonized world. Some of these risks are known but many more will
emerge as the world changes. Here it is important to view risk management in its
broadest context and to assess the opportunities that change will deliver, as well as
the threats.
Risk management in the 21st century has always been about more than anticipat-
ing threats. What distinguishes risk management now from the past is the way in
which it embraces risk to spot opportunities and focus on the ways to best exploit
them. The changes that will take place in all human activity as we get to grips more
with climate change will throw up myriad opportunities. The risk manager’s role will
include the rapid identification and exploitation of those opportunities as they
emerge as well as offering mitigation to the inevitable threats.
Finally, we reviewed the area of legal risk. This is likely to become the most rapidly
growing area of risk over the next few years. There is hearsay among the legal profes-
sion that climate issues could provide a more lucrative opportunity than tobacco or
asbestos did in the last century.
As societal attitudes change some form of retrospective liability may be inevitable,
especially as sources of funding will be required to implement the changes required.
That funding may be through finding guilt in those parties that caused more carbon
release and planetary damage. The courts, as representatives of society, may see their
duty to impose penalties where there were none previously. This might be seen as
expropriation by current generations but viewed from the perspective of Millennials
could be seen as justice.
Notes
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300
10
Climate stress and scenario testing
This chapter explains how organizations can assess the materiality of the climate
risks and opportunities that they have identified through the use of stress and
scenario analysis. It is important to remember that the overall purpose of stress and
scenario analysis is to explore several plausible and ‘best-available’ ‘what-if’ scenar-
ios, rather than to precisely forecast the future.
●● Align the development of climate scenario analysis within an existing enterprise

risk management framework.
●● Understand some of the main guidance and expectations of regulators in design-
ing stress and scenario tests across an organization’s risk profile.
●● Provide details of a climate stress and scenario testing framework that covers six
main steps that a risk manager should consider in designing and implementing a
framework for assessing the impacts of climate scenarios.
●● Appreciate the range of different tools and techniques that can be used, depending
on the size and complexity of the climate risks facing an organization, and their
associated benefits and limitations.
Introduction
Risk managers can play a vital role in driving the scenario selection and design deci-
sions to assess future scenarios in a rapidly changing world. Risk management isn’t
about avoiding risks. Instead, it should be focused on understanding the key risks a
company faces then taking the right risks at the best time after using the most appro-
priate mitigation strategies.
‘I cannot imagine any condition which would cause a ship to founder. I cannot
conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone
beyond that.’ This famous quotation is attributed to Captain Edward Smith of the
Titanic. The example highlights that the world does not follow a normal distribu-
tion – low-frequency and high-severity events can occur at any time. The discounting
of extreme events is very dangerous.
CLIMATE STRESS AND SCENARIO TESTING 301
Enterprise risk management should allow for early recognition of risks so as to

empower the organization to classify and highlight the risks. The organization can
then deal with the threats and opportunities in an effective and timely way. The
development of an emerging risk management framework and climate change
examples are highlighted in Chapters 8 and 9. It is also important to develop a
formal process for designing stress and scenario tests that is aligned to the emerging
risk process.
Organizations should start by describing climate-related risk scenarios to which
they are exposed, how they are expected to manifest, and (if the scenario occurs) the
mechanism/path by which the firm, its external environment and/or its stakeholders
would be impacted. Consideration should also be given to the existing internal
control environment and the types of remediation that may be required.
Assessing climate change-related risks based on forward-looking information and
scenarios is also a central component of the TCFD and regulatory recommendations,
and is arguably the most challenging to implement given the complexity of design
decisions such as alternative time horizons and climate pathways. However, these
scenarios are strengthened when assumptions made are based on learnings from
previous events.
10.1 Evolution of stress and scenario analysis –

impact of financial crisis
There were many causes of the global financial crisis (GFC) in 2008 that led to
corporate failures and bailouts. Many were linked to the failure of risk models to
accurately predict future risks in the banking sector. This included the under-pricing
of risks in areas such as mortgage portfolios for subprime loans due to increasing
defaults. This is accurately represented in the film The Big Short.
As with many man-made and natural catastrophic events the GFC led to signifi-
cant improvements in enterprise risk management.
Rating agencies, which were also at fault, have stated that simply instituting
monitored compliance programmes does not address emerging risks. Controls and
metrics using historical data are not designed to be predictive of emerging or future
risks.
One of the most important areas, particularly for financial institutions, was to
develop the more formal emerging risk management frameworks that were covered
in Chapters 8 and 9 and stress and scenario testing (SST) frameworks, which will be
covered in this chapter.
Designing specific scenarios can help organizations to support strategic planning,
improve the setting of risk appetite, tolerance and limits, help develop risk monitor-
ing and management information and support product development.
10.2 Developing a formal stress and scenario framework

Stress and scenario testing (SST) should be a key part of the toolbox of the risk profes-
sional. Generally, it is used as a defensive tool to identify actions to protect the business
from material losses resulting from adverse events. The process involves taking emerg-
ing risks and quantifying the impact on risk assessment, and organizations should seek
to develop methodologies and approaches that they can use on an ongoing basis.
It is important to distinguish the two processes:
Stress testing is a process that explores reactions to small (sensitivity) or drastic

(stressed) changes in conditions such as financial variables, typically the
assumptions in, for example, the business plan.
These are often translated into a number of statistically defined possibilities to deter-
mine, for example, a weighted average future forecast based on the probabilities.
This is analogous to, say, stress testing the impact of different future economic
scenarios that organizations should undertake if there is an impending recession.
Scenario analysis is the process of evaluating the impact of a specified scenario on

the company’s financial position. In scenario analysis it is important to provide a
narrative (story) behind the scenario, including the risks (events) that generated
the scenario sometimes referred to as ‘alternative worlds’. Scenario analysis is
more granular in nature, in that specific scenarios for events are assessed, such
as a future flood event or assessing the impact of a change such as the regulatory
change to move to electric vehicles.
It is important to distinguish the two approaches, particularly for climate change, as

the methodologies and tools required for each can be significantly different.
There are many sources of good information: The International Actuarial
Association have published guidance on stress and scenario testing, ‘Stress Testing
and Scenario Analysis’. It states that:
Their use can enhance the risk culture of a firm, as they can alert decision makers to
potentially inconvenient truths and provide a framework to enable firms to base their
business strategies and risk mitigation activities on a range of forecasts rather than a
single best-estimate projected result or an average of stochastic results.1
As organizations start to explore a range of future scenarios it will initially improve

internal communication and discussions, help to alert decision makers to ‘inconven-
ient truths’ and provide a framework to enable firms to inform their future business
strategies and risk mitigation activities.
Organizations need to consider a wide range of factors:
●● The time frame over which the risk could crystallize (and the window to respond/
adapt)
●● The severity of the impact (to the firm, wider environment and stakeholders)
●● The anticipated climate change policies from stakeholders, e.g. governments,

customers, industry bodies, rating agencies, institutional investors, etc.
●● The specificity of impact, e.g. to the organization, whole of market or specific sector
10.3 Design of climate scenario considerations and benefits

It is important to consider designing specific climate change scenarios across the risk
taxonomy of physical, transition and liability risks that are material to the risk
profile of the organization.
The scope should consider the specific areas of the risk profile that are vulnerable
to climate change, and scenarios that are realistic, credible, consistent with regula-
tory expectations and achievable.
Organizations increasingly need to understand the material impact of climate
change to provide support for internal decision-making, including a wider range of
metrics that can include changes to profitability, liquidity, capital provisioning and
customer confidence, etc.
One of the main benefits of developing a formalized process is that it helps to build
consensus among a range of stakeholders about the issues and how to tackle them.
The main benefits are outlined below:
Support business decisions and long-term strategic planning
●● Understand the vulnerabilities of business plans to make improved decisions for

both business and capital planning.
●● Supplement existing ORSA and ICAAP reporting processes (financial services
organizations only).
●● Provide external stakeholders (such as investors or regulators) with a forward-
looking view of climate-related risks.
●● Identify gaps in understanding and bring into focus new areas of research required
to understand driving forces better.
Improve operational resilience
●● Enable management to react better to occurring risks and implement plans, e.g.
for triggers and limit breaches, and take action as appropriate. In addition, the
exercises will improve monitoring with respect to emerging climate risks.
●● Supports improvements in contingency plans.
Comply with growing regulatory expectations
●● Embed climate risk considerations within existing strategic and operational processes.
●● Climate disclosures, including TCFD.

●● Regulatory prescribed scenarios, e.g. the 2021 BES UK climate scenarios (finan-
cial services organizations only).
There are a range of other uses and benefits of stress and scenario testing that can
support a range of other business applications:
●● Manage and plan for multiple adverse events

●● Review appropriateness of risk appetite strategy and associated metrics
●● Assess interconnected extreme events (discussed in Chapter 6)
●● Optimize risk retention and transfer decisions
●● Support capital allocation and planning
While is it important to quantify the impacts of climate change, it is also important

to recognize how conducting climate scenario analysis is helpful in a broader sense
in facilitating greater engagement with internal stakeholders that can in turn lead to
significant knowledge transfer across the organization.
10.4 Regulatory guidance and expectations

There is a lot of guidance that has been developed by regulators with respect to
designing stress and scenario testing for climate-related risks. Many regulators
around the world have been advocating similar approaches and in this section a
number of specific examples by different regulators are provided.
There are some common considerations for scenario design across many regula-
tors, including the fact that they need to cover a wide range of risk types across the
risk profile and that they need to:
●● be realistic, credible, consistent with regulatory expectations, and achievable

●● consider short- and long-term time horizons
●● assess the impact on key metrics including earnings, solvency and liquidity
Regulators are keen that organizations, particularly in the financial services sector,
undertake stress tests to measure financial risks to multiple climate pathways, with
different physical and transition effects, over several decades. The main rationale is to
stress test the resilience of not only the organizations’ own business models but also
the financial system itself to the physical and transition risks from climate change.
Regulators acknowledge themselves that this requires new tools and approaches
to measure and understand the risks, and in the UK, for example, have been imple-
menting the CBES approaches that we will cover in more detail in this chapter.
A summary of some of the guidance from regulators with respect to scenario
analysis is provided below.
Bank of England Prudential Regulatory Authority (PRA) – (PRA Rulebook2 and

PRA Supervisory Statements) The PRA expects a firm’s board to understand and
assess the financial risks from climate change that affect the firm, and to be able to
address and oversee these risks within the firm’s overall business strategy and risk
appetite. The approach should demonstrate an understanding of the distinctive
elements of the financial risks from climate change and a sufficiently long-term view
of the financial risks that can arise beyond standard business planning horizons.
Where proportionate, the PRA expects firms to conduct scenario analysis to
inform their strategic planning and determine the impact of the financial risks from
climate change on their overall risk profile and business strategy.
Scenario analysis should also be used to explore the resilience and vulnerabilities
of a firm’s business model to a range of outcomes.
The PRA expects firms to use these scenarios to understand the impact of the
financial risks from climate change on their solvency, liquidity and, for insurers, their
ability to pay policyholders.
Generic timeframes have been included (e.g. decades for the long-term time
horizon and the business planning horizon for the short-term time horizon).3
Climate Biennial Exploratory Scenario (CBES) On 13 November 2020, the PRA

announced a programme of planned engagement with firms participating in the
Climate Biennial Exploratory Scenario (CBES). The purpose of the exercise is to test
the resilience of the current business models of the largest banks, insurers and the
financial system to climate change.
Key objectives of the process include enhancing risk management practices of
climate-related financial risks to help organizations embedding these risks in busi-
ness-as-usual risk management, engaging counterparties to understand their
vulnerability to climate change, and encouraging boards to take a strategic, long-
term approach to managing these risks.
To make these scenarios credible the bank proposes that the CBES examines
firms’ resilience using fixed balance sheets, focusing on sizing the risks and the scale
of business model adjustment required to respond to these risks, rather than testing
the adequacy of firms’ capital to absorb those risks.
On 24 May 2022 the Bank of England published the results of the 2021 CBES
exercise and one of the main findings was that participants need to prioritize invest-
ment in climate risk assessment capabilities.
EIOPA – European Insurance and Occupational Pensions Authority EIOPA states

that the aim of scenario analysis is to assess and discuss the resilience and robustness
of the undertaking’s business strategies under different developments of climate
change risks over time.
EIOPA also expects organizations to assess the long-term risks of climate change
using scenario analysis to inform the strategic planning and business strategy.4
Lloyds of London Insurance Market Lloyds uses realistic disaster scenarios (RDS)
to stress test both individual insurance companies and the market as a whole to test
their resilience to major catastrophe events. These are industry scenarios, termed
footprints, that any organization can apply. Lloyds defines the event together with
underlying assumptions in terms of industry loss levels and duration of event, which
the organization can use to superimpose its own exposures to evaluate the impact.
One of its latest RDSs is a ‘London flood’ event (illustrated in Figure 10.1).
FIGURE 10.1 London flood – event footprint

Event definition: The flood scenario is based on a heavy rainfall event. The total
flood extent covers 194 km2 and would cause significant impact on the major popu-
lated areas of Oxford, Reading, Slough, Henley and western Greater London.
Lloyds provide underlying assumptions, which managing agents need to then
superimpose on their own exposures.
Most regulators expect organizations to develop methodologies to assess the
impact of climate change. The time horizon is a key challenge.
10.4.1 Assessing climate scenarios over different time horizons

It is important to distinguish between existing risks that will change over time due
to climate change and new emerging climate risks that may impact the organiza-
tion in the future, i.e., when they are expected to crystallize. As an example, it is
important to consider the increases in the frequency and severity of ‘acute’ weather-
related events, such as floods and droughts, as well as longer-term ‘chronic’ shifts
in climate, such as increases in average temperatures and sea-level rise over differ-
ent time horizons.
In his Lloyds of London address in 2015 Mark Carney stated that ‘Climate change
is the Tragedy of the Horizon’ and that ‘once climate change becomes a defining issue
for financial stability, it may already be too late.’5
Mark Carney points out in his speech that there are not enough actuaries to tell
us about the catastrophic impacts of climate change that will be felt beyond the
traditional horizons, and that future generations will likely have to bear the cost as
there is lack of accountability and related incentives for the current generation to fix
the problem. This is mainly due to both the political and business cycles that are
relatively short term in nature.
10.4.1.1 HORIZON SCANNING AND THREE HORIZONS MODEL

Climate scenarios should be developed over three distinctive time horizons, namely
short, medium and long term, using a range of approaches and tools.
In the context of risk assessment the horizon effectively adds another dimension
by capturing when the event will happen. The Institute of Risk Management
published a guide on horizon scanning in 2018, which serves as a good reference and
details of the tools are provided in Chapter 8, ‘Designing an effective emerging risk
management process’.
10.4.2 Regulatory guidance on time horizons

Regulators, such as the PRA, provide good guidance and explain that the scenario
analysis should include short-term assessments covering the existing planning horizon
FIGURE 10.2 Risk assessment time horizons
Time horizon Description
Short- The emerging risk can be expected to occur within a three

near-term year time horizon
0–3 years
Medium or The emerging risk can be expected to occur within a greater

mid-term than three and less than 10 years’ time horizon
3–10 years
Long-term Extended modelling horizon for climate risks specifically

to capture longer term impacts such as policy changes in
Over 10 years
excess of the normal business planning horizon
and longer-term assessments of a firm’s exposures based on its current business model.
They explain that longer-term exercises are not intended to be precise forecasts but are
qualitative and used to inform strategic planning and decision-making. Therefore,
organizations should seek to develop approximate assessment criteria to describe each
time horizon. An example is shown in Figure 10.2.
The Climate Financial Risk Forum Guide issued in June 2020 helps to explain the
requirements of scenario assessment by stating that ‘This requires leveraging histori-
cal data and providing a forward-looking assessment over an extended time horizon,
whilst also evaluating the likelihood that extreme climate-related events will become
more frequent and severe.’6
10.5 Setting the baseline

Another key challenge for climate scenarios is how to set the baseline and there are
two main approaches that need to be taken into account:
●● ‘One-off shock’ – Assessing the impact of a one-off shock that has not already
been captured or considered on the business.
●● Assessing the difference between the central projection and alternative pathways
over time.
The context of developing scenarios is to first have a base case and then estimate the
impact of these changes over time. Figure 10.3 illustrates the concept of what the
outputs need to consider in terms of incremental expected losses and volatility for
FIGURE 10.3 Climate scenario design: setting the baseline – conceptual framework
Net carbon zero target

per Paris Agreement
Climate
change
Climate
change
Materiality impact
(refer reference
scenario)
2020 2030 2050

Scenario time horizon
Key:
Expected losses
Climate reference scenarios: Return period (1 in 100)
(i) Early policy action Green vs brown transition
(ii) Late and disorderly policy action
(iii) ‘Hot planet scenario’ paths
the business. As emissions are expected to continue increasing to 2050 (and beyond)
there is an expectation that future volatility of events will continue to worsen. This
will in turn lead to the increase in frequency and intensity of certain climate perils,
including hurricanes and floods.
This representation is too simplistic in that it tries to explain the impact of physi-
cal risks but does not reflect the impact of transition risks that can have both a
positive and negative impact on the organization.
The base case from a stress testing perspective should in theory represent the
future business plans and then a climate scenario can be superimposed to stress test
the impact across the profit and loss and balance sheet. This should include a ground-
up approach to stress the impact of climate change in detailed assumptions in the
business plan.
10.6 Climate scenario analysis framework

One of the main challenges for risk managers is to develop a framework that includes
a robust process for assessing the impacts of specific scenarios on the organization.
FIGURE 10.4 Climate change risk assessment process
Step 1:
Identify business decisions
Step 6: Step 2:
Reporting & action Define scope
A framework for
assessing impacts from
climate change
Step 5: Step 3:
Calculate impact Background research
Step 4:
Access available tools
The IRM Climate Change SIG have reviewed a number of frameworks that are being
developed to support the design of climate scenarios and we outline a six-step process
in Figure 10.4 that organizations can use.
A high-level summary of the main requirements that are important for risk
managers to consider within each of the steps is shown in Table 10.1.
10.6.1 Step 1: Identify business decisions

The first phase of the process should seek to link climate issues to specific organiza-
tional threats and opportunities that will help to support business decisions and
long-term strategic planning.
Organizations should also endeavour to identify and understand the key drivers of
their business performance and look to build these into their scenarios. In designing
TABLE 10.1 Framework for scenario analysis – six-step process
Main Steps Title Description
Step 1 Identify Identify the operational processes and/or business decision that the
business scenario is intended to inform. This step should also consider the
decisions relevant time horizon and metrics
Step 2 Define scope Define the limits of the scenario including: areas of business,
geography, legal entity, time horizon, stakeholders impacted, etc.
Acknowledge which area may have a more material impact on your
organization
Step 3 Background General research and market intelligence is to assess current
research legislation, regulatory requirements, relevant industry publications to
help inform scenario design discussions including climate pathways,
data sources and availability, etc
Step 4 Assess Select the most appropriate scenario analysis methodology and
available tools assessment tool(s) for the given scenario
Step 5 Calculate Measure the potential impact (financial and otherwise) of the
impact scenario and monitor against risk thresholds such as risk appetite and
tolerance
Step 6 Reporting and Communicate the output from the scenario analysis exercise with the
action aim of informing decisions
the scenarios it is important to understand past climate trends and losses, review the
current risk profile in detail and then consider emerging climate risk trends.
Scenario analysis can address multiple purposes while focusing on a range of
potential stresses and scenarios, and up front recognition of this diversity encourages
the placement of appropriate design elements and controls. Scenario analysis can
have important potential applications in a number of areas.
For each area of use, key scenarios must be identified along with a model for
analysing the impact of the scenarios. An important point is that the intended use of
the analysis should drive the scenario selection and design decisions. By ensuring
that objectives are identified and agreed up front, a common reference point is estab-
lished for communicating and interpreting results.
What makes climate change unique is the wide range of potential business impacts
that will need to be considered. They can influence a range of business decision-
making and regulatory requirements such as climate disclosures. A list is shown in
Figure 10.5 that illustrates the need to support a range of stakeholders both internal
and external, such as rating agencies and customers.
From an enterprise risk management perspective one of the main business deci-
sions will be to review and enhance the organization’s risk appetite framework and
FIGURE 10.5 Summary of the main business uses and applications
• Strategic planning
• Risk mitigation
• Risk assessment including risk transfer • Shareholder
decision making expectations
• Risk quantification
• Appropriate reserving • Regulatory
• Risk control/action and pricing compliance
planning
• Business continuity • Improved credit
• Risk reporting management (supply ratings
chain resilience)
• Customer satisfaction
• Investment strategy
and asset allocation
• Risk appetite
Understanding the dynamics of the risk environment and therefore providing

a tool for decision making
consider changes in both qualitative and quantitative statements and metrics relating
to climate change risk.
Another key consideration will include the impact of future changes in concentra-
tion and risk aggregation exposures emanating from climate change.
Existing scenario analysis applications, such as inputs within ERM regulatory
driven processes (including ORSA or ICAAP for financial services firms), will need to
continue with climate change threats being an additional set of inputs required. This
process is also applicable to most organizations in assessing the robustness of their
solvency or capital position.
10.6.2 Step 2: Define scope

This is a critical phase of the process in which the organization needs to consider the
scope of analysis. This will depend on the nature of the business, for example the
industry and economic sectors that the organization operates in.
Climate change can affect businesses across legal entities, sectors and geographies
and thus the scope of a scenario needs to be carefully thought through.
The TFCD suggests the following considerations:
●● The geographic location of the organization’s value chain

●● The organization’s assets and nature of operations

●● The structure and dynamics of the organization’s supply and demand markets
●● The organization’s customers
●● The organization’s other key stakeholders
Significant research is therefore required to support the scoping exercise. Key design
considerations are discussed in more detail in Step 3.
10.6.3 Step 3: Conduct background research

This step involves a range of approaches to undertake what is often termed a ‘deep-
dive’ exercise. Detailed research is undertaken into the design of a specific scenario,
which can include research into relevant previous climate-related loss events or the
extrapolation of known trends. Research into future changes in weather patterns of
natural catastrophic events will be an important consideration. For financial services
firms, one of the key areas of focus will be to assess the potential concentration of
risk exposures relating to these event types within their business.
For many transition risks it is important to conduct market research across the
competitive environment, for example to assess how companies in the sector are
embracing new technologies to reduce their carbon footprint.
10.6.3.1 CLIMATE SCENARIO TYPES AND ARCHETYPES

There are many types of scenarios to consider and below is some specific scenario
terminology that should be helpful to explain the differences. Risk managers should
seek to consider and use a range of scenario types.
Types of scenario to consider:
●● a ‘sentiment shock’ in (say) 2025 that prompts sudden and significant change;
●● a physical shock, e.g. a major adverse weather event, that could occur at any time;
and
●● long-term incremental worsening of climate.
The above scenarios can be categorized into the following broad descriptors:
●● Slow building – risk factors that are slow to change but which gain momentum
(need to be careful not to ignore the scope for non-linear growth).
●● De-anchoring – scenarios in which barriers (e.g. regulatory safeguards) are
suddenly removed, leading to sharp, sudden changes in the risk factors.
●● Point-in-time – scenarios where the probability over the short term is low, but are
almost certain to occur at some point.
Even if an organization chooses to use sophisticated statistical models, they aren’t

always capable of fully capturing such scenarios, so there is always a need for
forward-looking expert judgement to develop them.
10.6.3.2 CLIMATE PATHWAYS

In constructing scenarios it is important to factor in alternative scenario pathways
that allow for the potential impact of the transition to a low-carbon economy and
which utilize published definitions and associated assumptions.
As an introduction to climate pathways, it is important to understand that climate-
related scenarios have long been used by scientists and policy analysts to assess
future vulnerability to climate change. Producing these scenarios requires estimates
of future population levels, economic activity, the structure of governance, social
values and patterns of technological change. Economic and energy modelling are
also often used to analyse and quantify the effects of such drivers in climate change.
A number of published scenarios are available that outline various plausible path-
ways to particular target outcomes (e.g. specific temperature increases or CO2
concentration levels). These scenarios have varying assumptions about the likely
timing of policy changes, technology adoption, changes in energy mix and other
factors to achieve a climate-friendly economy that may be useful to a company in
conducting its own scenario analysis.
The Network for Greening the Financial System (NGFS) has been developing an
analytical framework for assessing climate-related risks in order to size the impact of
climate-related risks on the economy and the financial stability.7 The NGFS has
concluded that there are two important dimensions to consider when assessing the
impact of physical risks and transition risks on the economy and the financial system:
●● The total level of mitigation or, in other words, how much action is taken to
reduce greenhouse gas emissions (leading to a particular climate outcome)
●● Whether the transition occurs in an orderly or disorderly way, i.e. how smoothly
and foreseeably the actions are taken
However, they often have limitations for assessing the business implications of
climate change at a local or industry sector level.
Regulators have also built on the reference scenarios currently being developed by
the NGFS to provide a coherent set of climate pathways and key macroeconomic
variables.
The descriptions of the three most common scenario pathways are shown in
Figure 10.6.
What is important to recognize is that if governments fail to meet their obliga-
tions under the Paris Agreement then the knock-on effects will mean that organizations
will need to become more resilient in the face of increasing chronic changes in
weather (e.g. rising sea levels), as well as more frequent and extreme weather events
(e.g. flash floods).
FIGURE 10.6 Common climate pathway descriptions
Climate pathway Description
Early policy Early and decisive action to reduce global emissions in a

action gradual way. These actions are sufficient to limit global
average temperature increases to below 2 ºC. Moderate
increase in global temperatures leads to higher physical risks.
Late policy The climate target is still met; but due to late action which
action could include a steep increase in global carbon process,
there is a significant degree of disruption to the economy.
Physical risks rise more quickly than in the early policy
action scenario and transition risks are severe.
No additional Governments fail to introduce policies to address climate

policy solution change other than those already announced. This leads to
reduced level of transition risks but with resulting increases
in physical risks.
10.6.3.3 USE OF REPRESENTATIVE CONCENTRATION PATHWAYS (RCPS)

There is consistency in methodology that is being applied by aligning the scenarios
with, for example, future RCP scenarios. RCP is a greenhouse gas concentration (not
emissions) trajectory adopted by the Intergovernmental Panel on Climate Change.
Four pathways have been selected for climate modelling, which describe different
climate futures. The four RCPs are labelled as a possible range of radiative forcing
values in the year 2100 relative to pre-industrial values (+2.6, +4.5, +6.0 and +8.5).
The model results are frequently ‘downscaled’ to derive potential local-level
changes in climate, which are then used to generate scenarios of impacts from climate
change (first-order impacts such as flooding or drought, second-order impacts such
as loss of crop production and third-order impacts such as famine).
10.6.3.4 DATA SOURCES AND DATA AVAILABILITY

Some of the main climate data types, sources, uses and challenges were discussed in
Chapter 7.
One of the immediate challenges in calibrating a climate change scenario arises
from the lack of available data and the difficulty in understanding the wide range of
data sources that may need consulting and calibrating, for example historical obser-
vations, geological records, global climate models, evidence and research from
external bodies, etc. For the physical risks, data is often fragmented, there are differ-
ences in the level and quality of exposure data across regions and the complexities
associated with the physical events may not be captured. For transition risk, it is not
possible to tell the extent of climate risks already captured in asset valuations and
there is a lack of consistency across the markets.
The data for the financial variables are widely available, but the historical data
will not give a reliable indication of the future, hence future estimates will be subject
to uncertainty. Expert judgement is required for calibrating on a forward-looking
basis. However, government reports, academic research, financial reports and public
data can help to inform this judgement.
10.6.3.5 GLOBAL CLIMATE MODELS (GCM)

Global climate models (GCMs) (state-of-the-art numerical weather models) have
become an integral tool in meteorological research and help scientists simulate future
climates in line with IPCC emission scenarios. While they have not been designed to
model scenarios for organizations, their forecasts need to be integrated within
predictive tools and techniques.
The importance of the information is that modelling firms are able to take this
information and project low, medium and high emission scenarios for flood models,
for example, to support the incremental impacts of climate change. These can then be
superimposed on an organization’s asset portfolio, which is particularly helpful for
lenders and insurers. We will discuss this further in the next section, through the use
of hazard maps in the UK using flood modelling using flood mapping techniques.
10.6.4 Step 4: Assess available tools

Once the scenario has been defined it is important to use the most appropriate tools
to assess the scenario. There are a range of tools and techniques that risk managers
can seek to use. These include some quite advanced tools for modelling physical
risks, such as natural catastrophe model and hazard mapping techniques.
Organizations need to select appropriate impact assessment tools to analyse the
change in the chosen risk metrics for a given scenario. It is important to note that
while there are some robust tools for modelling certain risks, there is an expectation
that new methodologies and tools need to be developed to help organizations meet
the challenges that we have outlined in relation to the uncertainties and complexities
involved with modelling transition risks.
10.6.4.1 SELECTION CONSIDERATIONS
The key considerations for selecting a chosen tool or techniques will, of course, vary
depending on the size and complexity of the climate risks facing the organization,
but some are listed in Figure 10.7.
10.6.5 Step 5: Calculate the impact

With the increasing awareness of climate change risk, organizations should seek to
introduce climate scenarios into their existing scenario analysis programmes (in
FIGURE 10.7 Main scenario selection consideration
Key considerations Description
Qualitative and Consider traditional risk management assessment techniques

quantitative as well as bespoke proprietary external vendor modelling
methodologies techniques.
Stress and Use both bespoke scenarios such as future climate events as well as
scenario tests and stress tests across the balance sheet of the organization.
Appropriateness and Tools should be evaluated to make sure they are appropriate for the
limitations specific business decision and scope of the analysis. Methodologies
should be used with caution and fully evaluated in the context of the
scenario’s and model’s underlying assumptions.
New innovative Be open to consider new methodologies and tools that are currently
methodologies being developed, tested and evaluated particularly for evaluation of
transition and liability risks.
order to incorporate the potential financial impacts into their financial metrics). This
is facilitated further if climate risk considerations are included within their risk appe-
tite statements and key risk indicators.
An organization should seek to measure the aggregate impact of climate scenarios
into their income statements and balance sheet as well as other key financial metrics,
such as risk-weighted-assets ratios or regulatory capital buffers.
Defining meaningful metrics can be challenging. The metrics used in communi-
cating the outcome of an exercise should be driven by the decision they are meant
to inform, and their familiarity. Physical scenarios are often aligned to an extreme,
or ‘tail’, event with a return period such as a 1-in-100-year event; that is, the loss
event will occur once every 100 years or have a 1 per cent chance of occurrence in
a single year.
Metrics will vary by industry and business needs. As an example, insurers may
choose to focus on measuring the impact of climate-related financial risks on claims
and premiums that drive the profits and losses across their lines of business. Banks
may need to assess how climate-related financial risks are to be factored into their
measure of risk-weighted asset ratios in order to inform their capital reallocation
processes. The quantification of risk may involve reviewing the credit risk profile of
customers, changes in counterparty ratings, repricing of collateral and underlying
assets, etc.
For example, a mortgage bank would be interested in assessing the potential impact
of floods on its mortgage portfolio, quantifying physical damage with metrics that feed
into the expected loss models. Likewise, a bank with an oil and gas portfolio would
assess how potential carbon price movements may affect the credit risk profile of
corporate borrowers and therefore the calculation of loan provisions. For smaller
firms, it may be more sensible to start with one aspect of this analysis and build up
expertise over time.
10.6.6 Step 6: Reporting and action

Organizations will ultimately need to describe the methodology used for selecting their
scenarios – that will include the rationale for choosing the underlying assumptions for
each scenario regarding how a particular pathway might develop, for example. It will
be important for an organization to disclose and discuss this information, including
the sensitivity of various assumptions to changes in key parameters, so that investors
and other stakeholders have a clear understanding of the scenario process – not only
the outcomes each scenario describes, but the pathway envisioned by an organization
that leads to that outcome (i.e., the how and why of those outcomes).
Communicating the quantitative and/or qualitative loss results to decision makers
is arguably the most important step and could take the form of a recommendation
to ‘act’ or ‘monitor’ based on the results presented. The results will need to include a
clear indication of the extent to which loss estimates can be relied upon, and appro-
priate caveats will be necessary to manage the risk of misinterpretation. For instance,
‘these results are intended to illustrate loss sensitivity to climate change and do not
constitute a prediction or forecast’.
10.7 Types of qualitative and quantitative tools

There are a range of tools and techniques that can be considered and again it is
important to align the technique to the type of risk and business decision that the
organization is trying to assess. Many organizations are developing assessment capa-
bilities and experimenting with different approaches, and engaging in dialogue to
promote cross-learning.
It is important to distinguish between the use of qualitative and quantitative
approaches and it can be argued that the best approach for climate change will
perhaps be a blend of both. It is also important to recognize the pros and cons of
using a particular technique, and its limitations.
There are a growing number of quantitative assessment tools available for organ-
izations and a range of vendor models and tools available for risk practitioners. It is
important to point out that models will give different results for modelling the same
risks, many are complex and many are termed ‘black box’ in design. Practitioners
therefore need to be careful in both using and interpreting the results.
It is important to have tools for physical, transition and liability risks, and we will
consider tools under the following groupings:
●● Expert judgement – traditional qualitative scenario analysis

●● Hazard maps and footprints
●● Probabilistic modelling including catastrophe models
●● Integrated stress tests
A summary of each approach follows.
10.7.1 Expert judgement – traditional qualitative scenario analysis

A qualitative assessment typically focuses on understanding what the future world
may look like for the organization, based on a set of assumptions that support a
potential path for the emergence of climate change risk. With the less rigid nature of
qualitative assessments, organizations can more readily consider a variety of transi-
tion pathways and implications of changes in the socio-economic environment for
business strategy.8
In designing scenarios organizations should seek to provide a high-level descrip-
tion together with a synopsis and underlying assumptions that drive the scenario.
The scenario should be typically aligned to a specific future risk event.
A good starting point is for organizations to explore exposures to climate change
risk for both short- and long-term horizons. Traditional risk management tools, such
as risk questionnaires and structured interviews, should be considered and used but
probably the most useful tool is to set up working groups and run workshops with
key internal stakeholders to brainstorm future climate scenarios.
FIGURE 10.8 Expert judgement – design of climate scenarios
Future threat/opportunity and scenarios
Climate risk Physical Transition Liability
New legislation net zero Emergence of legal

Extreme weather event
Threat/opportunity emission by 2050 in UK action class action
wildfire in california
use of electric vehicles lawsuit
Property damage and Operational cost of

Scenario Director and officers
business interruption converting to electric vehicles
being sued for past
due to loss of premises Opportunity to reduce climate inaction
emissions and meet targets
These techniques help in a number of ways. Risk managers can facilitate discussions
and gain valuable insights from experienced first-line risk owners who know the
business well. Internal brainstorming will typically help to gain buy-in from the
senior management, exchange knowledge and help reach a consensus among partic-
ipants. This approach can be supplemented by external experts who have access to
wider industry and global knowledge and insights. In time, as more experience and
knowledge is acquired, these assessments can grow in complexity and their ability to
generate useful insights is improved.
10.7.1.1 DEVELOPING SCENARIO NARRATIVES – SAMPLE TRANSITION RISKS

A more detailed output that highlights some transition risks and scenario narratives
is shown in Table 10.2. It highlights how scenarios should be designed to link transi-
tion categories to risk categories.
Developing plausible assumptions Plausible assumptions will need to be made

about future developments, so questions should be asked about:
●● The development of climate policies: Will there be a direct carbon tax imposed?
Will there be regulation on efficiency? Will there be explicit disclosures for carbon
emissions? How fast can policy changes be imposed?
●● The rate of technology innovation: How much funding will be given to research
and development? Can all energy resources be made more efficient? Can tech-
nologies reduce the level of carbon in the atmosphere? How quickly will technol-
ogy changes be adopted?
●● Changes in energy mix: How will the proportions of renewable and non-renewa-
ble energy change? Will all countries increase renewable energy consumption?
●● Changes in society: What will be the secondary effects of changes to the way
people live and work? How will people’s attitude towards climate change alter?
By developing a set of detailed assumptions, an assessment of the impact on the

organization can then be undertaken linking the qualitative assessment to a quanti-
tative output. Overall this process allows for greater flexibility in considering the
potential correlations, interrelationships and understanding of the key drivers of the
risk. The benefits of this approach are that it generally means that there is better
transparency in respect of the scenarios chosen and enables an organization to docu-
ment an appropriate range of plausible, reasonable scenarios.
Expert judgement – use of heat maps Once a list of scenarios has been developed
across physical, transition and liability risk (threats and opportunities) the results can
be consolidated into a conventional heat map and then discussed through a work-
shop. This process helps to validate and prioritize the most relevant and material
TABLE 10.2 Example of transition risks and scenario narratives
Step 1: Identify
Transition Root cause/key Threat or main business
category drivers Risk title Scenario of concern/opportunity opportunity decisions Risk category
●● Policy Overexposure to Decline in Creditworthiness of investments Threat Investment ESG Market

sectors that are creditworthiness declines over time due to strategy
overpriced (stranded of investments overexposure to sectors adversely
assets) revalued as a consequence of climate
change
●● Reputational Suppliers are climate Noncompliance The organization uses services from Threat Supply change Reputational
inactive and not in of climate suppliers who are climate change management and operational
line with the criteria inactive or unaware, for example have risks
organization’s poor ESG ratings and are not using
onboarding criteria recyclable materials
●● Legal/Liability Legal actions Failure to adapt Legal case brought against the Threat Compliance Strategic/legal
or disclose organization though a breach of duty
climate change by the boards of directors for not
risks adequately considering or responding
to the impacts of climate change
321
FIGURE 10.9 Example heat map
Physical risks – risk map – inherent risk rating
• 4, • 4
• 1, • 1, • 1
5, 6. 6
• 3,
Likelihood
3, 4, 4,
• 5, • 6, • 5, • 5 6 •3
2, 2
1, 2, 3
2
Impact
Aggregate qualitative risk description
Should be brought to the attention of board and

Extreme risk
immediately progressed
Very high Requires attention of senior management including

priority CEO and an action plan developed as a priority
High risk Requires action and monitoring by the risk owner
Monitoring the risk by the risk champion along with

Medium risk
departmental manager
Monitoring the risk by the risk champion along with

Low risk
departmental manager
Climate scenario examples Time horizon
1 – Major flood event

= 0–3 years
2 – Major storm event
3 – Droughts leading to increase subsidence = 3–10 years
4 – Hot summer – Heatwave = +10 years
5 – 6 Other – All time horizons
scenario to the current and future risk profile. In Figure 10.9 a hypothetical heat map
is shown in which a number of pre-identified physical climate scenarios are mapped
against an agreed criteria covering the likelihood, impact and time horizon of the
scenario.
In running workshops with key stakeholders it is best to ask participants to
provide an initial risk score using the organization’s existing risk assessment matrix
in respect of an initial ‘inherent’ impact likelihood score. With climate change this
process should be extended to include a third assessment criterion, namely the most
applicable time horizon. In the example above the most important scenarios that
need to be prioritized against the others are scenario 1, followed by scenarios 3, 4
and 6 that are all classified on a weighted average basis as ‘very high’. These should
be brought to the attention of senior management and an associated action plan be
developed. It is also important to have robust impact criteria that can cover a wide
range of potential impacts and that can assess operational, customer, reputational
and regulatory impacts as well as financial impacts. The point here is that it is best
to take the highest impact across each of the criteria.
It is important to remember that this is a facilitation process to help to provide a
basis to prioritize scenarios and gain consensus among key stakeholders.
Once this step has been completed it is then necessary to build out the scenarios,
including more detailed risk descriptions and underlying assumptions in order to
complete the next step in the process, which may mean using a range of different
assessment tools depending on the scenario concerned.
One of the most important areas that risk professionals need to review is the
control environment and design of additional mitigation plans (controls and actions)
for each scenario. As discussed in Chapter 6, in building out resilience the use of bow
tie analysis is a very helpful tool to do this.
10.7.2 Hazard maps and footprints

Hazards such as drought, flood, hurricanes or sea-level rise can be assessed with
hazard-specific models. These make use of the outputs of climate models to model
changes in risk between present-day and future conditions. For example, models of
future flood risk use estimates of the change in likelihood of extreme precipitation
events, derived from climate model output.
The example below, provided by JBA Risk Management Limited, for the UK,
illustrates a range of specific analytical outputs that help organizations. Data are
provided for multiple climate scenarios and time horizons and consist of:
●● Climate change index (relative percentage change in flood depths due to climate
change)
FIGURE 10.10 Hazard modelling and mapping and future rating
SOURCE JBA Floodability® data. © JBA Risk Management Limited 2022. All rights reserved
●● Climate change scores (an easy-to-use scoring system range that summarizes
future flood depth and frequency information to show how a property’s flood risk
may change).
●● Climate change rating known as Floodability® (UK Trademark) (an easy-to-use
colour rating that shows how a property’s flood risk may change, using traffic-
light colours such as black, red, amber or green).
●● Climate change pricing data (financial metrics showing potential changes in the
annual cost of flood to a property due to climate change).
The image in Figure 10.10 shows an example of climate change flood data.
The data points relate to property locations – the shading relates to the level of
risk, with areas relating to extreme risk. Some properties which were not currently
at risk of flooding are predicted to be at risk in the future. The outputs can help
mortgage lenders, for example, assess how flood risk, at the individual property and
portfolio level, will likely change over time under different climate scenarios.
Increasing flood damage can be correlated to reduced asset valuations and therefore
increases in the probability of default on the loan.
The following case studies highlight the use of hazard maps.
CASE STUDY
Fathom: Climate change risk modelling
Fathom
A global authority in flood risk analysis, Fathom is active both in the research and commercial
space.
The problem
In June 2021, the Bank of England released its final guidance for the Climate Biennial
Exploratory Scenarios (CBES). A large UK insurer and reinsurer approached Fathom to support
its submission and fulfil its requirements for UK flood exposure. It needed to know how its
portfolio’s exposure to flooding might change in the next 10–30 years, under various warming
scenarios, to meet the requirements of the CBES.
The solution
Fathom has both flood hazard data and a catastrophe model for the UK, originally launched in
January 2021. Underpinned by leading academic research, the models utilize the UK Met
Office’s UK Climate Projections 2018 (UKCP18) dataset to assess how flood behaviour may
change in the future as a result of climate change.
The catastrophe model, Fathom-UK CAT, offers five unique climate scenarios in line with
the Bank of England’s assessment criteria. This includes the present day, 2030 and 2050 under
early action, late action and no additional action warming scenarios.
FIGURE 10.11 Fluvial ‘change factors’ for river gauges across the UK
NOTE Values indicate relative change factors at each gauge, through time, e.g. a change factor of 1.1 indicates a
10 per cent increase in peak river flow
To assess its portfolio’s present-day and future risk for flood, the insurer ran exposure data
through Fathom-UK CAT for around 50,000 properties. Losses were aggregated to the postcode
district level, with results for each sub-peril (pluvial, fluvial and coastal flood). Assessments
considered insured average annual losses (AAL) and insured 100-year losses for each sub-peril
within the five climate scenarios.
The result
The insurer then provided the model outputs as part of its CBES submission for climate-related
physical risk. While flooding was just one piece of the puzzle, its submission to the Bank of
England was supported by scientifically validated and robust data on the variety of flood-
related risks posed to its organization. Users can find out more about the research
underpinning Fathom’s flood models for the UK by visiting the Knowledge section of the
Fathom Global website.
CASE STUDY
A J Gallagher: Future climate scenarios for farmers
This example illustrates the impact of climate change in the UK between 2020 and 2060 using
a risk coding applied to four key variables:
●● Soil heave
●● Storm damage
●● Slope failure
●● Overheating/humidity
A schedule of locations (with values) at risk across the UK was set up and the risk of specific
locations, moving from ‘low risk’ to ‘high risk’ categories related to each of the four variables
above, was analysed and is summarized in the images that follow (Figure 10.12). The event sets
used were from open-source data compiled by the National Trust. The risk impact analysis is
reproduced with kind permission from EigenPrism.
The dots in the diagram represent individual farm locations where the values are the sums
insured from about 1,050 individual locations and about $450 million of total insured values.
The case study highlights the relative importance of each peril from a climate change
perspective. The most impacted peril is risk of ‘overheating’ (climate zone 3 – hot to very hot
dry summer with a cool winter – and higher) that will move from 49 to 956 locations by the
year 2060.
This type of analysis can assist the industry in seeking new forms of insurance protection,
such as seasonal drought cover, using parametric insurance solutions.
FIGURE 10.12 Overheating and humidity scenario
Farmers can start to plan and make better decisions in terms of investments and look to more
profitability in new types of crops that can better cope with the changing climate conditions.
A good example is wine growers in the south of England.
10.7.3 Probabilistic modelling including catastrophe models

A number of tools are available to help companies anticipate the frequency and
severity of potential future catastrophes before they occur so that they can adequately
prepare for their financial or social impact.9
Catastrophe models are widely used in the insurance industry and have been
designed to model many perils that may be impacted by climate change, such as
flood and windstorm. Until recently they have focused on present-day modelling.
Climate change modelling is inherently uncertain, especially over the longer term,
and this uncertainty is impacted by a number of meteorological, financial and social
factors. However, despite this, there is an industry need and increasing regulatory
requirements to consider the impacts of climate change on physical hazards over
short-, medium- and longer-term scenarios. Catastrophe models are one way of
doing so. The models are designed primarily to model ‘acute’ physical climate risks
but are not designed for ‘chronic’ physical scenarios such as drought and heatwave.
One of the questions that needs to be answered is: how will climate change alter
the probability of a severe weather event happening next year? Risk managers also
need to consider the impact of climate change in respect of the potential shift in the
return period. As an illustration, a 1-in-50-year event in 2020 may become a 1-in-35-

year flood event in 10 years’ time. This has many potential implications on the
financial costs of risk, and subsequently on risk selection, pricing and more.
10.7.3.1 ECONOMIC SCENARIO GENERATORS USING ECONOMETRIC MODELLING

TECHNIQUES
There are a number of sophisticated modelling approaches to simulate possible
future states of economies and financial markets, based on risk factors to identify
unexpected but plausible outcomes.
Most of these models have been applied to assess the impact on investment risk
portfolios for investors.
For investors, scenario analysis may be applied in different ways, depending on
the nature of the asset(s) being considered. For example, some investors may develop
energy transition pathways that they believe to be either optimal and/or likely and
use those pathways to measure individual potential investments and drive engage-
ment activities.
Other investors may consider how climate-related scenarios relate to the future
performance of particular sectors, regions or asset classes. The results may show that
some portions of a portfolio are set to benefit from a particular scenario, while
others face a loss in value. Such results, while not conclusive, can be a useful addi-
tional factor in determining where to prioritize risk management activities and where
to consider making additional allocations.
The UN Environmental Programme (UNEP) issued a comprehensive investor
guide about scenario-based methods for climate risk assessment developed in respect
of TCFD.
Their report issued in 2019 details the results of the UN Environment Programme
Finance Initiative (UNEP FI) Investor Pilot on TCFD Adoption.10 This was a collab-
orative effort to explore, enhance and apply a methodology for assessing the impact
of physical and transition risks and opportunities on the portfolios of institutional
investors.
Investors look into the carbon intensity of investment portfolios, considering the
implications of physical and transition risks. There are many tools available for the
investment community that can help to assess the impact of an investment strategy
of an organization. The focus has been on potential re-pricing of carbon-intensive
financial assets, and the speed at which any such re-pricing might occur.
10.7.4 Integrated stress tests

Many of these tools are stochastic models that use future econometric models and
integrated assessment models to predict the future economic conditions. The UNEP
FI report states that climate risks can be incorporated into different financial
modelling methodologies. It is important to decide whether to use macroeconomic

methodologies (that go from macroeconomic impacts to asset class impacts),
bottom-up methodologies (that go from asset-level cash-flow impacts to asset class
impacts), or whether to combine the two approaches.
There is a growing need for organizations to stress test the impact of climate
change on their current and future business models, which does requires sophisti-
cated methodologies.
There is a recognition that organizations need to identify new tools and approaches
to measure and understand climate risks, in order to help them in ‘sizing’ the risks
they are facing and to help ensure a proportionate and coordinated response.
Many organizations are considering and adopting a more integrated and holistic
stress testing approach that can assess a range of impacts of physical, transitional
and liability climate risk developments by assessing key climate triggers and drivers.
This integration would be able to support a wider number of business decisions in
areas such as risk appetite, pricing, reserving, risk aggregation/exposure manage-
ment, new product development, etc.
CASE STUDY
PwC: Transition risk impact assessment for a retailer
PwC UK supported a FTSE250 retailer whose senior management wanted to understand and
quantify the future financial impact of climate change risks and opportunities on its
business.11 To assess these impacts, PwC undertook the following steps:
●● Risk materiality assessment – understanding the key climate-related physical and transition
risks and opportunities to be taken forward to the quantification stage.
●● Business lenses – identifying through which lenses of the business the modelling would be
targeted. Selected lenses included revenue, energy, carbon, fleet and supply chain.
●● Scenario selection – identification of which reference scenarios were to be used for the
modelling and any scenario expansions required to supplement the data.
●● Impact pathways – development of modelling methodology to calculate the financial
impact from scenario variables and data.
●● Data gathering – gathering of any internal and external data to help support the modelling,
including relevant business plans.
●● Assumption setting – agreement of any assumptions to be used to cover data gaps as well
as simplify the modelling process.
●● Model build – building out the model according to the specification.
●● Quantification – using the model built to conduct the scenario analysis and assess the
results, linking to potential future management strategies.
330
FIGURE 10.13 Transition risks
Revenue Energy
• Change in sales of carbon-heavy products due to • Future energy prices will depend on regulation and
regulation and customer preference macroeconomic effects
• Opportunity for low-carbon alternatives • Modelling involved applying potential energy price
pathways along with the energy transition plans
• Modelling involved considering the effects of
changing market sizes and switches to
lower-carbon products Transition risk impact on
the business
Capex Carbon
• Future regulation and reputational risks may require • Risk that future carbon prices will have an
investment in lower-carbon methods of operating increasing cost for businesses
• Includes capex and opex cost for maintenance and • Modelling involved forecasting future scope 1, 2
operation of new assets and 3 emissions based on the modelling of
changing products and energy transition
• E.g. converting of fleet of vehicles into electric assets
The key transition risks that were identified are shown in Figure 10.13.
A complete scenario analysis impact assessment was provided to the firm and several
workshops were held. The results were then used to support the firm’s reporting under the
Task Force on Climate-related Financial Disclosures (TCFD) requirements. The modelling also
enabled the client to understand what the future implications might be for different strategies,
and allowed it to make decisions in terms of supply chain, energy transition, and products and
markets to invest in.
10.7.5 Scenario templates

For individual scenarios it is helpful to design a bespoke template, typically a one-
page output that can capture the information of the scenario and can be used for
reporting purposes. Some of the main types of information that should be captured
and reported would include:
●● Scenario title and description

●● Risk types and business area impacted
●● Details of underlying assumptions
●● Quantitative outputs (gross and net loss after recoveries)
●● Probability of occurrence (return period)
●● Potential management actions
With respect to the facilitation and discussions with key stakeholders, it’s impor-
tant to provide a template that can capture wider qualitative information that
should seek to include key findings and considerations from the stakeholders,
such as specific research. Perhaps one of the main areas that risk professionals
should focus on is to review the current control effectiveness and then provide
findings and future considerations that can then lead to specific recommendations
and treatment initiatives.
As an example, given the changes in legislation for electric vehicles in many juris-
dictions are likely to impact motor insurers, a scenario description and treatment
initiative could be set out as follows, which would form part of a template for report-
ing ongoing progress:
●● Scenario description – change in legislation in respect of use of electric cars, i.e.

sales of new petrol and diesel cars to end in the UK by 2030, which leads to
changing trends in claims and premiums across the motor business.
●● Treatment initiative – develop a robust and detailed EV strategy in line with the
competitive environment.
10.7.6 Climate change dashboards

In terms of internal reporting, it will be important to consider developing bespoke
climate risk dashboards that can be used to report risk assessments across the short-,
medium- and long-term time horizons to boards. An example was provided in
Chapter 3 in Figure 3.5.
It is important to clearly communicate the level of confidence in the modelling
outputs for the specific risk. The process will be iterative and it will be important to
share and discuss the outputs with stakeholders across the organization. Successful use
of the framework should ultimately lead to specific actions being taken by the firm.
Reporting and disclosure complement each other in improving decision making
and evidencing that an appropriate process was followed in order to achieve the
objective(s).
Over time, organizations should seek to improve reporting and improve disclo-
sure through documenting:
●● management’s assessment of the resiliency of strategic plans to climate change;

and
●● the range of scenarios used to inform management’s assessment, including key
inputs, assumptions, and analytical methods and outputs (including potential
business impacts and management responses to them)
Conclusion
Risk managers need to play a pivotal role in driving the scenario selection and design
decisions to assess future climate scenarios in a rapidly changing world. As we have
discussed, organizations should carefully consider the key parameters, assumptions
and other analytical choices.
Scenario analysis is not just about long-term planning but also about supporting
improved business decisions in the short term such as risk selection, pricing, reserv-
ing, risk transfer, risk appetite, etc that we explored in more depth in Chapter 2.
In conclusion it is important to remember that the overall purpose of scenario
analysis is to explore several plausible and ‘best-available’ ‘what-if’ scenarios, rather
than to precisely forecast the future.
Notes
1 International Actuarial Association. Stress Testing and Scenario Analysis, July 2013.
www.actuaries.org/CTTEES_SOLV/Documents/StressTestingPaper.pdf (archived at
https://perma.cc/N3XG-U9D8)
2 Bank of England. PRA Rulebook Online, nd. www.prarulebook.co.uk (archived at

https://perma.cc/RQ7U-RSXL)
bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-
statement/2019/ss319 (archived at https://perma.cc/U2SR-HVNL)
4 European Insurance and Occupational Pensions Authority. Opinion on the supervision
of the use of climate change risk scenarios in ORSA, 2021. www.eiopa.europa.eu/sites/
default/files/publications/opinions/opinion-on-climate-change-risk-scenarios-in-orsa.pdf
(archived at https://perma.cc/KD7H-B6ZK)
5 M Carney. Breaking the Tragedy of the Horizon – climate change and financial stability,
Lloyd's of London, 29 September, 2015. www.bankofengland.co.uk/speech/2015/
breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability (archived at
https://perma.cc/UWX4-HWQ8)
6 CFRF. Climate Financial Risk Forum Guide 2020: Scenario Analysis Chapter, June
2020. www.fca.org.uk/publication/corporate/climate-financial-risk-forum-guide-2020-
scenario-analysis-chapter.pdf (archived at https://perma.cc/563R-LW2V)
7 Network for Greening the Financial System. A call for action: Climate change as a
source of financial risk, April 2019. www.ngfs.net/sites/default/files/medias/documents/
synthese_ngfs-2019_-_17042019_0.pdf (archived at https://perma.cc/TFD4-SF94)
8 The Geneva Association. Climate Change Risk Assessment for the Insurance Industry,
February 2021. www.genevaassociation.org/sites/default/files/research-topics-document-type/
pdf_public/climate_risk_web_final_250221.pdf (archived at https://perma.cc/5MAV-2FD8)
9 Lloyds. Catastrophe Modelling and Climate Change, 2014. https://assets.lloyds.com/
assets/pdf-modelling-and-climate-change-cc-and-modelling-template-v6/2/pdf-
modelling-and-climate-change-CC-and-modelling-template-V6.pdf (archived at https://
perma.cc/44YJ-FKS3)
10 UNEP Finance Initiative. Changing Course, October 2019. www.unepfi.org/wordpress/
wp-content/uploads/2019/05/TCFD-Changing-Course-Oct-19.pdf (archived at https://
perma.cc/46UL-ZCTZ)
11 PWC. Risk Modelling, nd. https://www.pwc.co.uk/services/risk/risk-modelling.html
(archived at https://perma.cc/E7PJ-9ZJ2)
334
11
Climate risk integration into

specific business processes
This chapter will cover the integration of climate risk into the mainstream risk
management and operational process of organizations.
●● Recognize approaches to transitioning your organization to a net zero strategy.

●● Be able to design a process to map business operations to climate change transition
requirements.
●● Appreciate the different dimensions required to establish HR protocols with
respect to climate change.
●● Understanding how climate risk is applied within the financial community across
credit, investment and operational risk.
●● Provide examples of how climate risk is integrated into ‘business as usual’ (BAU)
processes.
●● Recognize the potential for ‘greenwashing’ to become fraudulent.
Introduction
The previous chapters have outlined the multiple facets of climate change risk
management and how it can be incorporated into the wider risk management frame-
work. This chapter focuses on how climate change risk management is being
integrated into existing business processes across the corporate value chain as
companies transition to net zero.
This will come in many forms and will depend on the organizational structure,
the processes undertaken and the various stakeholder groups but it will also be influ-
enced to varying degrees by the climate strategy and ambition of the company, which
was discussed in Chapter 2.
CLIMATE RISK INTEGRATION 335
The desire to achieve sustainability and effective carbon risk management is driv-
ing innovation globally and firms that will benefit most will be those that are
prepared to experiment in order to meet their strategic goals (i.e. to increase sustain-
ability or to reduce their carbon footprint). The firms most open to adaptation will
develop cleaner business practices and enhanced operational efficiency, which will
ultimately flow through to the bottom line in the longer term.
This chapter provides some specific examples of how climate change risk manage-
ment is integrated into BAU processes focusing on activities that seek to reduce the
carbon emission of the organization.
As outlined in Chapter 5, many organizations have been focusing on measuring
and monitoring Scope 1 and 2 emissions but the most complex area is Scope 3 emis-
sions that are indirect emissions (not included in Scope 2) that occur in the value
chain of the organization.
Scope 3 emissions are from activities that the organization does not own or
control and occur across the value chain, and are generally difficult to measure,
manage and mitigate. Some of the examples that will be covered in this chapter
include customers, suppliers and investment decisions both in relation to capital
expenditure and the investment strategies of an organization.
From a risk management perspective, risk managers can support this transition.
These are often change programmes in their own right, through climate action plans
that should seek to focus specifically on the design of updating risk and operational
policies and key risk indicators to manage and monitor the exposures against targets.
It is important to develop practices that provide the opportunity to engage with
customers or suppliers and to assess the transition risks across the entire value chain
of an organization.
11.1 Alignment with business strategy

An organization can make pronouncements with regard to having a climate risk or
sustainability strategy, however, this needs to be aligned to what the company does
(i.e. its core business) and how it conducts itself. Consequently, it is how this is inte-
grated that will determine the success with regard to the management of climate
change risk.
This can be achieved in many different ways and will be contingent on in-depth
analysis of the organization’s core offerings, the processes undertaken to deliver the
product or service, its product range, the behaviours of staff and the establishment
of mechanisms to measure its emissions.
Before discussing specific ways that an organization can integrate climate change
into specific ‘business as usual’ (BAU) processes across its risk profile it is important
to recognize two important trends that are key drivers for organizations.
First, investing sustainably with an ongoing consideration of climate change is an

ongoing process. This applies to companies that are seeking investment and those
that will be investing assets. Over time this will become more important to document
and demonstrate.
Second, organizations will be affected by climate change in a number of different
ways:
●● Profitability via the demand for their goods and services.

●● Market capitalization (which is driven by profitability, earnings projections, repu-
tation and quality of management).
●● Cost of capital will vary, dependent on their maturity in addressing climate change
issues. This is due to assessments from the investment community (which consider
assessments from the credit rating agencies – who are now considering additional
ESG/climate change factors).
11.1.1 Climate change and ESG risk factors

In recent years, sustainable investing as part of environmental, social and governance
(ESG) risk factors or with a more explicit focus on climate change and carbon emis-
sions has risen in prominence within risk assessments and investment decision-making
processes.
Organizations need to ensure that their approach to ESG considerations takes
into account and is consistent with the requirements articulated within the stated
overall ambition and risk appetite with regard to climate change.
Companies seeking investment will need to understand that one of the most
important components for an investor will be how their portfolio is monitored in
terms of ESG ratings and carbon footprint of their investments.
EXAMPLE
A generic process framework that facilitates the change to net zero
As an example of how ESG and in particular climate change can be integrated into
corporate strategy and BAU processes, it is necessary to assess the impact of climate
change across its activities to help inform strategic decision-making. In 2021 OneRisk
Consulting Ltd (OneRisk) with support from Milliman (a global management and
actuarial consultancy firm) were commissioned to design a process for transitioning to a
net zero strategy. Details of this approach are provided below in general terms in order to
show how it can equally be applied in other industries or by other organizations.
Implemented solution
The process framework involved the design of a unique climate risk assessment survey
tool, which required different business activities to capture feedback that enabled
management to design a conceptual framework to address the changes the business had
to make in order to achieve a net zero operating model.
The survey tool has been adapted to ask specific questions that seek to understand
the development of ideas, concepts and challenges in addressing how the business could
transition to a low-carbon economy and, through understanding from external sources,
to develop a process that can then be discussed with senior management as part of the
conclusions and recommendations.
The high-level flow chart of the process is shown in Figure 11.1.
FIGURE 11.1 High-level process flow chart of project
Web-based questionnaire Questionnaires completed

sent to an insurer’s divisions by senior management
Step 1
Step 2
impacted by climate change
Recommendations made to Centralized responses

support organization’s net- validated through structured
Step 4
Step 3
zero strategy interviews and workshops
A section of the key questions that were asked included:
●● Are you planning to make changes to your business strategy as a direct result of
climate change, i.e. changes to business mix and/or risk appetite due to either
maintaining or gaining a competitive advantage?
●● With respect to the transition to a low-carbon economy, have you made or are you
planning to make any changes to your activities to reduce your carbon footprint in
line with the Paris Agreement?
The survey captured a wide range of responses from the participants, which enabled the
design of an initial process framework, seen in the Figure 11.2. This framework was then
used as a basis to articulate and deliver practical strategic approaches to achieve net zero.
338
FIGURE 11.2 Net zero framework
Growth Shift to greener

opportunities assets
! £
Risk selection and Pricing strategy

escalation processes
Reduce capacity in Risk management

fossil fuels resilience incentives
Shift to carbon-friendly Design innovative

customers and suppliers solutions
Key:
• Risk appetite strategy

• Tactical implementation levers
• Product innovation
The framework outlined three main areas, which provide insight across all sectors as they
address their operations to focus on reducing their carbon footprint:
●● Risk appetite strategy – The main focus will be to change the organization’s risk
appetite over time to embrace opportunities arising from sustainable assets and
carbon-friendly partnerships as well as reducing exposure to fossil-fuels-related
activities.
●● Business resilience – Other areas of focus include tactical options, which provide
incentives for improvements in risk management and enhanced resilience such as
‘build back better’.
●● Product innovation - A third area is product innovation where the organization can
develop opportunities in from the transition to a carbon free economy.
In developing opportunities to move to a net zero strategy there will be a need to

collaborate across the entire value chain. This will require the development of bespoke
tools and techniques and a robust strategy that aligns with wider government targets.
Using tools like these question sets to facilitate discussion can be valuable in raising
awareness of climate change across an organization. Multiple responses can be obtained
and used to develop a wide range of potential benefits to support internal process
changes.
It is likely that discussions held initially will point to the need for collaboration and
research to develop industry best practices and common approaches.
11.1.2 Governance arrangements

The most tangible and immediate evidence that climate change risk is fully inte-
grated within an organization will be seen in its governance arrangements, which
were discussed in detail in Chapter 3.
It is important to emphasize again here that in terms of facilitating the implemen-
tation of climate change plans, robust governance is critical. For example, terms of
reference of key working groups, management committees and boards should be
embedded within project management practices. It will also be seen in the integra-
tion into the agendas and meeting papers from these key meetings and will provide
informed influence within the decision-making processes.
When looking for evidence to support this, it will be visible in the role profiles
and accountabilities of senior management, terms of reference, meeting agendas
(and the accompanying meeting minutes), meeting papers and project documenta-
tion. At a more granular level, the more developed and climate-aware organizations
will also have incorporated this into corporate and personal objectives (by making
it part of staff performance reviews) and thus shaping the attitudes, behaviours and
communication flows within an organization.
11.1.3 Sustainable investing – influencing capital expenditure investments

As companies integrate climate risk and sustainability considerations into their
investment decision-making, this can be focused on the reduction of energy consump-
tion but it can also be with regard to the sourcing of the energy that they require.
A recent high-profile example of this is Amazon, which in April 2022 reported
that it had increased its renewable energy portfolio by nearly 30 per cent, with its
announcement of 37 new wind and solar energy projects. Such an approach is
required in order to allow it to meet its stated sustainability goals (as part of its
stated mission of running 100 per cent of its operations on renewable energy by
2030). It is anticipated that this recent announcement will enable Amazon to achieve
this goal by 2025 (five years ahead of the original target).1
11.1.4 Integration of carbon pricing mechanism into internal decision-making

As global warming increases, it is likely that government measures will result in the
imposition of higher prices for companies’ carbon emissions. Increasing costs
through the imposition of carbon taxes could directly reduce profitability and returns
on capital investments. Consequently, companies are increasingly focusing on intro-
ducing their own internal carbon pricing mechanism, in order to better evaluate
investments, to manage risk and to shape the strategy.
The carbon footprint impacts of investment options and/or projects can be
assessed, based on an internal carbon price, in order to estimate the potential carbon
costs going forward. Following such an approach, this allows the expected carbon
footprint to be quantified as a financial cost that can be included on the net present
valuation of the investment or project. The inclusion of carbon considerations into
project evaluation documentation also provides a mechanism for ensuring that this
becomes a key consideration and reinforces the message with internal stakeholders
of the importance of this.
11.1.5 Acquisitions
Another positive step is for firms to review their due diligence processes when consid-
ering acquisitions (for both physical assets and corporate targets), so that
consideration is given to the net zero carbon profile of any purchases, and to evalu-
ate sustainability opportunities and risks. The aim should be that they only acquire
assets that are lower carbon or can be decarbonized over time. Upon acquisition, the
next step is to develop net zero road maps for each asset to ensure alignment with
the stated corporate strategy.
11.1.6 Internal carbon pricing (ICP)

ICP is a theoretical price that companies can use to place a monetary value on each
tonne of carbon emitted. The setting of the ICP relies on an understanding of carbon
economics (i.e. costs of carbon credits, carbon taxes and external carbon costs),
operational processes and the company’s corporate and climate change strategies.
The benefits of adopting such an approach are threefold. They aim to:
1 Support decision making with regard to capital investments

2 Measure, model and manage the risks (both financial and regulatory) associated
with the existing and future government policies
3 Help identify risks and opportunities and provide the chance to adapt strategy
When selecting an ICP, organizations need to choose between the prevailing market
rate or another shadow price, based on views of future carbon prices and potential
regulatory changes. The price chosen will influence investment decisions and also
behaviours within an organization.
As an example of how this could work, if an organization has two different divi-
sions in different countries, their levels of emissions and the cost per tonne of emissions
may differ significantly. Consequently, when bidding to be awarded the rights to
produce a new product, different ICPs may be applied to each investment proposal
and this could significantly influence which division is awarded the contract.
An alternative application of ICPs is when a company imposes a fee on each busi-
ness per unit of emission. This money is then pooled and can be used to reward those
that have the best emission reduction performance over a specified time period. This
approach incentivizes the reduction in emissions and promotes the investment in
carbon-friendly initiatives (i.e. operational efficiency initiatives, green projects or
low-carbon product development) and reinforces a carbon reduction mindset.
11.1.7 Integration into capital allocation decisions

The introduction of carbon pricing will be evidenced in the project and/or invest-
ment proposal documentation within more mature organizations and helps generate
an element of competition/peer benchmarking between business areas (which further
helps integrate climate change considerations into existing processes and approaches).
They will also help future-proof operational processes if it has driven the selection of
more operationally efficient and lower-emission solutions.
This internal approach is endorsed by one of the world’s largest institutional
investors (SSGA) in their ‘Guidance on climate-related disclosure’ article posted on
the Harvard Law School Forum on Corporate Governance in January 2022:2
We expect companies in carbon-intensive sectors to incorporate climate considerations

into capital allocation decisions, such as for existing or planned projects, portfolio
decisions, and financial planning. Companies are establishing a price for carbon (also
known as “carbon price”) to capture and monetize the costs/impacts of their activities
as they relate to climate change. It allows for companies to express and incorporate the
cost of operations, compliance, and future regulations into strategic decision-making. We
evaluate if companies take forecasted carbon pricing into account for project assessment
and encourage disclosure of the average and/or range of carbon price assumptions used.
While this market mechanism may not have achieved significant reductions in carbon
emissions, it is instilling a means to allow a comparison of investment proposals with
a consideration for carbon emissions (both in the marketplace and internally within
organizations).
11.1.8 Alignment with the transition to a circular economy

Today’s consumers are often making an extra effort to purchase products whose
suppliers produce them in an environmentally friendly way, recycle and use natural
ingredients. This represents a fundamental societal shift that puts pressure on every
organization.
On top of this, there are strict regulations coming from, for example, the European
Union (EU) Corporate Sustainability Directive that will make sustainability report-
ing mandatory in 2023 for thousands of companies. The new rules must be taken
seriously, or companies will see severe penalties for violations.
As organizations look to reduce their emissions, the first step is to see how the
processes can be optimized/improved, so that they reduce the amount of energy
required (thus reducing their consumption).
This requires analysis and optimization of the entire end-to-end production from
raw materials to waste product (post-use). This is the concept behind the move to a
FIGURE 11.3 From a linear to a circular economy
Linear economy Reuse economy Circular economy
Raw materials Raw materials Raw materials
Production Production Production
Recycling
Use Use
Recycling Use
Non-recyclable Non-recyclable
waste waste
SOURCE Dutch government, Government.nl

‘circular economy’. In a circular economy, waste is significantly reduced or does not

exist and products and raw materials are (designed to be) reused as long and inten-
sively as possible over and over again. Waste effectively becomes the new raw
material.3
This approach presents an opportunity for organizations. Looking at how to
implement a circular economy is beneficial because it saves raw materials, reduces
waste and carbon emissions, promotes product innovation, can create jobs and
reduces costs (all of which can improve profitability in the longer term).
The alternative to process change is the use of technology to reduce emissions and
promote efficiency. This may involve the substitution or replacement of existing tech-
nology/machinery being used across the value chain but it can also include automation
of manual or carbon-intensive processes or investment in new technologies or renew-
able energy sources that can complement each other and result in both reduced
emissions and improved efficiency.
This chapter will now focus on the integration of climate change consideration
into BAU processes.
11.2 Mapping the risk profile to business activities

In terms of this process, climate change can be considered a cause that leads to many
risks and associated impacts. The impacts are the ones that should align with the
organization’s own risk assessment criteria, which can be developed through work-
shops in developing climate scenarios that we discuss in Chapter 10.
Organizations should seek to initially map out their risk profile to business
processes and then consider how climate change can impact on the business processes
both as a threat and an opportunity.
This process can support business resilience (discussed in Chapter 6) but also be
used for sustainability purposes and reducing an organization’s carbon footprint,
which is the focus in this chapter.
One approach is to map out the climate risks against the other principal risks for
your organization. This approach helps to identify the key areas of focus and then
prioritizes those that are most likely to be impacted by climate risks, including tran-
sition risks, but we will also focus discussions on physical risks.
The main output of this review process needs to integrate the internal business
and risk information gathered, such as prevailing risk registers, and this is then
supplemented by expert judgement, feedback and discussion through risk question-
naires, structured interviews and workshops.
11.3 Operational risk processes

This section provides some general areas that focus on operational risk profiles and
operational processes that are applicable to many organizations in terms of climate
integration:
●● Procurement processes of third-party suppliers

●● Human resource processes including recruitment
●● Carbon trading
11.3.1 Operational risk – procurement of services from third-party suppliers

One of the main areas of focus for organizations is to integrate climate change and
their wider ESG factors within their third-party risk management processes.
Organizations across most sectors should seek to develop processes to be used to
assess the ESG/climate change supplier credentials in order to meet certain regula-
tory standards and be used to track their Scope 3 emissions in line with meeting their
strategic net zero goals through a robust supplier procurement process.
The reasons for developing a more robust and integrated process include:
●● Meet net zero targets by improving the supports that have a lower carbon foot-
print
●● Meet regulatory requirements and expectations
●● Reduce reputational and legal risks
●● Gain knowledge of best industry practices through improved communication
with suppliers
●● Align the procurement process with improved management of risk
●● Potential to automate the process to rank suppliers in terms of climate and wider
ESG credentials
11.3.1.1 ALIGNMENT WITH CORPORATE VALUES AND RISK-SEEKING PREFERENCES

As outlined in Chapter 2, one of the risk preferences may be to state ‘We seek to use
suppliers who are climate change active, aligned with our own plans and meeting
regulatory standards through a robust supplier procurement process and proactive
relationship management.’
Therefore, an association with a supplier that operates counter to your own corpo-
rate values may be detrimental to your customers’ views of your corporate brand
image.
It is important to note that this is equally applicable to existing suppliers and also
to prospective suppliers. Companies will want to align themselves with suppliers
that share similar corporate values with regard to climate change, and will either
decide not to work with (or use) a particular provider or may elect to agree an action
plan to remediate any concerns, which can then be monitored over an agreed period.
By incorporating climate change considerations into the process, this flags to your
suppliers (or prospective suppliers) the importance that you are placing on climate
change considerations and also provides a mechanism for monitoring carbon emis-
sions going forward. This can achieve an organization’s due diligence processes
during the selection process for a provider but also during their ongoing perfor-
mance monitoring and when contracts are up for renewal.
Figure 11.4 provides a process flow of the key steps to integrate climate change
into a due diligence process.
11.3.1.2 TIERING OF SUPPLIERS
The chosen approach needs to be proportionate to the size of the supplier and the
services or products provided, the degree of importance to the overall value chain,
the frequency (and value) of the services or products provided and the relative size
of the firms involved.
FIGURE 11.4 Supplier due diligence process
Tiering old suppliers

and/or third-party
providers
Distribute due
Periodic review of
diligence (i) simple;
contract(s)
or (ii) comprehensive
Ongoing service Review and assess

review meetings responses
Decision point (i)

work together; (ii)
follow up; or (iii)
not work together

For example, a small company will have limited opportunities to influence a multina-
tional organization that provides its IT equipment. Whereas in the other direction, a
multinational organization may be more exacting when requesting certain minimum
carbon emission standards from a local printing firm that may be dependent on a
significant contract with the multinational.
11.3.1.3 DESIGN OF DUE DILIGENCE QUESTIONNAIRE

The main step in the process is to design a set of questions against specific categories
that needs to include a scoring mechanism that can then be escalated. Risk categories
can be developed with specific climate change questions; other categories will also be
required (e.g. with regard to societal or governance as part of wider ESG considera-
tions). Categories should seek to include the following:
●● Climate change strategy and ERM

●● Climate change governance and policies
●● Supplier management
●● Carbon emissions management
Some sample questions could include the following:
●● Do you have documented processes and procedures for identifying, managing and
mitigating climate-related risks within your organization, (i.e. a climate change
policy)?
●● Have you engaged with an external third party to calculate your carbon foot-
print?
Once the due diligence questionnaire is distributed, the recipient firm has to be given
time to respond; these responses then need to be reviewed and assessed in an objec-
tive way. This will be reliant on having agreed assessment criteria, validation of the
responses received and a qualitative overlay.
11.3.1.4 SUPPLIER EVALUATION AND ESCALATION PROCESSES

The supplier evaluation should be based on designing a robust scoring system for
each main category and an overall scoring system that is linked to a RAG escalation
process and therefore can be used as part of a KRI process in the risk appetite strat-
egy discussed in Chapter 2.
Once a decision is made, it is then important to introduce climate risk considera-
tions into the ongoing review process. This may include incorporation into service
review meetings, the review of (or development of) relevant management informa-
tion that is to be provided going forward, follow-up on agreed actions/remediation,
due diligence visits, both regular and ad hoc, and escalation (as required).
11.3.1.5 ALIGNMENT WITH WIDER SUPPLY CHANGE RISK MANAGEMENT

A survey from the IBM Institute for Business Value (published in April 2022) found
that top supply chain executives are now recognizing sustainability as a business
priority and are reviewing the resilience of their supply chains due to the disruptions
in the last few years.4 In part this is a response to pressures from stakeholder groups
but it was also noted that while there may be a short-term profitability impact this is
balanced against benefits from complying with environmental regulation, reductions
in reputational risk, driving new innovation in the supply chain, reducing waste in
the product life cycle, offering opportunities to differentiate their brand and enhanc-
ing the opportunities to attract talent (due to having a reputation for sustainability).
11.3.2 Human resource processes (including recruitment)

The role of employees in mitigating climate risk should not be underestimated. As
employers examine their role in managing climate change, this involves a rethink of
their ways of working. It also increasingly requires an approach that, in the race to
attract and retain talent, creates an environment that makes the younger generation
want to work for the organization.
The HR function will therefore need to readdress some of the main processes and
related policies and procedures, especially covering recruitment and selection, perfor-
mance management, learning and development, and compensation and benefits in
respect of climate change integration.
Some of the areas in which the HR function can influence and shape this is via a
range of measures that include:
●● Employee accountability and objective setting

●● Staff engagement and communication
●● Revising HR policies and procedures
11.3.2.1 EMPLOYEE ACCOUNTABILITY AND OBJECTIVE SETTING

In developing and implementing a climate change strategy as discussed in Chapter 2
it is important, and in some instances will be a regulatory requirement, to set clear
accountabilities for climate and environmental matters, providing support to the
teams tasked with delivering them and developing appropriate mechanisms/metrics
so that the progress can be measured. This then forms the basis for performance-
related incentives for executives and senior management. It can also be extended to
the development and introduction of climate risk and related sustainability objec-
tives into the annual performance review process for all staff (which will also
influence behaviours).
By designing specific performance objectives for staff that relate to setting SMART
climate-related objectives this should seek to influence behaviours, enhance the employee
experience, and improve attraction and retention. This can also be positively encouraged
by the targeting of environmentally responsible applicants when recruiting for new
employees.
11.3.2.2 STAFF ENGAGEMENT AND COMMUNICATION

There are a number of areas that the HR function can leverage in terms of employee
engagement.
It is important to understand the attitudes of employees, which can be assessed
through internal surveys and employee focus groups. This can increase their under-
standing an can also identify opportunities to reduce emissions or address issues
where there may be gaps.
Promoting environmental awareness should seek to heighten employee engage-
ment and this should be aligned with a clear corporate climate risk strategy.
Such initiatives are useful tools to increase engagement, to raise the profile of
climate change risk and to empower and enable staff to think about how climate risk
emissions can be reduced (both in and outside of the workplace), how the risks can
be better mitigated or how operational processes can be made more efficient.
This can be achieved with training programmes, lunch and learns, the encourage-
ment of staff to take climate change related qualifications (where applicable),
effective and regular communication of what the organization is doing to support
climate change initiatives and reduce emissions, and celebrating successes when they
occur.
As discussed in the introduction, insurers are in the vanguard of impact on their
business from climate change, and we outline here two examples of how different
insurers have attempted to address employee communication:5
●● Aviva – Initiated weekly internal climate change updates to inform employees

about climate change developments for the insurance sector and globally. This
was complemented by ‘snapbriefs’ for staff, where specific details were provided
about what Aviva is doing about climate change and within the domain of influ-
encing public policy.
●● Allianz – Runs an annual group-wide sustainability forum for all staff to attend
and launched an app that allows staff to track their emissions and carbon savings.
These then feed into an offset process.
11.3.2.3 HR POLICIES AND PROCEDURES

Organizations, particularly since the Covid-19 crisis, have been reassessing employee
policy and procedures to seek to balance issues such as flexible and remote working
practices as help to both motivate staff and improve efficiency.
These policy changes also need to be aligned with climate emission targets through
initiatives to reduce the overall carbon footprint.
There are numerous additional HR/working practices that are being applied in
varying combinations but which are contributing to carbon risk management and
the reduction of emissions. Examples of this include:
●● Ongoing support for flexible working-from-home initiatives (reducing emissions

from commuting)
●● Promoting greater use of technology to facilitate meetings (which reduces emis-
sions from business travel)
●● Encouraging more environmentally friendly travel to work options
●● Choosing sustainable suppliers for office infrastructure and equipment
●● Introducing reductions in business travel (which can also have immediate finan-
cial benefits)
●● Installing EV charging points (or the introduction of electric vehicle schemes –
similar to the ‘Bike to Work’ schemes)
●● Replacing regular lighting with LED lights and motion sensors to reduce energy
consumption in workplaces
11.3.3 Carbon trading

Another operational consideration for organizations is obtaining the requisite
permits for the emissions from their operational processes. This represents a cost of
business for organizations and as prices increase, corporate behaviours will change
in order to minimize costs incurred.
Carbon trading is the process of buying and selling permits and credits that allow
permit holders to emit carbon dioxide (or other GHGs). While not a mechanism to
stop the emission of carbon dioxide it is a mechanism to gradually reduce carbon
emissions.
Governments or intergovernmental bodies establish an overall limit on emissions
for a defined time period (this is known as a ‘cap’) and a finite number of permits to
emit are granted to those firms releasing the emissions. Each permit is considered
equivalent to one tonne of CO2e. Organizations must have sufficient permits to cover
the emissions they release. These permits are tradeable on regional trading market-
places (e.g. the EU Emissions Trading Market) and effectively result in firms putting
a price on their emissions. This means that surplus permits can be sold if the firms’
own emissions have been reduced (this could be due, for example, to efficiency gains
in their own production processes).
The trading of permits allows emitters to exceed their emission caps if an organi-
zation elsewhere is reducing their emission (and are prepared to trade any surplus
emission permits). Consequently, carbon trading should not be seen as a means to
reduce emissions overall, it should be seen as an approach to prevent the situation
worsening. It does, therefore, incentivize the adoption of innovative technologies,

reward companies that cut their emissions and impose financial costs on companies
that do not.
11.4 Credit risk management

The specific credit risk exposure for organizations will vary considerably but some
of the principles are very similar.
In terms of moving to a low-carbon economy the banking industry is developing
some changes to its lending practices, which we discuss in more detail in the follow-
ing sections.
11.4.1 Lending practices

Lenders are seeking ways to make a contribution to tackling climate change and the
transition to a low-carbon economy in the UK by adapting their credit risk practices
and policies.
With regard to governance arrangements, credit risk management policies are
being revised to explicitly reference and consider climate risk (or as part of a wider
‘responsible lending’ policy), climate risk is becoming a standing agenda item at
credit risk committees (and included in meeting papers) and the monitoring of credit
portfolios is being expanded to cover a variety of additional variables.
11.4.1.1 BARCLAYS BLUETRACK APPROACH

One example of how lenders are making a contribution to tackling climate change
and the transition to a low-carbon economy in the UK is where Barclays have intro-
duced ‘BlueTrack’, which is a dashboard used to measure their financed emissions
and track them over time against a decreasing ‘carbon limit’ on the activity they
finance.6,7 Barclays have a stated ambition to be a net zero bank by 2050 and are
already net zero emissions from their own operations, so the focus is now switching
to reducing the client emissions that they finance. This approach (based on proprie-
tary methodology) follows a number of steps:
1 The first step constructs Paris-aligned portfolio benchmarks for the sector(s) in
which firms operate. These benchmarks define how emissions need to reduce over
time. Firms are then benchmarked in absolute terms and/or by emission-intensity.
2 The second step of the model quantifies emissions produced by the client to which
finance is provided.
3 The third step attributes emissions to the financing provided (i.e. linking each part
of the financing to the client’s respective absolute emissions or emissions intensity
metrics), which can lead to Barclays determining their ‘fair share’ of a company’s
absolute emissions.
4 The fourth step aggregates company-level emission measurements and financing
information into portfolio-level metrics.
The approach will evolve over time as company disclosures improve, as data quality
and greater coverage becomes available, by integrating company-level forecasts/
commitments and updating benchmarks as they are developed. The success of this
integration will nevertheless be contingent on the availability and reliability of the
underlying data, and systems to monitor the exposures.
FIGURE 11.5 Barclays BlueTrack approach
Model step 1 2 3 4 Output
Construct
Quantify Link Aggregate to Portfolio
Activity Paris-aligned
client emissions a portfolio- alignment
portfolio
emissions to financing level metric measurement
benchmarks
SOURCE Barclays
11.5 Development of a sustainable investment strategy

This section covers the integration of climate change into investment risk strategy.
This will be important to companies seeking investment or to those with funds to
invest, for example:
1 Investment managers, e.g. pension funds

2 Investment strategy of an organization
11.5.1 Investment risks – stranded assets

One of the most important risks that organizations are facing is stranded assets due
to climate change. Stranded assets are assets that have had a premature reduction in
value, which can be attributed to changes in legislation, new regulations or unan-
ticipated changes in societal demands and/or production processes.
This can relate to the risk of stranded assets as a direct consequence of climate
change, changes in legislation, and indirectly due to changes in consumer demand,
which can then influence investors in their decision making.
If we consider the example of regulatory changes relating to GHG emissions and
the subsequent impact on the coal industry, this has resulted in sudden and material
impacts on operating measures such as revenues, earnings and margins of market
participants, all of which contribute to uncertainty relating to the estimation of value
of the underlying assets and consequently the shares of the companies involved. An
example of this could be the reduction in value of a company’s fleet of diesel cars. As
certain cities globally restrict the use of diesel vehicles, this reduces the demand for
such vehicles and consequently the assets are worth less than expected (which affects
both the company balance sheet and income statements).
Such changes can result in credit rating downgrades but also emphasize the
importance of valuation committees within the investment management firms in
order to determine a ‘fair value’ for distressed or insolvent assets within their portfo-
lios (albeit under the supervision of a transparent and robust governance framework).
11.5.2 Investment managers

Investment companies need to consider their appetite for risk, their time horizon and
the investment objectives of the portfolio of assets they are managing (i.e. the invest-
ment strategy).
The process can start with the need for investors to meet their fiduciary responsi-
bilities. This evolves in line with societal and client requirements and can, over time,
reduce investment risk (because the underlying companies develop an increased
focus on the long term).
11.5.3 Principles for responsible investing

A common approach for investment managers to evidence their responsible invest-
ing credentials is to become a signatory to the UN Principles for Responsible
Investment (UNPRI). These principles require explicit incorporation of environment,
social and governance (ESG) factors into investment decision-making and active
ownership.
UNPRI require firms to adhere to the following:
1 We will incorporate ESG issues into investment analysis and decision-making

processes.
2 We will be active owners and incorporate ESG issues into our ownership policies
and practices.
3 We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4 We will promote acceptance and implementation of the principles within the
investment industry.
5 We will work together to enhance our effectiveness in implementing the principles.
6 We will each report on our activities and progress towards implementing the
principles.
To be recognized as a signatory, firms are required to report on the implementation

of these principles (and this may be subject to external validation). Being a UNPRI
signatory is becoming the asset management industry’s norm for ESG (including
climate change risk management) and it is common practice for this to be a prereq-
uisite prior to an investing party allocating funds to a particular asset management
firm. To not be a signatory can place a firm at a competitive disadvantage (because
those in control of the funds cannot or will not allocate money to non-signatory
firms). Consequently, this form of peer group comparison becomes self-fulfilling and
reinforces the investment industry trend towards responsible investment.
11.5.4 Monitoring of investments

Investment managers monitor their portfolios and their investment exposures against
their peers, industry benchmarks and stock market indices across a wide variety of
data points on an ongoing basis.
Their range of analytics is expanding beyond traditional investment data to also
cover climate change/carbon emissions and other ESG analytics. This means that
FIGURE 11.6 Example of a sustainable investment process
Fiduciary
responsibility or
regulations
Reducing Changing client

reputational risk demands
Improving Reducing
stewardship/ investment
engagement risk
Improving
Enhanced analytics
investment
and data
returns

portfolios will now be considering the absolute emissions of the companies they
invest in, the highest and lowest emitters, highlighting which industries or geographic
areas are better or worse, benchmarking against industry providers (examples
include MSCI, Sustainalytics, S&P, Fitch Ratings and Moody’s).
In April 2022, credit rating agency Fitch Ratings announced the publication of
Climate Vulnerability Scores, which examine sector exposure to low-carbon transi-
tion risks for a number of new sectors (i.e. auto manufacturing, aerospace and
defence, transportation and technology, media and telecommunications, which
builds on their pre-existing coverage of utilities, oil and gas, and chemical sectors).8
Fitch’s Climate Vulnerability Scores provide the agency’s view of the creditworthi-
ness impact of sectors, companies and debt securities to a rapid low-carbon transition
between 2025 and 2050. According to Fitch, the scores were developed in response
to a need by investors for a long-term view of transition risks, recognizing the impli-
cations for instruments of different maturities and strategies, to help manage these
risks and support security selection, portfolio management, risk management, moni-
toring and reporting.
11.5.5 Key monitoring criteria

Below are some of the indicators for monitoring that may be applied by the various
ESG rating agencies.
11.5.5.1 CARBON EMISSIONS INTENSITY

This takes Scope 1 and 2 emissions and divides this by the enterprise value of the
organization (including cash) in order to get a measure of carbon emission intensity
based on the company’s activities (adjusted by company size and sector). A lower
intensity relative to the median is favourable and receives a higher score.
11.5.5.2 CARBON RESERVE INTENSITY

This looks at the reserves of fossil fuels that a company owns. This presents two
risks. The first relates to the impacts if all of the reserves were burnt and the second
relates to the value of fossil fuel assets (which may reduce due to energy transition).
Again, the sum value is divided, but the company’s enterprise value (including cash)
to get a score and a lower intensity score relative to the median is favourable and
receives a higher score.
11.5.5.3 GREEN REVENUES

Companies who generate revenues from low-carbon services and technologies are
assigned a green revenue score, in proportion to the percentage of the company’s
‘green’ revenues. This is a positive contributor to a company’s score.
11.5.5.4 INTERNAL MANAGEMENT VERSUS EXTERNAL OVERSIGHT

Investment companies are in the unusual position of facing climate change risk from
two angles. Internally they have to consider how they run their own company and
maintain high standards while also overseeing their investee companies, hold them
to account and ensure they meet the standards expected of them.
11.5.6 Engagement
Investment firms need to be clear on their engagement strategies with the companies
in which they invest. Will they operate on an exclusion basis (i.e. not invest in compa-
nies with bad sustainability/climate risk assessments) or choose to actively engage
and exert influence over the investee companies?
An example would be ownership of airline shares. One institutional investment
manager could decide no longer to invest in airlines due to the amount of emissions
that the industry generates. Alternatively, another investor could elect to invest only
in the best-in-class airlines (i.e. those with the lowest emissions). Whereas a third
investor could choose to invest in the worst-emitting airline with a view to actively
engaging management in order to influence them to reduce their emissions.
11.5.6.1 ACTIVE ENGAGEMENT WITH INVESTEE COMPANIES

As climate change risk gains a heightened profile and sense of urgency, investors have
a responsibility to exert positive influence over the companies in which they are
shareholders. The rise of ‘active ownership’ is influencing companies to adopt
sustainable business practices (which cover all of the facets of ESG), which in turn
benefits investors and the wider society.
Active ownership is typically being evidenced by open and transparent reporting
of voting records by institutional investors. These results are reported on each
company’s website and disclosed in their ‘active ownership reporting’. This rise in
transparency is aiding comparability and consequently it is helping ensure that
investment managers are being seen to fulfil their stewardship responsibilities. Part
of this is driven by the desire not to be seen unfavourably relative to their peers in
the eyes of clients. An example of this is the ‘Say on climate’ proposals, where share-
holders have an opportunity to vote on firms’ climate policy and strategy. This can
be approved (or disapproved) if a policy or strategy is considered not to be ambi-
tious enough or not sufficient to meet their stated climate strategy.
As investment managers build and manage their portfolios, they need to continu-
ally monitor their investments on an ongoing basis in respect of their underlying
investment returns and increases in their carbon risk scores. These carbon risk scores
need to be considered with regard to their ‘fit’ with the overall investment strategy of
their funds and to ensure that they align with the expectations of their underlying
investors or trustees. Institutional investors are now publishing case studies with
regard to their approaches in which they provide their assessments (including infor-
mation relating to their methodology) and details on the individual ratings of
companies and sectors, reference to specific historical issues and outlining the voting
records on climate change/sustainability initiatives.
A carbon rating could be monitored in isolation but can also be a component of
an overall ESG score. Legal & General Investment Management (LGIM), which is
one of Europe’s largest asset managers, uses 28 key metrics to monitor companies.9
These are spread across:
●● environmental
●● social diversity and human capital
●● governance (covering board composition, audit oversight and investor rights)
●● transparency
Within the environmental component, the primary criteria that are assessed are (i)
carbon emissions intensity; (ii) carbon reserve intensity; and (iii) green revenues.
11.5.7 Reducing reputation risk

One of the dangers of seeking investment, due to enhanced sustainability and the
business approach to sustainability, is the risk that the approach that is ‘advertised’
is found not to be as sustainable as intended and should not have been marketed to
investors (or to clients of investment companies) as such. This has potential to
become fraudulent, as shown below, or certainly to impact the reputation of the
organization.
In a market where demand is being driven by consumers for products and services
from companies that are actively contributing to carbon reduction and the move to
net zero, any perception that this is not the case could have serious reputational (and
thus financial) implications.
Two examples are shown here:
1 Deutsche Bank – The Frankfurt head offices of Deutsche Bank and DWS (their
subsidiary) were raided by the financial regulator ‘BaFin’ on 31 May 2022
following reports that a whistleblower reported the asset management arm of the
firm (DWS) was involved in actively misleading investors by ‘greenwashing’ their
investment strategy. While the subsidiary had been going through ‘troubled times’,
the day after the raid the CEO, Asoka Woerhman, was reported to be ‘stepping
down’ from his role.
2 HSBC Bank – At the end of April 2022, it was reported that HSBC had been
referred to the Advertising Standards Authority in the UK over its adverts in two
UK cities, which inflated its credentials regarding the provision of financing for
clients to transition to net zero and planting trees, without reference to its
disclosures relating to the financing of 25.6 million tonnes of CO2e or reference
to the bank’s commitments to fund thermal coals until 2040.10,11
In generic terms, greenwashing relates to when there is a suggestion that a product

or service that is provided by a firm has certain environmental credentials (or meets
certain environmental standards), when these standards have not been met. As the
appetite for ‘green’ products grows, this risk increases significantly and consequently
the number of legislative and regulatory initiatives increase in order to mitigate the
risk of greenwashing. Examples of greenwashing were outlined in Chapter 9.
11.6 Investment strategy of investors

Investment companies recognize that the increased risk from climate change may
affect the value of their assets in the future. Over the longer term, as efforts to move
away from a carbon-intensive economy gather pace, organizations recognize the
possibility that financial market participants may fundamentally reassess the value
of carbon-intensive assets and the businesses that rely on them.
Shifts in consumer behaviour may also affect the long-term viability of these busi-
nesses and their ability to repay debt. This re-evaluation may lead to impairments to
the value of these assets.
Specific transition risks relating an organization’s investment portfolio typically
include:
●● Increased cost associated with production of carbon intensive products

●● Impairments in carbon extractive industries due to falling demand, carbon pricing
or outright ban
●● Higher levels of business investment to support transition
●● Failure of businesses to evolve their business models
11.6.1 Investment considerations – selection criteria

One of the common issues in terms of investment decisions is the selection approach
of companies within the investment portfolio. Many organizations use a benchmark-
ing approach using an externally based ESG process to seek to exclude investing in
certain types of industry sectors or individual companies. This is often termed a
‘prohibited list’ and by excluding or removing firms that are the highest emitters it
may impact upon the risk–return profile and can lead to lower returns or mean that
investors do not gain all of the diversification benefits.
An example of this is the Lloyd’s Insurance Market. Lloyd’s, the world’s biggest
insurance market, will end new investments in coal-fired power plants, coal mines,
oil sands and Arctic energy exploration by 1 January 2022, and phase out existing
investments in companies that derive 30 per cent or more of their revenues from this
area by the end of 2025. Lloyds has stated that it will align themselves with the UN
sustainability development goals and principles.
11.6.1.1 CLIMATE AND ESG ‘WATCH LIST ’

Many organizations are implementing a process that enables them to develop an
‘ESG watch list’, which is monitored at each investment committee and is based on
ESG monitoring criteria. It is important to note that many issues are related to
governance-type issues and not necessarily climate related.
11.6.2 ESG scoring system

There are a number of global industry scoring systems that have developed method-
ologies to provide an ESG score that is broken down between the E, S and G
components. The concept is to provide additional information to investors in addi-
tion to conventional financial analysis (discussed in more detail in Chapter 12, which
focuses on climate financial reporting and disclosures).
One of the companies that provide ESG ratings is Morgan Stanley Capital
International (MSCI) ESG Ratings, which aims to measure a company’s manage-
ment of financially relevant ESG risks and opportunities.
MSCI uses a rules-based methodology to identify industry leaders and laggards
according to their exposure to ESG risks and how well they manage those risks rela-
tive to peers. However, it should also be noted that there are a multitude of ESG
rating companies (all of which use differing methodologies). The MSCI ESG Ratings
range from leader (AAA, AA), to average (A, BBB, BB), to laggard (B, CCC).
This represents the following descriptions:
●● Laggard – A company lagging its industry based on its high exposure and failure
to manage significant ESG risks.
●● Average – A company with a mixed or unexceptional track record of managing
the most significant ESG risks and opportunities relative to industry peers.
●● Leader – A company leading its industry in managing the most significant ESG
risks and opportunities.
One of the key points emanating from the rating description is the word ‘industry’,
as the ratings process is based on a score that is relative to industry peers. The bench-
marking process aligns with the discussion in respect of climate ambition and
strategic positioning (see Chapter 2). The higher the organization’s ambition, the
more likely the company itself is to have a higher ESG rating.
EXAMPLE
Analysis of a hypothetical investment portfolio
An illustration of how climate risk considerations are now embedded is shown in

Figure 11.7. This example of an investment portfolio analysis shows reporting (which
breaks down the investment exposures relative to industry benchmarks) and is becoming
the norm for portfolio analysis provided to organizations as they monitor their
investments, with an additional focus on climate risk considerations.
FIGURE 11.7 Hypothetical portfolio analysis – ESG ratings distribution
ESG ratings distribution – Investment portfolio

Sep-30 Dec-30
25%
20%
15%
10%
5%
0%
CCC B BB BBB A AA AAA
MSCI ESG score scale
SOURCE OneRisk Consultancy
The analysis helps to develop an overall weighted average score that can then be
monitored. For example, if the organization wants to maintain a target of AA, the
weighted average score would have to be over 7. The main focus of the analysis is to
track the score over time and look at the outliers (i.e. the CCC or Bs) and seek to include
them in the watch list, and provide supplementary qualitative data that can then be to
presented at the investment committee or board (as required).
An example from May 2022 highlights the differences in approach from the rating
agencies with regard to ESG assessments. Tesla, the electric vehicle manufacturer, was
removed from the S&P 500 ESG index, while oil companies remain within the index.12
Notwithstanding the differences in the companies and their relative emissions, it is a
notable decision because it highlights the importance of the relative weightings of the
different E, S and G components (a company that has a strong environmental record but
weaker social and governance standards would most likely be removed from the index,
depending on the methodology followed). In this instance, it also highlights the relative
importance of industry peer groups and how a firm compares to its direct competitors.
For example, if one oil and gas producer compares favourably to others within its
industry category this can support its ongoing inclusion within an index.
Figure 11.8 builds on the concept of industry comparators and show how a company can
monitor and manage the carbon footprint of its investment portfolio versus relevant sector
benchmarks in order to position itself favourably and to increase the likelihood of its
ongoing inclusion in various capital-market indices (and thus maintain its access to capital).
FIGURE 11.8 Monitoring of an investment portfolio’s carbon footprint
100 Tonnes CO2 128 Tonnes CO2
VS
Company X investment portfolio Benchmark
An average integrated oil and gas company generates X tonnes of CO2 for $1 million of revenue.
An average brewer generates X tonnes of CO2 for $1 million of revenues.
11.6.2.1 PRACTICAL IMPLEMENTATION EXAMPLE

This case study provides a good example of the approach taken by PwC to decar-
bonize its business activities through integrating climate change and sustainability
strategy with existing business processes, such as its supply chain, to reduce its over-
all carbon footprint across the organization.
CASE STUDY
PwC approach for net zero alignment
PwC UK first started measuring carbon emissions targets back in 2007 and we set our first
carbon reduction target in 2012 and have had decarbonization strategies ever since.13 We have
embedded ESG into our day-to-day business (the ‘ESG built-in strategy’) by supporting our
clients’ transformation, working collaboratively with our suppliers and, importantly, by
pushing ourselves to lead by example.
As a professional services firm, our direct emissions (Scope 1 & 2) are relatively low and are
driven predominantly by our energy consumption within our buildings. We recognized early
on that to make a real difference we needed to address Scope 3 emissions, in particular
business travel and the emissions of our supply chain given this represented a significant
proportion of our carbon footprint.
We knew that we didn’t have all the data we would need to calculate our emissions,
however, we worked out what data we could get hold of quickly to get started (e.g. energy
consumption data from utility bills, travel data from centralized bookings). Where we didn’t
have the data initially we made educated estimations. We then gradually increased the
breadth and sophistication of data over time.
To reduce our direct emissions, we adopted four complementary approaches: operating
differently; consolidating our office space into fewer properties; refreshing our real estate to
adopt sustainable designs and investing in new low-carbon technologies.
In terms of reducing travel, in a service business like ours we recognized the inherent
challenges as it is part and parcel of delivering services for our clients. We set about changing
behaviours, and started by significantly cutting our non-client-facing internal business travel
as this was fully within our control. Our next area of focus is to reduce client related business
travel.
With regard to our suppliers we set up a supply chain sustainability programme, which was
built around engagement, collaboration and innovation.14
●● Upskilling our suppliers – We have identified our key suppliers and emitters and
engaged with them to measure, report and set targets for reducing their emissions (asking
them, for example, to subscribe to science-based targets). We use an annual survey to
gather insights about our suppliers’ performance and hold forums to help them build
capabilities to improve.
●● Collaborating with suppliers – We collaborate with suppliers to find solutions to
sustainability challenges: for example, in our BREEAM ‘Outstanding’ offices, where
collaboration led to new technologies for energy, paper and waste. We have also worked
with key suppliers to include social enterprises and apprentices in the provision of their
service.
●● Building sustainability requirements into our commercial arrangements – Where
appropriate, we seek to embed sustainability considerations with key suppliers through our
procurement activities, from developing requests for proposals and evaluation criteria,
through to contract schedules, service-level agreements and ongoing relationship
management.
We have made excellent progress in reducing the carbon footprint from our direct operations,
achieving more than 90 per cent reduction in our Scope 1 and 2 emissions since 2007 –
decoupling them from revenue growth. Additionally, we have reduced office energy
consumption by 61 per cent, increased renewable energy to over 90 per cent, and have offset
any residual emissions to be carbon neutral since 2007.
From a Scope 3 perspective, carbon emissions fell by 40 per cent overall, mainly due to a
drop in business travel, with the pandemic driving reduction in associated carbon emissions in
2021. We are exploring ways to limit the bounce back as part of our aim to halve our
operational footprint from a new baseline of 2019 – a key element of our commitment to be
net zero by 2030. For instance, we intend to maintain our current hybrid model of working
and thus expect these positive results to continue.
Our engagement with our suppliers has been remarkably productive. We have an annual
supplier forum, and in 2022, over 100 people attended, including 63 supplier representatives
across five sectors. Participants rated the event as highly informative, describing it as
‘stimulating, inspiring and energising’. 72 per cent of our supplier attendees told us they have
already made a net zero public commitment, with a further 17 per cent looking to make a
commitment in the next 12 months.
We also want to turn ESG into a driver for all our stakeholders, by helping clients maximize
investment opportunities arising from the ESG agenda, launching an ESG platform and
committing to upskill our suppliers to build ESG into our client services. We are committed to
continuing working with suppliers to measure, report and set targets for reducing their
emissions.
Conclusion
Integration of climate change risk management practices is complex and multidi-
mensional. This chapter highlights how it is aligned to operational risk management
in the sense that it will be most successful if it is all-encompassing and incorporates
people, process and technology considerations simultaneously. Mapping these
processes to climate change considerations will be critical to embedding a change
programme in future.
Improvements can be made by the integration of single initiatives; however
comprehensive change will be only be delivered when embedded within governance
arrangements. These must be in place to focus on the transition across the business
and with reference to the future financing of the organization.
As processes are altered to take account of climate change they will affect the
entire value chain of the organization, from the HR processes through the supply
chain to end consumer, and increasingly focusing on the importance of marketing
‘green’ credentials to those end consumers. This will be of increasing importance for
the organization as claims of ‘greenwashing’ become more intense and the need to
demonstrate credentials ever more essential.
Investors will play a critical role in ensuring funds are secured for activities in
future if those activities can demonstrate their credentials to the transition to a
carbon fee economy. We have focused on what investors take into account when
deciding to invest their, or their clients’, funds. This will be of increasing importance
as financial flows are directed only towards sustainable activities, making those that
operate only in the short term ‘stranded’ assets.
Notes
1 E Kerencheva. Amazon unveils big Increase in renewable energy sourcing, on path to
100% by 2025, ESG Today, 21 April 2022, www.esgtoday.com/amazon-unveils-big-
increase-in-renewable-energy-sourcing-on-path-to-100-by-2025/ (archived at https://
perma.cc/CN7S-2A95)
2 B Colton, D Kaul and M Younis. (2022). Guidance on climate-related disclosure, The
Harvard Law School Forum on Corporate Governance, 2022. https://corpgov.law.
harvard.edu/2022/01/28/guidance-on-climate-related-disclosure/ (archived at https://
perma.cc/224S-STUS)
3 Government of the Netherlands. Circular economy. www.government.nl/topics/
circular-economy (archived at https://perma.cc/XXV2-WF4N)
4 M Segal. IBM Survey: Supply chain execs willing to trade profitability for sustainability,
ESG Today, 29 April 2022, www.esgtoday.com/ibm-survey-supply-chain-execs-willing-
to-trade-profitability-for-sustainability/ (archived at https://perma.cc/6GZU-HCYV)
5 ClimateWise. The ClimateWise Principles Independent Review 2021: The insurance
industry pulling together, 2022. www.cisl.cam.ac.uk/files/cisl_climatewise_
principles_2022.pdf (archived at https://perma.cc/M4JS-TRQM)
6 Barclays. Introducing BlueTrack™, nd. https://home.barclays/content/dam/home-
barclays/documents/citizenship/ESG/Introducing%20Bluetrack.pdf (archived at https://
perma.cc/RWE3-YY7P)
7 Barclays PLC. About BlueTrack™ – an update on our methodology for reducing our
financed emissions, 2022. https://home.barclays/content/dam/home-barclays/documents/
citizenship/ESG/2022/Barclays_Blue%20Track-White-Paper-2022.pdf (archived at
https://perma.cc/5EPF-R8CD)
8 M Segal. Fitch extending climate vulnerability scores for all corporate sectors, ESG
Today, 25 April 2022. www.esgtoday.com/fitch-extending-climate-vulnerability-scores-
for-all-corporate-sectors/ (archived at https://perma.cc/8S58-BRZ5)
9 LGIM. LGIM ESG score, nd. https://esgscores.lgim.com/srp/documents-id/dc2ca5ef-
933d-4748-b221-7085515bfa04/Methodologyforratingcompanies.pdf (archived at
https://perma.cc/94LZ-RDJD)
10 J Baxter-Derrington. HSBC set to be accused of greenwashing by Advertising Standards
Authority – reports, Investment Week, 29 April 2022, www.investmentweek.co.uk/
news/4048952/hsbc-set-accused-greenwashing-advertising-standards-authority-reports
(archived at https://perma.cc/29EV-TFSK)
11 HSBC. HSBC Holdings plc Annual and Accounts 2021, Environmental, social and
governance review, 2022, p 48
12 L Kolodny. Why Tesla was kicked out of the S&P 500’s ESG index, CNBC, 18 May
2022, www.cnbc.com/2022/05/18/why-tesla-was-kicked-out-of-the-sp-500s-esg-index.
html (archived at https://perma.cc/YQL5-TU36)
13 PwC. nd. https://www.pwc.co.uk/ (archived at https://perma.cc/8MLB-MZWH)
14 PwC. Embracing climate technology with our suppliers, nd. https://www.pwc.co.uk/
who-we-are/our-purpose/case-studies/climate-tech-supplier-forum.html (archived at
https://perma.cc/X9VR-USSF)
365
12
Financial reporting and

climate disclosures
This chapter will cover the growing importance of improving financial reporting and
disclosures for climate change risks in line with best practices based on the Task
Force on Climate-related Financial Disclosures (TCFD) recommendations, which
were established by the Financial Stability Board (FSB) in 2015.
●● Explain the purpose of climate disclosures in providing information requirements

by stakeholders, including investors and regulators.
●● Understand the TCFD’s four pillars and eleven overarching recommendations
across the four pillars.
●● Recognize the main financial impact types across different industry sectors.
●● Appreciate some of the main benefits, challenges and ongoing industry trends in
TCFD reporting.
●● Explain the importance of developing disclosures in line with the implementation of
an organization’s climate strategy including enterprise risk management integration.
●● Appreciate the increasing need for climate risks to be integrated into financial
reporting standards and included in financial statements.
●● Through case studies, explain some of the different disclosure approaches being
used to provide decision useful information
Introduction
As outlined in Chapter 1, there has been a significant shift in recent years by govern-
ments and organizations to tackle climate change and manage risks as both threats
and opportunities. This is due to many external drivers, expectations and pressures.
One of the main drivers has been the increase in new international and national
legislation and regulations, which includes TCFD reporting.
The Financial Stability Board created the TCFD to improve and increase report-
ing of climate-related disclosure. According to the TCFD 2021 Status Report, the
number of organizations supporting TCFD had grown five-fold in the previous three
years at an average annual growth rate of 73 per cent. As of 2021, over 2,600
organizations supported the TCFD framework, with a combined market capitaliza-
tion of $25 trillion.1
In this book, each of the four main pillars of TCFD, namely governance, strategy,
risk management, and metrics and targets, has been covered in detail in specific
chapters (e.g. governance in Chapter 3).
To some extent disclosure is a way for organizations to report their progress to
stakeholders on the implementation of their climate strategy and the road map for
providing specific evidence, including how they are performing against their climate
targets.
While momentum is increasing, most companies around the world are only just
beginning the process of implementation. There are increasingly rising expectations
from the spectrum of stakeholders for disclosures to be as insightful as possible
while meeting both current and future requirements.
Organizations need to be aware of future legislative changes within their jurisdic-
tions. For example, in the UK the Government intends to roll out mandatory
TCFD-aligned climate disclosures across the economy by 2025.
Clearly it is also important to ensure that financial statements reflect the most
up-to-date assessment of climate-related risks. The statements are intended to
provide information about the financial position and performance of the organiza-
tion and should provide comprehensive and consistent messaging to a range of
stakeholders and regulators.
12.1 Climate change’s evolutionary effect on how to account for risk

The following is a statement kindly provided by Rachael Johnson, Global Head of
Risk and Corporate Governance at the Association of Chartered Certified
Accountants (ACCA), which highlights some of the broader considerations of climate
change and the alignment needed within the accounting profession.
As a profession, accountancy professionals are asking themselves ‘to what extent can we
use accounting-based methods to more effectively value climate and the other hard to
measure transition and physical risks?’ This goes for all operational and non-financial
risks, which we know are business risks that might not seem material one minute but
could be as critical as any other the next.
FINANCIAL REPORTING AND CLIMATE DISCLOSURES 367
Given the complexity and speed of risk in today’s world, it is necessary to ensure the
issues raised by climate change are embedded into all the organization’s activities.
Environmental and social risks are intertwined with the rest of the risk landscape, and as
Mark Carney said at COP26 in November 2021, ‘every financial decision needs to take
climate change into account’.
As stakeholders increasingly ask how this is done, there is an ever pressing need to
place ‘a number’ on these risks. Making these intangibles visible, in this respect, has
become the new frontier of accountancy. The profession is well-positioned to lead this
shift in making our primary accounting measure of ‘corporate performance’ about
corporate sustainability rather than short-term profit and verifying how that translates
into stronger long-term performance.
Risk accounting
Given the transformations and faster moving risks of today, it is crucial that accountancy
professionals provide more foresight and assurance across the connected world,
ensuring companies integrate climate change and other existential threats into this
assurance. Capital markets, including large institutional investors and prudential
regulators, are already requiring this as are other types of policy makers, lenders,
insurers, rating agencies, stock exchanges, third parties, customers, and perhaps more
than ever before employees and affected communities.
We see more than ever how accountancy plays an essential role in gathering and
guarding information that leads to better decision-making and more positive outcomes
for stakeholders. It also is clear that those companies focused on the long-term, that
measure their externalities and are able to show that they are truly transparent regarding
their impacts on stakeholders in value and supply chains, so not only to shareholders,
are the ones most capable of attracting investment, loyal custom, and top talent.
The heightened regulation around climate issues, Russia’s invasion of Ukraine and
record rising inflation have led investors to reflect on how they themselves actually use
environmental, social and governance (ESG) as a means of pursuing long-term financial
performance. The key challenge for the finance world is how to allocate capital and apply
it in a way that fits with a fast-changing world.
This entails choosing to invest in companies that need the capital to make progress in
reaching net zero and becoming sustainable. Investors need to ensure they choose the
companies which have structured and achievable targets, not only sustainability
statements or even seemingly attractive ESG scores. The UNPRI now requires that
investors make sure their engagement in helping companies progress is made
transparent so all stakeholders can see how investment plays its part in facilitating more
positive outcomes.
Lost in translation
Building a common language for financial professionals is also essential to ensuring

accountability and effective risk management, and the Task Force on Climate-related
Financial Disclosures (TCFD) has been an instrumental impetus. As countries around the
world roll out their own TCFD roadmaps, the ACCA continues to advocate consistency,
alignment, compatibility, cross-border inter-operability, comparability and
interconnectedness of initiatives and standards at national, EU and global levels. In 2022,
the ACCA welcomed the collaboration between the IFRS Foundation and GRI on
creating a complete and compatible suite of sustainability disclosures.
The same initiatives are being driven in the US where the SEC has made a proposal to
move from voluntary to mandatory climate-related risk disclosures. This seems to
faithfully reflect the TCFD’s widely internationally accepted and adopted
recommendations on governance, strategy and risk management, which we believe
serves as a general guide for organizations across all industries.
As more disclosure requirements are introduced, the ACCA thinks that further
unification is inevitable in order to build trust and transparency into the impact of
climate change on the global economy and ensure that decision and policy makers
recognize that climate risk is indeed financial risk. Climate change is a global issue and
universal standards that allow comparability are crucial to making progress.
The alphabet soup of standards that have existed in the past certainly held many
companies back. However, greater cohesiveness in newly proposed standards for climate
risk reporting, and enhanced transparency around the world, should as well bring more
drive behind getting companies to actually account for the risks better.
Leadership accounting
Boards and C-suite members need to be thinking about purpose, values and vision, in
this sense, asking more questions that they may have never asked before if they are to
steer their companies in the right direction of creating rather than extracting value.
Getting risk into strategy requires more collaboration to understand what information we
might already be sitting on and not doing anything about or what additional data is
required if we are to understand the various future scenarios and help our decision
makers plan effectively for them. An unexpected loss can make a very detrimental dent
into the company’s finances (and wipe out shareholders’ equity), so as these existential
risks intensify and accumulate it is imperative that we properly account for them.
What we have been learning through our engagement with ACCA members around
the world is that a sustainable organization is one that addresses all potential threats and
uncertainties on the horizon by putting risk and risk taking into all decision making.
Companies that are focused on being sustainable and creating long-term value are
considering all risks into their strategy and by doing that have become much more able
to fulfil their purpose and meet stakeholders’ changing needs.
12.2 The purpose of climate disclosures

The main purpose of the disclosures requirements is to help meet the information
needs of investors’ regulators. The regulators expect firms to develop and maintain
an appropriate approach to reporting and disclosure that should be constantly moni-
tored and assessed for improvements.
The TCFD guidance implicitly mentions the need for organizations to provide
more meaningful information to external stakeholders by better evaluating the
potential financial implications associated with transitioning to a lower-carbon
economy and climate-related physical risks.
Mark Carney, the former Governor of the Bank of England, and now the United
Nations Special Envoy for Climate Action and Finance, stated in 2020: ‘Managing
climate-related financial risks requires disclosure to go beyond the static (a compa-
ny’s carbon footprint today) to the strategic (their plans to manage down their
emissions). Risk management means assessing the forward-looking disclosures to
judge the resilience of firms’ strategies to the transition.’2
Disclosures should include both quantitative and qualitative reporting with trans-
parency around the inputs and assumptions used to generate outputs, and TCFD
provides guidance on how the information should be used effectively to help in areas
such as risk pricing and capital allocation decisions.
Additionally, as organizations build their climate risk maturity and develop their
climate change strategies, they will need to concurrently provide broader and more
detailed decision-useful information.
It is, however, important that disclosures are not just ‘boiler plate’ outputs but
provide real and tangible information on the impacts of climate change on both the
current and future financial position of the company. This is required to inform vari-
ous stakeholders on how the company is addressing climate change as well as to
understand the threats and opportunities across the organization’s risk profile.
TCFD goes a long way towards standardizing approaches to climate-related finan-
cial reporting. The more jurisdictions that adopt its recommendations and the more
organizations that produce TCFD reports, the more realistic achieving net zero will
become. However, until appropriate and relevant data becomes more widely availa-
ble and easily accessible, the barriers to widespread TCFD adoption will remain.
The concept of disclosures is that it will help companies to better prepare for
climate change impacts, and help investors understand risks so that they can make
more informed investment decisions. Increased transparency and greater compara-
bility on corporate sustainability performance will help the allocation of financing to
sustainable projects. Investors need company data that is comprehensive, compara-
ble and credible.
Ultimately, companies need to assess the impacts of climate change on the value
of their assets and liabilities for reporting purposes and we cover this in more detail
later in the chapter.
There are several areas that would improve the usefulness of information disclosed
on financial impact to support decision making, including:3
●● Amount of expenditure or capital investment currently deployed towards climate-

related risks and opportunities
●● Amount of expenditure or capital investment to be deployed to meet targets for
addressing climate risks and opportunities, often disclosed in transition plans
●● Interconnected reporting linking qualitative disclosures with their actual and
potential financial impact
Rating agencies have stated, for example, that climate-related information is an

increasingly important input into their financial impact assessments and is a valuable
input into informing the rating process.
The UK regulators, the Financial Conduct Authority (FCA) have stated that:4
Better corporate disclosures will help inform market pricing and support business, risk nd
capital allocation decisions. And improved disclosures to clients and consumers will help
them make more informed financial decisions. This, in turn, will strengthen competition
in the interests of consumers, protecting them from buying unsuitable products and
driving investment towards greener projects and activities.
This has been reinforced by David Fairs (Executive Director of Regulatory Policy,
Analysis and Advice at the Pensions Regulator (TPR) when he stated ‘Ultimately, we
believe the disclosure requirements should be seen not only as an exercise in compli-
ance but as an exercise in risk (and opportunity) management, which should lead to
improved outcomes for scheme members’.5
12.3 The evolution and future direction

of climate-related financial disclosures
In April 2015, the G20 Finance Ministers and Central Bank Governors asked the
Financial Stability Board (FSB) to convene public- and private-sector participants to
review how the financial sector can take account of climate-related issues.
Recognizing the risks that climate change may pose to the financial system, the
Financial Stability Board (FSB) at request of the G20 launched the industry-led Task
Force on Climate-related Financial Disclosures (TCFD) to develop recommenda-
tions on climate-related financial disclosures. The TCFD has developed a framework
to help public companies and other organizations more effectively disclose climate-
related risks and opportunities through their existing reporting processes.6
The focus has been on the word ‘financial’ because the Task Force sought to move
the issues related to climate change out of sustainability departments and into the
boardrooms of every corporation in the world, no matter how big or small. To

achieve this, it was considered necessary for companies to understand what financial
risks and opportunities climate change creates for their business
In respect of disclosures requirements, regulators are continuing to request more
enhanced disclosures, for example the UK’s Financial Conduct Authority proposes in
its consultation on ‘Enhancing climate-related disclosures by asset managers, life
insurers and FCA-regulated pension providers’ that ‘firms should disclose Scope 3
GHG emissions from no later than 30 June 2024. This is 1 year later than the dead-
line for the first disclosures in accordance with the rest of our proposals.’7
12.3.1 Ongoing global standard-setting proposals on TCFD recommendations

Many organizations consider the TCFD as global standard, although the TCFD is
not mandatory and binding. In terms of disclosures in financial reporting or
other relevant reports, organizations have commenced complying with the TCFD
standards.
As an example of increasing regulatory changes and alignment to TCFD, the US
Securities and Exchange Commission (SEC) proposed a draft rule in March 2022
requiring US-listed companies to disclose their climate-related risks and greenhouse
gas emissions. This was announced in response to investors seeking more guidance
on how they should be reporting on their climate impact.8
At the time of writing in 2022, three organizations (the US Securities and Exchange
Commission (SEC), European Sustainability Reporting Standards (ESRS) by the
European Financial Reporting Advisory Group (EFRAG) and the International
Sustainability Standards Board (ISSB) have laid down proposals for climate-related
reporting. All these regulators are incorporating both TCFD and GHG protocols
recommendations, and TCFD’s report on climate disclosure convergence was
published on 9 May 2022.9
The final standards will be released after the consultation periods close and each
body reviews the feedback it has received, which will be a complex and time-consum-
ing process.
Some specific aspects to the proposal in respect to the four pillars are that the
greatest degree of alignment between the three proposals and TCFD is with govern-
ance but there will be differences in terms of the other pillars. For example, the SEC
will require Scope 3 disclosures only if it is financially material or where a company
has set Scope 3 reduction targets. Scope 3 is mandatory for both ESRS and ISSB but
with some technical differences.
To summarize and compare the proposals in terms of perspective by each organi-
zation, ESRS is the most prescriptive, the SEC is the most principles-based and only
the SEC is focused on climate.10
12.3.2 Task Force on Climate-related Financial Disclosures (TCFD) –

recommendations
The main TCFD recommendations were issued in 2017, in which it set out eleven
recommended disclosures around four core areas for companies to report material
climate-related information to the market via the mainstream financial report,11 as
shown in Figure 12.1 and detailed further in Figure 12.2.
The Task Force encourages organizations to undertake both historical and
forward-looking analyses when considering the potential financial impacts of climate
change, with a greater focus on forward-looking analyses as the efforts to mitigate
and adapt to climate change are without historical precedent.
The recommendations provide clear guidance for risk managers and boards.
Under strategy, it includes the need to: ‘Disclose the actual and potential impacts of
climate-related risks and opportunities on the organization’s businesses, strategy,
and financial planning where such information is material.’ Under risk management,
it recommends that organizations need to: ‘Disclose how the organisation identifies,
assesses, and manages climate-related risks.’
TCFD have provided subsequent updates to date that include:
●● Guidance on Risk Management Integration and Disclosure (October 2020)

●● TCFD 2021 Status Report (October 2021)
●● TCFD Guidance on Metrics, Targets, and Transition Plans (October 2021)
It is important to note that many regulators around the world such as the PRA
(Prudential Regulation Authority) in the UK expect organizations to consider engag-
ing with the TCFD framework as well as other initiatives in developing their
approaches to climate-related financial disclosures.
12.4 TCFD – main disclosure requirements

The TCFD assessment framework itself is set out in Figure 12.2, which sets out the
eleven overarching recommendations for disclosures over the four pillars that can be
used to provide information on how the organization is managing material risks and
opportunities that arise from climate change.
Some of the main challenges for organizations are to address the following questions:
●● How do companies understand what constitutes a material business risk?

●● How can organizations categorize the unpredictable, long-term impacts of a changing
climate as specific financial risks?
FIGURE 12.1 Core pillars of TCFD recommendations
TCFD disclosures - recommendations
PILLAR RECOMMENDATION EXAMPLE
Governance Disclose organization’s Describe board’s oversight, management’s

governance around climate- role, etc
related risks and opportunities
Strategy Disclose actual/potential Describe the identified short-, medium- and
impacts of climate-related risks long-term risks and opportunities, their
and opportunities impact, resilience of organization’s strategy
considering various scenarios, etc
Risk management Disclose how the organization Describe the identified risks and
identifies, assesses and opportunities and the process to manage,
manages climate-related risks describe the process of how the actions are
integrated in risk management, etc
Metrics and targets Disclose the metrics and targets Describe the metrics used to assess risks
used to assess and manage the and opportunities in line with the strategy
climate-related risks and and risk management process, Scope 1,2 &
opportunities where relevant 3 of GHG, targets used to assess
performance, etc
SOURCE TCFD
12.4.1 Disclosure guidance – TCFD

The TCFD 2017 report provides a helpful guide that maps the recommendations
and supporting recommended disclosures (see Figure 12.2).12 This applies for the
financial sector and non-financial groups.
The Task Force developed supplemental guidance for the financial sector, which it
organized into four major industries largely based on activities performed. The main
rationale for the Task Force was to foster an early assessment of climate-related risks
and opportunities, improve pricing of climate-related risks, and lead to more
informed capital allocation decisions. However, the Task Force also developed
supplemental guidance for non-financial industries, which account for the largest
proportion of GHG emissions, energy usage and water usage, and can be used for
other industries with similar business activities.
12.4.1.1 GUIDANCE ON FINANCIAL IMPACT BY SECTOR

To assist organizations in understanding which financial impacts are likely to be
most relevant to them, Figure 12.3 provides a high-level overview of four areas –
revenues, expenditures, assets and liabilities, and capital and financing – where
organizations in the financial sector and non-financial groups may be affected.
374
FIGURE 12.2 TCFD eleven overarching recommendations for disclosures
Recommendations and supporting recommended disclosures
Governance Strategy Risk management Metrics and targets
Disclose the actual and

potential impacts of climate Disclose the metrics and
related risks and targets used to assess and
Disclose the Disclose how the
opportunities on the manage relevant climate
organization’s governance organization identifies,
organization's business related risks and
around climate-related risks assesses and manages
strategy and financial opportunities where such
and opportunities climate–related risks
planning where such information is material
information is material
Recommended disclosures Recommended disclosures Recommended disclosures Recommended disclosures
a) Describe the board’s a) Describe the climate-related a) Describe the organization's a) Disclose the metrics used by the
oversight of climate-related risks and opportunities the processes for identifying and organization to assess climate-
risks and opportunities organization has identified over assessing climate-related risks related risks and opportunities in
the short, medium and long term line with its strategy and risk
management process
b) Describe the management’s b) Describe the impact of climate- b) Describe the organization’s b) Disclose scope 1, scope 2 and if
role in assessing and managing related risks and opportunities on processes for managing appropriate, scope 3 greenhouse
climate-related risks the organization’s businesses, climate-related risks gas (GHG) emissions, and the
and opportunities strategy, and financial planning related risks
c) Describe the resilience of the c) Describe how processes for c) Describe the targets used by the
organization’s strategy, identifying, assessing and organization to manage climate-
taking into consideration managing climate-related related risks and opportunities and
different climate-related risks are integrated into performance against targets
scenarios, including a 2C or the organization’s
lower scenario overall risk management
SOURCE TCFD
FIGURE 12.3 Potential financial impacts for different sectors
Sector (all industries in this sector) Potential financial impacts (certain)
Financial ●● Revenues
●● Assets & liabilities
Energy ●● Expenditure
●● Capital & financing
Transportation ●● Expenditure
Materials & building ●● Expenditure
Agriculture, food and forest ●● Expenditure
SOURCE TCFD Implementing the recommendations of the Task-Force on Climate-related Financial Disclosure
(2017)
The TCFD report states that the impact of climate-related issues will depend on:
●● The organization’s exposure to, and anticipated effects of, specific climate-related
risks and opportunities
●● The organization’s planned responses to manage (i.e. mitigate, transfer, accept or
control) its risks or seize opportunities
●● The implications of the organization’s planned responses on its income statement,
cash flow statement, and balance sheet
It is important for organizations to make sure that they are fully aware of the disclo-
sures they need to make in the context of what information stakeholders such as
investors expect.
12.4.2 Disclosure principles

To underpin its recommendations and help guide current and future developments
in climate-related financial reporting, the Task Force developed seven principles for
effective disclosure. These are described more fully in Appendix 3 of their report:
●● Represent relevant information

●● Be specific and complete
●● Be clear, balanced and understandable
●● Be consistent over time
●● Be comparable among companies within a sector, industry or portfolio
●● Be reliable, verifiable and objective

●● Be provided on a timely basis
While considering the TCFD’s seven principles, organizations must also carefully
consider:
●● How their disclosures are viewed, understood and ultimately used by stakehold-
ers such as shareholders.
●● How to make disclosures user-friendly for different stakeholders.
The Task Force encourages organizations to consider these principles as they develop
climate-related financial disclosures. The Task Force’s disclosure principles are largely
consistent with internationally accepted frameworks for financial reporting and are
generally applicable to most providers of financial disclosures. The principles are
designed to assist organizations in making clear the linkages between climate-related
issues and their governance, strategy, risk management, and metrics and targets.
12.4.3 Progress and use of TCFD recommendations

There has been significant progress in the development of climate change-related
disclosures. The TCFD 2021 Status Report highlights, for example, that 83 of the
world’s largest 100 companies now support, or report in line with, the TCFD’s
recommendations.
However, TCFD itself recognizes some shortcomings and the report acknowl-
edged that ‘companies continue to struggle to quantify the impacts of climate change,
and to source the data they need to fully assess the threats of a changing climate’.
Pursuant to the requirement of larger quantities of data by the organizations, on
a positive note, the cost of reporting is expected to fall as data, analysis and knowl-
edge improves.
Mary Schapiro, Head of the TCFD Secretariat and Vice Chair for Global Public
Policy at Bloomberg L.P., commented:
There is clear and growing consensus among investors and regulators on the importance
of climate-related disclosure and the need for standardized, transparent data to support
capital allocation decisions. As countries and companies around the world set net zero
targets, the TCFD framework is increasingly becoming the foundation for standards and
requirements needed to chart the transition to the low-carbon economy.
12.4.4 Shift from voluntary to mandatory financial disclosures

The TCFD recommendations have served as a road map for organizations that have
already voluntarily adopted them, and we are increasingly seeing countries around
the world introduce mandatory versions of their own.
FIGURE 12.4 TCFD disclosure by region, 2020
Regions considered for 2020 reporting – Asia Pacific, Europe, Middle East and Africa, North
America, Latin America
Recommendation Recommended disclosure Average disclosure by regions
Governance Board oversight 23.4%

Management’s role 17.2%
Risks and opportunities 49.8%
Strategy Impact on organization 36.2%
Resilience of strategy 12.4%
Risk ID & assessment process 30.2%
Risk management Risk management processes 28%
Integration into overall risk management 24.6%
Climate-related metrics 45%
Metrics and targets Scope 1, 2, 3 GHG emissions 35.6%
Climate-related targets 31.2%
SOURCE TCFD Status Report, 202113
New Zealand was the first country to announce mandatory TCFD-aligned climate-
related financial disclosures in 2020 and many countries, including the United
Kingdom, Japan and Switzerland are targeting to have mandates in place before
2025. In 2021, finance ministers and central bank governors from G7 countries
agreed to back mandatory disclosures under the TCFD framework for large organi-
zations. Singapore, Brazil and the European Union also announced reporting
requirements for certain carbon-intensive sectors.
Since COP26 in Glasgow in November 2021, more countries have announced
legislation to enforce mandatory reporting on climate-related risks aligned with the
TCFD recommendations, including the United States and Canada.
The United Kingdom will become the first G20 country to make it mandatory and
has enacted new legislation whose rules came into force in early 2022. This follows
the UK’s landmark Net Zero Strategy.
The UK regulator’s recent milestone move to mandatory TCFD reporting require-
ments along with some of the main regulatory timelines are set out in Figure 12.5.
These new requirements are provided by the UK Government in its report ‘A road-
map towards mandatory climate-related disclosures’.
The implication of governments rolling out regulations for mandatory disclosures
is that organizations will need to improve their approaches and methodologies to
provide more detailed and transparent reports in the future.
378
FIGURE 12.5 UK regulatory timelines and implementation of mandatory TCFD requirements
TCFD TCFD
UK will become first G20 country All companies - fully mandatory

to make it mandatory for Britain’s disclosures for listed commercial
SS3/19
largest businesses to disclose companies, UK-registered large
their climate-related risks and private companies, banks and
Must have embedded
opportunities. New legislation building societies, insurance
climate change into risk and
will require 1,300 of the largest companies, asset managers and
governance frameworks,
UK registered companies to FCA-regulated and occupational
upgraded scenarios and
disclose climate-related financial pension schemes
added to disclosures
information, with rules set to
come into force from April 2022
Oct 21 Dec 21 April 22 May 22 2025
PRA Report CBES
October - climate-related Output of PRA/BoE

financial risk CBES scenario exercise
management and the role published
of capital requirements
Climate change
Adaptation report 2021

12.4.5 Time periods and horizons

TCFD states that metrics need to be developed covering three distinct time periods:
historical, current and forward-looking. Figure 12.6 outlines the approach that
organizations should adopt.
One of the most important aspects in designing climate change metrics that we
have outlined throughout various chapters in this book is that organizations need to
consider future time horizons that cover the short, medium and long-term, as the
TCFD guidance recommends.
Moreover, TCFD also states that methodologies such as scenario analysis, trend
analysis, sensitivity analysis and simulations should be developed. These techniques
are discussed throughout the book, in particular in Chapter 10 where we cover the
design of stress and scenario testing.
12.5 TCFD summary of recommendations and benefits for organizations

The latest TCFD status report indicates that disclosures of climate-related financial
information have increased since 2017 but remain insufficient for investors’ needs.
Thus, this section provides more insights into each pillar of the main requirements,
benefits, and specific challenges and trends observed in implementing disclosures.
TCFD expectations state that ‘Through widespread adoption, financial risks and
opportunities related to climate change will become a natural part of companies’
risk management and strategic planning processes.’14
It is important to emphasize that that TCFD is not about reporting in the tradi-
tional sense. It involves the ongoing implementation of the climate strategy and plans
that have been discussed throughout the book. Organizations can use the opportu-
nity to provide evidence of how their climate change plans are being integrated into
business processes and how the material risks are being assessed and managed to
make improved business decisions.
FIGURE 12.6 TCFD guidance on reporting time periods and horizons
Informed by: Forward-looking

Historical Current Climate goal and Climate-related metrics
Climate-related Climate-related
metrics metrics high-level climate
strategy Targets
Scenario #1, 2, 3
Projections
Transition plan
SOURCE TCFD
It is important that organizations consider how climate-related financial risks are inte-
grated into governance and risk management processes, including the process by which
a firm has assessed whether these risks are considered material or principal risks.
Regulators expect firms to develop and maintain an appropriate approach to disclo-
sure, reflective of the distinctive elements of the financial risks from climate change.
High-quality disclosures should be viewed as a way to gain competitive advantage. It
highlights from a risk perspective the ambition and risk maturity of the organization
as well as highlighting a good risk culture.
The next section provides more specific recommendations and benefits across
each of the four main pillars. Many of the general points are taken from the TCFD
report.
12.5.1 TCFD Pillar 1 – Governance

Governance refers to ‘the system by which an organization is directed and controlled
in the interests of shareholders and other stakeholders.’15 Best practice climate
governance was detailed in Chapter 3.
12.5.1.1 SPECIFIC RECOMMENDATIONS
●● Describe the person(s) or committee responsible for climate policies, strategy and
information relating to climate.
●● Provide information on climate policies and how these are applied in the organi-
zation, detailing decisions made through these policies and how the policies are
delegated to management.
●● Include the processes for informing the board on climate-related issues, and the
frequency.
●● Describe systems for accountability and incentives.
1 2.5.1.2 BENEFITS
●● Helps investors and other stakeholders to understand i) the role of organization’s

board, ii) management’s role in assessing and managing the issues. This further
helps in evaluating whether the board and management are addressed appropri-
ately and have due attention over the relevant issues.
●● Provides transparency of an organization’s governance structure that can prevent
repercussions that weak corporate governance can have on asset values. (e.g.
2007–08 financial crisis).
●● The governance principles increase the directors’ climate awareness, thereby
improving navigation of the risks and opportunities that climate change poses to
the business.
●● Improved governance supports the ability to meet the increasing expectations and
requirements from investors, regulators, customers and employees to provide
greater detail and transparency in reporting.
12.5.2 TCFD Pillar 2 – Strategy
●● Scenario analysis: an assessment of the resilience of the organization’s business

model and strategy in a range of different warming scenarios.
●● A description of the actual and potential impacts of key climate-related risks and
opportunities on a company’s strategy and business model.
12.5.2.2 BENEFITS
●● Formalizing climate change strategies, commitments or guidelines can help articu-

late and clarify expectations and outline how they will be achieved.
●● It makes very clear to the investors that businesses are considering climate-related
impacts on a strategic level.
●● Provides a more efficient way of structuring mitigation and adaptation measures,
which can provide a competitive advantage over companies moving forward with
less focus.
●● Opens a pathway and promotes green bonds, innovations and ideas to reduce the
carbon footprint and save on operational costs.
●● There are different approaches by different companies to implement climate
change strategy depending on the organization’s strategy and the organization’s
processes and structure.16 This helps the company to learn and recognize the suit-
able strategy for their own organization.
●● Disclosure of revenues from products and services designed for a low-carbon
economy can help investors to better understand the climate-related changes in
the underlying business strategy.
12.5.3 TCFD Pillar 3 – Risk management
●● A description of the key climate-related risks and opportunities arising from the
organization’s operations.
●● A description of how the process/measurement of climate-related risks and oppor-
tunities are integrated into an organization’s overall risk management process.
12.5.3.2 BENEFITS
●● Determines the relative significance and prioritization of climate-related risks in

relation to other risks.
●● Helps to understand the risk mitigation strategies being developed by the organi-
zation to improve resilience to physical risks of climate change.
●● Markets will be better equipped to evaluate, price and manage climate-related
risks.
12.5.4 TCFD Pillar 4 – Metrics and targets

12.5.4.1 MAIN RECOMMENDATIONS
●● Details of performance against the targets to date, including a list of the KPIs used
to assess progress.
●● A list of the organization’s targets relating to climate impact reduction, climate
risks management and maximizing climate opportunities.
●● Metrics and targets should aim to be comparable over time to enable users of
disclosures to understand the firm’s general direction of travel.
1 2.5.4.2 MAIN BENEFITS
●● Targets can be used to underpin a firm’s strategy for shifting the business to help
deliver a net zero and climate-resilient global economy.
12.5.5 Disclosure challenges

There are a number of key challenges and we will highlight some of the current
broad challenges below, which mainly relate to the quality and reliability of data.
12.5.5.1 GENERAL CHALLENGES
●● Obtaining reliable and credible data is a key challenge, particularly for small and
medium-size businesses that do not have the access to or the resources to collect
and analyse data.
●● Organizations need to balance the cost and benefits of obtaining data and set
appropriate risk management targets including multiple time horizons.
●● There is currently an overreliance on external service providers, which is linked to the
challenge of older in-house systems being unable to capture and report disclosures.
●● There is often difficulty in determining what constitutes materiality and therefore

what needs to be disclosed in terms of risks.
●● Disclosing Scope 3 emissions is not mandatory. Therefore, it can get difficult for
the investors and other businesses to evaluate an organization’s relation with
other carbon emitting aspects and the organization’s overall carbon footprint.
●● Disclosure of targets can lead to the setting of aggressive or unrealistic targets to
artificially maintain the organization’s reputational standards and therefore
makes it difficult to monitor the progress and achieve the desired target. This can
lead to the accusation of ‘greenwashing’ as discussed in Chapter 9.
●● There are also ongoing misunderstandings of terminology, metrics and targets, for
example in interpreting the difference between the concepts of net zero, science-
based targets and carbon neutrality.17
Some specific challenges across the four pillars are outlined in Table 12.1.
TABLE 12.1 Specific challenges across the TCFD pillars
Governance Strategy
●● The disclosure requirements are not ●● In terms of strategy there is limited knowledge of
uniform. TCFD expects the disclosures how much capital expenditure (capex) organizations
should be included in annual financial will need to meet their net zero commitments.
filings, but some organizations provide ●● There are currently limited disclosures explaining
the disclosure in reports other than how business strategies and capital allocation plans
financial filings. This is because issuing have to be adapted and changed to align with the
public financial reports is not net zero transition.19
mandatory.18
Risk management Metrics and targets
●● Challenges from what constitutes a ●● It is much easier to find data on Scope 1 and 2
material risk and therefore what needs emissions than it is to find data on Scope 3. This is
to be reported.20 mainly because Scope 3 data is related to factors
outside of an organization’s direct control.
●● A balance has to be struck between providing clear
and comprehensive disclosures while climate
metrics and methodologies are still being developed.
●● Metrics should be reliable, verifiable and objective
while also supporting effective internal controls for
the purposes of data verification and assurance, i.e.
for compliance and auditing purposes.
12.6 Current main disclosure observations and trends

On reviewing the current status of disclosures there are a number of common themes
in respect of observations and trends, which are discussed below.
12.6.1 General trends and observations

Disclosure reporting is increasingly being used as a basis for benchmarking how an
organization compares to its peers.
Many regulators are requesting more concise reporting. For example, the US SEC
has advised that if a risk disclosure exceeds 15 pages, companies must include a
summary of ‘concise, bulleted, or numbered statements’ of their risks to enhance
readability and usefulness. The summary should not be longer than two pages.21
The specific trends across the four pillars are outlined in Table 12.2.
TABLE 12.2 Specific trends and observations across the TCFD pillars
Governance Strategy
●● There is a growing trend in obtaining ●● Many organizations are developing and
external validation to the approach in respect reporting more sophisticated approaches to
of disclosures. climate scenario analysis. These approaches
●● Organizations are increasingly reporting the are, for example, helping to stress test the
details of their climate governance in their future resilience across future revenues and
disclosures. This includes internal committees costs to provide better insights to support
and structures, roles and responsibilities, improved strategic decision-making.
frequency of meeting and the activities ●● Disclosing the impact on financial planning on
discussed on climate-related matters. areas including operating costs, capital
●● An increasing number of companies have allocation and access to capital, including
been putting the company’s climate where carbon reduction targets have been set.
transition plan to a shareholder vote.
●● Many companies have established a
standalone ESG committee.
Risk management Metrics and targets
●● Disclosing the impact of Scope 3 carbon ●● Targets can more easily emerge once key risk
emissions is increasingly helping to support indicators and metrics are in place. Thus, in
changes in business practices such as future the issue of disclosure of targets will
procurement, selection of third-party have to be revisited as norms evolve.22
suppliers, responsible investing and ●● The current ability of organizations and
engagement with customers. industries to specify metrics applicable to
●● Data availability is improving through open various categories varies, and they continue to
data sources and an increase in demand, evolve.23
which in turn will lead to more data being ●● Disclosures relating to Scope 3 emissions are
produced and collected to support risk improving mainly due to improvements in data
identification and assessment processes. capture and enhanced methodologies.
12.6.2 Industry examples

This section provides some specific high-level examples, to illustrate how leading
organizations such as Tesco and Aviva are reporting their disclosures across the four
pillars in their most recent annual reports. Tesco has published its Annual Report
and Financial Statements 2022, which includes its climate-related reporting, while
Aviva has specifically published a report related to TCFD, Climate-related Financial
Disclosure 2021.24,25
TESCO – ANNUAL REPORT AND FINANCIAL STATEMENTS 2022
Tesco’s Annual Report and Financial Statements 2022 contains a specific section on TCFD.
Some significant observations from the report are outlined below.
Governance
Tesco has established a group climate committee, which meets quarterly. Tesco states
that the committee is responsible for maintaining oversight of progress made against its
interim decarbonization milestones, and for holding the new steering groups to account
for delivery of the operational and supply chain decarbonization road maps.
The committee is also responsible for oversight of climate risk management,
including assessing and managing climate-related risks and opportunities on the group
risk register, where climate is a principal risk, and for its climate-related disclosures.
Strategy
Tesco’s operational science-based target was set in 2017. It has realized opportunities
through driving greater efficiency in key processes across operations, including
improving the efficiency of its refrigeration units and reducing refrigerant emissions
across the store and distribution centre network through switching from fluorinated gas
to CO2 systems.
Tesco has also been reducing emissions from logistics through a range of fuel
efficiency maximization initiatives, such as improved route planning in which it states
that it is also committed to the electrification of transport. As signatories to the Clean
Van Commitment and EV100, Tesco has committed to a fully electric home delivery fleet
by 2028.
Tesco met its 2030 ambition to switch to 100 per cent renewable electricity across its
operations 10 years early, through a combination of direct sourcing and renewable
certificates.
Risk management
Tesco established climate change as a stand-alone principal risk in 2020/21. Reviews

have been conducted at various levels including the executive committee and the board.
This includes the identification and documentation of climate-related risks and the
review and consideration of appropriate risk responses.
The report states that the board is conscious of the complexity and scale of its value
chain, in conjunction with the expectation for progressive regulatory requirements
governing climate reporting, and the executive committee concluded that the risk may
accelerate.
Metrics and targets
Tesco has set various targets. Tesco’s net zero strategy is underpinned by three key
commitments. It has committed to reduce Scope 1 and 2 market-based emissions by 60
per cent by 2025, to be carbon neutral across its own operations by 2035 and to achieve
net zero across its value chain by 2050.
AVIVA – CLIMATE-RELATED FINANCIAL DISCLOSURE 2021
Aviva has published its report on Climate-related Financial Disclosure 2021 and some of
the significant observations on each pillar are outlined below.
Governance
Aviva has incorporated its climate governance and described its roles and responsibilities
in its disclosure report. Some of them include roles in enterprise risk management,
external reporting, asset liability management, etc. It has also developed a guide on
‘tackling climate change together’ that reveals its business practices that could be
greener.
Strategy
As explained in Aviva’s disclosure report, its strategic focus has been on ensuring a net
zero future, decarbonizing its operational and supply chain, embedding climate change
across its culture, etc. The report implies that the disclosure helps in recognizing and
responding to transition, physical and litigation risk factors and related opportunities.
Time horizon
Aviva has also outlined the time horizon aspect in its report and describes its threshold
for each time horizon. They are as follows:
Short time horizon (1–3 years) – general insurance business considers risk in the
underwriting and pricing process and in setting the reinsurance strategy.
Medium time horizon (3–5 years) – large catastrophic losses have been explicitly
considered in its economic capital modelling to ensure resilience.
Long time horizon (>5 years) – Aviva is considering factors such as life and pension and
also in areas such as setting premium rates.
Exclusion policy
By the end of 2022, Aviva claims it will have divested from 202 companies making more
than 5 per cent of their revenue from thermal coal, and 7 companies making more than
10 per cent of their revenue from unconventional fossil fuel extraction, unless they sign
SBTs (Science Based Targets) or funding is for green project finance.
Risk management
Aviva has revealed its risk appetite to be low for climate-related risks that could have
material negative impact on its balance sheet, business models and its customers.
Metrics and targets
Aviva in its TCFD-based disclosure has incorporated several factors such as:
●● Weighted average carbon intensity (7 per cent reduction compared to previous year).
●● Investment in green assets (refined its definition of green assets and has set a target
to invest an additional £6 billion in green assets by 2025 compared to 31 December
2019 timeline).
●● Uses portfolio warming methodology (uses MSCI analysis) to capture Scope 1, 2 and 3
emissions and a cooling potential element to capture avoided emission together with
the company-reported decarbonization target.26
●● Weather-related losses – Aviva uses CAT model results supplemented by in-house
disaster scenarios and has listed its actual weather-related losses vs expected losses.27
●● Litigation risks – litigation trends have been classified by Aviva, for example litigation
that targets asset owners such as insurance businesses or asset managers in relation
to the climate impact of their investments.
12.7 Reporting disclosure information and

alignment to TCFD recommendations
Most organizations seek to draft updated disclosures on an annual basis for their
annual reports in line with TCFD and other guidance such as CFRF (Climate
Financial Risk Forum), as we have outlined.
It is important to emphasize that for many companies it is a mechanism to summa-
rize the progress made in the preceding calendar year and provide a high-level update
of progress and developments. The example outlined below is an actual case study
from an agricultural insurance mutual in the UK.
Cornish Mutual has kindly provided other contributions to this book in Chapters 2
and 3 covering aspects of its risk strategy and governance structure. The annual
TFCD report that is published in its annual report highlights the current and ongo-
ing activities aligned to the progress and implementation of its climate change plans.
It is a reflection of the activities undertaken over the previous year and analogous
to a ‘school report’, highlighting the performance and progress made throughout the
year with respect to climate enterprise risk management. One of the most important
aspects that is helpful to organizations is the opportunity to provide evidence of
ongoing activities and deliverables to improve their climate risk maturity, which was
discussed in Chapter 1.
CASE STUDY
Cornish Mutual sample output aligned to TCFD
Climate Change
Internally, and consistent with the regulator’s wishes, a significant amount of focus has been
on understanding the financial risks of climate change and implementing the
recommendations set out by the Task Force on Climate-related Financial Disclosures (TCFD).
The TCFD have published their recommendations, which are categorized as Governance,
Strategy, Risk Management and Metrics and Targets. For each of these sections we provide an
update below.
Governance
The RAC [Risk and Audit Committee] and the wider Board recognizes the tests that Climate
Change, as a new but fast-moving risk, will bring to the Company, and we have greatly
increased our consideration of the financial risk and opportunities that arise from Climate
Change during the year. To enable effective decision making in this area we have undergone a
programme of training; engaging with external specialists, attending industrywide talks and
reviewing literature specifically aimed at the agricultural industry.
To accompany this, Climate Change has featured as an agenda item at each Board meeting
alongside regular updates from our Climate Change Strategy Group on internal developments
to promote discussion. The Climate Change Strategy Group has been formed with a wide
representation from across the business and is led by our Insurance Director (who also acts as
our Chief Risk Officer). He has been allocated responsibility for identifying the financial risks
from Climate Change as a Senior Management Function holder, in line with the PRA’s
expectations. Two further Committees (the Corporate Social Responsibility Committee and
Future of Farming Group) feed into the Climate Change Strategy Group, looking at issues from
an internal and external point of view at an operational level.
In addition to Board engagement the Climate Change Strategy Group have provided
training to all employees. This has embedded knowledge throughout the business and
encourages our front-line people to identify risks and opportunity at source and as they
emerge, allowing for a quick operational response.
Strategy
Climate Change has the potential to cause inherent risk, not only to Cornish Mutual but to the
Membership as a whole, however alongside the challenges which will be posed there will also
be opportunities, which if engaged with correctly, can further enforce and support our
strategic objectives.
Our core customer base, the agricultural sector, has the chance to respond to Climate
Change by embracing changes which will contribute to reducing increasing temperatures. At
Cornish Mutual, we want to support farm businesses as they work to deal with both the
physical aspects of Climate Change, such as more frequent storms, and transition risks which
will help to promote a lower-carbon economy, as well as work to reduce our own impact. To do
this, we are engaging with both external providers and the Membership to understand the
insurance products and broader risk solution services which are available for the Membership.
Cornish Mutual has engaged with industry consultants and together developed a model
which identifies key Climate Change drivers which have the potential to prevent a level of
financial risk to the business. These drivers can then be monitored for development over a
short and long-term basis and be used to determine prioritization of each risk category. This
enables the Company to develop business strategy and financial planning accordingly. To
ensure the drivers are relevant both to the Company and the Membership a farm risk survey
has taken place to establish levels of priority, areas of concern and current levels of
management in place.
On a practical note, we have established an internal loss adjusting provision, which would
help us maintain our high service standards in the event of a surge-related event. This
improved skillset also contributes to fulfilling one of our core strategic objectives of
Empowered people.
As part of our review of the financial risks arising from Climate Change, we have to
undertake a review of investment portfolios to ensure that we do not hold carbon heavy
assets. We have engaged with our investment manager to understand the risk presented
within our current holdings and to understand the way climate change considerations are
evaluated in line with regulatory expectations.
Risk Management
In line with emerging best practice, the risk from Climate Change is considered as cross
cutting and is integrated into our risk framework in this way. As a specialist niche insurer, we
will continue to take a proportionate response that fully recognizes that our core farming
Membership will be significantly impacted. Risks within Cornish Mutual are grouped into
various categories, which are then reviewed against key considerations to understand which
areas present the most risk to the business in terms of the financial impact from climate
change. Considerations have been grouped into those which are internally controlled versus
those where there is more external influence.
All risk categories within the business have been reviewed by the Management Risk
Committee to establish whether they have the propensity to be impacted by Climate Change.
19 specific risk areas were identified within the categories and so an exercise took place with
the risk owners to consider the potential short (5-year horizon) and long term (30-year
horizon) affects. These will now be monitored within the current framework, engaging with
external specialists as and when required enabling us to make decisions on the level of
risk which the business is able to absorb and control.
Metrics and Targets

As our response to Climate Change unfolds, we are looking at our own carbon footprint, with
plans being developed to both reduce and offset this.
Managing the Financial Risks Arising from Climate Change
In the previous financial year, we raised the increased prominence of Environmental, Social
and Governance (ESG) considerations as part of the management of our investments with
a particular focus on Climate Change. This year built strongly on this theme with a
comprehensive review of our investment holdings and the overall philosophy, tools and
processes used by our investment manager to manage these risks. We considered each of the
Funds we hold and the extent to which ESG considerations are integrated in the asset
selection. As a result, we concluded that our current approach meets, and in some areas
exceeds, the minimum regulatory expectations. In particular, we were pleased to find the
increased prominence of ESG-screened equity indices being used to achieve equity exposure
and a broad range of ESG factors being used to inform the selection of fixed income holdings.
We had some reservations about less liquid infrastructure holdings (linked to the aviation
sector) within the IBOF fund and undertook to monitor these. Ultimately these holdings were
divested so alleviating this concern. We will continue to engage with our investment manager
in this arena.
Additionally, we have commenced an exercise to identify what values we may wish to
embed over and above the regulatory minimum. This is where our portfolios have historically
been constructed solely according to investment criteria (such as risk, return and liquidity)
without explicit non-financial objectives. We found broad consensus that as an insurance
company our foremost obligation to Members is to deliver attractive investment outcomes.

This validates our existing approach for the bulk of our investment assets. There is though
appetite to allocate a portion of our Funds to securing positive environmental and social
benefits for our members over and above the traditional investment criteria. We will further
explore options in this area with a desire to limit activity to the regions we operate in and
to achieve clearly quantifiable outcomes that our colleagues and Members can relate to.28
12.8 Use of sensitivity analysis for transition scenarios in reporting

Some organizations consider that the impact of climate risk and potential future
developments on the entity, including the sustainability of its current business model,
is too uncertain to allow for meaningful representation, through measurement and
quantified disclosures, in the financial statements. Generally, where there is a high
level of uncertainty, entities should consider disclosing their sensitivity analyses.
These can be particularly helpful in conveying relevant information in such cases, as
illustrated by the example discussed below.
One of the chief risk officers that we interviewed for this book was Robb Eadie of
BHP (referred to in Chapter 3). This group provides a good example of the potential
impacts of climate change and the transition to a low-carbon economy in its 2021
annual financial statements.
BHP developed two future carbon transition scenarios based on climate path-
ways, representing management’s assumptions regarding the impact of the transition:
●● Scenario 1: Central view – most likely view for global economy

●● Scenario 2: Lower-carbon view – based on accelerated decarbonization trends.
he most important aspect of the scenarios is that they are used for financial plan-
T
ning and inputs for aspects within the financial statements, for example the valuation
of assets and potential impairment charges.
CASE STUDY
BHP Group Limited – 2021 Annual Report (Illustration)
Transition risks
Global transition signposts and commodity impacts
In addition to the Group’s targets and goals significant judgments and key estimates are also
impacted by the Group’s current assessment of the range of economic and climate related
conditions that could exist in transitioning to a low carbon economy, considering the current
trajectory of society and the global economy as a whole. Despite recent progress, all 1.5°C
pathways to 2050 represent a major departure from today’s global trajectory and the Group
does not believe the technological, regulatory or economic foundations for a rapid transition
to net zero emissions are currently in place. Acknowledging these signposts, the Group’s
current best estimate of the potential impacts of climate change and the transition to a low
carbon economy are reflected in the following two scenarios, which consider existing policies,
trends and commitments and the Group’s view of the most likely range of futures for the
global economy and associated sub-systems:
●● Central Energy View: reflects, and is periodically updated to respond to, existing policy
trends in commitments and currently tracks to approximately 3°Celsius temperature
increase above pre-industrial levels by 2100.
●● Lower Carbon View: currently tracks to approximately 2.5°C temperature increase by 2100,
and accelerates decarbonization trends and policies, particularly in easier-to-abate sectors
such as power generation and light duty vehicles.
These two scenarios are reviewed periodically to reflect new information.

These scenarios are currently being used as inputs to the Group’s planning cases,
informing updates to the Group’s supply, demand and price forecasts, capital allocation and
portfolio decisions. As such, these scenarios impact certain significant judgements and key
estimates, including the determination of the valuation of assets and potential impairment
charges [. . .], the estimation of the remaining useful economic life of assets for depreciation
purposes [. . .], the timing of closure and rehabilitation activities [. . .] and the recoverability of
certain deferred tax assets [. . .].
The Group continues to monitor global decarbonization signposts and update its planning
cases accordingly. Where such signposts indicate the appropriate measures are in place for
achievement of a 1.5°C Paris-aligned scenario, this will be reflected in the Group’s planning
cases.29
12.9 Alignment with financial reporting

As discussed earlier through the commentary from the ACCA, climate change consid-
erations are becoming increasingly important and need to be factored into the
preparation and reporting of financial statements. These financial statements need to
reflect a multitude of factors and include any assessments that relate to climate
change, including any assumptions, and be consistent with any other shareholder
and regulatory disclosures. It is important to emphasize that accounting practices
need to be forward looking and prepared in accordance with IFRS (International
Financial Reporting Standards) standards.
At COP26, the IFRS announced the formation of a new International Sustainability
Standards Board (ISSB), which will develop a comprehensive global baseline of
sustainability standards. As TCFD will form a part of the ISSB, alignment will help
position companies well for compliance with the new standards set out by the ISSB.30
The example of BHP provides a good example of how the design of climate transi-
tion scenarios that are used in reporting disclosures can lead to better alignment with
financial reporting.
The most important issue is materiality and providing external stakeholders, in
particular investors, with the most accurate picture. Therefore, information in respect
of future uncertainty of outcome and underlying assumption and judgements of
those uncertainties will become more and more important.
Recognizing that accounting practices need to be prepared in accordance with
IFRS standards, the impacts of climate change may be felt in several ways and could
include:
●● Capital requirements – In the insurance sector for example, the solvency capital
requirement (SCR) for climate change is not currently a regulatory requirement.
However, many insurance companies are already increasing their SCR to take
account of increasing volatility due to increasing uncertainty for future claims
payments, for example physical risks from natural catastrophes claims (discussed
in Chapter 9) in future climate trends.
●● Asset valuation changes – The value of property, plant and equipment may change
markedly as well as change the useful life of an asset. Examples could be assets
used in high-emission industries, i.e. assets related to coal production or the use of
coal in their own production processes, which may need to be replaced, depreci-
ated or amortized differently.
●● rovisions – The nature, timing and amount provisions may change due to climate
P
change through, for example, new legislation or decommissioning costs that
introduce unexpected costs or new liabilities that had previously not been provi-
sioned for.
●● Reserving – The insurance industry is also seeking to strengthen its provisions
(that are known as reserves) to pay for potential reserve deterioration. Reserve
deterioration could stem from increases in liability losses, which was discussed in
Chapter 9, from class action lawsuits against policyholders covering, for example,
directors’ and officers’ insurance.
●● Investment costs – Heightened investments in technology are likely required to
adapt to the changes in the marketplace, consumer demands and regulatory
requirements.
●● Residual values –These may change significantly because of climate change, while
depreciation charges may introduce additional volatility from a profit and loss
perspective. The balance sheet will also be impacted because there are fewer
buyers for assets. An example could be a fleet of diesel cars, which has been
depleted in value due to the switch to electric vehicles, tax increases on diesel
vehicles and a shift in consumer demand away from the asset.
●● Repurposing costs – Assets being repurposed, for example, recent press releases
have noted that some old mines are now being repurposed as stores for carbon
capture. This represents a notable change in the business model and will necessi-
tate adjustments to the accounting practices deployed. There may be associated
costs in undertaking this exercise but there may also be allowable expenses.
These factors, plus others, will be evident to senior management via a range of indica-
tors, over differing periods of time, and need to be monitored as part of business as
usual to pre-empt a terminal decline in the commercial viability of the organization.
Indicators to monitor include changes to the cost base, i.e. increased costs being passed
on from suppliers or increases in own costs that are being absorbed, changes in profit-
ability, deteriorating demand for certain products or services, increases in required
investments for new or replacement assets, and costs associated with repurposing or
changes to production processes.
Conclusion
There is clearly much progress in the development of climate change disclosures as
we have seen through the TCFD 2021 Status Report and the number of new report-
ing requirements in line with the TCFD recommendations announced by regulators
around the world in 2022. These proposals come at a pivotal time as the newly
formed ISSB, as a standard-setter, also released its guidance for rule makers across all
jurisdictions in its report, released in March 2022, ‘General Requirements for
Disclosure of Sustainability-related Financial Information and Climate-related
Disclosures’. The ISSB is also in line with TCFD recommendations, which helps
promote the consistency and comparability necessary for developing quality report-
ing worldwide.
However, this will be a fast-moving field given the acknowledgement by TCFD
that ‘companies continue to struggle to quantify the impacts of climate change, and
to source the data they need to fully assess the threats of a changing climate.’
Organizations may not have explored the potential impact of climate risk on the
entity’s financial position and future performance and, therefore, climate risk is not
incorporated in the relevant valuations and judgements. In such cases, at the mini-
mum, entities should consider disclosing information clarifying their inability to
reflect climate risk in the financial statements, along with an explanation of how they
consider the financial statements to present fairly the financial position, financial
performance, and cash flows of the entity.
As outlined throughout this chapter, from an enterprise risk management perspec-

tive, organizations need to continue to build their climate risk maturity and develop
their climate change strategies. This will help to provide broader and more detailed
decision-useful information within their disclosures.
Notes
1 FSB. Task Force on Climate-related Financial Disclosures 2021 Status Report, October
2021. https://assets.bbhub.io/company/sites/60/2022/03/GPP_TCFD_Status_
Report_2021_Book_v17.pdf (archived at https://perma.cc/H6AX-2MVM)
2 M Carney. The Road to Glasgow, Harvard Law School Forum on Corporate
Governance, 12 March 2020. https://corpgov.law.harvard.edu/2020/03/12/the-road-to-
glasgow/ (archived at https://perma.cc/7NQE-X97T)
3 FSB. Task Force on Climate-related Financial Disclosures: 2021 Status Report, 2021.
www.fsb.org/wp-content/uploads/P141021-1.pdf (archived at https://perma.cc/WE33-
5EKZ)
4 FCA. FCA’s new rules on climate-related disclosures to help investors, clients and
consumers, FCA, 17 December 2021. www.fca.org.uk/news/news-stories/new-rules-
climate-related-disclosures-help-investors-clients-consumers (archived at https://perma.
cc/2YC7-EH53)
5 S. Smith. TPR highlights first wave TCFD reports as ‘opportunity’ despite data
challenges, Pensions Age, 10 June 2022. www.pensionsage.com/pa/TPR-highlights-
TCFD-reports-as-opportunity-despite-data-challenges.php (archived at https://perma.cc/
HQ98-GLE6)
6 TCFD. Recommendations of the Task Force on Climate-related Financial Disclosures:
Final Report, June 2017. https://assets.bbhub.io/company/sites/60/2021/10/FINAL-
2017-TCFD-Report.pdf (archived at https://perma.cc/F7TT-MPS4)
7 Financial Conduct Authority. Enhancing climate-related disclosures by asset managers,
life insurers and FCA-regulated pension providers: Consultation paper, June 2021, p 32.
8 S Moloney. Data, data, data’ remain biggest challenge to TCFD adoption, OMFIF,
4 April 2022. www.omfif.org/2022/04/data-data-data-remain-biggest-challenge-to-tcfd-
adoption/ (archived at https://perma.cc/VU36-MXUS)
9 TCFD. Climate Disclosure Convergence: TCFD, SEC, and ISSB, 9 May 2022. https://
assets.bbhub.io/company/sites/60/2022/05/TCFD-Webinar-Climate-Disclosure-
Convergence-May-2022.pdf (archived at https://perma.cc/D7BM-YW8F)
10 R G Eccles. A comparative analysis of three proposals for climate-related disclosures,
Forbes, 11 June 2022, www.forbes.com/sites/bobeccles/2022/06/11/a-comparative-
analysis-of-three-proposals-for-climate-related-disclosures/?sh=26c40d4e4e89 (archived
at https://perma.cc/9GW2-PZ5X)
11 TCFD. Recommendations of the Task Force on Climate-related Financial Disclosures:
Final Report, June 2017. https://assets.bbhub.io/company/sites/60/2021/10/FINAL-
2017-TCFD-Report.pdf (archived at https://perma.cc/9569-RYM6)
12 FSB. Task Force on Climate-related Financial Disclosures 2021 Status Report, 2021.
www.fsb.org/wp-content/uploads/P141021-1.pdf (archived at https://perma.cc/G4GW-
EDKQ)
13 FSB. Task Force on Climate-related Financial Disclosures 2021 Status Report, 2021.
www.fsb.org/wp-content/uploads/P141021-1.pdf (archived at https://perma.cc/G96G-
5RFY)
14 Task Force on Climate-related Financial Disclosures, TCFD, About. https://www.
fsb-tcfd.org/about/ (archived at https://perma.cc/7SAB-RMQM)
15 A Cadbury (1992) Report of the Committee on the Financial Aspects of Corporate
Governance, Gee and Co, London
16 EY. Towards TCFD compliance: Observations on reporting trends, 2021. https://assets.
ey.com/content/dam/ey-sites/ey-com/en_uk/topics/assurance/ey-towards-tcfd-
compliance-observations-on-reporting-trends-may-2021.pdf (archived at https://perma.
cc/45WT-PG7K)
cc/WLS9-8ZR8)
18 TCFD. Task Force on Climate-related Financial Disclosures: Implementing the
recommendations of the Task Force on Climate-related Financial Disclosures, October
2021. www.fsb.org/wp-content/uploads/P141021-4.pdf (archived at https://perma.
cc/5Q7M-CD2K)
cc/BPP5-9GBC)
cc/3FEX-FMNA)
21 D Kingsley, M Solomon and K Jaconi. Companies have work to do on risk disclosures,
WSJ Risk & Compliance Journal, 17 March 2021, https://deloitte.wsj.com/articles/
companies-have-work-to-do-on-risk-disclosures-01616007730 (archived at https://
perma.cc/DD2D-SCXG)
22 CFRF. Climate Financial Risk Forum Guide 2020: Disclosures chapter, 2020. www.fca.
org.uk/publication/corporate/climate-financial-risk-forum-guide-2020-disclosures-
chapter.pdf (archived at https://perma.cc/D9NB-LUDD)
23 TCFD. Task Force on Climate-related Financial Disclosures: Guidance on metrics,
targets, and transition plans, October 2021. https://assets.bbhub.io/company/
sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf (archived at https://perma.cc/
CRR5-6Z85)
24 Tesco PLC. Tesco PLC Annual Report and Financial Statements 2022. www.tescoplc.
com/media/759057/tesco-annual-report-2022.pdf (archived at https://perma.cc/
GXE5-2CRG)
25 Aviva plc. Climate-related Financial Disclosure 2021. https://static.aviva.io/content/

dam/aviva-corporate/documents/socialpurpose/pdfs/climate-related-financial-disclosure-
2021-report.pdf (archived at https://perma.cc/S7ZM-8P4P)
26 MSCI. MSCI Real Estate Climate Value-at-Risk (Climate VaR) Methodology: A
transparent approach to calculating climate value-at-risk, 2021. https://www.msci.com/
documents/1296102/19288350/ClimateVaR_RealEstate_Methodology.pdf (archived at
https://perma.cc/U2G6-Q8F5)
27 Insurers typically rely on catastrophe models (CAT models) to help them understand the
risk associated with underwriting, setting rates, maintaining a reserve, and other
relevant aspects.
28 Cornish Mutual. Annual Report & Financial Statements 2020/2021, December 2021.
https://cornishmutual.co.uk/media/3sqn2e2h/financial-statement-2021.pdf (archived at
https://perma.cc/W2ZE-RS7M)
29 BHP. Annual Report 2021: The future is clear. www.bhp.com/-/media/documents/
investors/annual-reports/2021/210914_bhpannualreport2021.pdf?sc_lang=en&hash=1
5F0B58BC27ADFA860F0BE29B61E199D (archived at https://perma.cc/2XQL-8Q86)
30 IFRS. IFRS Foundation announces International Sustainability Standards Board,
consolidation with CDSB and VRF, and publication of prototype disclosure
requirements, 3 November 2021. www.ifrs.org/news-and-events/news/2021/11/
ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/
(archived at https://perma.cc/HWH5-WX9K)
398
GLOSSARY
ambition mechanism the Paris Agreement’s Ambition Mechanism commits countries to

come together every five years to take stock of progress towards the
long-term goals and to use this as input to enhance their level of
ambition if the stocktake indicates this is necessary.
carbon budget the cumulative amount of carbon dioxide emissions that is
tolerable, from a global perspective, over a period of time, to keep
within a certain temperature threshold.
carbon capture and the process of trapping carbon dioxide before it enters the
storage atmosphere, transporting it, and storing it (carbon sequestration).
carbon credits a permit which allows a country or organization to produce a
certain amount of carbon emissions and which can be traded if the
full allowance is not used.
carbon extractive extractive industries consists of any operations that remove metals,
industries mineral and aggregates from the earth. The most carbon-intensive
industries are mining and oil and gas.
carbon footprint the amount of carbon dioxide released into the atmosphere as a
result of the activities of a particular individual, organization, or
community.
carbon hierarchy a hierarchy by which you find ways to avoid, reduce, replace,
sequester and offset in order to reduce carbon emissions.
carbon negative the reduction of an entity’s carbon footprint to less than neutral, so
that the entity has a net effect of removing carbon dioxide from the
atmosphere rather than adding it.
carbon neutral the status achieved when an organization has measured its carbon
footprint (CO2e) and then carries out carbon offsetting activities to
remove an equivalent amount of CO2e from the atmosphere.
carbon pricing a mechanism to capture external costs and impacts of greenhouse
mechanisms gas emissions by adding an extra cost to the use of the fossil fuels.
carbon sequestration the process of capturing and storing atmospheric carbon dioxide.
There are two main types of processes: geologic and biologic.
carbon sink a natural or artificial reservoir that absorbs and stores the
atmosphere's carbon with physical and biological mechanisms.
carbon tax a tax on fossil fuels intended to reduce the emission of carbon
dioxide.
carbon trading the process of buying and selling permits and credits that allow
permit holders to emit carbon dioxide (or other GHGs), and a
mechanism to reduce carbon emissions.
circular economy avoidance of destroying or eliminating the product, but to put the
product to use yet again by way of enhancement, refurbishing,
reusing, or recycling.
GLOSSARY 399
climate action failure relates to the undesired and unanticipated outcome of climate
change as against the actions taken to be insufficient for meeting the
targets and goals outlined in the Paris Agreement.
climate ambition generally refers to the four levels of ambition that organizations are
adopting for their strategic positioning that is dictated by the board.
These ambitions are generally termed as Follower, Adapter,
Champion and Leader.
climate change – the potential for litigation if entities do not adequately respond to
liability risks the impacts of climate change.
climate change – the risk of direct damage to assets and indirect damage from supply
physical risks chain disruptions.
climate change – risk associated with transitioning to ‘green economy’.
transition risks
climate change risk a key diagnostic tool used to help identify an organization’s key
radar climate-related risks across its risk profile.
climate data value a process of data generation, collection and use from identifying
chain climate data needs to its application and potential reuse.
climate disclosure disclosing climate-related financial information by an organization,
ensuring that there is consideration of the risks and opportunities
an organization faces as a result of climate change while preparing
the disclosure.
climate resilience the ability to anticipate, prepare for, and respond to physical risk
climate related events, trends, or disturbances related to climate.
climate risk appetite describes an organization’s desired risk appetite in the context of
strategy articulating the amount and types of risk an organization wishes to
seek, minimize, or avoid and defines the boundaries within which
risk taking can occur, to in order to meet its strategic objectives
and climate-related goals and objectives.
climate risk strategy determines the ambition and sets the strategy of an organization
that is typically underpinned by two foundational components
namely, ‘resilience’, and ‘sustainability’.
convective storm formed when surface heat causes moisture and other particles to
(also thunderstorm) rise into the atmosphere.
covert lobbying setting up and funding ‘pseudo-science’ research groups who are
briefed to blur the edges of any science debate around public policy,
or the true extent of social harms resulting from certain products,
investments or employment practices.
global climate models models that support meteorological research to help scientists
(GCM) simulate future climate conditions in line with IPCC emission
scenarios.
global warming an increase in global average temperatures of the Earth’s
atmosphere through the greenhouse effect, which is caused by
increases of pollutants, such as carbon dioxide and methane.
green bonds these enable capital-raising and investment for new and existing
projects with environmental benefits.
400 GLOSSARY
green energy inflation the contribution that environmental policies make to the cost of
delivering goods and services that is passed on via supply chains to
consumer prices.
green transition refers to the period of time between now and when human activity
will not endanger the health of the planet.
greenwashing a marketing technique aimed at creating an illusion of ecological
responsibility.
heating degree day the difference between the actual temperature as determined by the
average of the high and low daily temperatures, and 65F. It was
created by the energy utility sector to better forecast demand.
hedging the act of reducing risk, often through use of financial derivatives
instruments.
horizon scanning a formal process to help to explore what the future might look like,
to understand uncertainties better and to analyse whether the
organization is adequately prepared for potential opportunities and
threats.
hydrogen economy an economy relying on hydrogen as the primary component as a
substitute to fossil fuel. For example, hydrogen gas and hydrogen
liquid.
internal carbon pricing a mechanism by which companies can put a value on their
greenhouse gas emissions in a way that drives positive change in
their business.
international provides a comprehensive global baseline of sustainability-related
sustainability standards disclosure standards that are used by investors and other capital
board (ISSB) market participants with information about companies’
sustainability-related risks and opportunities to help them make
informed decisions.
low-carbon alternatives the carbon-friendly substitutes to carbon-emitting products/
commodities.
low-carbon economy economic activities that deliver goods and services to an economy
that generate significantly lower emissions of greenhouse gases;
predominantly carbon dioxide.
nationally determined a climate action plan to cut emissions and adapt to climate impacts.
contributions (NDCS)
natural capital the world’s stocks of natural assets which include geology, soil, air,
water and all living things.
natural catastrophe a violent, sudden and destructive change in the environment
without cause from human activity, due to phenomena such as
floods, earthquakes, fire and hurricanes.
operational resilience the ability of an organization to deliver critical operations through
disruption.
parametric (or index- a type of insurance that covers the probability of a predefined event/
based) insurance trigger occurring instead of indemnifying actual loss incurred.
solutions
GLOSSARY 401
risk aggregation a common concept in risk management context, relating to the

process of summing and showing the interaction between single or
individual risks, to assess the bigger picture. In the context of
climate change, this is often used to assess physical risks from
natural catastrophe exposures across a portfolio.
scenario analysis a process of examining and evaluating possible events or scenarios
that could take place in the future and predicting the various
feasible results or possible outcomes.
science based targets targets that align with what the latest climate science says is
necessary to meet the goals of the Paris Agreement – currently to
limit global warming to well-below 2°C above pre-industrial levels
and pursue efforts to limit warming to 1.5°C.
stakeholder mapping the process of identifying, and prioritizing stakeholders by
categorization both the organizations influence and importance on a
specific area of business activity such as e.g. credit risks.
stranded assets assets that have suffered from unanticipated or premature write-
downs, devaluation or conversion to liabilities.
strategic resilience consideration of the implications of the strategic and organizational
choices a firm has to make, and the potential implications for long
term stability.
sustainability strategy relates to the need to decarbonize, manage and mitigate transition
risks as a consequence of transitioning to a lower-carbon or green
economy.
sustainable investing investing in progress, and recognizing that companies solving the
world’s biggest challenges can be the best positioned to grow.
sustainable strategy relates to the organization’s strategy to decarbonize and manage
and mitigate transition risks, including setting net zero emission
targets, as a consequence of transitioning to a lower-carbon or
‘green’ economy.
task force on climate- created by the Financial Stability Board in 2015 to provide guidance
related financial and improve and increase reporting of climate-related financial
disclosures (TCFD) information.
the network for NGFS was established by eight central banks and supervisors at the
greening the financial Paris One Planet Summit on 12 December 2017. Its goal is to
system (NGFS) strengthen the global response required to meet the goals of the
Paris Agreement and to enhance the role of the financial system to
manage risks and to mobilize capital for green and low-carbon
investments.
402
INDEX
absolute emissions 154, 157, 158, 350–51, 354 BACILAT tool 180
ACCA (Association of Chartered BaFin 285, 356
Accountants) 246, 366, 368 balance sheets 20, 305, 317
accountability 61–62, 71–75, 83, 88, 248 Bank of England 19
Acies MGU 169–70 see also Carney, Mark; Climate Biennial
acquisitions 340 Exploratory Stress Test (CBES); Prudential
action (remediation) plans 21, 25, 32, 37, 54, 335 Regulation Authority (PRA)
nationally determined contributions 17–18 Barclays BlueTrack 350–51
active ownership 352, 355 BASEL III regulations 198
activism 16, 119, 283, 284 baseline setting 37–38, 178, 219, 308–09, 392–93
acute (extreme weather) risks 22, 102, 163, BAU 2, 25, 51, 343–64
272–80, 307 behavioural regulation 285
see also flooding; hurricanes; thunderstorms; benchmarking 142, 341, 350–51, 354, 357–60,
tropical cyclones; wildfires 384
adapters 34 beverage sector 165
advisory boards 63 BHP 31, 82–83, 391–92
aggregate exceedance probability outputs 228, 229 biodiversity loss 268, 271
agricultural sector 47–48, 128, 130, 131, 137, biologic carbon sequestration 151, 153
140, 165, 269, 271, 280 biomass fuels 273, 289
disclosure reporting 375, 388–91 black swans 237, 247
see also farming sector blackouts 162, 190–92, 272, 280
Allianz 113 BlackRock 111, 153, 271, 283
Amazon (rainforest) 267, 281, 282 Bloomberg 21, 376
Amazon (retailer) 286, 340 board responsibility 2, 33, 57–59, 60–73, 80,
amber RAG status 48, 50, 54 88, 368
ambition mechanism 17 see also CEOs; chief risk officers (CROs); tone
American Express 21 from the top
American Flood Hazard model 221 bottom-up modelling 329
annual risk reviews 94, 104–05, 106–08 bow tie analysis 99, 171–76
anti-greenwashing rules 286 BP 21, 131
A.P.Muller-Maersk 21 bridging strategies 193
Arctic sea ice 271, 281 buffering strategies 193, 317
Army Signal Research and Development Lab buildings (property) 140, 156, 176–77, 288
(US) 210 business as usual (BAU) 2, 25, 51, 343–64
asset-level data 217, 329 business continuity management 164, 171,
asset valuation 77, 199, 208, 285, 315, 324, 380, 185–92, 312
387, 393 business lenses 329
see also stranded assets see also supply chains
Association of British Insurers 131 business services 166
Association of Chartered Accountants business strategy (corporate strategy) 25, 31–32,
(ACCA) 246, 366, 368 33, 35, 335–43
assumption setting 174, 227, 314, 318, 319,
320, 329 California wildfires 12, 22, 127, 271, 273, 276,
audit function 72–73, 88 277, 279, 293, 294–95
see also risk and audit committees Cambridge City Council 139, 145, 146, 157–58
Australian bushfires 275–76 Canada 192, 276, 279, 377
Australian Prudential Regulatory Authority 22 capital allocation 341–42, 369
automation 51, 151, 209, 343, 344 capital management 198–99, 262
average companies 358 capital requirements 393
Aviva 113, 385, 386–87 captive insurance companies 167, 194, 197, 216
INDEX 403
car-pooling (sharing) 80, 156 climate action failure 4, 11, 268–69

carbon budget 21, 131–32 climate ambition 24, 26, 31, 33–35, 37–38
Carbon Calculator 150 Climate Biennial Exploratory Stress Test
carbon capture, usage and storage 142, 270, (CBES) 198–99, 304, 305, 325–26, 378
288, 394 climate change, defined 7, 8, 13, 240–41
carbon credits (permits) 155, 341, 349–50 climate change index 323
carbon dioxide (CO2) 11, 127, 128, 131–32, 146 Climate Change Special Interest Group (SIG)
carbon dioxide equivalent (CO2e) 129 1, 44, 74, 81, 241
Carbon Disclosure Project 270, 286 climate change strategy 8, 25, 30–55, 66–68
carbon emissions risk management Cornish Mutual 388–89
framework 143–49 Tesco 385–86
Carbon Footprint 150 TFCD recommendations 373, 374, 377, 381,
carbon footprint calculation 37, 143, 147–50, 383, 384
154–55 climate change strategy groups 66–68
carbon hierarchy 150–54 Climate Change 2022 (UN) 136, 139–40, 238–39
carbon negative 20, 37–38, 131 Climate Coalition 284
carbon neutral 21, 37–38, 362, 383, 386 climate data value chain 211–16
carbon offsetting 150, 151, 154, 155, 398 Climate Financial Risk Forum 118, 253, 308
carbon pricing 137, 138, 148, 152–53, 270, 318, Climate Impacts Programme 180
340, 341–42 Climate Indicators model 222
carbon rating (risk) scores 355–56 Climate Innovation Fund 20, 131
carbon reduction activities 145–46, 151–52, climate model reanalysis 222–23
155–57 climate models 210–11
carbon reserve intensity 354, 356 climate pathways 314–15
carbon risk appetite strategy 144, 145–46 climate prediction 223–24
carbon sequestration 151, 153 climate risk strategy plans 39–41
carbon sinks 273, 398 Climate Vulnerability Scores 354
carbon taxes 23, 102, 134, 138, 340, 398 ClimateWise 250
carbon trading 349–50 climatological normals 218–20
Carbon Trust 149–50 closed data 218
Carney, Mark 111, 126, 253, 307, 367, 369 collaboration 89, 114, 176, 193, 233, 250, 361
case studies 355–56 Committee of Sponsoring Organizations 24, 90–91
Cassandra syndrome 247 communication 64–65, 75–78, 89, 97, 163, 183,
catastrophic (CAT) model vendors 227–28 188, 348
catastrophic (CAT) models 204–05, 212, 223, see also reporting; risk articulation
225–30, 325–26, 327–28, 387 compensation (performance) management 79–80,
CBES 198–99, 304, 305, 325–26, 378 84, 89
Central & Eastern European Flood Model 222 competitive advantage 38, 100, 110, 119–20,
central energy view 392 135, 169–70
CEOs 74, 90 see also risk opportunities
Certificate in Climate Risk 81 compliance function 72, 74, 80, 88
champions 34, 81, 250, 322 composite weather variable 213
channel partners 110, 113 compounded (connected) extremes 190–92,
Chapter Zero 38 193–94, 205
Chartered Body Alliance 81 construction industry 112, 165
chief risk officers (CROs) 66–68, 74, 389 contingency planning 49, 50
China 14, 18, 130 control functions 88–89, 98–99
chronic physical risks 22, 163, 195, 232, 253, see also compliance function; detective
272–73, 280, 307, 314, 327 controls; preventative controls; reactive
see also droughts; heatwaves controls; risk and control self-assessments
circular economy 148, 342–43 convective storms see thunderstorms
claims settlements 67, 77, 78, 169, 232, 234, 317 Copernicus Atmosphere Monitoring Service 206,
class action 261, 293–94 220, 221, 276–77
clean energy 8, 117, 135, 154, 270, 289 COP26 17–18, 145, 205–06, 286, 377
see also renewable energy Cornish Mutual 47–48, 155–57, 388–91
clients (customers) 110, 114–15, 156 corporate culture (organizational culture) 37, 57,
climate, defined 203, 216–17 84–85
404 INDEX
corporate pledges 10, 20–21, 176, 282–83, 286 duty of care 59

corporate social responsibility 35, 65, 115, 389 DWS 356
corporate strategy (business strategy) 25, 31–32,
33, 35, 335–43 early policy action 309, 315
Corporate Sustainability Directive 342 earthquakes 12, 14–15, 194, 234
covert lobbying 287 econometric modelling 205–06, 212, 213–14, 328
Covid-19 pandemic 7, 8, 18, 111–12, 139, 157, economic losses (risk) 14–15, 126–27, 192, 194,
247, 257, 267 195–96, 268, 280
credit ratings agencies 11, 23, 110, 115–17, Edelman 287
301, 336 El Niño 281
see also Fitch Ratings; S&Ps (Standard and electric vehicles 35, 80, 100, 152, 156, 270, 271,
Poor’s) 283, 289, 349
credit risk management 53–54, 172, 350–51 embedded risk maturity 27
crisis management 182, 187–88 emerging risk, defined 237, 239–42
CROs 66–68, 74, 389 emerging risk focus groups 68–71
culture emerging risk management 76, 168–70, 236–65
corporate (organization) 37, 57, 84–85 technology 287–92
risk 82–91, 116, 244–45 emerging risk owners (EROs) 256, 258
customers (clients) 110, 114–15, 156 emerging risk prioritization 256–58
cyclones 12, 14–15, 222–23, 224 emerging risk radars 260–63
emerging risk registers 243, 246, 254, 255, 256,
daily temperature data 213 257, 258, 259, 263
Daily Weather Reports (Summaries) 209 emissions, absolute 154, 157, 158, 350–51, 354
dairy farming industry 165, 195–96, 280 emissions cap 349
dashboards 54, 76–78, 332, 350–51 emissions metrics 47–48, 146–49
data centres 187, 269 emissions monitoring 154–59
data licensing 218 employee benefits 79–80
data management 63, 138, 211–16, 329 employee engagement 71, 80–81, 86–87, 110,
data sources 202–35, 245–46, 315–16 111–13, 121, 347–48
asset-level 329 energy efficiency 53, 127, 136, 140, 142, 148,
exposure 326 152, 270, 289
historical 275, 279 energy performance certificates (EPCs) 53, 142
open 384 Energy Policy Act (1992) 290
see also loss data energy sector 130, 140, 269, 291
de-anchoring scenarios 313 see also clean energy; renewable energy
decision making 260–63, 310–12 environmental risk 10–11, 100, 109, 111, 172,
deep dive research 63, 68, 76, 250, 254, 258 174, 268
deforestation (Amazon) 267, 281, 282 ERA5 220, 221
demand data 213 escalation processes 48, 50, 88, 346
Department for Environment, Food and Rural ESG agenda 2, 10–11, 33, 112, 115–16, 126,
Affairs (DEFRA) 154, 164, 177, 179, 207 284–87, 336–39, 352–53, 362
detective controls 99 scoring systems 358–60
Deutsche Bank 285, 356 watch lists 358, 359
digital monitoring 289 see also environmental risk; governance;
direct (scope 1) emissions 37, 132, 146, 147, 148, societal risk
354, 361–62, 386 ethics code 82
disclosure 10, 40, 78, 126, 282–83 European Centre for Medium-Range Weather
financial impact 373–75 Forecasts 221
mandatory financial 376–77 European Financial Reporting Advisory
see also Task Force on Climate-related Group 371
Disclosures (TFCD) European Flood Hazard Risk Model 222
Dixie Fire 276 European Insurance and Occupational Pensions
documentation 180, 258, 332, 336, 339, 346, 386 Authority 305–06
driver mapping 251 European Union (EU) 285, 286, 342, 377
drought vulnerability assessments 174 exclusion policies 355, 387
droughts 12, 14–15, 18, 22, 173–76, 224, 270, expert input 65, 75, 121, 319–20
273, 282 exposure data 204–05, 315, 326
INDEX 405
extended-range climate forecasts 224 GHG (Greenhouse Gas) Protocol 132–33, 149,
external reporting 78 150, 371
external risk identification 103, 104, 105–08 Glasgow Climate Pact 17
Extinction Rebellion 119 Global Association of Risk Professionals 81
extreme weather (acute) risks 12–15, 22, 54, 102, global climate models 316
127, 163–64, 272–80, 307 global financial crisis (2008) 82, 245, 301
see also flooding; hurricanes; thunderstorms; Global Flood Hazard Model 222
tropical cyclones; wildfires Global Framework for Climate Services 210
ExxonMobil 287, 293–94 Global Methane Pledge 129
global pledges 119, 129
farming sector 128, 131, 195–96, 233, 271, 289, Global Risks Report (WEF) 11, 246, 248–49,
326–27, 389, 390 268–69
dairy 165, 195–96, 280 Global Storm Surge Model 222
see also agricultural sector global warming 111, 205–06, 219, 238–39, 240,
Fathom 325–26 279
Financial Conduct Authority (FCA) 118, 370, see also Paris Agreement
371, 378 global warming potential 129
financial impact disclosure 373–75 governance 10–11, 19, 41, 56–93, 116, 118,
financial incentives 79, 89, 153, 286 258–59, 339
financial metrics 46, 51, 324 reporting 373, 374, 377, 380–81, 383, 384,
financial planning 198–99 385, 386, 388–89
financial reporting 365–97 governance framework 61–82
financial resilience 39, 167–68, 170–71, 194, 196–99 government intervention 20, 43, 109, 110,
see also hedging 117–18, 125, 126, 153, 177–79, 284
financial risk 43, 181, 183, 269, 316 see also regulation
global financial crisis (2008) 82, 245, 301 green assets 285, 387
Financial Stability Board 1, 8, 22, 84, 87–89, 118, green bonds 136, 381
133, 370 Green Book 177, 179
first line of defence 71, 72, 73 green energy inflation 282
Fitch Ratings 354 green finance 8, 142, 143, 286
FitzRoy, Robert 209 green hydrogen 290
flood risk models 207, 221–22, 323–26 Green Hydrogen Catapult 290
flood warning services 169–70 green jobs 141, 143
Floodability(®) 324 Green Jobs Taskforce 143
flooding 12–16, 18, 49, 53–54, 114, 172, 183, green pensions 49
194, 269, 272 green revenues 354, 356
fluorinated gas emissions 128 green transition 267
focus groups 68–71, 348 greenhouse gas (GHG) emissions 7, 11–12, 125,
followers 34 126–59, 239
food sector 113, 165, 268 see also representative concentration pathways
forecasting 169, 221, 223–25, 238–39, 251 Greenhouse Gas (GHG) Protocol 132–33, 149,
formalized risk maturity 28 150, 371
4Ts of risk management 183–85 Greenland sea ice 281
franchise value 46–47 greenwashing 138, 283, 285, 286–87, 294, 356,
fuel switching 140 357, 362
Full CAT model 222 grey swans (known unknowns) 7, 237
fusion reactors 143, 289
Hawkins, Ed 209
gap analysis 197–98 hazard maps 316, 323–27
gas production 142, 165 HAZOP (hazard and operability analysis) 105
Gen Z 111–12 health and safety 116
geocoding 226, 227 heat maps 115, 320, 322, 323
geopolitical risk 237, 267, 268 heat pumps 142, 152
geospatial data 217 heat stress 279, 280, 282
GHG (greenhouse gas) emissions 7, 11–12, 125, heat stress index 195–96
126–59, 239 Heathrow Airport ruling (2020) 23
see also representative concentration pathways heating degree days 213
406 INDEX
heatwaves 13, 18, 269–70, 272–73, 278–80 International Sustainability Standards Board
hedging 39, 48, 167, 212–16 (ISSB) 371, 392–93, 394
high-level summary reporting 54 investment 8, 37, 49, 50, 78, 138, 152–53, 271,
historical data 222–23, 229, 275, 279 387, 393
horizon scanning 69, 169, 241, 251–53, 307 monitoring of 353–55
‘How to Set Up Effective Climate Governance on selection criteria 357–58
Corporate Boards’ (WEF) 58 sustainable 283, 340, 351–57
Howden 233–34 investment companies 355–56, 357–62
HR policies 112, 267, 347–49 investment managers 352
see also recruitment; training investors 110, 111
HSBC 193, 356–57 IPCC 18, 125, 131, 136, 207, 228, 238–39, 281
Hurricane Ida 14 IRM 1, 44, 81, 87, 307
Hurricane Katrina 13, 188–90, 194, 204–05 Climate Change Special Interest Group
Hurricane Sandy 188 (SIG) 1, 74, 81, 241
hurricanes 13, 14, 188–90, 194, 204–05, 232–34 ISO Guide 73 109
hybrid vehicles 35, 156, 270, 291 ISO Guide 83 109
hydrofluorocarbons 128, 129 ISO 31000 82
hydrogen economies 137, 283, 290–92
hydrogen gas 291 Jamaican Co-Operative Credit Union
hydrogen liquid 291 League 233–34
Johnson & Johnson 21
implementation strategies 37, 64
incentive schemes 79, 89, 153, 286 key performance indicators (KPIs) 79, 180,
incident reporting 196, 274 181–82
indemnity insurance 230–31 key risk indicators (KRIs) 43, 48, 50–54, 83, 146
index (parametric) insurance 194–96, 216, known unknowns (grey swans) 7, 237
230–34, 280
India 18, 130, 272, 282, 287 laggard companies 358
indirect costs 192 late policy action 315
indirect emissions 37, 132–33, 143, 146, 147, leader companies 34, 358
148, 335 leakage detection technology 175, 176
see also scope 2 emissions; scope 3 emissions LED lighting 135, 152, 349
individual KRI dashboards 54 Legal & General Investment Management 356
individual loss events 228, 229 legal (liability) risk 22, 23, 46–47, 135, 174, 175,
industrial sector 37, 130, 140 292–95, 319, 321
INSDEX parametric calculation 195–96 Aviva (litigation) 387
Institute of Actuaries 244 see also claims settlements
Institute of Risk Management (IRM) 1, 44, 81, lending practices 350–51
87, 307 Lloyds of London Insurance Market 253,
Climate Change Special Interest Group 306–07, 358
(SIG) 1, 74, 81, 241 lobbying 16, 151, 287
Insulate 284 local policy deductibles 197
insurance 13, 22, 115, 117, 127, 131, 164, locational risk 164, 182
169–70, 196–98, 277–78 London flood assessment 306–07
captive insurance companies 167, 194, 216 long-range climate forecasts 224
indemnity 230–31 Looney, Bernard 21
parametric (index) 194–96, 216, 230–34, 280 loose commitment 287
see also reinsurance loss adjustment 389
intensity targets 154 loss data 246, 250
interest-free season ticket loans 80 see also indirect costs; individual loss events
internal carbon pricing 138, 148, 152–53, low-carbon economy 2, 49, 59, 139, 142, 314,
340, 341 350, 381
internal projects 75, 197 lower carbon view 392
internal reporting 76–78 Lytton heatwave 279
see also dashboards
internal risk identification processes 103, 104–08 machinery 136, 152, 287, 288, 343
International Energy Agency 290 MacKay Carbon Calculator 150
INDEX 407
macroeconomic methodologies 269, 314, 329 Nimbus 210

management 87–89 nitrous oxide 128
see also board responsibility; senior management no additional policy solution 315
management risk committees 254, 390 North America 14, 276–77, 279, 281, 282
mandatory financial disclosures 376–77 see also Canada; US
marine ecosystems risk 207, 281 North of England P&I Club 76–78
mark to market accounting 270 Northeast blackout (2003) 192
market capitalization 336, 366 ‘nowcasts’ 224
market opportunities 136
market sentiment risk 135 Oasis Hub 221–22, 227
marketing function 139, 183 objective setting 31, 89, 347–48
materiality assessment 28, 57, 260, 309, 329, 393 see also target setting
see also scenario analysis; stress testing occurrence exceedance probability 228
Mediterranean wildfires 271, 276, 279 open data 202, 218, 384
medium-range forecasts 224 operational resilience 39, 166–67, 170, 173–74,
Met Office 207–08, 209, 220, 325 185–96, 303
methane 128, 129, 281 see also business continuity management
metrics 35, 37, 43–47, 51, 53, 317–18, 324, 356 operational risk 49, 172, 174–75, 181–82, 344–50
emissions 47–48, 146–49 optimized risk maturity 27
reporting 373, 374, 377, 379, 382, 383, 384, optimum bias 177–78
386, 387, 390–91 Orange Book 73
see also key risk indicators (KRIs) organizational (corporate) culture 37, 57, 84–85
Microsoft 20, 21, 131 outsourcing 113
milestones 69, 159 overnight (night-time) temperatures 219, 280
millennials 283–84, 296 Own Risk and Capital Assessment process 199
Milliman 336–39
mining sector 134 Pacific Gas & Electric 13, 293, 294–95
Minneapolis demonstration (2021) 112 packaging 152
mis-selling practices 89 pandemic (Covid-19) impact 7, 8, 18, 111–12,
misdirection 287 139, 157, 247, 257, 267
model risk 204, 205, 228, 230 parametric (index) insurance 194–96, 216,
monsoons 282 230–34, 280
Moody’s Investor Services 115, 354 Paris Agreement 12, 16–18, 23, 65, 119, 129,
Morgan Stanley Capital International ESG 292, 309
Ratings 358 Paris Rulebook 17–18
mortgage providers 53–54, 114, 301, 317, 324 pensions 49, 305, 370, 371
Munich Reinsurance 233–34, 240 people risk 49
performance (compensation) management 79–80,
NASA 202, 210 84, 89
National Farmers Union 131 permafrost thawing 281
National Oceanic and Atmospheric PESTLE analysis 101, 248, 250, 251
Administration (NOAA) 202, 210, 219, physical climate risks 46, 53, 100, 116, 134, 148,
220, 224–25, 279 163–66, 167, 261, 313
national standards bodies 109 chronic 22, 195, 232, 253, 272–73, 280, 307,
nationally determined contributions 17–18 314, 327
natural capital risks 16, 23 data sources 202–35, 315
natural catastrophes 52, 126–27, 230 emerging trends 271–82
see also physical climate risks scenario analysis 319
Naval Photographic Center (US) 210 see also extreme weather (acute) risks
negative conceptual risk identification 99 Physical Science Basis Report (2021) 18, 125
net natural peril tolerance threshold 52 physical shocks 313
Net-Zero Asset Owners Alliance 111, 283 planning 183
net zero framework 336–39 contingency 49, 50
Network For Greening The Financial System financial 198–99
(NGFS) 118, 314 strategic plans 63, 75–76
New Zealand 377 see also forecasting; remediation (action)
night-time (overnight) temperatures 219, 280 plans; risk mitigation plans
408 INDEX
plastic bag usage 117 reactive controls 172, 173, 175, 183, 185
pledges 10, 20–21, 119, 129, 176, 282–83, 286 reactive resilience see business continuity
point-in-time scenarios 313 management
policy risk 117, 135, 321 Reading University 209
exclusion policies 355, 387 recruitment 112–13
HR policies 112, 267, 348–49 recycling 156, 321, 342
population growth (density) 125, 273 red RAG status 48, 50
portfolio warming methodology 387 regression models 213–14
positive conceptual risk identification 99–100 regulation 2, 18–19, 40, 43, 49, 110, 117–18,
post-loss mitigation strategies 164, 166, 167 198–99, 303–08
post-loss reporting 274 behavioural 285
PRA 18, 19, 40, 43, 60, 79, 118, 253, 305, 378 emerging risks 257, 284
pre-loss mitigation strategies 164, 167, 168–69 transition risks 23, 125, 134
precipitation 165, 217, 219, 220, 225, 323 see also Prudential Regulation Authority (PRA)
see also monsoons reinsurance 230, 240, 249, 277, 325
prevailing market rate 341 remediation (action) plans 21, 25, 32, 37, 54, 335
preventative controls 98, 99, 142, 172–75, nationally determined contributions 17–18
183, 185 remuneration (compensation)
Previsico 169–70 management 79–80, 84, 89
PricewaterCoopers (PwC) 21, 329, 331, 360–62 renewable energy 8, 23, 127, 131, 133, 134, 138,
pricing 257 142, 157, 166, 230, 288
carbon 137, 138, 152, 270, 318, 340, 341–42 Renewable Energy Guarantee of Origin 288
shadow 341 replacement strategies 151, 152–53
primary data 211, 213 reporting 54, 62, 75–78, 91, 254, 256, 259–63,
primary strategic risk metrics 46–48 318, 365–97
prioritizing actions 40, 256–58 active ownership 355
private sector 42, 125 ESG 284–87
probabilistic modelling 327–32 incident 196, 274
probable maximum loss 52 see also dashboards
product strategy 136, 139, 152, 270, 339 representative concentration pathways 207,
professional qualifications 80, 81–82, 348 221–22, 315
profitability 34, 42, 336, 347 repurposing costs 394
prohibited lists 357–58 reputational risk 34, 35, 46–47, 112, 119, 135,
project management 40, 109, 182, 339 270, 321, 356–57
project workstreams 40, 41 research 117, 311, 313–16
property (buildings) 140, 156, 176–77, 288 deep-dive 63, 68, 76, 250, 254, 258
provisions 393 Research and Development Roadmap 143
Prudential Regulation Authority (PRA) 18, 19, reserves 393
40, 43, 60, 79, 118, 253, 305, 378 residual values 393–94
public sector (services) 117, 125 resilience 8, 36, 39, 136, 162–201, 303, 339
purpose 32, 83 see also business continuity management
PwC 21, 329, 331, 360–62 resilience framework 179–85
resource allocation 40, 74–75, 136, 248
QAS (Quality Assurance Scheme) (UK) 155 responsible approach (corporate social
qualifications 80, 81–82, 348 responsibility) 35, 65, 115, 389
qualitative analysis 35, 317, 318–32 responsive approach 35
Quantis 150 restaurant sector 165
quantitative analysis 213–14, 317–19, 327–32 retail sector 165, 329, 331
questionnaires 105, 106–08 retention, employee 112–13
reward structure 83
RAG status 48, 50, 51, 52, 54, 346 see also financial incentives; performance
rating systems 324, 355–56 (compensation) management
ratings agencies 11, 23, 110, 115–17, 301, 336 risk aggregation 52, 312
see also Fitch Ratings; S&Ps (Standard and risk and audit committees 66–68, 388
Poor’s) risk and control self-assessments 104
RCA 210 risk appetite 42
INDEX 409
risk appetite integration maturity 44 risk treatment plans 256, 258, 331
risk appetite statements 43–44, 47–48, 65, 88, risk universe 100
90, 146 road maps 38, 39–41, 228
risk appetite strategy 42–55, 65, 339 root cause analysis 97–99, 105, 127, 171–72,
carbon 144, 145–46 175, 189, 196, 274–76
risk articulation 96, 97–100 RSVP approach 82–83
risk assessment framework 309–18 Russia 130, 142, 275, 367
risk attitudes 91
risk avoidance 48, 150, 151, 184 S&P (Standard and Poor’s) 10, 11, 89–90,
risk awareness 47–48, 49, 64–65, 80–81, 116–17, 247
113, 348 Sainsbury 21
risk champions 34, 81, 250, 322 satellite technology 202, 208, 209–10, 230
risk committees 40, 63, 65, 254, 350, 390 ‘say on climate’ proposals 355
risk culture 82–91, 116, 244–45 scenario analysis 19, 43, 106, 118, 170–71, 187,
risk culture model 86–91 251, 253, 300–33
risk descriptors 97–98, 99 scenario descriptions 182–83, 331
risk drivers 133–39, 164–66 scenario narratives 320–23
risk events 97, 98, 99, 171 scenario selection 329
risk financing 196–97, 215–16, 231 scenario templates 331
risk function 35, 64, 72, 75, 80–81, 104–05, 248 science based targets 7, 10, 146, 361, 385, 387
risk identification 94–123, 174, 180–81, 245–46 scope 1 (direct) emissions 37, 132, 146, 147, 148,
risk identification template 108 354, 361–62, 386
risk impact 97, 98, 164–66, 181, 186, 189 scope 2 emissions 37, 38, 132–33, 147, 149,
risk impact assessment 259, 316–18, 323, 329, 331 361–62, 374, 386
risk impact pathways 329 scope 3 emissions 37–38, 47, 114, 133, 147–48,
risk management 19, 118, 163 157, 335, 361–62, 371, 383
evaluation of 89–91 Scope 3 Emissions Calculator 150
risk management committees 102 scope definition 311, 312–13
risk maturity 26–28, 31, 34 scorecards 83
risk minimization 45, 48 sea level rises 7, 125, 203, 207, 269, 281
see also detective controls season ticket loans 80
risk mitigation plans 25, 40, 176 seasonality 164, 181, 183, 212, 223
risk mitigation strategies 127, 148–49, 184, 185, second line of defence 71–72, 73
278, 288 Securities and Exchange Commission (SEC) 285,
post-loss 164, 166, 167 368, 371, 384
pre-loss 164, 167, 168–69 self-insurance 194
risk neutral 91 senior management 40, 57, 60–62, 73–74, 79,
risk opportunities 101, 120, 134–39, 270–71 80–81, 88, 96, 106–07, 339
see also competitive advantage see also board responsibility; tone from
risk outcomes 172, 173, 175, 216 the top
risk preferences 43, 45, 48, 49 senior management function holders 60, 73–74
risk principles 45–46 sensing technology 210
risk profile 180–82, 250, 343 sensitivity analysis 391–92
risk questionnaires 105, 106–08 sentiment shocks 313
risk radars 101–02, 121, 260–63 shadow pricing 341
risk registers 96, 104, 177 shared data 218
emerging risks 243, 246, 254, 255, 256, 257, shareholders 110, 111, 282
258, 259, 263 Shell 293, 295
risk reviews 94, 104–05, 106–08 short-range forecasts 224
risk seeking 48, 49, 91 Siemens 21
risk structure 83 SIG (IRM) 1, 44, 74, 81, 241
risk threats 101, 135, 136, 137, 138–39 simulation models 204, 207, 210–11, 214–15,
risk tolerances 43, 45, 48, 51–54, 91, 184, 222–23
215–16 Skyline Partners 195–96, 232–34
risk trackers 254, 257 slow-building risk 313
risk transfer 39, 184, 196, 215–16, 262 smart glass 289
410 INDEX
SME Carbon Footprint Calculator 149–50 Sustainability Consortium 193

snapbriefs 113 sustainability forums 113
snow cover 281 sustainability framework 143–49
social proof 283 Sustainability Investment Alliance 283
societal risk 2, 10–11, 18, 110, 116, 119, 121, sustainability strategy 10, 36–38, 87, 134,
268–69, 283–84 138, 271
soft risk-taking boundaries 51 Sustainable Finance Disclosure Regulation
solvency capital requirement 393 285, 286
Solvency II regulations 198, 199 sustainable investment 283, 340, 351–57
SONAR Report (2021) 240, 249–50, 259 Swiss Re 12, 31, 126–27, 240, 246, 249–50,
sourcing strategy 138 259, 277
Southern Water 173–74 SWOT analysis 103
Special Interest Group (SIG) (IRM) 1, 44, 74,
81, 241 tail events see extreme events
speed (velocity) 239, 247, 256–57, 260 Taittinger 169
sponsorship 40, 97 Tandem Bank 53
SS3/19 40, 43, 378 Target 100 plan 176
stakeholder, defined 109 target setting 20–21, 35, 37, 126, 146, 154–59
stakeholder analysis (mapping) 108–20 reporting 373, 374, 377, 382, 383, 384, 386,
stakeholder engagement 46–47, 58, 96, 117, 387, 390–91
248, 323 see also science based targets
stakeholder expectations 59–60, 81, 126 Task Force on Climate-related Disclosures
stakeholder prioritization framework 120–21 (TFCD) 16, 19–20, 40, 59–60, 118,
standards of care 295 134–36, 138, 365–97
standards writers 109 tax-efficient schemes 80
standing agenda items 68 taxation 117
STEEPLE analysis 251 carbon 23, 102, 134, 138, 340, 398
STEP programme 143 taxonomy 7, 8, 22–23, 100–01
stranded assets 135, 138, 270, 351–52 technology 135, 138, 152, 349
strategic approach 35 emerging 271, 287–92
strategic plans 63, 75–76 leakage detection 175, 176
strategic resilience 168–70, 171 satellite 202, 208, 209–10, 230
strategic risk metrics 45, 46–48 sensing 210
strategic risks 174, 175 see also automation; flood warning services;
strategy fusion reactors; Nimbus
bridging 193 temperature rises 7, 13, 16, 18, 174, 205–06,
buffering 193, 317 219–20, 239, 269–70, 326–27
business (corporate) 25, 31–32, 33, 35, Ten Point Plan for a Green Industrial Revolution
335–43 (UK Government) 141–42
product 136, 139, 152, 270, 339 Tesco 385–86
replacement 151, 152–53 Thailand floods (2011) 194
sustainability 10, 36–38, 87, 134, 138, 271 thermoscopes 208
see also climate change strategy; risk appetite third line of defence 72–73
strategy; risk mitigation strategies three horizons model 252–53, 307
stress testing 170–71, 198–99, 251, 302, 304, three lines of defence model 71–73
306, 309, 317, 328–29 thunderstorms 13, 127
sub-committees 63, 64, 65 time horizons 307–08, 309, 379, 387
sub-sea cabling 269 tipping points 280–82
sub-working groups 65 TIROS-1 209–10
Superstorm Sandy 188 tone from the top 87–88, 187
supplier due diligence 51, 113–14, 345–46 training 62, 64–65, 80–82, 91, 113, 389
supplier evaluation 346 transition risk 22–23, 115, 116, 133–39, 261
supplier management 51, 110, 113–14, 156, 193, data sources 315
344–47, 349, 361–62 emerging trends 282–84
supplier tiering 345–46 investment 357
supply chains 100, 113, 183, 192–96, 347 metrics 53
see also business continuity management reporting 391–92
INDEX 411
risk mitigation strategies 148 urban sprawl 13, 127

scenario analysis 319, 329–31 US 210
scenario narratives 321 Securities and Exchange Commission
stakeholder engagement 46–47 (SEC) 285, 368, 371, 384
transport sector 140, 269, 291
see also electric vehicles; hybrid vehicles valuation committees 352
tree-planting 153, 154, 357 value chain 117, 133, 211–16
trend analysis 143, 251, 379 values 83, 85, 87, 344–45
tropical cyclones 12, 14–15, 222–23, 224 Vanguard 283
velocity 239, 247, 256–57, 260
UK 16, 129, 141–43, 177–79 very short-range forecasts 224
breach of directors’ duties 23 Vodafone 21
Climate Impacts Programme 180 volatility 4–5, 46, 213, 267, 270, 309
disclosures 377–78
Green Jobs Taskforce 143 waste management 130, 138, 152
Greenhouse Gas (GHG) Protocol 132–33, watch lists 254, 256, 258, 263, 358, 359
149, 150, 371 water management 156, 173–74, 176,
Mackay Carbon Calculator 150 181–82, 183
Met Office 207–08, 209, 220, 325 Water Resources Management Plans 176
National Farmers Union 131 Water Resources South East 176
QAS 155 weather 203, 387
UK Climate Projections (2018) 207 Weather Bureau (US) 210
UK Flood Model 222 weather forecasting 169, 207, 216–17, 221,
UK Futures 252 223–25, 238–39, 251
Ukraine 142, 257, 267, 269, 367 satellite technology 202, 208,
under developed risk maturity 28 209–10, 230
underwriting 77, 78, 115, 131, 136, 228, 246 weather simulations 207
United Nations (UN) 125 weather stations 202, 209, 213, 216, 217
Climate Change (2022) 136, 139–40, 238–39 West Africa monsoons 282
Environment Programme (UNEP) 12, 126, 328 West Antarctic ice sheet 281
Environment Programme (UNEP) Finance wildfire ignition process 274–75
Initiative 328–29 wildfires 13, 14–15, 225, 271–72, 273–80
Framework Convention on Climate Change California 12, 22, 127, 293, 294–95
(UNFCCC) 16–17 wildland-urban interface 273
Green Hydrogen Catapult 290 Willis Research Network 250
Intergovernmental Panel on Climate Change wine industry 168–69
(IPCC) 18, 125, 131, 136, 207, 228, Woerhman, Asoka 356
238–39, 281 working from home 152, 349
Net-Zero Asset Owners Alliance 111, 283 working groups 39–40, 65, 319, 339
Paris Agreement 12, 16–18, 23, 65, 119, 129, workshops 106–08, 250, 319, 323
292, 309 World Economic Forum (WEF) 11, 58, 80, 246,
Principles for Responsible Investing 248–49, 268–69
(UNPRI) 352–53, 367 World Meteorological Organization (WMO)
unknown unknowns (black swans) 237, 247 210, 219
unmanned aerial vehicles 289 WRAP 114
upskilling 49, 361, 362
urban heat island effect 279 XR 119
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i

PRAISE FOR CLIMATE CHANGE ENTERPRISE

“Building on existing tools and techniques of risk management, Martin Massey

Climate Change Enterprise

Kogan Page books are printed on paper from sustainable forests.

Hardback 978 1 3986 0872 6

British Library Cataloguing-in-Publication Data

Library of Congress Control Number

Typeset by Integra Software Services, Pondicherry

To my wonderful children, Sebastian and Francesca.

THIS PAGE IS INTENTIONALLY LEFT BLANK

01 Climate change risk landscape and ERM maturity 6

02 Climate strategic positioning and risk appetite integration 30

03 Developing an effective climate governance framework 56

3.4 Building a good risk culture 82

04 Climate change risk identification techniques, including stakeholder

05 Managing transition risks 124

06 Building climate resilience 162

6.7 Building financial resilience 196

07 Climate physical risks – data sources, uses and challenges 202

08 Designing an effective emerging climate risk management

09 Emerging climate trends, issues and challenges 266

9.4 Climate and ESG reporting and ‘greenwashing’ 284

10 Climate stress and scenario testing 300

11 Climate risk integration into specific business processes 334

12 Financial reporting and climate disclosures 365

12.6 Current main disclosure observations and trends 384

Climate change and the route to net zero

Vision and philosophy

The specific goals of climate risk management include:

Book structure and key features

Climate change risk management in the future

Climate change risk landscape

The chapter provides an overview of why organizations need to address climate

●● Its global nature

1.1 Climate change risk management enablers

FIGURE 1.1 Climate change enterprise risk management – key enablers

11. Risk integration 4. Stakeholder

SOURCE © OneRisk Consulting. All rights reserved, 2022

1.2 Climate change and ESG integration

FIGURE 1.2 Environmental, social and governance criteria

Environmental Social Governance

Waste and Other social Other governance

1.2.1 Use of ESG factors

1.3 Global macro risk and climate change

●● Climate action failure

1.3.1 The main causes of climate change

1.3.2 The main impacts of climate change

1.3.3 Climate change and weather distribution

­F IGURE 1.4 Climate change and weather distribution

Less cold Extreme hot

Cold Average Hot

SOURCE US Environmental Protection Agency (EPA

REVIEW OF 2021 DIRECT ECONOMIC LOSSES FROM NATURAL

FIGURE 1.5 Significant economic loss events in 2021 – > $1 billion

SOURCE Data: Aon (Catastrophe Insight)

SOURCE Data: Aon (Catastrophe Insight)

Flooding and coastal change risks to communities, businesses and

Risks to health, well-being and productivity from high temperatures.

F IGURE 1.4 Climate change and weather distribution

ccording to the most recent COSO (Committee of Sponsoring Organizations – a

1.7 Developing a climate change risk maturity model

●● Agree maturity model categories