Climate Risk management

Question 1

What method can a FRFI use to to assess the impact of climate-related risks on its risk profile, business strategy, and business model?

Answer 1

Use climate scenario analysis

Question 2

Describe climate scenario analysis

Answer 2

Climate scenario analysis uses a hypothetical future state of the world to assess the impact of climate-related risks on a FRFI’s operations. These exercises can help the FRFI achieve different objectives in its strategic planning and enterprise risk management.

Question 3

Climate change risk can be split into two different risks, what are they?

Answer 3

Physical risks associated with climate change and transition risk associating with the transition to a low greenhouse-gas economy

Question 4

What does the FRFI need to disclose with respect to climate change risk?

Answer 4

Basically any information that is relevant for an outsider that wants to understand how the firm is exposed to climate change risk.

Question 5

What are the outcomes of good climate risk management?

Answer 5

1. The FRFI understands and mitigates against potential impacts of climate-related risks to its business model and strategy.
2. The FRFI has appropriate governance and risk management practices to manage identified climate-related risks.
3. The FRFI remains financially resilient through severe, yet plausible, climate risk scenarios, and operationally resilient through disruption due to climate-related disasters.

Question 6

Why is it important to disclose information about the climate change risk of the FRFI?

Answer 6

These disclosures can build confidence in FRFI management, and enable FRFIs to attract, or maintain their access to, capital and liquidity channels. By extension, confidence in FRFIs contributes to the public confidence in, and resilience of, the Canadian financial system.

Question 7

Climate scenario analysis can help an FRFI achieve different objectives in its strategic planning. Give a few examples (4) of objectives that climate scenario analysis can help with.

Answer 7

1. Assessing the impact of physical and transition risks on the FRFI’s strategy and risk profile, and the resiliency of its business model;
2. Identifying relevant climate-related risk factors that can drive the FRFI’s financial and non-financial risks, and estimating exposures and potential losses
3. Identifying data, methodology, and assumption limitations
4. Informing the adequacy of the FRFI’s risk management framework.