Sustainability and Climate Risk (SCR) — Question 20

A mid-size bank in Australia will implement scenario analysis as part of a risk assessment to measure climate risk. A risk manager in charge of this project reviews current practices among peers worldwide.
To align with common and well-established practices of financial firms, how will the risk manager implement scenario analysis to assess climate risk?

Answer options

• A. Create inclusionary criteria for investments based on climate risk
• B. Provide ex-ante climate risk analysis to national regulators
• C. Compare the likelihood of physical and transition risks
• D. Examine portfolio-level exposures in various climate outcomes

Correct answer: D

Explanation

The correct answer, D, focuses on analyzing portfolio-level exposures to different climate outcomes, which is essential for understanding how various scenarios might impact the bank's investments. Option A is incorrect because creating inclusionary criteria does not directly measure climate risk. Option B is not the best choice as providing analysis to regulators does not help assess the bank's own risk. Option C, while relevant, does not encompass the broader portfolio assessment needed for comprehensive scenario analysis.