Sustainability and Climate Risk (SCR) — Question 5

The board of directors of a growing asset management firm recommends the firm expand its ERM framework to incorporate climate risks. In response, the risk team references the COSO ERM framework for applying ESG-related risks to develop and propose a strategy to implement climate risk into the various ERM components.
How will the risk team modify the existing strategy component of the company’s ERM framework?

Answer options

• A. Gather and use scores and physical and transition risk exposure data to conduct various analyses to determine if excess risk would exist in an unfavorable climate scenario.
• B. Evaluate the full business context on climate risk and understand how climate change affects the inputs, business activities, and outputs.
• C. Factor in climate risk impacts when reassessing risks after considerable business changes.
• D. Rank climate risks by likelihood of occurrence and severity to examine resulting outcomes and how the firm can mitigate these risks.

Correct answer: B

Explanation

The correct answer is B because it emphasizes understanding the broader business implications of climate risk, which is crucial for effective risk management. Options A, C, and D focus on specific analyses or actions that, while important, do not encompass the holistic evaluation of climate change's effect on the entire business context as required by the ERM framework.