Climate Change in Scenario Analysis

Report - February 2022

Recognising the increasing focus on climate risk in financial services, the ORX Scenarios Working Group has been working on current scenario practices around climate change.

Climate's growing prominence as an emerging risk factor within the industry is evidenced by the fact that climate change ranked third in the Operational Risk Horizon 2021 survey, and recent discussions have only confirmed this trend.

Climate change is widely seen as a transversal issue, cutting across all areas of enterprise risk management.

It poses unique challenges to scenario practitioners in defining the nature, scope, and impact of the climate threat. These difficulties are further compounded at present by limited regulatory guidance and the scarcity of data to support scenario assessments.

To address these challenges, the ORX Scenarios Working Group (SWG) set out to explore current approaches to climate change in scenario analysis. Our aim was to guide scenario practitioners through some of the key issues and provide a basis for future discussions and investigations informed by greater member experience. The resulting paper is available to all ORX Scenarios subscribers.