Climate & Operational Risk: The ORX approach

Following discussions with members, ORX is considering climate as a causal factor of a range of operational risks rather than as a discrete event type. Therefore, we do not propose creating a new event type for ‘climate’ in the ORX Reference Taxonomy. Instead, we believe that several existing event types are likely to be impacted.

Climate tends to currently be broken down into two areas of consideration - transition and physical.

Climate change transition risk events

These include losses resulting from:

• Failures in a firm's process of implementing adjustments to a lower-carbon and more environmentally sustainable economy (triggered typically by a relatively abrupt adoption of climate and environmental policies)
• Failures in a firm’s product design process that fails to take climate change into account
• Misconduct in selling or financing environmentally controversial products or activities (‘greenwashing’), potentially leading to liability risks and/or reputational damage
• Failures to comply with climate – or environment – related regulatory guidelines

Climate change physical risk events

This includes losses resulting from:

• A changing climate, including more frequent extreme weather events and gradual changes in climate
• Environmental degradation, such as air, water and land pollution, water stress, biodiversity loss and deforestation.

This includes any of the following caused by extreme weather events falling outside the normal or expected frequency of occurrence or reflecting a longer-term shift in climate patterns*:

1. Destruction to property or assets
2. Failure of staff to reach offices/places of employment and to perform services for customers
3. Failures of utilities infrastructure
4. Failure of vendors to provide critical services, including failure to have appropriate BCM plans in place

This paper also looks at how we will enhance our existing data and services to support members. This will include:

• ORX Reference Taxonomy: Providing guidance on applying event, cause and impact taxonomies on climate risk-related events.
• ORX Global & Insurance Loss Data: Using a climate flag to allow members to begin to share climate-related operational risk loss events.
• ORX Scenarios: Publishing a paper on current scenario practices for climate, developing a climate-related scenario handbook, and using a climate flag/drivers in the scenario library to support sharing of relevant data.
• ORX News: A climate flag added to highlight relevant external event stories.
• Stress Testing: Activity to support members’ participation in relevant regulatory stress tests.

In addition, the paper outlines examples of how the ORX Reference Taxonomy can be used to capture climate-related operational risks.

Disclaimer: ORX has prepared this resource with care and attention. ORX does not accept responsibility for any errors or omissions. ORX does not warrant the accuracy of the advice, statement or recommendations in this resource. ORX shall not be liable for any loss, expense, damage or claim arising from this resource. The content of this resource does not itself constitute a contractual agreement, and ORX accepts no obligation associated with this resource except as expressly agreed in writing. ©ORX 2024

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