How is the operational risk discipline is approaching climate?
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Paper - April 2022
Climate is a major focus for risk managers across the globe. Given both the environmental changes we are witnessing, and the understandable regulatory focus and societal response, organisations have been grappling with how to integrate climate into their risk management approach.
As a result of discussions with members, ORX is intending to help with this challenge during 2022 (and beyond). This paper, which we've made freely available to download, sets out how we currently believe the industry is considering climate and operational risk, as well as how we will enhance our existing data and services to support members.
Defining an approach to climate
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*:
Destruction to property or assets
Failure of staff to reach offices/places of employment and to perform services for customers
Failures of utilities infrastructure
Failure of vendors to provide critical services, including failure to have appropriate BCM plans in place
*It is recognised that defining the difference between a ‘normal’ weather event and a ‘climate change-related’ weather event is difficult. This paper is not proposing a definition but this is a potential area of future activity.
What are we doing to support members and subscribers?
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.
Download the paper
Download the paper to learn more about how to approach climate from an operational risk perspective.
