A major hurricane extensively damages the electrical infrastructure of a utility company. To improve the utility’s risk management, the risk director prepares a strategy plan and incorporates climate risk considerations within the existing risk management framework.
Which recommendation should the director make to incorporate climate risk into the framework’s risk identification component?
To incorporate climate risk into the framework's risk identification component, the director should examine the transmission channels of climate risk drivers into financial risk to determine which risks are likely to materialize for the utility. This process allows for a thorough understanding of how climate risks can impact the utility financially, enabling better identification and management of those risks. Physical risks like hurricanes are part of these identified risks but integrating climate risk fully into the framework necessitates evaluating financial impacts first.
Risk identification starts with examining the transmission channels of climate risk drivers into financial risk (Sections 6.2–6.4) and then identifying which of these are the most relevant for a particular organization.
It is A. Because the issue is physical risks. Be careful with voted answers.
A is wrong. A is within the 2nd step of COSO ERM as it's more about defining risk appetite. Risk identification is within the 3rd step of COSO ERM.
Risk identification starts with examining the transmission channels of climate risk drivers into financial risk (Sections 6.2–6.4) and then identifying which of these are the most relevant for a particular organization.
The question itself is confusing. It says about the Utility's Climate Risk- in that case the answer should be C i.e. Transmission Channels. But hurricane was physical risk and if by highlighting the physical risk event, the question is indicating that only physical risk is to be taken in to consideration then answer is A
Risk identification starts with examining the transmission channels of climate risk drivers into financial risk
@goodforme: There is no indication, that the company is applying the COSO ERM Framework and also "Performance" component is not the question here (which consists of Risk identification, Risk assessment and risk prioritization). Answer A seems more plausible. Physical Risk is a result of potential harm (e.g. storm) exposure (location where hurricans occur) and understanding vulnerability is vital, so you can take measures (mitigate, adapt, etc.)
The answer is C. The question describes the utility company's risk management framework. Therefore, what recommendation should the director make to incorporate climate risk into the framework's "risk identification" component? The major hurricane throws you off, but the main purpose is incorporating climate risk within existing risk management framework.
To add, Risk Assessment describes "..internal risk assessment for a company will also require assessing the VULNERABILITY and ADAPTIVE CAPACITY of these facilities". This discusses about Risk Identification which involves "articulating the potential impact on business operations and strategy.