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?
To modify the existing strategy component of the company’s ERM framework, the risk team should evaluate the full business context on climate risk. This involves understanding how climate change affects the inputs, business activities, and outputs. This comprehensive evaluation allows for a strategic landscape assessment, particularly important for integrating climate risks, and ensures that the firm aligns its strategies with the potential impact of climate change throughout its operations.
Strategy and Setting Objectives, Goals, and Targets : An impor-tant prerequisite for strategic decisions is strategic landscape evaluation; this is especially the case in regard to climate issues. Understanding the full business context on climate risk requires understanding the external environment and megatrends, such as the expected physical, societal, and mac-roeconomic impacts of climate change.
pg. 136 6.6.2 Strategy and Setting OBjectives, Goals anf Targets
I agree with gooforme that answer B seems to be correct. However, I believe that answer D is also correct: (6.6.3) Risk prioritization is especially important in an ERM context, as any large enterprise will be exposed to a multitude of risks, and it is important to rank these in order of importance. Ranking methods include ranking by likelihood of occurrence, adaptability and complexity, or severity. One way of ranking by severity is to examine what outcomes the risks affect, where risks affecting the fundamentals of business—profits, revenues, and asset values—are ranked as more severe than risks that only affect more ancillary out-comes such as employee morale or land use. Another way of prioritizing risks is to filter by the risks that the company can actually control.
I would like to retract, since risk prioritization is part of the Performance component/area of the COSO ERM Framework. I fully agree with the choice of B.
without doubt the answer is D. All the Climate Risks may not affect company in same way and it all depends on adaptability and exposure. therefore ranking the risks is the first step on the basis of severity.