SCR Sustainability and Climate Risk Questions and Answers

A global electronics manufacturer experiences severe flooding in one of its key locations. Company senior management will mitigate supply chain risk and adhere to environmental standards by issuing a bond. The bond proceeds will simultaneously address floodwater contaminated by industrial chemicals and assist communities experiencing deterioration of health conditions due to waterborne diseases.

Which bond is the company likely to issue?

An industry association in Germany surveys members on business alignment with nationally determined contributions (NDCs). The association members express concern about potential cascading legal repercussions or penalties if governments do not conform to Paris Agreement pledges. An attorney at the association researches this issue and sends a memo to members.

The memo should state the Paris Agreement legally obliges signatories to take what action?

The sustainability team at a global airline company enhances long-term operational efficiency and resilience. The team reviews potential strategies using scenario analysis to assess climate transition risks and optimize logistics. How can the airline company use scenario analysis to assess transition risk?

Leaders of a small island nation implement a sector-specific carbon reduction policy to address climate change. The policy includes a commitment to reduce country emissions through NDCs under the Paris Agreement. Which of the following emission reduction policies is the nation most likely implementing?

A prominent housing developer plans construction of a small low-carbon-emitting city in an equatorial nation. The developer plans to maximize renewable energy use and estimates daily city summer solar energy generation capacity and load (total electricity demand), in megawatts (MW):

The developer estimates the following for capacity and load:

At 14:00 solar generation is highest at 720 MW

At 20:00 solar generation decreases to 0 MW

At 20:00 load is highest at 980 MW

At 4:00 load is lowest at 380 MW

How should the developer meet additional energy demand while achieving the lowest-carbon-emission goal option?

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?

A Central American country signs the Paris Agreement to align actions and policies to keep global temperature rise below 1.5°C. The country’s environmental agency develops a nationally determined contribution plan that includes domestic, economy-wide, and sector-specific policies. The power generation sector is most comprehensively covered by the plan.

Which policy included in the plan targets the power generation sector?

An alliance of electricity power producers examines a proposed cap-and-trade regulation that would affect most members. The alliance lobbies lawmakers to strengthen banking and borrowing provisions in the proposed regulation, allowing increased flexibility for the sector to comply with emissions limits.

What component of climate risk is the alliance directly attempting to influence?

A global cosmetics company surveys consumers. The survey reveals close to 75% of consumers indicate sustainability is an important issue and are willing to change shopping habits to reduce environmental impact. The company responds by establishing a sustainability framework. As part of the process to implement this framework, a company sustainability analyst identifies sustainable investment and disclosure practices.

Which recommendation will the analyst likely make to implement a company sustainability framework?

An investment bank of a southern African country appoints a task force to assess current climate risk practices. The task force examines the potential of climate change to cause systemic risk at the macro level to inform climate investment strategies. The task force evaluates potential disruption scenarios to the financial system due to climate risk. Which risk type will most likely have the lowest potential to cause systemic risk to the financial system of the country?

To assess potential business implications of climate change, a large manufacturing company implements scenario analysis for the first time. The company hires a consultant to help incorporate climate-related considerations into a model of the company’s potential business outcomes.

What useful scenario analysis information should the consultant make the company aware of?

A global investment bank expands its risk department to include climate risk assessment. Senior management directs the department to implement approaches for evaluating how climate change affects traditional risk types. A risk manager recommends risk metrics for key risk types that measure physical and transition risk impacts.

To measure credit risk, which metric should the analyst recommend?

Organizers of an upcoming UN Climate Change Conference prepare a document highlighting successes and failures of climate accords over the last 20 years.

The document lists what success from the 2009 Copenhagen Accord?

A retail company operates internationally, and increasingly incurs scrutiny for environmental and social impacts. In response, the company adopts the SDGs. The company sustainability director begins this process by linking the SDGs to material concerns for the company.

Which strategy should the director suggest the company take to directly address one of the SDGs?

A team of climate risk specialists at a global non-profit research organization prepares a study on climate policy and achieving national climate change mitigation targets. The study focuses on actors, non-state and subnational (NSA) participants, and actions that can be taken to impact climate policy.

How should the team describe effective climate policy and climate change mitigation targets?

A multinational food and beverage corporation has growing concerns that CO2 and other GHGs in the atmosphere have a negative effect on agricultural productivity. The corporation is subject to higher costs and scarce availability for commodities necessary for its supply chain.

The corporation will disclose this scenario under which climate-related risk type?

A diversified industrial company embarks on a climate transition strategy to invest in a more fuel-efficient airline fleet. To finance the investment, the CSO analyzes sustainable finance instruments and recommends instruments most suitable to issue.

Which of the following financial instruments should the CSO recommend and why?

To improve sustainability, a railroad and transportation services company will revitalize its rail network by installing an operating system that reduces idle time. A reduction in idle time will decrease GHG emissions. To finance this plan, the company will issue green bonds beginning in 2024. The company sustainability director develops sustainability objectives and eligibility criteria to communicate to investors.

The director is fulfilling which core component of the Green Bond Principles?

A prominent institutional investor forms a committee to support global investments to achieve net zero GHG emissions by 2050. To inform this investment strategy, the committee relies on the IEA Net-Zero Scenario.

How should the committee proceed with investments to align with IEA milestones?

The CRO of an automobile manufacturer in North America prepares a keynote address on risks in the auto sector over the next decade. The CRO highlights the primary technology risks facing its line of internal combustion engine (ICE) vehicles.

At approximately what point will many manufacturers of ICE vehicles experience a significant technology risk?

Senior officials in the environmental ministry of a South American country prepare a briefing for a new minister. The minister questions the usefulness of large international conferences to achieve real progress in GHG reduction. The briefing focuses on COP21 in Paris, which ended with an agreement to address climate change. Which of the following Paris Agreement achievements did the officials most likely note in the briefing?

An oil and gas company aligns strategy and resiliency planning with long-term global climate goals. After conducting a feasibility study, a company climate risk analyst recommends incorporating IEA scenarios into company strategy development. How might the use of IEA reference scenarios improve company strategy planning?

Alimento Y Agricultura (AYA) is a food and agriculture conglomerate headquartered in Costa Rica with operations throughout Central America. AYA historically produced coffee, bananas, and sugar. Over the last decade, the company growing region experienced climate-related crop production challenges. The region suffered prolonged drought conditions and severe flooding events. AYA leadership may relocate existing coffee farm locations in response to these climate stressors.

Last year Costa Rica introduced mandatory climate risk reporting aligned with ISSB standards The government mandate compelled AYA to enhance its transition and physical risk assessment across the company. A newly formed sustainability governance team prioritizes the following objectives:

• Update TCFD reporting with new ISSB IFRS S2 requirements

• Initiate more comprehensive scenario analysis

• Conduct nature and water risk assessments

AYA previously reported climate risks aligned with all TCFD pillars, risk categories, and scenario analysis recommendations. Reporting includes all Scope 1 and Scope 2 emissions, reduction targets, and appointments of board officers responsible for climate risks. Scenario analysis is used to assess all banana, coffee, and sugar production climate risk exposure.

AYA uses 2°C and 4°C climate scenarios to assess company impacts from physical and transition risk. Under the 2°C scenario transition risk increases, while under the 4°C scenario water risk significantly increases.

AYA appoints an SCR certificate holder to the position of nature risk manager to advance nature-based assessments. The manager contracts with a nature risk consultancy to better understand and manage exposure to nature-related risks and impacts. The consultancy identifies crop production, water quality, and water quantity as the primary nature-based risks.

The consultancy produces the following graph to demonstrate coffee crop productivity:

If growing conditions fall below 1, it is not economical for AYA to continue coffee production in the region. Point A indicates current growing conditions. Point B is a forecast of future conditions under a 4°C scenario, created by the consultancy model.

After identifying nature risks broadly, AYA performs a water risk assessment (WRA). The WRA assesses historical and future water withdrawal rates and identifies operational water dependencies.

Following the WRA, the company engages with existing stakeholders to adapt existing business strategy. AYA initiates a pilot project with upstream farmers to protect their land. AYA will either train or pay local farmers to plant shrubbery and buffer zones to reduce erosion and runoff of sediments, nutrients, and pathogens from local crop production and industry.

Which LEAP concept best describes Point A in the context of coffee growing conditions?

To achieve emissions reduction goals, a South American government considers policies other than carbon pricing to target carbon-intensive industries more effectively. The government intends to promote renewable power generation by implementing subsidies.

Which action should the government take to support this subsidy policy?

An investment analyst assesses climate-related stranded asset risk for a portfolio of energy companies. The analyst develops a list of companies potentially exhibiting stranded asset risk. After a more granular examination, the analyst summarizes corporate activity in the following table:

The analyst identifies the company with the highest stranded asset exposure for possible divestment. Which company does the analyst recommend for divestment?

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?

A recent sustainability report revealed the pension fund of a small European nation is heavily invested in sectors with poor sustainability records. In response to pensioner and other stakeholder requests, the fund joins the PRI.

What strategy must the fund incorporate to comply with the PRI?

A sustainability analyst for a global food and beverage company tracks ESG metrics to report to investors. The analyst meets with company leaders of different business units to explain criteria and indicator types for each ESG component.

To address each component, which metrics will the analyst socialize with company leaders?

A coalition of African central banks reviews member bank prudential policies for alignment with climate-related financial risk mitigation. To shape the coalition’s climate risk and business continuity planning objectives, coalition leaders review key risk metrics. Which of the following metrics will the coalition most likely use to evaluate operational risk due to climate change?

Senior management at a global manufacturer of commercial flooring explores strategies to reduce capital costs and improve company valuation, resulting in a comprehensive sustainability strategy. Management determines all future flooring products will be carbon neutral across their full product life cycle. The risk team is tasked with updating the company ERM framework in accordance with COSO guidelines to include ESG and climate-related risks. The team reviews and updates each of the ERM components.

What action should the team recommend the company take as part of the communication component of the ERM framework?

A large insurance company in South America expands use of climate scenario analysis. The company used RCPs in previous scenario analyses but now hires an actuary with climate expertise to incorporate SSPs in this process.

How can the actuary advise the insurance company use SSPs going forward?

A multi-industry consortium convenes risk managers from across the globe to discuss climate impacts on global trade and economic growth. A climate modeler leads a discussion on macro-level physical changes in the Earth’s atmosphere and highlights two climatic trends that demonstrate an inverse relationship in recent decades.

What two trends does the modeler highlight?