SCR Sustainability and Climate Risk Questions and Answers

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?

A multinational footwear company prepares its annual GHG inventory. The company sustainability director organizes data according to the GHG Protocol and prepares a set of recommended actions to lower company emissions.

Which action is the director most likely to recommend to reduce company Scope 3 emissions?

A large real estate investment firm increases resources to understand transition and physical risks as it expands into markets with climate regulations and increasing flooding events. Senior leadership requires the risk team train all business units in understanding how both climate risks can impact operations.

During this process, how should the risk team define commonalities between both risks?

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?

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?

An international report on SDG progress identifies a large south Asian nation as not on track to meet most SDGs. Specifically, the nation’s reduction of infant mortality and adoption of clean energy lag behind regional peers. In response, a government environmental minister creates a memorandum outlining steps the nation can take to advance the 2030 Agenda goals. The office distributes the memorandum to other government agencies.

How will the memorandum describe the 2030 Agenda goals?

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 senior sustainability consultant at an African think tank explains the complexities of different Earth science systems to a group of ESG practitioners as part of the think tank’s continuing education program.

Which of the following statements by the sustainability consultant accurately describes the Earth’s greenhouse effect?

An international chemical manufacturing company produces a variety of consumer and industrial goods and services. To progress company alignment with the SDGs, the sustainability director suggests incorporating nature-based strategies.

Which strategy best represents a nature-based solution for the company?

A company reduces water usage and increases usage of more expensive resources after regulations become more stringent. This most likely impacts:

A public policy think tank releases a report on global decarbonization pathways. The report describes the relative contribution of each GHG to modern climate change and recommends focusing global efforts on CO2 reduction.

Why would the think tank make this recommendation?

A European commercial bank recently became a signatory to the UNEP FI PRB. To fulfill PRB commitments, the bank CRO emphasizes the need to holistically integrate ESG considerations into lending decisions to reduce long-term risk exposure. Which of the following strategies will the bank most likely adopt going forward?

A large country joins the Paris Agreement and directs the national environmental department to disseminate new policies and goals to relevant federal agencies. Most agencies are familiar with past climate agreement principles and protocols but not those of the Paris Agreement.

The environmental department should educate federal agencies on what feature of the Paris Agreement?

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?

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?

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?

A financial institution prepares to issue a sustainability-linked bond. As part of the preparations, the institution:

Develops green lending products, which account for 5% of its overall portfolio

Monitors energy usage of operations

Assembles a gender-balanced board

The institution’s sustainability department creates sustainability targets to achieve by 2025. Which new target best aligns with the Sustainability-Linked Loan Principles?

In response to consumer demand for eco-friendly products, a global personal care company develops a net-zero transition plan. The company sustainability team recommends an appropriate carbon accounting method for the plan. Which of the following country-level emission accounting methods is most likely recommended and why?

After recent summer and winter temperature extremes disrupt operations, a national oil company evaluates its 10-year business plan. The risk department reviews how corporate assets, both physical and human, are resilient to climate change. Early in the planning process, a risk team member emphasizes the importance of planning for both acute and chronic climate hazards.

How should the team member describe acute and chronic hazards in terms of the 10-year strategy?

A city planning commissioner consults with climate scientists to assess the impact of sea level rise on strategic infrastructure projects. The scientists discuss several climate model projections and indicate sea level rise has a fundamental relationship to GHG emissions, regardless of a specific warming scenario.

How should the scientists describe this relationship?

A climate resilience consultant prepares an overview for a regional agency client. The overview summarizes climate policies that significantly reduce emissions. The client expresses a strong preference for a policy that limits emissions and offers flexibility in participant permits.

What policy should the consultant recommend to the client?

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 risk consultant begins an engagement for a development agency. The engagement focuses on identifying policies that address climate change impacts. The consultant drafts an action plan that incorporates a roadmap of effective climate policies to present to senior directors at a strategic meeting. The plan includes an introductory summary of the backdrop and effectiveness of historical and current climate policies.  

How should the consultant describe the context of climate policy evolution?  

As climate change poses new financial risks to a central bank’s monetary policy operations, the bank decides to adapt operations with NGFS guidelines. Because the central bank does not include climate change in supervision practices, the bank consults subject matter experts (SMEs) to develop a proposal for central bank action on climate change. After completing the risk assessment, SMEs recommend the bank incorporate microprudential and macroprudential measures to embed climate change into supervision practices.

Which action are SMEs likely to recommend?

An international development bank publishes an annual index that evaluates climate risk at a regional level. The index consists of several economic, policy, and physical risk components. For the upcoming index publication, the bank identifies new components that reflect the ability of companies and local infrastructure to incorporate clean and renewable energy sources into electric grids and transport systems. Which of the following risk components will the bank most likely identify?

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?

In response to policy and technology changes, a cement manufacturer looks for new opportunities to raise profits by reducing GHG emissions. Because the cement industry accounts for a considerable percentage of global emissions, the manufacturer joins a coalition of company peers. The coalition lobbies country governments to adhere to the Paris Agreement nationally determined contributions (NDCs).

Which of the following actions does the coalition recommend?

A telecommunications corporation issues a green bond to finance energy efficiency improvements for the company’s office space worldwide. The company’s risk management department commissions an independent advisory assessment of the bond to check bond alignment with components of the Green Bond Principles.

What action does the corporation take to align the bond with the “process for project evaluation and selection” component of the Green Bond Principles?

A senior advisor from a government agency in Southeast Asia proposes a national framework to classify sustainable economic activities, aligned with the EU Taxonomy. The new framework will limit environmental harm and promote sustainable growth. Which EU Taxonomy requirement will the advisor most likely incorporate into the proposed framework?

A risk manager at a fertilizer production company prepares a GHG emissions report on company product usage, emissions, and energy sources. The manager notes the company adequately tracks and proactively manages carbon emissions. However, the manager identifies several non-carbon emitting activities that can affect the climate through radiative forcing. Which of the following positive radiative forcing drivers will the manager most likely identify?

The climate risk team at a global bank works on a sustainability and climate risk report for a forthcoming company strategy meeting. The meeting will focus on bank goals to achieve net zero GHG emissions by 2050. Bank leaders will discuss potential risk exposures the bank may face, as well as possible financial systemic effects.

Which of the following is an example of how systemic climate risk can translate into liquidity risk for the bank?

A climate scientist develops a presentation on modern climate change for a group of policymakers.

What observation does the scientist include in the presentation that provides evidence of human attribution to current climate change?