Best Practices: The Role Of Climate Risk In Enterprise Risk Management

In late 2021 the Institute of Risk Management provided a framework for considering climate change risks, in which it stated: “There is widespread consensus that addressing climate-related risks is a critical component of ERM [enterprise risk management] in supporting an organisation in understanding its future risk profile”. The institute also acknowledged the need to have an “early warning system in place” to improve firms’ resilience. Nevertheless, many firms struggle to account for or incorporate climate-related risks into ERM frameworks. These risks are unique to each firm; they are also hard to quantify and their interrelation with traditional and emerging risks can be unclear. Accounting for climate-related risks requires specific data, analyses and capabilities that many firms lack, generating numerous challenges for their risk management processes. Moreover, compliance-based attitudes towards climate risks inhibit firms from fully capturing their climate risk landscape. Resilience-focused firms should therefore consider embedding climate risks into their ERM frameworks.