| 4. | The financial firm’s board and senior management should oversee the incorporation of climate-related financial risks into the organization’s internal risk management framework and oversee the development and implementation of policies and procedures to identify, assess, measure, mitigate, monitor and report on climate-related financial risk exposures.
| 4.1 | Climate-related financial risks affecting financial firms should be identified. Identification of these risks should involve a comprehensive assessment of how the risks posed by climate-related matters may affect the financial firm, which should include an assessment of climate-related financial risks across a range of plausible scenarios and under various time horizons.
| | 4.2 | An appropriate framework for managing climate-related financial risks should be based on a comprehensive assessment of how and to what extent such risks would affect the financial firm’s business, operations and/or portfolios. The assessment of climate-related financial risks should take into account strategic, financial, operational and reputational risk implications.
| | 4.3 | Financial firms should conduct a materiality assessment with clear definitions and thresholds for climate-related financial risks, which will help them decide how to embed climate-related financial risks into their existing risk management frameworks.
| | 4.4 | A financial firm should, in a materiality assessment, consider its exposure to physical and transition risks.
| | 4.5 | Depending on the type of exposure and risk drivers, financial firms should deploy qualitative and/or quantitative approaches to assess the materiality of the risks. To form a final judgement on materiality, financial firms should develop a threshold, or a combination of thresholds, against which the outcome of the materiality assessment is determined. These thresholds can be quantitative or qualitative, depending on whether a quantitative assessment of materiality is feasible or whether a qualitative threshold is more suitable.
| | 4.6 | Based on the materiality and potential impacts identified, financial firms should update their existing risk management framework to embed climate-related financial risk considerations.
| | 4.7 | Financial firms should also regularly review relevant policies and processes to assess their effectiveness, and adjust them based on the outcomes of ongoing risk monitoring. Any ensuing updates to these policies and procedures should be documented.
| | 4.8 | Where material climate-related financial risks are identified, financial firms should establish and implement plans to mitigate these risks and manage their exposures. Examples of such mitigation measures include establishing and enforcing sectoral or client-specific risk and relationship limits, including financial and durational; adjusting client engagement criteria; or applying haircuts to asset values, among others.
| | 4.9 | Relevant financial firms should consider climate-related financial risk within established traditional risk categories (for example, credit, market, liquidity, operational, underwriting and reputational risk profiles) or, depending on the materiality of the perceived risk, as a stand-alone risk category.
| | 4.10 | In line with their usual risk governance arrangements, relevant financial firms should consider how best to allocate the responsibilities for managing climate-related financial risks, such as by allocating them across the “three lines of defence” (core business, risk function and internal audit) to ensure comprehensive and effective identification, measurement monitoring and mitigation of climate-related financial risk.
| | 4.11 | A financial firm that has significant relationships with other entities in its group, including subsidiaries, affiliates or international branches, should develop and maintain methods and processes to coordinate the identification, assessment, measurement, mitigation, monitoring and reporting of material climate-related financial risks across the group.
|
|