Governance and Risk Management
The pilot CSA exercise included a review of governance and risk-management practices used by participants for the exercise.
Governance
All participants used or adapted existing governance and risk-management practices for the pilot CSA exercise. Most participants created a working group or council reporting into an existing climate risk committee or a management-level risk committee. The working group was typically responsible for overseeing the conceptual design and execution of the pilot CSA exercise. In some cases, these working groups were supported by task forces focused specifically on the physical or transition risk modules of the exercise. Some of these bodies will be incorporated permanently in governance structures, while others will be decommissioned following the exercise.
Most participants used existing stress testing governance structures and practices in the execution of the pilot CSA exercise. Most participants described processes that included review and challenge of estimates with management and board level risk committees, lines of business, independent risk, and stress testing groups to varying degrees.
Internal Controls
Participants used existing internal controls where applicable and instituted a limited number of new controls for the exercise, which were primarily focused on compliance with the Participant Instructions. Other controls implemented during the pilot CSA exercise related to model inputs, processing, output and estimates, and submission verifications. Most participants noted that time constraints, data limitations, and the nature of the exercise precluded participants from applying a full control framework, which would typically include model validation.
Internal Audit
Internal audit coverage of the pilot CSA exercise varied across participants, with primarily limited scope monitoring engagements rather than discrete events. Practices ranged from conducting a pilot CSA-specific audit to incorporating testing of the pilot CSA exercise into a broader audit of climate risk methodologies to approaching internal audit through continuous monitoring of aspects of the pilot CSA exercise. Most participants reported that time constraints precluded full audits of the exercise.
Model Risk Management
All participants relied on existing model risk-management frameworks to develop the models used for the pilot CSA exercise, but participants faced several challenges in conducting reviews of modeling frameworks. These challenges included limited data, lack of back-testing capabilities, non-linear risks, scenario horizon, heavy reliance on judgment, limited reliability of model output, and time constraints. Given the exploratory nature of the exercise, the Participant Instructions acknowledged and accepted the challenges with model validation.14
Participants focused on conceptual soundness, compensating controls, and overlays as applicable. Participants obtained appropriate waivers or exceptions in compliance with their internal policies and procedures.15
References
14. "Unless participants also rely on a model used in this exercise for business-as-usual decisionmaking, or to assess risks on a regular basis, participants may use models that have not been fully integrated into their model risk-management framework, including those that have not yet been subject to comprehensive model validation. Examples of constraints include limited data or challenges in confirming model performance via outcomes analysis." Pilot Climate Scenario Analysis Exercise: Participant Instructions, 9, https://www.federalreserve.gov/publications/files/csa-instructions-20230117.pdf Return to text
15. "The Board recognizes and accepts that these limitations may inhibit the application of certain principles for sound model risk management to models used in this pilot exercise." Participant Instructions, 9. Return to text