Using these definitions to identify potential climate-related risks and opportunities, organizations can start planning for their scenario analysis. They also help explore alternatives that may significantly alter the basis for “business-as-usual” assumptions and identify opportunities through innovation.
There is no “one solution fits all,” and organizations will have to look at their own circumstances and value chain when undertaking this analysis. Not only are the Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) providing different possible scenarios when it comes to global warming (i.e., changes of 1.5 oC, 2 oC, 3 oC or 4oC), the actual impacts of these possible scenarios may be very different in different parts of the world, and on different time scales. In different regions, climate change could be felt as more extreme temperatures, rise in sea levels or more hurricanes, rather than as a slow and steady increase in the temperature across months.
While scenario-analysis is not new, applying it to climate change is relatively recent, and there is much to be learned and understood. In addition, as more organizations start applying climate risk-related analyses, particularly in response to the TCFD recommendations, an increasing number of challenges are arising, such as:
- Which scenarios an organization should explore
- How climate change should be addressed from a business strategy perspective
- The physical, economic and regulatory connection between climate change and business and supply chain activities
- Consistent methods and assumptions used to support the scenario analysis
- Rigor and sophistication in the use of data set inputs
Over time, and as data needed to create more refined scenario analysis becomes available, organizations should be able to improve the key inputs, outputs, assumptions and analytical methods. But this shouldn’t stop organizations from starting now to understand the risks and opportunities associated with climate change, and applying scenario analysis and modeling.
Organizations should remember that this is a journey and not all analyses and risk assessments need to have a concrete quantitative outcome; they can be qualitative as a start.
What are organizations doing?
While many organizations are reporting on climate-related risk disclosures, only a few seem to be currently deploying a forward-looking scenario analysis to support their strategic vision of how to protect and to create value.
According to the EY Climate Risk Disclosure Barometer 2018, How are your climate change disclosures revealing the true risks and opportunities of your business? 4 (which provides a snapshot on the update of TCFD recommendations based on an assessment of over 500 companies), around 12% of companies assessed are disclosing information on scenario planning. But this was mostly in the context that the companies expected to conduct the analysis in the future. In most cases, no detail was given around the scenarios analyzed or the results of the modeling. Several organizations also disclosed their support for a 2°C future, but did not state how their business aligned with such an economy. Where organizations had undertaken detailed scenario analysis, generally, the scenarios only dealt with transition risks and not physical risks.
This aligns with findings from the TCFD’s research into the status of disclosure practices where two of the five key takeaways related to the use and disclosure of climate-related scenario analysis. Specifically, the findings included “information on strategy resilience under climate-related scenarios is limited” and “financial implications are often not disclosed.”5
Where to start?
Organizations that seek to understand their climate-related risk exposure should ask themselves the following questions and get familiar with the following concepts and misconceptions of scenario analysis: