Best Practices and Challenges: Using Scenarios to Assess and Report Climate-Related Financial Risk

Investor interest in understanding the long-term financial risks and opportunities of climate change is on the rise. The Center for Climate and Energy Solutions (C2ES) has here identified best practices in order to help companies start using climate scenarios in their risk analyses. 

The report aims to help companies follow the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) 2017 recommendation to “Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2-degree scenario”. C2ES describes several best practices and primary challenges of assessing and disclosing climate-related financial risks.

This resource was featured in the March 29, 2019 ASAP Newsletter.

"One path forward for companies facing climate related risks is to adopt the recommendations from the FSB’s Task Force on Climate-related Financial Disclosures to evaluate and disclose financial risk posed by a variety of climate scenarios. But even following this recommendation (which is not itself a prescriptive framework) may leave companies exposed to a new form of risk: As pointed out in C2ES’ report on Best Practices and Challenges for TCFD, without standard disclosure requirements companies could find themselves exposed to legal challenges from various national and subnational actors due to over or under disclosure."

 

Best practices:

  • Leverage existing tools - Use of widely accepted and understood climate scenarios that stakeholders are likely familiar with simplifies both the exercise of evaluating financial implications of climate change as well as the reporting process of such an exercise.
  • Consider a range of scenarios - Use of a range of scenarios (including various scenarios that meet a 2-degree target and those that do not) in a risk analysis offers a better sense of financial resilience.
  • Focus on key variables - Among an infinite number of variables that could be analyzed, companies should focus their scenario risk analyses on a few key sector-specific variables that may pose long-term, climate-related risk for a given company.
  • Include scenario exercises in strategic management and review on a regular basis - Climate scenario-based risk analyses should be considered part of the strategic management process. Regular monitoring of signposts related to the key variables used in climate-related risk analyses can indicate if a strategy or position change is needed. 

Challenges:

  • Disclosures and navigating legal issues - Disclosing appropriate outputs of climate-related risk analyses may reduce the risk of litigation or jeopardizing relationships with stakeholders. Disclosures should focus on the key variables used in the scenario exercise and relevant, non-financially material information should be made easily available to stakeholders. TCFD provides a framework to guide disclosures.
  • Demand for climate-related data is growing, but data points may not accurately portray a company’s climate-related risk profile - Companies need to ensure their stakeholders can fully contextualize the information reported about the outcomes of the company’s scenario exercises.
  • Determining what data is needed to accurately assess climate-related risks and opportunities - Ongoing communication with stakeholders and transparency regarding how scenarios are being used to analyze climate risks can help companies appropriately adjust assessments and disclosures over time.
  • Integrate both transition and physical impact scenarios into assessments - Climate-related scenario exercises have, to date, primarily focused on transition risks that focus on mitigation or reducing fossil fuels dependencies meeting a specific warming target (eg. 2 degrees C), but understanding physical risks (downscaled climate impacts based on global climate models) and adaptation measures the interplay between the two is equally important for assessing overall financial implications of climate change.

 

Publication Date: August 2018

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  • Best practice
  • Communication

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