What Does the Future Hold? Climate-Related Scenario Planning May Help

Scenario Planning
October 08, 2020

What would your company do if it had to withstand a stiff tariff, pandemic, or hurricane? Where are you vulnerable? What should you do now to plan for the future?

Many are finding out the answers to these scenarios in real time.

However, some who have performed a scenario-planning exercise know how the company will be impacted beforehand and are somewhat prepared.

In a recent post, we talked about the differences between the various Environmental, Social and Governance (ESG) reporting frameworks. Two of them, CDP (Carbon Disclosure Project) and TCFD (Task Force on Climate-related Financial Disclosures) encourage companies to conduct a company-wide scenario analysis in order to draw attention to key factors or critical uncertainties of a possible future.

This is particularly useful for climate-change related events.

According to a recent GreenBiz report, “How Corporations are Managing Risk, Resiliency and Sustainability,” scenario analysis helps companies understand the implications of climate-related risks and opportunities. It also provides companies with a methodology of informing stakeholders about their positioning on climate-related issues.

GreenBiz asked members of its Intelligence Panel whether they have conducted a scenario-planning exercise.

The results were small, but encouraging. About a quarter of the large organizations surveyed said yes. Another 29% of the sustainability executives surveyed were considering performing the plan.

For those who conducted a climate-related scenario planning exercise, the key reasons given were:

  1. Remaining competitive in an industry segment (48%)
  2. Reporting to CDP (44%) and TCFD (38%)
  3. Addressing requests from the risk management group to have the analysis done (43%)

The three main reasons why large organizations are NOT conducting scenario planning exercises were:

  1. No one is asking (39%)
  2. It is perceived to be too costly (18%)
  3. The risk department does not see the value (11%)

A Case Study

NRG, a large American energy company, is one of those firms that adopted this TCFD recommendation in 2017.

Greg Kandankulam, Senior Manager of Sustainability at NRG, told GreenBiz that the company originally tried scenario planning because, “We wanted to look at other aspects of sustainability that could inform the way we manage our business, deploy capital, and foresee the future. We were looking for an approach that was a bit more progressive than traditional enterprise risk management practices.”

The company highlighted different events and were able to come up with scenarios at all management levels.

Kandankulam pointed out that internal stakeholders — including some who were dubious about the effect of climate change on the organization — “were more apt to take ownership of the final results when the process was collaborative and inclusive. Management also recognized that goal setting and scenario planning must be regularly and formally revisited to ensure that the most direct path to meeting climate action goals can be attained and surpassed.”

Kandankulam stresses the importance of engaging a third party to facilitate the process as this offers a fresh perspective, and “can lead to a more open and collaborative atmosphere.” He also advises “to quantify climate-risk exposure in dollars and cents so that you are measuring financial impact on the business.”

To Make Public or Not?

NRG’s Kandankulam raises an important point about reporting, however. While this is a critical internal exercise, he cautions that it may be hard for some companies to publicly report the results as these are “not just a list of risks, but also opportunities for competitive advantage.”

Others agree. Of the 26% of the large corporations who performed a scenario analysis, 13% published their findings and 13% did not.

For companies wishing to implement the Science Based Target initiative, the question to whether or not to go public is also up for debate.

The SBTi encourages companies to set emission and reduction targets in-line with the latest climate science on how to meet the goals of the Paris Agreement.

SBTi says that the first thing a company should do is to publicly declare its intentions, then it can figure out what its goal is going to be and how to achieve it. But this does not go along with some business ideals.

One manufacturing executive told GreenBiz that this process doesn’t make sense for their company. “Within our company, I have to flip those,” he says. “I have to first of all figure out what we think the goal should be and how we would meet it. And if it seems like it’s a reasonable risk, then we could publicly declare. But until we get there, we’re not ready to go public with the science-based target commitment.”

So what does the future have in store for your company? Look inside a Scenario Analysis crystal ball and see.

Click here if you’re interested in finding out more about what TCFD recommends regarding Scenario Analysis.

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Laurie Toupin