From droughts in the West that lead to wildfires and water restrictions; to severe storms in the East that affect transportation and supply chains; to Southern hurricanes that cost lives and damage homes, climate change is affecting cities and businesses across the United States. Costs from these disasters are straining cities and businesses budgets. The recent climate assessment released by the US Government warns that the danger of more catastrophes is worsening and that climate change will threaten our economy, public health and wellbeing as well as the country’s infrastructure and natural resources.
Organizations will need to use scenario analysis, a forward-looking assessment of risk, to predict problems and possible solutions and deal with the uncertain climate and policy future. Using published global climate-related scenarios (both physical and transitional) businesses have a starting point to tailor their own analysis to understand future risks and opportunities. The Task Force on Climate-related Financial Disclosures has developed a robust methodology to conduct scenario analysis that includes materiality assessment for climate-related risks and steps to determine appropriate published scenarios. The petroleum, mining and finance industries are among the first to run this type of scenario analysis.
For instance, ENGIE Insight client ConocoPhillips — the world’s largest independent energy exploration & production company, based on production and proved reserves — has a public climate change strategy. As is the case with other companies in the sector, ConocoPhillips has developed scenarios combining different rates of alternative energy technology advancement and government actions. Running the scenarios through their own energy-planning model, the company gains insight into future supply, demand and prices of key commodities. This strategy helps it understand the range of risk around commodity prices, and the price risk associated with greenhouse gas reduction.
London-based real estate investment trust company Landsec also has a strong scenario analysis plan in place. Using best- and worst-case temperature-change scenarios, it modeled how future weather patterns could impact its assets before and after 2030. The company found in a worst-case scenario — a temperature increase of 4°C — and without any new controls in place, its assists will begin to be negatively impacted after 2030. This research helps it know to invest in controls and efficient energy systems in its properties, as well as information that helps it analyze its insurance coverage. Their scenario analysis also aids Landsec in engineering its future developments to be resilient in the face of extreme temperature and weather.
And South32 — a mining and metals company headquartered in Perth, Western Australia — uses three different scenarios to stress test its portfolio: Runaway Climate Change, Patchy Progress and Global Cooperation. The results from the Global Cooperation scenario were broken down by commodity, describing the financial resilience of each in its portfolio. The scenarios help South32 better understand the potential effects to its portfolio and how to communicate those changes to their stakeholders.
Climate change will continue to affect businesses and their business. They can prepare for the costly and dangerous effects by creating different scenarios to predict the impacts of climate change on their current and future financial performance. Scenario analysis can help companies change their ways of doing business, help customers and provide them with information to better assure their stability in an uncertain future.