As many companies gear up for the second quarter of 2019, they are preparing to respond to investor and reporting expectations around sustainability and climate risk. Our recent webinar, “The Evolution of Sustainability Reporting,” generated several great follow up questions from attendees. Our sustainability reporting experts provided answers to some of the most frequently asked questions around scenario analysis and more.
If you missed the webinar, it’s not too late! Click here to access the recording.
1. What is scenario analysis?
Scenario analysis is a strategic planning tool to help an organization evaluate its flexibility, resilience, or performance across a range of potential future states. Scenario analysis is not designed to produce rigid predictions, but rather shows your company is embracing complexity and uncertainty and considering possible and plausible alternative futures. The ultimate goal of scenario analysis is to encourage decision-makers to consider factors that shape their choices today through strengthening internal coherence (CDP Technical Notes on Scenario Analysis, page 5).
2. My company is planning its first climate-related scenario analysis exercise. What framework would you advise?
There are a number of climate-related scenarios that companies can apply. The Task Force on Climate-Related Financial Disclosures (TCFD) recommends that those just starting out utilize scenarios developed by the International Energy Agency (IEA) and Intergovernmental Panel on Climate Change (IPCC). According to TCFD, these scenarios are the most commonly utilized and supported by the scientific community.
3. How should we present our scenario analysis?
In general, scenarios can be broadly assigned into two categories: transition risk pathways or physical risks.
- Transition risk pathway scenarios consider how an organization is impacted by changes to policy/regulation, technology or market changes aimed at emissions reductions, energy efficiency, subsidies/taxes or other constraints or incentives implemented to facilitate a low carbon economy. IEA scenarios tend to follow this approach. One of the most commonly used transition scenarios is a so-called 2°C scenario, which helps companies lay out how limiting the average global temperature increase to around 2°C will affect their operations and how they will help achieve that goal. For companies just starting out, they can use a publicly-available scenario such as the IEA 450ppm or IEA 2DS.
- Physical risk scenarios assess the impact of acute or chronic physical change related to climate change such extreme weather, rising sea levels, or water shortages, among others. IPCC scenarios usually follow this approach. Some of the more commonly used Physical risk scenarios are the IPCC Representative Concentration Pathway (RCP) Scenarios (described in the CDP Technical Notes on Scenario Analysis, page 17). These scenarios describe the climate impacts of a range of possible future GHG emissions and consequent trajectories of atmospheric GHG concentrations.
It is important to note that there is no one way to utilize and adopt scenario analysis. Certain organizations will be more affected by transition risk (i.e., fossil fuel and energy-intensive manufacturers), while others will be more affected by physical climate risk (i.e., those reliant upon agriculture). Both CDP and TCFD recommend that there should be a progressive approach to adopting scenario analysis as a strategic planning tool. As an organization’s experience matures, scenarios should evolve to provide additional quantitative information to inform stakeholder decision-making.
4. What is more critical to emphasize in reporting? Figures and goals, or stories of new projects?
The short answer is both. Including both quantitative and qualitative data provides stakeholders with balanced information for decision-making. However, first you should understand what information your stakeholders value most.
If we had to select just one, reporting on the data is more critical. It is imperative that companies have accurate and comprehensive data, because without it there is no way to show the impact of your projects. However, the data itself is meaningless without the story of how you got there.
No matter where you are, reporting should show continuous progress and forward momentum. Having a goal shows stakeholders that you have something to work towards, Figures and statistics provide tangible data points that can quickly and easily illustrate progress. Stories of new projects demonstrate which specific actions you are taking to enact change.
Ultimately, determining which should be more emphasized in reporting is unique to each company, and companies should consider stakeholder needs and the data results when compiling reports.
5. What are the guidelines around setting a baseline year in CDP reporting?
Baselines are used to measure continuous progress, most commonly when working towards a goal or target, and are unique to each company. The World Resources Institute’s Greenhouse Gas Protocol recommends that when setting a baseline year, choose the earliest point in time for which you have the most complete and reliable data.
There are no restrictions on how far back a base year can be set, but the data included in the baseline should match current business. For example, if there was a major acquisition in 2015, the baseline should not be set prior to 2015. The most common practice is to set the previous year as the base year for reporting to ensure that the base year matches current business. If you have to reset and/or recalculate a base year, the key, as with all sustainability reporting, is transparency. Make sure it is clear in any publicly reported documents what the change was and why it occurred.
6. Can sustainability reporting and financial reporting work together?
Yes, and that is the purpose of the TCFD (Taskforce on Climate-related Financial Disclosure). The TCFD was tasked with developing a set of voluntary, financially relevant, climate disclosure recommendations that could promote informed investment, credit, and insurance underwriting decisions. In turn, stakeholders use this centralized data and reporting to better understand assets exposed to climate-related risks.
The TCFD released its disclosure recommendations in June 2017. Since that time, they have seen increased support and implementation globally. According to their 2018 Status Report, TCFD started with 101 supporters. Nearly a year and a half later, in September 2018, that number had grown to 513 supporters. Here’s a snapshot of the organizations that combine sustainability and financial reporting:
- Includes 457 companies and 56 other organizations (e.g., industry organizations, governments)
- Represents over $7.9 trillion in market capital across multiple sectors
- Includes over 287 financial institutions responsible for over $100 trillion in assets
- Receives support from governments—Belgium, France, Sweden, and the United Kingdom—as well as financial regulators around the world, including in Australia, Belgium, France, Hong Kong, Japan, the Netherlands, Singapore, South Africa, Sweden, and the United Kingdom
Additionally, sustainability reporting entities such as CDP are aligning with and incorporating TCFD guidelines into their questionnaires, strengthening the link between sustainability and financial health. Although climate-related financial disclosure remains voluntary across most of the world, the demands and expectations of stakeholders for this data is growing.
If you wish to learn more about climate-related scenario analysis and reporting, or if you need help setting baselines, calculating a GHG inventory or even setting a carbon target, ENGIE Insight can help. As one of only eight companies globally providing CDP-accredited carbon accounting software, ENGIE Insight is prepared to help you minimize the burden of sustainability reporting and stand out as a leader.
Note: the following resources were utilized in part to provide this information and you can find more in the CDP Technical Note on Scenario Analysis or the TCFD Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities.