For climate scenario analysis to really drive change, stakeholder engagement is essential

By Helena Nathan-King

Since the outbreak of Covid-19, we have seen a growing interest in climate scenario analysis as organisations focus on managing business risks.

The pandemic has meant that organisations suddenly faced difficult circumstances and have had to adapt quickly to survive. This growing awareness of risk management enables an organisation not only to avoid risk but make the most of opportunities and thrive.

As the impacts of climate change become more apparent, climate risk awareness is now on the Board agenda. Pressure from investors, consumers and governments is mounting on organisations to properly assess the risks of climate change and set science-based targets in line with limiting warming to 1.5 ºC.

Questions are also arising around the impacts that climate change has on business operations. Organisations are now being asked to demonstrate how they have considered these possible eventualities, to understand how they fare in low-carbon transition pathways.

What is climate scenario analysis?

One of the key recommendations of the TCFD, climate scenario analysis is a valuable tool for understanding the consequences – both positive and negative - of climate change for businesses and encouraging longer term strategic thinking about risks and opportunities.

By framing climate risks and opportunities in the context of potential future warming scenarios, it allows companies to assess the impact of future risks and opportunities arising from climate change across their value chain, make the necessary preparations, and demonstrate their resilience to stakeholders.

Last year, 54% of companies that respond to CDP reported using it.

A new requirement from the UK Government, announced in November 2020, requires listed companies to disclose alignment with TCFD for financial years starting on or after 1st January 2021. We therefore expect to see scenario analysis to become increasingly popular as companies look to manage risk and develop strategy.

Climate scenario analysis is an essential yet challenging component of understanding and preparing for the impacts of climate change on assets, markets and economies. Far from being abstract, expert users of TCFD-aligned disclosures report the impact of climate change on a company’s business and strategy as being the “most useful” for decision making.

The ultimate goal of risk and opportunity identification is to support strategic planning and risk management, with the ability to provide the associated financial impacts.

What does good stakeholder engagement in climate scenario analysis look like?

Stakeholder engagement helps to identify and prioritise major climate related risks and opportunities facing an organisation. At EcoAct, this involves interviews with an agreed list of stakeholders to determine their understanding of climate change and its relationship to the organisation, including any known or anticipated impacts. The outcomes of these interviews would be a climate-related risk and opportunity long-list register in preparation for a stakeholder workshop.

We normally find that stakeholders are very engaged and aware of climate change issues. Although the process is often embarked upon because of regulation or investor pressure, climate change is something most stakeholders really care about and want to see more action taken.

Scenario analysis clearly benefits from engagement of a wide range of stakeholders because it delivers a broader view of the organisation. It also plays a key role in raising awareness throughout departments and drives culture change that is both risk and climate focused.

What are the long-term benefits of stakeholder engagement in climate scenario analysis?

Engaging a wide range of stakeholders sets the whole business on the start of a much greater journey. It encourages a culture of awareness and engagement of climate-related issues throughout the business.

This cultural shift acts to embed change throughout the organisation by ensuring that climate change is understood within the context of the organisation. This is exactly the ambition laid out by the TCFD Recommendations in 2017.

We have also found that modifying the language used around to align with the way the company talks about risk and climate change adds long-term benefits to the process. Using terminology that is familiar to stakeholders and considers relevant local and cultural differences means it can be embedded into their risk processes more easily and thereby have more impact.

Personalising scenario analysis through stakeholder engagement turns it into a useful tool that drives meaningful climate action, instead of just another piece of compliance and reporting.