Changing course: A comprehensive investor guide to scenario-based methods for climate risk assessment, in response to the TFCD

This report details the results of the UN Environment Programme Finance Initiative (UNEP FI) Investor Pilot on TCFD Adoption, a collaborative effort to explore, enhance and apply a methodology for assessing the impact of physical and transition risks and opportunities on the portfolios of institutional investors. The Investor Pilot Group comprises 20 institutional investors from across the globe. This report presents the methodology enhanced and used by the Investor Pilot Group in collaboration with the data analytics firm Carbon Delta. Outputs and evaluations of this methodology are intended as a first step towards understanding the potential for incorporating the TCFD recommendations on scenario-based risk assessment in investors’ financial disclosure. In addition, and in order to highlight the range of methodologies currently available to conduct these types of assessments, the report offers a ‘landscape review’ of other providers’ methodologies for climate-related scenario analysis.

This report finds that investors should consider building in-house capacities and tools to integrate scenario analysis in line with the TCFD recommendations. The TCFD recommendations emphasise the use of scenario analysis in assessing the impact of climate change on the entire business over time and in enhancing critical strategic thinking within the organisation. It also highlights the importance of assessing a range of scenarios that challenge conventional wisdom about future developments, or significantly change the state of the world from ‘business as usual’, including a 2°C-compliant scenario. If scenario analysis is to become a component of climate risk management and company strategy as envisioned by the TCFD recommendations, investors may need to develop the internal capacity to integrate these assessments for their own decision-making, while at the same time establishing standardised and comparable disclosures that support regulatory assessments aimed at ensuring financial system stability.