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Mastering scenario analysis for ASRS compliance

In this article, we’re focusing on conducting and disclosing your scenario analysis for IFRS/ASRS compliance, as well as providing a step-by-step guide to help you get ready for reporting.

Join Barbara Albert, our Co-CEO, as she guides you through mastering scenario analysis for ASRS compliance

Previously in the series

Before we look at mastering scenario analysis, ensure you’re up to date with understanding climate risks and opportunities. We discussed assessing, managing and disclosing these risks in our previous blog post.

Introduction to scenario analysis

Climate change introduces a significant level of uncertainty into business planning and risk management. This uncertainty stems from various factors, including:

➡️unpredictable future greenhouse gas emission trajectories,

➡️the uncertain timing and impact of climate policies, and

➡️uncertainty about the physical manifestations and severity of climate change itself.

Scenario analysis can be a powerful tool to help manage these uncertainties. Scenarios are stories that have been methodically developed for the future and aim to shed light on the decisions you need to make today. A scenario describes a potential path of development that will lead to a particular outcome or goal. Scenario analysis is not about predicting the future with absolute precision but about preparing your organisation with the resilience to face multiple potential futures.

Common climate-related scenarios are based on exposure to either transition risk pathways or physical risks. By exploring a range of plausible scenarios, including varying degrees of climate impact and policy responses, you can not only identify external environmental indicators and recognise when the environment is shifting towards a particular scenario, but also craft strategies that are robust and adaptable to changing conditions.

ASRS requirements for scenario analysis

ASRS recognises that a one-size-fits-all approach doesn’t work for climate-related scenario analysis. The standards stipulate that businesses must tailor their scenario analysis to reflect their specific circumstances, including their exposure to climate-related risks and opportunities, as well as their available skills, capabilities, and resources. This means that a higher risk exposure suggests a need for a more detailed and quantitative approach, and that initial analyses may be simpler, evolving in sophistication as your capabilities grow over time.

Here is what the ASRS legislation requires:

➡️At least two scenarios: The ASRS mandates that you consider a broad range of climate-related scenarios, including a 2°C or lower scenario. This helps you to understand the potential impacts of global efforts to limit climate change on your operations, strategies, and financial planning.

➡️Short, medium, and long-term horizons: You are required to evaluate the impacts of climate-related risks and opportunities across different time horizons that are relevant to your strategic planning and risk management processes.

➡️Quantitative and qualitative analysis: Your analysis should include both quantitative and qualitative assessments, providing a comprehensive view of how different scenarios might affect your business financially and operationally.

➡️Integration into strategic planning: The results of the scenario analysis must be integrated into your company’s overall strategic planning, informing decisions on risk mangement, investment, and other strategic considerations.

While you don’t have to disclose detailed modelling, you need to disclose the inputs, assumptions, and outcomes of your scenario analysis, aiding stakeholders in understanding your strategic resilience to climate change.

Here are examples of what you need to disclose:

➡️The climate-related scenarios used for analysis, ensuring a diverse range of both transition and physical risks are covered.

➡️The rationale behind the selection of specific scenarios and their relevance to assessing resilience.

➡️Key assumptions made during the analysis, touching on climate policies, macroeconomic trends, technology developments, and energy usage, among others.

Step-by-step guide for conducting scenario analysis under ASRS

Join Barbara Albert, our Co-CEO, as she discusses the step-by step guide to conducting scenario analysis for ASRS compliance.

Scenario analysis can be challenging due to its speculative nature and the complexity of predicting how climate change will unfold. However, it’s a powerful tool for uncovering vulnerabilities in your business model and identifying strategic opportunities in a future low-carbon economy. Here are our 9 steps for conducting a successful scenario analysis:

1️⃣Learn from best practices and industry leaders: Draw inspiration from businesses that have excelled in integrating scenario analysis into their strategic planning. These case studies not only provide valuable insights into effective practices but also highlight the tangible benefits of a well-executed scenario analysis in navigating the complexities of climate change.

2️⃣Select scenarios that matter: Start by identifying a set of plausible climate scenarios that cover a range of possible futures. These should include a scenario that reflects the most ambitious global temperature goal, such as the Paris Agreement’s goal. Another scenario might reflect a pathway where current policies continue without significant additional efforts to mitigate climate change, leading to higher global warming. For example, scenarios developed by the Intergovernmental Panel on Climate Change (IPCC) or those included in the International Energy Agency’s (IEA) World Energy Outlook can serve as comprehensive references for this purpose.

3️⃣Leverage tools and expertise for scenario analysis: Embrace a range of existing tools, data, research, and external expertise to enrich your scenario analysis. From climate data modelling software to consultancy services specialising in climate risk, the resources at your disposal can significantly enhance the quality and depth of your analysis.

4️⃣Engage stakeholders: From early on in the process, facilitate an inclusive dialogue with internal and external stakeholders to gather diverse perspectives, build consensus, and integrate stakeholder concerns into your strategic planning. Engaging with stakeholders not only enriches your scenario analysis with broader insights but also helps build support for your strategic responses, enhancing transparency and fostering stronger relationships with customers, suppliers, investors, and the community.

5️⃣Understand the business impact: Analyse the direct and indirect consequences of each scenario on your business operations, supply chains, customer demand, compliance costs, and competitive landscape. Consider both the physical impacts of climate change, such as extreme weather events and sea-level rise, and transition impacts, including policy and legal changes, technological innovation, market trends, and societal shifts in behaviour and preferences.

6️⃣Assess the resilience of your strategy: Evaluate the robustness of your business model against the identified scenarios to uncover areas of vulnerability and strength. This step involves a detailed review of your operational, financial, and strategic capacities to withstand and adapt to climate-related changes. Highlight areas where your business is well-positioned to manage risks and identify gaps where additional measures or transformations are necessary.

7️⃣Develop strategic responses: Based on your analysis and stakeholder engagement, develop a strategic response that safeguards your business against risks while capitalising on emerging opportunities. Strategies might include enhancing operational efficiency, adopting new technologies, entering emerging markets for sustainable products and services, enhancing climate resilience in your infrastructure and supply chains, and setting science-based targets for emissions reduction. Your strategy should be both adaptive and forward-looking.

8️⃣Monitor and revise: Recognise that climate change and its impacts are dynamic and subject to ongoing scientific research and policy development. Regularly revisit and update your scenario analysis to reflect the latest climate projections, technological advancements, and regulatory changes. This iterative process ensures your business remains agile and responsive to new information and evolving risks and opportunities.

9️⃣Communicate and report: Clearly articulate the outcomes of your scenario analysis and strategic responses in your sustainability report and other communications. Transparency about your approach to managing climate risks and opportunities not only demonstrates accountability but also positions your business as a leader in sustainability and resilience.

Conclusion

By conducting detailed scenario analysis in line with ASRS requirements, you not only comply with the new standards but also gain strategic insights that could drive innovation and competitive advantage in the transition to a low-carbon economy. This proactive approach positions you to navigate the uncertainties of climate change more effectively, ensuring long-term resilience and sustainability.

Engage with experts and take action

Remember that if you need help with scenario analysis, we are here to help. To dive deeper into how you can effectively identify and manage climate-related risks specific to your industry, visit our Climate Risks and Opportunities page.

Next in the series

In our forthcoming blog post, we’ll explore developing a transition plan for ASRS compliance.

Our ASRS complimentary course

In our ongoing dedication to assist businesses in their sustainability endeavours, we’ve revamped this multi-part blog and video series into a complimentary online course. Alongside the video content, the course offers additional resources and quizzes designed to enhance your comprehension of the ASRS.

Kickstart your journey towards mastering the ASRS. Join now by following this link. Don’t hesitate to share this opportunity within your network to collectively advance the climate agenda.