Case Study

Climate Scenario Planning

Climate change and its associated risks pose increasing challenges to companies.

The Task Force on Climate-related Financial Disclosures (TCFD) considers climate scenario analysis to be the best approach for companies to assess long-term exposure to climate impacts. The TCFD advises organizations to use a range of scenarios that illuminate future exposure to both transition (those arising from the move to a lower-carbon economy, e.g. cost of complying with mandatory carbon pricing) and physical climate impacts, using established International Energy Agency (IEA) and IPCC climate model pathways.

Source: Framework and rating mentions over time – Datamaran

“The TCFD framework helps to elevate the climate challenge to the C-Suite and helps senior management within companies understand the financial risks and opportunities of different future climate scenarios. The scenario analysis process in particular encourages organizations to evaluate their strategic resilience to a range of plausible climate futures, over timescales that are often outside of conventional business planning horizons.”
Charles Allison, Partner, Energy & Climate Change Services, ERM

More than 340 investors with nearly $34 trillion in assets under management have committed to implementing the TCFD recommendations as part of Climate Action 100+. BNP Paribas, a French international banking group and asset manager, is at the forefront of companies integrating climate scenario planning into the company’s long-term risk management strategy. BNP Paribas conducted scenarios modelling, based on EIA and IPCC data, which examined future scenarios with global temperature increases between 1.5°C and 6°C. BNP is now actively using this data to manage climate-related financial risks within its portfolios, banking and direct operations.

ArcelorMittal, a multinational steel manufacturing company, is another early TCFD adopter, publishing its first Climate Action report in 2018. As one of the world’s most used materials, the steel industry accounts for approximately 7% of global emissions. Demand for steel is expected to almost double over the next 30 years as the middle class grows across countries including China, India and Nigeria. In line with TCFD recommendations, ArcelorMittal’s report details future challenges and opportunities for the steel industry, as well as technology pathways the company is exploring — from circular economy solutions to energy efficiency and carbon capture and storage — in order to reduce its emissions in line with the Paris Agreement and meet increasingly stringent regulatory requirements in Europe.

Scenario analysis is a well-established tool in corporate and investment risk assessment. Its application to climate change helps companies to evaluate strategic resilience for a range of climate futures, including the impacts of a variety of global temperature increases and regulatory changes. This positions companies to take advantage of emerging opportunities and engage in better risk management as well as more informed strategic planning, which in turn drives long-term financial success and resilience.

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