Organisations should disclose the impact of climate scenario analysisMonday February 06 2023
Climate scenario analysis assists organisations with identifying and preparing for the impacts that climate change will have on their business.
It enables organisations to understand and quantify the risks and uncertainties they might encounter under different hypothetical futures.
From this analysis, organisations can articulate the physical and transition climate risks that could impact their business in the short, medium and long term.
Investors and stakeholders, in general, understand the disruptive effect of climate change on society and businesses and the long-term viability risks that organisations face if they fail to prepare and plan for these risks.
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These risks could impact an organisation’s strategy and translate to other financial aspects such as earnings, cost profile, revenues, assets and liabilities values, capital allocation, and investments.
Therefore, organisations should perform their climate scenario analysis using scenarios tailored to their operations to identify the risks across the organisations from climate change and also provide stakeholders with disclosures on the impact of the risks identified.
Some areas organisations could consider when disclosing the effects of climate scenario analysis include the following.
Organisations should provide information on how risks and opportunities identified from climate scenario analysis impact their strategy.
They should include plans to mitigate the risks and leverage the opportunities identified and disclose how the analysis has informed investments and resource allocations.
In addition, organisations should highlight how these strategic decisions impact them financially, such as impairment considerations for assets, where future cash flows are affected.
Also, some assets may have their useful lives revised, and the fair value or recoverable amount could also be affected.
Organisations should also consider provisions and contingent liabilities arising from climate risks and apply the TCFD (Task Force on Climate-related Financial Disclosures) framework when providing these disclosures.
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TCFD helps organisations to disclose climate-related risks and opportunities effectively. The TCFD framework is structured across four thematic areas — governance, strategy, risk management and metrics and targets.