What’s the issue?
Climate-related scenarios can help investors understand how climate-related events and their associated risks and opportunities may impact a company’s business model, strategy and financial performance over time. Scenario analysis can range from narrative descriptions to quantitative information using detailed models.
Feedback provided to the International Sustainability Standards Board (ISSB) on the proposed IFRS S2 Climate-related Disclosures showed that many respondents broadly agreed with the proposal for disclosing a company’s climate resilience. However, some said that requiring scenario analysis would impose an undue reporting burden for companies that are smaller, less experienced or that do not have sufficient resources. Other respondents were concerned that the proposal may allow some companies to opt out of presenting scenario analysis.
The ISSB is taking a scalable approach to scenario analysis, recognising both the potential importance of the analysis to investors and the practical challenges for companies in preparing it.
What was proposed?
Under the proposal, companies would be required to present scenario analysis to assess their climate resilience, unless they are unable to do so. If a company is unable to use scenario analysis, then it would need to explain why and use an alternative method or technique to assess its climate resilience. Read our guide for further information on the proposed disclosure requirements.
What’s the ISSB’s latest thinking?
The ISSB has confirmed that companies would be required to use scenario analysis when describing their assessment of climate resilience.
To support companies in applying the requirements and performing climate-related scenario analysis, the ISSB plans to provide guidance, building on existing materials developed by the TCFD1. It will set out an approach that is scalable to a company’s circumstances; this could range from narrative descriptions to quantitative information. It will also provide guidance on the climate-related scenarios that companies would need to address in their analysis.
What’s the impact?
Companies would need to describe their climate resilience assessment using climate-related scenario analysis. Formal scenario analysis is an iterative learning process that may take multiple planning cycles to achieve.
Our recent global Survey of Sustainability Reporting shows that only 13 percent of the world’s largest 250 companies’ reports included modelling of the potential impact of climate change using scenario analysis.
Actions for management
- Familiarise yourself with the TCFD guidance on scenario analysis.
- Take stock of your scenario analysis capabilities to identify gaps and assess whether your existing systems, processes and controls are sufficient to meet the requirements.
- Develop a roadmap to improve disclosures over time.
How did we get here?
|Proposed IFRS S2||ED/2022/S2||Published 31 March 2022|
|ISSB Board meeting: 20–23 September 2022; Frankfurt||
Topics that the ISSB planned to discuss further included ‘climate resilience’
|ISSB Board meeting: 18–21 October 2022; Montreal||The ISSB discussed ways it would facilitate interoperability with jurisdictions including the EU and made initial decisions relating to its proposals on climate resilience|
|ISSB Board meeting: 1 November 2022; virtual||The ISSB discussed providing guidance to support companies in applying the climate resilience requirements|
1 Task Force on Climate-related Financial Disclosures Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities (June 2017) and Guidance on Scenario Analysis for Non-Financial Companies (October 2020).
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