(This article was published on 4 November 2022 and updated on 31 August 2023)
Highlights
What’s the issue?
Climate-related scenarios can help a company and its investors understand how climate-related events and their associated risks and opportunities may impact the company’s business model, strategy and financial performance over time. Scenario analysis can be complex and can range from narrative descriptions to quantitative information using detailed models.
Companies will need to report on climate resilience using scenario analysis. The ISSB’s proportionate approach provides practical support for companies, helping them to provide information much needed by investors.
What are the requirements?
Companies will use scenario analysis when describing their assessment of climate resilience. The International Sustainability Standards Board (ISSB) differentiates scenario analysis (i.e. a ‘what if’ analysis of the potential impacts from climate-related risks and assumptions) from a resilience assessment (i.e. a ‘so what’ analysis that considers the implications for strategy and the company’s capacity to respond).
The type of analysis that is appropriate for different types of company will differ based on the company’s exposure to climate-related risks and the skills and resources it has available.
When determining the inputs to its analysis, a company considers all ‘reasonable and supportable information that is available at the reporting date without undue cost or effort’. This means that scenario analysis could range from narrative descriptions to quantitative information, with an expectation that disclosures improve over time.
Companies will also disclose how they use scenario analysis to identify climate-related risks – creating a feedback loop.
What's the impact?
Companies need to get started now because using scenario analysis to inform climate resilience assessments is an iterative process that may take multiple planning cycles to achieve, with each cycle potentially lasting more than one year1.
Our 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.
Companies will need to assess what reasonable and supportable information they can access to undertake scenario analysis. For example, a company identifying lower gross exposure to climate-related risks could use a simpler method of analysis than a company facing greater climate-related risks that pose significant threats to the feasibility of its business model in the future.
Actions for management
- Read our guide to familiarise yourself with the requirements on scenario analysis. Guidance from the ISSB is also available.
- Assess what knowledge and resources you have available across all functions to perform scenario analysis and assess your company’s resilience.
- Take stock of your exposure and identify what ‘reasonable and supportable information’ means for your company.
- Determine the level of scenario analysis that is appropriate for your company and develop a roadmap to improve disclosures over time.
- Assess whether your existing systems, processes and controls are sufficient to provide disclosures that describe your company’s resilience assessment.
1 Companies will need to present their results on an annual basis, even if they perform scenario analysis as part of a multi-year planning cycle.
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