4 November 2022 (Updated 24 January 2023)
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 range from narrative descriptions to quantitative information using detailed models.
Feedback provided to the International Sustainability Standards Board (ISSB) showed that many respondents broadly agreed with the proposal1 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.
Further, the 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 ISSB will provide guidance on the type of analysis that would be appropriate for different types of company. It will base this on the company’s exposure to climate-related risks and the skills and resources available, and build on existing materials developed by the TCFD2.
When determining the inputs to its analysis, a company would need to consider 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.
The ISSB also agreed that a company would need to disclose how it uses scenario analysis to identify its climate-related risks and opportunities – 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 year3.
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.
Companies would need to assess what reasonable and supportable information they can access in order 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
- Familiarise yourself with the proposed requirements on scenario analysis and the TCFD guidance.
- 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.
How did we get here?
|Proposed IFRS S2||ED/2022/S2||Published 31 March 2022|
|ISSB Board meeting: 20–23 September 2022; Frankfurt||
AP3B and AP4B: Plan for redeliberations
Topics that the ISSB planned to discuss further included climate resilience
|ISSB Board meeting: 18–21 October 2022; Montreal||
AP3C and AP4D: Interoperability – key matters
|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|
|ISSB Board meeting: 17-19 January 2023; Frankfurt||
AP4a: Using scenario analysis to assess climate resilience
|The ISSB discussed guidance to support companies in performing scenario analysis and assessing climate resilience|
1 Proposed IFRS S2 Climate-related Disclosures.
2 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).
3 Companies would 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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