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How Companies Use Scenario Analysis to Manage Climate Risk

For Immediate Release

August 23, 2018

Contact: Alec Gerlach, GerlachA@c2es.org, 703-516-0621

How Companies Use Scenario Analysis to Manage Climate Risk
Disclosures Critical for Shareholder & Investor Understanding

Brief: Using Scenarios to Assess and Report Climate-Related Financial Risk

WASHINGTON – The Center for Climate and Energy Solutions (C2ES) today released a new brief focusing on the challenges and best practices for companies assessing and disclosing climate risk using scenario analysis. A product of a multi-sector industry roundtable organized by C2ES, the brief offers guidance to companies on assessing their resilience under a range of climate scenarios, one of the key recommendations of the Task Force on Climate-related Financial Disclosures.

“Companies are concerned about the risks of climate change because they already see impacts on their bottom line, and their stakeholders and investors are increasingly asking them to disclose more about the risks they face,” said C2ES President Bob Perciasepe. “Scenario analysis helps them better understand the risks and opportunities, make smarter decisions, and meet their obligations to shareholders.”

The brief recommends companies include a 2-degree scenario when stress testing their long-term business resilience. Limiting emissions to 2-degrees of warming is an internationally agreed upon threshold to stave off the worst effects of climate change. The brief also recommends companies consider several alternative futures, since there are many possible pathways to 2 degrees, and it is uncertain whether global ambition will rise to meet the goal.

Scenario analysis is a useful tool for scientists, policymakers, and businesses to consider the effects of a range of circumstances, including different environmental and policy conditions. To illustrate how companies are applying climate scenario analysis, the brief examines the different approaches taken by Duke Energy, Chevron, and Equinor (formerly Statoil).

As demand for corporate climate disclosures continues to grow, the new brief identifies best practices to assess climate risk and share better information with stakeholders:

  • Make use of publicly available scenarios and leverage them by customizing corporate scenario exercises around company-specific risks and opportunities.
  • Focus scenario exercises and disclosures on a few key variables associated with long-term climate-related risks and opportunities that could have a material impact.
  • Use a range of scenarios when conducting a scenario-based risk analysis, including those that do not meet 2 degrees.
  • Scenario exercises should be reviewed on a regular basis as part of a strategic management process.

Also identified are unique challenges to meeting the TCFD recommendations, including how companies navigate complex disclosure considerations, legal concerns around disclosure, and the inclusion of physical in addition to transitional risks of climate change.

C2ES has been working with companies to facilitate greater communication on how and what information to disclose since the release of Task Force’s recommendations last year. C2ES previously released a brief examining those recommendations last September, Beyond the Horizon: Corporate Reporting on Climate Change.

About C2ES: The Center for Climate and Energy Solutions (C2ES) is an independent, nonpartisan, nonprofit organization working to forge practical solutions to climate change. Our mission is to advance strong policy and action to reduce greenhouse gas emissions, promote clean energy, and strengthen resilience to climate impacts. Learn more at www.c2es.org.

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