TCFD considers work on standardised, “business-relevant” climate scenarios

The Task Force on Climate-related Financial Disclosures (TCFD), the Mark Carney-inspired initiative, says it is considering work on “business-relevant and accessible scenarios” to help the take-up of climate scenario analysis – acknowledging that existing scenarios from international bodies aren’t specific enough.

And it says it has market feedback indicating support for such “standard” scenarios.

In its latest update, the TCFD said it is considering additional work in two areas. The first was “additional process guidance around how to introduce and conduct climate-related scenario analysis” while the second was: “Business-relevant and accessible scenarios.”

It’s hoped the latter “may reduce concerns about releasing confidential business information, reduce scenario analysis costs, and improve transparency and comparability of disclosures”.

But it cautioned that using these “standard scenarios” may mean less flexibility for companies in “tailoring assumptions and key drivers” to their specific businesses.

The TCFD acknowledged that existing climate scenarios like the ones developed by the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPCC) “do not lend themselves” to being applied to business because they are largely intended for policy and research purposes.

The TCFD said that while respondents to a survey reported using scenario analysis for assessing strategy resilience, “its full integration into corporate planning and disclosure processes appears to be at early stages for many companies”.

Indeed, the 144-page report admits that companies “continue to find certain aspects of scenario analysis challenging” as the current climate scenarios were never intended for use as business-planning tools.

In April a group of investors including Hermes, Allianz and Legal & General Investment Management asked the IEA to develop a new model with lower emissions to align with 1.5C of warming.The development of business-oriented scenarios would likely require a better understanding of climate impacts at scales below the global level, identification of the key climate-related drivers affecting business performance, and the key climate-related uncertainties faced by an industry.

Many investors are at the first stages of developing internal scenario analysis models. Earlier this year, RI reported that Alecta – Sweden’s biggest pension fund – had developed a methodology based on carbon pricing forecasts. Denmark’s ATP detailed its progress too.
A recent report from the UN Environment Programme Finance Initiative called Changing Course outlined the current methodologies available around scenario analysis and provides a guide for design.

The TCFD update highlighted a “lack of appropriately granular, business-relevant data and tools supporting scenario analysis” alongside “difficulty determining scenarios, particularly business-oriented scenarios, and connecting climate-related scenarios to business requirements”.

The new status report looks at the extent to which companies in their 2018 reports included information aligned with the core TCFD recommendations that were published in June 2017.

The TCFD reviewed more than 1,110 company reports, while a total of 785 organisations are now supporters of the TCFD. The Financial Stability Board (FSB), the Basel-based international body which houses the TCFD, has asked the TCFD to deliver another status report in September 2020.

Meanwhile, the IEA was hosting its International Energy Workshop this week, a three-day event for the international energy modelling community that was attended by Peter Damgaard Jensen, chair of the Institutional Investors Group on Climate Change (IIGCC).