TCFD’s scenario analysis a ‘storytelling’ opportunity for sustainability professionals, says WRI

EXCLUSIVE: The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) provide sustainability professionals with a chance to strengthen relationships with board members and the finance department, by utilising the "storytelling" aspects of scenario analysis.

That is the view of the World Resources Institute’s (WRI) global director of the Sustainable Finance Center Leonardo Martinez Diaz, who claimed that government professionals and finance teams were “familiar” with the methodology of the TCFD’s recommendations, and it should be used to sell the risks and opportunities of climate change.

“[Climate change] has to break out from the sustainability department and has to come into the boardroom and into the offices of the chief investment officer and chief financial officer,” Martinez Diaz told edie. “It has to become a mainstream component of core strategic discussions, that’s where scenario analysis can help.

“It’s something that financial and risk officers are already familiar with in other areas of the business, and this helps them apply that type of thinking to a new risk. This can be a safe space, you’re not forecasting what you claim is going to happen, but you are participating in a storytelling process that helps you imagine and plan for the future.”

The WRI’s Sustainable Finance Center seeks to promote the shift of financial resources away from unsustainable activities towards those that can combat climate change. It works across a variety of sectors – from forests to energy – to inject financial thought processes into agendas. It also engages in policy recommendations for governments and works with corporates and investors to align strategy opportunities.

Scenario analysis

The WRI has previously endorsed the recommendations of the TCFD, which developed a voluntary framework for companies to align climate-related risks with financial filings, to give investors greater transparency when backing businesses financially.

A “Technical Supplement” was issued alongside the recommendations – which have been backed more than 100 companies – which explains how businesses can use “scenario analysis” as part of their disclosure to create action plans and pathways to decarbonise their operations.

The concept of scenario analysis is that it encourages businesses to explore uncertainty to create a “well-established method for developing strategic plans that are more flexible or robust to a range of future states”.

Through the analysis, businesses should evaluate a range of climate-related scenarios, including a 2C scenario to explore physical, strategic and financial risks and opportunities that could emerge. Scenarios should act as a hypothetical construct, rather than a forecast, but should be plausible, relevant, consistent and distinctive examinations of risks that challenge current consumptions on the future.

For Martinez Diaz, scenario analysis will not only strengthen internal relations, but can also be used to showcase the commercial viability of a company to investors during the low-carbon transition.

“The businesses that can convince the market place that they both understand the risks and opportunities they’re facing, and have an active and credible strategy to address them, will be the ones that will be rewarded by the market,” he added.

“They’ll receive greater investment and they’ll see more confidence in their plan. The relationship with the asset owners and managers are very important as it is in many other areas of the business. This is just one of the newer challenges they’re going to have to get around.”

Martinez Diaz worked for six years at the US Department of the Treasury, acting as deputy assistant secretary for energy and environment, before joining the WRI. In his opinion, governments, particularly finance ministers and secretaries, are also “well-positioned” to apply scenario analysis for climate change, having used a similar methodology in the wake of the 2008 financial crash. This could be used as a communications bridge between corporates and governments.

Although investors like Blackrock have warned that high-level directors could be voted out of companies that are failing to mitigate climate-related risks posed to individual firms, Martinez Diaz believed that companies should experiment with the TCFD recommendations to create a “convergence around common understandings”. This would eventually lead to making it mandatory to disclose the information alongside traditional financial filings.

Matt Mace

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