Climate Change, Scenarios & Risks Not Worth Taking
By: Paul Barnett
Tags: Management, Business, Sustainability, Risk Management, Climate Change

It seems there may be an opportunity for consulting practices, law firms, insurers or other institutions such as think tanks or policymakers to offer value to their clients and prospects by launching industry sector initiatives to help firms decide what climate scenario sources to take seriously, and how to apply them to their industry and their company-specific scenarios if, as seems unlikely, such initiatives have not already been launched.

This thought follows my reading of an article I was alerted to. Kate Mackenzie for Bloomberg wrote an article titled “The Trouble With Climate Scenarios Is Everyone Has Their Own”. The title was followed with a question “Scenario analysis has taken off as a way to assess climate risk. Is it giving investors useful information?”

MacKenzie suggests “scenario-based decision-making was originally a military tool and made its way into the world of business via Royal Dutch Shell Plc in the 1960s. Up until a few years ago, however, it was still confined mostly to a few big energy and mining companies”.

The origin is correct. However, it is not true to say it is confined to a few big companies in the industries she suggests. But, Mackenzie rightly says “scenario analysis can be a great way of structuring one’s thinking about the future.” She notes, it is essential to understanding climate change. But adds, “It’s also time-consuming, sometimes misapplied, and perhaps even slowing down attempts at tackling the actual problem”. So, the problem is not scenario planning, but whether or not it is being misapplied in the case of climate change, and what impact that is having.

MacKenzie goes on to suggests the real problem stems from the fact as a method of informing markets or society at large the focus on scenarios has not been very successful. She adds, “Climate disclosures often fail to provide data that allows comparisons between companies”. And the Taskforce for Climate-Related Financial Disclosure (TCFD) found, there is not enough information about how the company would fare against the events described in the scenario.

She notes, “some of the companies adopting TCFD recommendations have put considerable effort into developing their own scenarios, a long and tedious process.” And she rightly observes, “each of the many, many steps involved in scenario development presents new and grinding challenges for teams of consultants and in-house sustainability experts.” This is often true even in relation to issues with which they have deep levels of expertise.

These comments appear to suggest the problem stems from the fact that instead of using some authoritative source of climate risk scenarios to determine the climate change risks to the firm, which is what investors want to know, the firms are also trying to work out for themselves what the climate change scenarios might be. If this is the case, they would be better pooling resources with others in the sectors they operate in, to establish some consensus on which authorities to listen to regarding climate scenarios, and to determine jointly what the risk impacts to the industry might be. Then they can fine-tune their assessments based on the specific profile of their business or organisation.

Alternatively, as I said at the outset, they may be advised by those who offer industry-level thinking. Such advisers might also consider proposing what mitigating actions might be taken individually and collectively, and what opportunities may exist if problems are tackled sooner rather than later, again either individually or collectively. This would be consistent with the findings of a study Mackenzie quotes. The authors say, there is a need to recognize a warming world requires a precautionary approach because climate change “cannot be treated as conventional financial risks to which probabilities can be assigned.”