Big business is increasingly turning to scenario analysis to understand the risks and opportunities presented by climate change.
The latest global survey of company disclosures on environmental impact from UK-based nonprofit CDP suggests that companies are paying attention to the calls, from shareholders and others, to include climate-related financial risk disclosures in their periodic reports. According to the survey, US companies are taking a lead when it comes to planning for climate change.
Of the 7,000 global companies that responded, more than one-third are based in the United States, and 30 are on the CDP’s A-list of 177 environmental pioneers, more than any other country. The A-list is split into three sections, with 139 companies classified as leaders in climate change, 31 in water security, and the remainder in deforestation.
Here’s a closer look at what these companies are doing to get ahead of the effects of climate change, and the role scenario analysis plays in these efforts.
Planning for Climate Change
Both on the CDP’s A-list and beyond, companies are increasingly focusing on the potential business risks brought about by climate change. Weather events play a role in some companies’ forecasting; for example, A-lister Bank of America highlights worries that increased flooding brought about by climate change could see more homeowners default on their mortgages. AT&T is concerned about the cost of having to repair its network in the aftermath of a higher number of natural disasters like hurricanes.
Other companies have taken less-direct effects into consideration. Coca-Cola reports potential production disruptions arising from water shortages in its supply chain, and Visa underlines the risk that global warming could create more wars and outbreaks of disease, causing fewer people to travel and hindering cross-border transactions and foreign exchange activity. Alphabet,
the company behind Google and a climate change A-lister, describes its work to run the most efficient computer infrastructure in the world as a strategy for mitigating the risk of higher energy costs and regulation in connection with climate change. It also points to the risk of reduced online advertising if climate change delivers adverse socioeconomic impacts, and it even considers the reputational risks of climate change inaction.
“Not only does a company need to speak to the efforts they’re making, they also need to show through their actions that they are making improvements or taking mitigation measures,” Alphabet writes in its submission to CDP. “Not addressing climate change risks and impacts head on could result in a reduced demand for our goods and services because of negative reputation impact.”
At the same time, some corporations see opportunities amid these challenges. Healthcare companies have identified a link between a deterioration in global health and a likely rise in demand for their services, with pharmaceutical group Merck envisaging greater need for drugs to fight waterborne illnesses. A-lister and technology giant Apple suggests that global warning could drive demand for certain remote technologies and predicts that calls for the iPhone itself could rise due to concerns over personal safety. Banking group Wells Fargo notes the possibility of higher demand for financing to rebuild infrastructure in the wake of natural disasters, as well as for investment in conservation and mitigation measures.
Integrating Scenario Analysis
To articulate these climate change–related risks and opportunities, companies often rely on rigorous scenario analysis, which looks at many possible outcomes of potential future events rather than focusing on one central forecast. The insights generated by scenario analysis can help investors make decisions, which is why groups like the Task Force on Climate-related Financial Disclosures (TCFD) want firms to go further and publish climate-related scenario analysis in their financial reports.
With climate change presenting such a multitude of risks, the TCFD is pressing firms to establish a standardized, transparent approach to climate change analysis so investors can better judge for themselves how global warming could affect their long-term prospects. For instance, it recommends that companies use at least one scenario that assumes global temperatures will rise by 2 degrees Celsius, the number under which the Paris Agreement aims to keep them. According to the World Resources Institute
(WRI), most companies using climate-related scenario analysis are still in an experimentation phase. Since evaluating risk between companies or drawing firm conclusions at all is difficult when organizations model analysis on different assumptions, the WRI has called for more transparency and comparability between companies’ reports.
The TCFD hopes that the disclosure of potential financial impacts from climate-relates risks and opportunities will encourage investors to pursue more sustainable investments. As of April 2018, more than 275 companies had come out in support of TCFD’s recommendations on climate change disclosure, most of which were investment firms, with over $86.2 trillion collectively under management. Pressure from important shareholders could well be the deciding factor that prompts more big firms to take scenario analysis seriously and publish findings in a transparent and collaborative way.