Call for consistent approach to climate scenario planning

The Centre for Policy Development has released a discussion paper, Climate horizons: next steps for scenario analysis in Australia, which argues that rigorous planning for the financial and economic impacts of climate change is vital in Australia, and that business and investors should use consistent principles of scenario analysis to respond to climate risks and opportunities.

The paper, co-authored by CPD Policy Director Sam Hurley and CPD Fellow Kate Mackenzie, comes four months after the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) which recommended that scenario analysis be used by companies to model the impact of different assumptions about climate change and climate policy on their business.

“It is now very clear that Australian companies and investors should consider and disclose the financial and economic risks that climate change poses. Scenario analysis – which considers how risks and opportunities might evolve under different climate and policy trajectories – is emerging as a crucial part of global best practice for identifying climate risks, disclosing them to markets, and responding to them through strategy and risk management.”

“However, achieving robust, consistent scenario analysis will be challenging, particularly while new practices and standards are emerging. There is a risk that inconsistent or flawed approaches could obscure more than they reveal, and that different users and stakeholders might develop very different expectations about what good scenario analysis looks like.”

The paper suggests five key principles that stakeholders can focus on as hallmarks of robust scenario analysis, as Australian responses to the TCFD take shape.

Scenarios should:

  • be genuinely consistent with Paris targets – incorporating a high probability of limiting warming to well below 2°C.

  • include both transition risks and physical impacts from climate change. The latter are likely to be significant even if warming is kept be below 2°C.

  • engage with the best available resources for understanding the sectoral or regional impacts of climate change.

  • be transparent about assumptions and parameters used.

  • show clear evidence not just of analysis of climate risks, but of responses to them through strategy, governance and risk management.

The paper also recommends key priorities for regulators: encouraging wide adoption of the TCFD framework in Australia, boosting their own capabilities to understand scenario analysis and climate risk, and co-operating more effectively to manage and monitor system-wide risks and impacts.

CPD will use Climate horizons as a basis for stakeholder engagement and further research on scenario analysis over the next few months, leading towards a full report on this issue in mid-2018.

The discussion paper is available here.

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