Climate change is not some distant threat. It is a global tragedy unfolding before our eyes, disrupting ecosystems, communities and economies. For companies, investors and financiers the risks and opportunities are immediate and pressing. The expectations of markets and policymakers on emissions reduction targets and adaptation measures are ramping up. Customers, shareholders and regulators demand increasingly sophisticated responses. If Australian businesses and company directors fail to react urgently and coherently, then they will jeopardise their own future: assets will be stranded or uninsurable, investment will stall, debts will go unpaid, and companies will collapse.
An effective response requires effective disclosure — a frank acknowledgement of the threat that climate change poses to fixed assets and financial liabilities, and the potential for stricter controls on emissions and rapidly changing technology to disrupt established business practices profoundly. Adequate, timely disclosure is essential for appropriate pricing of risk and opportunity. Otherwise, capital will not flow to where it can be best used, profits will fall, and investments will fail.
This report focuses on a pivotal component of this bigger picture — the use of climate scenario analysis to help businesses plan for, and adapt to, an uncertain future.
One year ago, the International Taskforce on Climate-Related Financial Disclosures (TCFD) called on firms and investors to conduct scenario analysis in order to assess and disclose potential business, strategic, and financial implications of climate-related risks and opportunities. Since then, leading financial regulators, institutions and global investors have backed the TCFD recommendations as best practice. They have emphasised that scenario analysis can be a key driver of better corporate reporting on climate-related issues and, in turn, a concerted corporate response to climate change.
CPD’s 2017 discussion paper Climate Horizons showed how scenario analysis could help Australian companies, investors and regulators manage climate-related risks and opportunities. This report updates our findings, offers new resources for organisations coming to grips with scenario analysis, and recommends next steps for regulators and policymakers to build on the progress made.