TCFD Scenario Analysis

In an era where climate change has become an undeniable global reality, organizations are increasingly recognizing the urgent need to assess and manage the risks and opportunities associated with their carbon output. Scenario analysis can empower organizations to identify and manage climate risks effectively, ultimately fostering more resilient business strategies - learn more with Minimum.

What is Scenario Analysis?

Scenario analysis is a tool used to assess the potential impacts of different climate-related scenarios on an organization's financial performance. By exploring various scenarios, companies can assess how their business may be affected and make informed decisions to adapt and mitigate risks or capitalize on emerging opportunities for investment. 

Why does the TCFD recommend it?

The TCFD recommends scenario analysis as a way for organizations to better understand and manage their exposure to climate-related risks and opportunities. 

The TCFD recommends that organizations conduct scenario analysis on both physical and transition risks, and that they use a range of scenarios to capture the uncertainty and complexity of the climate-related landscape. Typically, it involves developing a range of plausible scenarios based on different climate-related assumptions and then analyzing how these could impact an organization's:

• Revenue
• Costs
• Assets
• Liabilities
• Cash flow 

The TCFD also recommends that organizations disclose information based on their scenario analysis findings. This should include any assumptions and inputs used, the results of the analysis, and how the organization is using the results to inform its strategic decision-making. 

How does an organization conduct a climate scenario analysis?

Undertaking a climate scenario analysis involves a structured and rigorous process, which typically includes the following steps:

Step 1: identify the scope of the analysis

Determine the focus of the scenario analysis and the relevant time frame. This may include physical and transition risks, and different time frames, such as short, medium, and long-term.

Step 2: develop scenarios

 Develop a range of plausible scenarios based on different assumptions about climate-related risks and opportunities. This may involve reviewing existing scenarios developed by third-party organizations or developing custom scenarios tailored to the organization's specific context.

Step 3: define drivers

 Identify the key drivers of risk and opportunity for each scenario. This may include factors such as policy and regulatory changes, technological developments, consumer behavior, and the physical impacts of climate change.

Step 4: assess impacts

Analyze how each scenario could impact the organization's financial performance, including revenue, costs, assets, liabilities, and cash flow. This may involve using financial modeling and other analytical tools to quantify the potential impacts.

Step 5: evaluate resilience

Assess the organization's resilience to each scenario, including its ability to adapt to changes in the business environment and to manage risks and capitalize on opportunities.

Step 6: develop strategies

Develop strategies to mitigate risk and capitalize on opportunities identified in the scenario analysis. This may involve identifying areas of the business that need to be strengthened, such as supply chain resilience, and opportunities to invest in low-carbon technologies or markets.

Step 7: Disclose results

Disclose the results of the scenario analysis, including the key assumptions and inputs used, the results of the analysis, and how the organization is using the results to inform its strategic decision-making. 

Overall, conducting a scenario analysis requires input and engagement from across the organization, including senior management, risk management team, and finance. The TCFD provides further guidance on how organizations can undertake scenario analysis and disclose the results of their analysis in their climate-related financial disclosures.