Preparing Your Sustainability Report
Under AASB S2 Climate-related Disclosures, sustainability reports must address four key elements:
1. Governance
2. Strategy,
3. Risk management
4. Metrics and targets
A core part of strategy and risk management in an organisation is scenario analysis, which helps organisations assess the potential impacts of climate-related risks and opportunities on their operations and strategic direction.
Below, we’ll explore how to approach scenario analysis and incorporate it effectively into your sustainability report.
Understanding Scenario Analysis
Scenario analysis is a strategic planning tool used to evaluate the potential future states of the business environment under different climate scenarios. It involves assessing how various climate-related risks and opportunities might impact the business, considering factors such as regulatory changes, physical climate impacts, and market shifts.
Key aspects of scenario analysis include:
Defining Scenarios
Under AASB S2, entities are expected to assess at least two climate scenarios: one aligned with a 1.5°C warming pathway and another representing a higher warming pathway (e.g., 3°C or more). These scenarios help companies understand the range of possible future conditions and their implications.
Assessing Impacts
Scenario analysis involves evaluating the potential impacts of each scenario on the business’ operations, financial performance, and strategic objectives. This includes assessing associated physical risks and transition risks.
Physical Risks
Physical risks to consider in scenario analysis include:
- Acute: e.g., extreme weather (floods, fires, storms), infrastructure damage, supply chain disruptions
- Chronic: e.g. rising sea levels, long-term climate shifts, biodiversity loss.) and
Transition Risks
Transition risks to consider in scenario analysis include:
- Regulatory changes
- Shifts in consumer preferences
- Technology
- Reputation.
Developing Responses
Based on the insights gained from the analysis, businesses can develop strategies to mitigate risks and capitalise on opportunities. This may involve adjusting business models, investing in new technologies, or enhancing risk management practices.
Conducting Scenario Analysis
Following the steps below will help guide you through conducting a scenario analysis:
1. Define Objectives and Scope
- Objective: Clearly define the purpose of your scenario analysis. Are you assessing risks, identifying opportunities, or both?
- Scope: Will the scope of your analysis cover the entire organisation or specific business units?
2. Identify Key Variables
- Variables: Identify the key variables that will influence your scenarios, such as greenhouse gas emissions, regulatory changes, technological advancements, market trends, and physical climate impacts.
- Data Sources: Determine the sources of data for these variables, ensuring they are reliable and relevant.
3. Select Scenarios
- Scenario Range: Choose a range of plausible climate scenarios to analyse. Typically, this includes at least one low-emission scenario and one high-emission scenario
- Scenario Details: Define the assumptions, inputs, and methods for each scenario. Ensure that the scenarios cover a broad spectrum of potential future conditions.
4. Gather Data
- Data Collection: Collect relevant data for each scenario. This may involve scientific research, industry reports, expert opinions, and historical climate data.
- Data Validation: Validate the data to ensure accuracy and relevance. Cross-check with multiple sources if necessary.
5. Analyse Impacts
- Impact Assessment: Evaluate the potential impacts of each scenario on your business. Consider both physical and transition risks.
- Quantitative and Qualitative Analysis: Use both quantitative methods (e.g., financial modeling) and qualitative methods (e.g., expert judgement) to assess impacts.
6. Develop Strategies
- Risk Mitigation: Identify strategies to mitigate identified risks. This may involve investing in new technologies, adjusting business models, or enhancing risk management practices.
- Opportunity Capitalisation: Develop strategies to seize opportunities. This could include entering new markets, developing new products, or improving operational efficiency.
7. Review and Update
- Continuous Monitoring: Establish a process for continuous monitoring and updating of your scenario analysis. This ensures that your analysis remains relevant and accurate over time.
- Periodic Review: Schedule regular reviews to incorporate new data, emerging trends, and changes in thew business environment.
Scenario analysis process:
By integrating scenario analysis into your reporting, you can enhance risk management, inform strategic decision-making, and build stakeholder confidence. Embracing this approach not only ensures compliance with upcoming standards but also positions your business for long-term success in a changing climate.
What next?
If you need assistance with conducting scenario analysis, preparing your sustainability report, or developing a Sustainability Strategy or Action Plan, our team at Synectic Accountants & Advisers is here to help.
Contact us today to learn how we can support your business in navigating the complexities of climate-related disclosures.
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