Introduction

The report’s primary objective is to guide policymakers, investors, regulators, and businesses in developing practices and capabilities for scenario analysis which are fit-for-purpose. The report acknowledges that a disjointed approach where stakeholders cannot agree on the right standards or where corporate spin obstructs the analysis conducted can make the pressing challenge of climate-related risk management much more difficult.

Analysis

The report emphasises five key propositions as a basis for discussion on how to ensure consistency in scenario analysis in Australia. These principles are intended to guide those designing and assessing scenario analysis, ensuring that early efforts set a high bar for broader take-up, particularly in Australia, where climate-specific corporate disclosures requirements are relatively weak, and the risks are profound:

• Companies should include a scenario that genuinely reflects the Paris targets, i.e. a scenario that integrates a high probability of limiting warming to below 2°C, and towards 1.5°C.
• It is important to include the physical impacts of climate change, not just transition risks. Physical risks may be significant, such as drought, flooding and other exceptional weather events, even if warming is kept level.
• Scenario analysis must be forward-looking, defining transition pathways and identifying the opportunities and risks that result from these pathways.
• Climate-related metrics and targets should be included in financial evaluations.
• The disclosures should indicate the response of the organisation to the results of the scenario analysis in terms of risk management, governance, and strategy.

The report highlights the importance of developing a consistent approach to disclosure practices around climate-related risks and opportunities in Australia. The report notes that in terms of sustainability-related disclosures and reporting, business practices have improved, but specific climate alterations remain lacking. In 2017, the Australian Council of Superannuation Investors (ASCI) reported that 58% of companies represented in the ASX200 listed on greenhouse gas emissions, with just less than half developing policies or targets for climate change. ASX200 are Australia’s equivalent to America’s Fortune 500 list.

Under the current Australian legislation and regulatory framework, companies and directors have various obligations, particularly under Corporations Act 2001 (Cth). As such, companies must consider and disclose material risks, such as ESG risks considered to significantly impact the operations or financial performance of the organisation.

Conclusion

The implementation of scenario analysis may be difficult and daunting for all parties. The challenges faced may include the legal and regulatory requirements of disclosing ESG metrics, the lack of global alignment on the standards and definitions of scenario analysis. Still, a disjointed approach to corporate sustainability initiatives may undermine the credibility and goodwill from stakeholders. Nonetheless, the impending challenges of climate-related risks and opportunities demand a consistent and digitally unified approach to scenario-based analysis. The report also recognised the role of regulators and policymakers play by developing analytical capability and expertise in scenario analysis. Stakeholders should focus on fundamental principles influential in scenario analyses to promote good corporate governance.