Introduction

The report introduces “storylines” as an innovative method for assessing and measuring future physical climate-related financial risk. Unlike traditional approaches that rely on probabilistic climate models, storylines focus on plausible scenarios to capture a range of uncertainties and extreme events, enabling more robust risk assessments for financial professionals.

Ten points of complexity for consideration

The report identifies ten key complexities in future climate risk assessments. These include the substantial computing power required for climate model simulations, the coarse spatial scale of Global Climate Models (GCMs), and the inherent uncertainties in projecting high-impact climate events. These complexities necessitate alternative approaches like storylines to enhance the accuracy and relevance of climate-related financial disclosures.

Future physical climate risk assessment

Traditional risk assessments, such as those based on ISO 31000 and COSO frameworks, typically involve identifying risks, analysing their severity, and evaluating outcomes. The report argues that these frameworks are limited in addressing the complexities of future physical climate risks, particularly for high-impact extreme events. Storylines offer a complementary approach by integrating qualitative scenarios with quantitative analyses, thereby improving the robustness of risk management processes.

How the storyline method works

The storyline method involves creating a “physically self-consistent unfolding of past events or plausible future events,” where the emphasis is placed on understanding the driving factors rather than predicting probabilities. This approach allows for the incorporation of both qualitative and quantitative information, enabling the full expression of uncertainties related to specific climate hazards. By focusing on plausibility over probability, storylines provide a more realistic and legally defensible framework for assessing climate-related financial risks.

Storyline-enhanced risk assessment in practice

The report highlights several examples of storyline applications, including the Electricity Sector Climate Information (ESCI) project and the Delta Commission of the Netherlands. These case studies demonstrate how storylines can be used to evaluate risks related to tropical cyclones, sea level rise, and other climate extremes. The ESCI project, for instance, shows that while the frequency of tropical cyclones in Australia has decreased, the severity of these events is expected to increase due to climate change. This information can be used to adjust financial models, such as impairment testing and expected credit losses.

Recommendations and implications for accounting practice

The report makes four key recommendations for integrating storylines into accounting practices:

• Ground all analyses in observations: Financial analyses should be based on observed data to ensure that risk assessments are anchored in reality. This includes cross-referencing financial performance with historical climate data.
• Consider multiple lines of evidence: Use a variety of evidence, including climate model projections and expert judgment, to capture the full range of potential climate risks.
• Sample the full range of plausible futures: Financial professionals should consider a wide array of potential future scenarios, rather than relying solely on probabilistic models.
• Engage in ongoing interdisciplinary dialogue: Collaboration between climate scientists and financial professionals is crucial for developing accurate and actionable risk assessments.

Conclusions

The report concludes that storylines provide a valuable tool for enhancing the assessment of physical climate risks in financial contexts. By focusing on plausible scenarios and integrating multiple lines of evidence, storylines can help organisations better prepare for and mitigate the financial impacts of climate change. The report emphasises the need for ongoing dialogue between disciplines to refine and implement this approach effectively .