Navigating Climate Uncertainty: Strategic Planning with Imperfect Data

Mitigating business risk with climate scenario analysis
Navigating Climate Uncertainty: Strategic Planning with Imperfect Data
Publ. date 7 Mar 2024
Predicting the future is inherently difficult. Indeed, if it was easy we would all be millionaires by virtue of our foresight to pick winning investments every time! The challenge is made even more difficult in the face of a rapidly changing climate where we are departing from historical norms, amplifying the adage ‘past performance is not a guarantee of future results’. This is where climate scenario analysis comes in. Not only is it now considered best practice and an immensely valuable exercise to go through a climate scenario analysis and strategic planning exercise, it is increasingly prescribed by various climate disclosure frameworks (TCFD, ISSB, CSRD etc.).

At SLR, we have found this works best when ‘climate scenario narratives’, that is stories we can all understand about how the future might unfold and how it will impact us, are co-developed with the key stakeholders in the organisaiton. This works best when the stakeholders are from a range of different functions that might not necessarily always come together (e.g. from finance, risk, sustainability, logistics, board etc.). This means thinking about the future through the lens of typically three different futures:

  1. A rapid decarbonization pathway (often referred to as 1.5 °C);
  2.  A disorderly transition where efforts are disjointed and left until the last possible moment; and,
  3.  A high warming scenario (often referred to as RCP8.5 or 4 °C+).

We have found interactive workshops (in person or online) that enable the participants to explore how the business environment could change under these different scenarios is particularly effective for developing a shared vision of the future. The purpose of this exercise is then to understand what actions to take now to mitigate the main risks.

One way to identify the main risks is to quantify the financial impact of the main risks, which is again a requirement of the main climate disclosure frameworks. This can be a challenging exercise as forward-looking price projections (e.g. for the price of raw materials or electricity) are not always available, and if they are, the data can be questionable.

This is why we are increasingly thinking about financial quantification in terms of ‘sensitivity analysis’. That is rather than being overly fixated on imperfect data, seeking to understand the stage gates at which a change in price becomes problematic. For example, understanding that if the price of a rare earth element that is key for a particular product goes above $100/per tonne, then this aspect of the business is no longer viable. This is important information for the board to understand and factor into its strategic decision making so it can explore alternatives. We are finding that many of our clients are finding this approach useful as a second- or third-year exercise after their initial financial quantification efforts.

 The purpose of the exercise is not to arrive at an exact number but rather to identify the trigger points for action that can increase resilience to climate change and avoid the business being wrong-footed. Indeed, combined with a good grasp of strategic scenario planning, this is exactly the type of decision-useful information that boards can use to help their organization stay ahead as the climate changes. If this is an area where you need help, then please do get in touch. Sam Gill – Director Climate Resilience via samgill@slrconsulting.com.

This blog post was written by Sam Gill, Director - Climate Resilience at SLR.

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