Helping a payments provider tackle two climate disclosures challenges at once

If you use scenario analysis for climate risk materiality assessment – can you satisfy both regulatory requirements?

As part of its Australian climate risk management obligations, a leading payments provider had to prepare to disclose credible assessments of its:

1. Climate-related risks and opportunities from a financial materiality perspective
2. Resilience to climate-related changes based on scenario analysis

The organisation had never previously quantified the financial impact of climate-related risks and opportunities – and lacked internal climate scenario analysis capabilities.

The Head of Sustainability was aware that other financial institutions were running two separate programs to comply with these requirements. They asked Baringa to come up with a more streamlined and efficient solution with a 6- to 12-week timeframe. 

Working with Finance, Risk and Strategy

Our integrated approach was a joint scenario analysis and materiality assessment. The priorities were to deliver quickly while ensuring findings were specific to the organisation and in practical language that made sense to the business. 

First, we met with Finance to understand the underlying drivers of profitability and balance sheet changes. We then interpreted the Network for Greening the Financial System (NGFS) climate scenarios to assess the potential physical and transition risks and opportunities relevant to their business model and strategy, under 1.5°C and >2.5°C scenarios.  

We worked with Risk to assess the likelihood and impact of occurrence in the context of the existing risk management framework. Then, at a line-item level, Risk could quantify the impact on financial drivers under each scenario – and set conditions for what qualified as material.

To complement the risk management approach, we also engaged with Strategy to work through which of the potential climate opportunities would add value to our client’s strategic priorities.

In just six weeks, the business had been through an efficient and data-driven approach to identifying and managing its climate-related risks and opportunities.

Getting Board endorsement

To embed the climate risk insights across leadership teams, we engaged with the company Executives to educate them on the findings and receive approval on recommendations. This sets the Head of Sustainability up for success as they take the final list of material risks and opportunities to the Board for endorsement. 

With its big-ticket, first year disclosure items in hand, the payments provider now has a structured way to assess potential climate pathways and define financial materiality. Our combined approach reduced duplication, streamlined compliance and improved strategic planning. The organisation is also well set up to integrate climate modelling with its balance sheet and P&L in future years.

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