Five ways to maximise return on investment from climate scenario analysis

In our recent analysis of more than 100 of Australia’s largest financial services firms, we found the biggest gap in disclosure lies in using climate change scenario analysis (CCSA) to understand the financial impact of climate change.  

For many organisations, the challenge has been justifying the investment in what has traditionally been viewed as an optional regulatory exercise. However, our experience tells a different story. 

Conducted effectively, climate change scenario analysis can unlock strategic insights, enhance business’ climate capabilities and meet regulatory requirements. 

To help firms still seeking collective endorsement, we present five strategies to maximise the return on your investment in climate scenario analysis. 

1. Define value and cost

Begin by identifying and prioritising the tangible (e.g. commercial insights, compliance) and intangible benefits (e.g. improved risk management, capability uplift) of performing CCSA. Costs materialise through resourcing requirements, data/system spend, third-party providers, and change management. Framing the high-level cost benefit analysis early establishes an anchor for everything that follows.

2. Scope ruthlessly

For all scoping decisions, refer to your value and cost definitions and ensure the analysis is return on investment (ROI) accretive. Design your quantitative analyses focusing on your organisation’s most material climate risks and opportunities, balancing coverage and granularity to deliver genuine insights, whilst keeping within the agreed budget. 

3. Use accelerators

New disclosure standards impose timeframes on firms to disclose climate change scenario analysis. Establishing the capability is a multi-year endeavour, but the process can be streamlined by leveraging technology, partnerships, and existing internal resources. We recommend developing the capability alongside experienced scenario analysis practitioners who understand your business, and the science and impacts of climate change. Getting it right first time will reduce time and cost, and avoid compliance issues.

4. Aim for competitive advantage

Shift your focus from compliance to competitive advantage by supplementing your transition and physical risk scenarios with a base case scenario. Having a view of a “most-likely” scenario grounds your analysis in pragmatism and delivers more business-ready, actionable insights. Consider also introducing short-term, tail-risk scenarios to conduct stress tests and war games, which can prepare you for more immediate climate risks and identify ways to differentiate your strategy. 

5. Embed insights across the business

Disclosure standards require the outputs of the analysis to be integrated into business-as-usual reporting processes. We would suggest using the CCSA results to inform employees on climate risks and opportunities, fostering a culture of sustainability and taking everyone on the journey. Incorporate climate considerations into risk frameworks and pursue business opportunities that are considerate of climate risk.  Looking ahead, consider how regularly you refine and refresh the analysis to reflect new data and market shifts, maintaining a dynamic approach to climate scenario analysis. 

Well-planned and executed climate change scenario analysis delivers a wealth of strategic insights that warrant the investment in going beyond compliance when implementing sustainability disclosure standards. That said, climate change scenario analysis remains a blind-spot for many of Australia’s financial institutions racing against time to credibly disclose.  

Find out more by downloading our Beyond Box-Ticking report or to discuss the points raised in this article, please reach out to a member of the team below.