Climate scenario analyses: New challenges for sustainability reporting

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published on 22 May 2023 | reading time approx. 2 minutes 
 

In the course of the Corporate Sustainability Reporting Directive (CSRD) and the application of the European Sustainability Reporting Standards (ESRS), companies will be obliged to carry out a climate scenario analysis. The aim is to determine how different climate scenarios could affect the company and to identify potential climate risks and opportunities. This is new territory for many medium-sized companies.


For the climate scenario analysis various scenarios based on assumptions of future climate developments are being used. Due to the complexity of the topic and the difficulty of making future predictions, the consideration of different scenarios is an essential component in the preparation of sustainability KPIs. Climate scenario analysis can help to develop strategies for adapting to climate change and to take measures to minimize the impact of climate change on one's own company.


Steps towards climate scenario analysis

Climate scenario analysis in the context of ESRS can be divided into the following steps:

  • Contextualization: Identification of relevant aspects of climate change that could affect the company.
  • Scenario development: Development of different scenarios that reflect the potential impacts of climate change on the company (e.g., use of scenarios from the Intergovernmental Panel on Climate Change (IPCC)).
  • Impact analysis: Assessment of the potential impact of each scenario variant on the company's business activities, financial performance, and sustainability.
  • Opportunity and risk analysis: Identification of opportunities and risks associated with the various scenarios and assessment of their impact on the company.
  • Action planning: Development of appropriate measures to adapt to climate change and reduce risks, as well as to seize opportunities.
  • Reporting: Documentation of the results of the climate scenario analysis in accordance with ESRS requirements.

Within the framework of the ESRS, both physical climate risks and transition risks and opportunities are to be identified through a scenario analysis. To make this possible, other important influencing factors, such as political assumptions, macroeconomic trends and technological developments, must be taken into account in addition to the various physical climate scenarios.


Application of the IPCC climate scenarios

The IPCC Report is an important source of information and data on climate change. The scenarios and projections presented in the IPCC Report can be used as a basis for climate scenario analyses. The IPCC Report contains extensive data and facts on climate change, such as historical emissions and temperature data. These can be used to conduct a robust analysis of the impact of climate change on the company or organization. Climate change impacts on various sectors such as agriculture, energy, water, and health are also examined and can be used by organizations. For example, the ESRS E1 (Draft) standard mentions the IPCC SSP5-8.5 scenario as a possible method of application.


Outlook

Conducting climate scenario analyses will become increasingly critical for companies to identify potential risks and opportunities related to climate change. Climate scenario analyses provide a valuable basis for developing adaptation strategies that enable companies to proactively address the impacts of climate change and successfully position themselves in the market.

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