Mike Scott reports on how Ørsted, Equinor, Unilever and Gold Fields are using climate risk reporting to help strategic transformation
Energy company Ørsted, which has recently transformed its strategy from a focus on fossil fuels to becoming a renewable energy generator, set up a Taskforce on Climate-related Disclosures working group with representatives from its strategy, risk, sustainability and investor relations teams, along with those working on its annual report and its ESG accounting.
For Ørsted, TCFD reporting goes hand in hand with its strategic transformation. “If we are trying to be a climate leader, ignoring the TCFD would be a bad idea,” she adds. “The business case is partly centred around where we are as a company now. We’re already doing a lot of things and we need to talk about them in a way that the investment community understands.”
Like many companies, it is struggling most with scenario analysis. “That’s the most ‘black box’ of the recommendations,” says Christine Sobieski, senior sustainability advisor. “We’re in the process of trying to find out what we’re already doing on scenario analysis and whether it is linked to 2C alignment or not.”
The desire for quantification of risks is very challenging due to the wide range of uncertainty related to climate-related scenarios
Norwegian energy group Equinor, together with finance group Storebrand, also highlight the challenges of scenario planning. “Forward-looking scenarios are highly uncertain,” they say in a TCFD case study. “The desire for quantification of risks is very challenging due to the wide range of uncertainty related to climate-related scenarios, and hence the difficulty of assessing the probability and scale of impact.” It is important for portfolio managers, sustainability analysts, corporate sustainability teams and executives to talk about the issues to increase understanding of the topic and align expectations.
Unilever, the consumer goods company, includes 2C and 4C scenarios in its TCFD report, calling scenario analysis “a complex but ultimately valuable exercise”. It had to address a number of issues in creating its scenarios. These include the need to develop the business case for addressing climate risk, selecting the right model, and overcoming complexity and uncertainty by starting with a limited number of factors that have robust data, and then extending to include other factors if necessary.
Taking this approach reduced complexity but also “created a number of challenges – not least the fact that physical and transition risks are often interdependent yet separation breaks this link,” the company says.
Another problem is that many existing scenario models for transition risks have a narrow focus on the energy sector, while physical risk scenarios provide clear analysis of changes in greenhouse gas emissions and what they will mean, “but are limited in the financial quantification of these impacts and the fact that most of the short-term physical risks will materialise regardless of action”.
The TCFD recognises that many companies find scenario analysis challenging, and in response it has announced plans for an advisory group to develop “practical guidance on climate-related scenario analysis” in order “to provide some of the building blocks that support disclosure of companies’ strategy resilience”.
South African mining group Gold Fields is another company that has recently released its first TCFD report. “Climate‐related risks are now a mainstream financial risk,” says CEO Nick Holland. “We are starting to understand the cost of inaction and importance of including climate scenarios in our long‐term planning.”
Gold Fields' climate risks include reduced availability of water and cooling in Australia and disruption to transport links in Peru due to extreme weather
Climate risks are both an immediate and a long-term issue, he adds, citing a number of risks that are already manifesting themselves at the company’s mines around the world. These include a reduced availability of water and increased cooling costs in Australia, droughts affecting the availability of power in Ghana, disruption to transport links in Peru due to extreme weather events and mudslides, and regulatory uncertainty in South Africa.
With energy accounting for 22% of the company’s 2018 operating costs, Holland points out that the company is vulnerable to rising energy demand and costs across all its operations. In response, it has embarked on a programme of fuel switching from diesel to gas power, renegotiated energy contracts, invested in energy efficiency initiatives and looked at renewable energy options at its mines and projects, including wind, solar and energy storage.
This article is part of our Climate Risk briefing. See also:
Corporations feel investor heat over slow response to climate risk
Property sector slow to wake up to climate risk
From zero to hero: How Japan Inc came from behind to lead the world on climate risk reporting
‘The TCFDs go to the heart of our job as a bank to assess risk’