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P4I - Capacity Building Workshop 4 - Deep Dive Into TCFD - v1.0
P4I - Capacity Building Workshop 4 - Deep Dive Into TCFD - v1.0
P4I - Capacity Building Workshop 4 - Deep Dive Into TCFD - v1.0
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Our team today
2
What’s on for today?
Date: 18 January 2023 Time:9:00-12:00pm, 3.0 hours Venue: Pusdiklat PLN Slipi
Introduction to TCFD
Russell, Associate
Recap of previous session Benefits of implementing TCFD 5 mins
Partner (English)
Core elements of the TCFD recommendations
OktaricoPradana
Q&A Session 10 mins
(Bahasa)
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Contents
1. Setting the direction and framework Design and implement organisational approach to manage climate risks
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Question time
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Task Force on Climate-Related Financial Disclosures (TCFD)
There is no standardised approach to disclose climate-related financial The Financial Stability Board (FSB) developed TCFD with the goal to
information. drive more informed investment, credit and insurance
underwriting decisions and increase stakeholder understanding
Investors,lenders and insurers are not able to evaluate which companies will of climate-related risks.
survive or thrive as the climate changes, and as decarbonisation regulations,
new technologies and behavioral change emerge. The TCFD seeks to develop recommendations for voluntary
climate-related financial disclosures that are consistent,
comparable, reliable, clear, and efficient, and provide decision-useful
information to lenders, insurers and investors.
TCFD’s Mission
Do you think that aligning with TCFD recommendations would improve your
company disclosure to your investors and other stakeholders? Is it necessary?
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Question time
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Benefits of implementing the TCFD recommendations
Better access to capital by increasing investors Smarter, more efficient allocation of capital and
and lenders’ confidence that the company’s help smoothen the transition to a more sustainable,
climate-related risks are appropriately assessed low-carbon economy
and managed
a) Describe the board’s oversight of a) Describe the climate-related risks a) Describe the organisation’s a) Describe the metrics used by the
climate-related risks and and opportunities the organisation processes for identifying and organisation to assess climate-
opportunities has identified over the short, assessing climate-related risks related risks and opportunities in
medium and long term line with its strategy and risk
b) Describe the management’s role b) Describe the organisation’s management process
in assessing and managing b) Describe the impact of climate- processes for managing climate-
climate-related risks and related risks and opportunities on related risks b) Describe Scope 1, Scope 2
opportunities the organisation’s businesses, and, if appropriate, Scope 3
strategy and financial planning c) Describe how processes for greenhouse gas (GHG)
identifying, assessing and emissions and the related risks
c) Describe the resilience of the managing climate-related risks
organisation’s strategy, taking into are integrated into the c) Describe the targets used by
consideration different climate- organisation’s overall risk the organisation to manage
related scenarios, including a 2°C management climate-related risks and
or lower scenario opportunities and performance
against targets
Source: TCFD, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures, June 2017
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1. Setting the direction and framework
Risk governance: design and implementation
Design and implement organisational approach to manage climate risks
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Question time
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Organisational changes and transformation would be required as
companies seek to become effective managers of climate risks
4 Guiding
5 – Risk reporting metrics
Materiality principles Strategic The board to review and challenge:
assessment integration
– Undue or unexpected climate risk concentrations
– The organisation’s strategy/corporate plan, considering the climate risk profile,
through short (e.g., 3-5 years), medium (e.g., 10 years) and long term (e.g., 30
6 7 8 years) lenses
– Materiality assessments and scenario analysis by climate outcomes and time
Incentivization Reporting and Exchange
disclosure horizons
– Emerging regulatory, reputational and legal obligation
Source: (1) World Economic Forum (2019): How to Set Up Effective Climate Governance on Corporate Boards, (2) Climate Financial Risk Forum Guide 2020, Risk
Management Chapter
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Ensuring understanding, oversight and accountability for financial risks
arising from climate change at all levels
External audit
controls measures Quality
Regulators
Inspection
Compliance
Carryout initial climate risk assessment when Set up and own central risk frameworks Review control design and execution
onboarding suppliers/consumers or during Develop the tools for identifying and assessing
periodic review of existing suppliers/consumers climate risks
Engage with consumers to understand carbon
Deliver climate risk training
intensities and their business plans for mitigating
climate risk Develop scenarios and undertake stress testing
Understand, assess
and consider uncertainties Support first line activity to understand, assess
and developments around timing and channels and consider uncertainties and developments
of climate risk around timing and channels of climate risk
A potential indicator of the organisation’s quality of climate risk governance could be based on the extent to which climate risk management is integrated
effectively into established risk management.
Source: (1) EY, Being business-minded about climate change: Ten ways to address climate-related risks and opportunities in 2020 and beyond, (2) Chartered Institute of
Internal Auditors, 2018, Governance of Three Lines of Defense, (3) Climate Financial Risk Forum Guide 2020, Risk Management Chapter
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Climate risk needs to be implemented across the full risk management
framework
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Example from TCFD adopter
Eni, Italy
Eni’s ensures understanding, oversight and accountability for climate risks at all levels
Orsted provides a clear framework to ensure understanding, oversight and accountability for climate-related risks at all levels
Orsted’s Sustainability
Committee is appointed by the
executive committee and
oversees their Sustainability
Commitment
Orsted provides a clear framework to ensure understanding, oversight and accountability for climate-related risks at all levels
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Embed climate-change risk deep into Enterprise Risk Management (ERM)
Ultimately, climate change must be built into the organisation’s risk management framework. This requires embedding it into
the risk management lifecycle:
1 2 3 4
Risk identification and
Risk taxonomies Risk reporting Risk mitigation
assessment
To identify risks, granular In order to capture climate risk Develop and maintain a set of risk Climaterisk analysis needs to
analysis of customers and within existing processes and metrics that capture their own and support decision-making on how
clients by region and sector is standards, organisations will need the counterparty’s climate change to manage climate risks
useful to re-evaluate their risk taxonomies risks This may range from:
to determine whether climate risk is
Bifurcating between physical Be able to aggregate those metrics
material – Altering exposure to certain
and transition risks makes the to enable board and senior sectors or region
analysis more precise and These granular components will management reporting and
actionable need to be examined across oversight – Pricing of new loans and
portfolios to inform credit limits and underwriting of investments
Understanding the direct Risk reporting can be linked to
internal ratings to maintain prudent – Making decisions on how to
impacts of physical risks on existing portfolios, concentration
risk management deploy capital
the organisation’s operations and exposure threshold and limits
and third parties is essential
Source: EY, Being business-minded about climate change: Ten ways to address climate-related risks and opportunities in 2020 and beyond 22
Risk identification and assessment
Based on the risk statement, assign a risk score equivalent to the likelihood of the risk multiplied by the impact
Risk of the risk
identification
Exposures on physical and non-physical assets related to the companies need to be taken into account. Assets
which are owned by customers and funded by the companies should also be considered
Non-physical assets include:
Risk
assessment – Customer and staff safety
– Financial exposures such as market risk
– Responsible investment and corporate social responsibility
– Reputational risk and loss of shareholder value
– Reputational risk and loss of shareholder value
Key stakeholders then form a collective view of the priority of the risk – a plan will be developed in response to
priority risk
Non-priority risk can still be identified and monitored going forward
Exposures on physical and non-physical assets related to the companies need to be considered
Source: Climate Risk Management for Financial Institutions, Actuaries Institute’s Climate Change Working Group, November 2016 23
Risks arising from climate change
Sources: 1TCFD, Final Report: Recommendations of the Task Force on Climate-Related Financial Disclosures, June 2017; 2Bank Negara Malaysia, Climate Change and
Principle Based Taxonomy, 27 December 2019 and 3Grantham Research Institute on Climate Change, Global trends in climate change litigation, 4 July 2019 24
Risk categorisation varies based on industry, business model and
regulations
Market
Impact on balance sheet
Consumer
- 65.7%
Physical risks
cumulative impact to 2050
in 20C Scenario
Acute
Source: Climate Financial Risk Forum Guide 2020, Risk Management Chapter 25
Breakout session 1
You will now be assigned to a breakout group. In your group, you will need to:
OR
Physical risk Transition risk
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TCFD climate-related risks and opportunities
Chronic Technology
Risks Market
1. Identify climate risks faced
by PLN Reputation
2. Discuss the potential impacts
of the climate risks to PLN Strategic planning
3. Possible metrics to evaluate Risk management
the financial impact of
climate-related risks
Source: TCFD, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures pg. 8, June 2017 27
Example of climate risks in the power and utilities sector (1/3)
Increased
cost of compliance
Reduced
assets and inflated cost of capital
Policy and legal
Stranded assets caused by national or state carbon mitigation policy
Removal of renewable energy supporting programs
Tainted
corporate reputation due to increased CO2
Reputation Increased shareholders’ pressure due to low quality climate disclosures
emissions
Oil,gas and coal extraction, as key suppliers to electric utilities face physical risks from
affected water supplies.
Both transition risks and physical risks impact operating costs and asset valuation of
Fossil fuel Energy production
organisations engaged in energy activities.
demand and usage
The regulatory and competitive landscape for electric utilities differs significantly
between jurisdictions, making assessment of climate-related risks very challenging.
Organisations within the Energy Group require major financial investments in fixed
assets and supply chain management and have longer business strategy/capital
allocation planning horizons relative to many other sectors.
Emissions Water
constraints availability
Demand
Product mix and production capacity Revenue
Revenues
Market positioning and competition EBITDA
Operational continuity
Production costs
COGS
Energy and other operating costs
Fixedcosts
Expenditures Fines and regulatory compliance
Operating and other margins
R&D
Resilience to supply chain disruption
CLP has embedded climate change into the organisation's risk management framework
CLP described its additional risk mitigation measures for their supply chain and power generation network
CLP highlights the materials risks connected with transition and physical risk drivers
CLP highlights the materials risks connected with transition and physical risk drivers
Source: TCFD, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures 36
2. Risk management
2.2 Recap of TCFD recommendation on risk management
Understand the TCFD recommendations on risk management
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Recap of TCFD recommendation on risk management
Strategy
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Organisation’s processes for identifying and assessing climate-related
risks
Describe the organisation’s processes for identifying and assessing climate-related risks
R (a)
Organisations should describe their risk management processes for identifying and assessing climate-related risks. An important aspect
of this description is how organisations determine the relative significance of climate-related risks in relation to other risks.
Organisations should describe whether they consider existing and emerging regulatory requirements related to climate change as well
as other relevant factors considered.
Source: TCFD, Final Report Recommendations of the Task Force on Climate-related Financial Disclosures
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Methods to identify and assess climate-related risks
Description of general risk management function and level of integration Description of internal taxonomy classification using recognised
into business-as-usual capabilities (e.g., risk ID, risk taxonomy, risk framework to apply “brown to green” scale by business segment
inventory, risk appetite / limits)
Description of internal tools and technology and external vendors
Reference to industry recognised frameworks for identifying risks and
explanation of why your firm selected them
An
overview of the company’s risk management processes via internal ratings reviews, scenario
Current disclosure practices of reporters: analysis and client engagement
Identifies climate-related credit, investment, market and operational risks and evaluates and
manages each risk category through the company’s Independent Risk Management (IRM)
function
Source: 1EY IIF UNEPFI, TCFD Report Playbook, 2020; 2Institute of International Finance: Climate-related Financial Disclosures: Examples of Leading Practices in TCFD
Reporting by Financial Firms, 2019; TCFD, Task Force on Climate-related Financial Disclosures, Status Report, 2021
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Organisation’s processes for managing climate-related risks
Organisations should describe their processes for managing climate-related risks, including how they make decisions to mitigate,
transfer, accept or control those risks
In
addition, organisations should describe their processes for prioritising climate-related risks, including how materiality
determinations are made within their organisations
Source: TCFD, Final Report Recommendations of the Task Force on Climate-related Financial Disclosures
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Methods to manage and prioritise climate-related risks independently and
relative to other risks
Discussion of the linkage between risk identification processes and the Commitments to future state capabilities
creation of limits and any other methods used to control risk within the
Carbon measurement methodology and process to evaluate
portfolio
portfolio carbon and portfolio decarbonisation pathways
Exposure ($ / %) and quantification of risk types by business segment
and jurisdiction Details of training and employee readiness planning and programs
Description of impacted risk management process and controls,
including a description of improvements planned / completed to enhance
capabilities and incorporate climate-change risk into existing risk
management framework
Current disclosure practices of reporters: Materiality matrix in the ESG report to describe the significance of climate risks to the
organisation relative to other ESG risks
Source: 1EY IIF UNEPFI, TCFD Report Playbook, 2020; 2Institute of International Finance: Climate-related Financial Disclosures: Examples of Leading Practices in TCFD
Reporting by Financial Firms, 2019; TCFD, Task Force on Climate-related Financial Disclosures, Status Report, 2021
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Integrating the process for identifying, assessing and managing climate-
related risks into the organisation’s overall risk management
R (c)
Describe how processes for identifying, assessing and managing climate-related risks are integrated into the
organisation’s overall risk management
Organisations should describe how their processes for identifying, assessing and managing climate-related risks are integrated into
their overall risk management
Source: TCFD, Final Report Recommendations of the Task Force on Climate-related Financial Disclosures; TCFD, Status Report, 2021 43
How climate-related risks are managed and prioritised both independently
and relative to other risks
Discuss
the potential impact, likelihood, velocity of change and context of climate issues and describe
Current disclosure practices of reporters: its mitigating actions and next steps
Highlight the physical and transition risks and opportunities that climate change poses to corporations,
governments and households
Source: 1EY IIF UNEPFI, TCFD Report Playbook, 2020; 2Institute of International Finance: Climate-related Financial Disclosures: Examples of Leading Practices in TCFD
Reporting by Financial Firms, 2019; TCFD, Task Force on Climate-related Financial Disclosures, Status Report, 2021
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Breakout session 2
You will now be assigned to a breakout group. In your group, you will need to:
OR OR
Organisations should describe their risk management processes for identifying and assessing climate-related risks. An
important aspect of this description is how organisations determine the relative significance of climate-related risks in
Describe the organisation’s relation to other risks.
processes for identifying and Organisations should describe whether they consider existing and emerging regulatory requirements related to climate
assessing climate-related risks change as well as other relevant factors considered.
Organisations should also consider disclosing the following:
– Processes for assessing the potential size and scope of identified climate-related risks and
– Definitions of risk terminology used or references to existing risk classification frameworks used.
Describe the organisation’s Organisations should describe their processes for managing climate-related risks, including how they make decisions
processes for managing to mitigate, transfer, accept or control those risks
climate-related risks In addition, organisations should describe their processes for prioritising climate-related risks, including how
materiality determinations are made within their organisations
Source: TCFD, Final Report Recommendations of the Task Force on Climate-related Financial Disclosures; TCFD, Status Report, 2021 46
How can PLN start aligning with TCFD recommendations on risk
management?
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Question time
When you begin to adopt TCFD recommendations, what are the main
challenges that you anticipate running into?
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Short break (10 mins)
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3. Scenario analysis
3.1 Overview of the process of climate scenario analysis
Understand the process of conducting risk assessment of financial and non-
financial risks to identify, measure, monitor and mitigate climate risk
50
Question time
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What is scenario analysis?
“
It is designed to embrace complexity and uncertainty,
allowing decision makers to evaluate the organisation’s
flexibility, resilience, or robustness across a range of potential In a world of uncertainty, scenarios
outcomes are intended to explore alternatives
Scenario analysis is not designed to produce rigid predictions
nor irrational futures, but is designed to consider possible
that may significantly alter the basis
and plausible alternative futures for “business-as-usual” assumption
Task Force on Climate-related Financial
In the context of climate change, the TCFD recommends the Disclosures
use of climate scenario analysis to help firms to explore the
potential range of climate-related outcomes and analyze the
impact of these alternative states of the world on the business
in a structured manner, as well as how the business may
respond in these circumstances
Source: Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter 52
Climate scenario analysis process
1 2 4 5
Examine Identify Socio- Techno-
transmission climate- economic logical
channels related risks context evolution
Develop
Identify
suitable
potential Climate scenario analysis
climate-
exposures to process
climate- 7 related 6
scenarios
related risks Emission
Climate
and
3 8 temperature
policy
Conduct landscape
pathways
exposure Define risk
analysis measure
10 Assess 9
the financial
Assess impact Choose
financial impact
impacts and assessment
take action tools
Source: Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter 53
Using scenario analysis data to restructure resilient business strategies
Example parameters/ assumptions Examples of analytical choices involved in Examples of business impact/ effects
involved in scenario analysis include: scenario analysis include: involved in scenario analysis include:
Discount rate to apply to discount Scenarios: selecting scenarios for Earnings: impact on earnings and how
future value transition and physical impact analyses it is expressed (e.g., EBITDA,
dividends)
Carbon price: the rationale behind the Quantitative vs. qualitative
assumptions regarding how carbon Timing of implications under scenarios Costs:implications on operating/
price(s) would develop over time (e.g., production cost and development
(e.g., on a decadal level)
geographic scope of implementation) Revenues: implications for revenue
Scope of application, whether applied
Energy demand and mix across from key products and services
throughout the whole value chain or on
different sources of primary energy and specific business units Capital allocation/ investments:
how they develop over time implications for CAPEX and other
Macro-economic variables: what GDP investments by the organisation
rate, employment rate and other
economic variables are used
In-depth consideration on
Robust scenario analysis
qualitative disclosure
Recommends organisations that may be more significantly affected by
To address concerns about burden on smaller organisations, TCFD transition risk and/or physical risk consider more in-depth, quantitative
established a threshold for organisations to consider conducting more robust disclosure around scenario analysis.
scenario analysis to assess the resilience of their strategies (organisations with
annual revenue greater than USD1 billion in the four non-financial groups). Organisations may use existing external scenarios or their own, in-house
modeling capabilities depending on their planning needs and resources.
Organisation should consider discussing the implications of different policy assumptions, macro-economic trends, energy
pathways and technology assumptions used in publicly available climate-related scenarios to assess the resilience of their
strategies.
For the climate-related scenarios used, consider providing information on the following factors to allow investors and others to
understand the procedure of gaining valuable insight from scenarios analysis:
Critical input parameters, assumptions and analytical Potential qualitative or quantitative financial implications of
choices for the climate-related scenarios used, particularly the climate-related scenarios, if any
as they relate to key areas such as policy assumptions,
energy deployment pathways, technology pathways and
related timing assumptions
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3. Scenario analysis
3.2 Type of climate-related risks, risk exposure and materiality
assessment
Understand the process of conducting risk assessment of financial and non-
financial risks to identify, measure, monitor and mitigate climate risk
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Climate risks could affect the economy through a range of different
transmission channels
Identify potential exposures to climate-related risks by examining both physical and transition transmission channels
Climate and economy feedback effects Economy and financial system feedback effects
Examine both physical and transition transmission channels and identify potential exposures to climate-related risks
Transmission
Transition Physical
channels
Direct As climate policies penalize fossil fuel production as well as the Corporate balance sheets will be impacted by acute physical
production and use of emission-intensive goods and services, events e.g., precipitation, flood, or wildfire; or by chronic physical
organizations will face risks from: effects, e.g., flood risk due to sea level rise.
Stranded assets
Negative movements in bonds and equity valuation The direct economic impact could be:
Changes in cash flows Loss of output
Deterioration in the customer credit risk profile (in the affected Costs of repair
sector)
In contrast, climate policies will promote organizations involved in the
production of goods and services that assist in reducing emissions.
Indirect Climate policies will also have broader, indirect consequences Long-term chronic changes in climate patterns (e.g., sea level
by: and mean temperature rises) as well as the broader impact of
Changing the prices of a broad basket of goods and services extreme events will impact aggregate demand and output.
Affecting aggregate patterns of demand and supply These broader economic costs may arise from spillovers, such
as disruption to a supply chain or support and adaptation costs
borne by the sovereign, which would then impact inflation,
interest rates and long-term productivity.
Source: Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter 61
How actions in one sector may have implications in another
Refinancing
Carbon pricing
Internal
combustion Increased electric vehicle Changes in commodities
vehicle sales Reduced oil demand prices
manufacturing
ban
Source: (1) Inevitable Policy Response, UN PRI (2020), (2) NGFS Climate Scenario for Central Banks and Supervisors
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Complementary approaches that organisations can take to start
identifying climate-related financial risks
Start from the business profile and risk register of organisations and
Start with a future climate scenario and consider how macroeconomic
questions such as which business areas or risks are vulnerable to
variables (such as gross domestic product (“GDP”) and unemployment)
the physical effects of climate change or the transition to a low-
used in existing financial risk assessments could be affected. 1
carbon economy?1
Aspects of business reviewed for climate risks and opportunities 2 Number of scenarios used, per firm2
Risk management
Strategy
Operations
Business targets
Financial planning
Other
Commonly used scenarios2
0 20 40 60 80 100
IPCC IEA SDS NGFS
Physical and transition risk – Potential impact2 Public scenarios from the UN
Intergovernmental Panel on Sets out an ambitious and Network for Greening the
Climate Change. Scenarios start pragmatic vision of how the Financial System (NGFS)
Non banks global energy sector can evolve scenarios were made available
Use of carbon capture and from projections of global
Banks greenhouse gas emissions to in order to achieve these critical in June 2020 and these will be
storage technology energy-related Sustainable leveraged for Bank of England
derive climate and
0 20 40 60 80 100 socioeconomic projections. Data Development Goals (“SDGs”) . 2021 biennial exploratory
Transition risk Physical risk Equal importance includes atmospheric scenario.
composition, land use, sea level,
among others.
Source: (1) Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter, (2) GARP GRI, Second Annual Global Survey of Climate Risk Management at Financial
Firms
63
Example from TCFD adopter
Drax Group, United Kingdom
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Components of the climate scenarios are interdependent and form
feedback loops
Identify feedback loops and interdependencies between the components of climate scenarios
The socioeconomic context lays out the
scenario backdrop, defining the economy’s tolerance Organisations may
for climate change. choose to analyze
only one of these
The emission pathways components or may
represent trajectories of GHG Theclimate policy decide that analysis
concentrations in the atmosphere. should cover several
landscape is
These concentrations result from Climate represented by policy of these components.
the interaction of the three scenario ambition, which is in large
previous factors and influence the feedback part influenced by
scale and nature of physical
climate impacts. Different
loop socioeconomic
challenges. This would depend
pathways reinforce or abate the
on:
socioeconomic challenges.
Context of business
decision
Technological evolution influences the Type of exposures
economy’s ability to effect and cope with transition.
Materiality of
Policy has an important role in facilitating technological
evolution and diffusion. exposures
Source: Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter 66
Business decisions where scenario analysis could be appropriate and the
likely associated time horizons
Motivation to undertake climate change analysis 1 Time horizon Time horizons for scenarios2
Disclosure: public reporting (e.g., Shareholders) Medium, long Most common scenario horizons are
“1 to 5 years” and “10 to 30 years” that allow
Disclosure: public policy advocacy Long organisation to understand both short- and long-
term impacts.
Business decision: underwriting and pricing Short
Short term: 1 to 5 years, which is the period during which boards typically operate to develop
risk appetite, strategy and business plans
Medium term: 5 to 10 years, which is the period that the viability of new products would need
to be tested against 1-5 years 5-10 years 10-30 years >30 years
Long term: 10 years or more
Source: (1) Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter, (2) GARP GRI, (2020) Second Annual Global Survey of Climate Risk Management at
Financial Firms 67
Scenario analysis - core climate scenario approaches
Most climate scenarios have been developed by government agencies and academics. Some vendors have developed their own
scenarios, whereas others consolidate available scenarios and data to develop modeling and reporting capabilities. Below are
some examples:
NGFS: Scenarios were made available in June 2020 and these will be leveraged for the Bank of England 2021 biennial
Scenario exploratory scenario
examples IPCC: Public scenarios from the UN Intergovernmental Panel on Climate Change. Scenarios start from projections of global
greenhouse gas emissions to derive climate and socioeconomic projections. Data includes atmospheric composition, land use,
sea level, among others
IEA: The International Energy Agency provides scenario data for different energy sources on a geographical granular level.
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Scenario analysis – to build or to buy?
Each organisation faces a basic ‘build or buy’ choice for climate risk modeling
Advantages Disadvantages
Build
White-box – The organisation owns the methodology and
Limited ongoing external support as fully owned
models and perpetual license
Initial coverage likely smaller / more focused
1 Better for knowledge transfer to the organisation‘s team
Less out-of-the-box features for outputs
Potentially better to deal with specific sector needs and low
Not automated data feeds
data environments
Buy
Industrial-strength model with full range of features from
day 1 Recurringcost for data-as-a-service subscription
2 Help line support, version update (incl. scenario updates) Less room for real-time adjustment of assumptions and
Requires less internal resources for modeling and parameters, black box models
maintenance
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Example from TCFD adopter
AGL, Australia
Xcel Energy engaged E3 to develop its climate scenarios that are consistent with Xcel Energy’s Net Zero Vision; 25%
reduction in GHG emissions by 2030 and net zero by 2050
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Approaches for climate scenario assessment
Physical Transition
channel channel
Risk identification
Source: Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter 73
Organisations need to measure the impact of climate-related risk drivers
on their key financial metrics
Time horizons
This
depends on the business decision being analyzed and the duration of the
organisation’s exposures
Shorter-time horizons, therefore, may allow organisations to construct alternative
transition scenarios which carry the same physical scenario
Longer-term horizons may allow organisations to explore a richer combination of
Determine both multiple transition and physical outcomes
Banks, P&U and other companies the
approach for
Will need to assess how climate-related financial impact
risks can drive variations in their financial assessment
earnings and portfolio valuations Baseline
Source: Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter 74
Organisations need to select appropriate impact assessment tools to
analyze the change in the chosen risk metrics for a given scenario
Macro-economic impact assessment tools Asset or company specific impact assessment tools
Organisations regularly usethese tools to assess the resiliency of Require more involved analysis and are resource-intensive, meaning they
their business model to macroeconomic stresses in the financial are typically applicable for smaller portfolios
system over the capital planning horizon (~3-5 years)
Characterised
by high granularity which considers company- and/or
These models can be used to quantify the impact on market and geography-specific idiosyncrasies
credit risk exposures of both instantaneous and prolonged
macroeconomic stresses in the financial system Thesetools are likely to vary more significantly from firm-to-firm, e.g.,
banks may use credit rating models, asset managers may use asset allocation
Input variables can typically include GDP, unemployment, interest models and insurance companies will have models to project natural disasters.
rates, currency rates and commodity prices, as well as assumptions
on asset devaluations (equity prices and credit spreads)
Source: Climate Financial Risk Forum Guide 2020, Scenario Analysis Chapter 75
Example from TCFD adopter
Enel Group, Italy (1/2)
Enel assessed the impact of their climate-related financial risks by conducting a company specific impact assessment
Enel assessed the impact of their climate-related financial risks by conducting a company specific impact assessment
Entergy assessed the impact of their climate-related financial risks by conducting a company specific impact assessment
Climate
Mitigation measures (existing and future) Scenario Adaptation plans in place to mitigate physical
to address transition risk climate risks
Analysis
Technologies that will help in reducing Policies / regulations (existing and emerging) that will affect PLN’s
PLN’s emissions operations
79
Select scenarios
Q&A
80
Summary
The five components of governance, framework, alignment, stress testing and enablers to effectively manage climate risks
Climate change must be built into the organisation’s risk management framework which requires embedding it into the risk management lifecycle
TCFD recommendations on risk management and how can PLN start aligning with TCFD recommendations on risk management
Process for climate scenario analysis and how TCFD addresses different organisations’ capacity to perform scenario analysis
81
Feedback
82
Thank You