The Financial Reporting Council (FRC) has commissioned Alliance Manchester Business School to explore how leading companies are using scenario analysis to disclose climate-related risks.
Recognising the importance of scenario analysis in climate-related reporting is a relatively recent development, and the research will cover a broader range of companies from which robust and relevant findings can be drawn.
The project specifically aims to learn more about the processes through which companies develop their scenario analyses, how these processes shape outcomes, and then how those outcomes influence companies’ strategic planning and decision making. As with other FRC commissioned research the over-riding purpose is to inform future regulatory strategy and its delivery.
Expertise
The FRC say the AMBS research team brings extensive experience in public and private-sector research collaborations, as well as expertise in climate-related accounting, reporting and policy. The team will initially survey FTSE 350 companies with a questionnaire, followed by in-depth interviews with relevant teams and individuals from a representative sample of companies.
Dr Yasmine Chahed, Visiting Research Fellow at AMBS, said the project was important to support evidence-based policymaking in an area of significant concern for the UK economy. “This project is actually part of a much wider initiative on climate change. The FRC has a significant role to play in terms of how UK companies are governed and about the quality of information that they have to give to shareholders about climate risks.
“At the end of the day there are always things in business that you simply don’t know and one of those areas is climate change. It is precisely because you don’t know the risks that you need to build scenarios.”
Unknowns
Co-investigator Robert Charnock added: “The key point here from an investor point of view, is that if you are investing in an asset that you are going to use for 20 years then climate change needs to be a core component of that decision. Companies also need to recognise that there will be different regulations in the future too.
“Businesses are so caught up in the day-to-day that imagining the transition to a low carbon economy might seem too big a question, but scenario analysis can really help answer some of these tough questions. What is clear is that we are now at a stage where the conversation on climate change has shifted to ‘when is the action going to start’ and ‘what is it going to look like’.”
Challenging
Scenario analysis is also one of the most challenging areas in the government’s Green Finance strategy that all listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations by 2022.
Professor Paolo Quattrone, Director of the Centre for the Analysis of Investment Risk at AMBS, added: “When you deal with future scenarios it is clear that measurement is not what will solve the problem of predictions. What will instead increase your ability to deal with the unknown relates to how you govern the process of exploration and sense-making of the future. Accounting has always played that role and it is great that the FRC views measurement as an issue of governance.”
The AMBS team is inviting expressions of interest from individuals and teams within FTSE 350 companies who would like to participate. The team is especially interested in hearing from those with recent experience of conducting scenario analysis, climate-related or otherwise. To express an interest in participating please complete this short web form. Companies’ participation in this research will remain confidential to AMBS and all information shared will be fully anonymised.
