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Firms must embed climate-related scenario-analysis into strategic planning processes – research

Research commissioned by the Financial Reporting Council (FRC) and carried out by Alliance Manchester Business School (AMBS) highlights importance of making climate change needs a core component of firms’ decision making.

A team of experts at Alliance Manchester Business School (AMBS) has published research, commissioned by the Financial Reporting Council (FRC), to explore how leading companies are using scenario analysis to disclose climate-related risks for their businesses.

With COP26 just around the corner, the research indicates that many businesses are uncertain of the effects of climate change on their organisation and argues that mapping out these uncertainties now will put businesses in a better position to mitigate any potential consequences associated with climate change.

The research highlights the various approaches companies have adopted, instances of good practice, typical challenges faced, and the common steps taken to conduct climate-related scenario analysis. The work forms part of the activity undertaken by the Centre for the Analysis of Investment Rise (CAIR) at AMBS, which provides research expertise on wide-ranging aspects of investment decision-making and the governance of the ambiguities, risk, and uncertainty faced when making decisions.

Dr Yasmine Chahed, Visiting Research Fellow at AMBS, said: “Efforts to limit global warming vary across the world’s nations. COP26 is just a few days’ away and represents an effort to limit global warming to 1.5-degrees, but businesses have to prepare for many possible outcomes and eventualities.

“That’s why projects like this are so important in helping to shape future regulatory strategy – and how that’s delivered. The climate challenge is huge and scenario analysis is critical in tackling this issue, and in facilitating the transition to a greener economy.

“Our research hammers these points home and indicates that many businesses are uncertain of the effects of climate change on their organisation. It’s clear, then, that mapping out those uncertainties now will put businesses in a better position to overcome the obstacles that lie ahead.”

Professor Paolo Quattrone, Director of the Centre for the Analysis of Investment Risk at AMBS, added: “It’s clear that dealing with future scenarios around the climate crisis needs to be baked into a company’s strategic approach.

“What will increase your ability to deal with the unknown relates to how you govern the process of exploration and sense-making of the future. The research has confirmed that governing the process of interaction among teams and communication among functions is key in making sense of the uncertainties surrounding the effects of climate change on businesses

Co-investigator Dr Robert Charnock added: “What the research showed first and foremost is that companies acknowledge that climate change will impact their sector and business model. Exactly what those effects will be still remains unclear to many. That’s where scenario analysis comes in, as it helps assess and plan for uncertain futures.”

“The companies with the most mature approaches had developed these by going through multiple iterations, where each of their climate scenario analyses built on the lessons learned and skills developed during previous exercises.”

Professor Fiona Devine, Head of Alliance Manchester Business School, said: “The climate emergency is more pressing than it’s ever been, and conducting research in this space is vital for the future prosperity of businesses, particularly as premium listed companies will now need to report against the taskforce on Climate-related Financial Disclosures (TCFD) recommendations in their annual reports. We’re proud to be working with the FRC on such an important initiative, and to be carrying out such important work in this area on an ongoing basis.”