Efficiency-focused business models leaving scenario analysis in the dark, warn ISSB and GFANZ chiefs.
Speaking at the International Sustainability Standards Board (ISSB) Sustainability Symposium, ISSB Chair Emmanuel Faber and UN Special Envoy for Climate Action and Finance Mark Carney highlighted the lack of attention on strategic resilience by large corporates, financial institutions and policymakers.
“We have built our business models very focused on efficiency, and we have a blind spot on resilience,” said Faber.
This was echoed by Carney, who said that economies and governments had “undervalued resilience relative to efficiency”. “We haven’t thought about what happens when things go wrong, we haven’t invested in that,” the former Governor of the Bank of England added.
He also noted that the “least observed or delivered recommendation” of the Taskforce on Climate-related Financial Disclosures is around strategic resilience which Carney describes as “effectively the outcome of scenario analysis”.
Climate-related scenario analysis includes how firms perform and behave under 1.5°C-aligned paths and policies compared with business as usual, as well as the risks and opportunities for different scenarios, according to Carney, also Co-chair for the Glasgow Finance Alliance for Net Zero (GFANZ).
Faber accredited the blind spot on resilience to “tragedy of horizons”, a term previously used by Carney to describe the threat climate change presents to the world’s financial stability if unchecked.
“What’s beyond the company’s remit in its value chains is where both opportunities, risks, but also impacts are,” the ISSB Chair said. “They need to be illustrated, illuminated by a language that allows investors and lenders to make appropriate capital allocation towards more resilient business models.”
This illumination is what the ISSB standards aim to do, according to Faber, while Carney noted that scenario analysis will be “helped by the very disclosure that the ISSB standards will bring”.
The ISSB had previously confirmed that companies will be required to use climate-related scenario analysis to inform and report on climate resilience, as well as identify climate-related risks and opportunities to support their disclosures.
Carney underlined that in their current state, scenarios offered by the Network for Greening the Financial System and International Energy Agency are “largely oriented towards policymakers”.
A key issue he noted was that the current scenarios are “not necessarily tailored to individual businesses, business sectors, [which] takes a fair bit of work”.
Due to this, scenario analysis many need to initially be qualitative, referencing certain scenarios and “highlighting where there’s strength, where there’s weaknesses, where there’s gaps, what you’re going to do about it , and go through a process of increasing sophistication”.
Carney underscored the ability of “large, well– resourced” companies in industries such as metal and mining to incorporate scenario analysis into their “core strategies”. This means that companies will have scenarios for long-term projects to “quite a sophisticated extent”, This has led to some firms – but not all – to judge they could be “worth twice as much in a 1.5°C world than in a business as usual [world], which isn’t intuitive at the start”.
The ISSB is due to issue its key standards by the end of Q2 2023 – a six-month delay from its original intended issuance date – and are due to come into effect from the start of 2024.