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CDSB WebinarTCFD Scenario building and useJuly 2018

SpeakersSouth Pole Page 2

Charles HendersonHead of Corporate Risks and Opportunities

Charlie Brunel-Lister Transition risks modeller and service developer

Dr. Nico KrönerExpert in climate modelling

ContentsSouth Pole Page 3

Objectives, focus and context

Scenario analysis from A to Z

Step 1 - Scenario selection

Step 2 - Risk analysis

Step 3 - Reporting and disclosure

Case studies

Q&A

Wrap-up and next steps

Objectives, format and context Page 4South Pole

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Main objectives

● To help you understand what climate scenarios are.

● To guide you through the practical steps of selecting, building and using 2ºC, and other scenarios for risk assessments.

● To highlight specific approaches using case studies and published reports.

● To help you better understand how to report and disclose and how are your peers doing.

Objectives, format and context Proposed objectives for the webinar

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Interactive webinar: feel free to ask questions through sound or the chat box. Follow-up: there will be a follow up with the delivering of the materials.

Chapter Time (approx.) Speakers

Objectives, format and context 5 minutes Charles Henderson

Scenario analysis from A to Z Step 1 - Scenario selection Step 2 - Risk analysis Step 3 - Reporting and disclosure

25 minutes Nico Kroener, Charlie Brunel

Case studies 10 minutes

Q&A 20 minutes Charles Henderson, Nico Kroener, Charlie Brunel

Objectives, format and context Proposed objectives for the webinar

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Why perform climate scenario-analysis?

Investors, governments, NGOs and consumers pressure● Task Force on Climate Related Financial Disclosure (TCFD) reporting● Carbon Disclosure Project (CDP) reporting● Article 173 of the French Energy Transition Law● Climate Action 100+● More to come?

Sustainable business rationale● Reducing fossil fuel risk exposure● Energy cost saving● Preparing for carbon pricing● Future-proofed technology● Resilient operations and supply chains● Employee satisfaction

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Objectives, format and context Context and rationale for scenario analysis

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(Source: IPCC (2013) Climate Change Action, Trends and implications for Business. IPCC 5th Assessment Report. ) *The four RCP (Representative Concentration Pathway) scenarios each predict carbon emissions and resultant warming

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Objectives, format and context Context and rationale for scenario analysis

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+4.0ºC

+3.0ºC

+2.0ºC

+5.0ºC

+6.0ºC

2020 +1.0ºC 2030 2040 2050 2060 2070

Some of the physical and transition risks examples include:

Regular severe storms in W. Europe decimate

arable land

Good farmland given over to housing as

flood plains become uninsurable

More pest invasives from N. Europe

Acute Physical

€25/tCO2 tax knocks 10% off share price of

climate laggards

€50/tCO2 tax adds 20% to average weekly

food shop

€75/tCO2 tax doubles price of beef

Shift to indoor-grown protein sources as

fertile land availability plummets

Huge investment in irrigation equipment

required

Demand for 100% organic renders

much of agri-equipment

redundant

Insect-derived additives become commonplace with

celebrity endorsement

Demand for fungi-based meat

substitutes grows as soils degrade

Huge shift to localism dramatically alters food

and drink business models

Companies importing from Africa suffer brand

damage as migration soars and populism

spreads

Meat and dairy farming declared carbon enemy #1 for 3 years running

NGOs pressure for disclosure of ecological

footprints leads to boycotts of some foods

ReputationTechnology MarketsPolicy & legal

Objectives, format and context Context and rationale for scenario analysis

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Scenario analysis from A to ZPage 10South Pole

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Collect data and define scope and purpose of the scenario analysis.

● Defining an operational boundary (physical and transition)

● Choosing relevant risk and scenarios (transition)

● Choosing relevant risk and scenarios (physical)

Perform an in-depth risk assessment based on the use of the scenario and/or historical data.

Prepare reporting and disclosure documentation.

● Graphical presentations

OverviewOur three step process

The operational boundary will define the scope of the scenario analysis:1. geography 2. order of effects (1, 2, 3) 3. scope (upstream, downstream)4. time frame (2030, 2050, etc.)

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A. Defining an operational boundary

Company

DownstreamUpstream

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Physical

Transition

3. Selection

2. Classification

B. Choosing relevant transition risk categories

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

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● Collective work (ERM, CSR, C-Suite, etc.)

● Analysis of peers’ strategy

● Literature review

● Existing scenario review

● Iterative process

1. Collection

Areas of work

Physical

Transition

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International Energy Agency (IEA) scenarios

World Energy Outlook (WEO)

● Since 1978● Featuring three main scenarios

○ Sustainable Development Scenario (SDS)○ New Policies Scenario (NPS)○ Current Policies Scenario (CPS)

● Six additional scenarios and cases (450, Bridge, Clean Air, Faster Transition, etc.)

Energy Technology Perspectives (ETP)

● Featuring three main scenarios ○ Beyond 2 degree scenario (B2DS)○ 2 degree scenario (2DS)○ Reference Technology Scenario (RTS)

● Two additional scenarios and cases (4DS, 6DS)

C. Selecting a transition scenario off the shelf

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Physical

Transition

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Alternative scenariosC. Selecting a transition scenario off the shelf

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Physical

Transition

Public, corporate or hybrid scenario…

...and scenario content

1. Analytical Choices Quantitative/qualitative, time horizons, frequency and scope

2. Parameters and assumptions Carbon price, energy mix, price of key commodities or inputs etc.

(Source: TCFD (2018). Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities)

Advantages Drawbacks

Public scenario ● Comparability● Simplicity

● Potential inadequacy ● Limited dataset boundaries

Corporate scenario● Higher adequacy ● Time consuming and expensive

● Complexity● Lack of comparability

Hybrid scenario A mix of advantages and drawbacks from public and corporate scenarios

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

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C. Selecting a transition scenario off the shelfPhysical

Transition

Scenario (Provider) Transition Physical ºC Policy Legal Technology Market Reputation

SDS - Sustainable Development Scenario (IEA WEO) Yes No 2ºC Yes No Yes No No

NPS - New Policies Scenario (IEA WEO) Yes No 4ºC Yes No Yes No No

CPS - Current Policies Scenario (IEA WEO) Yes No 6ºC Yes No Yes No No

Other WEO scenarios are 450, Bridge, Faster Transition, Low Oil Price, Energy for All, Clean Air Scenario

2DS - 2 degree scenario (IEA ETP) Yes No 2ºC Yes No Yes No No

B2DS - Beyond 2 degree Scenario (IEA ETP) Yes No 1.75ºC Yes No Yes No No

RTS - Reference Technology Scenario (IEA ETP) Yes No 2.7ªC Yes No Yes No No

Other ETP scenarios are 4DS and 6DS

SSP1 - Sustainability (IIASA) Yes Yes 2-4ºC Yes No Yes No No

SSP2 - Middle of the road (IIASA) Yes Yes 2-4ºC Yes No Yes No No

SSP3 - Regional rivalry (IIASA) Yes Yes 2-4ºC Yes No Yes No No

SSP4 - Inequality (IIASA) Yes Yes 2-4ºC Yes No Yes No No

SSP5 - Fossil fueled development (IIASA) Yes Yes 2-4ºC Yes No Yes No No

Other scenarios are DDPP - Deep Decarbonisation Pathways (IDDRI, SDSN), Advanced Energy [Revolution] (Greenpeace), REmap (IRENA)

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

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C. Selecting a transition scenario off the shelf

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

B. Choosing relevant physical risk categories

1. Analyse historical impacts

2. Start from general assessments

Extreme windExtreme rainfall and

floodsExtreme

heatVariability in precipitation

Variability in temperature

Water Stress Sea level rise

Overall sensitivity

Financial Services Low Medium Low Low Low Low Medium Low

Insurance High High Medium Low Low Medium High Medium

Gas and Utilities Medium High High Medium Medium High High High

Infrastructure High High Medium Low Medium Low High Medium

Retail Low Medium Low Low Low Low Medium Low

IT (Semiconductor, hardware and equipment)

Medium High High Medium Low Medium High Medium

IT (Software) Low Medium Low Low Low Low Medium Low

Advertising (Media) Low Medium Low Low Low Low Medium Low

Transition

Physical

C. Selecting a physical scenario off the shelf

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Representative concentration Pathways (RCPs)

DescriptionTemperature increase by 2046-20651)

Temperature increase by 2081-21001)

RCP2.6 Very high mitigation 1.0 (0.4 to 1.6) 1.0 (0.3 to 1.7)

RCP4.5 High mitigation 1.4 (0.9 to 2.0) 1.8 (1.1 to 2.6)

RCP6.0 Some mitigation 1.3 (0.8 to 1.8) 2.2 (1.4 to 3.1)

RCP8.5 Business as usual 2.0 (1.4 to 2.6) 3.7 (2.6 to 4.8)

1) IPCC AR5 WG1 (2013), Stocker, T.F.; et al., eds., “Climate Change 2013: The Physical Science Basis”. Working Group 1 (WG1) Cambridge University Press.

(Source: Van Vuuren et al (2011), The Representative Concentration Pathways: An Overview. Climatic Change, 109 (1-2), 5-31.)

Transition

Physical

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Temperature change scenarios (TCS)

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

Description Available RCP scenarios

1° Scenario Very high mitigation

RCP2.6,RCP4.5,RCP6,RCP8.5

2° Scenario High mitigation RCP4.5,RCP6,RCP8.5

3° Scenario Some mitigation RCP6,RCP8.5

4° Scenario Business as usual RCP8.5

(Figure based on data from: https://climexp.knmi.nl/start.cgi [Accessed on: 10.06.2018])

Transition

Physical

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

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<5 years:- historical analysis- probabilistic

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

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5-20 years:- Model data

analysis- probabilistic

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

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>20 years:- Model data

analysis- Scenario based

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

Low Medium High

Global models (CMIP5) Regional models (CORDEX)

Statistical downscaling (NASA-NEX)

Granularity

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

Granularity a question of budget and data availability? Transition

Physical

Scenarios Transition Physical ºC Timeframe Geography

RCP - Representative Concentration Pathways (IPCC)

No Yes 1-5°C 2010-2100 World wide

TCS - Temperature change scenarios No Yes 1ºC, 2ºC,

3ºC, 4ºC No time attached World wide

Datasets Dynamic Statistical Scenario Timeframe Geography Risks Resolution

Global model intercomparison project 5 (CMIP5)

Yes No RCP, TCS 2010-2100 World wide All 100km

x100km

Coordinated regional climate model experiment (CORDEX)

Yes No RCP, TCS 2010-2100

World wide (Different

ensembles for regions

All 25kmx25km

NASA-NEX No Yes RCP, TCS 2010-2100 World wide

Temperature and

precipitation

25kmx25km

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

Newcomer Intermediate Advanced

● IEA 2ºC scenario● IPCC RCP4.5 or

8.5 scenario● Low resolution

data● Qualitative data● 2-3 major risks

● IEA 2ºC scenario● IPCC RCP4.5 or 8.5

scenario● Mostly quantitative

data with some qualitative data

● >3 risks

● IEA and/or SSP scenarios with sensitivity

● IPCC’s 4 RCPs● High resolution data● Mostly quantitative data

and quantitative financial impact

● As much risks as possible

● Scenario against SBTs

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a scenario off the shelf Physical

Transition

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Overview

Define Risk indicators

Collect Data

● Risk category● Scenario● Fit for purpose (Time and intensity)

● Exposure (internal data)● Vulnerability (internal and external data)● Hazard (external data, risk indicator and scenario data)

● Risk = Exposure x Vulnerability x Hazard● Uncertainty analysis (confidence interval)● Financial implications

Calculate Impact

RIS

K

CA

TEG

OR

YD

ATA

MO

DEL

SM

ETR

ICS

Policy risks Legal risks Acute heatwave Chronic water stress

$/kgCO2e Price paid in litigation cases

Additional days affected by

extreme heat

Percentage of water withdrawn /

average water price

Carbon pricing investigations

Litigation databases

Climate model output and dynamical

downscaling

Shadow water prices

World Bank, ICAP, OECD,

IEA, SSP

Sabin Center, Carbon

Boomerang, IEA

IPCC datasets: CMIP5, CORDEX

Aqueduct tool and in-house analysis

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Risk PhysicalTransition

California

OregonWashington

British Columbia

AlbertaManitoba

OntarioQuebec

New BrunswickNova Scotia

RGGIUS

TRINIDAD AND TOBAGO

Tokyo & Saitama

BeijingTianjin

Hubei

ShanghaiChongqing

TaiwanShenzhen

Guangdong

ETS in place

Carbon tax with offsets being designed or in place

Hybrid carbon pricing

ETS being designed

Linkages

High carbon price

Moderate carbon price

Low carbon price

High

Moderate

Low

Exposure to riskCarbon Price

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Risks example Carbon pricing

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The illustration shows water risk on asset level. The color of the bubble shows water stress (from 1 = low to 5 = very high), with the size of the bubble showing the scale of water consumption of the respective facility.

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Risks example Water stress

(Source: WRI (2018) Measuring, mapping and understanding water risks around the globe [online] Available from: http://www.wri.org/our-work/project/aqueduct/; World Resources Institute [Accessed on: 20.05.2018] )

Climate opportunities may be identified by considering options, projected market size / trend indicators, including the following cleantech solutions and sustainability themes.

● Resource efficiency (circular economy, retrofits, among others) and associated low cost strategies

● Renewable energy options

● New technology for reducing carbon intensity of products and services (e.g innovations and patent registrations for industrial equipment, logistics and vehicles)

● Green finance mechanisms (for example, green bonds and funding for sustainable infrastructure)

● Options for improving business resilience (for example, for better predictions for supply chain security, weather forecasting and alternative crop types)

Data sources (including):● policy trends● market analysis from consultancies, academia etc.● trade associations● cleantech media● newsfeeds.

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

Opportunities

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Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

A. Graphical presentations and B. Recommendation for C-Suite

Case studiesPage 34South Pole

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Case studyAGL Energy - Electric and gas utilities

Scenario analysis Yes

Type of scenario Hybrid and Corporate

Number of scenarios used 3

Time horizon 2030 and 2050

Transition risks Technology, Policy

Physical risks Not assessed

Financial impact Yes

(Source: AGL (2016) A carbon constrained world)

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Case studyAGL Energy - Electric and gas utilitiesScenario

BAUNo carbon constraint

iNDC 26-28% GHG reduction

2ºCParis Accords world

Temperature: not mentioned

Geographical scope: Australia

Temperature: +2.7ºCGeographical scope: Australian national electricity marketTime horizon: 2030Public scenario: Not used

Temperature: +2ºC Geographical scope: Australian national marketTime horizon: 2050Public scenario: IPCC AR5

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Case studyAGL Energy - Electric and gas utilitiesRisks and financial impact

iNDC scenario

2ºC scenario

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Case studyAGL Energy - Electric and gas utilities

Risks and financial impact

iNDC 2ºC BAU

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Case studyAGL Energy - Electric and gas utilities

10 advantages and drawbacks

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Advantages Drawbacks

Financial impact modelling Absence of physical risk analysis

High quality visuals Limited to Australian national electricity market

Good level of disclosure on methodology Not integrated into a wider TCFD analysis

Use of existing public scenarios (IPCC, NDC)

Only 2 risks assessed

Potentially biased

Screening of investment portfolio for physical climate risks

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Case studyAnonymous - Financial Sector

Scenario analysis Yes

Type of scenario Public

Number of scenarios used 7 (3xRCPs & 4 TCS)

Time horizon 2020-2100

Transition risks Not assessed

Physical risks Yes (aggregated measure)

Financial impact No (indicator)

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● Understand portfolio’s geographical risk hotspots ● Analyse different scenarios and timeframes

Value add

Example output in a 4° scenario: the shading shows the proportion [%] of each portfolio countries’ contribution to the overall climate risk of the whole portfolio.

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Case studyAnonymous - Financial SectorIdentify geographical hotspots of risk exposure

Compare climate risk exposure across sectors

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● Understand sector performance in comparison with other sectors in terms of climate risk exposure

Value add

Case studyAnonymous - Financial Sector

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Value add

● Understand portfolio’s performance in comparison with benchmark in terms of climate risk exposure

Example of a portfolio benchmarking output

Example portfolios under ‘Business as usual’ scenario

Example portfolios under ‘High mitigation’ scenario

Case studyAnonymous - Financial Sector

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Q&APage 44South Pole

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Q&APossible discussion themes

● Why should I perform scenario analysis?

● How much does a scenario analysis cost?

● What’s the payback / business case?

● How do I choose the relevant risks to my business and how many should I pick?

● How many scenarios should I screen?

● Can I perform scenario analysis by myself?

● Where do I start?

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Supplementary informationPage 46South Pole

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ModelsScenarios

This presentation focuses on two types of scenarios:

○ physical scenarios○ transition scenarios

1. Climate models 2. Impact models3. Socio-economic and financial models

OverviewDifference between scenarios and models

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C. Selecting a transition scenario off the shelf

Shared Socioeconomic Pathways (SSPs) from the IIASASSP1

SustainabilitySSP2

Middle of the roadSSP3

Fragmented worldSSP4

Inequality

SSP5Conventional development

Good progress towards sustainability, with sustained efforts to achieve development goals, while reducing resource intensity and fossil fuel dependency.

Progress towards achieving development goals, reductions in resource and energy intensity at historic rates, and slowly decreasing fossil fuel dependency.

Separation into regions extremely poor with pockets of moderate wealth and a bulk of countries that struggle to maintain living standards.

Highly unequal world within and across countries. A small global elite is responsible for the majority of the emissions, while the rest is vulnerable to climate change.

Conventional development with domination of fossil fuels and high GHG emissions

AIM/CGE

CGAM

IMAGE

MESSAGE-GLOBIOM

REMIND-MAgPIE

WITCH-GLOBIOM

AIM/CGE

CGAM

IMAGE

MESSAGE-GLOBIOM

REMIND-MAgPIE

WITCH-GLOBIOM

AIM/CGE

CGAM

IMAGE

MESSAGE-GLOBIOM

REMIND-MAgPIE

WITCH-GLOBIOM

AIM/CGE

CGAM

IMAGE

MESSAGE-GLOBIOM

REMIND-MAgPIE

WITCH-GLOBIOM

AIM/CGE

CGAM

IMAGE

MESSAGE-GLOBIOM

REMIND-MAgPIE

WITCH-GLOBIOM

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

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Temperature change scenarios (TCS)

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

Scenario Description Available RCP scenarios

1° Scenario Very high mitigation RCP2.6,RCP4.5,RCP6,RCP8.5

2° Scenario High mitigationRCP4.5RCP6RCP8.5

3° Scenario Some mitigation RCP6RCP8.5

4° Scenario Business-as- usual RCP8.5(Figure based on data from: https://climexp.knmi.nl/start.cgi [Accessed on: 10.06.2018])

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<5 years:- historical analysis- probabilistic

5-20 years:- Model data

analysis- probabilistic

>20 years:- Model data

analysis- Scenario based

Step 1Scenario selection

Step 2Risk analysis

Step 3Reporting and disclosure

C. Selecting a physical scenario off the shelf

Charles HendersonDirector

Head of Corporate Risks and OpportunitiesUnited Kingdom

Franziska SinnerSustainability Expert

Director of Advisory services

Switzerland

Miguel ChavarriaSenior Consultant,

Metrics and Targets ExpertMexico

Nico KroenerProject Manager

Senior consultant, Climate risks and opportunitiesZurich

Andrés CasallasExpert in financial modelling

Consultant,Mexico

Jeff SwartzExpert

Carbon Markets and Climate Policy DirectorUnited Kingdom

Experts

The South Pole TCFD Team structurePage 51

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Hanna VärttöInvestor Engagement Expert

Practice Lead - Climate risks for the financial sector, Mexico

Charlie Brunel-ListerExpert in transition risks

ConsultantMexico

Anna AsikainenSenior Consultant

Climate risks and opportunities, Mexico

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TCFD Hub, Londonfinance@southpole.com

Offices and representations worldwideAmsterdam, Bangkok, Beijing, Bogotá, Hanoi, Jakarta, London, Madrid, Medellín, Melbourne, Mexico City, New Delhi, San Francisco, Singapore, Stockholm, Sydney, Zurich.

Charles Henderson, Primary Contact, Project SupervisorPractice Lead, Climate risks for corporatesc.henderson@southpole.com+44 7740 946955

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