Climate risk modelling in the Consumer sector: why start now?

Climate risk modelling is not just about compliance, it is about not being left behind as the world in which organisations operate changes drastically and evolving to retain a competitive advantage over your industry peers.

In practice, we are seeing many organisations in the consumer sector approach climate risk modelling from a compliance perspective. The Task Force on Climate-Related Financial Disclosures (TCFD) requires organisations to disclose the resilience of their business strategy under different future warming scenarios. With large privates now falling in scope because of the UK government’s new regulations, a significant mainstream of companies is faced with the challenge of scenario analysis. The International Sustainability Standards Board (ISSB) disclosures, which are likely to be mandated by UK law in the coming years, contain similar requirements.

However, the critical point is that conducting this exercise goes far beyond compliance. Scenario analysis is fundamental for future-proofing business strategy in the context of unprecedented uncertainty regarding future physical and economic conditions, which have the potential to be incredibly disruptive to Consumer businesses. As the impact of a changing climate on the planet increases, extreme weather events are only going to become more frequent, and more severe.

What are the benefits of conducting climate risk modelling?

Given the potentially catastrophic implications for consumer businesses of both risks from physical climate change and risks stemming from the transition to a low-carbon economy, short-term business plans such as those typically used for financial management, and spanning 2-3 years, are no longer sufficient.

The pivotal difference with scenario analysis is that it is conducted over much longer time horizons and considers a variety of different futures in which businesses may be operating. It is important to highlight that we do not make predictions for the purposes of modelling, the approach is exploratory. It considers the variety of different pathways that the future could take depending on our success in achieving the Paris Agreement and the level of international accord.

By considering multiple options, we are able to assess which of the risks facing an organisation would be the most severe in each plausible future, and also which risks materialise across multiple futures. Such risks may not be the most material in any one scenario, but their recurrence across multiple scenarios presents a strong business case for mitigating them.

Having extrapolated these patterns and conclusions, organisations are able to consider how they should adapt their business strategy, or combine different potential strategies, to ensure resilience regardless of the path that we ultimately take towards decarbonisation.

However climate modelling is not just about risks, it is also about opportunities. Efficient use of resources leads to cost savings, access to new markets as consumer preferences change, and the development of new products to fulfil the needs of consumers in a greener economy – these are all examples of the benefits that organisations can derive from the green transition. Conducting climate risk modelling is critical to identifying opportunities in an organisation’s sector and geography.

So the key point that I would make to organisations is that climate risk modelling is not just about compliance, it is about not being left behind as the world in which you operate changes drastically, and evolving to retain a competitive advantage over your industry peers.

What is the role of technology?

The use of technology underpins our service because of the scale and complexity of the risks that we are assessing. Firstly, the science around physical risk is evolving constantly and is characterised by a complex interplay of different factors.

Modelling risk indicators, such as flooding or heat extremes across different future scenarios on a granular basis, also requires vast amounts of data. So, having a technology solution, which can harness such quantities of data and produce information on potential outcomes, is a game-changer.

Additionally, using a technology solution significantly increases the volume of sites analysed for organisations from a physical risk perspective. Therefore, rather than relying on organisations’ assumptions about which of their sites are the most materially exposed to climate risk, we can draw these conclusions for ourselves based on the latest science.

We also find that the granularity of the data that technology solutions provide is crucial to our ability to extract financial conclusions from climate risk modelling. By extrapolating data on the impact of physical climate risk on an individual set of coordinates on a map, we can assess the potential future impacts on a particular asset’s value or ability to generate revenue, thus calculating a quantified value at risk. Not only does this fulfil the expectations of the TCFD, which hinges on the financial implications of climate risk on an organisation’s financial statements, but it also provides a business case for consideration of climate risk at a strategic level by the board, as well as engaging stakeholders and investors. Translating the impact of climate risk into financial metrics is the missing piece to drive the sustainability agenda at many organisations.

What are the next steps that organisations should take?

A common theme we are seeing in this space is that organisations are overwhelmed by the prospect of conducting climate scenario analysis as they do not have the expertise, methodologies or data in-house. However, do not let a desire to be perfect prevent you from getting started.

From a compliance perspective, it is vital that organisations have something to report. This could be relatively light-touch in the first reporting year and involve identifying improvements that the organisation intends to achieve for the next cycle of reporting. Furthermore, the process of conducting climate risk modelling serves as a helpful gap analysis across data needs for evaluating climate risk and can help organisations identify metrics that they should be tracking going forward.

To conclude, climate risk modelling is for many organisations no longer a nice to have but an expectation. Done properly, it will improve the resilience of your business strategy, so take the first steps as soon as possible. By its nature, it is a process of continuous improvement, but it will add value to your business from the first year.

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We are committed to working with organisations intent on embarking on and evolving, their sustainability journeys; not only because it makes good business sense, but also because we believe in collectively striving to create a more just and equitable society.

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