Strategy

Author

Shel

The goal of climate-related financial disclosures on strategy is to help users understand the organisation’s strategy for handling climate-related risks and opportunities.

The organisation should share information to help users understand:

the climate-related risks and opportunities that could reasonably be expected to affect the organization’s prospects;
the current and expected effects of those climate-related risks and opportunities on the organization’s business model and value chain;
the effects of those climate-related risks and opportunities on the organization’s strategy and decision-making, including details about its climate-related transition plan;
the effects of those climate-related risks and opportunities on the organization’s financial position, financial performance and cash flows during the reporting period, and the expected effects over the short, medium and long term, including how these have been included in the organization’s financial planning; and
how resilient the organization’s strategy and business model are to climate-related changes, developments and uncertainties, based on the organization’s identified climate-related risks and opportunities.

a) Climate-related risks and opportunities

The organisation should share information that helps users understand the climate-related risks and opportunities that could reasonably affect its prospects. It should :

describe those risks and opportunities;
say whether each identified risk is a physical risk or a transition risk;
state the time horizon (short term, medium term or long term) over which each identified risk or opportunity could reasonably have an effect; and
explain how it defines short term, medium term and long term, and how these match the planning periods used for strategic decisions.

When identifying climate-related risks and opportunities, the organization should use all reasonable and supportable information available at the reporting date, without undue cost or effort. This includes information about past events, current conditions and forecasts of future conditions.

The organization should also consider whether the industry-based disclosure topics in the Industry-based Guidance on Implementing IFRS S2 apply.

b) Business model and value chain

The organisation should share information that helps users understand how climate-related risks and opportunities currently affect, and are expected to affect, its business model and value chain. It should :

describe these current and expected effects; and
explain where in its business model and value chain these risks and opportunities are concentrated, such as in certain locations, facilities or types of assets

c) Strategy and decision-making

The organisation should share information that helps users of general purpose financial reports understand how climate-related risks and opportunities affect its strategy and decision-making. It should explain:

how it has responded to, and plans to respond to, climate-related risks and opportunities in its strategy and decision-making, including how it plans to meet any climate-related targets it has set or is required to meet by law or regulation. This includes:
1. current and expected changes to its business model, including resource allocation, to address climate-related risks and opportunities. These changes may include plans to manage or close operations that use high amounts of carbon, energy or water; shifts in resources due to supply or demand changes; spending on business growth through capital investment or research and development; and acquisitions or sales of businesses;
2. current and expected direct mitigation and adaptation efforts, such as changes in production processes, equipment, facility locations, workforce or product design;
3. current and expected indirect mitigation and adaptation efforts, such as working with customers and suppliers;
4. any climate-related transition plan, including key assumptions and dependencies the plan relies on;
5. how it plans to meet any climate-related targets, including greenhouse gas emissions targets;
how it is providing resources, and plans to provide resources, for the activities described above; and
quantitative and qualitative information about the progress of these plans shared in earlier reporting periods.

d) Financial position, financial performance and cash flows

The organisation should share information that helps users understand:

how climate-related risks and opportunities have affected its financial position, financial performance and cash flows during the reporting period; and
how these risks and opportunities are expected to affect its financial position, financial performance and cash flows over the short, medium and long term, including how they are considered in the organization’s financial planning.

The organisation should share quantitative and qualitative information about:

how climate-related risks and opportunities have affected its financial position, performance and cash flows during the reporting period;
which of the risks and opportunities identified above could lead to a significant risk of a material change to the value of assets and liabilities in the next annual reporting period;
how it expects its financial position to change in the short, medium and long term, based on its strategy for managing climate-related risks and opportunities, considering:
1. its investment and disposal plans, including plans for capital spending, acquisitions, divestments, partnerships, business changes, innovation, new business areas and asset retirements, even if not contractually committed; and
2. its planned sources of funding to carry out its strategy; and
how it expects its financial performance and cash flows to change in the short, medium and long term, based on its climate strategy, for example, revenue from low-carbon products, costs from physical climate damage or expenses for adaptation and mitigation.

When giving quantitative information, the organisation may disclose either a single amount or a range.

When preparing disclosures about the expected financial effects of a climate-related risk or opportunity, the organisation should:

use all reasonable and supportable information available at the reporting date without undue cost or effort; and
use an approach that matches the skills, capabilities and resources it has for preparing the disclosures

The organisation does not need to provide quantitative information about the current or expected financial effects of a climate-related risk or opportunity if it determines that:

the effects cannot be separately identified; and
the level of uncertainty in estimating the effects is so high that the information would not be useful.

The organisation also does not need to provide quantitative information about the expected financial effects of a climate-related risk or opportunity if it lacks the skills, capabilities or resources to do so.

If the organisation decides not to provide quantitative information about the current or expected financial effects of a climate-related risk or opportunity based on the criteria above, it should:

explain why it has not provided this information;
provide qualitative information about those financial effects, including which line items, totals and subtotals in the related financial statements are likely to be affected or have been affected; and
provide quantitative information about the combined financial effects of that climate-related risk or opportunity with other climate-related risks or opportunities and other factors, unless it determines that this combined information would not be useful.

e) Climate resilience

The organisation should share information that helps users understand how resilient its strategy and business model are to climate-related changes, developments and uncertainties, based on the climate-related risks and opportunities it has identified.

The organization should use climate-related scenario analysis in a way that suits its specific circumstances. It may disclose a single amount or a range when providing quantitative information.

Specifically, it should disclose:

its assessment of climate resilience as of the reporting date, including:
1. what the assessment means for its strategy and business model, including how it would need to respond to the effects found in the scenario analysis;
2. the major uncertainties considered in the assessment;
3. its ability to adjust or adapt its strategy and business model over the short, medium and long term, including:
  - whether and how its financial resources are available and flexible enough to respond to the effects identified in the analysis, manage risks and pursue opportunities;
  - its ability to redeploy, repurpose, upgrade or shut down assets;
  - how current and planned investments in mitigation, adaptation and resilience are expected to help.
how and when the scenario analysis was done, including:
1. details about the inputs used, such as:
  - which climate-related scenarios were used and their sources;
  - whether a wide range of scenarios was included;
  - whether the scenarios addressed transition risks, physical risks or both;
  - whether one of the scenarios aligns with the latest international climate agreement;
  - why the chosen scenarios are relevant to assessing climate resilience;
  - the time horizons used in the analysis;
  - which parts of its operations were covered in the analysis, such as specific locations or business units;
2. the key assumptions made, including:
  - policies in jurisdictions where it operates;
  - macroeconomic trends;
  - national or regional variables like local weather, demographics, land use, infrastructure and natural resources;
  - energy use and mix;
  - technology developments
3. the reporting period when the analysis was carried out

When preparing disclosures to meet the requirements above, the organisation should refer to and consider the relevance of cross-industry metric categories and industry-based metrics linked to disclosure topics in the Industry-based Guidance on Implementing IFRS S2.

Assessing the circumstances

The organisation should use a climate-related scenario analysis approach that fits its situation at the time it carries out the analysis. To assess its situation, the organisation should consider:

its exposure to climate-related risks and opportunities; and
the skills, capabilities and resources it has available for the scenario analysis

a) Its exposure to climate-related risks and opportunities

The organisation should consider its exposure to climate-related risks and opportunities when assessing its situation and choosing the approach for climate-related scenario analysis. This helps understand the benefits of using a specific approach.

For example, if the organisation has a high level of exposure to climate-related risks, a more detailed or technical approach to scenario analysis would be more useful for both the organisation and users of its financial reports.

On the other hand, users are less likely to benefit from a detailed or technical scenario analysis if the organisation faces few or less severe climate-related risks and opportunities.

So, all else being equal, the greater the organisation’s exposure to climate-related risks or opportunities, the more likely it should choose a more technical form of climate-related scenario analysis.

b) The skills, capabilities and resources it has available for the scenario analysis

The organisation should consider the skills, capabilities and resources it has when choosing the right approach for climate-related scenario analysis. These might include both internal and external resources. The available skills and resources help the organisation understand the potential cost and effort needed for a certain approach.

For example, if an organisation is just starting to use climate-related scenario analysis, it might not be able to use a detailed or technical approach without excessive cost or effort.

To be clear, if resources are available, the organisation can invest in gaining or developing the necessary skills and capabilities.

Climate-related scenario analysis can take a lot of resources and may need to be developed and improved over several planning cycles through a learning process. As an organisation repeats the analysis, it will likely build skills and abilities that help improve its approach over time.

For example, if an organisation has not used scenario analysis before or is in an industry where it is not common, it might need more time to develop these skills. In contrast, an organisation in an industry where scenario analysis is well established, such as extractives and mineral processing, would be expected to have already improved its skills through experience.

Determining the appropriate approach

The organisation should choose an approach to climate-related scenario analysis that allows it to use all reasonable and reliable information available at the reporting date without causing undue cost or effort.

Reasonable and supportable information includes details about past events, current conditions and forecasts of future conditions. It can be quantitative or qualitative, and may come from external sources or be owned or developed internally.

The choice should be guided by the organisation’s assessment of its exposure to climate-related risks and opportunities and its available skills, capabilities and resources. This involves:

selecting inputs to the climate-related scenario analysis; and
making analytical choices about how to carry out the climate-related scenario analysis.

a) Selecting inputs to the climate-related scenario analysis

When an organisation chooses inputs for its climate-related scenario analysis, it should consider all reasonable and reliable information available at the reporting date without causing undue cost or effort. These inputs can be qualitative or quantitative and may come from external sources or be developed internally.

For example, publicly available climate-related scenarios from trusted sources that show future trends and possible outcomes are considered available without undue cost or effort.

When choosing scenarios, variables, and other inputs for climate-related scenario analysis, an organisation might use one or more publicly and freely available climate-related scenarios from trusted sources. The entity should have a reasonable and supportable reason for using a particular scenario or group of scenarios.

For example, an entity operating mainly in a place where emissions are regulated or likely to be regulated may decide to use a scenario that matches a smooth transition to a lower-carbon economy or aligns with local commitments to the latest international climate agreement. In another case, an entity with high exposure to physical climate risks may choose to use a localised climate scenario that considers current policies.

When deciding if the chosen inputs are reasonable and supportable, the organisation should remember that the goal is to provide information that helps users of financial reports understand how resilient the entity’s strategy and business model are to climate-related changes, developments, and uncertainties, considering the climate-related risks and opportunities the entity has identified. This means the inputs used in the climate-related scenario analysis should be relevant to the organisation’s situation, such as the specific activities it carries out and where those activities take place.

b) Making analytical choices about how to carry out the climate-related scenario analysis

An entity’s resilience assessment is shaped not only by the inputs it uses in its climate-related scenario analysis but also by how it combines and analyses those inputs. The entity should choose analytical methods, like qualitative analysis or quantitative modelling, that allow it to consider all reasonable and supportable information available at the reporting date without undue cost or effort.

For example, if an entity can include multiple carbon price paths linked to a specific outcome (like a 1.5 degree celsius scenario) without undue cost or effort, this would likely improve its resilience assessment, provided this approach fits the entity’s level of risk exposure.

Quantitative information often helps an entity make a stronger assessment of its climate resilience. However, qualitative information, like scenario descriptions, either on its own or together with quantitative data, can also provide a reasonable and supportable basis for the entity’s resilience assessment.

An organisation should use judgement to decide the mix of inputs and analytical choices that allow it to consider all reasonable and reliable information available at the reporting date without causing undue cost or effort. The amount of judgement needed depends on how much detailed information is available.

As the time horizon gets longer and detailed information becomes less available, more judgement is needed.

Additional considerations

Climate-related scenario analysis is still developing, so an organisation’s approach will likely change over time. As explained earlier, the organisation should decide how to carry out scenario analysis based on its specific circumstances, including its exposure to climate risks and opportunities and the skills, capabilities and resources available. Since these factors can change, the approach to scenario analysis does not have to stay the same from one reporting period or planning cycle to the next.

An organisation might use a simpler approach to climate-related scenario analysis, such as qualitative scenario stories, if that suits its circumstances. For example, if an organisation lacks the skills, capabilities or resources for quantitative analysis but faces a high level of climate risk, it might start with a simpler approach and build its skills over time, moving to a more advanced quantitative method later. An organisation with high exposure to climate risks and opportunities, and with the right skills and resources, should use a more advanced quantitative approach.

Although an organisation is required to disclose information about its climate resilience at each reporting date, it might carry out its climate-related scenario analysis according to its strategic planning cycle, which can span several years (for example, every three to five years). Therefore, in some reporting periods, the organisation’s climate resilience disclosures might remain the same as the previous period if it does not do a scenario analysis every year. The organisation should update its climate-related scenario analysis at least as often as its strategic planning cycle.

However, an assessment of the organisation’s resilience must be done every year to reflect new understanding of how climate uncertainty affects its business model and strategy. As a result, the organisation’s disclosure that covers the results of its resilience assessment, should be updated each reporting period.

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