“In some cases, especially for smaller and medium-sized companies, conducting a complex quantitative scenario analysis is not actually necessary,” says Askham.
“Many people think they need specialists to deal with advanced climate models.
John Askham, partner, CFO advisory services and ESG reporting leader at Grant Thornton.
“However, it is possible to take a qualitative approach that describes a global warming scenario of 1.5 degrees or higher, as well as the impact on their supply chains and ultimately on their operations. Our starting point is that it is a story that can be told narratively, emphasizing qualitative rather than quantitative information.”
An example of this could be a scenario analysis around a company with buildings in different locations.
“One of the requirements is to describe the physical risks you may face from climate change,” says Askham. “If you have properties in a particularly cyclone-prone area, those risks will be different to a company with properties in Sydney’s CBD.
“There are indications that it is actually not possible to measure some types of physical risks quantitatively at postal code level,” he says. “In that case, it’s actually better to describe a story that is supported by publicly available government data and tells the story – and there is plenty of government data to support this – about the impact that climate change could have on a particular area.
“Telling this narratively often gives you a stronger and more plausible story than, for example, trying to model changes in the probability and impact of a cyclone in a particular geographic location.”
He says the new requirements – with an emphasis on ‘climate first, but not climate only’ – provide space and flexibility for smaller companies, ultimately allowing them to report on social impacts such as gender equality and modern slavery.
Grant Thornton is taking a step-by-step approach with its clients, eliminating fear and building education around mandatory reporting, he says.
“We don’t want companies to have to pay for consultants for their reporting year after year,” says Askham. “We want to teach companies how to do the reporting themselves so they can continue to build on what they learn and create better reports every year.”
He says customer feedback on this approach has been “overwhelmingly positive”.
“To help a customer understand what some of these risks and opportunities might be, we bring together people from all businesses who understand supply chains and customer bases better than we do,” says Askham. “They then tell us what is relevant and we help them figure out what is material.
“It’s really a collaborative approach that we’ve taken.”
“This joint approach is critical,” said Dr Tanya Fiedler of the UNSW Institute for Climate Risk and Response, who recently led research published in collaboration with climate scientists on the use of storylines for business.
“The term storylines can be misleading because it suggests a story constructed solely through imagination,” says Fiedler.
Dr. Tanya Fiedler from the UNSW Institute for Climate Risk and Response.
“However, the concept was developed in climate science as a way to communicate the causal networks driving changes in climate extremes such as cyclones in an uncertain future.
Importantly, she says, the basis of such stories lies in hard science: models, historical observation and expert judgment.
“Storylines therefore have four advantages over quantitative models. First, when developed in collaboration with experts, they provide more decision-useful information for those types of climate impacts on which models have little confidence,” says Fiedler.
“Secondly, as a decision instrument, they are better able to make an uncertain future tangible than figures. Third, when developed in collaboration with climate and other forms of expertise, they offer the opportunity for mutual learning.
“Finally, they enable more transparent disclosures than proprietary models where the underlying assumptions are unknown. Storylines therefore provide a much more powerful strategic tool to support financial decision-making and reporting.”
Askham says that while the new reporting requirements pose challenges, they also present tremendous opportunities, especially for accounting and auditing professionals.
“We are largely retraining our existing audit and financial reporting people to understand these new obligations and it is an opportunity to re-energize them and get them excited about accounting and auditing,” says Askham.
“The future of accounting and auditing lies in the non-financial space, particularly in the area of emissions calculations. Information included in reports will need to be checked at the same level as traditional financial information.
“We see that as an exciting path for the profession.”
For more information please visit Grant Thornton.
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