Why is Scenario Planning Prudent
Showing Business Prudence
Stresses are building in the systems that generate business climate risks. These stresses will lead to physical or policy ‘climate quakes,' much as tectonic stresses lead to earthquakes. Climate quakes could dramatically affect long-term business supply chains, operations, infrastructure, and employee health and productivity. Rising GHG concentrations or public policies intended to cap GHG concentrations will lead to different kinds of climate quakes. Climate quakes are inevitable. For some companies and sectors, a failure to recognize this reality could lead to being held liable for a failure to act accordingly.
Like earthquakes, it’s hard to predict when major climate quakes will occur, even if we can confidently anticipate them. It could be next year; it could be 20 years from now. But like earthquake preparedness, the lack of certainty should not stop us from taking prudent steps to improve business resilience to such quakes. The potential for business risk and business opportunity based on climate change and climate change policy is greater now than in the past. This potential will continue to grow as the gap between climate science and climate policy continues. It is important that corporate risk management strategies keep up.
This is hard to do if companies have not explored how the direct and indirect impacts of climate change might affect their operations, supply chains, and markets, even over a period as short as the next 5-10 years. It is impossible to tell one's board of directors, investors, employees, or other stakeholders that you have the topic of climate risk and opportunity under control without some kind of scenario planning or the equivalent.
With scenario planning, you can tell stakeholders you have prudently considered what the future might look like. You can assure them that you have prudently integrated that information into corporate strategies and that you are tracking changes to the situation.
Prudent decision-making does not pre-suppose any particular course of action. As long as it is based on good information and good analysis, prudence can be subjective. What makes sense for one company regarding climate risks and opportunities may bear no resemblance to what may make sense for another company. That makes it difficult indeed to identify simple answers to the question of "what would be prudent for us to do?"
There is no shortage of information that would let management choose a business course that could be defended as prudent. The big uncertainties surrounding both physical and non-physical climate risks can be bounded and incorporated into corporate risk assessments and risk management.
We do not mean to suggest that it's easy. For companies wanting to develop a coherent and forward-looking prudent climate change strategy in response to regulatory risk, for example, there are three big topics to consider:
- Will policy makers move forward with the policies and measures necessary to achieve a given societal target, whether 1.5, 2, or 3 degrees Celsius? If so, will it occur within a time frame relevant to business decision-making?
- Which policy makers would act? Would it be national decision-makers, state decision-makers, or local decision-makers? These entities all have different policy tools and levers at their disposal.
- What policies and measures would be deployed, and how?
How these questions are answered will have implications for the nature of the risks facing a company. Companies don't need to have the right answer to these and other questions to demonstrate prudence in their climate change decision-making. But they do need to have thought about these issues in ways that allows them to demonstrate how they've accounted for them in their thinking and their actions.
Scenario planning is perhaps the best way of doing that. Achieving the objective of demonstrating "climate prudence" has clear implications for what kind of scenario planning initiative to pursue (see Chapter 3) and to your choice of scenarios to utilize as part of your scenario planning initiative (see Chapter 4).