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WBCSD today released “Evaluating Climate-Related Financial Impacts on Power Utilities”, new guidance presenting approaches and insights for quantifying energy transition-related financial risk and opportunity in the power electric utilities sector.

Developed with WBCSD power sector members in response to recommendations by the Task Force on Climate Related Financial Disclosures (TCFD), the guidance shows power utility businesses how to develop an effective framework for analysis of climate-related risk and opportunity, as well as how to evaluate this.

The project was supported by the sustainability consultancy ERM, which provided a secondee to lead the project and write the guidance.

The analysis and disclosure of climate-related financial impacts are important to achieving a sustainable and timely transition towards a net-zero, nature positive and equitable future for 9+ billion people to live, within planetary boundaries, by 2050.

They provide strategic insights to individual companies and their investors, enabling more effective risk management and investment decision making, and ensuring the allocation of capital to activities consistent with a low carbon future.

The Financial Stability Board’s TCFD has developed recommendations to assist public companies and other organizations in disclosing climate-related risks and opportunities through their existing reporting processes, including using scenario analysis to assess and report on strategic resilience.

Power utilities – particularly in Europe – have been early adopters of scenario analysis as an important tool to develop strategic responses to energy transition. The new guidance will help build capacity in the power sector globally by sharing insights from WBCSD’s power sector members, many of whom have been developing detailed responses to TCFD for years.

“The launch of the TCFD Recommendations was a flagship moment for disclosure of climate-related financial impacts to the financial community,” Claire O’Neill, Senior Advisor, Climate & Energy, at WBCSD commented. “However, it has proved difficult for power utilities to align with the expectations of stakeholders as this is a technically complex area without consistently adopted approaches. This new guidance will help to address this issue through presenting proven approaches from leading organizations. In turn, this is expected to improve the resilience and strategic ​decision making of companies in the power sector, aligned with a low carbon future.”

Key insights presented in the new guidance.

Developing an effective framework for analysis of climate-related financial risk and opportunity – including the choice of scenarios and timeframes. In particular:

• Alignment of level of ambition with stakeholder expectations.
• Scenario choice beyond the minimum recommended by the TCFD, including more extreme scenarios for stress testing purposes.
• The importance of alignment of short, medium and long term time horizons with company targets and portfolio.
• Understanding the interplay between transition and physical scenarios, as the impacts may be felt over different time horizons.
• Different approaches that have been used with success by WBCSD’s members, including top-down, bottom-up and hybrid approaches.

Evaluating climate-related financial risk and opportunity:

• A step-by-step approach to analyze climate-related financial risk and opportunity is presented, with Case Studies and insights from WBCSD’s members.
• Example terminology and scenario indicators are presented, in order to improve commonality of approach by different companies.
• This is an area of which is developing quickly and there is not yet consensus on a “correct” way of doing the analysis. As a result, a number of options are presented, including the potential to use metrics such as value-at-risk.
• Importance of balancing resource requirements with business planning, and the role that a phased approach to analysis can play in this. Multi-departmental teams working on this topic is also seen as key.
• Keeping abreast of developments in datasets, tools and stakeholder expectations.
• While the focus is generally on risk, the importance of including Opportunity as an integral part of the analysis is also highlighted.

Looking forward, WBCSD will continue to work with its members to drive the transition to a net zero future. To find out more please see the WBCSD website: www.wbcsd.org.