3 Comments 3 Commentsby Andrea Malcolm
“Scenario analysis is a strategic tool where CREs construct plausible pathways to different world futures and analyse how resilient their current business model and strategy would be within these scenarios,” says FMA climate related disclosures manager Jenika Phipps.
Under the regime, CREs must include scenario analysis and explain how it was conducted in their annual climate statements. The information sheet explains the FMA’s expectations for the scenario analysis disclosures set out in the External Reporting Board’s Aotearoa New Zealand Climate Standards.
The information sheet explains the importance of scenario analysis as a tool for exploring significant uncertainties about the scale and speed of physical and transitional climate-related impacts that are likely to play out in the future.
Last month the Financial Services Council and Boutique Investment Group published a climate scenario analysis - Climate Scenario Narratives for the Financial Services Sector, which the FMA commented on in draft form.
The guide, commissioned from KPMG, provides fund managers with a common set of scenarios across short, medium and long term time horizons, which they can use to assess how climate risks and opportunities might impact their strategies over time.
Phipps says scenario analysis work has been done across multiple sectors including banking, tourism, agriculture, general insurance, energy, and building.
She says the FMA won’t monitor sector level reports and CREs will need to ensure they are relevant to their individual business. In some cases they will be broader than the ultimate disclosure requirements.
“It’s not something you can lift and shift. You do have to do additional work on top of it.”
She says for fund managers, it’s important that the scenarios used are relevant to the fund.
“There is a distinction between fund managers and the rest of the population in that they have to report per fund. Now there could be scenarios they create that would be appropriate for all of their funds or just some of their funds. It depends on the strategy of the fund and their investments.
“One piece of advice would be to assess whether they can do a scenario that would be appropriate across all funds. That assessment is quite important to making sure they start off on the right track.”
She says scenario analysis looks at risks and opportunities and sometimes opportunity seems to fall off the radar. “It’s really important that they are given equal weighting because it’s a changing world and there will be opportunities as well as risks.”
Scenario analysis forms part of the requirements under the strategy pillar of the CRD reporting regime. The other three pillars are risk management, governance, and metrics and data.
The FMA information sheet follows the suite of CRD documents it released in June.
* scenario analysis information sheet
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