The Taskforce looks forward to feedback from market participants on the proposed approach to scenario analysis and will undertake pilot testing and issue draft guidance on scenarios in the v0.4 beta release in March 2023.
Approach to scenarios
Like the TCFD, the TNFD recognises the utility of scenario analysis to help organisations navigate a complex set of interconnected uncertainties. Scenario analysis allows organisations to explore the possible consequences of climate change and nature loss, the ways in which governments, markets and society might respond, and the implications of these uncertainties for business strategy and financial planning.
Nevertheless, a survey of TNFD Forum members confirmed that most market participants have either found the application of climate-related scenario analysis very difficult or have not yet attempted to use scenarios to inform their strategy, risk management and capital allocation decisions.
As a result, the Taskforce is also releasing, alongside v0.3 of the beta framework, a discussion paper on the TNFD’s proposed approach to scenario analysis. In this discussion paper, the TNFD has set out its proposed approach to the use of scenarios and scenario analysis to support application of the TNFD framework. The TNFD seeks feedback on the discussion paper to help ensure that the approach in its complete framework and related guidance is practical and useful for market participants.
The TNFD defines a scenario as a story that describes a plausible future. It identifies some significant events, the main actors and their motivations, and how the world functions in this plausible future. Since the TNFD defines nature to include the atmosphere, and therefore the climate system, and is building on existing TCFD-aligned market practice and macro-prudential use of climate scenarios, the TNFD aims to work towards an approach to scenario analysis that fully integrates considerations of climate and nature.
The TNFD will use the approach outlined in its discussion paper as the basis for a set of pilot tests, focusing initially on use by corporates to improve decision-making. Drawing on insights from applying the proposed approach in practice in these pilot tests and feedback from market participants, the TNFD aims to develop draft scenarios guidance in v0.4 of the beta framework in February 2023 and further refine this guidance for the v1.0 framework in September 2023. As part of the next phase of work, the TNFD will develop and adapt its approach to scenario analysis for financial institutions.