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New guidance on scenario analysis

Download – Annex 4.10
Additional guidance on scenario analysis

TNFD v0.4 Annex 4.8

New guidance on scenario analysis

Like the TCFD, the TNFD recognises the utility and importance of scenario analysis to help organisations develop and test the resilience of their organisation’s strategy, given complex uncertainties. Scenario analysis allows organisations to explore the possible consequences of nature loss and climate change, the ways in which governments, markets and society might respond, and the implications of these uncertainties for business strategy and financial planning.

The Taskforce commissioned a market survey that reported that the majority of market participants found the application of scenario thinking to their climate-related risk management to be the most complex and challenging component of TCFD framework adoption.

Informed by this, the TNFD published a discussion paper in November 2022 outlining its proposed approach to scenario analysis. This v0.4 release includes new draft guidance on guidance, building on the feedback received from market participants.

Key insights from the Taskforce’s early research on the use of scenarios and the experience with TCFD adoption are that:

  • Most organisations do not have in-house capabilities to support the development and use of scenario thinking, and rely on the expertise and tools of other organisations; and
  • Scenario considerations are necessarily different for corporates and financial institutions. Scenarios for financial institutions need to be grounded in central banks and regulators’ macro-prudential models, given the significance of financial institutions for overall financial system stability and the use of stress testing by regulators.

In light of this, the TNFD’s approach to scenario analysis has initially focused on guidance and tools for corporates. In parallel, the TNFD has explored possible scenario-based methods for approaches risk quantification at a portfolio level for financial institutions. This work has learned from pilot testing, including:

  • A set of initial pilot tests with corporates in early 2023;
  • A separate set of pilot tests was with a group of asset owners.

The draft guidance published alongside v0.4 follows a toolbox approach, reflecting the need for flexibility and adaptability for different kinds of organisation. This includes a collection of user-oriented, practical tools, templates and techniques, in addition to general guidance.

The Taskforce welcomes further feedback and pilot testing of this draft guidance by 1 June 2023 to help ensure the guidance is practical and useful for market participants. The TNFD intends to extend and enhance the application of its scenarios approach to financial institutions in its final recommendations in September 2023 (v1.0), building on pilot testing and feedback from market participants.