ISSB Requires Use of Climate-Related Scenario Analysis to Support Disclosure

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ISSB Requires Use of Climate-Related Scenario Analysis to Support Disclosure

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The International Sustainability Standards Board (ISSB) unanimously confirmed that companies will be required to use climate-related scenario analysis to report on climate resilience and to identify climate-related risks and opportunities to support their disclosures, as reported by Financial Magazine on November 3. The ISSB will also provide support to preparers on how to apply scenario analysis. The application support will refer to Task Force on Climate-Related Financial Disclosures (TCFD) guidance, which outlines types of scenario analyses, including quantitative, partially quantitative, and qualitative. According to the ISSB, an entity would at least need to undertake the qualitative form of scenario analysis as a basis for its resilience analysis. 

Scenario analyses, ranging from simple narrative descriptions to more complex modeling, are adopted by enterprises to assess their strategic and financial implications of potential climate-related risks and opportunities. With scenario analysis, investors could also understand how climate change can affect a company’s performance. The latest requirements on scenario analysis and ISSB’s application support will be included in the final IFRS Sustainability Disclosure Standard S2 (Climate-Related Disclosures), which is expected to be published along with the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information as early as 2023. According to a recent survey by KPMG [KPMG:RU], only 13% of the world’s top 250 companies (G250) use scenario analysis to model the potential impact of climate change in their reports, despite that 96% of the G250 have provided sustainability data in their annual financial reports in 2020.