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CDSB WebinarTCFD Scenario building and useJuly 2018
SpeakersSouth Pole Page 2
Charles HendersonHead of Corporate Risks and Opportunities
Charlie Brunel-Lister Transition risks modeller and service developer
Dr. Nico KrönerExpert in climate modelling
ContentsSouth Pole Page 3
Objectives, focus and context
Scenario analysis from A to Z
Step 1 - Scenario selection
Step 2 - Risk analysis
Step 3 - Reporting and disclosure
Case studies
Q&A
Wrap-up and next steps
Objectives, format and context Page 4South Pole
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Main objectives
● To help you understand what climate scenarios are.
● To guide you through the practical steps of selecting, building and using 2ºC, and other scenarios for risk assessments.
● To highlight specific approaches using case studies and published reports.
● To help you better understand how to report and disclose and how are your peers doing.
Objectives, format and context Proposed objectives for the webinar
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Interactive webinar: feel free to ask questions through sound or the chat box. Follow-up: there will be a follow up with the delivering of the materials.
Chapter Time (approx.) Speakers
Objectives, format and context 5 minutes Charles Henderson
Scenario analysis from A to Z Step 1 - Scenario selection Step 2 - Risk analysis Step 3 - Reporting and disclosure
25 minutes Nico Kroener, Charlie Brunel
Case studies 10 minutes
Q&A 20 minutes Charles Henderson, Nico Kroener, Charlie Brunel
Objectives, format and context Proposed objectives for the webinar
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Why perform climate scenario-analysis?
Investors, governments, NGOs and consumers pressure● Task Force on Climate Related Financial Disclosure (TCFD) reporting● Carbon Disclosure Project (CDP) reporting● Article 173 of the French Energy Transition Law● Climate Action 100+● More to come?
Sustainable business rationale● Reducing fossil fuel risk exposure● Energy cost saving● Preparing for carbon pricing● Future-proofed technology● Resilient operations and supply chains● Employee satisfaction
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Objectives, format and context Context and rationale for scenario analysis
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(Source: IPCC (2013) Climate Change Action, Trends and implications for Business. IPCC 5th Assessment Report. ) *The four RCP (Representative Concentration Pathway) scenarios each predict carbon emissions and resultant warming
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Objectives, format and context Context and rationale for scenario analysis
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+4.0ºC
+3.0ºC
+2.0ºC
+5.0ºC
+6.0ºC
2020 +1.0ºC 2030 2040 2050 2060 2070
Some of the physical and transition risks examples include:
Regular severe storms in W. Europe decimate
arable land
Good farmland given over to housing as
flood plains become uninsurable
More pest invasives from N. Europe
Acute Physical
€25/tCO2 tax knocks 10% off share price of
climate laggards
€50/tCO2 tax adds 20% to average weekly
food shop
€75/tCO2 tax doubles price of beef
Shift to indoor-grown protein sources as
fertile land availability plummets
Huge investment in irrigation equipment
required
Demand for 100% organic renders
much of agri-equipment
redundant
Insect-derived additives become commonplace with
celebrity endorsement
Demand for fungi-based meat
substitutes grows as soils degrade
Huge shift to localism dramatically alters food
and drink business models
Companies importing from Africa suffer brand
damage as migration soars and populism
spreads
Meat and dairy farming declared carbon enemy #1 for 3 years running
NGOs pressure for disclosure of ecological
footprints leads to boycotts of some foods
ReputationTechnology MarketsPolicy & legal
Objectives, format and context Context and rationale for scenario analysis
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Scenario analysis from A to ZPage 10South Pole
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Collect data and define scope and purpose of the scenario analysis.
● Defining an operational boundary (physical and transition)
● Choosing relevant risk and scenarios (transition)
● Choosing relevant risk and scenarios (physical)
Perform an in-depth risk assessment based on the use of the scenario and/or historical data.
Prepare reporting and disclosure documentation.
● Graphical presentations
OverviewOur three step process
The operational boundary will define the scope of the scenario analysis:1. geography 2. order of effects (1, 2, 3) 3. scope (upstream, downstream)4. time frame (2030, 2050, etc.)
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A. Defining an operational boundary
Company
DownstreamUpstream
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Physical
Transition
3. Selection
2. Classification
B. Choosing relevant transition risk categories
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
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● Collective work (ERM, CSR, C-Suite, etc.)
● Analysis of peers’ strategy
● Literature review
● Existing scenario review
● Iterative process
1. Collection
Areas of work
Physical
Transition
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International Energy Agency (IEA) scenarios
World Energy Outlook (WEO)
● Since 1978● Featuring three main scenarios
○ Sustainable Development Scenario (SDS)○ New Policies Scenario (NPS)○ Current Policies Scenario (CPS)
● Six additional scenarios and cases (450, Bridge, Clean Air, Faster Transition, etc.)
Energy Technology Perspectives (ETP)
● Featuring three main scenarios ○ Beyond 2 degree scenario (B2DS)○ 2 degree scenario (2DS)○ Reference Technology Scenario (RTS)
● Two additional scenarios and cases (4DS, 6DS)
C. Selecting a transition scenario off the shelf
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Physical
Transition
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Alternative scenariosC. Selecting a transition scenario off the shelf
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Physical
Transition
Public, corporate or hybrid scenario…
...and scenario content
1. Analytical Choices Quantitative/qualitative, time horizons, frequency and scope
2. Parameters and assumptions Carbon price, energy mix, price of key commodities or inputs etc.
(Source: TCFD (2018). Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities)
Advantages Drawbacks
Public scenario ● Comparability● Simplicity
● Potential inadequacy ● Limited dataset boundaries
Corporate scenario● Higher adequacy ● Time consuming and expensive
● Complexity● Lack of comparability
Hybrid scenario A mix of advantages and drawbacks from public and corporate scenarios
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
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C. Selecting a transition scenario off the shelfPhysical
Transition
Scenario (Provider) Transition Physical ºC Policy Legal Technology Market Reputation
SDS - Sustainable Development Scenario (IEA WEO) Yes No 2ºC Yes No Yes No No
NPS - New Policies Scenario (IEA WEO) Yes No 4ºC Yes No Yes No No
CPS - Current Policies Scenario (IEA WEO) Yes No 6ºC Yes No Yes No No
Other WEO scenarios are 450, Bridge, Faster Transition, Low Oil Price, Energy for All, Clean Air Scenario
2DS - 2 degree scenario (IEA ETP) Yes No 2ºC Yes No Yes No No
B2DS - Beyond 2 degree Scenario (IEA ETP) Yes No 1.75ºC Yes No Yes No No
RTS - Reference Technology Scenario (IEA ETP) Yes No 2.7ªC Yes No Yes No No
Other ETP scenarios are 4DS and 6DS
SSP1 - Sustainability (IIASA) Yes Yes 2-4ºC Yes No Yes No No
SSP2 - Middle of the road (IIASA) Yes Yes 2-4ºC Yes No Yes No No
SSP3 - Regional rivalry (IIASA) Yes Yes 2-4ºC Yes No Yes No No
SSP4 - Inequality (IIASA) Yes Yes 2-4ºC Yes No Yes No No
SSP5 - Fossil fueled development (IIASA) Yes Yes 2-4ºC Yes No Yes No No
Other scenarios are DDPP - Deep Decarbonisation Pathways (IDDRI, SDSN), Advanced Energy [Revolution] (Greenpeace), REmap (IRENA)
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
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C. Selecting a transition scenario off the shelf
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
B. Choosing relevant physical risk categories
1. Analyse historical impacts
2. Start from general assessments
Extreme windExtreme rainfall and
floodsExtreme
heatVariability in precipitation
Variability in temperature
Water Stress Sea level rise
Overall sensitivity
Financial Services Low Medium Low Low Low Low Medium Low
Insurance High High Medium Low Low Medium High Medium
Gas and Utilities Medium High High Medium Medium High High High
Infrastructure High High Medium Low Medium Low High Medium
Retail Low Medium Low Low Low Low Medium Low
IT (Semiconductor, hardware and equipment)
Medium High High Medium Low Medium High Medium
IT (Software) Low Medium Low Low Low Low Medium Low
Advertising (Media) Low Medium Low Low Low Low Medium Low
Transition
Physical
C. Selecting a physical scenario off the shelf
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Representative concentration Pathways (RCPs)
DescriptionTemperature increase by 2046-20651)
Temperature increase by 2081-21001)
RCP2.6 Very high mitigation 1.0 (0.4 to 1.6) 1.0 (0.3 to 1.7)
RCP4.5 High mitigation 1.4 (0.9 to 2.0) 1.8 (1.1 to 2.6)
RCP6.0 Some mitigation 1.3 (0.8 to 1.8) 2.2 (1.4 to 3.1)
RCP8.5 Business as usual 2.0 (1.4 to 2.6) 3.7 (2.6 to 4.8)
1) IPCC AR5 WG1 (2013), Stocker, T.F.; et al., eds., “Climate Change 2013: The Physical Science Basis”. Working Group 1 (WG1) Cambridge University Press.
(Source: Van Vuuren et al (2011), The Representative Concentration Pathways: An Overview. Climatic Change, 109 (1-2), 5-31.)
Transition
Physical
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Temperature change scenarios (TCS)
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
Description Available RCP scenarios
1° Scenario Very high mitigation
RCP2.6,RCP4.5,RCP6,RCP8.5
2° Scenario High mitigation RCP4.5,RCP6,RCP8.5
3° Scenario Some mitigation RCP6,RCP8.5
4° Scenario Business as usual RCP8.5
(Figure based on data from: https://climexp.knmi.nl/start.cgi [Accessed on: 10.06.2018])
Transition
Physical
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
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<5 years:- historical analysis- probabilistic
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
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5-20 years:- Model data
analysis- probabilistic
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
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>20 years:- Model data
analysis- Scenario based
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
Low Medium High
Global models (CMIP5) Regional models (CORDEX)
Statistical downscaling (NASA-NEX)
Granularity
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
Granularity a question of budget and data availability? Transition
Physical
Scenarios Transition Physical ºC Timeframe Geography
RCP - Representative Concentration Pathways (IPCC)
No Yes 1-5°C 2010-2100 World wide
TCS - Temperature change scenarios No Yes 1ºC, 2ºC,
3ºC, 4ºC No time attached World wide
Datasets Dynamic Statistical Scenario Timeframe Geography Risks Resolution
Global model intercomparison project 5 (CMIP5)
Yes No RCP, TCS 2010-2100 World wide All 100km
x100km
Coordinated regional climate model experiment (CORDEX)
Yes No RCP, TCS 2010-2100
World wide (Different
ensembles for regions
All 25kmx25km
NASA-NEX No Yes RCP, TCS 2010-2100 World wide
Temperature and
precipitation
25kmx25km
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
Newcomer Intermediate Advanced
● IEA 2ºC scenario● IPCC RCP4.5 or
8.5 scenario● Low resolution
data● Qualitative data● 2-3 major risks
● IEA 2ºC scenario● IPCC RCP4.5 or 8.5
scenario● Mostly quantitative
data with some qualitative data
● >3 risks
● IEA and/or SSP scenarios with sensitivity
● IPCC’s 4 RCPs● High resolution data● Mostly quantitative data
and quantitative financial impact
● As much risks as possible
● Scenario against SBTs
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a scenario off the shelf Physical
Transition
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Overview
Define Risk indicators
Collect Data
● Risk category● Scenario● Fit for purpose (Time and intensity)
● Exposure (internal data)● Vulnerability (internal and external data)● Hazard (external data, risk indicator and scenario data)
● Risk = Exposure x Vulnerability x Hazard● Uncertainty analysis (confidence interval)● Financial implications
Calculate Impact
RIS
K
CA
TEG
OR
YD
ATA
MO
DEL
SM
ETR
ICS
Policy risks Legal risks Acute heatwave Chronic water stress
$/kgCO2e Price paid in litigation cases
Additional days affected by
extreme heat
Percentage of water withdrawn /
average water price
Carbon pricing investigations
Litigation databases
Climate model output and dynamical
downscaling
Shadow water prices
World Bank, ICAP, OECD,
IEA, SSP
Sabin Center, Carbon
Boomerang, IEA
IPCC datasets: CMIP5, CORDEX
Aqueduct tool and in-house analysis
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Risk PhysicalTransition
California
OregonWashington
British Columbia
AlbertaManitoba
OntarioQuebec
New BrunswickNova Scotia
RGGIUS
TRINIDAD AND TOBAGO
Tokyo & Saitama
BeijingTianjin
Hubei
ShanghaiChongqing
TaiwanShenzhen
Guangdong
ETS in place
Carbon tax with offsets being designed or in place
Hybrid carbon pricing
ETS being designed
Linkages
High carbon price
Moderate carbon price
Low carbon price
High
Moderate
Low
Exposure to riskCarbon Price
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Risks example Carbon pricing
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The illustration shows water risk on asset level. The color of the bubble shows water stress (from 1 = low to 5 = very high), with the size of the bubble showing the scale of water consumption of the respective facility.
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Risks example Water stress
(Source: WRI (2018) Measuring, mapping and understanding water risks around the globe [online] Available from: http://www.wri.org/our-work/project/aqueduct/; World Resources Institute [Accessed on: 20.05.2018] )
Climate opportunities may be identified by considering options, projected market size / trend indicators, including the following cleantech solutions and sustainability themes.
● Resource efficiency (circular economy, retrofits, among others) and associated low cost strategies
● Renewable energy options
● New technology for reducing carbon intensity of products and services (e.g innovations and patent registrations for industrial equipment, logistics and vehicles)
● Green finance mechanisms (for example, green bonds and funding for sustainable infrastructure)
● Options for improving business resilience (for example, for better predictions for supply chain security, weather forecasting and alternative crop types)
Data sources (including):● policy trends● market analysis from consultancies, academia etc.● trade associations● cleantech media● newsfeeds.
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
Opportunities
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Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
A. Graphical presentations and B. Recommendation for C-Suite
Case studiesPage 34South Pole
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Case studyAGL Energy - Electric and gas utilities
Scenario analysis Yes
Type of scenario Hybrid and Corporate
Number of scenarios used 3
Time horizon 2030 and 2050
Transition risks Technology, Policy
Physical risks Not assessed
Financial impact Yes
(Source: AGL (2016) A carbon constrained world)
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Case studyAGL Energy - Electric and gas utilitiesScenario
BAUNo carbon constraint
iNDC 26-28% GHG reduction
2ºCParis Accords world
Temperature: not mentioned
Geographical scope: Australia
Temperature: +2.7ºCGeographical scope: Australian national electricity marketTime horizon: 2030Public scenario: Not used
Temperature: +2ºC Geographical scope: Australian national marketTime horizon: 2050Public scenario: IPCC AR5
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Case studyAGL Energy - Electric and gas utilitiesRisks and financial impact
iNDC scenario
2ºC scenario
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Case studyAGL Energy - Electric and gas utilities
Risks and financial impact
iNDC 2ºC BAU
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Case studyAGL Energy - Electric and gas utilities
10 advantages and drawbacks
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Advantages Drawbacks
Financial impact modelling Absence of physical risk analysis
High quality visuals Limited to Australian national electricity market
Good level of disclosure on methodology Not integrated into a wider TCFD analysis
Use of existing public scenarios (IPCC, NDC)
Only 2 risks assessed
Potentially biased
Screening of investment portfolio for physical climate risks
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Case studyAnonymous - Financial Sector
Scenario analysis Yes
Type of scenario Public
Number of scenarios used 7 (3xRCPs & 4 TCS)
Time horizon 2020-2100
Transition risks Not assessed
Physical risks Yes (aggregated measure)
Financial impact No (indicator)
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● Understand portfolio’s geographical risk hotspots ● Analyse different scenarios and timeframes
Value add
Example output in a 4° scenario: the shading shows the proportion [%] of each portfolio countries’ contribution to the overall climate risk of the whole portfolio.
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Case studyAnonymous - Financial SectorIdentify geographical hotspots of risk exposure
Compare climate risk exposure across sectors
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● Understand sector performance in comparison with other sectors in terms of climate risk exposure
Value add
Case studyAnonymous - Financial Sector
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Value add
● Understand portfolio’s performance in comparison with benchmark in terms of climate risk exposure
Example of a portfolio benchmarking output
Example portfolios under ‘Business as usual’ scenario
Example portfolios under ‘High mitigation’ scenario
Case studyAnonymous - Financial Sector
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Q&APage 44South Pole
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Q&APossible discussion themes
● Why should I perform scenario analysis?
● How much does a scenario analysis cost?
● What’s the payback / business case?
● How do I choose the relevant risks to my business and how many should I pick?
● How many scenarios should I screen?
● Can I perform scenario analysis by myself?
● Where do I start?
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Supplementary informationPage 46South Pole
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ModelsScenarios
This presentation focuses on two types of scenarios:
○ physical scenarios○ transition scenarios
1. Climate models 2. Impact models3. Socio-economic and financial models
OverviewDifference between scenarios and models
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C. Selecting a transition scenario off the shelf
Shared Socioeconomic Pathways (SSPs) from the IIASASSP1
SustainabilitySSP2
Middle of the roadSSP3
Fragmented worldSSP4
Inequality
SSP5Conventional development
Good progress towards sustainability, with sustained efforts to achieve development goals, while reducing resource intensity and fossil fuel dependency.
Progress towards achieving development goals, reductions in resource and energy intensity at historic rates, and slowly decreasing fossil fuel dependency.
Separation into regions extremely poor with pockets of moderate wealth and a bulk of countries that struggle to maintain living standards.
Highly unequal world within and across countries. A small global elite is responsible for the majority of the emissions, while the rest is vulnerable to climate change.
Conventional development with domination of fossil fuels and high GHG emissions
AIM/CGE
CGAM
IMAGE
MESSAGE-GLOBIOM
REMIND-MAgPIE
WITCH-GLOBIOM
AIM/CGE
CGAM
IMAGE
MESSAGE-GLOBIOM
REMIND-MAgPIE
WITCH-GLOBIOM
AIM/CGE
CGAM
IMAGE
MESSAGE-GLOBIOM
REMIND-MAgPIE
WITCH-GLOBIOM
AIM/CGE
CGAM
IMAGE
MESSAGE-GLOBIOM
REMIND-MAgPIE
WITCH-GLOBIOM
AIM/CGE
CGAM
IMAGE
MESSAGE-GLOBIOM
REMIND-MAgPIE
WITCH-GLOBIOM
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
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Temperature change scenarios (TCS)
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
Scenario Description Available RCP scenarios
1° Scenario Very high mitigation RCP2.6,RCP4.5,RCP6,RCP8.5
2° Scenario High mitigationRCP4.5RCP6RCP8.5
3° Scenario Some mitigation RCP6RCP8.5
4° Scenario Business-as- usual RCP8.5(Figure based on data from: https://climexp.knmi.nl/start.cgi [Accessed on: 10.06.2018])
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<5 years:- historical analysis- probabilistic
5-20 years:- Model data
analysis- probabilistic
>20 years:- Model data
analysis- Scenario based
Step 1Scenario selection
Step 2Risk analysis
Step 3Reporting and disclosure
C. Selecting a physical scenario off the shelf
Charles HendersonDirector
Head of Corporate Risks and OpportunitiesUnited Kingdom
Franziska SinnerSustainability Expert
Director of Advisory services
Switzerland
Miguel ChavarriaSenior Consultant,
Metrics and Targets ExpertMexico
Nico KroenerProject Manager
Senior consultant, Climate risks and opportunitiesZurich
Andrés CasallasExpert in financial modelling
Consultant,Mexico
Jeff SwartzExpert
Carbon Markets and Climate Policy DirectorUnited Kingdom
Experts
The South Pole TCFD Team structurePage 51
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Hanna VärttöInvestor Engagement Expert
Practice Lead - Climate risks for the financial sector, Mexico
Charlie Brunel-ListerExpert in transition risks
ConsultantMexico
Anna AsikainenSenior Consultant
Climate risks and opportunities, Mexico
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southpole.com
TCFD Hub, [email protected]
Offices and representations worldwideAmsterdam, Bangkok, Beijing, Bogotá, Hanoi, Jakarta, London, Madrid, Medellín, Melbourne, Mexico City, New Delhi, San Francisco, Singapore, Stockholm, Sydney, Zurich.
Charles Henderson, Primary Contact, Project SupervisorPractice Lead, Climate risks for [email protected]+44 7740 946955
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