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Blog | Tuesday August 28, 2018

A Human Rights-Based Approach to Artificial Intelligence

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Artificial intelligence (AI)—and the big data business models underpinning it—is disrupting how we live, work, do business, and govern. 

The economic, social, and environmental benefits of AI could be significant, such as improved health diagnostics, self-driving vehicles that increase road safety, and enhanced fraud prevention.

However, AI also brings social risks, including new forms of discrimination arising from algorithmic bias, labor impacts associated with the displacement of workers by machines, and the heightened potential of surveillance using tracking devices and facial recognition tools.

Artificial intelligence (AI)—and the big data business models underpinning it—is disrupting how we live, work, do business, and govern.

The speed, complexity, and novelty of these disruptions imply that similarly innovative approaches to responsible business will be needed for us to realize the full potential of AI to create long-term value.

Over the past few years, various ethics-based approaches to the responsible development and deployment of AI have emerged, covering issues like privacy, surveillance, discrimination, bias, unintended consequences, and misuse by bad actors. The pace with which new principles, organizations, and design tools have been established is extremely impressive, and these have made a tremendously positive contribution to the debate about the future of AI.

We believe that three major enhancements to the current approach are required:

1. Human rights-based approaches offer a robust framework for the responsible development and use of AI and should form an essential part of business policy and practice.
2. Companies outside the technology industry have an essential role to play, and we believe they should be more proactively involved in the development of responsible approaches to AI.
3. Due diligence approaches developed by the business and human rights field in recent decades can be usefully deployed in the quest for responsible and rights-respecting development and deployment of AI—though we also believe that these approaches require significant stretching and innovation.

For these reasons, today we are publishing three papers describing a potential blueprint for responsible business practice with regard to AI both within and beyond the technology sector. 

• In Paper 1: Why a Rights-Based Approach?, we outline 10 beliefs—built on the internationally agreed foundations of the business and human rights field—to govern and guide the use of AI. We draw heavily on the UN Guiding Principles on Business and Human Rights, the foundational and internationally endorsed road map for addressing business human rights impacts on people.
• In Paper 2: Beyond the Technology Industry, we argue that we must pay attention to the AI value chain, as well as the positive and negative human rights impacts associated with AI that are directly relevant for companies beyond the technology sector.
• Finally, Paper 3: Implementing Human Rights Due Diligence, we explore the tools, methodologies, and guidance needed operationalize business respect for human rights in the context of AI development and use. We propose several innovations, including using futures methodology, experimenting with the concept of ‘human rights by design,’ and taking rights-based approaches to identify opportunities.

These papers draw upon approaches and lessons learned from the field of business and human rights. We are presenting them as “working papers” for discussion, dialogue, and feedback from our readers, and there will be many opportunities to examine these proposals in the months ahead. This will include a BSR member company event in New York in October and a session at BSR conference in November.

We intend to publish revised and improved versions of these papers at a later date based on your input. We’d love to hear your reactions or those of your colleagues and stakeholders. If you are keen to engage or collaborate, or if you see other opportunities to test these papers, please get in touch.

Reports | Tuesday August 28, 2018

Artificial Intelligence: A Rights-Based Blueprint for Business

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Artificial intelligence (AI)—and the big data business models underpinning it—is disrupting how we live, work, do business, and govern.

The speed, complexity, and novelty of these disruptions imply that similarly innovative approaches to responsible business will be needed for us to realize the full potential of AI to create long-term value.

We have published three papers describing a human rights-based blueprint for responsible business practice with regard to AI, both within and beyond the technology sector.

Why a Rights-Based Approach?

In Paper 1: Why a Rights-Based Approach?, we outline 10 beliefs—built on the internationally agreed foundations of the business and human rights field—to govern and guide the use of AI. We draw heavily on the UN Guiding Principles on Business and Human Rights, the foundational and internationally endorsed road map for addressing business human rights impacts on people.

Download Paper 1

Beyond the Technology Industry

In Paper 2: Beyond the Technology Industry, we argue that we must pay attention to the AI value chain, as well as the positive and negative human rights impacts associated with AI that are directly relevant for companies beyond the technology sector.

Download Paper 2

Implementing Human Rights Due Diligence

In Paper 3: Implementing Human Rights Due Diligence, we explore the tools, methodologies, and guidance needed operationalize business respect for human rights in the context of AI development and use.

Download Paper 3

Blog | Wednesday August 22, 2018

The Business Case for Building Climate Resilience into Your Supply Chain

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With the Global Climate Action Summit coming up next month in San Francisco, Climate Week taking place shortly thereafter in New York, and the UNFCCC climate negotiations happening in Poland in December, climate change is top of mind for many sustainability professionals as we head into the fall.

Here at BSR, we’ve been doing a lot of work on climate resilience, in particular what it means for business and how it relates to global supply chains.

The Intergovernmental Panel on Climate Change (IPCC) defines resilience as “the ability of a system and its component parts to anticipate, absorb, accommodate, or recover from the effects of a hazardous event in a timely and efficient manner, including through ensuring the preservation, restoration, or improvement of its essential basic structures and functions.”

As we assert in our recent report, a resilient business will therefore be able to anticipate, absorb, accommodate, and rapidly recover from climate events in its own operations and throughout its value chain. It will further contribute to resilient societies, which means moderating harm to socio-ecological systems and enabling people, economies, and natural systems to rebound quickly in the face of adversity.

To date, many businesses have focused on mitigation efforts—those focused on reducing greenhouse gas emissions—which are vital to any company’s climate strategy and critical to global efforts to avoid unmanageable climate impacts. These include steps like sourcing renewable energy, investing in more energy-efficient infrastructure, and choosing more sustainable fuels for operations and logistics.

As the impacts of climate change are increasingly felt around the world, however, it has become clear that simultaneous efforts are necessary to increase adaptive capacity and build resilience.

This is true both within companies’ direct operations and in their supply chains. In fact, 76 percent of suppliers reported climate risks with the potential to generate a substantive change in their business to CDP.

76 percent of suppliers reported climate risks with the potential to generate a substantive change in their business to CDP.

During Thailand’s severe flooding in 2011, more than 14,500 companies reliant on Thai suppliers suffered business disruptions worldwide. Total insured losses were estimated between US$15 billion and US$20 billion.

Electronics manufacturers and auto companies were particularly impacted. Western Digital, with one third of the global hard drive market, lost 45 percent of its shipments. HP lost US$2 billion, while NEC cut 10,000 jobs due to a global shortage of hard disk drives. Toyota, Honda, and Nissan lost 240,000, 150,000, and 33,000 cars respectively. Some companies had to postponenew car models.

While building resilience is something that will require many stakeholders across society to work together, many companies are actively considering how our already-changing climate is likely to impact their operations, products, and supply chains both now and in the future. One example of what this can look like is The Coca-Cola Company's recent work with us to build a climate resilience framework for its value chain.

Another example is the over US$100 million Starbucks has invested to help make the coffee communities in its supply chain more climate resilient.

Efforts like these help companies prepare for the effects of global temperature increases while simultaneously enhancing their relationships with their key partners and stakeholders and increasing the overall resilience of their business strategies.

In advance of the Global Climate Action Summit, we are encouraging companies to make large-scale supply chain climate resilience commitments that will enable their suppliers to implement resilience strategies—protecting workers, communities, and the natural environment from climate change impacts. If you’d like to learn more about what these could look like, please contact us to learn more.

We will also be co-hosting an event around the Summit on September 11 about Building Resilience Today for a Sustainable Tomorrow, and we would love to see you there.

Reports | Tuesday August 21, 2018

The Future of Sustainable Business

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For more than 25 years, BSR has been considering the systemic changes that are shaping the world.  This paper offers our thinking on where to go next. It also serves as an invitation to join us as we work to shape a new agenda, new approach, and a new voice for business that will help companies to anticipate the challenges and embrace the opportunities of the future.

Why Read This?

Looking back is important; there is much to learn. But it is even more essential to look ahead: BSR, and the sustainable business movement more broadly, have always been about the future, and we must maintain that focus.

Business as usual won’t get the job done—and sustainability as usual won’t suffice. If we are to avoid catastrophic climate change, build truly fair and inclusive economic growth, and navigate a radically reshaped world, it is time for change. We have within our grasp the ability to reorient business and turn the tide on climate change, deliver economic opportunity for all, and build connected societies in which all people can live in dignity and with respect. This paper offers our thinking on where to go next.

How the World Is Changing Today

Businesses that thrive in the future will be those that figure out how to harness these changes to address real human needs—placing sustainability at the heart of business strategy.

Blog | Monday August 20, 2018

Is This the Beginning of the End for Impunity?

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Wherever you live, and wherever you stand on the political spectrum, you probably believe that a significant share of the political elite in your country is irredeemably corrupt and unethical. And wherever you work, it is also likely that you know some senior leaders who do a poor job of conveying tone at the top and do not model or respect the organization’s stated values. There is plenty of evidence that once people attain power, they are more likely to engage in unethical behavior. The effects of power can even be compared to a form of brain damage: Power makes people less risk-averse, more impulsive, and less skilled at reading people and situations.

Nonetheless, impunity seems to be a fact of life. The human need for cognitive consistency goes a long way toward explaining why toxic organizational cultures and abuses of power can persist. A psychological mechanism known as the “just world” phenomenon inclines us to ascribe virtue to the powerful while assigning negative traits to the poor and powerless. 

Impunity is a daily issue in the lives of many who work in governance, risk, and compliance. Investigating your boss is usually a career-limiting move, but it is difficult, if not impossible, to sustain an ethical culture without the remit or tools to hold senior members of the organization accountable. This contradiction has been driving efforts to amplify the independence, seniority, and remit of chief compliance officers.

But today, something interesting is happening. The structures supporting impunity seem to be growing less reliable.

The structures supporting impunity seem to be growing less reliable.

In politics, corruption has become an issue of far greater concern to voters than it was 20 years ago. A recent report in Foreign Policy found that more than 10 percent of the world’s nations have undergone leadership change in the past five years as a direct result of corruption investigations. In 21 countries, leaders have either resigned or been removed from office before their terms were scheduled to conclude. In many additional countries, incumbents are facing electoral defeat amid the perception that they are corrupt. 

To be sure, this hopeful scenario is not playing everywhere.  Allegations of corruption, whether true or false, are frequently used by political candidates to gain advantage. But the increasing use of this technique in itself demonstrates that concern about the integrity of political officials may be at an all-time high.

The business world, too, shows signs that impunity is no longer predictable. The removal of chief executive officers for ethical lapses remains infrequent, but such instances increased by 36 percent from 2007-11 to 2012-16. This trend is most pronounced among North American and European companies with high market capitalization. Researchers believe this suggests an overall improvement in governance and accountability to the public. 

Company boards have also become more willing to state publicly that a CEO was fired for misconduct, rather than enabling him or her to slip into early retirement. The #MeToo movement has occasioned significant turnover at a growing number of media organizations and consumer-facing companies, and it seems to have positively influenced corporate culture in some cases. A growing number of companies has even made a point of proactively disclosing challenges, rather than responding only to media investigations or internal whistleblowers. Voluntary disclosure facilitates the rebuilding of reputation and trust.

The longer-term consequences of these trends are, as ever, uncertain. The ability to replace disreputable leaders does not necessarily mark a sustained power shift in organizations. Still, today’s corporate leaders are on notice that immunity from consequences is no longer the status quo.

All of this reflects deeper, more profound societal shifts. The most important is hyper-transparency, which makes it exponentially harder for companies to keep their inner workings confidential. Leaked revelations about offshore tax avoidance, soft lobbying, and other standard corporate practices have helped spur concern and distaste over self-serving corporate agendas. Data leaks and hacks have also been embraced by unhappy employees as powerful whistleblowing tools that can help them subvert or sidestep non-disclosure agreements. 

Employees in some companies, particularly in the tech industry, feel empowered to demand that the C-suite focus on better alignment between corporate principles and personal values, and companies are listening intently. Indeed, the new trend in corporate activism on social issues is, in large part, being driven by the voices and will of employees—to a surprisingly greater extent than by those of customers or investors.

As societies across the world call for leaders who can demonstrate that integrity is as important to them as personal advantage, the pendulum seems to be swinging away from venerating wealth and power for its own sake and toward valuing integrity and social conscience. This is great news for honest leaders—and for everyone who seeks to drive sustainable, ethical behavior in a public or private organization.

Reports | Thursday August 16, 2018

Clean Cargo Emissions Factors 2018 Report

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BSR’s Clean Cargo Working Group^TM (Clean Cargo) is the leading buyer-supplier forum for sustainability in the cargo shipping industry. Annually, Clean Cargo discloses trade lane carbon dioxide emissions factors for ocean container transport, this year collected from 22 ocean container carriers on more than 3,200 ships that collectively represent approximately 85 percent of ocean container capacity worldwide. Our annual reporting indicates that average CO2 emissions per container per kilometer for global ocean transportation routes fell 1 percent from 2016 to 2017. Since Clean Cargo began publicly reporting data from the industry in 2009, emissions per container per kilometer have dropped 37.1 percent on average.

Several years ago, Clean Cargo published its peer-reviewed, standardized methodology and reporting system that has been adopted globally by the industry, with carriers submitting operational data from the entire fleet to BSR on an annual basis. The results produce environmental performance scorecards for each carrier, which are used to meet corporate supply chain sustainability goals by 95 percent of shipping customers who participate in the group.

Today, Clean Cargo tools represent the industry standard for measuring and reporting ocean carriers’ environmental performance globally. Clean Cargo’s 50 members benefit from these tools while sharing knowledge and best practices for cutting emissions, and they publicly demonstrate their commitment to global efforts to reduce emissions.

Blog | Wednesday August 1, 2018

Steps to Create Your Company’s Renewable Energy Strategy

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At the Global Climate Action Summit this fall, stakeholders from around the globe will meet in San Francisco to discuss how we can take climate ambition to the next level. Business can play a significant leadership role in accelerating the transition to a lower-carbon economy, and as we have seen through initiatives like the Renewable Energy Buyers Alliance (REBA), renewable energy can be a key component of climate action efforts.

Corporate renewable energy procurement should be guided by a defined strategy based on available options, key priorities, and ambition. To create your strategy, you must identify your company’s motivations for procuring renewable energy, adopt supporting goals and commitments, and identify available internal human and financial resources to aid execution.

These are the steps we would suggest to help you get started.

1. Assess Your Options

The first step is to assess the landscape of renewable energy sourcing options available on the market to determine what is feasible. This will ultimately determine the renewable energy options available to you.  

Current and future policies will impact renewable energy costs, incentives, and availability. The Climate Policy Tracker can be a useful tool in assessing how regulations will impact your renewable energy choices in various jurisdictions.

After narrowing procurement options based on geography, your company must consider specific site constraints. Here are some questions to consider:

• Is your real estate portfolio suitable for onsite renewable energy generation? Leased assets often pose a challenge for onsite generation, requiring companies to liaise with their landlords; however, renewable energy availability also poses a challenge. For example, a company that leases retail space in an urban locality with poor solar energy potential may not have the option of leveraging onsite renewable energy, despite a supportive landlord.
• If your real estate portfolio is suitable for onsite generation, what is the energy capacity of potential projects/installations? Companies with owned or leased assets that support onsite renewable energy generation should consider the energy capacity of any potential projects/installations and use this to calibrate their local procurement implementation. Asset type and energy capacity should be significant considerations when negotiating contract terms with potential project developers.
• What is your time horizon? Long-term contracts should not be considered for sites that are likely to be eliminated from the real estate portfolio before the termination of the power generation contract.

2. Create Your Strategy

Once you’ve determined what your renewable energy options are, the next step is to determine your ambition level and define your strategy for renewable energy. To ensure adoption and integration within your company, this should complement both your business and sustainability strategies. A company with existing energy intensity, greenhouse gas reduction, and business growth goals should design a renewable energy strategy that complements existing objectives and initiatives to facilitate execution. Available financial resources should factor prominently into this and will ultimately dictate the realistic level of ambition your company can set.

Your strategy should reflect your company’s motivation for renewable energy procurement. For example, a company seeking to grow the renewable energy market and illustrate private-sector demand for clean power may prioritize options like new onsite or regional solar installations and choose to only purchase renewable energy attributes (e.g. RECs) that are bundled with renewable power. One example of this is Intuit’s Purely Green Program, which the company launched in part to show market demand for wind energy in Texas for its business partners, employees, and customers. Adobe’s renewable energy strategy prioritizes onsite installations and PPAs, supported by energy efficiency and policy advocacy, to meet its 100 percent renewable energy goal. Anheuser-Busch InBev’s strategy aims to source roughly 75 percent of its electricity from direct PPAs and roughly 25 percent from onsite installations.

3. Identify Opportunities to Collaborate

While renewable energy procurement variables can be complex to navigate, you do not need to work in isolation. Collaborating with other companies can help you achieve your strategic renewable energy objectives and minimize the barriers to entry for procurement.

For example, you could consider partnering with a group of companies with regional operations who are willing to enter into a shared procurement contract. This approach, known as consortium aggregation, is both feasible for companies with energy demands that are typically individually too small for project developers and companies with significant energy demands that can appropriately distribute the project load. For example, AkzoNobel, DSM, Google, and Philips leveraged this approach in the Netherlands—each company assumed an equal stake in a wind PPA there. The shared contract can also be anchored by a company that assumes the majority share of the energy, leaving smaller companies to assume small shares of the overall project load.

Initiatives like the Future of Internet Power and REBA can also provide the resources and tools for companies to execute against their renewable energy strategies together. Contact us if you’re interested in learning more about how you can help increase your climate ambition with renewable energy in advance of the Global Climate Action Summit.

Blog | Wednesday July 25, 2018

How Do We Solve the Plastic Waste Puzzle?

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In May 2018, public and private sector representatives with a stake in plastic gathered in Hong Kong to discuss collaborative solutions to reduce plastic waste in Asia Pacific, including plastic design, technology, financing, infrastructure, and consumer behavior. The dialogue—hosted by The Coca-Cola Company and Swire Beverages and moderated by BSR—resulted in six recommendations for business action to address one of the most salient challenges facing the world today: plastic waste.

Over the last few decades, plastic has made life easier for many of us. It is durable and relatively inexpensive, and in many cases, plastic devices like IV bags and syringes have saved lives. However, the plastic production rate has skyrocketed—half of the plastic ever made has been produced in the past 15 years, and globally, only 9 percent of all plastic has been recycled. Approximately 150 million tons of plastic is currently floating in our oceans, and it is accumulating at a staggering rate—9 million tons per year.

Thus far, efforts to reduce waste have been flawed or insufficient. There are several obstacles to recycling plastics, including inadequate sorting processes, lack of recycling infrastructure, and limited financing. Given these challenges, as well as the range of actors involved—from manufacturers and food and beverage companies to waste collectors, consumers, and investors—the waste problem looks like a jigsaw puzzle. However, through combined efforts by all the stakeholders involved, it is one we can—and must—solve.

Focusing on the marine litter problem is treating the symptom of plastic waste, not the cause. For the time being, one of the most important steps to addressing plastic waste is to prevent plastic from becoming waste in the first place by ensuring it is recycled. To increase recycling rates, a key mindset shift is required: understanding that plastic is a commodity.

Commodities exist within markets, and right now the plastics recycling market is functioning well below its potential. This is especially the case in the Asia-Pacific region. Lacking supranational waste management regulation like the EU, APAC countries produce more than 60 percent of all the plastic that enters the oceans. In addition to the lack of regulation, many markets have insufficient recycling capacities, a weak supply of recyclable plastics due to inconsistent or suboptimal design of plastic products, poor recycling practices, and low demand for recyclable plastics resulting from the high cost of recycling versus the often lower cost of virgin (unused) plastic.

For many stakeholders, recycling plastic just isn’t worth it. It’s time we change that mindset and improve the system.

While business is just one piece of a puzzle that involves civil society, academia, and government regulation, businesses both small and large have an immediate opportunity to drive action. There are six feasible and realistic actions that businesses across the plastics value chain, and particularly in Asia Pacific, can take to help prevent plastic from becoming waste:

1. Generate baseline data on plastic use and recycling and recovery rates.
2. Innovate with alternative or zero packaging, new types of distribution, and consumer incentive schemes.
3. Consider setting voluntary standards on plastic design, which can increase the supply and commodity value of recyclable plastic material.
4. Establish cross-/inter-industry and public-private partnerships.
5. Inspire governments, investors, and SMEs to invest in waste reduction solutions through commitments on plastic use.
6. Create corporate green loans, bonds, and other financing mechanisms to stimulate the recycling industry.

What can this look like in practice? The Hongkong and Shanghai Hotels, the owner and operator of The Peninsula Hotels, announced a ban on plastic straws in its operations around the world by November 1, 2018. It’s the organization’s first step toward a broader commitment to transition away from single-use plastics by 2020. Additionally, a number of companies, including The Coca-Cola Company, The Dow Chemical Company, and PepsiCo have backed a US$150 million fund for solutions to the global ocean plastics problem, with a focus on recycling infrastructure investment in Southeast Asia, as part of a wider initiative called Circulate Capital.

While plastic waste should be considered a commodity market challenge, this does not mean that non-business actors don’t also have a role to play.

• Governments can set regulations on plastic composition and design to improve recyclability and support the plastics recycling industry through subsidies, tax cuts, and the provision of long-term, low-cost land for infrastructure.
• Civil society can support public awareness campaigns to educate consumers on the importance of plastic recycling; it also has an important role to play in advocating for regulatory change.
• Academia can produce localized research to inform national plastic policies and support government decision-making.
• Multilateral development banks and agencies can earmark funding for waste management infrastructure, as they have done for renewable energy in the past, particularly in low- and middle-income countries.

Keeping plastic out of landfill, the oceans, and the riverways is undoubtedly a complex task, with many entrance points, perspectives, and approaches. But now, with the global, political momentum on plastic waste, is the time for all actors to take action.

Read our full report on this issue, What Can Business Do to Prevent Plastic from Becoming Waste in Asia Pacific?, and get in touch with us if you’d like to learn more.

Reports | Wednesday July 25, 2018

What Can Business Do to Prevent Plastic from Becoming Waste in Asia Pacific?

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Unfortunately, efforts to date to reduce plastic waste have been flawed or insufficient, and, as a result, there are approximately 150 million tons of plastic floating in our oceans today. This report aims to provide all actors with a stake in plastic with a primer on plastic waste and recycling in Asia Pacific and a set of realistic and feasible recommendations for businesses on what they can do to prevent plastic from becoming waste. It was developed in consultation with representatives from the private and public sectors, civil society, and academia.

Keeping plastic out of landfills, the oceans, and the riverways is undoubtedly a complex task with many entrance points, perspectives, and approaches. With global momentum on eliminating plastic waste, now is the time for stakeholders to act.

Blog | Monday July 23, 2018

How to Implement the TCFD Recommendations to Enhance Your Company’s Resilience

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Climate change is one of the defining challenges of our era. The complex impacts it unleashes will produce significant new risks and opportunities for business. The Task Force on Climate-Related Financial Disclosures (TCFD) has called on all public companies to report on climate risks and how they address them in mainstream financial filings.

Since climate risk is systemic and applies across all sectors, the TCFD recommends that companies with annual revenues over US$1 billion report climate risks in non-financial reports in preparation for the day when these systemic risks become material. Engaging with the TCFD recommendations today serves two purposes: (1) reporting to external stakeholders and (2) creating resilient business strategies through scenario analysis.

On the first front, the TCFD recommendations bring a great benefit to sustainability practitioners by potentially unifying the fragmented landscape of climate reporting, with alignment with CDP, GRI, and SASB underway. Over 290 companies and organizations now publicly support the recommendations; 18 companies have expressly committed to implement them as fully as practicable over the next three years.

But it is the second purpose—the development of resilient business strategy through scenario analysis—that gives the most added value for companies engaging with the TCFD.

"The TCFD recommendations do an excellent job of helping an organization evaluate and communicate the risks associated with a changing climate,” said Bruno Sarda, VP of Sustainability at NRG Energy. “Beyond risk mitigation, the use of scenario analysis can help an organization identify opportunities to bolster its strategic resilience and relevance, ensuring that it can thrive not only today, but well into the future.”  

Scenario analysis has been used for decades by business and government to improve decision-making under conditions of uncertainty. Rather than basing decisions on single-point forecasts, under scenario planning, companies consider a set of plausible alternative futures to shape more adaptive and resilient strategies.

While we can increasingly predict the aggregate physical impacts of climate change, the secondary and tertiary impacts are inherently challenging to model. For example, it is highly plausible that drought and extreme weather events will cause large-scale human migration with destabilizing sociopolitical impacts—but this is not something that can be predicted with accuracy. Given how consequential these cascading impacts will be, business should use scenario analysis to start considering them now.

Here are our suggestions for how companies can implement the TCFD recommendations to both engage with stakeholders and improve their strategies.

1. Approach scenario analysis primarily as an opportunity to improve strategic resilience

The primary objectives of climate scenario analysis should be to grapple with the uncertainty of climate impacts, challenge a company’s own potential blind spots about the future, and modify business strategies to make them more robust and resilient. We believe firms should disclose the scenarios they are using, key assumptions contained in those scenarios, and information about plausible risks and opportunities for the business. At the same time, disclosure should not prevent an honest and challenging internal appraisal of business strategy.

As the EBRD and the Global Centre of Excellence on Climate Adaptation state, “the ultimate objective in disclosing the use of scenarios is to build investor confidence that a company is meaningfully engaged on the topic of climate change, that it is looking at a broad range of outcomes and is responsive and proactive, rather than defensive and reactive.”

2. Consider a broad range of climate risks and opportunities

We urge companies to take an expansive view of the potential risks and opportunities they may face. While much of the initial conversation around the TCFD recommendations has emphasized transition risk faced by companies in high-emitting sectors should emissions be reduced along a 2°C scenario, equal consideration must be given to the physical risks of climate change, which will be highly disruptive even if warming is held to this level.

Many of the most profound challenges associated with climate change lie in the cascading social, economic, and political changes that will result from physical impacts and are inherently hard to model or quantify. For example, climate-driven human migration, political conflict, economic dislocation, and changing disease patterns will have major implications for society and business. Scenario analysis offers an important opportunity to think about those risks and opportunities that are not easily built into current models.

3. Use scenarios tailored to the business and leverage data from diverse sources

Finally, although comparability in financial disclosures is important, scenario analysis is most effective when tailored to the specific circumstances of an individual company. An energy company may be most concerned about the uncertainty of inbound climate regulation, whereas a consumer products company may be most focused on the uncertainty of physical climate impacts on its agricultural inputs.

Each source of information, including the IEA’s New Policies Scenario and Sustainable Development Scenario, has its unique strengths and limitations. Were all companies to use the same scenarios, based on the same assumptions, they could inadvertently create the kind of economywide risk the TCFD recommendations seek to prevent. Using a diverse set of scenarios reduces the possibility that everyone will be wrong in the same way.  

While we agree companies should include at least one scenario that correlates with a 2°C world and another with a higher-temperature world, they should choose scenarios that play out the critical uncertainties that are most relevant to their businesses. It is important that these be plausible and challenging in grappling with the uncertainty of systemic climate risk and do not provide a false sense of security by ignoring the potential for disruption.

The ultimate purpose of the TCFD recommendations is to better prepare the private sector to understand and prepare for the uncertain impacts of climate change. Businesses should approach implementation not merely as a disclosure exercise, but as an important opportunity to enhance their strategic resilience.

If you’d like to discuss this in greater detail, please join us on July 26 at the Japan Conference on the TCFD Recommendations.