The climate crisis is fundamentally changing business priorities, as rising temperatures and disruptive weather events generate a variety of physical, economic and social shocks that directly impact most economic sectors worldwide. This is especially true for the fertilizer industry, whose core clients — farmers — are highly vulnerable to extreme weather, which is expected to decrease crop yields.
While most businesses are aware of the imminent impacts of a changing climate, they have nonetheless been slow to adapt their risk management strategies appropriately. Identifying climate risks and implementing mitigative measures is a difficult but necessary task. A leading fertilizer producer we work with, however, has not only set ambitious sustainability targets but is taking steps to achieve them. They are aiming for a 50% reduction in Scope 2 emissions by 2025, obtaining 100% of their water from non-conventional sources, using 100% clean energy by 2030 as well as achieving carbon neutrality by 2040.
Reaching these targets will require rigorous analysis of their carbon footprint, informed roadmap building, stakeholder engagement and effective governance. The group decided the next step to build on their existing decarbonization efforts was to undertake a Task Force on Climate-Related Financial Disclosures (TCFD) scenario analysis to understand and disclose the potential financial implications associated with decarbonizing their operations.
The Financial Stability Board (FSB) created the Task Force on Climate-Related Financial Disclosures (TCFD) to develop recommendations on the types of information that companies should disclose to support investors, lenders and insurance underwriters in appropriately assessing and pricing the risks related to climate change. The goal is for it to become a natural part of companies’ risk management and strategic planning processes.
So, while it began as a voluntary reporting disclosure, it is becoming mandated for regulation. In the US, the Securities and Exchange Commission (SEC) proposed a new rule requiring public companies to disclose carbon emissions and climate risk, mentioning TCFD as a preferred framework for assessing risk identifying and measuring the financial impact of climate-related risks and opportunities. The risks are grouped into physical (acute and chronic) and transitional (market-related, such as regulation). The opportunities are sometimes overlooked, but there are real gains to be had from anticipating the market shift and developing new green products, offering green premiums, etc.
Climate risks are often difficult to understand. Their complexity, resulting from multiple interconnected factors, makes it hard to translate them into direct and indirect financial impacts. Consequently, integrating climate resilience measures into governance and investment strategies is challenging. The unpredictability of climate risks makes it hard to build a business case for investing in resilience planning sooner rather than later, yet the cost of doing nothing, as well as the missed opportunities, could be huge.
To obtain better information about their exposure and estimate the impact of climate change on their business, a leading fertilizer group contacted ENGIE Impact to assist with a scenario analysis exercise aligned with TCFD. Beyond their interest in quantifying their risk, this producer was also motivated by their goal of becoming a sustainability leader in the field, taking seriously their responsibility to ensure a sustainable and steady supply of crops to feed future generations.
While TCFD has four pillars (Governance, Strategy, Risk Management, Metrics and Targets), we began by undertaking the ‘strategy’ phase. This recommends disclosing the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning. In this initial phase we worked on the recommendations to evaluate risk and opportunities and to undertake scenario analysis in a five-step process:
As a next step, the group will define adaptation measures from these financial impacts and will incorporate adaptation measures into their corporate strategy.
The fertilizer group has quantified the potential financial impacts of climate change in this TCFD scenario analysis exercise. It is noteworthy that almost every hypothesis depicts a scenario that highlights the importance of them executing their decarbonization plans, as these plans are expected to reduce its risk exposure and take advantage of opportunities.
The modeled hypotheses led to the projection of three risks and one opportunity. The highest priority risks include:
The highest opportunity identified considers expanding the group's green products (including TSP and green N-based fertilizer). To capture this opportunity, they must proactively source green inputs (i.e., green ammonia) and structurally decarbonize its operations. Significantly, across the scenarios, the financial impact of the opportunity posed by the energy transition has a higher financial impact than each of the risks.
Physical impacts of climate change are expected to decrease crop yield significantly by 2050.
The group is exposed to carbon pricing and litigation impacting its upstream and downstream stakeholders; biggest risk is related to downstream N2O emissions.
Achieving carbon reduction targets leads to a threefold decrease in climate risk from the group's operating emissions, compared to a business-as-usual scenario in which they do not act to reduce emissions.
The financial opportunity from expanding green products is positive in all scenarios and is mainly driven by increasing the share of TSP in the product mix.
As a next step, the group will examine the remaining TCFD pillars (governance, risk management), and incorporate the scenario analysis into their corporate strategy. The recommended disclosures about these scenarios will not only reassure potential investors, who are increasingly demanding transparency about exposure to climate risk, but also contribute to the most efficient allocation of capital considering climate change impacts.
By sizing their climate risk using a TCFD framework, this fertilizer producer is better prepared to maintain its industry-leading position in the future. In March 2022 the SEC proposed a new rule requiring public companies to regularly disclose certain climate-related information. If this rule passes, those companies already gathering that information will have a distinct advantage.
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