Climate Related Scenario Analysis

Strategies for Sustainable Business (S-Lab)

2

Purpose The intent of this presentation is to give an overview

of Scenario Analysis as com

pleted by the MIT Sustainability Lab Team

from Spring 2018.

Agenda •

Understanding Scenario Analysis •

Categories of Climate-Related Risks &

Opportunities •

Types of Risks Climate Change Poses to Businesses

•Case Study: Unilever

•Prelim

inary Interview Insights from

Colgate Interviews

•Scenario Analysis Process

Scope and Stakeholders

Past Industry Trends

Future Trends: 2°C

Scenario •

Recomm

endations For additional details and expansion on this deck please refer to the report provided by the S-Lab team

3 Muhamm

ad Ali A

rman

Sloan Fellow

2018 S

tacey Cox

EM

BA 2019

Stephen S

tabile E

MB

A 2019 S

urya Kant Tiw

ari M

BA 2019

S-Lab Team

4

Understanding Scenario A

nalysis

CO

NTIN

GEN

CY

PLANN

ING

SEN

SITIVITY AN

ALYSIS U

NC

ERTAIN

ITY M

OD

ELING

SC

ENAR

IO AN

ALYSIS

Brief

Description

Alternative actions in

response to an exception in the base case projection.

Analysis of sensitivity of

variance in input variable to strategy outcom

e.

A statistical fram

ework to

measure how

likely uncertainty about a variable or set of variables is to influence outcom

es

Exploration of alternative futures

that are comprised of m

any uncertainties considered sim

ultaneously resulting in a baseline strategy that is successful under m

any scenarios.

Typical Usage

Assessm

ent of impact

of sudden market

changes or disruptions

To test profitability of an investm

ent if one variable w

ere to change. w

hether a capital

Decision under uncertainty

modeling is an effective

tool in geological assessm

ent

Formulate business strategy to

deal with various clim

ate-related scenarios

Source: "a framew

ork for 2 degrees scenario analysis - Ceres." https://ww

w.ceres.org/sites/default/files/reports/2017-

03/Framew

ork_Jan%2010%

2017.pdf. Accessed 13 May. 2018.

Source: "Dark Clouds or Silver Linings? Knightian Uncertainty ... - SSRN papers." 21 Jul. 2011, https://papers.ssrn.com

/sol3/papers.cfm?abstract_id=1891835. Accessed 14 M

ay. 2018.

5

Types of Risks C

limate C

hange Poses to Businesses

Transition Physical

Scenarios that articulate different pathw

ays in the energy and econom

y system that w

ould result in a certain level or trajectory of G

HG

emissions and

resulting GH

G concentrations in the atm

osphere

Scenarios that articulate different pathw

ays that account for physical changes arising from

different levels of G

HG

concentrations

Publicly-Available S

cenarios

3.6°C: IEA N

ew P

olicies Scenarios

2°C: IEA 2D

S/450 S

cenarios, DD

PP, IR

EN

A,

Greenpeace

1.5°C: Forthcom

ing IEA 1.5D

S scenario

6°C: IPC

C R

CP 8.5

4°C: IPC

C R

CP 6.0

2.6°C: IPC

C R

CP 4.5

2°C: IPC

C R

CP 2.6

There are many publicly-available scenarios that can be used by organizations as a platform

on which to base their ow

n evaluations of the im

pacts posed by climate change. These can be broadly assigned into tw

o categories

Source: "CD

P Technical N

ote on Scenario Analysis - Rackcdn.com

." https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com

/cms/guidance _docs/pdfs/000/001/430/original/C

DP

-technical-note-scenario-analysis.pdf?1512736385. Accessed 14 M

ay. 2018.

6

Categories of C

limate-R

elated Risks &

Opportunities

MAR

KETS AND TEC

HNO

LOG

Y SHIFTS

Policies and investm

ents to deliver a low carbon em

issions economy

-R

educed market dem

and for higher carbon products -

Increased demand for energy-efficient, low

er-carbon products -

New

technologies disrupt markets

REPU

TATION

Grow

ing expectations for responsible conduct from stakeholders,

including investors, lenders, and consumers

-O

pportunity to enhance reputation and brand value -

Loss of trust and confidence in managem

ent

POLIC

Y AND LEGAL

An evolving patchw

ork or requirements at international, national, and

state level -

Increased input/operating costs for high carbon activities -

Threats to securing license to operate for high carbon activities -

Emerging concern about liabilities

PHYSIC

AL RISK

S

Chronic changes and m

ore frequent and severe extremes of clim

ate -

Increased business interruption and damage across operations

and supply chains with consequences for input costs, revenues,

asset values, and insurance claims

Source: C

DP

, “Clim

ate Change Q

uestionnaire” 2016; Recom

mendations of the Task Force on C

limate-related Financial

Disclosures, D

ecember 2016

The business impacts related to clim

ate change may vary significantly depending

on the industry and economic sector(s)/sub-sector(s) in w

hich an organization operates. Below

are typical categories of climate-related risks and opportunities:

Source "Annual Report and Accounts 2017 (PD

F | 3MB) - U

nilever." 1 Jan. 2018, https://ww

w.unilever.com

/Images/

unilever-annual-report-and-accounts-2017_tcm244-516456_en.pdf. Accessed 14 M

ay. 2018.

Case Study: U

nilever U

nilever has integrated climate-related disclosures throughout the strategic report narrative

and included risks and opportunities arising from clim

ate change. The company has

performed a high-level assessm

ent of the impact of 2°C

and 4°C global w

arming scenarios

on its business.

The analysis shows that, w

ithout action, both scenarios present financial risks to Unilever by

2030, predominantly due to increased costs.

SCEN

ARIO

S ASSU

MPTIO

NS

ANALYZED

IMPAC

TS

2°C scenario

•Assum

ed that in the period to 2030 society acts rapidly to lim

it greenhouse gas emissions and puts in place

measures to restrain deforestation and discourage

emissions (for exam

ple implem

enting carbon pricing at $75- $100 per tonne, taken from

the International Energy Agency’s 450 scenario)

•Assum

ed that there will be no significant im

pact to their business from

the physical ramifications of clim

ate change by 2030 – ie. from

greater scarcity of water or

increased impact of severe w

eather events •

The scenario assesses the impact on U

nilever’s business from

regulatory changes

•C

arbon pricing is introduced in key countries and hence there are increases in both m

anufacturing costs and the costs of raw

materials such as dairy ingredients and the m

etals used in packaging

•Zero net deforestation requirem

ents are introduced and a shift to sustainable agriculture puts pressure on agricultural production, raising the price of certain raw

materials

4°C scenario

•Assum

ed climate policy is less am

bitious and emissions

remain high so the physical m

anifestations of climate

change are increasingly apparent by 2030 •

Did not include im

pacts from regulatory restrictions but

focused on those resulting from the physical im

pacts.

•C

hronic and acute water stress reduces agricultural productivity

in some regions, raising prices of raw

materials

•Increased frequency of extrem

e weather (storm

s and floods) causes increased incidence of disruption to U

nilever’s m

anufacturing and distribution networks

•Tem

perature increase and extreme w

eather events reduce econom

ic activity, GD

P growth and hence sales levels fall

7

8

Preliminary Interview

Insights

From our conversations w

ith executives at Colgate-Palmolive, it is clear clim

ate change is an em

erging risk and steps are required to actively consider and monitor its potential

impact

Energy infrastructure reliability: Extreme w

eather (including heat waves) w

ill likely im

pact energy infrastructure, including generators and transmission and

distribution lines. This will affect energy reliability

Energy cost: The cost of refrigeration, heating, ventilation and air conditioning is expected to increase each year due to an increased num

ber of unseasonably hot days. Transportation cost: M

ore sever and frequent extreme w

eather events might

cause disruption on the logistic and distribution lines, due to damage on roads and

buildings, potentially increasing the amount of tim

e that is needed to reach products to the end-users.

9

Preliminary Interview

Insights Infrastructure dam

age: Extreme w

eather events could damage our physical

assets such as warehouses, as w

ell as transport infrastructure Com

modity prices: Com

modity prices w

hich are required ingredients for Colgate-Palm

olive products may rise

Regulatory risk: Significant shift in governments’ attitudes to em

issions regulation, setting am

bitious targets and encouraging more global consistency in approach – trend is

expected to continue which could have im

pact to Colgate-Palmolive’s business

Reputational risk: In the context of more frequent severe w

eather events and shifting global attitudes, custom

ers may have changing expectations of com

panies, including their operational efficiency, environm

ental transparency in their supply chain and product range Com

petitive risks: Emerging business m

odels that take advantage of climate

change opportunities or are more resilient to clim

ate change risks may becom

e a threat

10

Scenario Analysis Process

Define scope and Stakeholders

Identify trends and uncertainties

Construct themes

and initial scenarios

Identify research needs and develop

quantitative m

odels

Evolve towards

decision scenarios

11

Scope and Stakeholders Tim

e Horizon: 10-12 years Geography: Global

Stakeholders C

onsumers

Buying behavior, sustainability aw

areness

Shareholders

Investment choices, sustainability aw

areness

Em

ployees S

ustainability awareness, future talent pool

Custom

ers S

ustainability initiatives, qualification requirements

Environm

ent G

HG

emissions, m

aterials, water, energy

Suppliers

Responsible suppliers

Governm

ent R

egulations, taxes

NG

Os

Sustainability reporting, rankings

Colgate-Palm

olive’s strategy time horizon

is 10-12 years. For sake of compatibility,

time horizon for scenario analysis w

as chosen to be the sam

e. Interviews w

ith C

olgate-Palm

olive employees revealed

that stakeholders of diverse nature are im

portant to Colgate-P

almolive.

Awareness of this list helped custom

ize trends and uncertainties at later stages.

12

Past Industry Trends

In this stage some key trends that have

impacted C

olgate Palmolive’s business in

past were looked at. D

ependencies on business environm

ent and climate change

were looked at in tandem

(in the long-term

view, both types of dependencies are interlinked). K

nowledge of these trends

was necessary to extrapolate know

n trends to the selected tim

e horizon.

PT1

Innovation in the industry has consistently increased SK

Us.

PT2

Em

erging markets have provided grow

th opportunities.

PT3

Globalization has expanded sourcing and m

anufacturing opportunities

PT4

eCom

merce com

panies have gained significant market penetration.

PT5

Sustainability regulations have been becom

e more stringent.

PT6

There is an increase in “sustainability pressure” from consum

ers and investors

PT7

Data analytics is enabling higher efficiency

PT9

Responsible sourcing concerns have changed the old m

odel of long-term

sourcing contracts resulting in price volatility.

PT10

Stronger hurricanes in the gulf have prom

pted many suppliers from

Mexico to

claim Force M

ajeure.

PT11

El N

ino and La Nina im

pact supply of palm oil.

13

Future Trends: 2°C Scenario

U1

Will em

erging markets im

pose carbon taxes?

U2

How

quickly will the cost of green technologies be reduced?

U3

How

will increased biofuel production im

pact tallow prices?

U4

Will the cost of responsible sourcing increase or decrease?

U5

How

deforestation and sustainable production requirements im

pact raw

materials prices?

U6

How

much cost w

ill CP be able to reduce due to conservation and

recycling efforts?

These scenarios should be used to check the validity of these assum

ptions in relation to other uncertainties in the scenario. S

uch analysis will help

formulate one scenario that m

akes realistic assum

ptions on each uncertainty that are valid for the w

hole scenario.

Recom

mendations

14

Scenario A

nalysis carries value beyond maintaining sustainability ratings.

Scenario A

nalysis forces corporations to take a long-term view

of the business and hence brings long-term

business continuity into limelight that m

ay be endangered by the pervasive short-term

ism.