The title may sound like an attempt at buzzword bingo, but actually covers a key topic: How can you optimise your business strategy in the face of massive uncertainty as the world grapples with climate change and geopolitical uncertainty? We argue that rigorous Scenario Based Financial Planning goes a long way to make a firm resilient.
If there is one thing every business knows, the world does not stay still. Firms can either understand these changes and anticipate the potential changes and grasp the opportunities and mitigate the threats from these potential changes or they can ignore them and be at their mercy.
This forms the basis of strategic planning. Most firms assess in detail their market share and competitor analysis and their medium term economic and cost environment. However, firms are only beginning to consider the scale of coordinated global action needed to avoid the worst impacts of climate change when thinking about their business strategies. Following the CBES stress test carried out for UK banks, The Bank of England concluded that climate risk is “a first-order strategic issue”* and noted that climate impacts led to a persistent drag on annual profits of around 10-15%. So this is now understood to be a strategic imperative to any firm that wants to think ahead, but how many firms could really answer the following questions:
Firms are only beginning to look at the wide-ranging impacts of climate change on their business and to take into account their own impact and the importance of reputation with stakeholders. Some climate and ESG related targets may be introduced, but this does not really help optimise a firm’s strategy for the climate uncertainties that lie ahead.
Similarly, changing expectations of investors and customers and the regulatory environment will develop over time.
No-one knows the answers to these questions. But they are no less important as a result of this.
So how can management make sense of all of this? The answer partly lies in climate models, which many firms are beginning to use. Also, climate scenarios which are beginning to be used in the context of climate stress tests can give an indication of potential physical and transitional impacts of climate change.
However, they are yet to be brought centre stage within strategic planning and it is key to understand the range of uncertainty embedded within them. As economists know, predictions are difficult, particularly about the future, but with the right tools you can still ensure your firm is resilient to a range of outcomes.
Basinghall Analytics scenario-based financial planning solution is designed to answer some of the above questions and support firms in becoming more resilient to adverse impacts of climate change. In particular, the solution’s capability includes:
One of the key themes for feedback from the Bank of England climate stress test was the need for some firms “to consider more deeply how they would respond strategically to different scenarios, including thinking through the implications of different paths for climate policy.”*
The combination of high-quality climate models and leading-edge scenarios analysis provided by our solution gives a powerful means of supporting you in your journey to strategic resilience.
* Climate capital − speech by Sam Woods, Bank of England on 24 May 2022