Australian companies need to start developing sophisticated scenario-based analyses of climate risks, and incorporating them into their business outlooks so shareholders know how climate change will affect profitability, a thinktank has said.

However, the Centre for Policy Development (CPD) said companies needed to do so in a standardised way, so investors and regulators were able to easily understand economy-wide risks to whole industries.

The progressive thinktank urged Australia’s biggest businesses to use the Paris climate agreement as the centrepiece for their scenario planning, saying it provided a credible, long-term anchor for policies that limit global warming to well below 2C.

The group has released a discussion paper, called “Climate horizons: next steps for scenario analysis in Australia”, explaining the best way to do so.

Australia’s financial regulator warned in February that climate change posed a material risk to the entire financial system and urged companies to start adapting. Geoff Summerhayes, from the Australian Prudential Regulation Authority (Apra), told the Insurance Council of Australia’s annual forum in Sydney in February that Apra wanted companies to start incorporating “scenario-based analysis” of climate risks into their business outlooks.

He said Apra intended to start running stress tests of the financial system to see if it would survive various climate shocks, and all Apra-regulated entities would need to adapt to the coming regulatory changes. “I think the days of viewing climate change within a purely ethical, environmental or long-term frame have passed,” Summerhayes said.

The CPD’s new discussion paper suggested how Australian businesses could be consistent with the country’s international climate commitments under the Paris agreement and with the leading international framework for robust climate disclosures, the Financial Stability Board’s taskforce on climate-related financial disclosures (TCFD).

It said businesses ought to try to develop a standardised approach to scenario-based analysis, and that all scenario analyses should include:

A scenario that is genuinely consistent with Paris targets. It should therefore incorporate a high probability of limiting warming to below 2C, and towards 1.5C



A scenario that includes the physical impacts of climate change, not just transition risks



Engage with the most relevant sectoral or regional scenarios and resources available



Be transparent about assumptions and parameters used to develop the scenarios, in line with the TCFD disclosure framework



Show evidence that management is overhauling their business models in response to scenario analysis results

Sam Hurley, the CPD’s policy director, said shareholders, courts and regulators like Apra clearly expected businesses and investors to prepare for climate change and also for the major physical impacts that are likely even if severe global warming of 2C or more is avoided.

CPD fellow Kate Mackenzie, a co-author of the paper, said many of the climate reference scenarios used by businesses only had a 50% chance of keeping global warming to 2C or less.

“Business-as-usual approaches have us on track for warming of three degrees or more, which would be incredibly damaging both economically and environmentally,” she said. “Scenario analysis work that does not factor in robust Paris-consistent scenarios will mean companies and investors underestimate the scale of the risks present and transitions required to meet Paris targets – and the opportunities that this transition will also create.”

The CPD discussion paper will be discussed at a public forum in Sydney on Wednesday. Summerhayes will be speaking at the event, along with Steven Skala, the chair of the Clean Energy Finance Corporation, Christina Tonkin, the managing director of specialised finance at ANZ, and new CPD board member Sam Mostyn.