Tag: climate

Purpose:
This guidance sets out the audit expectations for companies undertaking climate scenario planning, ensuring that disclosures and strategic responses to climate-related risks and opportunities are accurate, reliable, and aligned with regulatory and stakeholder expectations.

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1. Scope of Audit

Auditors are expected to assess the following aspects of corporate climate scenario planning:

1. Governance and Oversight
   • Review the board’s role and oversight in climate scenario planning.
   • Verify that climate-related responsibilities are clearly assigned and monitored within management.
   • Assess integration of climate considerations into enterprise risk management (ERM) frameworks.
2. Scenario Selection and Methodology
   • Evaluate whether the selected climate scenarios are relevant, credible, and aligned with recognized standards (e.g., IPCC pathways, TCFD recommendations).
   • Ensure that the assumptions underlying each scenario (e.g., transition risks, physical risks, policy changes, technological shifts) are documented, reasonable, and supported by evidence.
   • Confirm consistency of scenario methodologies across reporting periods.
3. Financial Impact Assessment
   • Examine how climate scenarios are integrated into financial modeling, including projections of revenues, costs, capital expenditures, and asset valuations.
   • Assess the appropriateness of discount rates, probability weightings, and sensitivity analyses applied to scenario outcomes.
   • Identify any potential misstatements or omissions in scenario-driven financial forecasts.
4. Strategic Response and Resilience
   • Verify that scenario outcomes inform corporate strategy, including investment decisions, risk mitigation plans, and resource allocation.
   • Evaluate whether contingency planning and adaptation strategies are evidence-based and linked to scenario insights.
   • Confirm that reported actions are achievable, measurable, and monitored over time.
5. Disclosure and Reporting
   • Ensure climate scenario disclosures in corporate reports are accurate, complete, and understandable to stakeholders.
   • Verify consistency between scenario assumptions, governance statements, and reported strategic responses.
   • Assess compliance with regulatory frameworks, such as TCFD, ISSB climate disclosure standards, and local reporting requirements.

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2. Audit Procedures

Auditors should apply a combination of procedures tailored to scenario planning, including:

• Document Review: Policies, board minutes, ERM frameworks, scenario analysis models, and internal reporting.
• Interviews: Key management, risk officers, sustainability teams, and board members overseeing climate planning.
• Data Validation: Verification of inputs and outputs of climate models, including historical data, assumptions, and scenario projections.
• Comparative Analysis: Benchmarking against sector peers and industry standards for scenario planning robustness.
• Stress Testing: Assessment of sensitivity analyses and potential financial and operational impacts under extreme scenarios.

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3. Key Audit Considerations

• Materiality: Focus on climate risks that could materially affect financial position, cash flows, or strategic outcomes.
• Uncertainty: Recognize inherent uncertainty in climate projections and assess whether disclosures adequately communicate these uncertainties.
• Forward-Looking Estimates: Scrutinize assumptions, methodologies, and potential biases in forward-looking scenario-based estimates.
• Governance and Accountability: Confirm that scenario planning is embedded in decision-making at the appropriate organizational levels.
• Transparency: Ensure disclosures are clear, comprehensible, and consistent with external climate guidance frameworks.

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4. Reporting

Audit findings should:

• Highlight gaps or weaknesses in scenario selection, methodology, or disclosure.
• Provide recommendations for enhancing reliability, transparency, and stakeholder confidence.
• Include an assessment of whether the company’s scenario planning adequately informs strategic decision-making and risk mitigation.

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Conclusion:
Neftaly expects that auditors provide a rigorous, evidence-based assessment of corporate climate scenario planning. Audits should ensure that scenario analyses are credible, decision-useful, and transparently disclosed, supporting both regulatory compliance and stakeholder trust.

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