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.
1. Scope of Audit
Auditors are expected to assess the following aspects of corporate climate scenario planning:
- 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.
- 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.
- 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.
- 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.
- 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.
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.
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.
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.
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.