What was the initial approach used?
Implementing the TCFD recommendations involved building on our plans to deliver Now and Next, which includes ambitious commitments on climate change issues, such as reaching Net Zero by 2050 and responding to other impacts, such as water stress.
Our CDP Climate Change response was our starting point as disclosing to CDP has already helped us to report elements of TCFD, including governance, identification and assessment of climate-related risks and opportunities. We collaborated between Sustainability, Risk/Insurance and Investor Relations teams to understand where climate change fits into our existing enterprise risk management processes and with the Annual Report.
We applied several climate scenarios to our most material climate-related risks and opportunities that were identified as part of our materiality assessment for Now and Next. These include transition risks, such as increasing carbon taxes, threat to raw material supply, as well as longer term physical climate risk, such as water stress. Our greatest climate-related opportunities include demand for sustainable packaging, use of renewable technologies and increasing resource efficiency, through improved recycling infrastructure and in the fibre that circulates through our integrated recycling, paper and packaging operations.
The climate scenarios describe a range of hypothetical future states, from technological advancements enabling significant decarbonisation to a ‘business as usual’ scenario of no policy change. We combined primary data (for example, energy and water consumption, production, current and projected carbon emissions) with secondary data provided in the IEA 1.5°C Pulp & Paper, IEA 2°C Sustainable Development Scenario and the IIPC 6°C climate scenarios to estimate the financial implications of our climate-related risks and opportunities, within the context of each scenario.
What did we learn?
Whilst the climate scenario analysis suggested that there could be some increased costs which would need to be managed, we would not have to make material changes to our circular business model. As society transitions to a low emissions economy, we see an opportunity for circular packaging to play a powerful role in helping brands and consumers reduce their carbon footprint.
As the IEA Pulp & Paper 1.5°C scenario describes, increased demand for recycled cardboard would necessitate greater recycling, shifting societies further to a system in which materials are kept in use for longer. This reinforces opportunities to design products for a lower-impact circular business model, increase resource efficiency and adopt renewable energy sources.
For example, using our Circular Design Metrics, our packaging solutions can be built to ensure recyclability and lower supply chain emissions. We can achieve greater resource efficiency by using no more fibre than is necessary and implementing closed-loop recycling solutions that keep high-quality material within the circular economy. Access to high-quality wastepaper means less processing (therefore less energy and water consumption) and less volume of recyclate needed overall, which generates cost savings for our papermaking operations and reduces emissions.
Powering a circular business model is energy-intensive and therefore investments in adopting circular energy in our Paper Mills and Packaging Plants, for example anaerobic digestion, waste heat recovery and self-generation of renewable electricity is crucial to reduce the life cycle carbon footprint of our packaging solutions.
Having achieved a 23% reduction in our carbon emissions per tonne of production since 2015, we recently announced a science-based target for 2030, which will require at least a 40% reduction in carbon emissions per tonne of production compared to 2019 and a commitment to reach Net Zero emissions by 2050.
In the long term, delivering progress in emission reduction will reduce our spend on carbon taxes and help our customers to reduce their Scope 3 value chain emissions.
What were the barriers, and how were they overcome?
In each scenario, we assumed that we have the same business activities that we have today and focused on a specific climate-related risk or opportunity. We used a combination of quantitative and qualitative methods in our analysis, giving preference to quantitative information where good quality, decision-useful data is available from reputable sources.
This was a substantial piece of work and there were several barriers to overcome. Combating the barriers to climate scenario analysis revealed three key learnings:
Scenarios are a steep learning curve, so begin early and set aside time
As the Task Force’s most recent status update report noted, it is recognised that companies may need time to work through climate scenario analysis and to determine whether the results warrant disclosure. Climate scenario analysis is a technical undertaking which should not be underestimated. In the first instance, selecting relevant scenarios from the myriad of possible options requires time to determine which scenario is useful. When beginning, set aside time for familiarisation with the options available. This involves studying the Implementation Guide, drawing on TCFD Knowledge Hub resources and learning from best practice examples.
Scenarios rely on data which might not be available, so prepare to be creative
The recommendations encourage quantification of potential financial impacts, which introduces an avalanche of assumptions and complexity. Although the scenarios provide quantification of some variables, e.g. the ETP 2DS scenario describes the introduction of a carbon tax increasing linearly to $210/tCO2 by 2050, applying this to future emissions and costs can be challenging. When constructing a scenario, be open to drawing on other reputable data, being sure to document assumptions and sources. This included for example, utilising our roadmaps combined with analysis from sources such as Bloomberg, Energy Aspects and Refinitiv. The intention should not be to calculate a perfect figure, but rather to model a climate scenario that can be used to inform strategic-thinking.
Scenarios are stories that require imagination, so encourage open-mindedness
Climate scenarios describe hypothetical outcomes of plausible future state under a given set of assumptions and constraints. It is natural to attempt to make sense of an unknown future based on what we know to be true today, which may not always be consistent with the ‘story’ set out in the scenario. When describing the results of your climate scenario, be sure that the audience understands that by definition, the scenario is a construct and should not to be taken too literally. As multidisciplinary stakeholders need to be involved, it can take time to get everybody on the same page.
Further insights
Whilst the climate scenario analysis suggests that there could be some financial risk by 2030, predominantly due to increased costs which would need to be managed, we would not have to make material changes to our business model.
There are opportunities to increase the sophistication of our modelling. For example, we did not consider financial implications of secondary impacts, for example reputational damage that may occur under some of the scenarios.
Particularly as new, higher quality data becomes available (for example, better long-term projections of future raw material supply under various conditions), we will continue to use climate scenario analysis to understand the effects climate change may have on our business and ensure we have appropriate mitigations in place to remain competitive in the future environment in which we will operate.
Our complete TCFD disclosure can be found on pages 56-58 of DS Smith Annual Report 2021
DS Smith Sustainability Report 2021
Now and Next sustainability strategy
Investing globally to lead the transition to the Circular Economy
