The importance of scenario analysis

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RR BWRachel Russell, Head of Client Service, writes on industry

Much of the media’s focus over this week and last has been on the energy industry and, in particular, natural resources. One eye-opening statistic quoted in the Financial Times came from research conducted by the Critical Resource company. Of 13 of the largest natural resource companies, all but three consider climate change to be a ‘material’ business issue. But only one has modelled a scenario predicting the costs and potential opportunities represented by proposed measures to mitigate climate change.

Few subjects provoke more impassioned debate than climate change. For business leaders, however, the debate is somewhat beside the point. While businesses may lobby for one outcome or another, the level of influence one organisation can expect to have on a global geopolitical process is essentially limited. The various arguments do not alter the fact that there is now a very real risk of regulatory change significant enough to threaten the efficacy of existing business models in the energy sector.

Failing to model the impact of these potential changes represents nothing less than the burying of heads in the sand. Even in the most optimistic reading, it hands the lobbying and PR operation de facto responsibility for defending a company’s business model – something which very few business leaders would be happy with in other circumstances. Scenario modelling doesn’t stave off threats. But defining and analysing potential scenarios and effective responses ahead of time does mean that an organisation is much better prepared to recognise when disruption is happening, and take action to maintain its position in the market.

Energy is far from the only industry facing challenges from global regulatory change, but it offers a very vivid example of what happens when leaders carry on with business as usual, in the hope and expectation that the status quo will always prevail. We don’t yet know how this story will end, but what we do know is that, sooner or later, change will come. Those companies that have already analysed potential scenarios, and effective responses to each one, will be the ones which continue to prosper when that change happens.

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