We have aligned our climate-related risk reporting with the four central themes of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations — Governance, Strategy, Risk Management and Metrics and Targets. We consider both transitional and physical climate-related risks in this report. Transitional risks are those risks that arise from a world changing to low carbon energy. This includes:
- Policy and legal risks from regulation, legislation and litigation.
- Technology risks from the move toward low carbon energy production.
- Market risk from shifts in the supply and demand for fossil fuels.
- Reputational risk from changes in consumer and stakeholder behaviors.
Physical risks are the acute physical risks arising from severe climate-related weather events and the chronic physical risks arising from longer-term events such as sea level rise and sustained temperature changes.
The different scenarios we have developed describe possible pathways leading to a particular outcome. It is important to remember that they are hypothetical constructs and are not meant to be used as predictions of what is likely or forecasts of what we think is going to happen. Scenarios are not intended to represent a full description of the future, but rather to highlight central elements of a possible future and to draw attention to the key factors that will drive future developments. The scenarios we have developed and discuss in this report describe four possibilities out of the myriad that are possible, given the uncertainty surrounding the development of future energy markets out to 2050. They do not, and cannot, describe all possible future outcomes. As such, there is no assurance that the scenarios presented in this report are a reliable indicator of the actual impact of climate change on ConocoPhillips’ portfolio or business.
We publish certain details of our scenarios to give an insight into the analysis we use to inform our strategic decision-making. We rarely make any decision based on a single source of information, but use a range of analyses, input and information when developing our strategy. We believe sharing these scenarios will give our stakeholders and shareholders a measure of confidence that we are both preparing for reductions in greenhouse gases consistent with the Paris Climate Agreement and developing resilient strategies that reflect the complex and uncertain range of energy futures.
An important disclosure issue requiring further engagement is the use of scenario planning as a tool to characterize and disclose comparative financial risk. The key to scenario planning is the use of a wide-enough range so that uncertainty can be characterized, rather than trying to correctly guess specific future variables or parameters. We believe different low carbon scenarios that depict a wide range of future possibilities should be used to facilitate strategic planning, not as reference scenarios to compare companies. For example, addressing market price uncertainty has led us to significantly change our portfolio, capital flexibility and cost structure over a short period of time. This illustrates how misleading it can be to compare companies based on a static view of a current portfolio that will continue to change, to either a single or even a range of “reference” scenarios of the thousands that are possible. We believe that the thoughtful application of scenarios in strategic planning is core to a company’s ability to navigate future uncertainty and is a practical way of conveying this information in a decision-useful manner.
We welcome your feedback on our approach to scenario planning or any other content in this report. If you have comments, suggestions or questions, please send them to our Sustainable Development team at SDTeam@ConocoPhillips.com.