Climate scenario analysis: Valmet’s risks and opportunities

Valmet has analyzed the potential impact of climate change on its operations and business environment by 2030 across the value chain, including the supply chain, own operations, and customers’ use phase of Valmet´s technologies. The potential long-term impacts of climate change have been analyzed through two different scenarios: in the first scenario the global warming is limited to 1.5°C and in the second scenario the global warming has reached 4°C.

These scenarios have been chosen as they represent different climate states of the future. The scenarios are also in line with the Task Force on Climate-related Financial Disclosures (TCFD) reporting, which recommends organizations to take into consideration different climate-related scenarios. The scenario analysis enables organizations to identify potential climate-related risks and opportunities and assess how prepared they are for different climate scenarios.

The scenarios are set for 2030, as it is far enough in the future to analyze the potential business impacts when climate-related risks have most likely materialized, and to analyze outcomes from company strategy and risk management perspective.

Valmet’s exposure to climate-related risks and opportunities have been analyzed under the following risk categories: Physical (such as storms, floods, and drought), regulatory, technological, market, reputation, and social. Exposure refers to an organization’s vulnerability to negative impacts or ability to realize positive impacts from the transition to a low-carbon economy and the impacts of climate change itself.

The results of the scenario analysis are utilized to support Valmet's strategy and capability to adapt to and mitigate climate change.

Summary of the results

In both scenarios, Valmet is seen to benefit from its energy and water efficient technologies and its position as one of the enablers of climate change mitigation. Demand for technologies enabling carbon neutral pulp, paper, and energy production together with alternative energy sources, such as biomass and CO2 free electricity, are likely to increase rapidly. There are also reputational opportunities to Valmet, if pulp and paper and bioenergy industries reach carbon neutrality enabled by Valmet’s technologies.

Differences between the two scenarios are expected to emerge more towards 2050 as negative climate events become more frequent and severe, especially in the 4°C scenario. In the 1.5°C scenario, transitional impacts, such as regulation play a bigger role, and in the 4°C scenario physical impacts dominate, such as floods, volatile forest yield, storms, and drought.

First scenario: The global warming is limited to 1.5°C

Valmet is committed to the Paris Climate Agreement´s 1.5-degree pathway. In this 1.5-degree scenario, where the global warming is limited to 1.5°C, the Paris Climate Agreement goals have been met and the mitigation of climate change has been strong.

In this scenario, it is expected that regulations will be more ambitious, globally consistent, and aiming for low-carbon economy. The demand for sustainable and climate resilient solutions creates opportunities for Valmet. The potential risks rise from the high demand for bio-based products, which increases competition for forest-based raw material. Availability of forest-based raw material for pulp and paper and energy industries might face limitations, impacting the growth potential for Valmet. There is also an increasing risk that forest utilization as raw material will be seen more negatively as protecting and extending forests to mitigate climate change is expected to increase. This increases reputational risks also for Valmet as a technology provider.

Second scenario: The global warming has reached 4°C

Second scenario reflects the situation where the global warming has reached 4°C, which means that emissions have continued to rise at current rates.

In this scenario, transition to low-carbon economy is disorganized, as climate policies are fragmented, carbon markets are not integrated, and carbon leakage will increase due to large differences in carbon regulations between countries. The demand for energy and water efficient technologies will grow in advanced economies, whereas in developing markets the demand is not likely to change.

Overall, Valmet’s offering in low-carbon and water efficient solutions will provide limited competitive advantage. There is also a risk that customers are not willing to pay for such solutions, and that the expectations of customers between regions will increasingly differ.

The scenario analysis has been done with IPCC’s RCP2.6 and RCP8.5 scenarios. Transition scenarios were considered for the whole value chain according to IEA (Sustainable Development Scenario and World Energy Outlook 2020) and IRENA (Global Renewables Outlook: Energy Transformation 2050) scenarios. IIASA's Shared Socioeconomic Pathways was used alongside the RCPs to analyze the feedbacks between climate change and socioeconomic factors, such as world population growth, economic development and technological progress.

Quantitative analysis of selected climate-related risks and opportunities

Based on the risks and opportunities identified in the qualitative climate scenario analysis, Valmet conducted a quantitative modelling of its most impactful climate-related risk and opportunities. Focusing on Valmet’s largest geographical locations and key elements in the supply chain, the analysis provided a financial impact range for the climate related risks and opportunities by 2030, based on the 1.5°C and 4°C scenarios.