CLIMATE ANALYSIS REPORT CONTINUED
2 Strategy In 2026 we reviewed the qualitative and quantitative analysis of the resilience of our business model and strategy under two Representative Concentration Pathway (“RCP”) scenarios – RCP2.6 and RCP8.5 – representing the best- and worst-case scenarios projected by the Intergovernmental Panel on Climate Change (“IPCC”).
As part of this review, we updated the assessment of the physical risks of climate change posed to our sites. Using CLIMADA climate data we created a bespoke program, which enabled us to overlay established climate science on the precise locations of our sites. The analysis showed that, on balance, the Group’s business model and strategy are not expected to be materially affected by climate-related risks and opportunities, and that the net financial impact of climate change was considered to be immaterial. We review this analysis annually, to monitor potential changes to our risk profile, and to ensure the data on which we report remains current. In order to better understand the potential financial impact of climate-related risks on the Group’s Statement of Financial Position and future cash flows, during the year we conducted a high-level review of the potential financial impact of the identified risks and opportunities. The financial impact is considered in the estimates of future cash flows used in the Group’s goodwill impairment and viability assessment, as detailed on pages 85 to 86 of this Annual Report. We assess and report the climate change-related transition risks and opportunities on short (up to 4 years), medium (5-10 years) and long (more than 10 years) term bases. For physical risks, we define short term as the period up to 2030, medium term up to 2050 and long term up to 2100. Given the fast-changing and unpredictable nature of economic and environmental conditions, the potential financial impact was modelled up to 2030 only. During the process, we identified and assessed 12 climate change-related risks, of which eight were transition risks and four physical. Following this, we then prioritised four transition risks and two physical risks, being those with the highest risk scores, based on a combination of impact magnitude and likelihood. We also identified three climate-related opportunities. We modelled the financial impact of these six risks and three opportunities. Assessment of all 12 climate-related risks identified can be found on page 63. The highest ranked risk was the risk of capital markets shifting investment to low-carbon activities, which may impede the Group’s acquisition-fuelled growth strategy. The other key risks include customers shifting to low-carbon substitutes, and raw material price increases. The financial impact of these risks was modelled by applying estimates of
TCFD recommended disclosures
■ Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term ■ Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning ■ Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario
RCP2.6 The outcome of the assessment showed that, under the RCP2.6 scenario, the net financial impact over the five- year period to 2030 is immaterial and represents less than 2% of the Group’s operating cash flows. The net financial impact considered both the increased operational costs of quantifiable climate-related risks and mitigation costs, offset by the benefits arising from the climate-related opportunities. Assessed in isolation, the total risks estimated to our business under RCP2.6 are unlikely to have a material financial impact on the Group’s performance. This factors in the costs of the six climate-related risks identified, with the main financial impacts a result of an assumed decline in higher-carbon markets (such as oil and gas, consumer electronics and sales through wholesalers) and an increase in the cost of our commoditised raw materials (assuming that this cost cannot be passed on to customers). We remain confident of our strategy under an RCP2.6 scenario, as we believe that the assumed accelerated growth in low-carbon markets (such as renewable energy, electric vehicles and the electrification of rail) offers increased margin growth which more than offsets the negative effects, above. We believe growth in these markets could offer increased operating profit which comfortably offsets the negative impacts of the risks described above in the years to 2030. The Group’s resilience to the modelled risks is also mitigated by our broad customer portfolio beyond the market segments assumed to be at risk, and by our pricing structure, which enables us to pass a proportion of cost increases on to our customers.
RCP8.5 Under the RCP8.5 scenario, we assumed that the decline in high-carbon markets such as oil and gas would be less pronounced, as demand would continue longer if society makes less attempt to abate these sectors. However, the increased cost of commoditised raw materials was assumed to be higher, with an assumed inability to pass these costs to customers. In addition, we assumed that greater competition for coverage under an RCP8.5 scenario would add additional freight and insurance costs. If all potential unmitigated negative impacts identified should come to pass, our operating profit could be reduced by a material amount. Compounding the effects of assumed higher costs is our assumption that growth in low-carbon markets (such as renewable electricity) would be slower in an RCP8.5 scenario. Although the Group would still benefit from some growth in these markets, the opportunity would clearly not be as beneficial as on a lower-carbon pathway. Taken together, our assumptions of increased costs and decreased sales growth under RCP8.5 results in a decrease of operating profit, estimated to be no greater than 1% to 2% of operating cash flows. As the division with the highest proportion of raw material costs, Magnetics and Controls is more at risk from increased commodity costs, particularly under the RCP8.5 assumptions. However, it also has the greatest potential opportunities in low-carbon growth markets, having already developed expertise and close customer relationships in these markets. The division has expertise in sourcing materials at competitive cost, and currently has pricing contracts which permit cost increases to be passed on to customers.
Further information ▶ Sustainability
▶ Our Sustainability
Strategy on page 46
Materiality Assessment on pages 47 to 48
▶ Our Strategy
▶ Principal Risks and Uncertainties on pages 79 to 84
on pages 10 to 13
attrition rate to affected revenues for the RCP2.6 and RCP8.5 scenarios, respectively. For the physical risks, we considered likely mitigation costs. In the case of possible site relocations due to changes in climate patterns, we factored in relocation costs such as fit-out, staff relocation, recruitment and training, and certification, as well as insurance coverage. Because the risk profiles were similar for both scenarios, the same mitigation approach was applied in both cases. For the climate-related opportunities, we applied an estimated excess growth rate to each of the opportunities in the RCP2.6 scenario and halved the rate in the RCP8.5 scenario, on the assumption that growth in renewable energy, electrification of transportation, and automation would accelerate under the more aggressive reduction scenario. We considered materiality both in terms of potential financial impact on the Group and the importance of climate change to our internal and external stakeholders.
60
61
discoverIE Group plc Innovative Electronics
Annual Report and Accounts for the year ended 31 March 2026
Made with FlippingBook - professional solution for displaying marketing and sales documents online