Best Practices: Climate Scenario Analysis
18 Jul, 2023
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Executive Summary
The effects of climate change are expansive and inter-related. In this context, climate scenario analysis offers a risk management approach and way of thinking that can help firms develop resilient strategies, make disclosures to the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), and meet stress-testing or industry group expectations. This report provides sustainability executives and risk managers with a climate scenario analysis guide covering the key terms, concepts and moving parts. It provides a breakdown of current corporate approaches to scenario analysis and developing best practices. At present, few organizations have started climate scenario analysis work, with many struggling with a lack of internal expertise and budget constraints. Those that have done so are mainly engaging consultants or running qualitative assessments in house. Future best practices for climate scenario analysis will require firms to enhance governance structures, increase the numbers of climate-focused staff, ensure audit trails, and apply insights in transition and adaptation planning.
Scenario analysis underpins robust strategic planning and climate disclosures
Climate scenario analysis requires models and scenarios that are imperfect
Temporal and geographical variance in climate models constrain scenario analysis
Firms must navigate a range of scenario model types
Climate scenarios are best efforts and do not cover complex variable interactions
Many organizations are just starting their scenario analysis journeys
Firms struggle with a lack of internal expertise and budget constraints
Corporates are mostly running scenario analysis in-house or employing consultants
Best practices for scenario analysis are only just beginning to emerge
Firms should create foundations for decision-useful scenario analysis
Climate scenario analysis requires models and scenarios that are imperfect
Temporal and geographical variance in climate models constrain scenario analysis
Firms must navigate a range of scenario model types
Climate scenarios are best efforts and do not cover complex variable interactions
Many organizations are just starting their scenario analysis journeys
Firms struggle with a lack of internal expertise and budget constraints
Corporates are mostly running scenario analysis in-house or employing consultants
Best practices for scenario analysis are only just beginning to emerge
Firms should create foundations for decision-useful scenario analysis
Figure 1. How scenario analysis is being incorporated into voluntary standards and reporting regulations
Figure 2. Definitions of key terms
Figure 3. How climate scenarios and climate models are used together to conduct scenario analysis
Figure 4. Advantages and disadvantages of dynamic and statistical downscaling
Figure 5. Explaining the IPCC’s SSPs
Figure 6. Insufficient internal expertise is the biggest challenge for firms looking to conduct climate risk analysis
Figure 7. Limited buy-in, coordination and expertise at the board and executive level are barriers
Figure 8. Developing best practices for scenario analysis
Figure 2. Definitions of key terms
Figure 3. How climate scenarios and climate models are used together to conduct scenario analysis
Figure 4. Advantages and disadvantages of dynamic and statistical downscaling
Figure 5. Explaining the IPCC’s SSPs
Figure 6. Insufficient internal expertise is the biggest challenge for firms looking to conduct climate risk analysis
Figure 7. Limited buy-in, coordination and expertise at the board and executive level are barriers
Figure 8. Developing best practices for scenario analysis
US National Oceanic and Atmospheric Administration (NOAA), National Centre for Atmospheric Science, Maplecroft, World Meteorological Organization (WMO), Task Force on Climate-related Financial Disclosures (TCFD), International Renewable Energy Agency (IRENA), One Planet Summit, Massachusetts Institute of Technology (MIT), KPMG, International Energy Agency (IEA), World Climate Research Programme (WCRP), Climate Financial Risk Forum (CFRF), S&P Global, International Sustainability Standards Board (ISSB), Intergovernmental Panel on Climate Change (IPCC), United Nations Environment Programme (UNEP), Ortec Finance, WTW, Prudential Regulation Authority (PRA), CDP (Carbon Disclosure Project), McKinsey & Company, UK Centre for Greening Finance and Investment (UKCGFI), Met Office Hadley Centre, OPTrust, WWF, Network of Central Banks and Supervisors for Greening the Financial System (NGFS), Climate Action 100+, Inevitable Policy Response (IPR), European Central Bank (ECB), Nestlé, Moody's, Great Lakes Integrated Sciences and Assessments (GLISA), Glasgow Financial Alliance for Net Zero (GFANZ), IBM, Canadian Centre for Climate Modelling and Analysis, Landsec, Barclays, US Agency for International Development, Institutional Investors Group on Climate Change (IIGCC), RMS, United Nations Framework Convention on Climate Change (UNFCCC), US Securities and Exchange Commission (SEC), Global Association of Risk Professionals (GARP), Rolls-Royce, Bank of England (BoE), Verisk, PwC
About the Authors
Alice Saunders
Industry Analyst
Alice is an Industry Analyst in the Verdantix Net Zero & Climate Risk practice. Her current research agenda focuses on climate risk solutions and biodiversity. Alice holds…
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Ryan Skinner
Research Director, Net Zero & Climate Risk
Ryan is the Research Director for the Verdantix Net Zero & Climate Risk practice. He guides the research team to develop compelling research at the intersection of net zer…
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