Best Practices: Climate Scenario Analysis

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.