Scenario analysis is a well-established method for developing strategic plans across a range of plausible future climate outcomes
Scenario analysis is the process of identifying and assessing how your organization could be impacted by future climate events taking into account the range of climate uncertainty. Climate scenarios allow organizations to evaluate how their strategies might perform across different plausible climate futures. Organizations use scenario analysis to understand how the physical and transition risks of climate change will impact its strategies and financial performance over time.
What is a scenario?
A scenario describes a potential path of development that leads to a particular future outcome. Scenarios are not intended to represent a full description of the future. They highlight central elements of a plausible future and draw attention to which key factors and drivers your organizations need to be aware of. They are not designed to deliver precise outcomes, predictions or forecasts. This is why it is best practice to develop and consider several scenarios as part of your analysis.
What is scenario analysis?
Scenario analysis is designed to help organizations plan and adapt in a way that minimizes shocks and stresses from future events by considering multiple potential outcomes. It is a tool adopted to enhance critical thinking for strategy. A key feature of scenario analysis is that it should challenge conventional assumptions about the future. Scenario analysis is designed to address situations that contain a lot of uncertainty.
Scenarios explore several alternatives that may significantly alter the basis for “business-as-usual” assumptions.
Where would I use scenario analysis?
Scenario analysis is a useful tool for climate-related risk reporting. The Task Force on Climate-Related Financial Disclosures (TCFD) recommends that organizations use scenario analysis as part of the Strategy pillar.
Strategy recommendation C asks organizations to describe how their climate strategy accounts for how their organization will be impacted under different climate-related scenarios. These should include a Paris-Aligned scenario, where national Net Zero commitments keep global temperature increases to 2°C or lower.
What is a Paris-Aligned Climate Scenario?
Following negotiations at COP21 in 2015, 191 members of the United Nations signed the Paris Agreement, making a legally binding commitment to limit global average temperature increase to less than 2°C, and preferably to 1.5°C. This number is the generally accepted danger line for global temperature increases as a result of climate change. Holding the line at 1.5°C reduces the risk of natural systems and processes reaching “tipping points” of potentially irreversible change.
As a result, a 2°C scenario is used as a common reference point indicating alignment with the objectives of the Paris Agreement. Using this scenario in analysis and climate-related risk reporting allows external stakeholders to assess how an organization might be impacted by the transition to a low carbon economy.
For a more in-depth look at climate scenario analysis and how it can be applied, we recommend this resource from the TCFD Hub.