There is a tendency, when the words “climate scenario analysis” are heard, for eyes to glaze over. Perhaps it’s the weight of the acronyms (CSRD, TCFD) or the tedious instructions and ambiguities that follow. But don’t let the reporting frameworks fool you into thinking that this is a trite, box-ticking exercise. At its core, climate scenario analysis is one of the most imaginative tools in the business sustainability toolkit. It is the practice of stepping into tomorrow’s world, looking around, and asking: what will our business look like here?
What a Scenario Analysis Really Is
Scenario analysis begins with a simple idea: the future will not look like the present. It might be warmer, wetter, stormier. Policies might be tougher, technology faster, markets more volatile. The IPCC offers a set of global climate pathways, called Shared Socioeconomic Pathways (SSPs), from a low-emission, 1.5°C world to a high-emission, more than 4°C one.
Each SSP scenario tells a different story, leading to varying risks and opportunities. Through a climate scenario analysis, you inhabit different potential worlds that these scenarios represent and gauge how you fare in them. This means extending your imagination to the whole value chain, from the streets customers live on to the factory floors and offices teams work in.
Much more Than Just Compliance
For some companies, scenario analysis is now a legal requirement under the CSRD and the EU Taxonomy. With the notorious Omnibus proposal, the fate of scenario analysis is also up for negotiations. Please refer to our 2050 Highlights article (Omnibus – What’s the current status? – 2050) for more information on the status of the Omnibus. Forward-thinking companies, however, are going further than relying on mandatory legislation, because scenario analysis can save businesses from being blindsided by climate-driven costs in the future, uncover hidden opportunities in the transition to a net-zero world, and future-proof business strategies, irrespective of legislations or which path the world takes.
From Overwhelming to Manageable: Our Method for Climate Scenario Analysis
As you can imagine, this could quickly turn into an overwhelming exercise. Therefore, at 2050 Consulting, we’ve developed a framework for climate scenario analysis that follows all regulatory guidelines whilst breaking it down into manageable steps. Our approach is built around three key phases:
1. Exposure Analysis
We start by identifying the climate hazards that could affect your operations, supply chain, or markets. This is often based on the geographic area a business is in and includes both acute and chronic physical risks. For transition risks and opportunities, sector and industry-specific trends provide useful input.
2. Vulnerability Analysis
The next step is to evaluate how severe the impact of each risk could be. For example, if frequent heavy rains flood the basement of a building, what will be the impact on the residents? Or as in a low-emissions scenario, where the cost of CO2 emissions will become more expensive – but how expensive? It’s important to involve the finance team to help quantify potential impacts, such as changes in revenue, cost structure, asset values, insurance premiums, or employee health and productivity.
3. Resilience Analysis
Resilience, as defined by the Stockholm Resilience Centre, is “the capacity of a system to deal with change and continue to develop.” In a business context, this means the ability to absorb shocks, adapt, and continue functioning and evolving in the face of disruptions.
Therefore, the final step in this framework is to evaluate how well the business is prepared to respond to the identified risks and opportunities. This involves reviewing existing mitigation strategies and their effectiveness. Based on this assessment, a set of recommended actions is developed. These may include strengthening existing strategies or creating new ones.
These insights should inform whether the overarching business strategy still holds or whether more fundamental changes are needed to remain competitive and resilient in a changing environment.
Common Challenges
Scenario analysis is still a developing area, and many organizations face a variety of challenges when trying to implement it, which include, but are not limited to:
- Selecting the right sources of climate data: It can be difficult to know which data source one to rely on, since different sources use different assumptions and granularities.
- Dealing with complex climate variables: Climate datasets often include a wide range of indicators. Choosing which variables best represent the physical risks to your business requires a deep dive into the technical definitions of each variable.
- Defining risk levels: There are not always universal thresholds for what qualifies as high risk for a particular variable. For instance, in Sweden, a heatwave is generally defined as at least five consecutive days with daily maximum temperatures above 25°C, whereas in India the threshold is around 30°C or more.
- Mapping risks across the value chain: Risks are not limited to a business’ own operations. The entire value chain can be affected, requiring a broader view of potential impacts.
- Financial quantification of risks and opportunities: Translating physical and transitional climate-related risks and opportunities into revenue loss, increased costs, or asset impairment is complex and often based on numerous assumptions.
In the End, It’s a Rehearsal
As illustrated above, scenario analysis involves many complex challenges and uncertainties and thus requires a robust framework to that provides structure and scientific grounding.
When done well, scenario analysis moves beyond compliance and becomes a strong strategic tool that prepares your business to adapt and thrive in uncertainty. It is a rehearsal for the future. At 2050 Consulting, we help you rehearse with clarity, creativity, and confidence.
What will your business be like in a 1.5 or a 4-degree warmer future?
Hanniyah Mir
Senor Consultant at 2050
Mattias Andir
Senior Consultant at 2050
This article is part of 2050 Highlights, a series where we explore pressing sustainability and business topics. Want to learn more about how your company can navigate the evolving regulatory landscape? Contact us at 2050!