Climate Scenario Analysis: Mapping Risks and Opportunities at Scale

How can climate scenario analysis help investors understand and prepare for climate impacts across industries?

Summary

Climate scenario analysis is a vital tool for understanding how companies and portfolios may be impacted by climate change and the low-carbon transition. It combines scientific pathways, financial modeling, and risk exposure to stress-test strategies under different futures. Tools from S&P Global and others translate these scenarios into actionable financial signals—giving businesses and investors insight into resilience, vulnerability, and potential upside.

Why This Matters

• If companies fail to test scenarios, they risk being blindsided by climate events.

• If scenario analysis becomes standard, capital can flow to resilient businesses and away from risky ones.

• If done well, it reveals both vulnerabilities and innovation opportunities.

• Global exposure to physical risk is projected to triple by 2050, making forward-looking risk tools essential.

• Scenario analysis aligns with mandatory disclosure expectations, including ISSB, EU CSRD, and SEC proposals.

  
  

What is Climate Scenario Analysis?

I t’s a forward-looking, exploratory approach that models financial and operational exposure to plausible climate outcomes. These scenarios use scientific frameworks—like Shared Socioeconomic Pathways (SSPs)—to simulate the implications of different global warming pathways and decarbonization trajectories.

Key Components:

• Physical Risk Models: Assess damage from floods, wildfires, hurricanes, and heat stress based on emissions pathways.

• Transition Risk Tools: Simulate policy shifts, carbon pricing, and technology shifts using inputs from IEA’s Net Zero Emissions by 2050 or NGFS scenarios.

• Financial Stress Testing: Firms like S&P Global x Oliver Wyman link climate data with income statements, credit risk, and capital allocation.

Challenges and Opportunities

Climate scenario analysis is not without its complexities. Companies must navigate:

• Data Gaps: Inconsistent or missing data on emissions, suppliers, or climate risks

• Assumption Sensitivity: Small changes in assumptions can drive large changes in modeled outcomes

• Cross-Sector Uncertainty: Impacts vary significantly across industries—from utilities to agriculture to real estate

Still, these hurdles are not excuses for inaction. Tools like the NGFS Scenario Explorer and initiatives like PACTA offer open-source pathways for progress.

Bottom Line & Looking Ahead

As climate risks grow more immediate, climate scenario analysis is becoming essential for understanding potential impacts and informing long-term strategy. Frameworks like TCFD and IFRS S2 already emphasize its importance in forward-looking disclosures.

Companies that begin using scenario analysis now will not only strengthen their climate resilience but also build trust with investors and regulators. As the practice evolves, it will play a central role in shaping a more transparent and informed transition to a low-carbon economy.