Climate scenario analysis – The building block of your climate strategy and transition plan

Although climate change is recognised as one of the biggest risks facing the world right now[1], understanding its exact impact on businesses remains a challenge. Climate scenario analysis (CSA) is a key tool to help you understand the most material climate-related risks and opportunities facing your organisation and its findings can feed into your climate ...

Omer Farooq

14 May 2024 7 mins read time

Although climate change is recognised as one of the biggest risks facing the world right now[1], understanding its exact impact on businesses remains a challenge. Climate scenario analysis (CSA) is a key tool to help you understand the most material climate-related risks and opportunities facing your organisation and its findings can feed into your climate transition plan to guide your transformation journey. EcoAct climate risk expert, Omer Farooq, outlines what CSA is, why it matters and how to use CSA strategically within your organisation.

What is a climate scenario analysis?

Assessing risks from climate change involves understanding how your company will perform in a low-carbon global warming context vs. a high-carbon global warming context. Analysis of climate risk depends on how different physical and economic factors may evolve in different climate scenarios (referred to as exposure) as well as how susceptible the business is to those changing physical and economic factors (referred to as vulnerability).

Assessment of the risks and opportunities in these different scenarios is referred to as a climate scenario analysis (CSA) and following the classification of risks by the Taskforce for Climate-related Financial Disclosures (TCFD), it can be categorised into two types:

  1. Physical risk – more impactful in a high-carbon world
  2. Transition risk and opportunity – more impactful in a lower-carbon world
Climate scenario analysis – The building block of your climate strategy and transition plan

Physical risk is typically assessed at a site level where the location of an asset (office, supplier, factory, logistics hub, etc.) is assessed for potential climate-related hazards. These hazards can range from heatwaves to flooding and the analysis can be used to quantify the potential value at risk for a business from climate change. You can analyse key sites and supply chain points to paint a full picture of physical risks and in response, develop adaptation measures. This may include heating/cooling solutions, flood defences, etc. and in extreme cases, change of location or supplier.

As transition risk refers to risks your business faces as the world transitions to a lower-carbon economy, its impacts and drivers are highly dependent on sectors and geographies of operation, as well as other sectors and countries that the business interacts with. As opposed to physical risks, transition risks are usually assessed at a country level. A globalised business environment makes this more complex, as you not only have to consider the risks you face in your own country but also in other countries where you have operations, clients and/or suppliers. A transition risk CSA is a relatively efficient process for estimating the scale of transition risks in different climate scenarios at a high level. Once the key risks and opportunities are identified, a more in-depth analysis can be conducted to build out measures to reduce risks and capitalise on the opportunities.

Why does CSA matter? 

CSA is an important tool for your businesses to identify climate-related risks and opportunities in an efficient and systematic manner. CSA can be an important input to your overall strategy and can help enhance resilience. Enhanced resilience and a well-informed climate-proof strategy provides confidence to investors, which may lead to higher and/or more reliable revenue generation as well as higher business valuation.

Depending on the sector and geography, investors may highly value the climate resilience of a business and CSA forms an essential building block of the climate strategy. For example, Danish energy company, Ørsted announced a transition strategy in 2009 to move from fossil fuels to renewables and not only have they successfully completed the transition, but they have also improved their valuation over the years. Although Ørsted’s valuation has faced setbacks recently, these were mostly driven by political factors rather than strategic.

Beyond financial impacts, CSA also plays a part in reporting requirements that are being implemented globally. In the UK, this is driven by Climate-related Financial Disclosures (CFD) as well as the TCFD reporting requirement by the Financial Conduct Authority (FCA). In the EU, CSA is driven by the Corporate Sustainability Reporting Directive (CSRD) and globally, it is a requirement of the International Sustainability Standards Board (ISSB), which has taken over the TCFD’s role and developed standardised sustainability reporting frameworks called IFRS S1 (sustainability) and IFRS S2 (climate). A well-developed CSA with robust analysis and gaps already identified will better stand up to scrutiny from both investors and regulators.

How to use CSA strategically within your organisation? 

1. Identify your material risks and opportunities

Start by identifying risks and opportunities across your entire business and value chain. This can range from the location of your suppliers to the carbon content of materials you are importing from another country. The more thorough the materiality research, the better the quality of CSA.

When analysing physical risks, you can make use of climate scenario tools to assess key locations. ECLR, EcoAct’s Climate Risk Platform, analyses the vulnerability of organisations’ physical sites to climate change hazards, supporting the identification and prioritisation of mitigation and adaptation measures.

Given their complexity, analysing transition risks may require several methodologies, tools and approaches. Carbon and energy pricing remain major transition risks and can be readily estimated in different climate scenarios using EcoAct’s Energy and Carbon Pricing Tool. However, the complexity and range of transition risks throughout the value chain requires a more bespoke approach. This further highlights the importance of the initial materiality exercise and stakeholder engagement.

2. Quantify the impact of risks and opportunities

Once you have identified the key risks and opportunities that are most material to your organisation, their impact should then be quantified to show the scale of their impact on the business’ financial projections. This is where the importance of CSA in the strategy development process of a business becomes most useful.

By understanding and quantifying your exposure and vulnerability to climate risks and opportunities, strategies can be developed that put into context investments and costs, where a business can make strategic decisions on decarbonisation levers as well as adaptation options. CSA provides evidence-based support for decarbonisation, mitigation and adaptation activities and makes the transition to a lower carbon economy not only a discussion on ethical responsibilities but also on financial performance.

How to integrate CSA in your strategy development process? 

Some businesses may look at CSA as a reporting requirement whilst others may treat it as a one-off exercise to understand their current exposure. However, best practice for a climate-resilient strategy requires a strategy development process that has climate as an essential consideration. A group-level CSA can be useful to identify major risks and opportunities at a high level, however, climate considerations should be integrated throughout the business.

By integrating climate across governance structures, roles, responsibilities, metrics, targets and remuneration, you can ensure that climate-related risks and opportunities are actively managed by all units and levels of seniority in the same way as the most principal of business risks.

The findings of a climate scenario analysis can also feed into your climate transition plan to guide your mitigation/adaptation/transformation journey. As more and more companies begin to understand their risks and opportunities and set climate-related targets, the next step that stakeholders expect of them is to show exactly how they plan to address those risks and opportunities and achieve targets. This is where climate transition plans can support the business both in developing a robust climate journey and in disclosing information on the journey.

EcoAct’s wide range of specialist services on climate scenario analysis, decarbonisation, strategy development and climate-related reporting can help your business across each step of the climate transition journey.


[1] According to the WEF’s Global Risk Report 2024, over the next 10 year period, environmental risks comprise of five of the top ten global risks

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