What is Climate Scenario Analysis?
Climate Scenario Analysis (CSA) is an essential strategic tool that enables businesses to assess the potential impacts of climate-related changes on their operations, financial performance, and long-term resilience. It involves modelling different plausible future scenarios based on variables such as greenhouse gas (GHG) emissions trajectories, socioeconomic shifts, and evolving climate policies, to understand how these developments might affect an organisation.
Through CSA, businesses can explore the potential consequences of climate change under various assumptions. This includes evaluating physical risks (e.g., rising sea levels, extreme weather events), transition risks (e.g., policy changes, carbon pricing, market shifts), and their potential financial implications. More importantly, it allows organisations to test the robustness of their strategies and identify opportunities to enhance operational resilience and sustainability performance in a changing climate landscape.
Why Does It Matter for Businesses?
There is now broad scientific consensus that climate change is accelerating and that it poses significant risks to economies, ecosystems, and businesses. In response, global regulatory and disclosure frameworks, such as the International Sustainability Standards Board (ISSB) through IFRS S2, have emerged to guide companies in assessing, disclosing, and managing climate-related risks and opportunities.
For businesses, CSA offers a proactive way to align with these evolving frameworks. Beyond compliance, it supports strategic decision-making, long-term financial planning, and investment strategy development. Organisations can use CSA to:
- Evaluate the performance and exposure of their current assets, portfolios, and investments under different climate futures,
- Estimate baseline emissions and model the financial impacts of net-zero commitments,
- Adapt financial and operational strategies to mitigate risk and capture opportunity across sectors, regions, and supply chains.
As climate disclosure becomes the norm, CSA helps businesses future-proof their operations and strengthen their credibility with investors, regulators, and other stakeholders.
Climate Risk Is a Strategic Priority
According to the World Economic Forum’s Global Risks Report 2025, the top risks over the next decade are dominated by environmental threats, with extreme weather, biodiversity loss, climate-driven Earth system changes, and natural resource shortages ranking among the top five. These risks are not just environmental, but also deeply economic, operational, and social in impact.
However, the nature and magnitude of climate risks vary widely by industry, geography, customer base, and asset profile. A coastal manufacturing plant may face greater physical risks from sea level rise, while a financial institution may be more exposed to transition risks stemming from climate-related regulations or shifts in market sentiment.
This complexity reinforces the importance of CSA. Businesses can use it to explore “what if” scenarios that reflect different combinations of risks and opportunities. It allows organisations to:
- Understand climate-related impacts across timeframes and geographies,
- Evaluate trade-offs between short-term cost and long-term resilience,
- Identify strategies that are effective across multiple possible futures (so-called “no-regret” options).
Who Develops Climate Scenarios and How Businesses Use Them
Given the uncertainties of how climate action will unfold globally, multiple authoritative bodies have developed climate scenario frameworks. Among the most widely recognised are:
- Intergovernmental Panel on Climate Change (IPCC),
- Network for Greening the Financial System (NGFS),
- International Energy Agency (IEA),
- International Renewable Energy Agency (IRENA), and
- Science-Based Targets initiative (SBTi).
These organisations offer a variety of baseline and advanced scenarios, often categorised by temperature increase trajectories (e.g., 1.5°C, 2°C) and assumptions about policy and technology pathways. Companies can choose scenarios that align with their sector, location, or regulatory context, and tailor them further based on internal business models and financial data.
Strengthening Climate Governance
Integrating CSA into business operations isn’t just about risk, but it is also about governance and opportunity. As part of a broader climate governance framework, scenario analysis should be embedded within core business functions such as corporate strategy, financial planning, and enterprise risk management.
Increasingly, CSA is being linked with IFRS standards, encouraging companies to provide consistent, comparable, and decision-useful information about how climate risks are assessed, managed, and reported. Embedding CSA within the company’s overall governance structure enhances strategic agility, stakeholder trust, and regulatory readiness.
Conclusion
Climate Scenario Analysis offers businesses a structured, forward-looking lens to understand, prepare for, and adapt to the evolving climate landscape. In a time of accelerating change and regulatory expectations, CSA is more than a reporting tool, it is a critical enabler of resilience, competitiveness, and sustainable growth.