Scenario analysis involves exploring risks and opportunities in a range of hypothetical futures. It can enhance strategic thinking and form a key part of climate-related financial disclosures. Granular data is available on transition pathways, climate impacts and macro-financial indicators to support this analysis. The NGFS is working with key stakeholders to set out a more standardised set of scenarios and variables for disclosure.
The transition pathways provide a view of how the energy system and land-use would shift in response to different levels of climate policy and technology trends. Three Integrated Assessment Models were used to model each of the six scenarios. These models typically solve at 5 year time steps to the end of century and provide indicative temperature outcomes based on the level of greenhouse gas emissions. This data can help answer questions like: when will fossil fuel use have to peak and decline? How high would emissions prices have to rise? How much energy-system investment is needed? All transition pathways data can be explored via the NGFS IIASA Scenario Explorer.
Consider the objectives of the exercise. This could be to assess the impacts on profitability, business models, financial risks or the broader economy.
Select a range of scenarios that best suit the objectives of the exercise and the types of risks to be explored. For example, the Current Policies scenario is best suited to assessing physical risks.
Assess the macro-financial impacts
Often here a qualitative assessment can be just as important as a quantitative assessment.
Communicate and use results
Scenario analysis can be a useful tool to understand risks and opportunities, identify the implications for strategy and/or policies and pinpoint areas for further research.
Granular data on energy, land-use, greenhouse gas emissions and temperature (transition pathways), and from physical climate change (climate impact data) from the NGFS can be mapped to assets and economic activities.
Financial impacts on households or companies
Different climate scenarios and warming levels will have different financial impacts on different companies and households depending on their location and characteristics. Further assumptions will likely have to be made to translate climate-related data into financial impacts.
Climate-related risks will also affect the economy as a whole. The NGFS has worked collaboratively with the National Institute for Economic and Social Research to quantify the potential impcts. Changes in the macroeconomic environment should also be factored in when assessing financial impacts on individual exposures.
The financial impacts on companies and households may affect their ability to pay dividends and/or service debt. This will have an impact on financial risks such as credit, market, operational, liquidity and/or insurance underwriting risks for financial firms.