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What is a climate risk assessment and a climate scenario analysis?

Climate risk assessment and scenario analysis are designed to help organizations identify and evaluate climate-related risks and opportunities. Conducting these assessments is recommended as a foundation for materiality assessments on climate change, ensuring that all relevant risks and opportunities are integrated into strategic decision-making.

  1. Climate Risk Assessment

    A climate risk assessment is the process of identifying, analyzing, and evaluating risks related to climate change that could impact a business, its operations, and its value chain. It helps organizations prepare for and mitigate potential disruptions caused by climate-related factors.

    How businesses can use climate risk assessments:

    • Map risks across the company’s operations and supply chains.
    • Analyze vulnerabilities by assessing how likely different climate events are and their potential financial consequences.
    • Use geospatial tools to identify which locations are most at risk from climate hazards.
    • Assess regulatory, technological, and market trends to see how changes in policy or consumer preferences might affect business operations.

  2. Climate Scenario Analysis

    While risk assessments identify vulnerabilities, climate scenario analysis helps businesses plan for different possible futures. Due to the uncertainty of climate change, companies must test multiple scenarios to understand how extreme weather, carbon regulations, and economic shifts could impact them over time.

    Scenarios analysis allows businesses to explore different pathways climate change could take and how they would respond. This allows for long-term strategic planning and guarantees that companies are prepared for various climate-related challenges.

    Types of climate scenarios used:

    1. High-Emission Scenarios (e.g., IPCC SSP5-8.5, NGFS “Hot House World”):

      These scenarios assume little to no action is taken to reduce global carbon emissions, leading to severe climate impacts like rising temperatures, more frequent natural disasters, or economic instability.

    2. Low-Emission Scenarios (1.5°C-Aligned Pathways) (e.g., IEA Net Zero by 2050, Paris Agreement goals):

      These assume determined global action to limit temperature rise to 1.5°C, involving stricter carbon regulations, quicker shifts to renewable energy, and innovation in green technology.

    How businesses conduct scenarios analysis:

    1. Define different time horizons: Analyze risks and opportunities over short-, medium-, and long-term periods to understand their evolving impact on the business.
    2. Include critical assumptions: Identify key assumptions that shape each scenario, such as future policy actions, market responses, and expected advancements in technology.
    3. Identify key drivers: Consider macroeconomic conditions and energy use patterns that influence different climate scenarios.
    4. Quantify financial impacts: Assess the potential financial consequences under each scenario, including revenue loss, cost increases, and asset valuation changes.
    5. Analyze business resilience: Evaluate how assets and business models can withstand and adapt to various climate change scenarios, ensuring long-term sustainability.