- Climate scenario modelling is becoming widely used. Given the multitude of climate scenarios that are available, it is crucial that investors understand how scenarios are constructed, the uncertainties that are inherent in climate model design, and the associated implications for the results of a climate scenario analysis.
- Deciding on the type of climate scenario analysis to perform and the metrics used to analyze the results will also depend on an investor’s use case – whether the aim is to consider the impact of a low carbon transition or physical climate change on a portfolio, or whether it is to consider a portfolio’s impact on climate change.
- To help investors navigate their own climate scenario journey, and ensure they are able to interpret and use the outputs of their scenario analysis, we look in depth at the current state of climate scenario modelling. We explore the details of commonly used scenarios, their key assumptions and limitations, and assess the scenario-based metrics and tools that can be applied to gain the most effective results.
How can investors use climate scenarios?
“Climate scenarios” is an umbrella term used to refer to various forward-looking analyses that explore possible climate futures. Climate scenario analysis is still in its infancy, but regulators are starting to require the reporting of some climate scenario metrics , and many financial institutions are also using these metrics for stress testing, risk management and decision making.1
Climate scenarios aim to answer two key questions: first, what might happen to global warming as a result of certain actions, such as policy measures or technological choices, or their absence; and second, what it could take to limit the global temperature rise to a specific goal.