Scenario Analysis
No one can predict the climate and policy landscape a company will face in 2040. Scenario analysis accepts that uncertainty head-on: instead of betting on one future, it stress-tests the business against several plausible ones.
It is a tool for testing resilience, not a forecast — and confusing the two is the fastest way to get it wrong.
Scenario analysis explores how an organisation’s strategy and finances perform under different plausible future climate and policy states, using transition and physical scenarios such as IEA, NGFS and IPCC pathways. Scenarios are plausible, not predictions.
What scenario analysis means
Scenario analysis is a structured process for exploring how an organisation would perform under a range of different, plausible future states of the climate, economy, and policy — in order to test the resilience of its strategy and to identify climate-related risks and opportunities.
The method builds several internally-consistent narratives about the future — for example, a rapid, orderly shift to net zero versus a delayed, disruptive one versus a world of continued high emissions — and then asks how the business fares in each. The point is not to find the single “right” future but to reveal where a strategy is fragile across a spread of them. Each scenario is a coherent picture of key drivers (carbon prices, energy mix, demand, temperature, regulation) held together by cause and effect, not a random set of assumptions.
A scenario is plausible, not probable. Scenario analysis does not predict what will happen or assign probabilities; it explores what could happen so the organisation can prepare. Treating a scenario as a forecast — or picking only the comfortable one — defeats the exercise.
Scenario analysis is a strategic-resilience concept, not an emissions-measurement method. It stress-tests the numbers your inventory produces against different futures; it does not generate the emissions figures themselves. Those come from the underlying inventory and the risk models applied on top of it.
Transition vs physical scenarios
Climate scenario analysis works through two distinct risk channels, and a complete analysis addresses both. They answer different questions and typically draw on different reference scenarios.
Transition scenarios
Explore transition risk — the exposure created by the shift to a low-carbon economy: carbon pricing, policy change, technology disruption, shifting demand, and stranded assets. Most relevant in a rapid-decarbonisation world, and most acute over the near-to-medium term.
Physical scenarios
Explore physical risk — the exposure created by the changing climate itself: acute hazards (floods, storms, wildfire) and chronic shifts (heat, drought, sea-level rise). Most severe in high-warming worlds, and most material over the long term.
| Transition scenarios | Physical scenarios | |
|---|---|---|
| Risk explored | Transition risk | Physical risk |
| Driven by | Policy, technology, market shifts | Degree of physical warming |
| Key variables | Carbon price, energy mix, demand | Temperature, hazard frequency and severity |
| Typical reference | IEA NZE, NGFS orderly / disorderly | IPCC high-warming SSPs |
| Horizon emphasis | Near-to-medium term | Long term |
Reference scenario families
Rather than build scenarios from scratch, most organisations anchor their analysis to published reference scenarios. Three families dominate climate work, each designed for a different lens.
| Family | Publisher | Example pathways | Primary lens |
|---|---|---|---|
| IEA | International Energy Agency | Net Zero by 2050 (NZE), Announced Pledges (APS), Stated Policies (STEPS) | Energy system & transition |
| NGFS | Network for Greening the Financial System | Orderly, Disorderly, Hot house world, Too little too late | Financial & supervisory risk |
| IPCC | IPCC (AR6) | SSP1-1.9 through SSP5-8.5 | Physical climate outcomes |
The IEA pathways are the workhorse for transition analysis; the NGFS set was built specifically so banks, insurers, and supervisors could compare climate risk on a common basis; and the IPCC’s SSP–RCP combinations underpin the physical-hazard end. A robust analysis usually pairs at least one ambitious mitigation scenario (a 1.5–2 °C pathway) with a high-warming one, so both transition and physical risk are stressed.
What the frameworks require
Scenario analysis moved from good practice to disclosure expectation through the TCFD recommendations, whose Strategy recommendation asks organisations to describe the resilience of their strategy under different climate scenarios, including a 2 °C or lower scenario. That requirement was carried into IFRS S2, which requires climate resilience assessment using scenario analysis, and into the EU’s ESRS E1, which requires resilience analysis of the transition plan.
Frameworks also recognise a maturity spectrum. Qualitative scenario analysis describes narrative impacts and directional exposure; quantitative scenario analysis models the financial effect — revenue, cost, asset value — under each pathway. Disclosure standards expect the analysis to become more quantitative as data and capability mature, and to connect explicitly to strategy and financial planning rather than sitting in a standalone report.
Scenario analysis and your GHG inventory
Transition scenario analysis starts from the emissions baseline. A company projects its gross Scope 1, Scope 2, and Scope 3 inventory — stated in tonnes of CO₂-equivalent, with gases converted on the IPCC AR6 GWP-100 basis (methane at 29.8 [GreenCalculus gwp.CH4_fossil.ar6_100 · IPCC AR6 · v2026.284], nitrous oxide at 273 [GreenCalculus gwp.N2O.ar6_100 · IPCC AR6 WGI Ch 7 Table 7.SM.7 (2021) — AR6 GWP-100]) — and stress-tests that footprint against each scenario’s carbon-price and policy pathway. The TCFD scenario analysis calculator is built for exactly this step, and the inventory it draws on is produced by the GHG accounting methodology.
The bigger the footprint and the higher the modelled carbon price, the larger the transition exposure — which is why Scope 3 usually dominates the transition risk of downstream-heavy sectors. For banks, insurers, and asset managers, scenario analysis runs at the portfolio level, where the relevant baseline is financed emissions and the question becomes how portfolio value moves under each NGFS pathway.
Worked micro-example
A cement producer with 500,000 tCO₂e of annual Scope 1 emissions tests its 2030 carbon-cost exposure under two illustrative transition scenarios (carbon prices shown are illustrative, not a specific NGFS output).
| Scenario | Illustrative 2030 carbon price | Annual carbon cost |
|---|---|---|
| Orderly (early, gradual policy) | $130 / tCO₂e | $65.0 m |
| Disorderly (delayed, abrupt policy) | $185 / tCO₂e | $92.5 m |
The output is a range of plausible exposures ($65–92.5 m), not a single predicted number. The gap between the two — $27.5 m — is the value at stake in whether the transition is orderly, and it is exactly the kind of insight scenario analysis exists to surface.
Common mistakes
- Treating a scenario as a forecast. Scenarios are plausible futures for testing resilience, not probability-weighted predictions. Reporting one as “expected” misrepresents the method.
- Running a single scenario. The value is in the spread. One pathway — especially a comfortable one — reveals nothing about resilience.
- Ignoring physical risk. Transition-only analysis misses the long-term hazard exposure that high-warming scenarios are designed to surface.
- Leaving it disconnected from strategy. Scenario analysis that never feeds capital allocation, risk appetite, or the transition plan is a disclosure exercise, not a decision tool.
- Confusing warming levels with policy pathways. A 1.5 °C outcome and an orderly transition are related but not the same axis — physical scenarios describe warming, transition scenarios describe how the economy responds.
Test your strategy’s resilience across transition and physical climate scenarios.
Frequently asked questions
Climate scenario analysis is a structured process for exploring how an organisation’s strategy and finances perform under different plausible future climate and policy states. It uses transition and physical scenarios — often anchored to IEA, NGFS, or IPCC pathways — to test the resilience of the business and identify climate-related risks and opportunities.
No. A scenario is plausible, not probable — scenario analysis does not predict what will happen or assign probabilities. It explores a range of possible futures so an organisation can test resilience and prepare. Treating a scenario as a forecast, or analysing only one, defeats the purpose.
Transition scenarios explore transition risk — carbon pricing, policy, technology, and market shifts in the move to a low-carbon economy — and are most acute in rapid-decarbonisation, near-to-medium-term futures. Physical scenarios explore physical risk — acute and chronic climate hazards — and are most severe in high-warming, long-term futures. A complete analysis addresses both.
Three families dominate: IEA pathways (Net Zero by 2050, Announced Pledges, Stated Policies) for the energy transition; NGFS scenarios (Orderly, Disorderly, Hot house world, Too little too late) for financial and supervisory risk; and IPCC SSP pathways for physical climate outcomes. A robust analysis usually pairs an ambitious mitigation scenario with a high-warming one.
Yes. The TCFD recommendations ask organisations to describe strategy resilience under different scenarios, including a 2 °C or lower scenario. IFRS S2 requires a climate resilience assessment using scenario analysis, and the EU’s ESRS E1 requires resilience analysis of the transition plan. All expect the analysis to grow more quantitative and to connect to strategy over time.
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