Most companies are struggling with climate risk scenario analysis. Our climate model En-ROADS can help change that.

July 8, 2024 by Katherine Markova

“En-ROADS is unique in its ability to take a commonly-used scenario, such as the International Energy Agency’s Net Zero 2050, and build on it by changing inputs or assumptions.”

Climate risk scenario analysis and its impact on business strategy remains the most underreported Task Force on Climate-related Financial Disclosures (TCFD) recommendation.¹ Only 1 in 10 companies that have adopted the recommendations of TCFD on a voluntary basis have done work in this area, at different levels of maturity.

This is a small fraction of the total number of companies that will have to undertake this exercise when mandatory climate risk reporting comes into force in their jurisdiction, as early as next year.

Those companies that are performing scenario analysis are not doing it comprehensively, treating it as a compliance exercise rather than a genuine input into the business strategy.

Companies have been cautioned against the practice of using two bookend scenarios, such as one that reaches 1.5°C in an orderly transition, and one that results in a >3°C “hot house world,” and are instead being encouraged to develop scenarios that are tailored to their business and industry. And yet, most still take the two extremes which show the best and worst outcomes for the company, without giving it too much additional thought.

We get it—it’s hard. Translating complex scenarios developed by the Intergovernmental Panel on Climate Change and the Network for Greening the Financial System and applying them to your business is challenging. Some standard scenarios are black boxes—the underlying assumptions and inputs are often unclear. Some scenarios assume that climate change will not impact economic growth, which we know not to be true.

Up until now, corporations have prioritized the analysis of physical climate risks over the assessment of transition risks. This is evidenced by the large number of physical risk tools that have become available on the market over the past few years.

Transition risk analysis is, in many ways, harder as it involves analyzing various country- and regional-level policies and making broad assumptions over future population growth, customer sentiment, and political developments (e.g., will there ever be a federal tax on carbon in the US?). Most of this analysis happens in a piecemeal fashion and, unlike the myriad of physical risk tools, there are few applications available to help companies assess transition risks.

Do you wish you could analyze climate policies holistically to see the big picture and understand interconnected impacts?

Our climate model En-ROADS can do just that. We can model the impact of various climate policies over different time horizons using variables that can be adjusted to fit your assumptions and show impacts ranging from the expansion of global GDP, loss of biodiversity, impact on crops, market prices of conventional fuels, and their carbon intensity, to name just a few.

Financial quantification of transition risks continues to be a challenge for companies. In the graph below we have modeled the marginal cost of electricity production by source in a scenario where in 2030 the global population is 8.5 billion, the average global carbon price is $50/ton CO₂, and no new fossil fuel infrastructure is being permitted. In this scenario, the marginal cost of renewable electricity production falls to $0.05/kWh in 2030. This is just an example of a tailored scenario we can help you develop for your company.

If you would like to take your company’s transition risk analysis to the next level, please get in touch.