Climate scenario analysis
Intuition
No one knows how fast the world will cut emissions, or how severe climate change will be. Scenario analysis deals with this uncertainty by asking "what if?" for a few different, internally consistent futures, rather than trying to predict one.
A typical exercise compares a world where governments act fast (high transition risk, lower physical risk) with a world where they do little (low transition risk, high physical risk), and sometimes a messy middle where action is late and uneven. For each, the company estimates what happens to demand, costs, asset values and cash flows.
Scenario analysis is now a standard expectation. TCFD asked for it, IFRS S2 requires companies to assess their climate resilience using it, and banking regulators use it to stress-test lenders. For analysts, it is also the most practical way to build climate risk into a valuation range.
Mechanics
Scenarios are not forecasts
A scenario describes a plausible future, not the most likely one. Good analysis uses two to four scenarios that differ sharply, so that the range of outcomes is visible.
The main scenario sets
| Source | What it offers | Common scenarios |
|---|---|---|
| NGFS (Network for Greening the Financial System, a group of central banks) | Transition and physical risk scenarios with macroeconomic effects, widely used by banks | Net Zero 2050 (orderly), Fragmented World (too little, too late), Current Policies (hot house world), among others |
| IEA World Energy Outlook | Detailed energy demand, supply and prices by sector | Current policies and stated policies, announced pledges, net zero emissions by 2050 |
| IPCC pathways | Physical climate outcomes under different emissions paths | Low, middle and high emissions pathways |
NGFS findings (Phase V, released November 2024)
- Net Zero 2050: warming of about 1.35°C to 1.45°C by 2100, after a peak of about 1.65°C to 1.70°C around 2040 to 2050; transition-related GDP losses of up to about 1.6% by 2050
- Current Policies: warming of about 2.75°C to 3°C by 2100, with high physical risk
- Fragmented World: delayed and uneven action, with rising physical risks over time
NGFS notes that its physical damage estimates have drawn academic criticism, so users should treat them with care.
A six-step method
- Pick the material risks. For example, carbon cost and demand for a cement company, or heat and flood risk for a warehouse operator.
- Choose scenarios. At least one fast-transition and one high-warming scenario.
- Set time horizons. Short (to about 2030), medium (to about 2040) and long term (to 2050 or beyond).
- Translate into drivers. Carbon prices, demand for products, technology costs, energy prices and physical hazards at each site.
- Model the financial effects. Revenue, costs, capex, asset lives and impairments under each scenario.
- Decide on responses. What the company would change in each case, and what that costs.
Sources
From the research
A Comparative Financial Analysis of Three Listed Companies
Three IT services leaders, five years of numbers: similar growth, very different margins and returns on capital, and their October 2026 valuations.
MarketsIPO Issue Price vs. Listing Price vs. Subsequent Performance
Seven of India's most talked-about IPOs since 2021, tracked from issue price to listing to October 2026. Buying on listing day lost money in six of seven.
ValuationPaytm: Valuing a Company With No Clean Comparable
Paytm is part payments processor, part device business, part loan distributor. Why no single peer fits, and how to value it in parts and in reverse.
Try it yourself
Interactive exercises coming soon.
Key glossary terms
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