1. The ‘climate as a standalone risk’ fallacy
Many businesses still treat climate risk as distinct from operational and
regulatory risks, misrepresenting the challenge. Keeping things separate makes
analysis easier on the surface but doesn’t reflect the reality that business
value is inextricably
linked
to climate
resilience.
Climate change does not sit on the risk register — it reshapes it.
Treating climate as a separate risk also frustrates management action. If
climate risk is treated separately, it invites the development of separate
management actions and responsibilities. For example:
-
Climate-related business disruption might be addressed by the sustainability
team, but other facility disruptions might be addressed by the operations
team.
-
Regulatory
changes on carbon
pricing might be addressed by the sustainability team, but other regulations
are addressed by the government relations team.
This is not an efficient way forward. When climate is seen as a driver of
existing risk, the solution becomes clearer: It’s about the sustainability team
supporting existing risk controls and equipping existing responsibilities with
better information about the changes unfolding.
2. The 'average score' mirage
No one would say that the effects of a
storm
and a
wildfire
cancel each other out, but this is what we say when we try to create an average
climate risk score. Consider the risk ratings for climate events across two
sites:

Busy decision-makers looking for the answer will prioritize investment in Site A
over Site B based on the average climate risk score. Is this the right call?
Probably not.
At Site B,
storm and
heatwave
risks could cause disproportionate financial damage due to their severity.
People have written entire books about the importance of high-impact,
low-probability events — Nassim Taleb’s The Black
Swan
being an example.
As Einstein said: “Make things as simple as possible, but no simpler.”
Aggregate climate risk scores offer problematic simplicity. Acknowledging the
diversity of climate effects leads to targeted insights for decision-making —
which is the actual objective of scenario analysis.
3. Scenario analysis ≠ sensitivity analysis
Companies often perform sensitivity analyses, so it’s easy to assume that
climate scenario analysis is just a sensitivity analysis on climate. Despite
similar names, the two are apples and
oranges.
In sensitivity analysis, a business tests the capacity of its existing strategy
to withstand a challenge (such as a carbon price). Many companies have published
climate scenario analyses that are, upon closer inspection, just sensitivity
analyses.
It is a nuanced but important distinction for business
resilience.
Sensitivity analysis imputes the objectives of control and short-term efficiency
— fundamentally at odds with scenario analysis’ goal of preparing for long-term
resilience.

4. The baseline ‘no change’ fantasy
When considering future change, it is tempting to assume a “no change”
counterfactual baseline for comparison purposes.
The Bank of International Settlements
(BIS) concludes that “no change” scenarios are misleading for climate scenario
analysis. They note that other baseline scenarios such as a warming of 3°C
or a transition to a low-carbon society by 2050 are “more informed and realistic
than the use of the counterfactual baseline, which assumes that neither climate
change nor policy-driven transition will happen.”
This bears repeating: BIS considers that a low-carbon society by 2050 is “more
informed and realistic” than a scenario assuming no change.
“No change” scenarios offer no value in scenario analysis — not even as a
“baseline.” They imagine fantasy conditions that justify “staying the course”
while change continues apace.
5. The ‘most likely’ delusion
Scenario analyses have been
criticized
because they don’t identify a “most likely” scenario. If no scenario is most
likely, how are we supposed to plan for the future?
While “most likely” scenarios help plan for optimization, they do not support a
company’s
resilience.
TCFD guidance does not suggest the use of a “most
likely” scenario. The Network on Greening the Financial
System doesn’t pick a “most likely” scenario.
The “most likely” scenario is sinful because it narrows decision-makers’ focus
on a single predicted future, at the expense of others. Resilience is about
preparing for uncertainty, including unlikely futures with high impact. A
narrower focus encourages the type of thinking that scenario analysis seeks to
avoid altogether.
6. The Goldilocks ‘central case’
Today’s GHG emissions and warming exceed the upper limit of projections from
decades ago.
This doesn’t mean projections are useless for scenario analysis. Instead, it
informs how we need to use them to guide decision-making. Climate scenario
analyses should include a high-emissions scenario that assumes extreme (but
plausible) warming, and a low emissions scenario that assumes a rapid (but
plausible) low-carbon transition.
If we include a third, we need to be mindful of the sin of the “central case.”
Once we’ve developed our high-emissions and low-emissions scenarios, a third
scenario will land somewhere between the two extremes — inviting the assumption
that there is a central-case
scenario
— one that seems like an average of the low- and high-emissions scenarios. Like
the tale of Goldilocks, participants will gravitate to this central case as
“just right” — a sensible scenario to plan for because it includes a bit of
everything.
The opposite is true. Planning for a central-case scenario risks addressing
neither the low-emissions nor high-emissions scenario.
When building scenarios that lie between the extremes, be sure to include
something unique — such as a shock event. This helps additional scenarios offer
something unique to the assessment and minimize the tendency for participants to
discount the extremes.
7. The financialization fetish
Financial forecasting in scenario analysis is the ultimate case of substituting
means for ends. The TCFD itself says that it isn’t looking for a financial
forecast. Considering financial effects is a means to an end — a resilient
company strategy.
Here’s an example that will remain anonymous but is publicly disclosed. A
company noted climate-related reputational risks and estimated the financial
impact: “Though there is no globally recognized approach to estimate such
financial impact. The financial impact of 1% revenue was a consensus reached by
experts after discussions and assessments.”
Investors care more about how companies manage reputational risk than about
speculative financial estimates. This is what resilience is about. Offering a
speculative financial forecast fails to demonstrate how resilient a company
is to climate
change.
Today’s sustainability reporting standards push back against the
financialization fetish. The creators of the European Sustainability Reporting
Standards clarify that when reporting on financial effects from climate
change:
"The intent is not to report the monetary amount of expected damage and loss ...
which would be complex and uncertain to estimate."
Resist the temptation to deliver a precise financial forecast of future climate
effects. It’s expensive, prone to accusations of fake certainty, and isn’t
required. Instead, focus on the true purpose of scenario analysis — a
comprehensive set of actions that enhance the resilience of your corporate
strategy.
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Published Feb 5, 2025 8am EST / 5am PST / 1pm GMT / 2pm CET