How can i use climate scenarios?

Financial professionals have long used scenario analysis to estimate potential change in asset values
given possible changes in economic or market conditions. Climate scenarios plausibly describe how
the future may develop based on a set of assumptions about key driving forces and relationships.
Climate scenario analysis represents a developing area of practice in which investors, risk professionals,
managers, and policymakers translate scenarios developed by climate scientists into models that
examine how future pathways might affect their investments. We have found in practice that different
use cases within the investment process require tailored approaches to address users’ specific needs.
These use cases include:

Reporting obligations: Whether voluntarily or by mandate, institutions are disclosing information on
climate risk management and performance to regulators, investors and the public.

• Stress testing: Institutions are being asked by stakeholders, regulators and prudential supervisors
  to estimate the potential impacts of climate on portfolio values, profitability and operations.
  Use cases also increasingly extend to business functions, including:
• Investment activities: Investors are seeking to maximize risk-adjusted returns based on
  anticipated climate risks and opportunities. This can include high-level activities such as strategic
  asset allocation and asset-liability management, as well as portfolio construction and security
  selection.
• Risk management: Risk teams are tasked with quantifying and managing risk arising from climate
  change, from the overall enterprise down to the security level.
• Client advisory: Advisory teams are advising clients on strategies designed to mitigate climate
  risks, identify opportunities and inform investment decision-making.

Climate scenario analysis begins with the assumption of hypothetical future events that define each scenario. Consideration of discrete future outcomes is necessary because our global climate future will be greatly influenced by distinct, bifurcating events, including action (or inaction) by governments, technological shifts and potential climate-related tipping points. Figure 1 shows sample output of scenario analysis. Here that analysis shows the estimated maximum devaluation of several companies based on three scenarios for the low-carbon transition.

source:

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