Climate Scenario Analysis: It’s about More than CSRD Compliance

Photo by jamesteohart on iStock

July 3, 2024
  • Ameer Azim portrait

    Ameer Azim

    Director, Climate Change, BSR

  • Taylor Black portrait

    Taylor Black

    Associate, Climate Change, BSR

  • Travis Osland portrait

    Travis Osland

    Associate, Technology Sectors, BSR

  • Victoria Woolner portrait

    Victoria Woolner

    Manager, Nature, BSR

Key Points

  • BSR’s updated climate scenarios provide a comprehensive analysis of three plausible climate futures and their cascading impacts on business.
  • Climate scenario analysis will enhance organizational resilience by identifying key climate risks and opportunities, serving as a crucial component in preparing for the Task Force on Climate-Related Financial Disclosures (TCFD) and the EU’s Corporate Sustainability Reporting Directive (CSRD).
  • The updates include the latest climate data, commitments, and technological trends, along with financial quantification of impacts. They also offer new sector-specific insight, providing a thorough analysis of how the three scenarios will impact six different sectors.

According to leading climate scientists, 2023 was not just the warmest year in recorded human history—it was the warmest by far. While this increasingly unstable and warmer climate demands business action to decrease emissions, regulations are also requiring companies to begin identifying and addressing the risks and opportunities that climate change, as well as climate policies, poses to business. 

For the past few years, BSR has helped companies meet these expectations by identifying their unique climate risks and opportunities through a best practice known as scenario analysis. This is a well-established methodology that has been embraced by the Task Force on Climate-Related Financial Disclosures (TCFD) to explore divergent climate futures and ultimately develop resilient business strategies that are better prepared for multiple potential realities. 

The Latest Updates to BSR’s Approach to Climate Scenarios 

In 2023, BSR updated its three climate scenarios to align with the latest narratives and datasets published by the Network for Greening the Financial System (NGFS). The NGFS models are notable for their coverage of both physical (e.g., extreme weather) and transition risks (e.g., climate policies, carbon pricing) in a single, integrated dataset.

The latest updates incorporate new policy pledges and targets from countries around the world, updated projections for emerging technologies (e.g., solar, wind, carbon capture and storage), as well as brand-new projections for financial losses from floods and tropical cyclones. 

In addition to including the most current data from NGFS, BSR has made two major changes to its approach to climate scenario analysis: 

Financial quantification of climate impacts to help companies develop a more tangible understanding of their climate risk with estimated impacts to financial performance and cash flow. BSR’s financial quantification methods include the option to estimate the overall risk of misalignment with a net-zero transition and a more bespoke option to quantify the physical risk to your business’s specific locations of interest using geospatial analysis. 

Sector-specific scenarios provide a thorough analysis of how the three scenarios will impact each sector, including insights on which regions are likely to experience the greatest physical risks, which business-relevant opportunities are likely to arise, and which sector trends are likely to be impacted. These ready-made insights provide a better starting point to identify insights specific to your company’s unique situation. For this latest update, the scenarios include coverage of the following six sectors: 

  • Consumer Products 
  • Energy 
  • Financial Services 
  • Food, Beverage, and Agriculture 
  • Industrials 
  • Technology 

Why Conduct Climate Scenario Analysis: It’s About More than TCFD Alignment 

Regulations and standards across the globe are steadily adopting the TCFD framework for climate disclosures, including its recommendation to conduct climate scenario analysis. This includes the EU’s CSRD, California’s recently published climate disclosure bill (SB-261), and numerous other country-level regulations that are aligned with the IFRS Sustainability Disclosure Standards. Beyond complying with regulations and meeting investor expectations, climate scenario analysis can also help companies to: 

  • Enable long-term planning to inform strategy setting and financial planning that more robustly capture climate considerations across a wide range of plausible futures
  • Improve the management of critical climate risks by integrating them into existing enterprise risk management processes
  • Enhance strategic conversations by challenging business-as-usual assumptions and considering novel, disruptive developments 
  • Promote collaboration among internal stakeholders through shared discussion of key drivers reshaping the external operating environment 
  • Improve strategic agility by establishing indicators that should be monitored and rehearsing responses to disruption in advance 

If you’re interested in conducting a climate-scenario analysis with BSR, please contact us. In the upcoming months, the climate team will continue to develop these scenarios, including the latest models and data from the Network for Greening the Financial System (NGFS), a new fourth scenario that depicts a world with both high transition and physical risks, and guidance on incorporating nature considerations into scenario analysis.

Let’s talk about how BSR can help you to transform your business and achieve your sustainability goals.

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