How would your business be affected by more frequent flooding, changing energy prices or a shift in customer demand?
Climate change is not only a sustainability issue. It can affect production, supply chains, costs, investments and competitiveness. Do you know which climate-related risks your business is exposed to, and how vulnerable you are to them?
Climate scenario analysis helps companies explore how different plausible futures could affect the business and identify actions that could strengthen resilience. The purpose is not to predict exactly what will happen. It is to make better decisions despite uncertainty.
What could different climate futures mean for your business?
Different climate futures bring different types of business challenges. These may come from physical climate impacts, such as flooding, heatwaves and water scarcity, or from the transition to a low-carbon economy, including changes in regulation, technology, energy systems and customer demand. Climate scenario analysis can help companies explore these developments over the short, medium and long term, considering potential impacts on their own operations and across their value chain.
A useful starting point is to compare contrasting scenarios. A future with rapid climate action may involve significant changes in regulation, technology and markets. A future with slower action and higher warming may bring more severe physical impacts and disruption. Neither future is free from risk. What matters is how these different developments could affect your business, your suppliers and your customers.
Example climate scenarios illustrating different possible pathways and climate-related challenges
Source: IPCC (2022), AR6 Working Group III.
Translating broad climate developments into concrete business implications is what makes scenario analysis useful.
- Physical risks: Could flooding, heatwaves, drought or water scarcity disrupt your sites, suppliers, logistics or production?
- Transition risks: Could new regulation, changing energy prices, new technologies or shifting customer expectations affect costs, investments or demand?
- Opportunities: Could the transition create demand for new products, improve resource or energy efficiency, strengthen customer relationships or open new markets?
The important question is not simply whether a risk exists, but what it could mean for your business. Being exposed to a climate hazard does not automatically mean being equally vulnerable. Two companies exposed to the same risk may face very different consequences depending on their operations, dependencies and existing safeguards. A flood risk at a critical supplier may, for example, be just as important as a risk at your own site if it interrupts production or deliveries.
Why does climate scenario analysis matter for business decisions?
Climate scenario analysis becomes valuable when the findings are connected to actual decisions.
It can help companies:
- Protect business value: Identify operational, financial and supply chain vulnerabilities before they develop into more significant problems.
- Strengthen business continuity: Understand where disruption could occur and where preventive action may be needed.
- Make better investment decisions: Identify where investments may need to be brought forward or reconsidered as conditions change.
- Prepare for future competitiveness: Explore how changing markets, technology and customer expectations could affect today’s strategic choices.
- Identify opportunities: Recognise where changing conditions could create demand for new products, services or more efficient ways of working.
Climate scenario analysis does not remove uncertainty. It makes uncertainty easier to understand and manage.
Getting started does not require every answer
A first climate scenario analysis does not need to cover everything. Start with the business questions that matter most and build the analysis over time.
- Define the purpose. Which business questions and decisions should the analysis support?
- Bring together relevant functions. Involve colleagues who understand operations, finance, purchasing, strategy and sustainability.
- Test contrasting futures. Use relevant scenarios and time horizons to challenge assumptions about how the business may develop.
- Understand exposure, vulnerability and resilience. Consider your sites, operations, suppliers and other critical parts of the value chain.
- Turn insights into action. Identify where further analysis, risk mitigation, investments or strategic actions may be needed.
The goal is not to create a perfect model of the future. It is to develop a better understanding of where your business may be vulnerable and what you can do about it.
The analysis can strengthen risk management, investment decisions and transition planning, while also providing useful input to financial materiality assessments and business strategy. This is where the real value of climate scenario analysis lies.
Companies do not need certainty about the future to start preparing for it. By exploring different futures and understanding what they could mean for the business, management can make more informed decisions today and strengthen the company’s ability to respond as conditions change.
How can Dutt CSR Consulting support you?
At Dutt CSR Consulting, we take a practical approach to climate scenario analysis. We start with your business, the decisions you need to make and the information already available, and develop the analysis over time.
The key questions are practical: Which climate-related changes could affect your business most, and what do you need to understand to prepare for them?
Would you like to explore what climate scenario analysis could look like for your company? Get in touch with us to discuss possible next steps.
Further reading
For readers who want to explore climate scenarios in more detail:
- IPCC Sixth Assessment Report: Climate Change 2023 Synthesis Report
A good starting point for understanding climate change, future risks, impacts, mitigation and adaptation. The Synthesis Report brings together the findings of the three IPCC working groups. - NGFS Scenarios Portal
Particularly useful for understanding the interaction between physical and transition risks. The portal presents contrasting scenarios ranging from orderly and disorderly transitions to higher physical-risk futures. - IEA Global Energy and Climate Model
Useful for companies wanting to understand future energy, technology, policy and market developments. The model underpins the IEA’s medium- and long-term energy scenarios.
