Climate scenario analysis: What it is and how to do it

The case for climate scenario analysis

Climate change creates risks that don’t show up in a normal business plan. A flood that shuts down a supplier, a carbon price that changes your cost base, or a new regulation that reshapes your market. None of these is guaranteed, but all of them are possible. 

Climate scenario analysis gives you a structured way to think through these possibilities before they happen. Instead of betting on one version of the future, scenario analysis asks: what happens to our business under several different futures?

This matters because investors, regulators, and customers increasingly expect companies to show they’ve thought through the climate risks and opportunities ahead. Frameworks such as ESRS have made climate scenario analysis an important part of credible climate and ESG reporting.

Beyond compliance, scenario analysis is a useful planning tool in its own right. It helps you stress-test your strategy, prioritise where to invest in resilience, and explain your reasoning to leadership and the board in terms they understand: risk, cost, and opportunity.

This guide walks through how to run a climate scenario analysis step by step, using your own business and emissions data as the starting point.

How to run a climate scenario analysis: 6 easy steps

Running a climate scenario analysis isn’t complicated. Here are the easy steps you can follow:

Step 1: Define the scope of your analysis

Start by deciding what you’re analysing. This could be your whole company, a specific business unit, a key product line, or a critical part of your supply chain. A narrower scope is often easier to manage for a first attempt, and you can expand it later.

At this stage, also decide your time horizons. Most scenario analyses use a near-term horizon of 1 to 5 years, a medium-term horizon of 5 to 10 years, and a long-term horizon of more than 10 years. Climate risks unfold differently across time horizons, so testing multiple horizons gives you a fuller picture.

Finally, identify the assets, locations, or activities that are most exposed to climate-related change. This might include: 

• Manufacturing sites in flood-prone areas
• Suppliers reliant on a single raw material
• Revenue tied to products that could be affected by future regulation

Step 2: Choose your climate scenarios

Climate scenarios describe possible futures, typically defined by how much the world warms and how quickly the transition to a low-carbon economy occurs. Most organisations work with a small set of scenarios rather than building their own from scratch.

Commonly used reference scenarios include:

• A scenario where global warming stays below 1.5°C or 2°C, driven by strong climate policy and a fast transition to clean energy
• A scenario where current policies continue roughly as they are, leading to warming above 2°C
• A scenario where little additional climate action is taken, leading to high physical climate risk by the second half of the century

These scenarios typically come from established sources such as the Network for Greening the Financial System (NGFS) or the Intergovernmental Panel on Climate Change (IPCC). Using recognised scenarios makes your analysis easier to defend and compare with peers, since you’re not relying on assumptions you invented yourself.

For most companies, two or three scenarios are enough: one aligned with a rapid transition, one reflecting current trends, and one representing a higher-warming, higher-physical-risk world.

Step 3: Identify climate-related risks and opportunities

For each scenario, work through how it would affect your business. Climate risks generally fall into two categories.

Physical risks come from the changing climate itself. These include more frequent extreme weather events, rising sea levels, water scarcity, or changing temperature patterns that affect operations, supply chains, or asset values.

Transition risks come from the shift to a low-carbon economy. These include carbon pricing, new regulations, changing customer preferences, and shifts in technology or market demand. A company with high direct emissions, for example, may face higher costs under a scenario with strong carbon pricing.

It helps to work through each scenario with the people who run different parts of the business, since they often have the clearest view of where exposure sits. Don’t focus only on risks. Some scenarios also create opportunities, such as growing demand for low-carbon products or new markets opening up as competitors struggle to adapt.

Step 4: Assess the financial and operational impact

Once you’ve identified the risks and opportunities, the next step is to estimate their scale. This doesn’t need to be perfectly precise, especially early on, but it should be specific enough to compare across scenarios.

For each material risk or opportunity, consider questions such as: How would this affect revenue, costs, or asset values? Over what timeframe would the impact be felt? How likely is this outcome under this particular scenario?

This is where strong carbon accounting becomes valuable. If you already know your Scope 1, 2, and 3 emissions by source, it is far easier to model how a carbon price or supplier change might affect your business.

Where possible, express impacts in terms meaningful to your business, such as cost increases, revenue at risk, or capital expenditure required for adaptation. This makes the results easier to use in planning and easier to communicate to leadership. 

You can easily do all this with tools like Emission Twin that enable you to simulate different climate scenarios.

Step 5: Translate findings into action

Scenario analysis is only useful if it changes what you do. Once you’ve assessed the impacts, work through what actions would reduce your exposure or help you capture identified opportunities.

This might include diversifying suppliers to reduce reliance on climate-exposed regions, investing in energy efficiency to reduce exposure to carbon pricing, or adjusting your product portfolio to align with where demand is heading under a low-carbon transition.

Prioritise actions based on which scenarios they help with most. Some actions, like improving energy efficiency, tend to help across most scenarios and are usually a safe starting point. Others may only make sense under specific conditions, and these can be revisited as the picture becomes clearer over time.

Step 6: Document, report, and revisit

Climate scenario analysis isn’t a one-time exercise. Document your scope, the scenarios you used, your key findings, and the actions you’ve decided to take. This documentation supports disclosure requirements across different frameworks and provides a clear record to build on.

Revisit your analysis regularly, ideally every one to two years, or sooner if there’s a major change to your business, your supply chain, or the external environment. Climate science, regulation, and market conditions continue to evolve, and your scenario analysis should keep pace.

Emission Twin: Making scenario analysis easier with the right data

The biggest barrier to climate scenario analysis usually isn’t the scenarios themselves. It’s the underlying data. If your emissions and operational data are scattered across spreadsheets and disconnected systems, every scenario becomes a manual exercise in pulling numbers together.

Emission Twin provides a structured view of your Scope 1, 2, and 3 emissions, mapped to your operations and supply chain. Doing so makes scenario analysis far more manageable. It means you can model how changes in carbon pricing, supplier emissions, or energy costs would affect your numbers, rather than relying on estimates.

The platform centralises your GHG data, enabling you to simulate how changes in your business affect emissions and costs. While scenario analysis also involves external factors like policy and market shifts, having a reliable internal data foundation makes it far easier to connect those external scenarios to your actual business.

Book a demo and see how it works.

Frequently asked questions

What is the difference between climate scenario analysis and a climate risk assessment?

A climate risk assessment typically looks at current and near-term risks based on today’s conditions. Climate scenario analysis goes further by testing how your business would perform under several different possible futures, often over longer timeframes, helping you plan for uncertainty rather than a single expected outcome.

Do small and medium-sized businesses need to do climate scenario analysis? 

Formal scenario analysis requirements under frameworks like CSRD mainly apply to larger companies, but smaller businesses can still benefit. Even a simple exercise looking at how a couple of scenarios might affect your suppliers, costs, or customers can help you plan ahead and prepare for questions from larger customers or investors.

How many scenarios should we use? 

Most organisations start with two or three scenarios: one reflecting a fast, well-managed transition to a low-carbon economy, one reflecting current trends continuing, and one reflecting limited climate action and higher physical risk. This range is usually enough to show how different your exposure looks across plausible futures without making the analysis too complex to manage.

How does climate scenario analysis relate to setting science-based targets? 

The two are connected but serve different purposes. Scenario analysis helps you understand risks and opportunities under different futures, while science-based targets define the emission reductions your business commits to. Insights from scenario analysis, such as where transition risk is highest, can help inform which areas to prioritise when setting and working toward your targets.