What if? Practitioner insights on climate-related scenarios

Apr 17

Scenario analysis helps individuals and teams uncover and challenge their assumptions, enabling organisations to adapt how they understand and respond to volatile, uncertain, complex, and ambiguous environments— ultimately strengthening their ability to perform under uncertainty (Chermack 2011).

Scenario analysis is particularly suited to a deeply uncertain future where it is not practicable to assign a probability and consequence to any one outcome. This is the case for climate-related change, where the complexity, nonlinearity, scope and interconnectedness of potential impacts and responses could lead to multiple, often equally plausible futures¹.

While scenario analysis was designed as a strategic management tool, insights gained through the process can form the basis of risk identification for risk management purposes. Additionally, they can enable the identification of opportunities that may arise. The Godfather of scenario analysis, former Royal Dutch Shell’s Pierre Wack (1985) stated that scenario planning can be applied by organisations in two main ways:

by helping them anticipate and understand their risk exposure; and
by helping them identify strategic options of which they are currently unaware.

Identification of a comprehensive set of driving forces is an integral part of the climate-related scenario development phase. However, only a subset of driving forces, largely filtered by impact and uncertainty, will be adopted in a final suite of scenarios. The full set of driving forces identified represent a comprehensive list of climate-related risks that can form the basis of risk management efforts.

Appropriately designed and supported, an organisation can reap significant benefits from both phases of climate-related analysis:

Development: Active participation of an organisation’s employees in scenario development (and where relevant, analysis) can generate greater understanding and knowledge of how climate-related change could impact organisational functions, services and strategy and in doing so build internal capability to address such changes.
Analysis: The results of scenario analysis form the basis of changes and enhancements required for resilience of strategy and business models to climate-related changes.

Signals identified from this process support the implementation of more agile decisioning making – critical to effectively addressing climate-related events as they begin the emerge. The extent and quality of outputs an organisation gains from climate-related scenario analysis will be determined by that organisation’s investments and inputs.

Designed appropriately, the tangible outputs of a climate-related scenario are:

Initial inventory of options to build strategic resilience to climate-related change. Options represent those actions an organisation can take to make it more resilient to climate-related change.
Barriers and enablers to strategic resilience. While this output is a departure from traditional scenario analysis, we have found both the process to derive it and the output itself particularly useful. It represents an inventory of both current enablers and barriers required for an organisation to maximise resilience and thrive in a climate-related changed future.
Set of signals. The signals (or signposts) that emerge from the scenario development process enable an organisation to have an active lens on climate-related risks and opportunities. They also help ensure that the scenarios are still relevant and fit-for-purpose.
Detailed list of climate-related risks and opportunities. This output is an integral product of the scenario development process. To draw focus to the most impactful and uncertain climate-related issues, many of these risks and opportunities will be excluded from the final scenarios.

Succinct
A good scenario is concise and captures the imagination (and thus, attention) of decision-makers.
Engaging
A scenario must be well written and be in a story-based narrative. It must be able to draw in the reader and support them to let go of preconceived ideas. We find that a temporal-based flow makes for an engaging read.
Relevant
A good scenario is constructed with reference to the nature of an organisation’s business model and strategy, and the environment in which it operates.
Challenging
For a scenario to be challenging assumptions should be rigorously challenged, especially when they reflect conventional wisdom or rely on overly simplistic interpretations of today’s complex and dynamic environment. True insight comes from questioning what is often taken for granted. In New Zealand, the regulators place emphasis on the disruptive nature of climate-related scenarios, stating that they ‘should explore assumptions that will significantly alter the basis for business-as-usual thinking’ (FMA, 2023, p. 10).
Plausible
Scenario events should be possible, believable, and reasonable within the boundaries of a scenario’s outcome and overall context. While the assumptions that underlie scenario events and futures and may be adopted from the extremes of modelling results, they still must be possible and consistent with credible information produced by reputable sources of scientific and socioeconomic research.
Internally consistent
To be internally consistent, scenario events and associated impacts must combine and interact in a logical fashion that is consistent with the scenario’s future state.
Distinctive
Analysis of one scenario would hardly prepare an organisation for a future of multiple states. To test as many potential futures as possible, each scenario should be clearly differentiated. Scenarios should not just be a variation of a single theme. Having said that, given the significant uncertainty of the timing of climate-related impacts, differing scenarios can be used to explore how timing of key factors can result in very different outcomes.
Organisational inputs
We don’t advocate for consultant-led scenarios developed in isolation—instead, we support a consultant-supported approach where internal teams are actively engaged throughout the process. The value organisations gain from scenario planning is directly linked to the effort they invest in the process. Those that engage deeply—by challenging their assumptions, involving diverse perspectives, and exploring a wide range of plausible futures—consistently generate more useful insights and strategic and operational options.

We concur with academic literature² and recommend the development of four scenarios. Four scenarios enable coverage of distinctive combinations of key factors and prevents decision-makers becoming invested in any one of the futures—thus ensuring they can prepare for them all. We recognise that four is greater than the minimum number of scenarios required in both Australia and Aotearoa New Zealand. For example:

Australia requires the analysis of at least two climate-related scenarios³. Two scenarios can lead decision-makers to gravitate to the most positive scenario.
New Zealand requires the analysis of at least three climate-related scenarios⁴. Three scenarios can lead decision-makers to gravitate to the middle scenario.

We would also advise that the marginal value for a third or fourth scenario far outweighs their cost. However, we think this efficiency flips from the fifth scenario onwards.

We only recommend that organisations quantify elements of a scenarios where it would be of great value to interpretation of the qualitative narrative, and it can be pragmatically derived. Much of the climate-related disclosure guidance to emerge of late gives the impression that quantitative scenarios are more sophisticated than qualitative scenarios. While we don’t disagree, we believe that developing qualitative scenarios are superior to quantitative ones for two reasons:

Misrepresentation: Many of the quantitative scenarios developed to date, such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), have been criticised by the scientific community⁵ for favouring measurement to the detriment of a true representation of climate-related risk. Over-simplification of assumptions, exclusion of significant physical and transition events, in addition to a failure to incorporate compounding and non-linear events has led to gross under-representation of climate-related risks.
Insight: Time and effort required to quantify scenarios risks focusing attention to only a subset of climate-related risks. Consistent with the above, such an approach can impede gaining a much broader and nuanced understanding of climate-related drivers and falsely under-represent potential drivers and impacts in resultant scenarios.

The short answer is yes. The teleconnections that distinguish the modern world mean that non-climate and climate-related events will intersect and interact with varying outcomes. To exclude other trends would misrepresent how climate-related change is perpetuated and diminished. Having said that, we recommend that non-climate drivers should only be included where they provide greater insight into how climate-related change could impact an organisation or substantially support an engaging narrative. It is important that the focus of climate-related scenarios on climate-related change is not diluted by the inclusion of non-climate-related drivers.

Many institutions have developed climate-related scenarios that are available for public consumption. These include:

The Shared Socioeconomic Pathways (SSPs) and Representative Concentration Pathways (RCPs) developed by Intergovernmental Panel on Climate Change (IPCC),
The suite of global scenarios developed by the likes of the Network for Greening the Financial System (NGFS) and Inevitable Climate Response (IPR), and
The regional and sectoral scenarios developed for New Zealand’s financial services, construction, property, and tourism sectors.

We apply such scenarios in two ways:

We strongly recommend against full adoption or downscaling of any public scenario as:

the scale of global scenarios and assumptions incorporated in regional scenarios rarely align to the climate-related issues of singular organisations, and
adopting a public scenario precludes the significant insight and organisational capability that can be gained from building from scratch.

Whilst it may be tempting to utilise an “off the shelf” scenario, any upfront savings in associated costs could be at the detriment of organisational-specific insights.

Chermack, T. (2011) Scenario Planning in Organizations: Berrett-Koehler Publishers. Kindle Edition.

FMA (2023). Information sheet: Climate-related Disclosures – Scenario analysis (Updated October 2023).

Haigh, N. (2019). Scenario planning for climate change : a guide for strategists.

Keen, S. (2023). Loading the DICE against pension funds: Flawed economic thinking on climate has put your pension at risk: Carbon Tracker.

Wack, P. (1985). Scenarios: Shooting the rapids. Harvard Business Review, 63(6), 139–150.

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What if? Practitioner insights on climate-related scenarios

About this guide

Practitioner insights

What is scenario analysis and why is it suited to exploring climate-related changes?

What is a climate-related scenario?

What is climate-related scenario analysis?

Phase 1: Development

Developing multiple climate-related scenarios.

Phase 2: Analysis

Using scenarios to help identify how an organisation’s business model and strategy can adapt to ensure it can anticipate and prepare for possible climate-related changes that organisation might encounter in future.

What is climate-related scenario analysis?

What can an organisation gain from climate-related scenario analysis?

What are the tangible outputs of climate-related scenario analysis?

What are the characteristics of a good scenario?

What is the best number of scenarios to analyse?

Quantitative scenarios or qualitative scenarios?

Should climate-related scenarios integrate other trends?

Where do public scenarios fit?

Concluding remarks

References

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