Climate risk reporting: using a Paris-aligned climate scenario

At COP27, there were widespread fears about the key 1.5˚C global temperature target being compromised. According to the BBC, the Head of the European Climate Foundation and architect of the Paris climate agreement, Laurence Tubiana, said: “The world is witnessing the impact of the EU fossil fuels addiction, it should not repeat the same mistakes."

The 1.5˚Cs target was established in 2015 as a legally binding part of the Paris Agreement, to avoid the worst climate change outcomes by reducing carbon emissions enough to keep average global temperatures within 1.5˚C of the pre-industrial global average by 2100. Policies and commitments that are “Paris-aligned” aim to halve carbon emissions by 2030, in line with what climate science estimates it will take to fulfill the commitments made as part of the Agreement. A “Paris-aligned” future, where we keep warming to 1.5˚C, is still theoretically in reach, but the window of opportunity is closing fast. Current policies and commitments have the world on track for a 2.7˚C increase in global average temperatures, according to the carbon action tracker project.

With so much uncertainty around how policy decisions will affect emissions over the coming decades, organizations looking to understand how climate change will affect their assets and operations and estimate the financial impacts of their exposure to climate change need to look at a range of potential outcomes depending on different emissions futures. This is where forward-looking tools such as climate scenario analysis come in.

A climate scenario is a description of a possible emissions outcome, based on policy decisions around emissions and how they interact with our climate system and socioeconomic activity. Using climate scenarios as part of climate risk assessments allows organizations to create better strategies to mitigate damage caused by climate hazards to their assets – ensuring they have resilient business models, operations and assets.

Climate scenario analysis is used in climate risk assessments to explore the potential impacts of climate change under different emissions futures. Climate scenario analysis is vital to illustrate the potential impact of climate change against multiple emission scenarios and incentivize action towards a Paris-aligned future. It is critical that an organization can discover its climate risk against a range of potential futures. Using different climate scenarios, organizations can understand the full range of their climate risk using scenarios that represent the best- and worst-case climate change outcomes. These insights help leaders make the most-effective plans to protect their asset portfolio.

There are two types of climate scenarios that each take a different approach to address climate-related risk. The first category takes an earth system modeling approach that comprehensively covers climate-related physical risks: this approach is best for understanding physical risk from extreme weather events and is used by the Intergovernmental Panel on Climate Change (IPCC). This helps organizations to look at how severe weather could impact assets they own, assets they depend on as part of critical infrastructure, and assets across their supply chain – allowing them to make the most informed adaptation and resilience plans possible.

The second category, uses a basic climate model but cleverly fuses how energy markets act into emissions scenarios and explores the potential for economic, political, and social disruption. This second set of scenarios includes widely used scenarios created by the International Energy Agency (IEA) and the Network for Greening the Financial System (NGSF). As these scenarios contain more detailed models of the ways economic and energy systems may respond to climate change, these scenarios offer more scope to explore transition risks - risks for organizations that result from our responses to climate change, such as the transition to a low-carbon economy.

Within each approach to developing climate scenarios, there is an array of possible future scenarios, from scenarios where we do nothing to limit fossil fuel emissions to scenarios where we act now to reduce emissions in line with the Paris Agreement. Most climate disclosure recommendations and frameworks do not specify which climate scenario approach or which future climate scenario to include. However, it is widely recommended that you disclose the scenarios you have used in your climate analysis, so investors can better understand your climate-related risk and make informed decisions.

To build a more comprehensive view of climate risk, the TCFD recommends organizations take into consideration different climate-related scenarios, including a 2°C or lower (Paris-aligned) scenario. Organizations unfamiliar with climate scenario analysis might struggle with knowing where to start with scenario analysis, or how to select the right scenarios for assessing their climate-related risk.

EarthScan™, Cervest’s climate intelligence product, enables organizations to discover climate risk across multiple climate scenarios which are based on the scenarios used in the most recent IPCC report, which forms the scientific basis of the negotiations and discussions behind climate commitments such as the Paris Agreement. These are:

• Paris-aligned: the Paris-aligned scenario refers to an emission decrease in line with the UNFCCC Paris Agreement. In short, global temperatures would not increase past 2°C by 2100 – this would limit severe climate change outcomes. This is currently the most optimistic climate scenario.

• Emissions peak in 2040: as it suggests, this intermediate scenario is based on policy decisions that lead to the maximum level of emissions peaking in 2040, and dropping afterward. This scenario is the closest to the future we are on track for given current policy commitments.

• Business as usual: this represents the worst-case scenario we face, where no further policy action is taken, and future emissions continue to increase without critical intervention.

Scenario analysis can provide business with a view of the future that demonstrates why decarbonization efforts must be pursued in tandem with adaptation efforts. Using the Paris-aligned scenario in reporting, which illustrates the best-case scenario, demonstrates that organizations are still exposed to increasing climate risks over time. This emphasizes that while Net Zero is essential, on its own is insufficient. Even if we hit Paris-aligned emissions targets, businesses must still adapt to the decades of climate volatility already baked into our climate system.

By analyzing multiple outcomes – spanning various locations, timelines and climate hazards – organizations can prepare for the best and worst impacts depending on which emissions scenario plays out. Cervest’s climate intelligence product, EarthScan, enables organizations to discover climate risk across multiple climate scenarios — including Paris-Aligned, Business as Usual and Emissions peak in 2040 – simultaneously across multiple time horizons and climate hazards.

By harnessing EarthScan’s on-demand climate intelligence, organizations can screen thousands of assets and portfolios for physical climate risk, identify risks and opportunities across multiple climate scenarios and time horizons simultaneously, and use the single, shared source of truth to share and collaborate across all regions and departments.

On the path to resiliency and a Paris-aligned world, transparency is key. EarthScan provides you with the CI insights you need to drive collective action. Discover how companies are using climate intelligence to create comprehensive, accurate and credible climate risk reports by downloading our free ebook.