Why scenario analysis is valuable to your business

Last week I stepped off a plane in Manchester to find it hotter than my departure airport in Portugal. Now you don’t need to have lived in Manchester to know that our climate is generally somewhat wetter and cooler than the Iberian Peninsula, but the well-publicised heat dome was clearly having a significant impact.   

This week, we’re being warned of the return of El Niño, a natural weather pattern that raises global temperatures and worsens some rainfall, and some scientists are predicting that the impacts felt from this year’s warming Pacific Ocean will be felt to the extreme during 2027. 

In business, boards and senior leaderships teams have a responsibility to understand whether their organisations are prepared for the physical realities of a changing climate and for most, this might mean developing adaptation and business continuity plans. For companies that report via CDP, or complete Task Force on Climate-Related Financial Disclosures (TCFD), scenario analysis will already be well understood. For others, it may soon become a compliance requirement under the proposed UK Sustainability Reporting Standard (UK SRS), which is likely to be in force in early 2027. 

What is a scenario analysis? 

Climate scenario analysis is a structured process used to evaluate how different climate futures could affect an organisation over time. Rather than attempting to predict a single outcome, it explores a range of plausible outcomes based on different levels of global warming, government policy responses and socio-economic developments. 

By applying these scenario analysis examples to your own business model, the process helps answer critical questions such as: 

• What climate hazards could affect our operations in 2030, 2040 and 2050? 

• Which sites are most vulnerable to flooding, heat stress, drought or water scarcity? 

• How might our employees be impacted by extreme weather events? 

• How might our supply chain be disrupted? 

• What financial impacts could arise from physical climate risks? 

• What actions should we be taking today to reduce future exposure? 

  
  

How is climate scenario analysis conducted? 

An organisation will typically start by selecting the most business-relevant climate scenarios and the time horizons to apply these to (e.g. 2030, 2040, 2050, etc.). This in part is dictated by the data available as this information typically needs to be purchased from third-party sources.  

In terms of the scenarios considered these often include a lower-warming scenario such as 1.5°C or well below 2°C, a delayed or disorderly transition scenario, and a higher-warming scenario such as 3°C or 4°C, where physical risks become more severe.  

For each scenario the climate is measured in a range of ways, for example the amount of precipitation; temperature changes; sea level rise and coastal flooding; likelihood of landslide; wildfire; drought; and cold stress. 

The impact of climate is location specific and so the next stage is to identify key locations for consideration, such as the sites of key assets, operations and supply chain dependencies.

Combining these together should give a range of climate impacts (precipitation, temperature changes, etc.) for each location at a specific timeframe and for a specific climate scenario. With multiple timeframes and climate scenarios usually considered the volume of data here can be huge. Just one building assessed for 2 timeframes and in 3 climate scenarios with 7 climate impacts considered leads to 42 data outputs that need analysing. 

This is where climate scenario analysis stops being a straightforward data exercise and becomes more about interpretation. A list of potentially significant climate impacts does not automatically tell you what the business risk is, how severe that risk could become, whether it is already being managed, or whether different impacts might combine to create a much bigger issue. In some cases, a significant climate impact doesn’t sound that bad. 

When completing this for a client based in North-West England, the forecast temperature increase of 2°C by 2040 sounded great to most people given the level of rain and poor weather normally experienced. However, when we discussed that this could impact employee productivity, cooling requirements, asset maintenance and insurance costs, health and safety for employees/contractors, and even the reliability of services to that particular building, impacting customer service, that increase didn’t sound so positive from a business perspective.  

You can see that it’s at this stage that the challenge moves on from being a data gathering exercise to understanding what it means in an operational and financial context. 

Organisations will need to translate climate outputs into business language. That means asking questions such as:

• What would this change mean for a particular building, process, product line or service? 

• What does this change mean for employees attempting to access the building and work in it? 

• Would it increase downtime risk? What impact might that have on our customers?  

• Could it shorten asset life?  

• Might it affect insurance costs, maintenance schedules, staff safety, customer delivery performance or regulatory exposure?  

  
  

This is also the point at which assumptions need to be challenged. A location that appears resilient on paper may rely on vulnerable transport links, a fragile supplier base or local infrastructure that is itself exposed to climate hazards. Equally, a risk that looks severe on paper, in a raw dataset, may prove less material once the design of a facility, existing controls or local circumstances are properly understood. 

Interpreting the data is one of the reasons many businesses struggle to complete robust scenario analysis internally. The data can be highly technical, the terminology unfamiliar, and the interpretation requires input from several parts of the organisation at once.  

Sustainability teams may understand reporting expectations, but may not have detailed knowledge of asset value, logistics dependencies, financial impacts or insurance implications.

Operations teams may understand the realities on the ground and the potential customer impacts, but not how to interpret climate model outputs or align the process with frameworks such as TCFD, CDP or the proposed UK Sustainability Reporting Standards.  

Finance teams may be best placed to assess financial impact, understand some of the transition pressures such as carbon pricing etc., but not necessarily the climate assumptions sitting behind the analysis. Without a structured approach, it is easy for the exercise to become either too superficial to be useful or too technical to support decision-making. 

This is where experienced support can make a real difference. Good consultants will always do more than run climate datasets or populate disclosure tables. They help organisations to identify the right scenarios, focus on the most decision-relevant assets and dependencies, interpret what is genuinely material, facilitate cross-functional discussions via workshops, and help convert technical findings into business language and clear actions for leadership teams.  

They can also help ensure the work is proportionate to your business by not making this a complex modelling exercise. The approach needs to be credible and evidence-based and will need to satisfy any external disclosure requirements that you have, but by working with you to scope out the analysis correctly, it shouldn’t be overly complex.    

The advantages of scenario analysis: Turning climate data into business decisions 

In my experience, climate-scenario analysis often falls to the sustainability lead or team and is seen primarily as a disclosure tool. However, boards have a responsibility to understand material risks facing the organisation. If climate change has the potential to disrupt operations, damage assets, affect employee wellbeing, impact supply chains or influence long-term profitability, then it falls squarely within the board's remit and it is exactly what stakeholders expect to be done.  

The key benefit of climate change scenario analysis is that it provides leadership teams with a practical way to fulfil their responsibilities by translating complex climate science into business-relevant insights, including financial impact. 

Rather than producing a technical report that sits on a shelf or is embedded into a report, effective scenario analysis helps leadership teams make informed decisions about: 

• Capital investment planning 

• Site selection and future property portfolios 

• Business continuity arrangements 

• Supply chain resilience 

• Insurance considerations 

• Infrastructure upgrades 

• Workforce planning 

• Long-term business strategy 

  
  

By understanding which risks are likely to emerge under different climate futures, organisations can prioritise investments and adaptation measures where they will have the greatest impact. 

Scenario analysis example 

One organisation I worked with was initially concerned to discover that one of its long-established warehouse facilities was located within a designated flood zone. On the surface, this appeared to represent a significant climate-related risk and raised questions about the site's long-term resilience. 

However, climate scenario analysis demonstrated the importance of looking beyond headline risk classifications. When we examined site-specific climate projections for 2030 and 2050, we found that the flood zone designation was linked to the presence of a nearby man-made underground reservoir rather than a river, coastal floodplain or other climate-sensitive water source. As a result, the modelling indicated that the likelihood of climate-related flooding affecting the facility remained very low across the scenarios assessed. 

In this case, what initially appeared to be a significant physical risk proved to be far less material when assessed through the lens of site-specific climate data and future climate projections, something that would have been difficult to judge when simply looking at its flood risk designation. This allowed the senior leadership team to make decisions based on evidence rather than assumptions, focusing resources on the risks that were most likely to affect the business. 

Building resilience before it becomes necessary 

Unlike a cybercrime or hacking event, the organisations that will be most successful in navigating climate change are unlikely to be those that react fastest when an event occurs. They will be those that have recognised climate-change impact, already considered the risks, understood their vulnerabilities, and implemented proportionate adaptation measures in advance. 

As heatwaves, extreme temperatures, flooding events and other climate-related disruptions become increasingly common, boards and senior leadership teams will face growing scrutiny over how well prepared their organisations are. 

Scenario analysis isn’t always easy but one day you might find that your business, employees, customers and stakeholders are grateful that you completed it.  If you need any support or guidance, then we can help - contact us to find out more.

Authored by Sarah Kirton.