Corporations, investors, and financial markets hate surprises; yet, when it comes to climate change, science indicates that future environmental conditions will vary in some dimension – from increased fluvial flooding to reduced water supplies. It is no longer strategic to base forward-looking decisions on historical or even present-day conditions.
We see evidence of this already. The 2018 California wildfires, for example, triggered the beginning of what could become an insurability crisis; premiums rose and, were it not for the intervention of the state government, many homeowners would have lost coverage. As the world warms, catastrophic events will increase in frequency and intensity and in ways that are impossible to predict using conventional risk assessment methods.
Hence the need for a new approach; one that combines the benefits of traditional methods, like catastrophe modeling, with new approaches like climate risk and opportunity modeling. These forward-looking, probabilistic models help companies make strategic and risk management decisions under complex and changing environmental conditions. For example, the amount of greenhouse gas emissions released into the atmosphere will continue to affect atmospheric conditions as well as elicit a range of societal responses. This is where scenario analysis becomes so crucial when assessing climate impacts.
Climate scenario analysis is central to understanding climate impacts and undertaking the Task Force on Climate-related Financial Disclosures (TCFD) – reporting set by the Financial Stability Board. This can be incredibly complex as it requires access to terabytes of climate data, scientific expertise to calculate specific hazard metrics, immense computing power, and the ability to pair climate model outputs with asset location to measure potential impacts. Corporations are increasingly turning to analytical tools, such as the Climanomics® platform, to assess both physical and transition risk as well as opportunities over a time horizon of 2020-2100.
Without preparation, all sectors will face unexpected impacts and unprecedented change. For example, in addition to increases in coastal flooding risk around the world, we observe in the data spikes in wildfire risk by mid-century in certain regions that traditionally have had very little exposure, leading to unforeseen damage to property, business interruption, and, perhaps even outmigration of certain areas.
Fundamentally, climate scenario analysis is about minimizing surprises. It is about enhancing risk management by enabling intelligent investment, insurance and planning strategies. As corporations, investors, and governments worldwide embrace the TCFD and begin to mandate climate risk reporting, climate scenario analysis will come to the fore as critically important for businesses to master to prepare and be future-ready.
About the author
Tory Grieves, completed dual MEM/MBA degrees at Yale University before joining TCS to lead analytics initiatives. The TCS Climanomics® platform puts a price on climate risk for investors and businesses and was recently named a leader in climate risk solutions by Forrester Research.
