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Climate scenario guide

This new CICERO’s Climate scenario guide helps investors understanding and implementing the recommendations on scenario stress testing by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (TCFD):

Key points

Scenario stress testing is useful for some risks and periods, but not all. Stress testing against a range of scenarios can help prepare for transition risk, but does not capture physical risk in the near term.
Plan for 2°C…but also 3°C and 4°C. We need to plan for a 2°C world, but at the same time recognize that it is not the most likely outcome given today’s policy ambition:
– Meeting 2°C requires having all the building blocks in place: CO₂ pricing, renewable electricity generation, energy efficiency, electric vehicles, and carbon capture & storage (CCS). We are on track for electric vehicles, and made good progress in renewable electricity generation and energy efficiency, but are lagging behind on CO₂ pricing and CCS.
– Currently, 3°C global warming seems more likely than 2°C due to high uncertainty about the implementation and potential tightening of pledges under the Paris Agreement, and uncertainty about a rapid upscaling of low-carbon technologies like CCS.
– Scenarios around 4°C can help examine extreme physical impacts in the longer term.

Due to the profound changes needed for aggressive climate targets such as 2ºC, transition risk affects all sectors. In the short to medium term, industries that supply or use fossil fuels are most likely to be disrupted.

We do not need elaborate scenario testing to prepare for physical climate change in the short term. Changes such as extreme events and flooding are affecting all sectors and regions already. These impacts will become clearer over the next 10-20 years, because of historical emissions and independent of the scenario. By limiting future emissions, we can limit additional and worse impacts in the longer term.

Physical climate risks can affect all sectors. Extreme events, such as recent hurricanes and flooding, influence companies across all sectors via electricity, production and transportation outages.