SCENARIO ANALYSIS

The purpose of scenario analysis is to simulate and understand the possible evolution of a company under different future contexts, i.e. to test its long-term resilience. In the case of climate change, scenarios of future climate trends allow an organisation to explore and develop an understanding of how the physical and transitional risks and opportunities of climate change might plausibly impact the business over time.

A scenario describes a possible development path. Scenarios are not intended to be a complete description of the future, but rather to highlight central elements of a possible future and draw attention to key factors that will drive future developments. It is important to remember that scenarios are hypothetical constructs; they are not forecasts or sensitivity analyses.

In a world of uncertainty, scenarios are meant to explore alternatives that could significantly alter business-as-usual. Scenario analysis is therefore a tool to extract qualitative and quantitative assessments, to increase the organisation's awareness of the impact of climate change on business and consequently improve critical strategic thinking.



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Scenario Analysis is a useful tool to support business decisions that allows to consider different risks related to climate change to be considered in the company's strategic choices

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Examples of Climate Change scenarios

The emission sources of which the corporate carbon footprint is composed can be grouped into three macro-classes, defined by the GHG Protocol SCOPE 1, SCOPE 2 and SCOPE 3. This categorisation is necessary to establish which emission sources are under the direct control of the company and which are under the control of other organisations, in order to distinguish between direct and indirect emission sources.

1.    IEA ETP 2DS, IEA INDCS Paris Agreement, IEA WEO CURRENT POLICIES

2.    IPCC RCP 2.6, RCP 4.5, RCP 6.0, RCP 8.5

3.    Net Zero Emissions by 2050 and further scenarios in line with Science Based Target

4.    Ad-hoc scenario depending on industry sector, business model, sector trends

Why is it important?

Scenario analysis applied to the context of climate change is a tool to stimulate the company to develop a long-term strategic vision that considers the risks (physical and transitional) and opportunities associated with climate change. This analysis should be used to inform stakeholders about how the company intends to position itself considering the risks and opportunities it will face in the future.

Scenario analysis is a very useful tool both for understanding the strategic implications of climate-related risks and opportunities and for informing stakeholders about how the organization positions itself considering the identified risks and opportunities. It is important to update scenarios as conditions change.

Check the consistency of the company's strategic plan with climate change over time.
Integrate risks (physical and transitional) into decision-making and long-term investment choices
Accelerate innovation to seize new business opportunities
Raise management's awareness of the new challenges posed by climate change
Demonstrate to investors, customers, and stakeholders that the company considers today the possible risks that the organization will face in the future

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Identification of company-relevant scenarios among the main globally recognized and considered scenarios (e.g., IPCC, IEA, IRENA, etc.) in line with TCFD recommendations
Simulation of impacts for the company by applying the selected scenarios in the short, medium, and long term
Integration of the results of the scenario analysis in the assessment of the company's Risks and Opportunities
Valorization of results in reporting systems (CDP, DJSI)
Workshops to present the results to Management to illustrate the effects that climate change may have on the company's business in relation to the scenarios considered

Scenario analysis applied to the context of climate change

Scenario analysis applied to the context of climate change is a tool to stimulate companies to develop a long-term strategic vision.

This type of analysis is becoming more and more relevant for companies, which are exposed with respect to their operations, and for financial operators, who risk reducing the returns on certain investments.

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Scenario Analysis

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