Integrating climate modeling into due diligence

🤓Here’s one for your holiday reading list: A new report from our Institute aims to help finance practitioners use #climate scenarios, which are a critical tool for quantifying the impact of a warming world on the value of investments. They are, however, challenging to implement for even experienced proponents. Read it here: https://lnkd.in/d_2Uzu9Z The report, which provides a practical guide to climate scenario analysis, classifies climate scenarios into four types, based on their complexity and characteristics. It also advocates for adoption of climate scenario analysis across four levels, which start with using fully narrative scenarios to identify key pathways and continue with quantifying the financial impact of scenarios using quantified or model-driven scenarios, refining the analysis, and integrating the output of climate scenario analysis into decision-making. “The report espouses a holistic approach to climate scenario analysis designed to improve financial decision-making and infuse planning with resilience,” write co-authors James Edwards, executive director for climate risk research at MSCI Research and an Institute fellow for the climate scenario landscape, Nathan Faigle of MSCI Research, and Wenmin Li, an associate for climate risk with the United Nations Environment Programme Finance Initiative (UNEP FI). The authors consider the use of climate scenarios in specific applications, including internal stress testing for both prudential supervision and regulation, and uses of scenario analysis to fulfill disclosure obligations. They further consider scenario analysis in the context of stress testing for investment activities, as well as for risk management and engagement. The report complements work by the Institute and MSCI’s Climate Risk Center to develop a climate scenario informed by market participants’ consensus expectations on how the risks of a changing climate and the transition to a low- carbon economy could impact their investments. “By organizing these scenarios based on their complexity and offering a roadmap for integrating them into investment decision-making, the paper can help stakeholders make informed choices,” notes David Carlin, former head of risk at the UNEP FI, in a foreword to the report. You can find the full report here: https://lnkd.in/dq49hz7V

Unlocking Climate Scenario Analysis for Better Decision-Making The latest report from the MSCI Sustainability Institute, “How Can I Use Climate Scenarios? A Practical Guide,” offers a comprehensive framework for investors, risk professionals, and policymakers to integrate climate scenario analysis into financial decision-making. With climate change reshaping economies and financial markets, understanding potential futures is essential. This report demystifies climate scenario analysis, outlining four key scenario types—fully narrative, quantified narrative, model-driven, and probabilistic—and their applications across investment, risk management, and regulatory stress testing. As climate risks and opportunities evolve, leveraging robust scenario analysis will be a critical tool for financial resilience. Download the report to explore how your organization can integrate climate scenario planning effectively. #ClimateRisk #ESG #SustainableFinance #ScenarioAnalysis #MSCI

Climate scenario analysis 101 🌍 A great resource from MSCI outlines the fundamentals of climate scenario analysis and how it supports decision making in finance and business. Scenario analysis provides a structured way to evaluate how climate risk and transition pathways may influence markets, portfolios, and corporate strategies. For companies, this is increasingly relevant. Climate change is driving shifts in policy, technology, and consumer demand, and businesses need tools that test strategies across multiple possible outcomes. MSCI describes four types of scenarios. Fully narrative scenarios are qualitative frameworks that help map potential risk pathways and identify emerging issues in the early stages of analysis. Quantified narrative scenarios combine narratives with numerical estimates. They allow organizations to assign data to possible futures, creating an entry point to quantify risks before moving to more complex models. Model driven scenarios are developed with integrated assessment models that merge economic, energy, land use, and climate systems. These scenarios are widely applied by regulators and investors for stress testing and forecasting. Probabilistic scenarios introduce probability distributions to reflect uncertainty across multiple futures. This approach is useful for assessing financial risk exposure and for stress testing under varying climate conditions. Each scenario type has clear strengths and limitations. Narrative approaches are flexible and cost effective, while model based and probabilistic approaches provide more detail and credibility but require technical expertise and resources. MSCI proposes a progressive method that combines different types of scenarios. Organizations can begin with narratives, advance through quantification, refine insights with models, and ultimately integrate scenario analysis into strategy and governance. For business leaders, the implications are significant. Scenario analysis helps evaluate exposure to transition and physical risks, assess regulatory impacts, and identify opportunities emerging in a low carbon economy. It also strengthens strategic foresight. By translating complex climate science into structured outputs, it enables boards and executives to take informed decisions on risk and resilience. As expectations on sustainability rise, climate scenario analysis is becoming an essential capability for companies seeking to manage uncertainty and position themselves for long term competitiveness. Source: MSCI #sustainability #business #sustainable #esg