The need for climate-related scenario analysis has its origins in the 2015 Paris Agreement (COP21). A central aim of the agreement is to keep a global temperature rise in the 21st century well below 2°C. This includes an ambition to limit the temperature increase even further to 1.5°C (Article 2).5
In 2022, Gaia Vince, a broadcaster and honorary senior research fellow at University College London (UCL), noted, ‘Climate models predict that we’re on track for a heating of somewhere between 3°C and 4°C for 2100 — and bear in mind that these are global average temperatures’.6 Vince goes on to document what she terms, ‘The four horsemen of the Anthropocene’: fire, heat, drought and flood.7 (Anthropocene is a term devised in the 1980s to describe the time period during which human activities have impacted the environment enough to constitute a distinct geological change.) David Wallace-Wells, in his book, The Uninhabitable Earth, documented the impact of climate change through 12 ‘elements of chaos’8
The Intergovernmental Panel on Climate Change (IPCC), in the ‘Synthesis Report of the Sixth Assessment Report,’ released in March 2023, reached some stark conclusions:
Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred. Human-caused climate change is already affecting many weather and climate extremes in every region across the globe. This has led to widespread adverse impacts and related losses and damages to nature and people (high confidence).9
Based on current projections, the IPCC forecasts warming will likely exceed 1.5°C this century.
GHG [greenhouse gas] emissions in 2030 implied by nationally determined contributions (NDCs) announced by October 2021 make it likely that warming will exceed 1.5°C during the 21st century and make it harder to limit warming below 2°C.10
Interestingly, although the Paris Agreement is a universal legally binding treaty on global climate change, there is no legally binding obligation for parties to achieve their declared nationally determined contributions (NDCs) to reduce climate change.11
The philosopher and journalist Julian Baggini poses the question on the history of non-binding agreements:
Or ask yourself: given that non-binding agreements have always failed to slow greenhouse gas emissions sufficiently in the past, is it rational to expect them to suddenly start doing so in the future? If the parties at an intergovernmental conference proclaim, ‘This time it's different’, aren't we right to disbelieve them?12
This makes it even more urgent for organisations to account for climate resilience and build adaptation plans into their purpose, strategies and business models. Accounting for climate resilience allows organisations to stop and reflect. It asks us to broaden our thinking on measurement and modify our focus beyond growth. Traditionally, organisations have been focused on growth and maximising profit. This leads to business models based on wealth extraction, where nature capital has been exploited. Accounting for climate resilience helps refocus an organisation’s strategies and measurements to consider the health of natural ecosystems that organisations are placed within.
Building resilient, antifragile organisations and business models
At its most basic, the climate impact scenario analysis process represents an organisational stress test. It sets the stage for conversations with an organisation’s internal and external stakeholders. Together, a diverse range of people challenge and question an organisation’s longer-term resilience. Ultimately, the scenario implications and consequences can inform future decision-making and lead to the creation of new strategies, plans, and business models adapted to fit potential climate impacts.
In the context of climate change, the TCFD recommendations define resilience as
the capacity of social, economic, and environmental systems to cope with a hazardous event or trend or disturbance, responding or reorganizing in ways that maintain their essential function, identity and structure while also maintaining the capacity for adaptation, learning and transformation.13
Another concept worth considering is ‘antifragility’, which Nassim Nicholas Taleb defines as being 'beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better’.14 An antifragile organisation, in response to increase climate volatility, leads to a positive sensitivity and performance gains.
The process of scenario analysis tests whether an organisation’s current strategy makes sense given the potential climate drivers (‘the four horsemen of the Anthropocene’). It then explores alternative strategies based on plausible futures, rather than trying to predict the future. Margaret Heffernan, author and chief executive, notes that scenario planning recognises ‘that much in the world is too complex to be predictable and that the future is too malleable to be revealed by hard data alone’15
The focus within scenario analysis is about being prepared for the random and uncertain potential events driven by climate change. It is a process that highlights the stark difference between dealing with risks and uncertainty. Alex Edmans, Professor of Finance at London Business School, notes:
A risky problem can be analysed as you have a rough idea of its parameters … With uncertainty, you don’t even know the parameters of the problem … To use terminology popularised by former US Defense Secretary Donald Rumsfeld, risk concerns known unknowns, but uncertainty comprises unknown unknowns.16
Scenario analysis is a useful tool for assessing the threats and opportunities implications of climate change on an organisation and the ecosystem it sits within. It can shine a light on unknowns. The Taskforce on Nature Financial-related Disclosures (TNFD) defines ‘trends’ and ‘uncertainties’ as follows:
A trend is something around which there is a high degree of confidence will eventuate in the future. An uncertainty is something for which the future outcome is unknown or unknowable. 17
There are lessons from history on the impacts of climate uncertainty. Peter Frankopan, Professor of Global History at Oxford University, has detailed a global history that links cultural progress to the natural environment. In one example Frankopan highlighted, the changing weather patterns in late sixteenth and seventeenth centuries, rather than causing new disasters, accentuated existing vulnerabilities. These weather events caused food shortages, he explains:
Pushing communities over the edge that were living on land that was at the limits of its carrying capacity did not require dramatic, extreme or apocalyptic weather events; rather, as many of the accounts from different parts of the world make clear, the problem was not the cold or rain or drought, but rather that it stayed cold, wet or dry for longer than people were used to — and that adaptation proved difficult, especially at speed.18
In present day, it is still about understanding how changing climate events exacerbate communities’ and organisations’ existing vulnerabilities. In the UK, increasing energy costs in 2022 and 2023 have exposed vulnerabilities and challenged the supermarkets’ ‘just in time’ supply models. Tim Lang, emeritus professor of food policy at City, University of London, observes:
Stresses and strains are beginning to show up in the model that assumes: one, cheap energy; two, constant availability; three, constant [good] weather; four, no political disruptions. All those assumptions are now wrong.19
The fragility exposed in the supply chains has led to shortages of fruit and vegetables on supermarket shelves with retailers rationing customers’ purchases of tomatoes, peppers, cucumbers, broccoli, lettuce and cauliflower. Poor yields due to poor weather in Morocco and Spain and energy price increases in Britain have made growing early tomatoes and cucumbers in greenhouse uneconomical, which further challenges food security.
In the US, the extended drought in the West has necessitated the development of a federal plan for the allocation of water amongst states that are dependent upon the Colorado River.20 The intent of this proposed plan is to prevent the possibility of what is referred to as a ‘deadpool’, the point at which dams no longer have enough water to generate electricity. In addition to providing electricity to millions of homes and businesses, the Colorado River supplies drinking water to 40 million Americans and two states in Mexico. It is also a major source of irrigation for farmlands.
As you can see, it is time to develop your organisation’s accounting for climate resilience literacy to help build resilient and sustainable businesses.