Scenario analysis is the engine of modern climate risk management. Because the future is uncertain, regulators and frameworks require firms to test their resilience across a range of climate scenarios rather than a single forecast. This guide explains the standard scenarios, the regulations driving their use, and how a scenario becomes a decision.
What Climate Scenario Analysis Is
Climate scenario analysis stress-tests an asset or portfolio against multiple plausible futures, each with its own assumptions about warming, policy, and technology. The point is not to predict which future will occur, but to understand how exposure changes across futures, and to identify where an organisation is most fragile.
The Standard Scenario Sets
Two scenario families dominate financial climate analysis:
- •NGFS Phase V: the reference scenarios for financial supervisors, spanning orderly (Net Zero 2050, Below 2C), disorderly (Delayed Transition), and Hot House World pathways.
- •IPCC RCP/SSP: the underlying climate-science pathways describing emissions and socioeconomic futures, from which physical hazard projections are derived.
Regulatory Drivers by Region
Scenario-based climate risk assessment is now embedded in financial regulation across most major markets:
- •Europe: the ECB climate stress tests and the PRA's supervisory expectations.
- •Canada: OSFI Guideline B-15 on climate risk management.
- •Asia-Pacific: Bank Negara Malaysia (BNM), the Hong Kong Monetary Authority (HKMA), Indonesia's OJK, and the Reserve Bank of India (RBI) have all introduced climate risk and scenario-analysis expectations.
- •Global: the NGFS provides the common scenario backbone many of these regimes reference.
From Scenario to Decision
A scenario is only useful if it changes a decision. The output of scenario analysis feeds capital planning, provisioning, underwriting limits, and strategic choices about which assets to hold, hedge, or exit. Expressed as Climate Value-at-Risk under each scenario, it lets a risk committee compare climate exposure directly against the market and credit risk it already manages.
How Floodlight Supports Scenario Analysis
Floodlight models physical and transition risk at the asset level across the NGFS Phase V reference scenarios and reports the results as Climate Value-at-Risk. Because the figures are asset-level and scenario-aligned, they map directly onto TCFD, CSRD, and regional supervisory stress-testing requirements without a separate translation step.