Building Climate Scenarios

This lesson provides comprehensive guidance on developing robust climate scenarios for business planning and AASB S2 compliance. Moving beyond using pre-existing scenarios, we’ll explore how to build, customize, and validate scenarios that meet your organization’s specific strategic planning and risk assessment needs.

Scenario Architecture and Design

Fundamental Scenario Components

Physical Climate Variables

Temperature pathways: Global and regional temperature trajectories under different warming levels
Precipitation patterns: Changes in rainfall timing, intensity, and seasonal distribution
Extreme events: Frequency and intensity changes for heat waves, storms, droughts, floods
Sea level rise: Global and regional sea level rise projections with ice sheet dynamics
Ecosystem changes: Shifts in vegetation, biodiversity, and ecosystem services

Socioeconomic Pathways

Population dynamics: Population growth, urbanization, demographic transitions
Economic development: GDP growth, income distribution, sectoral economic structure
Technology development: Innovation rates, technology diffusion, learning curves
Land use patterns: Agricultural expansion, urbanization, forest conservation
Social and cultural factors: Governance quality, social cohesion, cultural values

Policy and Institutional Frameworks

Climate policy ambition: Emission reduction targets, policy stringency, international cooperation
Policy instruments: Carbon pricing, regulations, subsidies, standards, trade policies
Institutional capacity: Government effectiveness, regulatory quality, enforcement capability
International coordination: Climate agreements, technology transfer, climate finance
Sectoral policies: Energy, transport, industry, agriculture, and land use policies

Scenario Selection Criteria

Strategic Relevance

Business model exposure: Scenarios should test key vulnerabilities and opportunities for the business
Geographic coverage: Scenarios must cover relevant geographic regions and markets
Time horizon alignment: Scenario timeframes should align with strategic planning horizons
Stakeholder expectations: Scenarios should address key stakeholder concerns and interests

Scientific Credibility

Peer review: Scenarios should be based on peer-reviewed climate science and modeling
Model validation: Underlying models should be validated against historical observations
Uncertainty representation: Scenarios should appropriately represent key uncertainties
Consistency: Internal consistency between physical, economic, and policy assumptions

Decision Utility

Differentiation: Scenarios should explore meaningfully different future pathways
Actionability: Scenarios should inform specific strategic decisions and investments
Communication: Scenarios should be communicable to decision-makers and stakeholders
Updatability: Scenarios should be updatable as new information becomes available

Example: Mining Company Scenario Selection

Scenario Selection for Australian Mining Company:

Core Business Exposures:
- Thermal coal demand under energy transition
- Critical mineral demand for clean technology
- Water availability in mining regions
- Carbon pricing and border adjustments

Selected Scenarios:
1. Orderly Transition (1.5°C): Gradual coal decline, high mineral demand
2. Disorderly Transition (Late Action): Rapid coal collapse, supply shortages
3. Failed Transition (3°C+): Continued coal demand, severe water stress
4. Technology Breakthrough: Accelerated clean tech, mineral super-cycle

Geographic Focus: Australia, China, Europe, North America
Time Horizon: 2025-2050 with 5-year intervals

Customizing Reference Scenarios

Starting with Established Scenarios

NGFS Climate Scenarios

Current Policies: No new policies beyond those already implemented
NDCs: Countries implement announced nationally determined contributions
Below 2°C: Policies consistent with below 2°C warming
Net Zero 2050: Immediate policy reaction, global net zero by 2050
Divergent Net Zero: Net zero achieved but with regional differences
Delayed Transition: Late policy reaction requiring rapid catch-up action

IEA Energy Scenarios

Stated Policies Scenario (STEPS): Current policy commitments and announcements
Announced Pledges Scenario (APS): All announced pledges are met in full
Net Zero Emissions by 2050 (NZE): Global net zero emissions by 2050
Sustainable Development Scenario: Meeting energy access and air quality goals

IPCC Representative Concentration Pathways

RCP2.6: Strong mitigation, 1.5-2°C warming
RCP4.5: Moderate mitigation, 2-3°C warming
RCP6.0: Limited mitigation, 3-4°C warming
RCP8.5: No mitigation, 4-5°C warming

Scenario Customization Process

Step 1: Baseline Assessment

Current state analysis: Detailed analysis of current business operations and context
Exposure mapping: Identification of key climate exposures and sensitivities
Stakeholder priorities: Understanding of stakeholder priorities and concerns
Strategic objectives: Alignment with organizational strategic objectives

Step 2: Variable Selection and Modification

Key variable identification: Identification of most important variables for the business
Regional downscaling: Adapting global scenarios to relevant regional context
Sectoral specification: Adding sector-specific detail and assumptions
Timeline adjustment: Adjusting timelines to match business planning horizons

Step 3: Internal Consistency Checking

Cross-variable consistency: Ensuring consistency between different scenario variables
Temporal consistency: Ensuring realistic evolution over time
Causal relationships: Respecting causal relationships between variables
Physical constraints: Respecting physical and technical constraints

Example: Retail Company Scenario Customization

Customizing NGFS Scenarios for Australian Retail Chain:

Base Scenario: NGFS Net Zero 2050
Key Customizations:
1. Consumer Behavior:
   - Accelerated shift to sustainable products (+20% vs global average)
   - Price sensitivity to carbon costs (elasticity: -0.8)

2. Supply Chain:
   - Asia-Pacific focus for sourcing exposure
   - Logistics electrification timeline: 40% by 2030

3. Physical Risks:
   - Extreme weather impacts on logistics and stores
   - Urban heat island effects on customer behavior

4. Regulatory Environment:
   - Australian carbon pricing: $75/tCO2e by 2030
   - Mandatory climate disclosure compliance costs

Sector-Specific Scenario Development

Energy Sector Scenarios

Generation mix evolution: Renewable energy penetration, fossil fuel retirement schedules
Grid transformation: Storage deployment, grid flexibility, demand response
Energy demand patterns: Electrification, efficiency improvements, behavioral changes
Market design: Electricity market structure, pricing mechanisms, capacity markets

Financial Services Scenarios

Credit risk: Climate impacts on borrower creditworthiness and default rates
Market risk: Climate impacts on asset prices and portfolio performance
Operational risk: Physical risks to financial infrastructure and operations
Transition risk: Stranded assets, sectoral shifts, technology disruption

Agriculture and Food Scenarios

Productivity impacts: Crop yields, livestock productivity, growing season changes
Water availability: Irrigation water availability and costs
Pest and disease: Changes in pest and disease pressure
Market evolution: Consumer preferences, trade patterns, policy support

Manufacturing Scenarios

Input costs: Energy, materials, water, carbon pricing impacts
Supply chain: Supplier disruption, logistics changes, sourcing shifts
Product demand: Consumer preferences, regulatory requirements, trade impacts
Technology adoption: Process electrification, efficiency technologies, circular economy

Australian-Specific Scenario Development

Australian Climate Context

Physical Climate Projections

Temperature: 1.4°C warming since 1910, accelerating to 2-4°C by 2090
Rainfall: Declining in southern regions (-20 to +5%), increasing variability in north
Extremes: More frequent heat waves, severe fire weather, intense rainfall events
Coastal: Sea level rise 20-60cm by 2090, increasing storm surge risk

Australian Policy Scenarios

Federal level: Net zero by 2050, enhanced Safeguard Mechanism, potential carbon pricing
State level: Renewable energy targets, emission reduction targets, sectoral policies
Local level: Planning regulations, building codes, infrastructure investments
International: Border carbon adjustments, international carbon markets, technology cooperation

Example: Australian Policy Scenario Development

Australian Climate Policy Scenarios (2025-2040):

Scenario 1: Gradual Implementation
- Federal carbon pricing: $25/tCO2e by 2030, $50/tCO2e by 2040
- State renewable targets: 80% by 2030, 100% by 2035
- Gas transition: Gradual phase-out, hydrogen development
- Border adjustments: Delayed implementation post-2035

Scenario 2: Accelerated Action
- Federal carbon pricing: $50/tCO2e by 2030, $150/tCO2e by 2040
- State renewable targets: 90% by 2030, 100% by 2032
- Gas transition: Rapid phase-out, accelerated electrification
- Border adjustments: Implementation from 2028

Scenario 3: Delayed Response
- Federal carbon pricing: Limited expansion of Safeguard Mechanism
- State renewable targets: 70% by 2030, 90% by 2040
- Gas transition: Continued gas use as "transition fuel"
- Border adjustments: No implementation during scenario period

Regional Australian Considerations

State and Territory Differences

New South Wales: Coal dependency, manufacturing exposure, coastal risks
Victoria: Brown coal exposure, agriculture vulnerability, urban heat
Queensland: Mining economy, cyclone risks, agricultural diversity
Western Australia: Mining dominance, water scarcity, remote communities
South Australia: Renewable leadership, wine industry exposure, heat extremes
Tasmania: Hydroelectric advantage, forestry exposure, tourism impacts

Urban vs Regional Differences

Major cities: Transport electrification, building efficiency, heat island effects
Regional centers: Economic diversification, infrastructure resilience, service access
Rural areas: Agricultural adaptation, natural resource management, community resilience
Remote communities: Energy access, extreme weather preparedness, economic opportunities

Indigenous and Cultural Considerations

Traditional Knowledge Integration

Seasonal calendars: Traditional ecological knowledge of seasonal patterns
Land management: Traditional fire management and land care practices
Water systems: Traditional water management and conservation practices
Biodiversity: Traditional knowledge of species and ecosystem changes

Cultural Impact Assessment

Sacred sites: Climate impacts on culturally significant locations
Traditional practices: Impacts on traditional hunting, fishing, and gathering
Community connectivity: Climate impacts on community access and connection
Intergenerational knowledge: Impacts on knowledge transfer and cultural continuity

Scenario Validation and Testing

Internal Consistency Testing

Quantitative Consistency Checks

Mass balance: Energy, material, and emission balances across scenarios
Economic equilibrium: Supply-demand balance in markets and sectors
Physical constraints: Respect for physical laws and technical limitations
Historical benchmarking: Comparison with historical rates of change

Qualitative Consistency Assessment

Stakeholder behavior: Realistic stakeholder responses to scenario conditions
Institutional capacity: Realistic institutional capacity for scenario implementation
Social acceptance: Realistic social acceptance of scenario developments
Political feasibility: Realistic political feasibility of scenario policies

Example: Scenario Consistency Testing

Energy Transition Scenario Validation:

Quantitative Tests:
- Renewable deployment rate: 20GW/year (vs historical max 5GW/year)
- Grid stability: 90% renewables requires 40GW storage (vs 2GW current)
- Workforce transition: 50,000 coal workers (retraining capacity: 10,000/year)
- Investment requirements: $200B over 10 years (vs current $20B/year)

Consistency Issues Identified:
- Deployment rate exceeds supply chain capacity
- Storage requirement exceeds current technology deployment plans
- Workforce transition timeline unrealistic without enhanced programs
- Investment gap requires significant policy intervention

Scenario Adjustments:
- Extended timeline for renewable deployment
- Enhanced storage technology assumptions
- Accelerated workforce transition programs
- Increased public investment commitments

External Validation Methods

Expert Review Process

Scientific experts: Climate scientists, energy system modelers, economists
Industry experts: Sector specialists, technology experts, market analysts
Policy experts: Government officials, policy researchers, advocacy groups
Stakeholder representatives: Community groups, Indigenous organizations, unions

Stakeholder Workshop Validation

Scenario presentation: Clear presentation of scenario assumptions and implications
Stakeholder feedback: Structured feedback on scenario realism and relevance
Stress testing: Testing scenario robustness against stakeholder challenges
Refinement process: Iterative refinement based on stakeholder input

Historical Validation

Backtesting: Testing scenario logic against historical periods
Analogue analysis: Comparison with historical analogues and precedents
Pattern recognition: Identification of realistic patterns and relationships
Learning from surprises: Incorporation of lessons from historical surprises

Sensitivity and Robustness Testing

Parameter Sensitivity Analysis

Key assumption testing: Testing sensitivity to key scenario assumptions
Uncertainty range exploration: Exploring reasonable uncertainty ranges
Break-point analysis: Identifying break-points where scenario logic changes
Threshold identification: Identifying critical thresholds for scenario outcomes

Cross-Scenario Robustness

Strategy testing: Testing strategies across multiple scenarios
Investment robustness: Identifying robust investment strategies
Risk assessment: Assessing risk exposure across scenario range
Adaptation planning: Developing adaptive strategies for scenario uncertainty

Advanced Scenario Techniques

Morphological Analysis

Scenario Dimensions

Climate outcomes: Different physical climate futures (temperature, precipitation, extremes)
Policy responses: Different policy ambition and implementation approaches
Technology development: Different technology cost and deployment trajectories
Social evolution: Different social values, behaviors, and institutional development

Morphological Box Construction

Morphological Analysis Example - Transport Scenarios:

Dimension 1: Policy Ambition
- Low: Voluntary targets, limited regulation
- Medium: Mandatory targets, moderate regulation
- High: Stringent targets, comprehensive regulation

Dimension 2: Technology Progress
- Slow: Incremental improvements, high costs
- Moderate: Steady progress, declining costs
- Rapid: Breakthrough technologies, rapid cost decline

Dimension 3: Consumer Behavior
- Conservative: Slow adoption, price sensitivity
- Moderate: Gradual adoption, mixed motivations
- Progressive: Rapid adoption, sustainability priority

Resulting Scenarios: 3 x 3 x 3 = 27 possible combinations
Selected Scenarios: 4-6 representative combinations

Dynamic Scenario Development

Adaptive Scenario Frameworks

Branching scenarios: Scenarios that branch based on trigger events or thresholds
Learning scenarios: Scenarios that evolve based on new information and learning
Contingent scenarios: Scenarios with contingent pathways based on decision points
Real-time updates: Scenarios that update based on real-time indicator monitoring

Trigger Point Identification

Tipping points: Physical, technological, or social tipping points that change scenario trajectory
Policy triggers: Policy decisions that fundamentally alter scenario pathways
Technology triggers: Technology breakthroughs that accelerate or redirect development
Market triggers: Market changes that reshape competitive dynamics

Participatory Scenario Development

Stakeholder Co-Creation

Stakeholder workshops: Collaborative development of scenario assumptions and storylines
Expert panels: Technical expert input on scenario feasibility and implications
Community engagement: Community input on local context and priorities
Cross-sector dialogue: Multi-sector collaboration on shared scenario elements

Deliberative Processes

Citizen panels: Representative citizen input on scenario preferences and concerns
Delphi processes: Iterative expert consultation on scenario development
Scenario gaming: Interactive simulation of scenario dynamics and decisions
Participatory modeling: Stakeholder involvement in quantitative model development

Scenario Documentation and Communication

Comprehensive Scenario Documentation

Scenario Narratives

Storyline development: Compelling narratives that explain scenario logic and evolution
Key milestones: Important events and developments in scenario timeline
Causal explanations: Clear explanation of causal relationships and feedback loops
Uncertainty acknowledgment: Explicit acknowledgment of uncertainties and limitations

Technical Documentation

Assumption database: Comprehensive database of all scenario assumptions
Data sources: Documentation of all data sources and references
Methodology description: Detailed description of scenario development methodology
Validation evidence: Documentation of validation processes and results

Example: Scenario Documentation Template

Scenario Documentation Structure:

1. Executive Summary
   - Scenario purpose and scope
   - Key assumptions and outcomes
   - Strategic implications

2. Scenario Narrative
   - Storyline and evolution
   - Key events and milestones
   - Stakeholder responses

3. Technical Specifications
   - Quantitative assumptions
   - Data sources and methods
   - Model inputs and outputs

4. Validation and Testing
   - Consistency testing results
   - Expert review feedback
   - Sensitivity analysis

5. Uncertainties and Limitations
   - Key uncertainties
   - Scenario boundaries
   - Update schedule

Effective Scenario Communication

Audience-Specific Communication

Board and executives: High-level implications and strategic choices
Management teams: Operational implications and implementation requirements
Technical staff: Detailed assumptions and methodology
External stakeholders: Relevant implications and engagement opportunities

Visualization and Presentation

Timeline graphics: Visual representation of scenario evolution over time
Impact maps: Geographic visualization of scenario impacts
Dashboard displays: Key indicator dashboards for scenario monitoring
Interactive tools: Interactive scenario exploration and comparison tools

Scenario Training and Capacity Building

Workshop delivery: Training workshops on scenario understanding and application
User guides: Practical guides for scenario application in decision-making
Support systems: Ongoing support for scenario users and interpreters
Knowledge management: Systems for sharing scenario insights and lessons learned

Summary

Building robust climate scenarios requires systematic approaches that balance scientific credibility with business relevance:

Scenario architecture must integrate physical, socioeconomic, and policy dimensions
Customization processes adapt reference scenarios to specific business contexts
Australian specificity requires understanding of national and regional climate, policy, and social contexts
Validation methods ensure internal consistency and external credibility
Advanced techniques enable sophisticated analysis of complex scenario dynamics
Documentation and communication support effective scenario use and stakeholder engagement

Well-constructed scenarios provide the foundation for robust strategic planning and effective AASB S2 climate disclosure.

Key Takeaways

✅ Scenario architecture requires integration of physical climate, socioeconomic, and policy dimensions ✅ Customization processes adapt reference scenarios to specific business contexts and exposures ✅ Australian context includes unique climate, policy, and cultural considerations ✅ Validation methods ensure scenario credibility through internal consistency and external review ✅ Advanced techniques enable dynamic, participatory, and morphological scenario development ✅ Documentation and communication support effective scenario application and stakeholder engagement

Scenario Development Process

Phase	Activities	Outputs	Timeline
Scoping	Objective setting, exposure mapping, stakeholder engagement	Scenario specifications, success criteria	Weeks 1-2
Development	Reference scenario selection, customization, quantification	Draft scenarios, assumption database	Weeks 3-8
Validation	Consistency testing, expert review, stakeholder feedback	Validated scenarios, validation report	Weeks 9-12
Documentation	Narrative development, technical documentation, communication materials	Scenario documentation, user guides	Weeks 13-16
Implementation	Training delivery, tool development, monitoring setup	Implemented scenarios, trained users	Weeks 17-20

Scenario Quality Framework

Scientific Credibility:

Peer-reviewed basis: Based on peer-reviewed climate science and modeling
Physical plausibility: Respects physical laws and system constraints
Empirical grounding: Grounded in historical evidence and observations

Business Relevance:

Strategic alignment: Aligned with business strategy and planning horizons
Exposure coverage: Covers key business exposures and sensitivities
Decision utility: Provides actionable insights for business decisions

Stakeholder Acceptance:

Transparency: Clear and transparent scenario development process
Participatory: Includes relevant stakeholder input and validation
Communication: Effectively communicated to target audiences

Practical Exercise

Scenario Building Project: For your organization or a case study:

Define scenario objectives including strategic purpose, time horizon, and success criteria
Map business exposures to climate, policy, technology, and market changes
Select and customize scenarios based on established reference scenarios
Validate scenario logic through internal consistency and expert review
Document scenarios with narratives, technical specifications, and communication materials
Plan implementation including training, tools, and monitoring systems

Focus on creating scenarios that balance scientific credibility with practical business application while meeting AASB S2 disclosure requirements.