Research and analysis

Getting started with climate scenario analysis

Published 5 August 2025

Despite the long-term, complex, and uncertain nature of climate-related risks, scenario analysis has the potential to deliver decision-useful information in the here and now. Understanding how climate-related risks may evolve across a suitable range of plausible futures is a powerful tool in itself, but can also present unique opportunities for the public sector, supporting both risk mitigation and adaptation. HM Treasury has published Application Guidance for government and public sector bodies to apply climate scenario analysis. This is aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. Government recommends the use of scenario analysis to assess significant climate-related risks, understand their potential financial impacts, and to inform strategic decision making. Careful preparation and a willingness to iterate are key to ensure this scenario analysis is, and remains, decision-useful. The following steps will help you get started on your climate scenario analysis journey.

Step 1: Survey existing climate work

Undertaking scenario analysis is unlikely to be the first time that your organisation’s climate-related risks will have been considered. By building on previous work – perhaps undertaken for quite different purposes – you can often make your job significantly easier. Coordinating across the organisation may be difficult, but it will save time in the long run.

Step 2: Establish present-day risk

Understanding your present climate-related risks and their financial impacts (e.g. current flood risk, annual repair costs and insurance premiums) can be extremely useful in itself. It can also provide a firm basis on which to estimate climate impacts under different future scenarios, as these can be adjusted to reflect changes in the intensity of perils and other metrics. You may have detailed information on this as part of existing work. If you don’t, establishing your present-day risk is a good place to start.

Step 3: Understand data requirements

The data required for effective scenario analysis can be usefully divided into three kinds:

Hazard data: These are (often location-dependent) data describing the potential occurrence of a climate-related event, or projected value of a related metric. This could be a physical hazard, such as a heatwave, or related to the transition to a low carbon economy, such as the increase in carbon price. Normally these are modelled, meaning limitations need to be understood in terms of final outputs to your risk analysis.

Exposure data: Data on the operations, assets, staff or customers that may be adversely affected by climate-related risks. Most of this data should be available by completing step 2.

Vulnerability data: This data considers the predisposition of operations, assets, staff or customers to be affected by the climate-related event or hazard you are considering. This may involve assessing existing risk mitigations and adaptations at individual sites or operations, so some prioritisation of risks will be needed to keep costs tractable (see step 4).

Step 4: Prioritise and set the scope

Setting the scope of scenario analysis means answering some quite technical questions about the nature of the work.

Which risks to prioritise? This is principally a question of decision-usefulness, constrained by budget and data collection costs, but it is also useful to qualitatively assess risks at this stage. Looking at the likelihood and impact at a high level can often make it clear what needs further investigation.

What timescales to use? Guidance and best practice here are to project risks to a specific year in each of the short, medium and long term. These timeframes can be informed by strategic or business planning horizons, policy horizons, and useful asset lifetimes to ensure usefulness and relevance to your organisation.

Whole organisation or specific areas? Once again, the key guide here should be what is decision-useful, subject to the limitations of budget and data. This may entail choosing quality over quantity or understanding the big picture in the first instance. Remember, the process is iterative, so more areas can be revisited in future.

External support or internal capabilities? This will depend on your organisation’s existing skill-base, timescale for delivery and budget. Remember, there are ‘middle ways’ available, including external quality assurance and external support on any one of the steps listed.

Step 5: Assess climate risks

Once your approach is scoped and you have a list of prioritised risks and a good understanding of what data is available, you need to define your climate scenarios. These will be based on available global scenarios describing how the climate will change and how the world transitions to a low carbon economy, but may also include sector, country or location specific information.

Risks may then be analysed across each scenario by looking at how exposed and vulnerable your organisation is to future climate hazards and interpret what this means in terms of potential financial impact. The key — as with all analysis — is to clearly state the assumptions made and limitations of the analysis.

Multiple models may need to be used and integrated, alongside more qualitative assessments of climate-related risk.

Step 6: Evaluate and disclose

At the heart of TCFD is the relationship between risk and governance. Both evaluation and disclosure should be undertaken in concert with decision makers. Outputs from scenario analysis allow you to evaluate the resilience of your strategy and financial position to climate-related risks and identify where resilience can be improved in future. Disclosure, then, is a record of the state of this ongoing analysis.

Step 7: Iterate

The outputs from the previous steps, along with quality assurance of your models and/or disclosures, will all help to point you towards where your analysis should go next. When it comes to climate scenario analysis, there are always areas to improve, whether that is introducing new modelling techniques or climate data, or collecting more detailed internal data on your climate-related risk exposure and vulnerability. It is vital to not let the prospect of future improvements hold you back from getting started (don’t let the perfect be the enemy of the good). Repeating these steps over time is the best way to understand an unpredictable future ever better.

This document was produced for public sector use by the Government Actuary’s Department.

We provide actuarial advice and support to the government and public sector, helping our clients to understand and analyse financial risk and uncertainty for a wide range of contemporary issues. GAD is a shared service supplier to the government, devolved administrations and public bodies.

For details of the services we offer and how GAD can help support your organisation’s TCFD journey email: Climate.Change@GAD.Gov.UK.

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