Scenario Analysis as a Tool for Companies, Investors, and Regulators on the Path to Climate Neutrality

Abstract

The structural transformation necessary for achieving climate neutrality is characterized by many interdependent changes. Shaping the transition to a zero-emissions economy cannot be based on past data alone, but also requires the definition of future scenarios that are as consistent as possible. The aim of these scenarios is to show how companies are prepared for transformation processes and burdens associated with achieving climate neutrality, both against the backdrop of current climate policy reduction targets and measures (core scenario) and in the event that existing targets are tightened in line with the Paris Climate Agreement (policy scenario “Climate Neutrality 2035”). Ideally, the scenarios and corporate reporting based on them can fulfil a number of important functions. They are a tool for strategy development and decision-making at the corporate level, they enable clearer communication between the real economy, the financial sector, and regulators, and they provide comparable and robust information to adequately address transformation opportunities and risks. However, to actually fulfil these functions, comparability across actor groups and application areas should be ensured when defining scenarios. While some comparability is provided in the core scenario by referring to current policy goals and measures, such comparability should also be sought in more extreme policy scenarios that serve as the basis for stress testing. As such, the information can be used in quantitative risk management systems and the reporting burden is minimized. Further, the corresponding scenario can also be used in internal decision-making processes of companies in the real economy. This Policy Brief aims to contribute to the design of such a standardized policy scenario.