What changing climate scenarios mean for capital strategy

New climate models are expected to reshape risk, regulation and investment. Acting now may help organizations build resilience and long-term advantage.

In brief

• Climate scenario analysis is evolving, with new CMIP7 models reshaping how organizations assess risk, plan strategy and meet regulatory requirements.
• Uncertainty around future policy and modeling may require businesses to evaluate scenarios and align decisions with risk tolerance and cost-benefit trade-offs.
• Scenario-informed insights can guide capital allocation, supply chain resilience and risk management decisions across long-term assets and operations.

2. The changes in scenarios are significant, but specific implications for policy and regulations are still unknown

The new CMIP7 scenarios will inform updated vulnerability, impacts, adaptation and mitigation outcomes and may impact policy and regulatory requirements in coming years. A challenge to date for regulatory reporting has been a lack of clear and/or consistent guidance on which scenarios to use for analysis, though leading practice has been to run a range of scenarios. Two older (CMIP6) scenarios are now being retired, and regulatory updates could integrate CMIP7 scenarios into new requirements.

3. Businesses that build scenario literacy and adaptive capacity today will likely be better positioned to respond to both the changing regulatory environment and expected climate impacts to supply chains, operations, assets and customer demand impacted by extreme weather.

While the scenario changes are underway, there are three core action areas where businesses can integrate climate intelligence into strategic decision-making today:

Introduction

Climate scenario analysis has emerged as a foundational tool for businesses seeking to understand and manage exposure to a rapidly changing physical environment with many potential futures. At its core, the methodology draws on climate models. Climate models are scientific projections of future temperature, precipitation and weather patterns driven by the trajectory of global greenhouse gas emissions. As the world continues to emit carbon dioxide and other greenhouse gases, the resulting warming intensifies the frequency and severity of some extreme weather events, such as wildfires, precipitation and prolonged heat waves. Global climate scenarios were first developed by researchers in the 1980s to forecast emissions and later applied by governmental regulations and businesses for stress-testing, planning and scenario analysis of climate impacts.

Businesses are already experiencing the financial consequences of these physical climate shifts, from supply chain disruptions and asset damage to workforce productivity losses and rising insurance costs. Industry catastrophe reviews show insured losses just over $100b in 2025, with the US accounting for 80%+ of losses and wildfires and convective storms dominating the loss profile.³ A recent study estimates nearly $900b in expected losses from climate change in coming years, with nearly 50% of those costs estimated to manifest in the next two years.⁴

In response, leading organizations are adopting scenario-based analysis approaches to proactively identify where physical and transitional climate risks sit within their operations, value chains and portfolios. The goal of climate scenario analysis is to evaluate targeted investments in adaptation and mitigation strategies that can materially reduce future costs and protect long-term value. This practice has been further accelerated by a growing regulatory landscape: frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD), the International Sustainability Standards Board (ISSB) IFRS, and the European Sustainability Reporting Standards (ESRS)⁵ rules increasingly require companies to articulate how climate scenarios inform their strategy, governance and risk management, making scenario analysis not only a strategic imperative but a compliance obligation.

The challenge and the solution

As new scenario development is underway, businesses can prepare for the policy, regulatory and strategic implications of a changing future. Evolving scenarios are expected to reshape assessments of vulnerability, impact and adaptation needs — shifting policy and regulatory requirements in the years ahead. Today, most regulations do not prescribe specific models for analysis and reporting, and this ambiguity is unlikely to be resolved in the near term. As a result, companies currently navigate an evolving landscape by leveraging leading practice insights, evaluating multiple scenarios, and selecting those best suited to their regulatory obligations, strategic priorities and organizational capabilities.

Current research points to our current climate trajectory being slightly below Shared Socioeconomic Pathway 2, Radiative Forcing 4.5 W/m² (SSP2-4.5) as the most plausible baseline scenario.⁶ From 2026 to AR7 report publication, or until the new CMIP7 scenario pathways are fully developed and made available, CMIP6 scenarios will likely remain prominent and companies may consider using SSP2-4.5 as the most plausible current scenario. Additionally, high and low scenarios will likely continue to be used for stress testing.

The table below illustrates the central CMIP6 (old) and CMIP7 (new) scenarios and leading use cases.

Overall, the imperative is clear: organizations should build scenario literacy and adaptive capacity now to be best positioned to respond as new frameworks emerge.

The implications for business – and actions to take today

The applications for scenario analysis span many areas of the business, from risk management to business continuity planning to environmental, health and safety roles. A particularly important lens is the time frame for which decisions are being made. For example, some capital allocation decisions are to support infrastructure capital investments for equipment that may operate 20 to 30 years or more into the future. Consideration of the future conditions under which these assets will be operating can bring more informed analysis of the costs and benefits of different options.

The selection of which scenario(s) to use can be informed by the use case for mitigating risk. When applying, considering multiple scenarios can provide a range of options to help identify where different scenarios highlight consistent areas of risk or opportunity. Key applications include:

Capital allocation

Stress-test major capex decisions (e.g., facility siting, asset upgrades) against mid-range and higher-end climate pathways to consider investment durability under plausible futures. Using scenario data to inform long-term infrastructure investments can help reduce costs while helping increase the resilience of an asset operating in a more intense climate future.

Supply chain resilience

Map recent supply chain disruption, potential physical risk exposure and areas of increasing supply chain disruption across sourcing regions using mid-range and higher-end pathways to support areas and products where diversification, supplier collaboration and adaptation investments may need to be proactively managed.

Enterprise risk management

Quantify financial impacts across multiple scenarios to calibrate risk appetite, strengthen disclosures and target mitigation strategies to material exposures.

Environmental, health and safety

Drive proactive risk mitigation across equipment and workforce safety by integrating health and safety priorities into capital investment planning and targeted training programs.

Transition planning

Assess how evolving policy and decarbonization trajectories affect cost structures, portfolio strategy, demand signals and competitive positioning using a low-end pathway.

Net-zero pathway planning

Benchmark emissions reduction targets against the normative low-end scenario to sustain ambition and maintain credibility with stakeholders.