The Climate WebPreview
Open in TheBrain

Scenario Planning

Climate Scenario Planning

One could easily conclude that the climate change problem is basically impossible to solve and that risk management is largely a function of waiting for climate change to happen. But predictions of the future are notoriously unreliable. It is particularly difficult to reliably forecast specific climate risk outcomes given the sheer number of and uncertainties associated with physical, economic, and political variables.

The entertainment field and mass media have produced multiple movies and books that have painted wide-ranging scenarios regarding climate change and climate risk. Many scenarios painted in these venues are pessimistic (e.g. the 2004 film The Day After Tomorrow) and moralistic (e.g. how could today’s generation have let this happen?). But others are much more optimistic, envisioning a relatively painless transition to a ‘low carbon future’ through means and technologies already at our disposal.

The ‘opportunity storyline’ is attracting a large following among business and environmental groups seeking to motivate corporate action on climate change. Proponents of this opportunity-based approach believe that it will motivate corporate action as well as reduce business opposition to material climate change policy. A casual observer of today’s corporate climate change strategy literature might think that global climate change is a good thing, given all the ‘opportunities’ it is creating.

Risk and opportunity are two sides of the same coin. In a disaster-prone scenario, disaster-response companies can anticipate big profits. Any major effort at climate risk management, while proving fundamentally disruptive to certain business sectors, will create opportunities for other sectors. This should not be mistaken, however, for the ability of companies to find win-win solutions across the board, nor for their ability to choose whether they will ultimately be winners or losers. The reality is that individual companies may be able to influence the degree to which they win or lose under alternative climate risk and climate policy scenarios through risk management and risk-positioning efforts today, but relatively few can determine whether they are on the winning or losing side of the ledger (without fundamentally changing their business model).

From a risk perspective, it is easy to overplay the business opportunity side of climate change policy and risk management for today’s dominant industries. With scientists calling for dramatic measures to reduce dangerous climate change, the gap between science and policy is enormous and continues to grow.

This almost certainly contributes to future business risk. Most companies today are in all likelihood substantially underestimating the range of potential business climate risks. This is not to argue that companies are ignoring climate change; more and more companies are explicitly seeking to address climate change through a variety of corporate programs, most prominently through sustainability and corporate social responsibility strategies. But how many companies would be prepared for climate change or climate change policy outcomes under several of the scenarios introduced below, and the attendant impacts on their operations and supply chains?

There is no “right answer” to any of these questions. But scenario-thinking can help inform how we think about the answers, and better prepare us for the future.

In his classic 2005 study of business scenario planning titled The Art of Strategic Conversation, Kees van der Heijden made this statement, noting “the big unarticulated issue” that can really interfere with management’s ability to assess and respond to a changing risk environment.

For many companies, climate change is that “big unarticulated issue.” The tepid business response to climate change is just part of the challenge. The field of behavioral economics and studies of cognitive decision making have documented that the decision-making characteristics of climate change lead us to want to deny the existence of the problem in the first place. Our brains naturally provide our decision-making processes with much of the ammunition they need to do just that.

Faced with a problem with the characteristics of climate change, and faced with pervasive uncertainties about the future, how can companies act to ensure that their decision makers are getting the best available information for climate change decision-making?

Scenario planning can help. Scenario planning has been an accepted business risk management tool for decades but  remains widely misunderstood and underutilized. Because of how valuable it can be for informing corporate responses to climate change, we will explore several aspects of scenario planning in this lesson. We will review:

Note: Scenario planning is a big enough topic in the context of business climate change risk management, particularly in the context of the TCFD, that we’ve created a bonus Your Climate Change MBA sub-chapter specifically around scenario planning. Access it through the link below (we suggest right-clicking on the link to open it in a new browser window, allowing you to return to this Decision-Support Chapter easily).

It’s beyond the scope of this page to comprehensively explore these and other topics, but we’ve organized substantial resources below to allow you to dig deeper into the topics on your own.

Upon request the Climatographers can utilize these and other materials to answer specific questions you may have, or in support of internal briefings or other needs. For more information see: Topical Briefings/Courses

Resources: