Data Story — Key Signals in Climate Risk Analytics & Scenario Modeling

The climate risk analytics market has grown from niche consultancy to essential infrastructure. In 2025, the global climate risk analytics market reached approximately $9.84 billion, with projections suggesting growth to over $50 billion by 2033—a compound annual growth rate of 17.5%. Meanwhile, TCFD-aligned disclosure adoption has plateaued at 35-63% across regions as organisations transition to the newer ISSB framework. For sustainability leads navigating this evolving landscape, understanding which signals genuinely matter for decision-making has never been more critical.

Why It Matters

Climate risk is no longer a distant concern—it directly impacts asset valuations, credit ratings, and regulatory compliance today. The Climate Policy Initiative reports that global climate finance flows reached $1.9 trillion in 2023, yet the annual need from 2024-2030 stands at a minimum of $6.3 trillion. This gap underscores why accurate risk quantification matters.

For UK organisations specifically, mandatory TCFD disclosures (enacted April 2022) are now transitioning to ISSB S1/S2 standards. The EU's Corporate Sustainability Reporting Directive (CSRD) became mandatory in 2025, requiring double materiality assessments and scenario analysis. Financial institutions face additional pressure from European Banking Authority guidelines mandating NGFS climate scenario stress testing.

Beyond compliance, the business case is compelling. Asset managers with over $22.4 trillion in assets under management have committed to nature-related reporting through TNFD. Companies that accurately assess climate risk gain competitive advantages in capital allocation, insurance pricing, and strategic planning.

Key Concepts

Physical Risk vs Transition Risk

Climate risk divides into two fundamental categories that require different data inputs and analytical approaches.

Physical risks stem from climate change impacts on assets and operations. These divide further into:

• Acute risks: Event-driven hazards including floods, wildfires, cyclones, extreme heat events, and severe storms
• Chronic risks: Long-term shifts such as rising sea levels, increasing mean temperatures, drought conditions, and water stress

Transition risks emerge from the policy, technology, and market shifts accompanying decarbonisation:

• Policy risks: Carbon pricing mechanisms, regulatory mandates, stranded asset exposure from unburnable reserves
• Technology risks: Competitive disruption from clean technology advancement, R&D requirements for low-carbon alternatives
• Market risks: Demand shifts from fossil fuels to renewables, supply chain restructuring costs
• Legal risks: Climate litigation exposure, insurance premium increases

SSP and RCP Scenarios

Modern climate risk assessment uses standardised scenarios combining atmospheric science with socioeconomic projections.

Representative Concentration Pathways (RCPs) describe future greenhouse gas concentrations measured in watts per square metre of radiative forcing by 2100. Shared Socioeconomic Pathways (SSPs) add narratives about population growth, economic development, and policy choices.

The most commonly used combined scenarios include:

• SSP1-1.9 (~1.5°C warming by 2100): High transition risk, Paris-aligned pathway
• SSP1-2.6 (~1.8°C warming by 2100): High transition risk, aggressive mitigation
• SSP2-4.5 (~2.6°C warming by 2100): Balanced physical and transition risks
• SSP3-7.0 (~3.6°C warming by 2100): High physical risk, fragmented policy
• SSP5-8.5 (~4.4°C warming by 2100): Severe physical risk, minimal mitigation

Best practice in 2025 recommends using at least two scenarios: a Paris-aligned pathway (SSP1-2.6) and a high-emissions pathway (SSP3-7.0 or SSP5-8.5). Many organisations now use three to capture the full risk spectrum.

Climate Value at Risk (CVaR)

Climate Value at Risk quantifies potential financial losses from climate-related events and transitions. MSCI's methodology—the industry benchmark—measures the present value of climate costs as a percentage of current market capitalisation or enterprise value.

CVaR integrates multiple risk factors:

• Physical Value at Risk (PVaR): Revenue and cashflow impact from climate hazards
• Transition costs: Carbon pricing impacts, technology competitiveness shifts
• Stranded asset exposure: Percentage of reserves that may become unburnable

Financial institutions increasingly use CVaR for portfolio stress testing and capital allocation decisions.

What's Working

Geospatial Asset-Level Analysis

Platforms like S&P Climanomics now cover over 78,000 companies and 7.1 million assets globally, mapping physical risk exposure across ten climate hazards. This granular approach enables organisations to identify vulnerability at the individual facility level rather than relying on sector-wide averages.

Sustainalytics' XDI platform extends this to 12 million assets across 235 countries, providing standardised Physical Value at Risk scores. Asset managers can now screen portfolios for climate exposure with unprecedented precision.

NGFS Scenario Standardisation

The Network for Greening the Financial System has established three core scenario categories—Orderly Transition, Disorderly Transition, and Hot House World—that provide consistent frameworks for central bank stress testing. In May 2025, NGFS released new short-term scenarios with 3-5 year horizons for assessing "extreme but plausible" systemic risk events.

This standardisation enables comparability across institutions and jurisdictions, addressing a longstanding challenge in climate risk assessment.

Regulatory Integration

The Financial Stability Board's January 2025 analytical framework established three metric categories: early warning proxies, exposure metrics, and institution-level risk metrics. This provides a coherent structure for integrating climate considerations into supervisory frameworks globally.

What Isn't Working

Data Fragmentation and Comparability

Despite progress, significant gaps persist. Coverage varies dramatically between data providers, and methodological differences make cross-platform comparisons challenging. Granular Scope 3 emissions data—critical for transition risk assessment—remains incomplete for many sectors.

Forward-looking metrics rely heavily on estimates when direct company disclosure is unavailable. The standardised historic climate finance data currently covers only 2018-2022, with updated 2023 data expected in early 2026.

Scenario Selection Challenges

Many organisations default to SSP5-8.5 (the highest-emissions scenario) for physical risk assessment without considering whether this represents a plausible future. Conversely, some underestimate transition risks by assuming orderly policy implementation. The disconnect between scenario timelines and business planning horizons further complicates decision-making.

Translation to Financial Metrics

Converting hazard exposure scores into actionable financial impacts remains imprecise. Damage functions vary by asset type, and business interruption costs are difficult to model accurately. Many organisations struggle to integrate climate risk findings into existing enterprise risk management frameworks.

Key Data Signals That Matter

Temperature Pathway Indicators

• Current trajectory alignment: Is global policy tracking toward 2.5°C or higher by 2100?
• Near-term divergence points: 2030 emissions targets provide early signals of pathway direction
• Sectoral decarbonisation rates: Steel, cement, aviation showing slower progress than power sector

Carbon Price Signals

• EU ETS prices: Currently trading at €60-80/tCO2, with projections suggesting €100+ by 2030
• Regional carbon border adjustments: CBAM implementation affecting traded goods pricing
• Internal carbon prices: Companies using shadow prices of $50-150/tCO2 for investment decisions

Physical Exposure Metrics

• Asset-level hazard scores: Normalised 0-100 scales for flood, heat, fire, water stress
• Expected annual loss (EAL): Probability-weighted damage costs
• Business interruption days: Supply chain and operational disruption potential

Transition Readiness Signals

• Stranded asset ratios: Percentage of fossil fuel reserves potentially unburnable under Paris alignment
• Capex allocation trends: Clean versus carbon-intensive investment ratios
• Revenue at risk: Percentage of earnings exposed to declining demand sectors

Action Checklist

• Map all physical assets (facilities, supply chain nodes) with geographic coordinates for hazard exposure assessment
• Select minimum two climate scenarios (Paris-aligned plus high-emissions) aligned with asset lifecycles
• Calculate Physical Value at Risk for material assets using at least one established methodology (MSCI, Sustainalytics, Jupiter)
• Model carbon pricing impacts on operating costs under €50, €100, and €150/tCO2 scenarios
• Assess stranded asset exposure for any fossil fuel-related holdings or supply chain dependencies
• Integrate climate risk metrics into existing enterprise risk register with defined risk appetite thresholds
• Establish board-level reporting on climate VaR with quarterly updates

FAQ

Q: Which climate scenarios should my organisation use for TCFD/ISSB disclosures? A: The minimum recommended approach uses two scenarios: SSP1-2.6 (or equivalent Paris-aligned pathway) and SSP5-8.5 (or SSP3-7.0 for high physical risk). Many regulators expect at least three scenarios covering orderly transition, disorderly transition, and failed transition pathways. Align time horizons with your longest-lived assets—typically 2030, 2050, and 2080 for infrastructure.

Q: How do I choose between different climate risk data providers? A: Evaluate providers on four criteria: asset coverage for your sector and geography, methodology transparency, scenario flexibility, and integration capabilities with existing systems. S&P Climanomics and MSCI lead on corporate coverage; Sustainalytics (XDI) and Jupiter excel on physical asset analysis. Many organisations use multiple providers for cross-validation.

Q: What carbon price should we use for internal planning? A: Conservative approaches use current regulatory prices (EU ETS around €70-80/tCO2) for near-term planning and projected prices (€100-150/tCO2) for 2030+ decisions. The IEA Net Zero scenario suggests prices reaching $130-250/tCO2 by 2050 in advanced economies. Many multinationals use $80-100/tCO2 as a baseline internal price for investment decisions today.

Q: How accurate are current climate risk models? A: Models provide directional guidance rather than precise predictions. Physical risk models are generally more reliable for relative risk ranking than absolute loss estimation. Transition risk models depend heavily on policy assumptions that may shift rapidly. Use scenario ranges rather than point estimates, and update assessments annually as methodologies improve.

Sources

• Business Research Insights. "Climate Risk Analytics Market Size, Share - Forecast To 2033." 2025.
• Climate Policy Initiative. "Global Landscape of Climate Finance 2024." 2024.
• Financial Stability Board. "FSB Roadmap for Addressing Financial Risks from Climate Change 2025 Update." January 2025.
• Harvard Law School Forum on Corporate Governance. "2025 Sustainability Reporting: Global Trends in Framework Adoption." November 2025.
• MSCI. "Climate Value-at-Risk (VaR) Methodology." June 2024.
• Network for Greening the Financial System. "NGFS Scenarios Portal." 2025.
• S&P Global Sustainable1. "Climanomics Methodology." June 2025.
• UNEP Finance Initiative. "Climate Risk Landscape Report 2024." 2024.