Climate Scenario Analysis (TCFD): A Tool for Risk Management

Climate change is no longer an external variable or a long-term risk: it is a factor that directly affects business strategy, profitability, and continuity.

Increasingly frequent physical events, accelerated regulatory changes, and market transformations are forcing organizations to anticipate future developments and make decisions based on plausible climate scenarios.

In this context, climate scenario analysis proposed under the TCFD framework has become a key tool to identify risks and opportunities, assess their financial impact, and strengthen business resilience across different climate horizons.

In this article, we analyze in detail what climate scenario analysis under TCFD entails, why it has become a key requirement for companies and financial institutions, and how it can be practically applied in risk management.

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What is climate scenario analysis under TCFD?

Climate scenario analysis is a structured methodology that enables companies to assess how different plausible climate futures may affect their business model, financial position, and corporate strategy.

Under the framework of the Task Force on Climate-related Financial Disclosures (TCFD), this tool has become the leading standard for anticipating physical and transition risks associated with climate change.

TCFD scenario analysis is not a theoretical exercise. It is an advanced risk management mechanism that translates climate variables — such as temperature increases, regulation, carbon pricing, and resource availability — into quantifiable financial impacts.

Organizations that apply it properly identify vulnerabilities before they materialize and make decisions based on forward-looking data.

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Why is scenario analysis key for corporate risk management?

Climate change introduces systemic risks that simultaneously affect operations, supply chains, physical assets, and access to financing. In this context, scenario analysis enables companies to assess these risks in a structured and comparable way.

Companies that integrate climate scenario analysis reduce exposure to extreme events, avoid stranded investments, and improve financial resilience. According to market data, organizations that incorporate climate scenarios into strategic planning can reduce medium-term cash flow volatility by up to 25%.

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What types of climate risks does TCFD analyze?

TCFD distinguishes two main categories of risk:

Physical risks

Physical risks arise from the direct impacts of climate change:

• Rising average temperatures
• Prolonged droughts
• Floods and extreme weather events
• Water stress

These risks directly affect facilities, logistics, workforce productivity, and the availability of raw materials.

Transition risks

Transition risks stem from the shift toward a low-carbon economy:

• Stricter climate regulation
• Increased carbon pricing
• Accelerated technological change
• Evolving customer and investor preferences

Carbon-intensive companies are the most exposed, but no sector is entirely exempt.

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Which climate scenarios does TCFD recommend?

The Task Force on Climate-related Financial Disclosures (TCFD) framework recommends analyzing at least three contrasting climate scenarios.

The objective is not to predict exactly how the climate will evolve, but to assess the robustness of corporate strategy under different regulatory, physical, and market conditions.

1.5°C scenario: rapid and orderly transition

• Accelerated implementation of climate and regulatory policies
• Increased fiscal and regulatory pressure on emissions
• Strong push for technological innovation and decarbonization
• Business implications: early investment requirements, transformation of business models, and competitive advantage for agile organizations.

2°C scenario: gradual transition

• Progressive introduction of regulatory and market measures
• Phased changes in demand and value chains
• Greater adaptation margin for carbon-intensive sectors
• Business implications: gradual adjustments in costs, operations, and competitive positioning.

Above 3°C scenario: climate inaction

• Significant delays in mitigation policies
• Increase in extreme climate events and physical risks
• Greater market volatility and operational disruptions

Business implications: severe impacts on assets, supply chain disruptions, and increased financial and insurable risks.

Why is it necessary to analyze multiple scenarios?

• It allows identification of risks and opportunities under divergent climate contexts.
• It tests the resilience of corporate strategy.
• It improves medium- and long-term decision-making.
• It strengthens credibility with investors, regulators, and auditors.

The value of climate scenario analysis does not lie in predicting the future, but in evaluating the robustness of corporate strategy under different climate and economic conditions.

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How to conduct climate scenario analysis step by step

Conducting climate scenario analysis requires a structured approach that connects climate data with strategic decisions. This process enables the evaluation of risks and opportunities under different plausible futures and translates them into financial and operational impacts.

Below are the key steps to implement it rigorously and in alignment with TCFD.

1. Define the scope and time horizon

The analysis should cover own operations, supply chains, and key markets, with short-term (5 years), medium-term (10–15 years), and long-term (30 years) horizons.

2. Identify relevant climate variables

Critical variables may include:

• Carbon price
• Energy demand
• Water availability
• Regulatory costs

3. Translate climate impacts into financial impacts

This is where the greatest maturity shift occurs: risks are converted into financial metrics (EBITDA, CAPEX, OPEX, and asset valuation).

4. Assess strategic resilience

Evaluate whether the current strategy remains viable under each scenario and determine what adjustments are necessary.

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What is the relationship between TCFD and CSRD?

TCFD serves as the methodological foundation for the European ESRS standards, particularly regarding climate risk.

Companies subject to CSRD must conduct double materiality assessments that integrate climate scenarios aligned with TCFD.

Implementing scenario analysis today accelerates future regulatory compliance and reduces reporting costs.

Platforms such as Manglai enable automation of this process and connect climate scenarios with real data on emissions, energy, and water.

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Common mistakes in climate scenario analysis

Although climate scenario analysis is a powerful tool, incorrect application can limit its strategic value.

Identifying common mistakes helps improve the quality of analysis and avoid decisions based on incomplete assumptions:

• Treating scenarios as purely narrative exercises without financial impact
• Using overly short time horizons
• Failing to integrate results into decision-making
• Outsourcing the analysis without internal knowledge transfer

Leading companies integrate scenarios directly into strategic and financial planning.

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Scenario analysis as a pillar of corporate resilience

Climate scenario analysis under TCFD has become a key tool for turning climate uncertainty into competitive advantage.

Organizations that systematically integrate it into strategic planning not only anticipate physical and transition risks, but also improve decision quality, strengthen financial stability, and enhance medium- and long-term resilience.

In an increasingly demanding regulatory and market environment, applying this approach is no longer optional — it is a differentiating factor for business sustainability and continuity.

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Frequently Asked Questions about Climate Scenario Analysis (TCFD)

Is TCFD scenario analysis mandatory?

Not always mandatory, but highly recommended and often indirectly required by investors and regulators.

How often should climate scenario analysis be updated?

It should be reviewed at least every two years or whenever significant regulatory changes occur.

Which sectors should prioritize TCFD scenario analysis?

Energy, industry, transport, food, real estate, and financial services have the highest climate exposure.

Can scenario analysis be automated?

Yes. Specialized digital tools allow scenario modeling, connection of primary data, and generation of auditable reports.