Climate risks: scenarios and what they mean for your business

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Sustainability risks are financial risks that environmental, social and governance factors feed back onto a company. Methodology and data are furthest developed on the climate side, and that is where regulation starts. The EBA has since widened its scenario guidelines to environmental risks as a whole, covering water and biodiversity among others, and has left the door open to extending them to social and governance factors later. This page deals with the part that can be quantified today.

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Climate risks fall into physical and transition risks. Both take effect when a hazard meets an asset or a business model that is exposed to it.

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Physical risks stem from the changing climate itself. They include acute events such as storms, heavy rainfall, flooding and heatwaves. They equally include gradual shifts, among them rising average temperatures, changed precipitation patterns, increasing drought and sea level rise. What is at stake are sites and production facilities, loan collateral and insured assets, as well as transport routes and inputs.

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Transition risks arise from society's response to climate change. Their drivers are policy and regulation, for instance carbon pricing under EU ETS 1 and ETS 2 or tighter efficiency and retrofit requirements. Technological change, shifting customer and investor behaviour, and liability and reputational consequences add to them.

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Both chains of effect play out over decades. Capital planning and business strategy, by contrast, rarely look further than three to five years. Scenario analysis bridges that gap and makes developments tangible whose full effect only arrives decades from now.

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Who has to demonstrate what

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Credit institutions: On 4 November 2025 the EBA published its Guidelines on environmental scenario analysis (EBA/GL/2025/04). They rest on Article 87a CRD and apply from 1 January 2027 to all institutions, including small and non-complex ones. What they require is a two-pillar approach. Short and medium-term scenarios test financial resilience and feed into the ICAAP and ILAAP, while a second exercise tests the resilience of the business model over at least ten years. How far the analysis has to reach follows from the materiality assessment under the ESG risk guidelines. Institutions also have to name the transmission channels through which a scenario reaches them: microeconomically through credit and market risk, macroeconomically through variables such as inflation and economic output.

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Insurers: Article 45a of the amended Solvency II Directive makes climate scenario analysis part of the ORSA. Undertakings with material exposure run at least two long-term scenarios, one with global temperature rise below two degrees and one well above, and review both at least every three years. Undertakings with a low risk profile are exempt. The time horizon spans decades and thus reaches well beyond the usual ORSA horizon. Possible modelling approaches based on the NGFS scenarios are set out by the German Insurance Association (GDV) in its publication "Klimawandelszenarien im ORSA".

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Companies in the real economy: The most solid anchor here is the EU taxonomy. Delegated Regulation (EU) 2021/2139 requires, in Annex I, Appendix A, a robust climate risk and vulnerability assessment, both as a substantial contribution criterion for adaptation and as a DNSH criterion for all other activities. Since Delegated Regulation (EU) 2026/73 of 8 January 2026, the assessment is no longer required for activities that together account for less than ten per cent of turnover, capital expenditure and operating expenditure. On top of this comes the climate risk and resilience assessment under ESRS E1, restructured in the revised standards and no longer prescribing scenario analysis. Companies that have fallen out of the reporting scope under the new CSRD thresholds remain under pressure through the taxonomy and through what their lenders and customers ask of them.

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All sectors: On 8 January 2026 the European Supervisory Authorities published joint guidelines on ESG stress testing. Formally they address national supervisors, but they reach corporate clients through the institutions as soon as those clients are asked for data. The 2027 EU-wide stress test, whose draft methodology the EBA put up for discussion in June 2026, integrates climate risks in a structured way for the first time.

 

How this differs from reporting

 

Scenario analysis in risk management and the resilience assessment in the sustainability statement answer different questions. The first tests whether capital, liquidity and the business model withstand a scenario. The second discloses how resilient the strategy is to climate change. Both should rest on the same scenarios and time horizons. Where they diverge, it becomes a topic in the audit discussion.

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Common weaknesses

 

Many institutions and insurers adopt the NGFS pathways without translating them onto their own portfolio. Climate risks then show up as a qualitative section in the ORSA or the risk report, while the effect on solvency capital, reserves and liquidity goes unquantified. In the real economy, vulnerability assessments often stay at company level, even though the taxonomy calls for an assessment of the individual activity and its locations. Writing off an entire risk category as immaterial is common too. A materiality assessment has to be traceable by sector, by geography and in numbers.

 

Our services

 

• Materiality assessment: For each risk category we establish whether and where you are materially exposed, and we document the reasoning so that it holds up when a supervisor or auditor asks.
   

• Scenario selection and calibration: We select the scenarios that fit your portfolio or asset base, from NGFS pathways through the GDV approaches to adverse scenarios of your own, and we set the time horizons and reference points.
   

• Physical risks at asset level: We map hazards for sites, production facilities, property collateral and insured risks, and combine hazard data with your own portfolio data.
   

• Climate risk and vulnerability assessment under the EU taxonomy: We carry out the Appendix A assessment end to end, from hazard screening through adaptation measures to the documentation that supports taxonomy alignment.
   

• Transition risks in the portfolio and the business model: We run carbon price pathways and sectoral transformation assumptions through counterparties, collateral values and your own business lines, and show which parts drive the result.
   

• Translating results into steering and capital: We feed the results into the ICAAP and ILAAP, into solvency capital, into limit frameworks or into investment planning, so that they inform decisions.
   

• Consistency and documentation: We make sure that your risk plan, stress tests, taxonomy assessment and sustainability statement use the same scenarios, and we record assumptions, data sources and methodological decisions in audit-ready form.

 

Contact us

 

Whether you are a bank, an insurer, an asset manager or an energy utility, we will work out with you where you stand against the requirements coming in 2027 and which step makes sense next.