For many organisations, climate scenario analysis (CSA) is not new. Firms have invested heavily in understanding their exposure to physical risks. As a result, skills, tools and data have developed substantially when it comes to assessing the impact of floods, storms and heatwaves on the organisation. However, this narrow focus does not reflect the full reality of organisations’ climate exposures. To remain strategically resilient and regulation-ready, firms must broaden climate scenario analysis beyond physical impacts and fully embed transition risk.
For some firms, transition risks may be as material as, if not more material than, physical risks. However, because they are harder to assess, they often remain under-analysed. This creates a strategic blind spot, increasing the risk that organisations make long-term decisions on their business strategy without fully understanding how the transition could affect future performance. Therefore, regulatory scrutiny is increasing, and regulators are becoming more focused on how organisations are assessing transition risks and using CSA.
Financial services
The Prudential Regulation Authority (PRA) has made it clear, under SS5/25, that financial service companies are expected to identify and assess all material climate-related risks and to use CSA to evaluate business model resilience and inform decision-making.
Large and listed organisations
Large and listed organisations will be expected to use an approach to climate-related scenario analysis, in line with the level of exposure to climate-related risks and their capabilities in assessing CSA, based on the most recent draft of the UK Sustainability Reporting Standards.
Considerations for insurers
Transition risks are already influencing underwriting decisions, portfolio concentration, long‑term profitability, and the viability of transition plans, particularly where firms are exposed to carbon‑intensive or transition‑sensitive sectors. For example, insurers are grappling with:
- inconsistent sustainability policy signals across jurisdictions, making it difficult to set underwriting and investment strategies
- data scarcity and limited actuarial expertise which, according to the Federation of European Risk Management Associations, contributes to conservative underwriting, exclusions, or mispricing, particularly for transition‑enabling technologies such as battery storage, renewables, and carbon capture
- rising climate-related and greenwashing litigation affecting Directors’ and Officers’ (D&O), professional indemnity and liability claims
- reputational impacts linked to heightened stakeholder and social expectations.
Why is transition risk CSA more complex?
Whilst CSA is relatively well-established for physical risk, applying it effectively to transition risk remains more challenging due to the forward-looking and non-linear nature of the risks.
Physical risk assessments benefit from decades of scientific modelling, with extensive climate predictions and large future-looking data sets. These models draw on well-established hazard understanding, such as the link between increased rainfall and surface water flooding. Although not perfect, the underlying science is understood, tested and widely used.
In contrast, transition risk impacts are driven by assumptions around policy ambition, regulatory intervention, technological advancement, market behaviour and social response. None of these factors follow predictable or linear trajectories. They are uncertain, evolve at different speeds, and can shift abruptly in ways that are difficult to predict or model. Additionally, transition variables interact with each other in complex ways. For example, divergence in global policy may trigger supply-chain disruption and market volatility, leading to increased costs, as well as litigation and reputational risks.
As a result, modelling transition risk requires constructing plausible and science-based pathways, making the analytical process more subjective, more assumption-heavy and more sensitive to changes in external conditions. Firms, therefore, need to ensure they are using credible transition scenarios, informed by their own business model and risk portfolio, to develop a transition risk CSA that works for them. It is also worth remembering that physical and transition effects maybe interact, and so hybrid scenarios may be relevant for some organisations. Clear documentation of assumptions and the methodology is essential to ensure transparency and decision usefulness.
The fundamentals remain the same
The good news is that the underlying principles of CSA remain the same when considering transition risks. Firms do not need perfect data or sophisticated models to begin; instead, they need a structured, proportionate approach anchored in materiality and strategic intent. Developing your approach for CSA typically involves four key steps.
1. Set the CSA strategy
Many organisations may already have a CSA strategy agreed at Board level, however, it might be time to revisit it to ensure all material risks are considered. Given the multi-channel nature of transition risk, a well-defined purpose statement and clear strategic questions should anchor the exercise. For example, an insurer may want to assess the potential impact of litigation risk within its D&O portfolio, or a listed firm may want to test the viability of its transition plan under different policy or market pathways. The purpose statement defines which risks matter, what data is required and how the outputs will be used.
2. Design the scenario analyses
Science-based transition pathways developed by international organisations, such as the Intergovernmental Panel on Climate Change, provide a useful starting point. However, they are typically macro‑level and often require additional inputs, such as sector‑specific analysis, policy or regulatory developments, or emerging climate‑related litigation trends. The design of the scenario should include determining whether a qualitative, quantitative or blended approach is most appropriate, based on data availability, the complexity and materiality of transition risks, and the intended use of the results.
3. Run the analysis, iterate and refine
Once the transition risk CSA has been designed and scoped, the assessment can be run. For transition risk in particular, the first analyses will likely reveal data gaps, structural issues, or additional questions. This is to be expected and means that organisations should expect to revisit assumptions and refine methodologies as their understanding matures. It is unlikely that the first run of the analysis will give the required outcomes.
4. Integrate the scenario outcomes
This step begins during the analysis itself, as emerging findings are discussed in the context of the business. For transition risk, interpretation is critical: results are rarely definitive and must be understood in the context of the business. Effective transition risk CSA should provide robust input to support next steps, such as changes to risk appetites, business strategy to manage sectoral or geographical exposure, transition plans, or management actions.
The strategic opportunity
Transition risk CSA is more complex, but it can also be more revealing. Broadening CSA to include transition risks presents a competitive advantage, and firms that have started or start now can gain clearer insight into business resilience, future revenue and profitability, and capital adequacy under different climate pathways. As transition uncertainty accelerates, the ability to understand and act on these risks will become one of the defining strengths of resilient organisations.
How can Crowe help?
There is no one-size-fits-all approach to building and running transition risk climate scenario analysis. The right approach depends on an organisation’s risk profile, strategic objectives and CSA maturity. Crowe works with organisations to design purpose-led, proportionate CSA frameworks that move beyond compliance and support real business decision-making. This includes helping firms identify and prioritise material transition risks, translate climate scenarios into business-relevant impacts, and embed CSA outcomes into strategy, risk appetite and governance.
For more information, please get in touch with your usual Crowe contact.
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