Scenario analysis intro
Companies are affected by climate change in different ways. Extreme weather could damage assets at a company facility or the introduction of new climate change policies could require technological change. Both effects could end up influencing a company’s balance sheet. By calculating the financial risks from climate change per asset and per scenario, MSCI ESG Research's Climate Value-at-Risk (VaR) provides a framework that helps investors quantify and understand these risks and take necessary action for portfolio performance optimization, risk management and regulatory reporting purposes.
The approach is closely aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) in that it assesses both transition and physical risks and opportunities. The Climate VaR metric provides insight into the climate-stressed valuation of assets based on specific scenario pathways such as the 2ºC goal of the Paris Agreement. Investors can then assess how much they stand to lose or gain from the impact of climate change across their portfolio
Scenario Analysis video
MSCI ESG Research’s financial modeling approach translates climate-related costs into valuation impacts on companies and their publicly tradable securities. In this way, the Climate VaR framework helps investors to understand the potential climate-related downside risk and/or upside opportunity in their investment portfolios.
The framework provides a large number of scenarios which incorporate different temperature as well as socio-economic pathways to help assess the climate impact of investment portfolios. The robust and sophisticated transition assessment has been development by climate and policy experts over the last five year and incorporates model development enhancement from large global institutional investors.
Cost/ profit calculation
Modeling approach part 2
MSCI ESG Research’s climate change risk and opportunity calculations provide holistic analysis across a portfolio.
Holistic Coverage across Portfolio
Listed Equity & Corporate Bonds
Physical and transition risk across more than 10,000 companies assessing all of their associated equities and corporate bonds.
Using stress testing analytical models to run transition risk climate VaR across 46 markets and +9K securities.
Analysis across 1 million commercial and residential real estate properties enabling investors and real estate managers to evaluate both transition and physical climate-related impacts in their portfolios down to the specific asset level. For more information go here.
Assess portfolio risk and opportunities to differing scenarios
MSCI ESG Research analyzes several scenarios per company, providing an extensive overview of exposure to climate change risks and opportunities.
The framework used provides a large number of scenarios which incorporate different temperature as well as socio-economic pathways to help assess the climate impact of investment portfolios. The robust and sophisticated transition assessment has been development by climate and policy experts and incorporates model development enhancement from large global institutional investors.
Transition risks and opportunities
|Transition risks and
|The policy scenarios aggregate future policy costs based on an end of the century time horizon. By overlaying climate policy outlooks and future emission reduction price estimates onto company data, the Climate VaR model provides insights into how current and forthcoming climate policies could affect companies.
The technology scenarios identify current green revenues as well as the low carbon patents held by companies, calculate the relative quality score of each patent over time and forecast green revenues and profits of corporations based on their low carbon innovative capacities.
Physical risks and opportunities
|Physical risks and
|Physical climate scenarios define possible
climate consequences resulting from
increased concentration of GHG emissions.
They describe changes in global temperatures, precipitation levels, extreme weather
events such as storms, snowfall, wildfires,
etc. Using the past 35 years of observed
extreme weather to set a historical base-line,
MSCI ESG Research brings current and future
extreme weather developments into perspective for the coming 15 years.
Current physical climate scenarios modeled by MSCI ESG Research include costs of extreme weather events relating to temperature changes (extreme heat and cold), extreme precipitation, extreme snowfall and wind patterns.
Transition risks and opportunities
Scenario Analysis Featured Content
Climate and Net-Zero Solutions
Scenario analysis is one component of the tools required on the path to Net-Zero, learn more about all our solutions available to support this.
Stress Testing Portfolios for Climate-Change Risk
Scenario analysis provides a powerful tool for investors to understand the implications of climate change for their portfolios.
Scenario analysis for real estate
Scenario analysis Footnotes
1Climate Value-at-Risk (VaR), Climate Data and Metrics, Climate Risk Reporting and Scenario Analysis are produced by MSCI ESG Research LLC, a subsidiary of MSCI Inc. MSCI ESG Indexes, Analytics and Real Estate are products of MSCI Inc. that utilize information from MSCI ESG Research LLC. MSCI Indexes are administered by MSCI Limited (UK).
MSCI ESG Research LLC. is a Registered Investment Adviser under the Investment Adviser Act of 1940. The most recent SEC Form ADV filing, including Form ADV Part 2A, is available on the U.S. SEC’s website at www.adviserinfo.sec.gov (opens in a new tab).
MIFID2/MIFIR notice: MSCI ESG Research LLC does not distribute or act as an intermediary for financial instruments or structured deposits, nor does it deal on its own account, provide execution services for others or manage client accounts. No MSCI ESG Research product or service supports, promotes or is intended to support or promote any such activity. MSCI ESG Research is an independent provider of ESG data, reports and ratings based on published methodologies and available to clients on a subscription basis. We do not provide custom or one-off ratings or recommendations of securities or other financial instruments upon request.