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Scenario Analysis
Quantify and understand the financial risks of climate change and take necessary action for portfolio performance optimization, risk management and regulatory reporting purposes
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
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Scenario Analysis video
What is Climate VaR?
Watch our short video to learn more about the Climate VaR metric and its application.
Modeling approach
Modeling Approach
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.
Nested Applications
Nested Applications
Impact modeling
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Cost/ profit calculation
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Cost/ Profit |
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Nested Applications
Security valuation
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Portfolio aggregation
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Portfolio |
Nested Applications
Modeling approach part 2
Holistic Coverage across Portfolio
MSCI ESG Research’s climate change risk and opportunity calculations provide holistic analysis across a portfolio.
Listed Equity & Corporate BondsPhysical and transition risk across more than 10,000 companies assessing all of their associated equities and corporate bonds. |
Sovereign BondsUsing stress testing analytical models to run transition risk climate VaR across 46 markets and +9K securities. |
Real Estate1Analysis 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. |
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 developed by climate and policy experts and incorporates model development enhancement from large global institutional investors.
Transition risks and opportunities
| Transition risks and opportunities |
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Transition risk scenarios define a company's future costs driven by the policies implemented during the global transformation to a low-carbon economy. 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.
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Physical risks and opportunities
| Physical risks and opportunities |
| 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 a combination of climate model projections, statistical extrapolation of historical trends from the last 40 years, and scenario analysis, MSCI ESG Research brings current and future extreme weather developments into perspective until the end of the century. 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
Featured Content
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.
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Scenario analysis for real estate
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Learn MoreScenario 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.
ESG ADV 2A (PDF, 355 KB) (opens in a new tab)
ESG ADV 2B (brochure supplement) (PDF, 232 KB) (opens in a new tab)