Sustainable Fitch: Climate Scenario Limitations Are Surfacing as Usage Rises

Climate scenario analysis is a key tool for evaluating complex physical and transition risks of companies and communities.  This raises questions about the credibility of transition plans and long-term risk management processes that do not apply the scenarios.  Limited standardization and transparency make it difficult to compare results across entities.  There is increasing recognition of the ESG rating limitations, notwithstanding their ignoring of the Sustainable Development Goals (SDGs).  Current models exclude or underestimate significant risks from climate tipping points or macroeconomic and financial second-order effects.   This suggests that scenario analysis must be adjusted to better inform supervisory and regulatory actions.