Navigating climate scenario science to embrace climate risk analysis

The global climate science community is finalising the Coupled Model Intercomparison Project (CMIP) 7 – the next generation scenario framework[1] promising more plausible, policy-relevant projections for the decades ahead. CMIP7 restructures scenarios around policy pathways rather than end-of-century temperature outcomes. For firms, this update demands a recalibration of scenario analysis frameworks, away from outdated “business-as-usual” extremes, toward plausible futures and integrated narratives.

Here, we give practical recommendations for refreshing climate scenario analysis in financial contexts.

What are climate scenarios?

Scenarios are coherent descriptions of alternative future worlds used to drive climate models. They use consistent assumptions about population, economic growth, technology and policy, translated into emissions or concentration trajectories for greenhouse gases. Scenarios represent plausible “if-then” experiments that help decision-makers assess a range of outcomes. They underpin major climate projections, from Intergovernmental Panel on Climate Change (IPCC) reports to regulatory climate stress tests, by informing models of what the world might look like under different policy choices.

Firms use scenario analysis to stress-test portfolios, evaluate strategic resilience and meet disclosure obligations. Climate scenario frameworks have significantly evolved to reflect the state of science and policy.

Table 1: Evolution of major climate scenario frameworks (2000–2026)

Climate scenario design is continually recalibrated to scientific progress and real-world developments. Early scenario sets aimed to span extremes, while recent efforts prioritise plausibility and policy relevance, ensuring that scenario analysis remains a credible foundation for both climate research and financial risk planning.

CMIP7 scenario framework: why now?

The climate modelling community designed CMIP7’s scenario framework now, ahead of the next IPCC cycle, to update scenario baselines and incorporate new knowledge before its Assessment Report (AR) 7.

The IPCC AR7 process will assess literature that includes CMIP7 scenario results, though the IPCC doesn’t create these scenarios. The AR7 reports will likely adopt CMIP7-based insights for global climate risk guidance. Meanwhile, the NGFS is expected to incorporate these developments in future iterations. As firms plan beyond 2030, aligning with the CMIP7 framework will help ensure scenario consistency across regulatory guidance and scientific updates.

Key highlights of CMIP7 scenarios:

• A narrower but more plausible range: scenarios span seven pathways from very low to high emissions, but with a narrower forcing range (approx. 1.5°C to 3.5°C warming by 2100) compared to the ~1°C–5°C range of prior sets. Extremely high emission futures have been ruled out as core scenarios due to their implausibility under current socio-economic trends. However, significant warming beyond 3.5°C remains possible through uncertainties.
• Retirement of “implausible” high-end pathways: SSP5-8.5, the extreme high-emissions scenario (massive coal growth, >4°C warming) that dominated many worst-case analyses, is effectively retired. The new High (H) scenario is still a severe pathway but peaks at much lower emissions. The expected 2100 warming in the high scenario is about 3.0–3.5°C – a downward revision of nearly 1°C compared to previous high-end pathways (~4.4°C). This shift acknowledges that recent trends (policy actions, renewable uptake) make the old “business-as-usual” no longer credible as a baseline.

• Redesigned scenario architecture:
  • High (H): maximally high emissions deemed plausible, assuming policy reversal and heavy fossil fuel use.
  • High-to-Low (HL): emissions rise like High until mid-century, then plummet to net-zero by 2100.
  • Medium (M): emissions consistent with current policies, frozen as of 2025, yielding moderate warming.
  • Medium-to-Low (ML): a slow transition scenario, moderate reductions eventually reaching net-zero at the century’s end.
  • Low (L): a pathway aligned with likely staying below 2°C warming (but not fully back to 1.5°C) by 2100.
  • Very Low (VL): aggressive mitigation to keep warming ~1.5°C by 2100.
  • Low-to-Negative (LN): a slight overshoot above 1.5°C mid-century, then steep negative emissions bring warming back down by 2100.
• CMIP7 scenarios introduce a few technical advances:
  • Most participating climate models will run in emissions-driven mode for CO₂. Instead of prescribing atmospheric CO₂ concentrations, models start from emission inputs and simulate the carbon cycle. This captures uncertainty in carbon sinks and can widen the range of warming outcomes – an important consideration for tail-risk analysis in finance.
  • Explicit overshoot and Carbon Dioxide Removal (CDR): the scenarios explicitly address temporary overshoot of temperature targets and the required removal of CO₂. Overshoot scenarios emphasise short-term physical risk peaks and late policy shock transitions, while heavy CDR reliance introduces uncertainty around technology viability.
  • Extended time horizon: CMIP7 includes extended pathways to 2150 and 2500. This helps researchers examine long-term climate commitments beyond 2100, though for most financial risk applications, 2050–2100 remains the focus.
  • Plausibility criteria: the scenario design process applied explicit plausibility checks on input assumptions to ensure scenarios bracket realistic futures.

CMIP7 scenarios are more grounded but still explore critical uncertainties. The highest scenario has been toned down to reflect actual trends, but it still leads to dangerous warming (~3°C+) and could exceed 4°C if the climate system is more sensitive than expected. Meanwhile, the lowest scenario shows that 1.5°C is virtually out of reach without overshoot.

If a firm was accustomed to using SSP5-8.5 as their extreme physical risk scenario, they would now look to the CMIP7 High scenario (H) for an updated worst-case baseline. This H scenario implies somewhat fewer extreme emissions, but prudent risk analysis can account for uncertainty bands such that >4°C outcomes are still considered (due to climate sensitivity or feedback risks).

In summary, the CMIP7 framework emphasises plausibility and diversified pathways supporting credible scenario inputs. However, it also poses a challenge: legacy scenario sets must be refreshed to remain aligned with mainstream science, which we tackle next.

The importance of scenario framework recalibration

The scenario data and categories underpinning many risk models and disclosures will soon give way to this new framework. Clinging to legacy scenarios without recalibration risks using futures now considered implausible or missing out on new scenario types that have become salient.

Why recalibration is necessary and how to do it:

1. Gap analysis: compare current internal or vendor-provided scenarios with the new framework. Identify if your “orderly / disorderly / hot house” cases map coherently to the emerging scenario archetypes.
2. Portfolio coverage & variable remapping: ensure that the variables required by new scenarios are available and integrated into your risk models.
3. Narrative consistency: align scenario narratives across risk types. For example, if you adopt the High-to-Low (HL) scenario to stress test a disorderly transition, make sure the macroeconomic pathways used for credit risk match the physical climate trajectory of that scenario.
4. Governance & communication: treat scenario framework updates as a governance exercise. Seek validation from risk committees on the rationale for moving to new scenario definitions. Clearly communicate with stakeholders how your scenario analysis approach has been updated.

By methodically recalibrating now, firms maintain analytical credibility and improve the decision-usefulness of their scenario outputs.

What it means for climate scenario analysis

Finally, we translate these scenario shifts into concrete best practices for climate risk analysis:

• Revisit “single worst-case” dependency: many organisations historically anchored on one extreme climate scenario (often the old “business-as-usual” like RCP8.5) as the worst-case benchmark. With that paradigm now outdated, revisit your approach to capture worst-case risk. For instance, employ a range of scenarios and sensitivity analyses to cover the high-impact tail. This ensures that you capture severe physical risk without using an implausible pathway as your base assumption.
• Focus on plausible range and narratives: scenario analysis illuminates different, plausible narratives about the future. Firms should emphasise internally consistent scenario sets that span the range from ambitious climate action to limited action, each with a narrative context.
• Revisit stress testing assumptions: with scenario updates, refresh your stress test calibration. If you previously assumed a particular scenario as “business as usual,” reconsider that, considering current policy trajectories. For example, if a regulatory stress test used to require analysing “no further policy action and 4°C warming by 2100,” a revised approach might be to consider a 3°C baseline with high physical risks, plus a separate tail-risk scenario with compounding feedback causing >4°C warming.
• Evolving disclosure expectations: regulatory and voluntary frameworks are likely to expect companies to articulate which scenario they use, why it’s plausible and how it aligns with updated science. Firms can anticipate by documenting their scenario choices and rationale clearly.
• Transition risk narratives as central elements: the new scenario architecture underlines how reaching a given climate outcome can vary widely. Treat transition risk scenarios as equally important as physical risk endpoints. Rather than viewing transition narratives as secondary qualitative overlays, model them quantitatively. This means scenario analysis should inform not just physical risk exposure but also transition readiness.

What it means for firms

Climate scenario science is moving fast and so must climate risk analysis. The shift from CMIP6 to CMIP7 is a push to ensure that the scenarios guiding trillions in financial decisions remain credible. Firms should proactively adapt their scenario frameworks, phasing out legacy extremes and embracing a set of plausible futures enriched with narrative context. This will enhance risk assessments and meet stakeholder expectations.

Ultimately, navigating climate scenario science is about embracing uncertainty smartly: using the best available science to bound risks, while acknowledging that reality may still surprise us. By updating scenario analysis now, firms can remain resilient and forward-looking on the journey through our changing climate landscape.

How Forvis Mazars can help

We support firms to perform climate scenario analysis, including scenario selection and design, and climate risk model development. If you would like to know more about our services, reach out to our experts and visit our climate risk management webpage. You can also book a demo of our in-house CliMate web tool.

Contact us

Sources

[1] https://wcrp-cmip.org/explainer-scenarios-for-cmip7/