5.2. Scenarios

When setting scenarios involving environmental risks, institutions should consider, consistently with the identification of the transmission channels, a number of intertwined factors to ensure that the scenarios are as relevant as possible. Namely, institutions should consider the following:

• a. socioeconomic context, i.e. assumptions about global or regional socio-economic conditions, including population growth, economic development and social inequalities; and other macroeconomic factors, including inflation and monetary policies, increased protectionism;
• b. technological evolution, i.e. the level and pace of innovation, technological adoption, and the availability of infrastructure to support new technologies;
• c. consumer preferences, i.e. potential shifts in consumers’ appetite for goods and services considered as sustainable, locally produced, healthy.

For climate risks, the additional following factors should be considered:

• a. climate policies, i.e. the level of policy intervention aimed at mitigating climate change or managing its impacts through adaptation policies; this can range from highly ambitious to minimal actions;
• b. energy systems, i.e. the structure of energy production, consumption, and infrastructure, including reliance on fossil fuels vs. renewable energy sources;
• c. sectoral pathways to net-zero emissions, i.e. how the different sectors transition and adapt to a sustainable economy, including, where relevant, the international outlook, such as the International Energy Agency (IEA), the Science Based Target initiative (SBTi)²⁸ or the Net Zero Banking Association (NZBA)²⁹ sectoral decarbonisation pathways, the FINAL REPORT ON GUIDELINES ON ENVIRONMENTAL SCENARIO ANALYSIS

regional context, foremost among which the European Green Deal strategy, the Fit-for-55 package, and the 2050 climate-neutrality target, and the national policies and climate strategy;

• d. emissions level and ensuing climate impact, i.e. concentration of greenhouse gases emissions and how temperature and other biophysical processes are expected to develop in the future.

²⁸ The SBTi is a global partnership (between CDP, the UN Global Compact, WRI, and WWF) that helps companies and financial institutions set greenhouse gas emission reduction targets that are aligned with the Paris Agreement goals (limiting warming to well below 2°C, and pursuing 1.5°C).

²⁹ The NZBA is a UN-convened, industry-led initiative launched in 2021 under the Glasgow Financial Alliance for Net Zero (GFANZ) that provides a common framework for banks to align their portfolios with net-zero emissions by 2050 through the adoption of sectoral targets.

For other environmental risks (beyond climate), the additional following factors should be considered:

• a. environmental policy and regulation, i.e. the level of ambition and enforcement of environmental protection policies, such as biodiversity conservation, water and air quality regulation, circular economy mandates, restrictions on harmful chemicals, and deforestation bans. This includes regional frameworks like the EU Nature Restoration Law or the Biodiversity Strategy for 2030;
• b. ecosystem condition, i.e. the status and trends in biodiversity, ecosystem degradation, soil fertility, freshwater availability, and pollution levels. These factors define the baseline environmental stress and influence the materialisation of risks such as resource scarcity, species collapse, or water crisis;
• c. land and resource use patterns, i.e. the extent and intensity of land use (urban expansion, agriculture, mining), and patterns of raw material extraction or water usage. Unsustainable use can amplify environmental degradation and trigger social or economic tipping points;
• d. supply chain dependencies on ecosystems, i.e. the degree to which sectors or regions rely on ecosystem services such as pollination, water filtration, or raw material availability. Disruption of these services can lead to sectoral losses, for instance in agriculture, forestry, fishing, food, or textiles.

Institutions should use credible scenarios, based on the most recent scientific knowledge, and on scenarios and resources provided by widely recognised international or regional organisations, such as:

• a. for climate risks: the Intergovernmental Panel on Climate Change (IPCC), the Network for Greening the Financial System (NGFS), the International Energy Agency (IEA), the United Nations Environment Programme (UNEP), the Joint Research Centre of the EU Commission (EU JRC) or national government or non-government bodies;
• b. for other environmental risks beyond climate: the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), the United Nations specialised agencies³⁰ , the European Environment Agency (EEA)³¹ , the World Resources Institute FINAL REPORT ON GUIDELINES ON ENVIRONMENTAL SCENARIO ANALYSIS

(WRI)³² , as well as regionally or nationally developed science-based assessments (e.g. national biodiversity strategies, soil and water management plans, or pollution monitoring frameworks).

³⁰ The UN specialised agencies include UNEP, FAO (Food and Agriculture Organisation), GBO (Global Biodiversity Outlook) which is the Convention on Biological Diversity – CBD’s flagship framework for tracking global biodiversity progress, and others relevant to environmental monitoring and policy.

³¹ The EEA is an EU body offering a framework for environmental data and policy support.

³² The WRI is a research institute developing frameworks for sustainable resource management and climate action.

Institutions should refine and customise the chosen scenarios based on the objective, scope and granularity of the analysis being conducted. For example, when conducting stress tests, institutions could consider relatively short-term scenarios, focusing more on acute physical risks (i.e. sudden materialisation of extreme climate events) than on chronic physical risks (i.e. gradual shift in climate conditions) and with greater emphasis than in longer-term scenarios on the potential negative impacts of a strong disconnect between the environmental regulation agenda, the business cycle and the consumer and market sentiment.

Institutions should ensure that the scenarios are well aligned with the unique risk characteristics of their portfolios and business model by adjusting the scenarios to the extent necessary and possible.

Where a scenario does not include some of the elements listed in paragraphs 29 and 30, institutions should assess the potential materiality of these factors and consider the extent to which the results of the analysis should be adjusted based on expert judgment.

When setting scenarios, institutions should consider both physical risk and transition risk. Even if modelling can lead to setting separate scenarios for each of these risks, institutions should ensure sufficient consistency between the scenarios given that the risks are strictly correlated over the long-term.

Institutions should select the specific aspects of transition risk and physical risk hazards to be covered by the scenario based on their materiality assessment, which may differ according to the time horizon concerned.

Institutions should ensure that scenarios are internally consistent. In particular, the trajectory of each key factor should not be considered in isolation but in relation to the trajectory of the other key factors. For example, assumptions about economic growth should be consistent with assumptions about energy demand and technology adoption.

In application of the proportionality principle, institutions may initially, or depending on the size, nature, complexity of their activities, or on their environmental risk materiality assessment, focus on a narrower scope, use fewer input factors, set simpler scenarios and/or use simplified approaches. FINAL REPORT ON GUIDELINES ON ENVIRONMENTAL SCENARIO ANALYSIS