Scenarios and pathways
Institutions should understand their sensitivity to ESG risks, in particular environmental transition and physical risks, under different scenarios, including those implying higher levels of physical risk or a disorderly transition. Institutions should understand how different scenarios may affect their transition planning efforts.
For the purposes of monitoring and addressing the specific environmental risks that may stem from the process of adjustment towards the climate-related and environmental regulatory objectives of the jurisdictions in which they operate, institutions should carefully select scenarios by taking all the following steps:
assess the potential implications of EU, Member States and, where relevant, third countries’ objectives for transition pathways, at least for selected sectors determined on the basis of the materiality assessment. In this process, institutions should take into account the likely pathways originated from the European Green Deal, the EU Climate Law, and the latest reports and measures prescribed by the European Scientific Advisory Board on Climate Change;
consider science-based and up-to-date scenarios originating from national, EU or international organisations as referred to in paragraph 38;
take into account voluntary or regulatory-mandated objectives or commitments of the institution with respect to climate change mitigation and adaptation.
The geographical reference and granularity, such as in terms of regional breakdowns, of the scenarios and pathways used by institutions should be relevant to their business model and exposures.
The range and complexity of the scenarios used by institutions should be proportionate to their size and complexity. SNCIs and other non-large institutions may rely on a simplified set of main parameters and assumptions, included risks, time horizons considered, and regional breakdown of impacts. Large institutions should benchmark their plans (including final and intermediary targets) against a scenario compatible with the limiting of global warming to 1.5°C in line with the Paris Agreement and with the objective of achieving climate neutrality by 2050 as established by the EU Climate Law.
Institutions should ensure that scenarios and pathways used as part of their plans are consistent across the organisation and time horizons considered, such as when building business strategies and setting targets for the short, medium and long term. Institutions should document the process for scenario selection, and the reasons for any change or different usage. Decisions to use different scenarios for different purposes as well as decisions to modify scenarios should be clearly justified.