Climate Risk Basics: TCFD and Scenario Analysis Explained
Climate risk is now a core part of financial risk management. This guide explains the TCFD framework, the difference between physical and transition risks, and how to conduct scenario analysis.
What is the TCFD?
The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board in 2015 to develop voluntary, consistent disclosures for companies to communicate their climate risks and opportunities to investors and financial markets.
Today, TCFD is no longer just voluntary. It has been adopted by regulators across the UK, EU, US, and globally — and its recommendations form the basis of the ISSB's IFRS S2 standard and CSRD's ESRS E1 requirements.
The Four TCFD Pillars
Governance
How does your board oversee climate-related risks and opportunities? What is management's role?
Strategy
What are the actual and potential impacts of climate risks and opportunities on your business, strategy, and financial planning?
Risk Management
How does your organisation identify, assess, and manage climate-related risks? How are these integrated into overall risk management?
Metrics & Targets
What metrics and targets does your organisation use to assess and manage climate risks? Report GHG emissions (Scope 1, 2, 3).
Physical Climate Risks
Physical risks arise from the changing physical climate itself. They fall into two categories:
Acute Risks
Short-term, event-driven climate hazards that can cause immediate damage.
- Extreme heat events and heatwaves
- Flooding (coastal, pluvial, fluvial)
- Tropical cyclones and storms
- Wildfires
- Droughts and water scarcity
Chronic Risks
Longer-term, gradual shifts in climate conditions.
- Rising mean temperatures
- Sea level rise
- Changing precipitation patterns
- Ocean acidification
- Permafrost thaw
Transition Risks
Transition risks arise from the process of shifting to a lower-carbon economy. They include:
| Risk Type | Examples |
|---|---|
| Policy & Legal | Carbon taxes, fuel standards, emissions trading, climate litigation |
| Technology | Disruption from renewable energy, EVs, CCS; stranded fossil fuel assets |
| Market | Shift in consumer preferences, commodity repricing, insurance cost increases |
| Reputational | Greenwashing accusations, investor pressure, media and NGO scrutiny |
Climate Scenario Analysis: A Practical Primer
Scenario analysis is a key TCFD requirement. It involves assessing your company's resilience under different plausible futures — not forecasts, but coherent “what if” narratives.
Recommended Scenarios
The NGFS (Network for Greening the Financial System) provides the most widely used climate scenarios for financial institutions and corporates. The three main scenario archetypes are:
Net Zero 2050 (Orderly)
1.5°C warmingAmbitious, early, well-managed transition. High transition risk, low physical risk.
Delayed Transition (Disorderly)
1.8–2°C warmingDelayed action leads to sudden, disruptive policy changes. Very high transition risk spike.
Hot House World
3–4°C warmingInsufficient action. Low transition risk, very high physical risk by 2050 and beyond.
3-Step Scenario Analysis Process
- 1
Identify exposures
Map which of your assets, operations, revenue streams, and supply chains are exposed to physical and transition risks under each scenario.
- 2
Assess financial impacts
For each exposure, estimate the potential financial impact on revenue, operating costs, capital expenditure, and asset values. Use qualitative or quantitative methods depending on your maturity.
- 3
Test resilience and set strategy
Determine whether your current strategy is resilient across scenarios. Identify adaptations, hedges, or opportunities to strengthen your position.
Key Metrics to Report
- GHG emissions: Scope 1, Scope 2 (location and market-based), and Scope 3
- GHG emissions intensity (per revenue, per employee, per unit of production)
- Reduction targets and progress against them
- Amount of assets or revenue exposed to climate risks by scenario
- Capital deployment towards climate transition opportunities
Ready to conduct your climate scenario analysis?
Our Company-Level Climate Scenario Analysis Dashboard includes NGFS scenarios, physical risk heatmaps, and TCFD-aligned output reports — all for just £5.