Scenario analysis for investment decision-making has traditionally relied upon quantitative models using historical data to provide valuable numerical insights into potential futures.  

As investors navigate the complex interlinked network of environmental, social and economic drivers found within climate scenarios, many now realize that a solely numerical-based approach cannot fully capture the spectrum of drivers and outcomes. This limitation is particularly heightened against the backdrop of extreme uncertainty and an unprecedented future.  

To address the limitations of numerical-based insights across potential climate futures, we explain how qualitative data, its counterpart, can play a key transformative role in enhancing the valuable insights gained from climate scenario analysis. 

Understanding views and assumptions vs historical data 

Historical data forms the backbone of all scenario analysis by building the foundation of past trends and patterns to shape future interactions. However, a focus limited to using historical data only can overlook the nuances of relationships between the interconnected drivers as well as the alternative interpretations that can significantly influence the narratives and outcomes within each specific climate scenario. 

In comparison, qualitative insights allow for diverse scientific viewpoints, cultural and political nuances, and evolving societal attitudes towards climate change to be incorporated under different futures. By engaging with literature, news, leader and expert opinions, the implicit assumptions within quantitative models through the historical data can be articulated to investors. For example, the context behind the design and implementation of major policy developments such as the Paris Agreement or US Inflation Reduction Act are important to describing the evolution and trajectory of a global net-zero scenario. 

Including qualitative insights into climate scenario design and the overall interpretation of the implication of its results reflects, anticipates and explores key material shifts in public opinion, policy priorities and societal values. Without qualitative insights, the means and channels needed for such societal shifts might be overlooked, resulting in incomplete and potentially inaccurate climate scenarios and subsequently, an increased risk of misguided investment decisions. 

Encompassing all key drivers of climate scenarios, short- and long-term 

While quantitative models excel at predicting trends based on historical data, they often struggle to capture the dynamic nature and evolving interactions of the key systemic short and long-term drivers behind climate scenarios. Qualitative insights effectively compensate for this shortcoming by providing a deeper explanation of the intricate web of interconnected driving factors that shape different plausible climate futures. 

Qualitative research can also identify and explore emerging trends and potential disruptors that may not have a substantial historical footprint or clear projections but are likely to have material implications. For instance, a sudden breakthrough in renewable energy technology, a transformative policy shift or a grassroots movement advocating for sustainable practices could be powerful drivers of change, influencing climate scenarios in ways that traditional models may not foresee. 

One example is the “Low Demand” climate scenario recently introduced by the Network for Greening the Financial System (NGFS). Although presented as a quantitative scenario, it primarily draws from qualitative insights in relation to the proliferation of climate activism and societal shifts, whereby the society places immense value on sustainable practices, leading to alterations in consumption patterns and energy demand. The changes in cultural aspects of a community, governance structures and individual behaviors may hold the key to understanding and predicting climate-related outcomes. 

By exploring alternative options in addition to historical data, we can gain foresight into the cascading and reinforcing effects of policy choices, technological advancements and societal shifts, which ultimately helps to formulate more robust, plausible and resilient climate scenarios. 

Unveiling other factors that could influence climate change-related outcomes  

While quantitative models focus on variables with established data, there exists a vast landscape of potential influences and outcomes that are currently excluded from more traditional climate scenario analyses. Qualitative insights act as exploratory tools, allowing us to uncover and understand these hidden underlying variables that could significantly shape climate outcomes. 

Nature is being increasingly drawn into the design of climate scenario analysis. Other topics worth exploring qualitatively include: Migration for both climate refugees and those seeking opportunities arising from the low carbon transition; urban planning and design for adaptation and resilience; and the health and disease implications of altered ecosystems. 

Current scenario modelling mostly assumes frictionless economies, where materials, goods and people are abundant and move freely. While in practice, the concern towards national control over migration and labor, minerals critical to the transition to an electric-based economy and food security are leading barriers to global trade. Quantitative modelling indicates a global net-zero by 2050 scenario is possible, while qualitative narratives describe the world we would be living in for this to occur, which in turn can translated into actionable insights for investors. 

By incorporating qualitative data, we can identify these under-recognized yet pivotal factors, providing a more comprehensive and nuanced understanding of the driving forces at play.  

Conclusion: The positive synergy between quantitative and qualitative climate scenario insights 

As investors strive to comprehend the multifaceted nature of the design and implications of results from climate scenarios, the integration of qualitative insights should be viewed as a powerful and necessary complement to quantitative data. By using qualitative insights to unravel influential climate drivers not currently accounted for in traditional scenario analyses, investors can foster a more inclusive and robust overall approach to their investment decision-making and our climate future.  

To learn more about how you can generate useful financial insights with a credible climate scenario analysis, download Ortec Finance’s latest whitepaper: Generating useful financial insights with a credible climate scenario analysis.

 

Learn more about our Climate Scenario Analysis Solution - ClimateMAPS

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