A disputation on the use of scenario analysis to assess climate risk
On Thursday April 25, you can catch Tony and Louie debating the concept of "forward-looking data" on LinkedIn Live. Sign up for the event below:
The faith of regulators in the value of climate scenario analysis continues. In the past week or so, both the Basel Committee and the Bank of England have issued decrees on the topic. It is clear that they both view scenarios as the True Path to climate risk enlightenment.
As Louie pointed out on Friday, though, both communiqués indicate a degree of awareness that current approaches are missing something. The regulators’ faith has been shaken, possibly because the scenario studies they publish gain so little traction in the broader community. And yet they have no interest in proposing an alternative approach. They are yet to reach the Age of Enlightenment, where scientific principles will finally come to dominate the field of financial climate risk.
Comparing the use of scenarios to the practice of faith was very deliberate on my part.
If a particular scenario projection accords with your view of the world and prompts you to lead a moral, upstanding life full of good works in pursuit of society’s sustainability goals, this would be a great outcome and your faith will have been anything but in vain.
But if someone else has a different perspective on the effect of a particular scenario, it’s important that you realize that there is no way for you or them – in this life or the next – to show that their view of the future is more perfect.
If you declare that climate is a “future risk”, and therefore that historical data cannot be used to inform future outcomes, it implies that you are not open to appeals based on the available evidence and that your faith in your favored set of projections is pure.
Even if you do accept that evidence is relevant, however, I’m afraid that the construction of scenarios is still of vanishingly little analytical value, at least in the realms of economics and finance.