Quantifying climate risk uncertainty in competitive business environments

Abstract

As the impact of climate change and CO2 emissions gain more visibility globally, there is increased interest in understanding how the industry landscape will be reshaped in response to the changing physical, economic and political environment. This paper introduces an approach for quantifying the risks associated with the release and adoption of competitive products and services for the long-term uncertainty generated by climate risk scenarios. Our approach can be used for assessing the risks of business strategies whose revenues are used for the repayment of obligations in industries affected by climate risk or CO2 emission costs, and for estimating the probability of default on those obligations under different scenarios. Our approach can also help gain insight into the uncertainty of different net-zero emission strategies and into the uncertainty of outcomes due to nonlinearities, synergies and model misspecification.