Scenario Analysis in the GARP SCR Exam: How It Works & Why It Matters

As climate risk becomes a central theme in financial decision-making, scenario analysis has emerged as one of the most vital tools for professionals preparing for the GARP Sustainability and Climate Risk (SCR) exam. The 2025 GARP SCR curriculum places significant emphasis on this topic, not only because it's practical in real-world climate risk management, but also because it's tested directly through theory and use cases. In this article, we break down what scenario analysis is, how it is applied in the SCR framework, and why mastering it is essential to passing the exam and thriving in the field.

What Is Scenario Analysis? Scenario Analysis in the GARP SCR Exam , GARP SCR Exam

Scenario analysis is a forward-looking risk management tool that evaluates how different future states could impact an organization. In the context of climate risk, it allows firms to assess the resilience of their strategies under various climate-related conditions. It is not about predicting the future, but about preparing for multiple plausible outcomes.

In the SCR context, scenario analysis evaluates both physical risks (e.g., extreme weather, sea-level rise) and transition risks (e.g., regulatory changes, carbon pricing, technology shifts) that could impact financial and operational outcomes. Scenario Analysis in the GARP SCR Exam , GARP SCR Exam

Importance of Scenario Analysis in the SCR Curriculum

According to the official GARP SCR Candidate Guide, scenario analysis appears prominently in Chapter 7: Climate Models and Scenario Analysis, and is also referenced in other chapters such as Chapter 6 (Climate Risk Measurement and Management) and Chapter 10 (Transition Planning and Carbon Reporting). It is not only a core technical concept but is also embedded in broader strategic frameworks.

This means candidates can expect multiple-choice questions that:

Define what scenario analysis is and is not.
Test understanding of scenario parameters (e.g., time horizons, emissions pathways).
Explore applications across corporations and financial institutions.
Challenge knowledge of reference scenarios like SSPs and RCPs.

Key Reference Scenarios You Must Know

GARP expects candidates to be familiar with standardized reference scenarios used globally to assess climate outcomes. These include:

1. SSPs (Shared Socioeconomic Pathways)

Developed by the Integrated Assessment Modeling Consortium, these reflect different assumptions about global development:

SSP1: Sustainable path with climate-safe energy; warming limited to ~2°C.
SSP2: "Middle of the road" continuation; ~3°C warming.
SSP3: Regional rivalry and slow tech growth; ~4.5°C warming.
SSP5: Fossil-fueled development; ~5.5°C warming.

2. RCPs (Representative Concentration Pathways)

These are older but still widely used to model radiative forcing trajectories (e.g., RCP2.6, RCP4.5, RCP8.5).

3. IEA and NGFS Scenarios

The International Energy Agency (IEA) and Network for Greening the Financial System (NGFS) provide real-world scenarios used by regulators and financial institutions.

Understanding these scenarios helps candidates interpret modeling assumptions and assess strategic implications.

How Scenario Analysis Applies to Physical and Transition Risks

Physical Risk Application:

Scenario analysis models future outcomes such as:

Frequency and severity of hurricanes, floods, and droughts.
Sea-level rise projections and heat stress impacts.

Example: A bank might use regionalized climate projections to assess mortgage portfolio exposure to coastal flooding over a 30-year horizon.

Transition Risk Application:

Scenarios simulate policy and market changes such as:

Introduction of carbon taxes.
New regulations on emissions disclosure.
Shifts in consumer behavior or energy prices.

Example: An asset manager could assess the impact of a $100/tonne carbon price on a portfolio of industrial equities.

Corporate vs. Financial Use Cases

In Corporations:

Scenario analysis supports:

Strategic planning and capital allocation.
Communication with stakeholders about climate resilience.
Compliance with sustainability disclosure requirements.

In Financial Institutions:

Scenario analysis enables:

Portfolio stress testing.
Climate Value-at-Risk (VaR) modeling.
Credit exposure assessments by sector and geography.

Parameters That Matter in Exam Questions

GARP may test candidates on how to design and interpret scenarios using variables such as:

Time horizon (short-, medium-, long-term)
Geographic granularity
Sectoral exposure
Climate policy stringency
Economic growth assumptions

Why It Matters Beyond the Exam

Scenario analysis is more than an exam topic; it is a core capability for sustainability professionals, financial analysts, risk managers, and policymakers. It allows organizations to:

Comply with frameworks like TCFD and ISSB.
Identify and mitigate long-term climate risks.
Communicate resilience strategies to investors and regulators.

As climate scenarios continue to evolve, the ability to interpret and apply them critically will differentiate SCR certificate holders in the job market.

Final Tips for Candidates

Memorize the key SSP and RCP pathways and what they represent.
Understand the link between scenario narratives and financial impacts.
Practice interpreting scenario tables and graphs.
Review case studies in the SCR curriculum showing scenario use in banks and corporations.
Expect integrated questions tying scenario analysis to enterprise risk management (ERM) and transition planning.

Mastering scenario analysis is not just about passing the GARP SCR exam—it’s about becoming a forward-looking risk leader equipped to navigate a climate-uncertain future.

Enhance your GARP SCR exam preparation with our comprehensive study packages —get started today to achieve success in 2025 exam window!