There is now a meaningful and well-documented gap between that baseline and the direction global emissions are actually heading. Understanding that gap — and its implications for financial planning — is one of the more important risk management conversations that is not yet happening consistently at the executive level.
Global emissions grew 2.3% in 2024. Current pledges, fully implemented, still put warming at 2.3–2.5°C. The ‘optimistic’ scenario requires a world that no longer exists.
In November 2025, the UN Environment Programme published its annual Emissions Gap Report. The findings were unambiguous. Global greenhouse gas emissions grew 2.3% year-on-year in 2024, reaching 57.7 gigatons of CO2 equivalent — a record. Even if every country fully implements its current national climate pledges, the world is still projected to warm between 2.3 and 2.5°C by the end of the century. Under current policies alone, without those pledges, warming reaches up to 2.8°C.
To align with a 1.5°C pathway, global emissions would need to fall 55% from 2019 levels by 2035. Current national commitments, if fully implemented, would deliver roughly a 12–15% reduction in that window. The report’s conclusion: the multi-decadal average global temperature will exceed 1.5°C, at least temporarily, within the next decade.
This is the world that physical risk models need to reflect. The SSP1-2.6 scenario — the 1.5°C pathway used as the “optimistic” case in TCFD-aligned analysis — requires global CO2 emissions to reach net zero by around 2050 to 2075, and assumes emissions already peaked before the mid-2020s. That assumption is incompatible with a year in which emissions set a new record.
Climate scenario analysis as practiced under TCFD — and now carried forward under ISSB’s IFRS S2 standard — typically uses SSP1-2.6 to stress-test transition risks (what happens if the world decarbonizes rapidly and aggressively?) and a higher-emissions scenario like SSP5-8.5 to test the worst-case physical risk exposure. The problem is that neither of those scenarios closely matches where current policy trajectories are pointing.
A January 2025 assessment by climate researcher Zeke Hausfather estimated median warming under current policies at approximately 2.7°C by 2100, with the range spanning roughly 2.3 to 3.0°C. That’s closest to SSP2-4.5, the “middle of the road” scenario that represents a continuation of current development trends — not the optimistic case and not the extreme. Yet in many corporate disclosures, SSP2-4.5 is treated as the “central” scenario rather than the realistic floor for physical risk planning.
The Bank of England flagged this directly in its 2024 Quarterly Bulletin on climate financial risk:
“Forward looking physical risk metrics are particularly important given historical backward-looking data will underestimate future physical risks.”
The Bank also noted that existing scenario models do not account for climate tipping points — feedback mechanisms that could accelerate warming in ways that amplify physical damage beyond what the scenarios project.
Morgan Stanley’s analysis of climate scenario integration in investment processes reached a similar conclusion, noting that “physical risks may be systematically underestimated” in existing models, and that even in transition-focused analysis, TCFD recommends including a higher-temperature scenario as best practice.
The financial stakes of this gap are quantifiable. S&P Global’s Sustainable1 physical risk methodology, applied to S&P 1200 companies under a moderate emissions scenario (SSP2-4.5), estimates that extreme heat, water stress, and drought alone could generate approximately $885 billion in annual losses by the 2030s, rising to $1.2 trillion by the 2050s. Coastal flooding costs under the same scenario are projected to escalate nearly 14-fold between the 2050s and the 2090s.
These are not tail-risk numbers. They reflect a scenario that is increasingly the most plausible central case for physical planning — not the worst case. Organizations whose long-term capital plans, asset valuations, and insurance strategies are calibrated to a lower-risk baseline are carrying exposure that their models are not surfacing.
For boards, the practical consequence is that the resilience assessments and risk disclosures they are reviewing may be structurally conservative in the wrong direction. Companies reporting under California’s SB 261, CSRD, or ISSB IFRS S2 are required to demonstrate that their strategy is resilient across plausible scenarios. If the scenarios being used don’t reflect where current trajectories are pointing, that resilience test is incomplete — and increasingly likely to be scrutinized as disclosure standards mature.
Compounding this is a separate but related problem: most companies are not yet doing scenario analysis rigorously enough for it to be decision-useful regardless of which scenarios are chosen. The IFRS Foundation’s 2024 progress report, which analyzed 3,814 public companies, found that while 82% disclosed information consistent with at least one of the 11 TCFD recommended disclosures, fewer than 3% fully complied with all 11. The area where companies reported least — by significant margin — was the resilience of strategy under different climate scenarios.
That means the majority of organizations presenting climate risk disclosures to investors and regulators are doing so without the analytical foundation that the frameworks are designed to produce. The gap between disclosure activity and disclosure quality is wide, and the scenario analysis component is where it is widest.
For executive leaders, the practical question is whether the scenario work being done inside their organizations is calibrated to the world that is materializing, or to the world that climate policy once hoped to produce. The distinction matters for how physical risk is priced across long-lived assets, for how supply chain exposure is assessed in geographies facing increasing heat, flood, and drought risk, and for whether the financial projections being presented to boards reflect a realistic range of futures.
None of this requires abandoning the 1.5°C scenario. It remains a necessary input for transition risk analysis — understanding what rapid decarbonization means for capital-intensive sectors, carbon pricing exposure, and regulatory trajectory. But using it as a physical risk baseline is a methodological choice that a growing body of scientific guidance, regulatory expectation, and peer practice is moving away from.
The companies getting ahead of this are treating SSP2-4.5 or higher as the starting point for physical risk planning, running the 1.5°C scenario for transition risk, and being explicit with their boards about why the distinction matters. That is what rigorous scenario analysis looks like in 2026. The question is how many organizations are still running models built for a world that no longer exists.
