Climate scenario analysis

A transition plan or an impairment test usually assumes one future; scenario analysis asks what happens if the world turns out differently. It is one of the hardest IFRS S2 requirements for first-time reporters and one of the most useful for management, because it shows which risks matter and which responses work across futures. This guide explains what IFRS S2 and the ESRS require, where scenarios come from, the steps, works through a cement company's analysis, and covers how results connect to the financial statements.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

Climate scenario analysis tests how a company's strategy and business model would perform under different plausible futures for climate policy, technology and the physical climate. IFRS S2 requires companies to assess their climate resilience using scenario analysis, with an approach proportionate to their circumstances: qualitative for many, quantitative for those with significant exposure. They disclose the scenarios used and their sources, whether they cover a diverse range, whether they relate to transition or physical risks, whether one is aligned with the Paris Agreement, the time horizons and key assumptions, and the results. Under the revised ESRS, scenario analysis is reported where a company has carried it out, while resilience must still be assessed. Common sources are the IEA's World Energy Outlook scenarios, the NGFS scenarios and the IPCC's emissions pathways for physical risks. In this guide's example, a cement company's 2035 EBITDA ranges from US$ 120 million to 310 million across three scenarios.

At a glance

Purpose
Test strategic resilience
IFRS S2
Required, proportionate
ESRS E1
Reported if carried out
Transition scenarios
IEA, NGFS
Physical scenarios
IPCC pathways
Link to accounts
Same assumptions
Climate scenario analysisPurpose: Test strategic resilience; IFRS S2: Required, proportionate; ESRS E1: Reported if carried out; Transition scenarios: IEA, NGFS; Physical scenarios: IPCC pathways; Link to accounts: Same assumptions.KEY FACTS AT A GLANCEClimate scenario analysisPurposeTest strategic resilienceIFRS S2Required, proportionateESRS E1Reported if carried outTransition scenariosIEA, NGFSPhysical scenariosIPCC pathwaysLink to accountsSame assumptionsTax BakersClimate scenario analysisPurpose: Test strategic resilience; IFRS S2: Required, proportionate; ESRS E1: Reported if carried out; Transition scenarios: IEA, NGFS; Physical scenarios: IPCC pathways; Link to accounts: Same assumptions.KEY FACTS AT A GLANCEClimate scenario analysisPurposeTest strategic resilienceIFRS S2Required, proportionateESRS E1Reported if carried outTransition scenariosIEA, NGFSPhysical scenariosIPCC pathwaysLink to accountsSame assumptionsTax Bakers
Key facts at a glance, as set out in this guide.

What is climate scenario analysis?

A scenario is a coherent, plausible description of how the future might unfold, not a forecast. Climate scenario analysis applies several scenarios, typically one in which the world meets the Paris Agreement goal through fast policy action, one with delayed or disorderly action, and one in which current policies continue and physical impacts grow, to see how revenue, costs, assets and strategy would be affected over the short, medium and long term. See IFRS S2 climate disclosures.

What do IFRS S2 and the ESRS require?

IFRS S2 requires a company to disclose its climate resilience, assessed using climate scenario analysis carried out at least in line with its strategic planning cycle, which can span several years, while the resilience disclosure itself is given every reporting period. It uses an approach commensurate with its circumstances, considering all reasonable and supportable information available without undue cost or effort and its skills, capabilities and resources. It discloses the inputs: which scenarios and sources, whether they cover a diverse range, transition or physical risks, a scenario aligned with the latest international agreement on climate change, the time horizons, the scope of operations covered and the key assumptions. The revised ESRS E1 asks for scenario analysis only where the company has carried it out, but the resilience assessment remains required. See ESRS E1.

Where do climate scenarios come from?

  • IEA World Energy Outlook: the 2025 edition, published on 12 November 2025, includes the Current Policies, Stated Policies and Net Zero Emissions by 2050 scenarios, with energy demand, prices and technology by region.
  • NGFS scenarios: the Network for Greening the Financial System, a group of central banks and supervisors, publishes long-term scenarios, most recently updated in November 2025, grouped as orderly, disorderly and hot house world, with carbon prices and macroeconomic effects.
  • IPCC pathways: shared socioeconomic pathways, such as SSP1-2.6, SSP2-4.5 and SSP5-8.5, used with climate models for physical risks such as heat, flooding and drought at specific locations.

Climate scenario analysis: a cement company

A cement producer with EBITDA of US$ 300 million today models its 2035 EBITDA under three scenarios, first without changing its strategy and then with its transition plan, which adds clinker substitution, alternative fuels and carbon capture at its largest plant.

2035 EBITDA by scenario, without and with the transition plan (US$ million)2035 EBITDA by scenario, without and with the transition plan (US$ million)310300Current policies180240Delayed transition120230Net zero 2050Without the planWith the transition plan
The plan costs a little in a slow transition and protects earnings in a fast one.

Under current policies, carbon costs stay low, so the transition plan slightly reduces EBITDA, because of its costs. Under a delayed transition, carbon prices jump after 2030, and the plan protects 60 million of EBITDA. Under net zero 2050, the unmitigated business loses 180 million of EBITDA, while the plan keeps it at 230 million, with low-carbon cement earning a premium. The company concludes that its strategy is resilient if it delivers the plan, discloses the key assumptions, carbon prices, demand and the cost of capture, and explains the uncertainties, such as the timing of carbon capture. See climate transition plans.

What are the steps?

Identify the main climate risks and opportunities; choose scenarios and time horizons that test them; translate the scenarios into business drivers, such as carbon prices, demand, input costs and physical hazards at each site; estimate the effects on revenue, costs and assets; and decide what the results mean for strategy, capital allocation and risk management. Smaller companies can do this qualitatively, through workshops and narratives, and add numbers as their exposure and capabilities grow.

How does scenario analysis connect to the financial statements?

Scenarios test resilience; the financial statements use management's best estimates. They can differ, but the difference should be explained, and the same underlying data should be used. Where a net zero scenario is a stress test rather than the expected outcome, impairment tests may weight it alongside others. See climate risk in impairment testing and the ISSB standards and ESRS compared.

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Questions people ask

What is climate scenario analysis?

A way of testing how a company's strategy and business model would perform under several plausible futures for climate policy, technology and physical climate.

Does IFRS S2 require quantitative scenario analysis?

Not always. The approach must be proportionate: qualitative analysis can be enough for companies with limited exposure or resources.

Which scenarios do companies use for climate scenario analysis?

Commonly the IEA World Energy Outlook scenarios, the NGFS scenarios and IPCC emissions pathways for physical risks.

Is scenario analysis required under the revised ESRS?

It is reported where the company has carried it out; the resilience assessment itself remains required.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2)
  2. IEA: scenarios in the World Energy Outlook 2025
  3. NGFS: explanatory notes on the NGFS long-term scenarios, November 2025
  4. Commission Delegated Regulation (EU) 2026/1563 revising the ESRS, published 21 September 2026
  5. EFRAG: Commission publishes delegated act on revised ESRS and voluntary standard
  6. EY: European Commission adopts revised ESRS delegated act, July 2026

Rules and fees change. If you are reading this long after October 10, 2026, confirm the figures with the source before you rely on them.

SustainabilityIFRS S2 climate-related disclosuresSustainabilityESRS E1: climate changeSustainabilityDisclosing climate transition plans

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