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Definition

Climate scenario analysis Definition

Climate scenario analysis tests how your strategy, business model and financial performance could change under several plausible climate futures, including physical hazards and policy, market and technology shifts.

What is climate scenario analysis?

Climate scenario analysis tests a decision against plausible but uncertain climate futures. Each scenario combines assumptions about physical conditions, policy, markets, energy and technology, then traces their effects on operations and finance. It is not a forecast. IFRS S2 paragraph 22 requires an entity applying the standard to use scenario analysis to assess climate resilience with an approach suited to its circumstances. Keslio's TCFD and IFRS S2 guide explains the wider disclosure structure.

A usable analysis names the scenario source and version, base year, temperature outcome, geographical scope, short-, medium- and long-term horizons, and affected financial line items. Translate assumptions into units your team manages, such as kilowatt-hours, downtime days, revenue, operating cost or capital expenditure.

Why does climate scenario analysis matter to you?

An investor, lender, customer, platform or regulator may ask how your strategy performs under different futures. CDP's 2026 full corporate questionnaire asks in Questions 5.1, 5.1.1 and 5.1.2 whether you use scenario analysis, which scenarios and timeframes you used, and how the outcomes influenced business strategy, financial planning and risk management. AASB S2 paragraph 22 asks covered Australian entities for the implications, significant uncertainties, capacity to adapt, inputs, assumptions and reporting period.

A weak answer lists heat, regulation and energy prices without showing what changes in a budget or decision. A reviewer cannot check it unless you retain the scenario file, input table, model version, calculation workbook, management response and approval record.

How does climate scenario analysis work?

Start with one decision, such as whether to upgrade cooling equipment or renew a ten-year lease. Set the business units, sites, baseline and time horizons. Choose at least two scenarios that differ meaningfully, including a transition case and a case with greater physical hazards where both are relevant. Select inputs that match your activities and locations. Convert them into operational effects, then into revenue, cost, cash-flow, asset-value or capital-expenditure effects.

Compare results, identify the assumptions that change the decision, and record a trigger for management action. IFRS S2 paragraph B18 permits analysis to follow a multi-year strategic planning cycle but requires an update at least in line with that cycle. Keep the source, version, scope, assumptions, outputs and decision together so the next update can reproduce the prior result.

What mistakes should you avoid?

  • Treating one scenario as the most likely forecast or assigning a probability without support.
  • Using two scenarios with different names but the same policy, energy and physical-risk assumptions.
  • Applying a global temperature label without local inputs for the sites, assets and suppliers being tested.
  • Publishing a narrative without the model, financial line items, uncertainties and management decision behind it.

Is climate scenario analysis the same as a forecast?

No. A forecast estimates the outcome management expects. Scenario analysis compares internally consistent possible futures without claiming that one will occur. Keep each scenario's source, version and assumptions beside its results so readers can see the distinction.

Do you need a quantitative model?

Not always. IFRS S2 paragraphs B15 and B17 say a qualitative scenario narrative can be sufficient when it fits the entity's circumstances. If the entity has high climate exposure and the skills and resources to model it, paragraph B17 requires a more advanced quantitative approach. State which method you used and why it matches the decision.

What do you send when an investor asks for climate scenario analysis?

Send a short methods note, the scenario table, source and version, scope, time horizons, key assumptions, financial outputs, uncertainties, management actions and approval date. For CDP Questions 5.1.1 and 5.1.2, also identify the risk types, frequency of analysis and how outcomes changed strategy or financial planning.

Worked example

Suppose a hypothetical cold-chain warehouse operator in Saudi Arabia uses 40 GWh of electricity in its 2026 base year across four sites. Cooling uses 75%, or 30 GWh. Other equipment uses 10 GWh. For an internally developed 2030 analysis, version 1 dated 19 August 2026, management uses a baseline tariff assumption of SAR 0.18 per kWh, so baseline electricity cost is 40,000,000 kWh x SAR 0.18 = SAR 7,200,000.

Rapid-transition scenario for 2030: management tests a 12% tariff increase from assumed climate-policy and power-market changes while electricity demand stays at 40 GWh. Cost becomes SAR 7,200,000 x 1.12 = SAR 8,064,000, an increase of SAR 864,000.

Higher-warming physical-risk scenario for 2030: management tests a 15% increase in cooling electricity from assumed higher local heat exposure while the tariff stays at SAR 0.18 per kWh. Cooling use becomes 30 GWh x 1.15 = 34.5 GWh. Total use becomes 44.5 GWh, and cost becomes 44,500,000 kWh x SAR 0.18 = SAR 8,010,000, an increase of SAR 810,000.

A proposed chiller upgrade is assumed to cut cooling use by 10%. In the physical-risk scenario, it would save 34.5 GWh x 10% = 3.45 GWh and SAR 621,000 a year. Management can compare that saving with the supplier's capital-expenditure quote. These figures are stated management assumptions, not forecasts or claims about Saudi tariffs or future climate conditions.

Where you'll meet it

IFRS S2 climate resilience assessed using climate-related scenario analysisIFRS S2 paragraph 22 and paragraphs B1-B18CDP scenario use, scenario details and outcomesCDP 2026 full corporate questionnaire, Questions 5.1, 5.1.1 and 5.1.2AASB S2 climate resilience, scenario inputs, assumptions and reporting periodAASB S2 paragraph 22(a)-(b) and paragraphs B1-B18

Related terms

Physical climate risk

Physical climate risk is the potential for acute events or chronic climate shifts to damage assets, interrupt operations, disrupt supply chains, and change revenue, costs, cash flows, financing, or insurance.

Climate-related transition risk

Climate-related transition risk is the financial risk that policy, legal, technology, market, or reputation changes create as economies move towards lower greenhouse gas emissions.

Materiality

Materiality is the test a company uses to decide which sustainability topics matter enough to manage or report because they could affect its finances, reflect significant impacts on people or the environment, or both.

Sources

Last verified 2026-08-19

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Climate scenario analysis Definition | Keslio