What is Climate Scenario Analysis? Tools, Examples, and How to Get Started
Climate scenario analysis is a crucial tool for exploring, assessing and preparing for climate related issues
9th June 2025
Insights
Table of Contents
- What is Climate Scenario Analysis?
- What are Climate Scenarios?
- Physical and Transition Risks and Opportunities
- Example of Climate Scenario Analysis
- Climate Scenario Analysis Tools
- Purpose of Climate Scenario Analysis
- Key Benefits of Scenario Analysis
- How to Get Started
Share this article
Climate-related financial disclosures are now mandatory in many parts of the world through the International Sustainability Standards Board (ISSB) standards and in Australia under the Australian Sustainability Reporting Standards (ASRS). Climate scenario analysis is a key part of these standards (AASB S2 and IFRS S2) and a critical tool for organisations to assess and disclose their material climate and sustainability-related risks and opportunities. This article explores the purpose, benefits, and implementation of scenario analysis in line with ASRS and IFRS requirements and global best practices.
What is Climate Scenario Analysis?
Climate scenario analysis is a strategic planning tool that helps organisations evaluate how different plausible future climate conditions could impact their operations, assets, and markets. By exploring a range of potential climate futures, scenario analysis can help identify critical climate-related vulnerabilities and opportunities for your business, supporting the development of targeted adaptation and mitigation strategies. Scenario analysis enables organisations to align sustainability and risk management with long-term business planning, ensuring your business is better prepared for a range of climate futures.
What are Climate Scenarios?
Organisations typically examine three core climate scenarios for short-, medium- and long-term time horizons focused on climate-related risks and opportunities (CRROs).
- Low-Emissions (1.5–2°C / Paris-Aligned). Assumes strong global climate action and rapid decarbonisation. Higher transition risk, but lower physical climate impacts.
- Intermediate (2.5–3°C). Reflects moderate action on emissions. Mix of both transition and physical risks.
- High-Emissions (4°C+). Assumes little to no action on climate. Low transition risk but high physical and systemic impacts.
These scenarios help organisations understand potential risks and opportunities under different climate futures.
This graphs outlines two example sets of scenarios to help organisation understand climate-related risks and opportunities under different futures.
Understanding Physical and Transition Risks and Opportunities
Climate scenario analysis helps organisations assess exposure to two primary categories of climate-related risks and opportunities.
Physical: Risks include acute risks such as extreme weather events, and ongoing risks such as rising sea levels or long-term shifts in temperature and precipitation. Scenario analysis allows organisations to model potential operational disruptions, supply chain instability, or asset impairments due to these physical changes.
At the same time, scenario analysis can also help identify opportunities to build organisational resilience. This might include investing in climate-resilient infrastructure, re-evaluating supply chains, or adapting business models to better serve markets impacted by climate stressors. Proactively addressing physical risks can create a competitive advantage and long-term value.
IPCC climate models underpin many scenario analyses by illustrating how temperature and physical climate risks evolve under different emissions pathways. The visual shows projected global temperature rise across low to high-emission scenarios, helping organisations assess risk exposure and plan accordingly. Using IPCC-aligned data ensures scientific credibility and supports robust climate-related disclosures.
Source: IPCC temperature Pathways
Transition: Risks arise from the move to a low-carbon economy. They can come from policy and regulatory changes (e.g. carbon pricing), shifts in consumer preferences, technological disruptions, or evolving market dynamics. Scenario analysis helps businesses understand how these changes could impact costs, revenues, asset values, reputation, and market positioning – all key risks.
At the same time, it leads to opportunities such as new product development, access to sustainable finance, enhanced brand value, and early-mover advantage in low-carbon markets. This dual lens allows organisations to make informed decisions, balancing exposure with strategic investment in future-ready initiatives.
By analysing both risk and opportunity types across a range of future climate scenarios, organisations can better prepare, adapt and disclose their strategies for long-term resilience and regulatory alignment.
Learn More in this Podcast: Quantifying Climate Risks & Opportunities
Approaches to Scenario Analysis: Top-Down vs Bottom-Up
When conducting climate scenario analysis, organisations can take either a top-down or bottom-up approach, or a combination of both, depending on the context and objective.
- In a top-down approach, scenarios are developed by a central body (e.g. financial regulators or policy institutions). These are applied using standardised models and national datasets to test macro-level risk exposure. This method enables consistency, particularly across sectors or financial institutions.
- A bottom-up approach gives individual entities a shared set of scenarios, which they assess using internal models and business-specific data. The results are then reported back for aggregation and refinement.
This distinction is particularly relevant under emerging disclosure frameworks like the ASRS (AASB S2), where companies may be expected to engage with both regulatory-led scenarios (e.g. NGFS or APRA guidance) and internally driven modelling. A hybrid approach leveraging external scenarios while applying internal expertise allows organisations to test strategic resilience in a way that is both credible and context-specific.
What is an Example of Climate Scenario Analysis?
An example of climate scenario analysis for a food retailer could involve assessing how different climate futures might affect product availability, logistics, and consumer demand. Under a medium-term scenario (e.g. SSP2-4.5), the retailer may face increasing physical risks, such as extreme heat, droughts, or floods disrupting agricultural production and delaying distribution. For instance, over the past few years, floods in Australia have cut off the Bruce Highway and other critical transport routes in North Queensland, making it difficult to move fresh produce and packaged goods into affected communities.
In contrast, a short-term, low-emissions scenario (e.g. SSP1-2.6) could introduce transition risks, such as stricter emissions regulations across the food sector, carbon pricing on refrigerated transport, or mandatory disclosures affecting investor and consumer expectations. These may drive up costs or necessitate changes in sourcing and packaging.
By modelling these different climate trajectories, the food retailer can identify supply chain vulnerabilities, engage with and support growers and logistics providers, and prioritise investment in local sourcing, low-carbon operations, and climate-resilient infrastructure. This enhances both operational continuity and brand trust over the long term.
A truck becomes stranded on the Bruce Highway at Thompson’s Creek, south of Proserpine. (ABC News. Robert Murolo)
The Use of Scenario Analysis in Climate-Related Disclosures
Scenario analysis is a key component of climate-related disclosures like AASB S2 and IFRS S2, enabling organisations to demonstrate the resilience of their strategies under various climate conditions. It is designed to support transparent reporting and informing stakeholders about potential climate-related financial impacts, and also the disclosure of climate-related risks and opportunities.
The TCFD in its Guidance on Scenario Analysis recommends that organisations, “describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario“. Australia’s AASB S2 recommends that entities conduct climate-related scenario analysis using at least two possible future scenarios: one aligned with limiting global warming to 1.5°C and one where warming well exceeds 2°C.
Image: AASB Scenario Analysis 22 paragraphs B1-B18.
As best practice, we recommend organisations use three possible scenarios.
What are Climate Scenario Analysis Tools?
There are various tools and models to assist organisations in conducting climate scenario analysis. Aligning with best practice climate change models is essential for conducting reliable scenario analysis. Models such as those developed by the IPCC or the Network for Greening the Financial System (NGFS) provide scientifically grounded frameworks for assessing climate risks and opportunities under different scenarios. These models help organisations understand potential future climate conditions and their impacts on operations, assets, and markets.
- IPCC Scenarios: Provide comprehensive climate projections based on different greenhouse gas concentration pathways.
- NGFS Scenarios: Provide macroeconomic and climate projections, focusing on use within the financial services sector.
- TCFD Guidance: Offers frameworks for integrating scenario analysis into financial disclosures.
These tools help organisations align their scenario analysis with scientific and regulatory standards. Using external models enhances the credibility of the analysis and reduces risk, helping build confidence in the outputs.
What is the Purpose of Climate Scenario Analysis?
The primary purpose of climate scenario analysis as we have discussed, is to assess the resilience of an organisation’s strategy against a range of plausible future climate conditions, including both physical and transition-related risks.
By exploring multiple scenarios, businesses can gain deeper insight into how their operations, assets, and supply chains may be affected by climate change over time. This enables more proactive risk identification, better strategic and financial planning, and more informed decision-making.
To appreciate how foreseeing future shocks can help, think back to the 2007–2008 global financial crisis, triggered by the collapse of the subprime mortgage market. The ripple effects crumbled the global financial system, from stock market crashes to widespread business failures and unprecedented mortgage losses and sky-high unemployment. One of the key issues was the lack of foresight. The scale and speed of the crisis that unfolded caught most institutions completely off guard. Scenario analysis is a tool that helps organisations prepare for exactly this type of uncertainty.
What are the Benefits of Climate Scenario Analysis?
- Risk Identification: Uncovers potential physical and transition risks associated with climate change.
- Strategic Planning: Informs long-term business strategies and investment decisions.
- Regulatory Compliance: Supports adherence to ASRS and other climate-related disclosure requirements such as ISSB IFRS.
- Stakeholder Confidence: Enhances transparency and builds trust with investors, regulators, and the public.
TCFD Scenario Analysis Guidance
The TCFD provides comprehensive guidance on implementing scenario analysis. It recommends using a range of scenarios, including a 2°C or lower scenario, to assess potential impacts on business operations and financial performance.
According to the TCFD’s Final Report recommendations, scenario analysis, “can help organizations consider issues, like climate change, that have the following characteristics: possible outcomes that are highly uncertain; outcomes that will play out over the medium to longer term; potential disruptive effects that, due to uncertainty and complexity, are substantial”.
How to Get Started on Scenario Analysis in 5 Steps
Here is a brief outline on how to get started on climate scenario analysis, aligned with AASB S2 requirements and global best practice.
1. Establish Governance and Oversight
Begin by setting clear internal responsibilities and governance for scenario analysis. This typically includes a cross-functional working group involving risk, sustainability, finance, and strategy, and establishing oversight by the board or executive committee. In our experience with clients, an effective and engaged cross-functional working group is one of your best chances for success.
Ensure that scenario analysis is integrated into existing governance structures, risk management frameworks, and strategic planning processes, not treated as an isolated ESG task.
2. Define Scope and Objectives
Clarify what you are trying to understand through the climate scenario analysis. Are you evaluating exposure to physical risks (e.g. extreme weather, asset vulnerability), transition risks (e.g. policy shifts, reputational or technological risks), or both?
Then define the scope: Which regions, business units, supply chains, or asset classes will be analysed? This scope should be informed by your materiality assessment, we recommend a double materiality assessment. It should also reflect where your business is most exposed to climate-related risk and what the material opportunities are.
For best practice, also consider how this aligns with AASB S1, particularly if you’re planning to broaden your disclosures to include sustainability, nature, human rights, or social risks over time. Future-focused organisations are already embedding a light-touch AASB S1 into their preparations.
3. Select or Build Credible Scenarios
AASB S2 requires the use of at least two climate-related scenarios, including one aligned with a 1.5°C warming trajectory (i.e. a low-emissions pathway) and one that reflects higher levels of warming (e.g. 2.5°C+).
Use scenarios and datasets from reputable scientific sources such as:
- IPCC (e.g. SSP-RCP combinations)
- NGFS (central banks’ climate scenarios)
- IEA, CSIRO, or BoM for Australian-specific modelling
Ensure that you explain why each scenario was chosen, including key assumptions, policy environments, technological trends, and relevant macro or sectoral drivers.
4. Assess Impacts and Evaluate Strategic Resilience and Opportunities
Analyse how your business would be affected under each scenario. This includes:
- Disruptions to operations
- Supply chain disruptions and instability
- Shifts in customer behaviour
- Asset damage or revaluation
- Regulatory and reputational impacts
- New customer, market and sector opportunities
Use both quantitative and qualitative methods depending on data availability and maturity. Then evaluate whether your existing business strategy is resilient under these conditions, or whether adjustments are needed.
5. Integrate Findings and Communicate Transparently
The true value of scenario analysis lies in how it brings cross-functional teams together and informs strategic, operational, and financial decisions. Use your insights to:
- Update risk registers
- Inform capital allocation
- Adjust strategy and targets
- Support investor engagement
Finally, report your scenario analysis clearly in your climate-related disclosures, including:
- The scenarios used, including parameters, assumptions, and sources of the scenario data.
- The specific time horizons and assumptions
- The implications for your business
- How the entity determines which risks and opportunities are material
- How scenario analysis was used to assess climate resilience and opportunities
- How the results are factored into strategy and risk planning
This will not only meet the requirements of ASRS but also build trust with investors, regulators, and other stakeholders by demonstrating a forward-looking, risk-aware, and strategic approach.
Why Every Organisation Should Be Conducting Climate Scenario Analysis
Scenario analysis is now a critical tool for most organisations to anticipate risk, enhance resilience, explore new opportunities, and make informed decisions.
Implementing climate scenario analysis, and if you have the resources nature scenario analysis, is not only essential for meeting mandatory climate-related disclosures like the ASRS and IFRS standards, but also for strengthening strategic planning and stakeholder confidence.
By following a structured approach and leveraging credible tools and guidance, businesses can better understand their exposures, opportunities and prepare for a range of future climate realities.
Need Help with Climate Scenario Analysis?
Anthesis are experts in climate scenario analysis and can guide you on how to integrate outcomes into strategic planning and risk management processes, ensuring you’re prepared for compliance or simply strengthening your overall business strategy.
As technical experts and trusted advisors to some of the world’s most well-known companies for over a decade, we’re here to help, call us for a chat on +61 3 7035 1740 or reach out to our experts via email or the form below.
We are the world’s leading purpose driven, digitally enabled, science-based activator. And always welcome inquiries and partnerships to drive positive change together.
