Climate change is reshaping how businesses plan, compete and grow. For Australian organisations navigating the Australian Sustainability Reporting Standards (ASRS), climate scenario analysis is one of the more technical parts of preparing climate-related financial disclosures, and one of the most valuable for building a genuinely resilient strategy.
This guide covers what climate scenario analysis involves, why regulators require it, and how smart organisations use it to move beyond compliance toward real strategic advantage.
What Is Climate Scenario Analysis?
Climate scenario analysis tests how a strategy and financial performance would hold up under different climate-related scenarios. Instead of betting on a single future, it compares a range of plausible outcomes, from a world close to the Paris Agreement goals to one where global temperatures rise well beyond that threshold. The comparison shows where a strategy is exposed and where it is built to last.
Where the practice comes from
The approach traces back to the Task Force on Climate-related Financial Disclosures (TCFD), which the Financial Stability Board established in 2015. The TCFD recommendations, released in 2017, built a shared framework around four pillars:
- Governance
- Strategy (scenario analysis sits here)
- Risk management
- Metrics and targets
The task force disbanded in October 2023 after completing its work. Its recommendations were folded into the International Sustainability Standards Board’s (ISSB) global baseline standards, IFRS S1 and IFRS S2, the direct link to Australia’s framework, since AASB S2 was built on IFRS S2.
Physical Risks and Transition Risks Explained
Under ASRS, climate-related risks fall into two categories.
Physical risks are the direct impacts of a changing climate:
- Extreme weather events, including floods, bushfires and storms
- Rising sea levels and shifting climate patterns over the longer term
If left unmanaged, physical climate risks disrupt operations, damage assets, and interrupt supply chains.
Transition risks come from the shift toward a low-carbon economy:
- Changes in climate policy and regulation
- Emerging technologies
- Shifting market preferences and reputational pressure as the global economy moves away from carbon-intensive practices
A business that has not planned for this shift may find its assets, revenue streams or business model less viable over time. Assessing both categories of risk, and the opportunities they open up, is central to credible climate scenario analysis, and it is where forward-thinking organisations find their edge.
How AASB S2 and ASRS Apply Climate Scenario Analysis in Australia
AASB S2 is Australia’s mandatory climate-related disclosure standard. The Australian Accounting Standards Board issued it in September 2024, within the ASRS framework, alongside the voluntary AASB S1 standard for wider sustainability topics.
AASB S2 is legislated under the Corporations Act 2001 and phased in by entity size:
- Group 1: reporting since annual periods beginning on or after 1 January 2025
- Group 2: from 1 July 2026
- Group 3: from 1 July 2027
It closely aligns with the ISSB’s IFRS S2, which itself built directly on the TCFD recommendations.
What this means in practice
Organisations captured by ASRS must:
- Describe management’s role in managing and assessing climate related risks
- Disclose the actual and potential impacts of those risks on strategy and financial planning
- Show that climate scenario analysis has been used to test the resilience of that strategy, alongside metrics such as Scope 1, 2 and 3 emissions.
AASB S2’s transitional relief covers Scope 3 emissions disclosure and comparative information in the first reporting period, not scenario analysis itself. Scenario analysis is required from year one, with a three-year modified liability period that limits enforcement to the regulator rather than private litigants.
Building the scenarios
Building climate scenarios does not require complex climate models built from scratch. AASB S2 requires at least two scenarios: one aligned with limiting global warming to 1.5°C under the Paris Agreement, and one where warming exceeds 2°C, with the financial effects of both disclosed.
Recognised reference scenarios, such as those from the Network for Greening the Financial System, the International Energy Agency or the Intergovernmental Panel on Climate Change, give businesses a credible starting point. The real value comes from applying them to what matters for the organisation specifically: its locations, its supply chain and its asset base.
The Board’s Oversight and Strategic Resilience
Climate-related governance tests an organisation’s leadership and its readiness for what comes next.
ASRS, like the TCFD recommendations before it, sets clear expectations for the board’s oversight of climate-related risks and opportunities. A genuinely engaged board will:
- Understand the outputs of scenario analysis, not just a summary
- Question the assumptions behind them
- Ensure climate considerations shape strategic planning, risk management processes and capital allocation decisions.
Done well, climate scenario analysis is more than a disclosure exercise. It shows where a strategy is vulnerable and where it has room to grow, shaping decisions from supply chain structure to capital allocation to product and market development in a lower-carbon economy.
For organisations working toward broader sustainability goals, including alignment with the UN Sustainable Development Goals, scenario analysis bridges high-level purpose and day-to-day decision-making. Strong governance here signals to investors, regulators and stakeholders that an organisation is serious about doing well while doing good.
Getting Started with Climate Scenario Analysis
For organisations preparing for ASRS obligations, a practical starting point is to:
- Identify the physical and transition risks most relevant to the business and its supply chain
- Select at least two plausible climate scenarios, including one aligned with limiting global warming to 1.5°C under the Paris Agreement and one where warming exceeds 2°C.
- Assess how each scenario could affect operations, financial performance and strategy.
- Document management’s role and the board’s oversight in this process
- Integrate findings into existing risk management and financial planning processes rather than a standalone report
Climate scenario analysis is now core to how Australian organisations demonstrate strategic resilience under AASB S2 and ASRS. Businesses that engage early and treat it as a genuine tool for growing towards good, rather than a compliance formality, will be better placed to manage climate-related risks and seize the opportunities of the shift to a low-carbon economy.
Not sure where to start with your AASB S2 climate scenario analysis?
Don’t wait for reporting season to catch you off guard. The Growth Activists will help you build a scenario analysis approach that meets your AASB S2 obligations and sets your organisation up with real strategic resilience, not just a tick-box report.
Get in touch with our team today and let’s start building your climate scenario analysis.
