Key takeaways:
- Climate scenario analysis maps plausible futures — low, intermediate, and high-emissions — so businesses can stress-test strategy before risks materialize, not after.
- It covers both physical risks (floods, heat, supply chain disruption) and transition risks (carbon pricing, regulation, market shifts), and surfaces opportunities on both sides.
- Under IFRS S2 and CSRD/ESRS E1, scenario analysis is a mandatory disclosure requirement — not a best-practice recommendation — with the expectation that rigor improves over time.
- The process runs in five steps: governance, scope, scenario selection, impact assessment, and disclosure — and typically spans multiple planning cycles to get right.
Climate scenario analysis is a planning tool that helps organizations understand how different future climate conditions could affect their operations, assets, and financial performance. It does not predict the future. It maps out plausible futures so you can stress-test your strategy against each of them.
For sustainability and finance teams, that distinction is worth sitting with. You are not forecasting. You are asking “what if?” systematically across multiple futures — including some uncomfortable ones.
Under IFRS S2 and CSRD/ESRS, climate scenario analysis is now mandatory for most large companies. Under ISSB standards, it forms the backbone of the climate resilience assessment companies must disclose. A KPMG survey found that only 13 percent of the world’s 250 largest companies included scenario modelling in their sustainability reports. Most organizations are still figuring out where to start.
What is a climate scenario?
A climate scenario is not a forecast. The IPCC defines it as a coherent, internally consistent, and plausible description of a possible future state of the world. In practice, companies work with three scenarios covering low, intermediate, and high warming:
- Low-emissions (1.5–2°C): Strong global climate action, rapid decarbonization. High transition risk, lower physical risk.
- Intermediate (2.5–3°C): Moderate action. A mix of transition and physical risks.
- High-emissions (4°C+): Little to no policy action. Lower transition risk, but severe systemic physical impacts.
These three pathways force a company to think beyond a single future. The low-emissions world punishes slow movers on decarbonization. The high-emissions world erodes asset values in exposed geographies. Neither is certain. Both are plausible. That tension is the purpose of the exercise.
Physical and transition risks — and the opportunities that often get skipped
Climate risks split into two categories. Physical risks are what most people think of first: floods, droughts, extreme heat, rising sea levels disrupting supply chains and damaging assets. Transition risks are less visible but just as real — carbon pricing, tightening regulations, shifts in consumer behavior, market disruption as low-carbon alternatives emerge.
What often gets missed is the opportunity side. Scenario analysis surfaces it. Early movers on climate-resilient infrastructure gain competitive advantage. Companies that anticipate regulatory shifts access green finance earlier and on better terms. Engaging suppliers in exposed regions before disruption hits builds supply chain resilience that you cannot retrofit quickly.
A food retailer running climate scenario analysis under SSP2-4.5 might find that flooding in key agricultural regions threatens product availability within five years. Under SSP1-2.6, that same retailer faces carbon pricing on refrigerated logistics and new disclosure obligations reshaping investor expectations. The response strategy looks different in each scenario, which is exactly why running more than one matters.
What IFRS S2 and CSRD require
Under IFRS S2, scenario analysis is required as part of the climate resilience assessment. The ISSB draws a distinction between the “what if” — exploring potential impacts through scenarios — and the “so what” — what your strategy can actually absorb. Both must be disclosed.
Companies with lower climate exposure can start with simpler, narrative-based approaches. Those in manufacturing, agriculture, real estate, or energy should plan on quantitative models. The ISSB’s proportionate approach means you are not required to build a bespoke climate model from day one, but the expectation is clear: disclosures improve over time.
For CSRD reporters, ESRS E1 requires scenario-based disclosure on climate risks and opportunities across short, medium, and long-term horizons against a low-emissions pathway. The MSCI Sustainability Institute classifies climate scenarios into four types — narrative, quantified, sector-specific, and model-driven — and recommends building progressively toward quantified financial impact analysis, starting with narrative approaches rather than trying to do everything at once.
The main tools used in climate scenario analysis
Three scenario sets dominate in practice:
- IPCC scenarios (SSP-RCP combinations): Scientifically grounded projections across temperature pathways, from 1.5°C to 4°C+.
- NGFS scenarios: Developed for the financial sector by the Network for Greening the Financial System. Useful for banks and institutional investors.
- TCFD guidance: The foundational framework for climate-related financial disclosures. Recommends using at least a 2°C or lower scenario.
Using recognized scenario sets matters for credibility and reduces the analytical burden. You are applying established frameworks to your specific business context rather than building assumptions from scratch.
How to run climate scenario analysis in 5 steps
- Set up governance. Assign clear ownership across risk, sustainability, finance, and strategy. Get board-level oversight established early. Scenario analysis done in an ESG silo rarely influences actual business decisions.
- Define your scope. Which assets, geographies, and supply chains are you assessing? Start from your materiality assessment. Where is the business most exposed?
- Select credible scenarios. Use at least two — one aligned with 1.5°C, one reflecting higher warming. Document why each was chosen and what assumptions underpin it.
- Assess impacts and opportunities. Model operational disruptions, asset damage, regulatory changes, and market shifts. Then look at the other side: what investments or adaptations would protect or grow the business under each scenario?
- Integrate and disclose. Update risk registers. Inform capital allocation. Then report: which scenarios you used, the time horizons and assumptions, the material risks identified, and what you plan to do about them.
KPMG notes that this process may take multiple planning cycles, each potentially lasting over a year. Starting at a narrative level now is better than waiting for perfect data.
The thing most organizations miss
Scenario analysis is not a compliance audit. The companies that get real value from it treat it as a strategic conversation — forcing risk owners in procurement, operations, and finance to think concretely about how their decisions look under radically different futures.
Think back to the 2007–2008 financial crisis. The collapse of the subprime mortgage market caught most institutions completely off guard. The scale and speed of what unfolded was not predicted. That lack of foresight — across some of the most sophisticated financial institutions in the world — is part of what scenario analysis is designed to address. Not predicting the worst case. Getting comfortable with uncertainty before it arrives.
The IPCC’s definition is worth returning to: a scenario is “one alternative image of how the future can unfold.” Not a worst case. Not a forecast. An alternative. Running three of them in parallel, with the right people in the room, tends to produce better long-term decisions than any single projection.
How CrediblESG supports climate scenario analysis
CrediblESG’s CSRD reporting tools are built to support this process from the ground up — from ESRS E1 climate disclosures to the double materiality assessments that define what goes into your scenario scope. If you are preparing your first climate resilience assessment or improving an existing one, our platform is designed so you do not have to start from a blank page.
Frequently asked questions
What are the 5 steps of the scenario planning process?
The five steps are: (1) establish governance and cross-functional ownership, (2) define the scope covering which assets, regions, and supply chains to assess, (3) select credible recognized scenarios with at least one low-emissions and one high-emissions pathway, (4) assess financial and operational impacts across each scenario, and (5) integrate findings into strategy, risk registers, and disclosures. The process is iterative — expect to revisit it across multiple planning cycles as data and disclosures mature.
What are the three scenarios in scenario analysis?
Most climate scenario analyses work with three pathways: a low-emissions scenario aligned with 1.5–2°C warming (strong climate action, high transition risk), an intermediate scenario around 2.5–3°C (mixed transition and physical risks), and a high-emissions scenario of 4°C+ (limited policy action, severe physical impacts). These are drawn from IPCC SSP pathways and NGFS scenario sets.
What is a scenario in climate?
A climate scenario is a plausible, internally consistent description of a possible future state of the climate system and the broader economy. It is not a prediction. The IPCC defines it as one alternative image of how the future can unfold. Scenarios are used to explore how different levels of warming — and the policy and market responses that accompany them — could affect a business’s operations, assets, and markets.
What is the 4.5 scenario for climate change?
SSP2-4.5 is an intermediate emissions scenario from the IPCC’s Shared Socioeconomic Pathways framework. It assumes moderate climate policy action — not a rapid energy transition, but not business-as-usual either. Under SSP2-4.5, global temperatures are projected to rise by roughly 2.7°C by 2100. It is one of the most commonly used scenarios in corporate climate scenario analysis because it represents a realistic middle path, and because the physical risks it implies are already materializing in many sectors.
