Nicole: Hi everyone, welcome back to Sustainability Matters! This is episode follows on from our previous video of understanding climate risk and scenario analysis. Now that we have a background understanding of both topics, this second video will focus on what you will need to consider when conducting your scenario analysis. 

Tom: Let’s now walk through some key considerations for you to undertake successful scenario analysis: 

1. Ground It in your Business Model 

Your business model should guide your focus for the scenario analysis — because it determines how and where climate risks are incorporated. 

If your organisation owns or operates substantial physical assets with extended operational lifespans, your analysis should consider how physical climate impacts could disrupt operations or increase maintenance costs. 

If your business relies more on market positioning, IP, or supply chains, transition risks such as policy changes, customer expectations, or input costs will be more material. Therefore your scenarios should reflect that exposure. 

Nicole: 

2. Choose Scenarios that reflect a full range of risk 

AASB S2 requires to assess at least two distinct temperature outcomes: one below 1.5°C, and one that exceeds 2°C. That means you need to model both optimistic and challenging futures. 

Make sure you're stress-testing resilience under a disorderly transition or a high-physical-risk pathway. This will help your organisation understand how exposed you are under different degrees of policy action, market change, and physical climate shifts. 

Tom: 

3. Use credible, Publicly Available Data 

Base your analysis on established frameworks – such as the IPCC’s SSPs and RCPs, to ensure the scenarios have scientific legitimacy. SSP1-1.9 is a great benchmark for <1.5°C; SSP5-8.5 works for a >4°C scenario. 

• Once you’ve selected your pathway, layer in sector-specific scenarios from the IEA or AEMO to get access to carbon pricing, energy demand, and fuel cost assumptions.
• This alignment helps you move from broad climate narratives to concrete inputs. 

Nicole: 

4. Quantify Impacts where possible 

You will then need to translate risk into financial data, such as operating costs, stranded assets, or supply chain disruption. 

Where detailed data isn't available, be consistent and transparent about your assumptions. 

Even partial quantification can be valuable, at this can helps inform capital planning or risk mitigation decisions. 

Tom: 

5. Collaborate Across the Business 

Lastly, scenario analysis shouldn’t sit in the Sustainability division. Involve finance, operations, risk, and strategy teams early in the process. 

Collaboration helps make the scenarios realistic, grounded in current business planning, and more likely to be acted upon. This collaboration will also help embed climate thinking within broader enterprise risk management and decision-making. 

Nicole: Now that your scenario analysis has been completed – how do we link this to strategic resilience? One of the most important, and often overlooked, steps in scenario analysis is using the outputs to assess your business’s resilience. Under AASB S2, companies need to disclose how resilient their current strategy is under the scenarios they’ve analysed. 

Tom: That means looking at the results and asking yourselves: Are our current mitigation and adaptation strategies still effective under a 3°C world? What about under an ambitious net zero pathway with high carbon prices and stricter regulations? If the answer is no, or only partially, then you need to disclose your answer and explain the proposed actions you will undertake. It is important to remember, it is about being transparent and showing that climate risk has been incorporate at a strategic level. 

Ultimately, the goal of scenario analysis is to support better decisions and communicate clearly how prepared the business is for the climate transition ahead. 

Nicole: As AASB S2 comes into effect, businesses need to move from awareness to action, by aligning with credible scenarios, quantifying impacts, and assessing the strength of their current strategies. Thank you for joining us today and if you have any questions or would like to explore how this applies to your organisation, please don’t hesitate to reach out to us.