The objective of climate-related financial disclosures on strategy is to enable users of general-purpose financial reports to understand an entity’s strategy for managing climate-related risks and opportunities. (IFRS S2, Paragraph 8)

Understanding climate-related risks and opportunities

Climate-related risks refer to the potential negative impacts of the climate change on an entity. These are classified as:

• Physical risks, arising from extreme weather events or long-term shifts in climate patterns (e.g., sea level rise and global temperature increase); and
• Transition risks, resulting from the global shift toward a low-carbon economy, driven by regulatory changes, changing consumer preferences and technological innovations. 

Climate-related opportunities emerge from efforts to mitigate or adapt to climate change. These include investments in renewable energy, the development of low-emission products and access to sustainable finance instruments like green bonds or sustainability-linked loans.

Understanding these risks and opportunities is the first step towards evaluating an entity’s exposure and determine whether its business model and strategy are resilient to climate change. But how can organisations assess that resilience?

Building Climate Resilience through Climate Scenario Analysis

An entity shall disclose information that enables users of general-purpose financial reports to understand the climate resilience of the entity’s strategy and business model to climate-related changes, development and uncertainties, taking into consideration the entity’s identified climate-related risks and opportunities. (IFRS S2, Paragraph 9(e))

This is where Climate Scenario Analysis (CSA) plays a critical role. A scenario is a hypothetical pathway leading to a particular outcome from the current state. CSA thus helps entities explore how their business might perform under different climate futures influenced by global socio-economic and policy trends. To conduct CSA:

1. Select appropriate climate scenarios (e.g., NGFS, IPCC RCP/SSP, IEA) to explore physical and transition risks across short-, medium- and long-term timeframes, aligned with the entity’s strategic planning horizon.
    
2. Identify material climate-related risks and opportunities across operational geographies, supply chains, assets and core business activities.
    
3. Assess potential business and financial impacts and prioritise key risks and opportunities based on their likelihood and severity. Evaluate relevant business strategies to inform internal decision-making.
    
4. Develop mitigation and adaptation strategies for identified material risks and opportunities. These actions also support setting performance metrics and targets, to be discussed further in our next article on the “Metrics and Targets” pillar.
    

We supported a client in the printing industry with CSA to assess the potential financial impacts of climate change. Using NGFS scenarios (Net Zero by 2050 and Current Policies scenarios), we identified key risks such as prolonged heatwaves, disruptions in raw material supply and a consumer shift toward digital alternatives. The analysis helped the client to better understand impacts on productivity and revenue. It also prompted internal strategic discussions, ranging from exploring insurance coverage for key facilities to evaluating solar panel installation to reduce grid electricity dependence.

How does IFRS S2 build on the TCFD Strategy pillar?

IFRS S2 builds upon the TCFD recommendations, so entities already reporting in line with TCFD will find many of the concepts familiar. However, IFRS S2 introduces key enhancements under the Strategy pillar: 

• Parameters for CSA: While TCFD specifies using scenarios “including a 2°C or lower” pathway, IFRS S2 does not mandate specific scenarios. Instead, entities are required to disclose details of the scenario analysis process, including the assumptions considered (e.g., governmental policies, macroeconomic trends and technological development), as well as when the analysis was conducted.
• Disclosure of the impact of climate-related risks and opportunities: IFRS S2 requires entities to provide quantitative information on the financial effects of climate-related risks and opportunities. We will explore this in more detail in our upcoming article.

Next steps for reporting

From increasingly frequent extreme weather events to regulatory shifts, the climate landscape is evolving rapidly. Understanding where the entity currently stands and how climate-related risks could affect future financial performance is vital for building a resilient strategy.

If you are new to CSA, start by exploring commonly used public scenarios. Documenting your process will support internal decision-making and help you craft a narrative in your sustainability report to engage stakeholders.

For further guidance, refer to the “Strategy” section of IFRS S2: “Climate-related risks and opportunities” and “Climate resilience.”