Strategy disclosures are the heart of IFRS S2. They require an entity to explain not just what climate risks it faces, but how those risks affect its business, what it is doing in response, and what the financial consequences are. This lesson introduces the five strategy disclosure areas and the requirements for identifying climate-related risks and opportunities.
The Objective of Strategy Disclosures
Paragraph 8 of IFRS S2 sets the strategy objective: disclosures shall enable users to understand an entity's strategy for managing climate-related risks and opportunities.
This is a demanding objective. It requires an entity to demonstrate that it has genuinely analysed its climate exposure and developed a coherent response, not just listed risks from a generic framework.
The Five Strategy Disclosure Areas
Paragraph 9 specifies five areas that strategy disclosures must address:
| # | Area | Key Question | Paragraphs |
|---|---|---|---|
| (a) | Climate-related risks and opportunities | What specific risks and opportunities does the entity face? | 10 to 12 |
| (b) | Business model and value chain | How do climate risks affect operations and supply chain? | 13 |
| (c) | Strategy and decision-making | How has the entity responded, and what is its transition plan? | 14 |
| (d) | Financial effects | What are the financial consequences of climate risks and opportunities? | 15 to 21 |
| (e) | Climate resilience | How does the entity's strategy hold up under different climate scenarios? | 22 |
Identifying Climate-Related Risks and Opportunities (Para 10)
For each identified climate-related risk or opportunity, paragraph 10 requires four pieces of information:
- (a) Description: A clear description of the specific risk or opportunity. Generic statements ("we face risks from climate change") are insufficient. The entity must describe what the risk is.
- (b) Classification: Each risk must be classified as either a physical risk or a transition risk. An opportunity should be described in terms of whether it arises from physical changes (for example, new agricultural opportunities in warmer regions) or from the transition (for example, increased demand for low-carbon products).
- (c) Time horizon: When is the risk or opportunity expected to materialise? Entities must specify whether each is short, medium, or long term.
- (d) Definition of time horizons: An entity must explicitly define what "short", "medium", and "long" term mean for its specific circumstances, linked to its planning horizons. There is no universal IFRS S2 definition. A mining company with 30-year asset lives will define "long term" differently from a fashion retailer.
Example: A European automotive manufacturer identifies the following risk:
"Regulatory risk (accelerating transition risk, medium term, 2025 to 2030): The EU's legislation requiring all new passenger cars sold to be zero-emission by 2035 creates a transition risk for our internal combustion engine (ICE) product lines. Our ICE vehicles currently account for 78% of revenue. If consumer preferences shift faster than anticipated or if intermediate targets tighten (for example, a 2030 zero-emission requirement in certain member states), we face revenue decline, stranded tooling investments, and potential loss of market share to EV-native competitors. We define medium term as 2025 to 2030 based on our product development cycle."
This is a compliant disclosure: it identifies a specific risk, classifies it as a transition risk, assigns a medium-term time horizon, and defines what medium term means.
Using All Reasonable and Supportable Information (Para 11)
Paragraph 11 requires entities to use all reasonable and supportable information available without undue cost or effort. This includes:
- Past events and current conditions (retrospective)
- Forecasts of future conditions (prospective)
The "without undue cost or effort" qualifier acknowledges that perfect information is unavailable. In practice, this means:
- An entity does not have to conduct exhaustive or expensive research if the cost would heavily outweigh the benefit to investors
- It cannot ignore readily available or clearly material information
- An entity is not expected to commission bespoke climate science; it should use publicly available information (IEA scenarios, IPCC reports, regulatory announcements, industry analyses)
Referring to Industry-Based Guidance (Para 12)
Paragraph 12 requires entities to refer to and consider the Industry-based Guidance on Implementing IFRS S2. This guidance, derived from SASB Standards (the Sustainability Accounting Standards Board's sector-specific disclosure standards), provides sector-specific disclosure topics and metrics for 68 industries.
The guidance does not create additional mandatory requirements. However, it is a starting point for identifying which climate risks and opportunities are likely to be material for an entity in that industry. If an entity considers an industry disclosure topic and concludes it is not material, it should explain why.
The Industry-based Guidance works like a standard menu at a restaurant. Every restaurant serves food, but the items on the menu differ by cuisine. IFRS S2 sets the universal requirement to disclose climate risks. The Industry-based Guidance tells you which specific risks are on the menu for your particular sector. You do not have to order everything on the menu (materiality applies), but you do have to look at it and explain why you are skipping certain items.
Key Takeaways
- 1Strategy disclosures cover five areas: risk identification, business model effects, strategic response and transition plans, financial effects, and climate resilience
- 2Each identified risk or opportunity requires four elements: specific description, physical or transition classification, time horizon, and entity-defined horizon definitions
- 3Generic statements like 'we face climate risks' are non-compliant - each risk must be described with specificity tied to the entity's actual operations
- 4Entities must define what short, medium, and long term mean for their circumstances, linked to their planning horizons - there is no universal IFRS S2 definition
- 5Paragraph 12 requires entities to refer to and consider the 68-industry SASB-derived guidance as a starting point for identifying material climate risks