Climate Resilience and Scenario Analysis

What Is Climate Resilience?

IFRS S2 Appendix A defines climate resilience as the capacity of an entity to adjust to climate-related changes, developments, and uncertainties. It encompasses both:

• Strategic resilience: The ability to adapt the business model, strategy, and plans in response to climate-related developments
• Operational resilience: The ability to manage physical disruptions and transition-related changes in day-to-day operations

Climate resilience is not a binary property. It is a spectrum. An entity might be highly resilient to transition risks (because it has already pivoted away from fossil fuels) while remaining vulnerable to physical risks (because its facilities are in a flood-prone region).

The Two Components of Para 22 Disclosure

Paragraph 22 requires two types of disclosure:

22(a): The Resilience Assessment

This is the output of scenario analysis: what the analysis reveals about the entity's resilience. Specifically:

• (i) Implications for strategy and business model, including how the entity would respond to the scenarios analysed:
  • Which aspects of the strategy are robust across scenarios?
  • Which aspects are vulnerable under certain scenarios?
  • What strategic choices or pivots would be triggered under different scenarios?
• (ii) Significant areas of uncertainty: Where the entity faces the greatest uncertainty about how climate will affect its business. This is often more informative than point estimates.
• (iii) Capacity to adjust and adapt, covering three dimensions:
  • Financial flexibility: Availability and flexibility of financial resources to respond to climate change
  • Asset adaptability: Ability to redeploy, repurpose, upgrade, or decommission assets
  • Existing investments: How current and planned investments in mitigation, adaptation, and resilience contribute to the entity's capacity

22(b): How Scenario Analysis Was Conducted

This is the methodology disclosure: how the analysis was done, so users can assess its credibility. It covers:

• Which scenarios were used and their sources
• Whether a diverse range of scenarios was included
• Whether scenarios cover both transition risks and physical risks
• Whether a scenario aligned with the latest international agreement on climate change (currently the Paris Agreement) was used
• Why the chosen scenarios are relevant to the entity
• The time horizons used
• The scope of operations covered
• Key assumptions (climate policies, macroeconomic trends, energy mix, technology development)
• The reporting period in which scenario analysis was conducted (which may differ from the annual reporting period, see B18)

What Is Scenario Analysis?

Scenario analysis is an analytical exercise in which an entity models its strategy and finances under different plausible futures. Each scenario represents a coherent, internally consistent description of how the world might look, including climate conditions, policy environments, and technology landscapes.

The Key Distinction: Resilience Assessment vs Scenario Analysis

IFRS S2 makes a crucial distinction (elaborated in Application Guidance B1 to B3):

• Resilience assessment (Para 22(a)) is the conclusion that must be disclosed annually: what does management believe about the entity's resilience?
• Scenario analysis (Para 22(b)) is the analytical process that informs the resilience assessment: how was the conclusion reached?

This distinction has a practical implication: scenario analysis does not need to be redone every year. It can be aligned with the entity's strategic planning cycle (for example, every 3 to 5 years, see B18). But the resilience assessment itself must be updated and disclosed in every annual report, even in years when scenario analysis is not re-run.

Assessing the Circumstances (B2 to B7)

Application Guidance B2 to B7 describes how to calibrate the sophistication of scenario analysis to the entity's circumstances.

B4 to B5 (Exposure level): Entities with higher exposure to climate risks should conduct more sophisticated scenario analysis. An entity with significant physical assets in climate-vulnerable locations, or with a business model highly sensitive to carbon pricing, faces higher exposure and should invest more in analytical rigour.

B6 to B7 (Skills, capabilities, and resources): The approach must also be commensurate with what the entity can reasonably do. An entity early in its climate risk journey may begin with qualitative narratives based on publicly available scenarios. This is acceptable. The ISSB explicitly acknowledges that scenario analysis is an evolving practice, and the expectation is iterative improvement.