Knowing what scenario analysis should reveal (the resilience assessment) is one thing. Actually conducting it is another. IFRS S2's Application Guidance B8 to B18 provides detailed guidance on how to select scenarios, what assumptions to document, and how to structure the analytical process, including when you can align it with your strategic planning cycle rather than doing it annually.
Selecting the Right Information (B8 to B10)
Application Guidance B8 establishes the foundation: entities must use all reasonable and supportable information available without undue cost or effort. This means you are not expected to conduct exhaustive and expensive research if the cost would heavily outweigh the benefit to investors, but you cannot ignore readily available data. This is the same proportionality standard applied throughout IFRS S2.
For scenario analysis, this means:
- Using publicly available climate scenarios from authoritative sources rather than inventing bespoke scenarios
- Not limiting analysis to scenarios where the entity performs well (cherry-picking)
- Extending the analysis horizon beyond the entity's normal planning horizon when climate effects are long-term
B9 to B10 acknowledge that judgement increases with time horizon. Near-term scenarios (5 to 10 years) can draw on existing regulatory commitments and announced policies. Longer-term scenarios (30+ years) require more assumptions about technological development and geopolitical change.
Selecting Input Scenarios (B11 to B13)
IFRS S2 requires disclosure of which scenarios were used and why they were chosen. Para 22(b)(i) and B11 to B13 guide this selection:
Use authoritative sources. Scenarios should come from credible, publicly available sources such as:
| Source | Key Scenarios | Focus |
|---|---|---|
| International Energy Agency (IEA) | Net Zero Emissions by 2050 (NZE), Announced Pledges Scenario (APS), Stated Policies Scenario (STEPS) | Energy transition and transition risks |
| IPCC | Shared Socioeconomic Pathways (SSP1-1.9 to SSP5-8.5) | Physical climate outcomes across temperature pathways |
| NGFS (Network for Greening the Financial System) | Net Zero 2050, Below 2 degrees C, Current Policies | Financial sector; combined transition and physical risks |
| UK Climate Change Committee | Balanced pathway, Tailored scenarios | UK-specific policy pathway analysis |
Include diverse scenarios. Para 22(b)(i)(2) requires disclosure of whether a diverse range of scenarios was used. This typically means including both a scenario aligned with the Paris Agreement (1.5 degrees C or well below 2 degrees C) and at least one scenario with higher warming (for example, 3 degrees C or 4 degrees C current policies scenario). A diverse range prevents the analysis from being anchored on only optimistic outcomes.
Align with the latest international agreement. Para 22(b)(i)(4) requires disclosure of whether a scenario aligned with the Paris Agreement (currently the "latest international agreement on climate change") was included. This does not mean the entity must assume its strategy is compatible with 1.5 degrees C, but it must test whether it is.
Making Analytical Choices (B14 to B15)
IFRS S2 does not prescribe quantitative or qualitative approaches. Both are valid depending on circumstances. B14 to B15 guide the analytical choices:
- Qualitative analysis: Narrative descriptions of how each scenario would affect the entity's business, strategy, and operations. Suitable for lower-exposure entities or those early in their journey.
- Quantitative modelling: Financial impact estimates under each scenario, including ranges for key metrics (revenue, costs, asset values, capital requirements). Expected from high-exposure entities with modelling capability.
Many entities use a hybrid approach: qualitative narrative for long-term, high-uncertainty impacts, with quantitative modelling for near-term, more tractable impacts.
Key Assumptions to Disclose (Para 22(b)(ii))
For each scenario, entities must disclose the key assumptions used:
- Climate-related policies in jurisdictions where the entity operates (for example, carbon pricing levels, regulatory timelines)
- Macroeconomic trends (GDP growth, inflation, commodity prices)
- National and regional variables (weather patterns, demographics, land use, infrastructure)
- Energy usage and mix (the trajectory of fossil fuels vs renewables)
- Developments in technology (cost curves for clean energy, carbon capture, electrification)
Disclosing assumptions allows investors to evaluate whether the scenario analysis reflects a realistic view of the entity's situation or whether optimistic assumptions have been used.
The Annual vs Multi-Year Question (B16 to B18)
One of the most practical provisions in the Application Guidance:
B18 confirms that scenario analysis may be aligned with the entity's strategic planning cycle (for example, conducted every three to five years) rather than repeated annually.
However, the resilience assessment (Para 22(a)) must still be updated and disclosed in every annual reporting period. In years when scenario analysis is not re-run, the entity should:
- Indicate the period in which the analysis was last conducted
- Note any material changes in circumstances since then
- Confirm whether the previous resilience assessment conclusions remain valid
Example: Annual vs periodic disclosure
A European airline conducts a comprehensive scenario analysis in 2024 using IEA NZE, APS, and STEPS scenarios. It commits to refreshing this analysis every three years (aligned with its strategic planning cycle).
In its 2024 report, it provides full scenario analysis methodology disclosure (Para 22(b)).
In its 2025 report, it states: "Our last comprehensive scenario analysis was conducted in 2024 (disclosed in our 2024 Annual Report, available on our website). There have been no material changes to our operational footprint or the regulatory environment that would alter the conclusions of that analysis. Our resilience assessment conclusions remain: [updated assessment]. We will conduct our next comprehensive scenario analysis in 2027."
This approach is compliant with IFRS S2.
Key Takeaways
- 1Use authoritative scenario sources (IEA, IPCC, NGFS) rather than inventing bespoke scenarios - and do not cherry-pick only favourable outcomes
- 2Include a diverse range of scenarios: at minimum a Paris-aligned scenario (1.5 or well below 2 degrees C) and a higher-warming current-policies scenario
- 3Disclose five categories of key assumptions for each scenario: climate policies, macroeconomic trends, regional variables, energy mix, and technology developments
- 4Qualitative, quantitative, and hybrid analytical approaches are all valid - many entities use qualitative narratives for long-term impacts and quantitative modelling for near-term risks
- 5In years when scenario analysis is not re-run, confirm whether prior conclusions remain valid and note any material changes in circumstances since the last analysis