CSRD Climate Scenario Analysis
Climate scenario analysis is one of the most technically demanding elements of CSRD — required under ESRS E1 to assess the resilience of your business strategy under different climate futures. Most companies have never done this before. Here is exactly what is required, which scenarios to use, and how to make it proportionate.
Climate scenario analysis is one of the most technically demanding elements of CSRD — required under ESRS E1 to assess the resilience of your business strategy under different climate futures. ESRS E1-2 requires companies to disclose the process for identifying and assessing climate-related risks and opportunities — including the use of climate scenarios.
What ESRS E1 requires from scenario analysis
ESRS E1-2 requires companies to disclose the process for identifying and assessing climate-related risks and opportunities — including the use of climate scenarios. ESRS E1-9 requires disclosure of anticipated financial effects from material climate risks and opportunities, which requires scenario-based assessment.
Minimum scenario requirement: ESRS does not prescribe specific scenarios but requires that the analysis covers at least a scenario consistent with limiting warming to 1.5°C (or 2°C) and at least one higher warming scenario. In practice, companies use two or three scenarios covering: a Paris-aligned orderly transition; a disorderly or delayed transition; and a high physical risk scenario.
The NGFS (Network for Greening the Financial System) scenario framework is the most widely used — free at ngfs.net and updated annually. Key NGFS scenarios for ESRS: Net Zero 2050 (1.5°C, orderly transition); Delayed Transition (1.8°C, disorderly); and Current Policies (3°C+, high physical risk).
Time horizons: ESRS requires coverage of short (typically 0–5 years), medium (5–10 years), and long-term (10+ years) horizons. The relevant horizon depends on your asset life — a company with 30-year infrastructure assets must assess physical risks over a 30-year horizon; a software company with 3-year asset cycles has a shorter relevant horizon.
Physical risk vs transition risk scenarios
Climate scenario analysis must cover both physical and transition risk pathways — they require different scenarios and produce different financial effects.
For physical risk: use scenarios with high warming trajectories (NGFS Current Policies, IPCC RCP 8.5). These scenarios produce the most severe physical climate impacts — flooding, extreme heat, drought, sea level rise — that test the resilience of your physical assets and operations. High warming scenarios are the worst case for physical risk.
For transition risk: use scenarios with rapid policy action (NGFS Net Zero 2050, NGFS Below 2°C). These scenarios involve carbon pricing, technology mandates, and demand shifts that test the resilience of your business model. The orderly transition is more manageable; the disorderly transition (NGFS Delayed Transition) produces the most acute transition risk — abrupt policy changes after years of inaction.
The risk trade-off: the scenario that minimises physical risk (aggressive climate action → 1.5°C) maximises transition risk (rapid carbon pricing, technology disruption). The scenario that minimises transition risk (no new climate policy → 3°C+) maximises physical risk. Disclosing both shows investors that your strategy is resilient under a range of outcomes — not just the most favourable scenario.
For the financial effects disclosure (E1-9): quantify the financial impacts under each scenario — revenue impact, operating cost change, asset impairment, CapEx requirements. Range-based quantification (€X–€Y million impact by 2030 under NGFS Net Zero 2050) satisfies ESRS E1-9 even where precise financial modelling is not feasible.
Making scenario analysis proportionate — a practical approach
Full quantitative climate scenario modelling is resource-intensive. ESRS applies proportionality — the depth of analysis should be proportionate to the materiality of climate risk to your business.
For companies with high physical climate exposure (coastal infrastructure, agricultural operations, manufacturing in water-stressed regions): quantitative physical risk analysis is expected. Use commercial physical risk providers (Moody's ESG, XDI, Jupiter Intelligence) to generate site-level financial impact ranges under high and low warming scenarios.
For companies with high transition risk exposure (fossil fuel dependency, carbon-intensive manufacturing, automotive): quantitative carbon price sensitivity analysis is expected. For every €10/tonne increase in carbon price, what is the impact on operating costs? This simple calculation using your Scope 1 emissions as the exposure provides investor-grade transition risk disclosure.
For companies with low climate exposure (pure service businesses, technology companies with limited physical assets): qualitative scenario analysis — narrative description of how the business is affected under each scenario — may be sufficient. The key is demonstrating that you have considered both physical and transition pathways, not that you have built a complex financial model.
For all companies: reuse scenario analysis across frameworks. The ESRS E1 scenario analysis satisfies IFRS S2 scenario requirements and CDP C3 business strategy questions simultaneously. Invest once in the analysis and extract disclosures for multiple frameworks.
Frequently asked questions
Can we use our own proprietary scenarios rather than NGFS?
Yes — ESRS does not mandate specific scenarios. IEA scenarios (Net Zero Emissions by 2050, Stated Policies), IPCC scenarios (SSP1-1.9, SSP5-8.5), and proprietary scenarios developed by strategy teams or consultants are all acceptable. Whatever scenarios you use, disclose their key assumptions, temperature outcomes, and policy frameworks — allowing stakeholders to assess comparability with peer disclosures.
Do we need to update scenario analysis every year?
Yes — ESRS requires annual reporting and the scenario analysis should be reviewed and updated annually. Material updates are required when: significant new climate science is published; NGFS updates its scenarios; you acquire assets in new geographies; or the policy environment changes materially. Where no material changes have occurred, prior year analysis can be updated with current-year data rather than completely rebuilt.
We are a small company newly in CSRD scope — can we start with qualitative scenario analysis?
Yes — qualitative scenario analysis is a proportionate starting point for companies with limited climate exposure or resource constraints. Describe how the business would be affected under each scenario in narrative terms. Commit to developing quantitative analysis over 2–3 reporting years as data and methodology capability develops. Disclose the limitation transparently.