IFRS S2 Scenario Analysis
Scenario analysis is one of the most technically demanding requirements of IFRS S2 — and the element where most companies are least prepared. IFRS S2 requires assessment of climate resilience under at least two scenarios, one consistent with 1.5°C warming. Here is what is required and how to do it efficiently.
Scenario analysis is one of the most technically demanding requirements of IFRS S2 — and the element where most companies are least prepared. IFRS S2 paragraphs 22–25 require entities to use climate-related scenario analysis to assess the resilience of their strategy and business model to climate-related risks and opportunities.
IFRS S2 scenario analysis requirements
IFRS S2 paragraphs 22–25 require entities to use climate-related scenario analysis to assess the resilience of their strategy and business model to climate-related risks and opportunities.
Minimum scenario requirement: at least two scenarios must be used. One must be consistent with limiting global warming to 1.5°C (or at most 2°C). At least one scenario must reflect higher physical climate risk — typically a 3°C or 4°C warming pathway.
Physical risk assessment: at least one scenario must involve significant physical climate risk to enable assessment of the entity's exposure to physical climate impacts at material locations.
Transition risk assessment: at least one scenario must reflect the transition to a lower-carbon economy — enabling assessment of policy, technology, and market transition risks.
Narrative vs quantitative: IFRS S2 allows qualitative scenario analysis for entities where quantitative scenario analysis is not feasible. However, IFRS S2 paragraph 25 states that where an entity is able to extend quantitative scenario analysis, it should do so. Investor expectations and leading practice are moving toward quantitative financial effect disclosure.
NGFS scenarios — the recommended framework
The Network for Greening the Financial System (NGFS) provides the most widely used climate scenario framework for corporate and financial sector climate disclosure. NGFS scenarios are free, regularly updated, and explicitly referenced in IFRS S2 application guidance.
The six NGFS scenarios fall into three categories:
Orderly transition (low physical risk, manageable transition risk): Net Zero 2050 — immediate ambitious climate policy action, limits warming to 1.5°C; Below 2°C — strong climate policy but less ambitious than Net Zero 2050.
Disorderly transition (low physical risk, high transition risk): Divergent Net Zero — net zero achieved but through divergent policies across sectors and regions; Delayed Transition — abrupt policy changes after years of inaction.
Hot house world (high physical risk, no transition): Current Policies — only current implemented policies, warming of ~3°C by 2100; NDCs — nationally determined contributions implemented, warming of ~2.5°C.
For IFRS S2 minimum compliance: use NGFS Net Zero 2050 (the 1.5°C scenario) and NGFS Current Policies or Hot House World (the high physical risk scenario). These two scenarios satisfy the minimum requirement and are the most widely used across peer companies.
Making scenario analysis proportionate — the IFRS S2 approach
IFRS S2 acknowledges that full quantitative climate scenario modelling is complex and resource-intensive. The standard takes a proportionate approach:
For entities with less complex operations and limited climate exposure: qualitative scenario analysis — narrative description of how the identified scenarios affect the business — is acceptable. Describe what physical or transition risks materialise under each scenario and how the business model responds.
For entities with material climate exposure (energy, agriculture, real estate, manufacturing): quantitative scenario analysis — numerical financial effects under each scenario — is expected. Use commercial physical risk providers (Moody's, XDI, Jupiter) for physical risk quantification and NGFS transition pathways for carbon price and technology cost assumptions.
For ESRS E1 reporters also doing IFRS S2: the scenario analysis required by ESRS E1-9 (anticipated financial effects) is equivalent to or exceeds the IFRS S2 scenario analysis requirement. Prepare the ESRS E1 analysis and use it directly for IFRS S2 — do not duplicate. The scenarios, methodology, and financial effect disclosures are the same.
Common gap: many companies conduct scenario analysis but do not explicitly link it to strategy resilience. IFRS S2 requires disclosure of how the entity's strategy would change under each scenario — not just what the risks are, but what the strategic response would be. Ensure your scenario analysis section includes explicit strategy resilience conclusions.
Frequently asked questions
Can we use proprietary scenarios instead of NGFS?
Yes — IFRS S2 does not mandate specific scenarios. You can use IEA scenarios (WEO Net Zero, Stated Policies), IPCC scenarios (RCP 2.6, RCP 8.5), or proprietary scenarios developed by your strategy team or consultants. Whatever scenarios you use must be disclosed with their key assumptions. NGFS is the most widely used because it is free, regularly updated, and credible with investors and regulators.
How often do we need to update our scenario analysis?
IFRS S2 requires annual disclosure. The scenario analysis should be reviewed annually and updated when: material new climate science is published; the NGFS updates its scenarios (typically every 1–2 years); you acquire significant new assets or enter new geographies; or material changes in policy environment affect your transition risk assessment.
We are a small company — do we need full quantitative scenario analysis?
IFRS S2 applies proportionality — qualitative scenario analysis is acceptable where quantitative analysis is not feasible. For small companies with limited resources, a structured qualitative analysis using NGFS scenario narratives and publicly available sector-specific climate risk guidance is a credible starting point. Document the limitation and the plan to develop quantitative analysis over time.