Climate Scenario Analysis Under IFRS S2: A 2026 Practitioner Walkthrough

If your team is moving from "we understand IFRS S2" to "we need to actually run the scenario analysis and disclose it," this guide is for you. It covers exactly what the standard requires, which scenario frameworks to use for your sector, how to handle the qualitative-vs-quantitative question, and what regulators are scrutinising in early adopter disclosures.

Key takeaway: Climate scenario analysis under IFRS S2 is not a compliance checkbox. It is a mandatory strategic tool, and the disclosure must show how the results changed something, a strategy, a capital allocation decision, or a risk management process. Boilerplate descriptions of scenarios used will not satisfy auditors or investors.

What Does IFRS S2 Actually Require for Climate Scenario Analysis?

IFRS S2 paragraphs 22 and 23 require every entity to use climate-related scenario analysis to assess the resilience of its strategy and business model to climate-related risks and opportunities. The analysis must consider a range of scenarios, and that range must include at least one scenario consistent with limiting global warming to 1.5°C. The full application guidance sits in paragraphs B1 through B13 of the standard.

No top-ranking article on this topic cites those paragraph numbers. Practitioners need to know exactly where the requirements live, because auditors will.

The standard requires you to disclose four things for each scenario analysis:

1. The scenarios used and their key assumptions (including the warming pathway each represents)
2. The time horizons applied and how you determined they are relevant to your business
3. How you concluded the scenarios are appropriate for your business model and value chain
4. The results and, critically, what they imply for your strategy and business model

That fourth point is where most early adopters fall short. EY's 2025 Climate Risk Barometer found that 78% of investors surveyed rated current scenario analysis disclosures as insufficient, citing failure to connect results to strategic decisions as the top deficiency.

As ISSB Chair Emmanuel Faber stated at the publication of IFRS S2: "This is not a compliance checkbox. It is a strategic tool that should inform how companies plan and invest."

The value chain scope requirement

One requirement that catches teams off guard: IFRS S2 explicitly requires scenario analysis to cover the entity's full value chain, not just its own operations. That means upstream suppliers and downstream distribution and product use are in scope. For a manufacturer with complex global supply chains, this significantly expands the data gathering exercise before modelling even begins.

Which Scenario Frameworks Should You Use?

IFRS S2 does not mandate specific scenarios. It references publicly available scenarios from credible bodies and requires at least one 1.5°C-aligned pathway. The practical question is which framework fits your sector.

The three main frameworks, and who uses them:

Sector usage data from KPMG's 2025 IFRS S2 implementation survey confirms this split: IEA scenarios were used by 58% of energy and utilities companies, NGFS scenarios by 71% of financial institutions, and IPCC SSPs by 44% of real estate and infrastructure companies. Many companies used more than one framework.

For most non-financial corporates, a practical starting point is:

• IEA NZE as the 1.5°C transition scenario
• IPCC SSP5-8.5 or SSP3-7.0 as the high-physical-risk scenario
• An intermediate scenario (IEA APS or IPCC SSP2-4.5) to capture the middle ground

This three-scenario structure mirrors the approach PwC's IFRS S2 implementation guide identifies as most common among large companies, and it satisfies the ISSB's Transition Implementation Group (TIG) confirmation that using only a 1.5°C scenario without a higher-warming scenario would not meet the "range of scenarios" requirement.

You may also develop proprietary scenarios, provided they are credible, well-documented, and you can explain why they are more appropriate than publicly available alternatives. In practice, most preparers anchor to a public framework and layer in entity-specific assumptions.

A note on NGFS for financial institutions

The NGFS Phase IV scenarios (published September 2023) provide six pathways across three categories: orderly transition (Net Zero 2050, Below 2°C), disorderly transition (Divergent Net Zero, Delayed Transition), and hot house world (Current Policies, NDCs). For banks and insurers running portfolio-level climate risk assessments, NGFS is the most operationally useful framework because it is designed for financial sector modelling and is the framework central banks and supervisors reference.

How to Define Time Horizons Under IFRS S2

IFRS S2 does not define short, medium, or long term. Paragraph B8 of the application guidance states that time horizons must be consistent with the entity's strategy and financial planning cycles, and must reflect when climate-related risks and opportunities are expected to have a financial impact.

This flexibility is deliberate, but it creates a real implementation headache. Deloitte's IFRS S2 readiness survey found that 67% of respondents found it difficult to align time horizons with their business planning cycles.

A practical approach:

• Short term: align with your financial planning horizon (typically 1 to 3 years)
• Medium term: align with your strategic planning cycle (typically 3 to 10 years)
• Long term: align with asset lifespans, regulatory commitments, or sector-specific milestones (2030, 2050 net zero targets)

The key disclosure requirement is that you explain the rationale. A utility with 40-year asset lives should have a longer long-term horizon than a software company. Auditors will challenge time horizon selections that appear arbitrary or that conveniently avoid the periods where physical risks peak.

Qualitative vs. Quantitative: The Proportionality Question

IFRS S2 paragraph B6 includes an explicit proportionality relief. Entities that do not have the resources or capability to conduct quantitative scenario analysis in early reporting periods may use qualitative analysis, provided they:

• Explain why quantitative analysis was not practicable
• Commit to developing quantitative capability over time
• Disclose what steps they are taking to build that capability

This relief is real and meaningful. KPMG's analysis of 2024 annual reports found that fewer than 30% of IFRS S2 early adopters provided quantified financial impact estimates. That compares to fewer than 20% in TCFD-aligned reports as of the TCFD's final status report in October 2023, so the baseline was already low.

But the proportionality relief is not a permanent escape hatch. As PwC's IFRS S2 guide puts it: "Entities that use qualitative analysis in year one need to have a credible plan for developing quantitative capability."

Paragraph B4 adds a proportionality signal in the other direction: the greater an entity's exposure to climate-related risks or opportunities, the more likely a technically sophisticated quantitative approach is required. A coal miner using qualitative-only analysis in year three will face hard questions from auditors.

What "decision-useful" means in practice

IFRS S2 requires scenario analysis to be decision-useful, meaning it must provide information that investors, lenders, and creditors can actually use. Generic scenario descriptions that do not connect to the entity's specific business model, assets, or geographies will not meet this standard. Grant Thornton's IFRS S2 guide makes this point clearly: boilerplate analysis that fails to connect to the entity's specific situation is not decision-useful, regardless of how technically sophisticated the underlying model is.

Connecting Scenario Analysis to the Financial Statements

This is the requirement most early adopters missed, and it is a significant audit risk.

IFRS S2 scenario analysis outputs must be consistent with the assumptions embedded in the financial statements. If your scenario analysis identifies material physical risks to property, plant, and equipment, those risks need to flow through to impairment testing under IAS 36. If scenarios imply that certain assets will become stranded before the end of their useful lives, asset life assumptions under IAS 16 may need revision.

As Deloitte's IFRS S2 guide states: "You cannot have a sustainability disclosure that contradicts your financial statements."

In practice, this means the finance team, not just the ESG team, needs to be in the room when scenario analysis results are reviewed. The outputs need to be stress-tested against:

• IAS 36 impairment indicators: Do physical risk scenarios trigger impairment indicators for specific assets or CGUs?
• IAS 16 useful life assumptions: Do transition scenarios imply accelerated obsolescence for carbon-intensive assets?
• Going concern assessments: Do severe physical risk scenarios affect the entity's ability to continue as a going concern?

Auditors are increasingly asking these questions. Sustainability disclosures and financial statements that tell inconsistent stories about climate risk will not survive assurance review.

IFRS S2 vs. ESRS E1: What Dual Reporters Need to Know

For companies subject to both IFRS S2 and the EU's CSRD (reporting under ESRS E1), scenario analysis requirements overlap but are not identical.

The ISSB-EFRAG interoperability guidance published in May 2024 confirms that scenario analysis conducted for ESRS E1 can largely satisfy IFRS S2 requirements. But there are gaps. ESRS E1's double materiality framing means the analysis must also capture the entity's impacts on climate, not just climate's impacts on the entity. IFRS S2 focuses on financial materiality only.

For dual reporters, the most efficient approach is to build a single scenario analysis process anchored to IFRS S2's financial materiality requirements, then layer in the impact materiality dimension required by ESRS E1. Running two separate processes is expensive and creates consistency risks. The ESRS and ISSB standards alignment guide on Finrep covers the broader interoperability picture in detail.

Governance: The Board Sign-Off Requirement

IFRS S2 requires board-level oversight of scenario analysis. The disclosure must explain how the board reviewed and challenged the analysis, not just that it was presented to the board.

This is a meaningful governance requirement. Many boards lack the climate literacy to meaningfully challenge scenario assumptions, time horizons, or the credibility of scenario framework choices. ESG teams need to build a board engagement process that goes beyond a slide deck presentation. The board needs to be able to explain, in the disclosure, what questions it asked and how management responded.

Step-by-Step: Running Your IFRS S2 Scenario Analysis

1. Scope the value chain. Map your upstream and downstream exposure before selecting scenarios. Physical risks in your supply chain may be as material as those in your own operations.

2. Select your scenario frameworks. Match the framework to your sector (see the table above). Document why the selected scenarios are appropriate for your business model and geography.

3. Define time horizons. Anchor to your strategic planning cycle and asset lifespans. Document the rationale explicitly.

4. Assess exposure and choose your analytical approach. High-exposure entities (energy, real estate, agriculture, financial institutions) should plan for quantitative analysis. Lower-exposure entities may use qualitative analysis in early years, with a documented capability-building plan.

5. Run the analysis. For each scenario, assess transition risks (policy, technology, market, reputational) and physical risks (acute events, chronic changes) across your value chain and time horizons.

6. Connect to the financial statements. Review scenario outputs against IAS 36 impairment indicators and IAS 16 useful life assumptions. Flag any inconsistencies before the disclosure is finalised.

7. Engage the board. Present the methodology, key assumptions, and results. Document the board's questions and the responses. This becomes part of the governance disclosure.

8. Draft the disclosure. Cover all four required elements: scenarios and assumptions, time horizons, relevance rationale, and strategic implications. The strategic implications section is where most early adopters under-deliver.

9. Assess assurance readiness. Scenario analysis disclosures are subject to limited assurance in most jurisdictions adopting IFRS S2. Auditors will look for documented methodology, traceable assumptions, and consistency with financial statement inputs.

What Regulators and Auditors Are Looking For in 2026

Early adopter disclosures (2024 annual reports) have given regulators a clear picture of where companies are falling short. The patterns are consistent:

• Scenario descriptions without strategic connection. Companies describe the scenarios used but do not explain what the results mean for capital allocation, asset strategy, or risk management. This fails the decision-useful test.
• Inconsistency with financial statements. Scenario analysis identifies material physical risks that do not appear in impairment disclosures or asset life assumptions.
• Boilerplate time horizon definitions. Short, medium, and long term defined identically across industries, with no entity-specific rationale.
• Value chain gaps. Analysis covers own operations only, ignoring supply chain and downstream exposures that IFRS S2 explicitly requires.
• Qualitative analysis without a capability roadmap. Entities using the proportionality relief but providing no plan for developing quantitative capability.

The ISSB's Transition Implementation Group (TIG) has addressed several of these implementation questions directly, including how to handle scenarios where data is not available for specific geographies and how to disclose when scenario outputs are highly uncertain. TIG decisions are authoritative ISSB guidance and should be part of every preparer's implementation toolkit.

KPMG's global IFRS S2 implementation report captures the stakes: "Many preparers are underestimating the work required to move from qualitative to quantitative analysis, and the clock is ticking."

Global Adoption: Where IFRS S2 Is Now Mandatory

For teams assessing which entities in a group are in scope, the current mandatory adoption picture:

Australia's AASB S2 is substantively identical to IFRS S2, including the scenario analysis requirements. Singapore's SGX mandate covers large-cap issuers from FY 2025 and mid-cap from FY 2026. Japan's SSBJ expects mandatory application from April 2027 for the largest listed companies. Canada's CSA has not yet finalised mandatory rules as of mid-2026.

For a full IFRS S1 and S2 disclosure checklist covering all required elements, see the IFRS S1 and S2 disclosure checklist for preparers on Finrep.

FAQ

Do we have to use all three scenario types (1.5°C, 2°C, BAU) simultaneously? No. The ISSB's TIG confirmed that the requirement is to use a range of scenarios that includes at least one 1.5°C-aligned scenario. Using only a 1.5°C scenario without a higher-warming scenario would likely not satisfy the range requirement, but a specific three-scenario structure is not mandated.

Can we use our own proprietary scenarios instead of IPCC, IEA, or NGFS? Yes, provided the scenarios are credible, well-documented, and you explain why they are more appropriate than publicly available alternatives. In practice, most preparers anchor to a public framework and layer in entity-specific assumptions rather than building fully proprietary scenarios.

What is the proportionality relief and does it apply to us? Paragraph B6 of IFRS S2 allows entities without the resources for quantitative analysis to use qualitative analysis in early periods, provided they explain why quantification was not practicable and commit to building capability. The relief is more defensible for smaller or lower-exposure entities. High-exposure entities (energy, real estate, financial institutions) face a higher bar.

How does IFRS S2 scenario analysis differ from what we did for TCFD? IFRS S2 absorbed the TCFD framework, so the four TCFD pillars map directly onto IFRS S2's requirements. The key differences are that IFRS S2 is now mandatory in adopting jurisdictions (not voluntary), the value chain scope is explicit, the connectivity to financial statements is a formal requirement, and the decision-useful standard is more rigorously applied by auditors.

What tools and data providers support IFRS S2 scenario analysis? Publicly available scenario data from the IPCC, IEA, and NGFS is free and widely used. Third-party data providers including Moody's, S&P Trucost, Verisk Maplecroft, and Jupiter Intelligence offer proprietary physical risk datasets and modelling tools that can supplement public scenario frameworks, particularly for asset-level physical risk quantification.

What level of assurance applies to scenario analysis disclosures? Most jurisdictions adopting IFRS S2 are starting with limited assurance over sustainability disclosures, including scenario analysis. Auditors will look for documented methodology, traceable assumptions, internal review processes, and consistency between sustainability disclosures and financial statement inputs. Reasonable assurance requirements are expected to phase in over time in most jurisdictions.