What is climate scenario analysis and transition plan?

Mandatory climate reporting in Australia (AASB S2) requires organisations to perform climate scenario analysis, provide information on their climate transition plan and disclose their climate-related risks and opportunities over the short, medium and long-term.

What are climate scenarios?

Climate scenarios are imagined future climate situations.  A number of standardised scenarios have been developed by scientists and have different levels of physical and transition risks (see table below).

What is climate scenario analysis?

Climate scenario analysis involves assessing how various possible climate futures could impact an organisation's business model, operations, and finances in different ways. Under IFRS S2, companies can use standardised scenario or develop their own climate scenarios. However, as per the Australian climate reporting regulation, two climate scenarios shall be considered, including a high global warming scenario (2.5°C or higher) and a low global warming scenario (1.5°C above pre-industrial levels). Scenario SSP2-4.5, SSP3-3.7 or SSP5-8.5 are examples of high emission scenario while SSP1-1.9 would correspond to a low emission scenario. Australian companies are also required to disclose information on the inputs used for the scenario and the key assumptions underlying the scenario.

The results of the scenario analysis can be disclosed using qualitative and quantitative information. For instance, a bank could disclose the percentage of its corporate loans exposed to drought or flood risks under an SSP1-1.9 scenario versus an SSP3-3.7 scenario.

What is a climate transition plan?

A climate-related transition plan describes the strategy developed by an organisation to transition to a more climate conscious business model. It includes targets such as GHG emission reduction targets, a description of actions planned to transition to a low carbon economy and become more sustainable as well details on the corresponding resources to enable that transition and meet targets.

How to develop a climate transition plan?

Developing a climate transition action plan requires in depth reflections about the strategy and business model of the organisation. While making aspirational commitments is often a starting point, it is important to back these commitments with concrete actions and dedicated investments.

What are climate risks & opportunities?

Climate-related risks and opportunities are physical and transition risks and opportunities that an organisation faces due to climate change and the transition to a lower carbon economy. In line with TCFD recommendations, the Australian Sustainability Reporting Standards (ASRS) require companies to disclose their climate-related risks and opportunities over the short, medium, and long term.

What are climate physical risks?

Physical risks are risks arising from climate change such as extreme weather events (storm, flood, drought…) that may affect the assets, operations and supply chain of a business. There are acute physical risks that are event-driven or chronic physical risks that relate to long term change in weather patterns. The resulting financial impacts could be direct (e.g., damage to assets) or indirect (e.g., supply-chain disruption).

Examples of physical climate-related risks

Adapted from ESRS E1

What are climate transition risks?

Transition risks include policy, legal, technological, market and reputational risks. A change in regulation such as the introduction of a carbon tax could increase operating costs.

Examples of climate-related transition risks

Adapted from ESRS E1

What are climate opportunities?

Climate-related opportunities are the opportunities that the company may seize from climate-related changes or events. This may include innovation and investment in low-emission technology to capture new markets or adjustment to current products and services to follow shift in consumer preferences.

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How Forvis Mazars can help

• AASB S2 gap analysis and detailed implementation action plan / roadmap
• Carbon footprint calculations and analysis
• Decarbonisation pathways and target setting
• Review of governance arrangements around climate risks and opportunities
• Physical and transition risks and opportunities analysis
• Climate scenario analysis
• Risk management and internal control development and implementation
• Reporting assistance

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Date published: 05/11/2024

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.

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