Takeaways
- IFRS S2 requires companies to use climate-related scenario analysis to inform their assessment of business and strategic resilience.
- The sustainability report should clearly explain the scenarios, time horizons, scope, assumptions and methodology applied.
- Climate scenario findings should be connected to material physical risks, transition risks, opportunities and potential financial effects.
- Companies may begin with proportionate qualitative analysis before progressing towards asset-level assessments and quantitative financial modelling.
Climate scenario analysis is becoming an important component of sustainability reporting in Malaysia.
Under IFRS S2 Climate-related Disclosures, companies must explain the resilience of their strategy and business model to climate-related changes, developments and uncertainties. Climate-related scenario analysis must inform this assessment, although the sophistication of the approach may be proportionate to the company’s exposure, resources and capabilities.
For companies preparing for Malaysia’s National Sustainability Reporting Framework, conducting the analysis is only part of the process. The results must also be translated into clear, decision-useful disclosures for investors, lenders, directors and senior management.
A credible sustainability report should explain what was assessed, how the assessment was conducted, what the company discovered and how management intends to respond.
Table of Contents
What Is Climate Risk Scenario Analysis Under IFRS S2?
Climate scenario analysis is a structured method of examining how different plausible climate futures could affect an organisation.
It is not a prediction of exactly what will happen. Instead, it allows management to test the company’s strategy under conditions such as:
- A rapid transition to a lower-carbon economy;
- A delayed or disorderly transition;
- Higher carbon prices and energy costs;
- More stringent environmental requirements;
- Increasing floods, heatwaves or water stress;
- Supply-chain and infrastructure disruption; and
- Growing demand for lower-carbon products.
The analysis should help management understand whether the company can continue creating value under different physical, regulatory, technological and market conditions.
For further guidance, refer to Bernard Business Consulting’s article on qualitative climate scenario analysis under IFRS S2.
Step 1: Explain the Purpose and Scope
Begin the climate scenario disclosure by stating why the assessment was conducted and what it covered.
The scope may include:
- The whole group or selected subsidiaries;
- Priority business units;
- Production facilities, properties or warehouses;
- Key suppliers and logistics routes;
- Major export markets;
- Planned investments; and
- Material assets or geographical locations.
Readers should be able to determine whether the assessment covers the parts of the business most exposed to climate-related risks.
Companies should also disclose material exclusions. Where certain assets, suppliers or markets have not yet been assessed, explain why and indicate whether their inclusion is planned.
Step 2: Describe the Climate Scenarios
The report should identify the scenarios used and explain their relevance to the business.
Possible scenarios may represent:
- An orderly low-carbon transition;
- A delayed or disorderly transition;
- A moderate-warming pathway; and
- A high-warming pathway with more severe physical risks.
Do not only name a temperature pathway. Summarise the underlying assumptions, including:
- Temperature outcomes;
- Carbon prices;
- Energy costs;
- Climate policies;
- Technology adoption;
- Customer demand;
- Physical hazards; and
- Supply-chain conditions.
The IFRS Foundation’s scenario analysis resources explain that the approach should be commensurate with the organisation’s circumstances and support an assessment of climate resilience.
Step 3: Define the Time Horizons
Companies should define what they consider short, medium and long term.
The periods should reflect actual business considerations, such as:
- Strategic planning cycles;
- Budgeting periods;
- Asset lives;
- Financing arrangements;
- Capital expenditure plans; and
- Product development cycles.
For example, a company may define the short term as up to 2030 and the long term as up to 2050. The selected periods should be appropriate to the company rather than copied from another organisation.
Step 4: Explain the Methodology and Assumptions
A useful disclosure should explain how the analysis was performed. Include:
- Whether the assessment was qualitative, quantitative or combined;
- Data sources and climate pathways used;
- Assets and locations assessed;
- Important policy, market and technology assumptions;
- Departments involved;
- External expertise used;
- Management and Board oversight; and
- Material data limitations.
Companies should not imply a level of scientific or financial precision that the supporting information cannot provide. Uncertainty is expected in scenario analysis, but assumptions and limitations should be transparent.
Malaysia’s meteorological authority identifies rising temperatures, increased rainfall intensity, extreme weather and sea-level rise as potential climate-related changes relevant to local risk assessments. Companies may therefore consider both national climate information and asset-specific exposure data.
Step 5: Report Physical Risks, Transition Risks and Opportunities
Physical risks may include floods, storms, heatwaves, sea-level rise and water scarcity. Transition risks may arise from carbon pricing, regulation, technology changes, customer requirements and changing access to finance.
The report should explain how each material issue could affect the business.
Instead of stating that flooding is a risk, explain the impact pathway:
More intense rainfall may increase flooding around a manufacturing facility, causing production interruptions, inventory damage, repair costs and delayed deliveries.
Climate-related opportunities should also be considered, including energy efficiency, renewable energy, resilient infrastructure and demand for lower-carbon products.
Read The CEO’s Guide to Climate Physical and Transition Risks in Malaysia for further examples.
Case Study: Sime Darby Property
Sime Darby Property provides a useful Malaysian example of how climate scenario analysis can be presented progressively in a sustainability report.
In its Sustainability Report 2024, the company explained that it had begun assessing physical and transition risks with reference to the Task Force on Climate-related Financial Disclosures and IFRS S2.
The company disclosed three climate scenarios:
- SSP1–2.6: Sustainable development and an approximately 2°C world;
- SSP2–4.5: A middle-of-the-road pathway and an approximately 3°C world; and
- SSP5–8.5: Fossil-fuelled development exceeding 3°C.
It also defined two time horizons: the short term up to 2030 and the long term up to 2050. Selected assets were being evaluated for potential costs and opportunities, while physical-risk assessments had started for seven key townships and selected assets.
The disclosure is useful because it communicates:
- The reporting standards informing the assessment;
- The scenarios and temperature pathways selected;
- The short- and long-term periods used;
- The initial asset coverage;
- The use of external specialists where required; and
- The intention to expand the assessment.
Its approach also illustrates that climate scenario reporting can develop over several reporting periods. Companies may first establish scenarios and asset coverage before progressing towards broader portfolio assessments and more detailed financial quantification.
However, organisations should not copy Sime Darby Property’s scenarios or horizons without assessing their own operations, assets and strategic planning periods.
Step 6: Connect the Findings to Financial Effects
IFRS S2 reporting should show how climate-related risks and opportunities may affect financial prospects.
Consider potential effects on:
- Revenue and customer demand;
- Energy and raw-material costs;
- Asset values and useful lives;
- Capital expenditure;
- Insurance and financing costs;
- Production continuity;
- Provisions and impairment; and
- Future cash flows.
Where reliable figures are unavailable, companies may begin with qualitative explanations. They should state why quantification is not currently possible and how the assessment will be improved.
Finance, risk, operations and sustainability teams should work together so the disclosures remain consistent with budgets, strategic plans and financial reporting.
Step 7: Conclude on Climate Resilience
The report should answer:
How resilient are the company’s strategy and business model under the scenarios assessed?
Explain:
- Where the organisation appears resilient;
- Where vulnerabilities remain;
- Whether existing controls are sufficient;
- Which assumptions create uncertainty;
- What adaptation or transition actions are planned; and
- How climate resilience will be monitored.
Avoid unsupported statements that the company is fully climate resilient. A balanced conclusion should recognise both existing capabilities and unresolved risks.
Can a Company Begin with Qualitative Scenario Analysis?
Yes. A structured qualitative analysis may be a proportionate starting point where an organisation has limited data, modelling capability or prior climate risk experience.
A practical process may involve:
- Identifying material physical risks, transition risks and opportunities;
- Selecting two or more relevant climate scenarios;
- Defining short-, medium- and long-term horizons;
- Conducting cross-functional workshops;
- Assessing potential operational, strategic and financial effects;
- Evaluating existing controls and planned responses;
- Documenting assumptions and evidence; and
- Obtaining management and Board review.
The IFRS Foundation recognises that the appropriate scenario analysis approach may vary according to an organisation’s exposure, skills, resources and available information.
Companies may begin qualitatively and progressively introduce location data, financial estimates, asset-level analysis or quantitative modelling as their capabilities mature.
What Should Companies Do Next?
Companies preparing for NSRF and IFRS S2 reporting should establish climate governance, identify material risks, select suitable scenarios, define time horizons and involve finance, risk and operational teams.
They should document the methodology, assumptions, evidence and limitations before translating the findings into strategic and financial disclosures.
Related Bernard Business Consulting resources include:
Strengthen Your Climate Scenario Disclosures
Effective climate scenario reporting requires more than a risk matrix or a list of climate hazards. Organisations need relevant scenarios, documented assumptions, cross-functional involvement and a clear connection between climate risks, financial effects and strategic decisions.
Starting early can help companies identify data gaps, improve governance and produce more credible, decision-useful climate-related disclosures.
Contact us to find out how Bernard Business Consulting can support your organisation with practical advisory, training, reporting, and implementation support related to climate risk and opportunity assessment, climate scenario analysis, IFRS S2 disclosures, climate resilience and NSRF readiness.
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