Takeaways
- Climate scenario analysis under IFRS S2 helps organisations assess how climate-related risks and opportunities may affect business strategy, financial performance, and long-term resilience.
- CEOs should view climate scenario analysis as a strategic planning tool, not only a sustainability reporting requirement.
- CFOs play a key role in translating climate risks into financial impacts, including revenue, costs, assets, capital expenditure, and financing.
- Climate scenario analysis supports better decision-making on business resilience, capital allocation, risk management, and investor communication.
- Early preparation can help organisations strengthen IFRS S2 readiness, improve disclosure quality, and build stakeholder confidence.
Climate-related risks are increasingly becoming business and financial risks. Under IFRS S2 Climate-related Disclosures, organisations are expected to explain how climate-related risks and opportunities may affect their business model, strategy, financial performance, and long-term resilience.
This makes climate scenario analysis an important discussion for CEOs and CFOs.
For CEOs, it helps assess whether the organisation’s strategy remains resilient under different climate futures. For CFOs, it provides a basis to understand how climate-related risks may affect financial planning, asset values, operating costs, capital expenditure, and access to financing.
In Malaysia, the introduction of the National Sustainability Reporting Framework (NSRF) has further accelerated the need for businesses to prepare for IFRS S1 and IFRS S2 adoption. Climate scenario analysis is no longer just a technical sustainability exercise. It is becoming a key part of governance, strategy, enterprise risk management, and investor communication.
For a broader overview of climate-related disclosure readiness, you may also read our article on Preparing for Climate-Related Financial Disclosures in Malaysia.
Table of Contents
What Is Climate Scenario Analysis?
Climate scenario analysis is a forward-looking assessment that helps organisations understand how different climate-related futures may affect the business.
It does not aim to predict the future. Instead, it helps management test the resilience of the organisation under different possible scenarios, such as:
- A rapid transition to a low-carbon economy
- A delayed transition with sudden regulatory changes
- A high-emissions future with more severe physical climate impacts
- Increased carbon pricing, energy costs, or supply chain pressure
- More frequent flooding, heatwaves, or operational disruptions
The purpose is to help leadership understand potential vulnerabilities, strategic risks, financial implications, and opportunities for adaptation.
Why IFRS S2 Makes Climate Scenario Analysis Important
IFRS S2 requires organisations to disclose climate-related risks and opportunities that could reasonably affect their prospects. This includes how climate risks may influence strategy, business model, risk management, metrics, targets, and financial performance.
Climate scenario analysis supports IFRS S2 disclosures by helping organisations answer important questions:
- How resilient is our business model under different climate scenarios?
- Which assets, operations, or markets are most exposed?
- How could climate risks affect revenue, costs, cash flow, and capital allocation?
- What transition risks may arise from carbon pricing, regulations, or changing customer expectations?
- What physical risks may disrupt operations, supply chains, or asset values?
- What strategic decisions should management take now?
This is where the role of CEOs and CFOs becomes critical.
Why CEOs Should Pay Attention to Climate Scenario Analysis
For CEOs, climate scenario analysis is a strategic management tool. It provides a structured way to assess whether the current business strategy remains resilient in a changing operating environment.
1. It Supports Long-Term Business Strategy
Climate change can affect customer demand, regulatory requirements, supply chains, technology adoption, and market competitiveness. CEOs need to understand how these changes may influence the organisation’s strategic direction.
Climate scenario analysis helps CEOs evaluate:
- Whether the current business model is future-ready
- Which markets or products may face transition risks
- Where new business opportunities may emerge
- Whether the organisation needs to adapt its operations, investments, or supply chain strategy
For further reading on strategic climate risks, see our article on The CEO’s Guide to Climate Physical and Transition Risks in Malaysia.
2. It Strengthens Board and Management Oversight
Under IFRS S2, organisations are expected to explain how the Board and management oversee climate-related risks and opportunities.
This means climate risk oversight should not sit only within the sustainability department. It should be integrated into leadership discussions, business planning, and risk management.
CEOs should ensure that climate-related matters are connected to:
- Corporate strategy
- Enterprise risk management
- Investment planning
- Business continuity planning
- Performance monitoring
- Stakeholder communication
3. It Helps Identify Strategic Opportunities
Climate scenario analysis is not only about risk. It can also help organisations identify opportunities arising from the low-carbon transition.
These may include:
- New products and services
- Energy efficiency improvements
- Low-carbon technologies
- Sustainable financing opportunities
- Green procurement advantages
- Stronger positioning with customers and investors
By understanding these opportunities early, CEOs can make more informed decisions on business transformation and long-term competitiveness.
Why CFOs Should Pay Attention to Climate Scenario Analysis
For CFOs, climate scenario analysis is important because climate-related risks can affect financial planning, reporting, and capital decisions.
1. It Connects Climate Risks to Financial Impacts
CFOs are expected to understand how climate-related risks may affect financial performance and enterprise value.
Potential financial impacts may include:
- Increased operating costs
- Higher energy and raw material costs
- Asset impairment
- Supply chain disruption costs
- Higher insurance premiums
- Additional capital expenditure
- Revenue changes from shifting customer demand
- Financing and borrowing implications
Climate scenario analysis helps finance teams move from qualitative risk descriptions to more decision-useful financial insights.
2. It Supports Capital Allocation and Investment Decisions
Capital allocation is one of the most important areas where CFOs can use climate scenario analysis.
For example, before approving major investments, organisations may need to consider:
- Whether the asset is exposed to future flooding or heat stress
- Whether the project may be affected by carbon pricing
- Whether future regulations may increase compliance costs
- Whether low-carbon alternatives may provide better long-term value
This helps organisations make investment decisions that are more resilient under future climate conditions.
3. It Improves Investor and Lender Confidence
Investors and lenders increasingly expect companies to explain how climate-related risks may affect financial performance and long-term value creation.
A credible climate scenario analysis can strengthen investor confidence by showing that the organisation has considered:
- Climate risk exposure
- Financial implications
- Business resilience
- Transition planning
- Risk mitigation measures
This is especially important as sustainability reporting moves closer to financial reporting and assurance expectations. You may also read our article on Preparing for Sustainability Reporting Assurance in Malaysia.
Physical Risks and Transition Risks: What Leadership Should Understand
Climate scenario analysis usually considers two main categories of climate-related risks: physical risks and transition risks.
Physical Risks
Physical risks arise from the direct impacts of climate change. These may include:
- Flooding
- Heatwaves
- Water stress
- Extreme weather events
- Rising temperatures
- Operational disruptions
For CEOs and CFOs, physical risks may affect asset values, production capacity, employee productivity, supply chain reliability, insurance costs, and business continuity.
Transition Risks
Transition risks arise from the shift towards a low-carbon economy. These may include:
- Carbon taxes
- Emissions regulations
- Technology changes
- Market shifts
- Customer expectations
- Investor requirements
- Supply chain decarbonisation pressure
For leadership teams, transition risks may affect competitiveness, operating costs, pricing strategy, capital expenditure, and long-term profitability.
What Should CEOs and CFOs Ask Internally?
To prepare for IFRS S2 climate scenario analysis, CEOs and CFOs should begin asking practical questions across the organisation.
Questions for CEOs
- Is our business strategy resilient under different climate scenarios?
- Which parts of our business are most exposed to physical and transition risks?
- What climate-related opportunities should we pursue?
- Are climate risks included in strategic planning and enterprise risk management?
- Does the Board have sufficient visibility over climate-related risks and opportunities?
Questions for CFOs
- How could climate risks affect revenue, costs, assets, liabilities, and cash flow?
- Do we have reliable data to support climate-related financial disclosures?
- How will carbon accounting data support IFRS S2 reporting?
- What investments are needed to improve climate resilience?
- Are our sustainability disclosures ready for future assurance requirements?
For organisations strengthening emissions data and verification readiness, our article on What Malaysian Companies Need to Prepare Before a GHG Verification may be useful.
A Step-by-Step Approach to Climate Scenario Analysis
Organisations do not need to start with overly complex models. A practical and phased approach can help leadership teams build capability over time.
Step 1: Identify Climate-Related Risks and Opportunities
Start by identifying the climate-related risks and opportunities that may affect the organisation’s operations, value chain, markets, assets, and financial performance.
Step 2: Prioritise Material Climate Issues
Assess which risks and opportunities are most relevant based on likelihood, impact, time horizon, and financial significance.
Step 3: Select Relevant Climate Scenarios
Choose scenarios that reflect different possible climate futures. These may include low-carbon transition scenarios, delayed transition scenarios, and high physical risk scenarios.
Step 4: Assess Business and Financial Impacts
Evaluate how each scenario may affect the organisation’s strategy, operations, revenue, costs, assets, capital expenditure, and financing.
Step 5: Assess Business Resilience
Identify whether the organisation’s current strategy remains resilient under each scenario. This helps management understand where adaptation, mitigation, or strategic changes may be required.
Step 6: Integrate Findings into Strategy and Risk Management
Climate scenario analysis should inform business planning, enterprise risk management, capital allocation, and performance monitoring.
Step 7: Prepare IFRS S2-Aligned Disclosures
Finally, translate the findings into clear and decision-useful disclosures under IFRS S2, particularly under governance, strategy, risk management, and metrics and targets.
Common Challenges Organisations May Face
Many organisations are still at an early stage of climate scenario analysis readiness.
Common challenges include:
- Limited internal climate risk expertise
- Difficulty selecting suitable scenarios
- Lack of reliable climate and financial data
- Weak linkage between sustainability and finance teams
- Limited understanding of Scope 1, Scope 2, and Scope 3 emissions
- Difficulty quantifying financial impacts
- Unclear governance over climate-related decision-making
These challenges are common. The key is to start with a structured approach and improve the level of sophistication over time.
Climate Scenario Analysis Is a Leadership Tool, Not Just a Reporting Requirement
Climate scenario analysis should not be treated as a compliance checklist. For CEOs, it is a way to test business resilience and identify strategic opportunities. For CFOs, it is a way to understand financial exposure, improve capital planning, and support investor communication.
Under IFRS S2, the organisations that will be better prepared are those that connect climate analysis with business strategy, financial planning, risk management, and credible disclosures.
How Bernard Business Consulting Can Support Your Organisation
At Bernard Business Consulting, we help organisations prepare for climate scenario analysis and IFRS S2 climate-related disclosures through practical, business-focused sustainability solutions. Our services include climate risk and opportunity assessments, climate scenario analysis, IFRS S1 and IFRS S2 readiness assessments, NSRF advisory, sustainability reporting, carbon accounting, emissions management, and sustainability assurance readiness support.
Through our integrated advisory and technology-driven solutions, we help businesses strengthen climate-related disclosures, improve reporting readiness, and build long-term climate resilience.
If your organisation is preparing for NSRF, IFRS S1, or IFRS S2 adoption, contact us today to discuss how we can support your climate disclosure journey. To learn more about our services, visit our NSRF advisory page or explore our NSRF Implementation Training Series.
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Practicing Mindfulness for Sustainability
Reconnect with nature and yourself through this guided forest bathing experience, combining mindfulness, reflection and sensory awareness. Designed to help you slow down, reduce stress and gain clarity, this session offers a practical pathway to personal wellbeing and deeper sustainability awareness.