AASB S2 Scenario Analysis Explained: 1.5°C, 2°C+ and Climate Resilience

Climate scenario analysis is one of the most technically demanding components of AASB S2. It requires an entity to assess how its strategy holds up under different possible futures — specifically, a rapid decarbonisation scenario and a higher-warming scenario where physical climate risks are more severe.

For first-time reporters, this can feel abstract. Here’s what the standard actually requires and how to approach it practically.

What AASB S2 requires

AASB S2 requires entities to disclose how climate resilience is assessed, using scenario analysis. ASIC’s guidance is explicit that entities must consider at least two scenarios:

1. A scenario consistent with limiting warming to 1.5°C — representing a rapid and orderly transition to net zero, with strong policy, technology, and market shifts
2. A scenario where warming exceeds 2°C (sometimes expressed as a “2°C+” or “3°C+” scenario) — representing a world where transition is insufficient and physical climate impacts become severe

The purpose of using two contrasting scenarios is to assess whether your strategy is resilient across a range of possible futures, not just the one you think is most likely.

The two scenario types reflect the two risk types

The scenario pairing is not arbitrary — it maps directly to the two categories of climate risk:

A 1.5°C scenario is characterised by high transition risk: rapid policy change, carbon pricing, technology disruption, shifting market preferences. Physical risks are relatively lower because warming is contained. For businesses in carbon-intensive sectors (construction, manufacturing, energy), this scenario can involve significant operating model disruption.

A high-warming scenario (2°C+) is characterised by lower transition risk (because policy action was insufficient) but high physical risk: more frequent extreme weather, rising sea levels, water stress, higher average temperatures affecting operations and assets.

By analysing your business under both scenarios, you identify risks that don’t appear under a single scenario: a business might be resilient to transition risks but exposed to physical risks, or vice versa.

You don’t need to build your own model

A common misconception is that scenario analysis requires proprietary climate modelling. It doesn’t. AASB S2 allows — and most entities use — publicly available published scenarios as the basis for analysis.

Commonly used scenarios:

Scenario source	Scenario name	Approx. warming pathway
IPCC	SSP1-1.9	~1.5°C
IPCC	SSP5-8.5	~4°C+
IEA World Energy Outlook	Net Zero Emissions by 2050	1.5°C
IEA World Energy Outlook	Stated Policies Scenario	~2.5°C+
NGFS	Net Zero 2050	1.5°C
NGFS	Current Policies	3°C+

Choose scenarios that are relevant to your industry and geography, explain your selection, and apply them consistently.

What to disclose

AASB S2 requires disclosure of:

• The scenarios used — which published scenario, why it was chosen, the time horizons applied
• Key assumptions — what does each scenario assume about policy, technology, and physical conditions that are relevant to your business?
• The assessment methodology — how were the impacts of each scenario on your business evaluated? (Qualitative narrative? Quantitative financial impact? Asset-level analysis?)
• Climate resilience conclusion — given the analysis, how resilient is your strategy? What are the significant risks under each scenario, and how does the business respond?

For first-time reporters, a qualitative scenario analysis — using published scenarios as the basis and narrating the potential impacts on your business — is acceptable. More quantitative approaches (financial impact estimates, asset-level exposure analysis) are expected to develop over time.

Practical steps for a first-year analysis

Step 1: Select your scenarios. Choose two published scenarios — one 1.5°C, one high-warming. NGFS scenarios are widely used for financial entities; IEA WEO scenarios are common in energy-intensive sectors.

Step 2: Identify your significant exposures. For each scenario, what are the most material potential impacts on your business? For a construction company: carbon pricing on materials (transition), flooding of project sites (physical), changes in building code requirements (transition), water scarcity at operational locations (physical).

Step 3: Assess impact and timeframe. For each exposure, assess the potential magnitude and the timeframe over which it becomes material. Don’t need precise numbers — qualitative (low/medium/high) with a narrative is acceptable at first.

Step 4: Describe your strategic response. What is your business doing, or planning to do, in response to each material exposure? This connects scenario analysis to strategy.

Step 5: State your resilience conclusion. Summarise how resilient your overall strategy is given the analysis. Identify the most significant risks and any aspects of the strategy that would need to change under extreme scenarios.

Transition relief

AASB S2 provides some relief on scenario analysis for the first year of reporting for some groups. However, the expectation is that scenario analysis will be included in early reports and will become more rigorous over time.

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Ayika focuses on the data layer of AASB S2 — the emissions figures and audit trail that underpin the metrics section of your climate statement. Book a demo to see how it works.