Climate Scenario Analysis for IFRS S2

In 1957, Herman Kahn, a strategist at the RAND Corporation, published a book called "On Thermonuclear War." Kahn was not a scientist. He was a mathematician who specialized in thinking about the unthinkable. His method was simple: define the worst case, define the best case, and map everything in between. He called them "scenarios." Governments used his method to plan for nuclear war. Today, companies use the same method to plan for climate change.

IFRS S2 §22 requires companies to conduct scenario analysis and disclose the climate resilience of their strategy. The standard does not prescribe specific scenarios. It requires companies to use scenarios that are relevant to their business — a 1.5°C pathway, a 3°C pathway, a world with a $100-per-tonne carbon price, a world with physical disruption from extreme weather. The goal is not to predict the future. It is to show that the company has thought about it.

Under IFRS S2 §13–15, companies must describe how climate-related risks and opportunities affect their business model, value chain, strategy, and financial planning. The scenario analysis feeds directly into this disclosure. A manufacturer might discover that its largest facility is in a flood zone that becomes uninsurable under a 3°C scenario. A retailer might find that its supply chain depends on a single port that faces sea-level rise. An insurer might calculate that its exposure to wildfire zones exceeds its capital buffer. Kahn's method — define the cases, map the space between — is now a disclosure requirement. The unthinkable is now thinkable. And it must be disclosed.