Climate scenarios: decision tools, not forecasts

What scenarios are for and why boards need to know this

Well-designed scenarios serve three purposes. First, they test the resilience of the business model and strategy under materially different future conditions. Second, they help identify risks and opportunities that may not be apparent in a base-case forecast. Third, they support adaptive planning by identifying signposts, observable developments that should trigger a review of assumptions or a change in strategy.

The aim is to identify stress points in business operations or within the value chain arising from plausible future states. Organisations should adopt strategies which perform reasonably well across several futures, while preserving flexibility where outcomes remain uncertain.

Climate scenarios usually require companies to consider time horizons well beyond traditional management planning horizons. The ASRS provides significant flexibility in this regard, simply requiring consideration in the short, medium, and long term, as defined by the reporting entity. In the first group of reports, time horizons were widely defined but varied substantially in length.

Materiality determines what climate information requires disclosure; proportionality allows scenario analysis to reflect the entity’s circumstances and available skills, capabilities, and resources.

Why hazards, risks, and divergence get confused

When considering how a scenario may impact a company’s operations, it is important to distinguish between a climate hazard, such as extreme heat or flooding, and the resulting risk, which depends on how the hazard interacts with assets and people, including what adaptation measures are in place. Changes in exposure and vulnerability may impact risk as much as changes in the hazard itself.

We also need to distinguish between emissions pathways and warming. Over the next two decades, past emissions and climate-system inertia mean warming is similar across most plausible scenarios, even if emissions differ. Near-term weather differences may be driven more by natural variability or cycles such as El Niño–Southern Oscillation and the Indian Ocean Dipole. Across plausible near-term scenarios, many climate extremes – notably heat extremes and heavy precipitation – are projected to become more frequent or intense, although changes vary by hazard and region.

Why the scenarios themselves have shifted and what this means for boards

The International Energy Agency’s 2025 net zero scenario now projects warming to peak at about 1.65°C around mid-century before declining below 1.5°C by 2100, an outcome known as ‘overshoot’. Separately, scenarios expected to inform AR7 include a lower upper-end emissions pathway, although warming above 4°C by 2100 remains possible.

This does not alter the ASRS requirement to assess a scenario in which warming well exceeds 2°C, nor does it invalidate severe high-warming stress tests. Boards should understand whether scenarios represent a central expectation or a low-likelihood, high-impact test.

Even if holding warming to 1.5°C without overshoot is no longer plausible, companies should evaluate their exposure to government policy designed to limit warming to that level, given Australia is committed to reaching net zero by 2050. Decarbonisation policy will result in material economic changes, creating major risks and opportunities for businesses.

Another important distinction is between global emissions and national policies. Changes in physical hazards largely reflect global emissions; physical risk also depends on exposure, vulnerability, and adaptation. Transition risk often reflects national policies. Thus, Australia could face high physical risk if other countries fail to reduce emissions and high transition risk as domestic decarbonisation proceeds. This combination creates challenges, but it may also generate significant long-term opportunities for companies.

How companies can use scenarios

Companies should not collapse analysis around a single ‘most likely’ scenario or treat resilience testing as forecasting or budgeting. Scenario outputs identify stress points in the organisation and its strategy; quantification illuminates the scale of potential effects. The depth of analysis should be proportionate to the entity’s circumstances and exposure.

For example, before approving investment in a long-lived coastal asset, a board could request that performance be tested under different assumptions about inundation, insurance costs, and adaptation policy, then establish triggers requiring further analysis.

The same techniques that support ASRS disclosures can be applied to many emerging risks, including geopolitical challenges, cyber threats, or disruptive AI. They can support a range of other strategic planning activities in companies, strengthening competitive position. By integrating qualitative and quantitative scenario analysis with other robust data driven risk management tools, companies can be prepared for a rapidly changing world.

Questions for boards

• What strategic question is each scenario intended to inform?
• Are the scenarios internally coherent, sufficiently distinct, and relevant to our business?
• Which assumptions drive the results, and where are the largest uncertainties?
• Which strategic options are robust across scenarios, and what signposts would cause us to change course?
• How often will scenarios be refreshed as science, policy, technology, and markets evolve?
• Has management documented the materiality, proportionality, inputs, assumptions, limitations, and methodologies underpinning the analysis?
• Has the audit and risk committee tested the methodology, controls, and consistency with financial reporting?
• Can the techniques implemented for ASRS reporting be applied elsewhere to strengthen the organisation against other kinds of emerging risk?

¹. Q1 2026 State of the Market, Purpose Bureau and Monash Business School, May 2026. Available here.