ESRS Climate Scenario Analysis and Resilience: A Proportionate First-Year Approach

A practical first-year method for identifying material climate risks, using scenarios where they improve decisions and producing a defensible resilience conclusion.

E1-2 requires the undertaking to classify each material climate-related financial risk as physical or transition risk and explain key elements of the methodology used to assess exposure and sensitivity of assets and business activities in own operations and the upstream and downstream value chain over short, medium and long terms. The Application Requirements describe identifying hazards or transition events, screening assets and activities and assessing exposure and sensitivity considering likelihood, magnitude and duration. Physical analysis also considers locations and value-chain dependencies.

If scenario analysis is used, the undertaking discloses the range of scenarios, whether a high-emission scenario was used for physical risk and a 1.5°C no- or limited-overshoot scenario for transition risk, the associated temperature projections and relevance, the scope, key assumptions and when the analysis was carried out. The wording matters: the revised ESRS permits scenario analysis as a method, rather than making a complex multi-scenario model the automatic entry point for every undertaking.

E1-3 nevertheless requires a climate-resilience analysis for material climate risks. It explains results, implications for strategy and business model, how scenario effects - if used - inform responses, how transition and adaptation actions contribute to resilience, significant uncertainty and capacity to adjust over time. Scenario analysis can be highly valuable to that assessment, but complexity should be proportionate to exposure and decision need.

Figure 1. Increase scenario-analysis complexity only where it improves the assessment of material exposures, strategic decisions or financial effects.

Proportionality is not a reason to omit material risk. It is a way to focus analysis. A small number of high-risk assets may justify detailed quantitative work even where the group as a whole starts qualitatively. Conversely, a sophisticated enterprise model can still be weak if it does not identify which assets, products, suppliers or customers are exposed and how management uses the results.

Do not begin by downloading scenarios. Begin by defining which decisions the analysis must support. Examples include site adaptation, asset retirement, supplier diversification, product redesign, capital allocation, insurance strategy, target feasibility, transition-plan dependencies, financial planning or disclosure of anticipated financial effects.

Build the population from the climate IRO register. Identify assets, locations, activities, products, suppliers, customers and dependencies that could be exposed. Record why apparently relevant populations were excluded. Use stable identifiers so that scenario outputs can be linked to E1-2 risk disclosures, E1-3 resilience, E1-5 actions, E1-1 transition plan and E1-11 financial effects.

Scenarios should be sufficiently different to test vulnerability and strategic choices. For physical risk, a high-emission pathway is useful because it explores more severe hazards and adaptation needs. For transition risk, a 1.5°C no- or limited-overshoot pathway tests rapid policy, technology and market change. Additional intermediate or disorderly pathways may be useful where they affect decisions.

The source and version should be controlled. The reporting file should record the provider, publication date, temperature outcome, policy assumptions, geography, variables, downscaling or adaptation, and why the scenario is relevant. Do not describe a scenario as “1.5°C” based only on its title; confirm the underlying temperature and overshoot characteristics.

ESRS uses short, medium and long-term concepts, but a climate assessment should explain the entity-specific horizons used and why. A two-year short term may align to the operating plan, a five-year medium term to the strategic plan and a longer term to asset lives or climate targets. Different risk pathways may need different horizons.

Avoid truncating physical risk at the financial forecast horizon if long-lived assets, concessions or products remain exposed. Also avoid publishing a 2050 transition narrative without near-term policy, market and investment consequences. The time-horizon bridge should connect ESRS terminology, scenario years, transition-plan milestones, financial planning, asset useful lives and E1-11 financial-effect periods.

Exposure asks whether the asset, activity or dependency is located or positioned where a hazard or transition event can affect it. Sensitivity asks how strongly it would be affected. Adaptive capacity asks whether the undertaking can prevent, absorb, respond to or recover from the effect.

A site may be exposed to extreme heat but not highly sensitive because the process is temperature controlled and power supply is resilient. Another site may have low direct flood exposure but high sensitivity because the only access road and supplier corridor are exposed. A transition-exposed product may be resilient if it can be redesigned quickly and customers will accept the replacement; a similar product may create stranded-asset risk where technology, contracts and CapEx are inflexible.

Qualitative analysis can be decision-useful when it uses defined criteria, evidence and challenge. It can compare scenarios, identify vulnerabilities, rank populations and explain strategic implications. It is weak when it relies on generic global narratives and labels all risks “medium”.

Quantification is most valuable where the amount could change strategy, capital allocation, financial reporting, financing or disclosure. It can include asset carrying amounts at risk, revenue exposure, production losses, adaptation cost, carbon cost, margin impact, CapEx, potential liabilities or scenario ranges. Quantification should not create false precision. Use ranges and sensitivities where uncertainty is significant and explain what is and is not modelled.

The resilience conclusion should answer whether the strategy and business model are prepared for and can adapt to material climate risks over the relevant horizons. It should explain implications for strategy, how scenario effects - if used - inform responses, how the transition plan and mitigation/adaptation actions contribute, significant uncertainty and the capacity to adjust.

A conclusion should not simply state “the business is resilient”. It should identify which parts are resilient, which are vulnerable, what actions are required, what resources are available, where dependencies or uncertainty remain and what decisions have been made. The analysis may be updated when the climate IRO assessment is updated rather than automatically re-run every year, but the undertaking should monitor events that invalidate the prior conclusion.

Figure 2. Preserve one evidence chain from climate drivers and exposure through resilience to anticipated financial effects.

E1-11 uses the risk and scenario work to disclose anticipated financial effects. The connection should be explicit: which hazard or transition event affects which asset or revenue stream, under which time horizon and assumption, and how the amount was calculated. Physical-risk disclosures may include assets and net revenue at risk and adaptation coverage. Transition-risk disclosures may include carrying amounts at risk, potential stranded assets using a 1.5°C scenario, mitigation coverage, potential liabilities and revenue at risk.

Financial-effect models should reconcile populations to financial statements and planning. Where a scenario assumption differs from an impairment test, budget or valuation, document why. The sustainability disclosure may address broader anticipated effects than recognised accounting amounts; it should not imply that recognition or measurement criteria are the same.

Scenario analysis is a model-governance activity as well as a climate exercise. Assign clear owners for scenario selection, hazard/transition data, asset populations, financial quantification, strategic interpretation and disclosure. Separate model preparation from review. Record expert involvement, management challenge, assumptions changed, decisions made and open limitations.

The administrative, management and supervisory bodies should receive the material conclusions and strategic implications, not a technical appendix without decisions. Approval evidence should show that the governing body understood significant uncertainty, financial exposures, dependencies and the actions required.

A strong first-year climate scenario and resilience process is specific before it is sophisticated. It identifies the assets, activities and dependencies at risk, selects contrasting pathways for a clear decision purpose, uses time horizons that match the business model, distinguishes exposure from sensitivity and adaptive capacity, quantifies the highest-value questions and connects the conclusions to strategy and anticipated financial effects. Complexity can increase over time, but the evidence chain, governance and transparent limitations should be present from the first year.