ISSB S2 deep dive: what climate scenario analysis needs to show investors
Most organisations can produce a climate scenario analysis, but fewer can explain why it should change how a lender, insurer, or investor sees their business.
In this article, part of our series on ISSB and CSRD, Senior Consultant Allegra Long discusses how ISSB S2 is impacting how organisations produce their climate scenario analysis.
She unpacks four key insights that have surfaced from our recent work with clients, covering different futures, financial exposure, assumptions and opportunities.
How is ISSB S2 impacting how organisations produce their climate scenario analysis?
ISSB S2 is forcing organisations to ask a set of harder questions:
Do our chosen scenarios reveal different futures?
Do the metrics used explain financial exposure?
Can the assumptions behind the numbers survive scrutiny?
Are opportunities being considered as much as risks?
Banks and insurers are already pricing climate risk into lending decisions and premiums. The PRA's new climate risk management policy is pushing this further into how financial institutions assess borrowers. An organisation that can't explain its exposure to physical and transition risk is a harder credit or insurance decision. This is starting to determine who gets financing on good terms.
Under the previous TCFD approach, scenario analysis often meant picking a few scenarios, assessing exposure, and reporting the findings. Now, under ISSB S2, it means:
asking whether the analysis helps users of general-purpose financial reports understand how climate-related risks and opportunities could affect the business's prospects; and
connecting climate drivers to the organisation’s business model, strategy, financial planning, metrics, and targets.
We work with clients on climate scenario analysis, so have had a front-row seat to the impacts of these changes. Here are four interesting insights that have surfaced from our recent projects:
Insight #1: Scenarios are most useful when they reveal different business futures
A common weakness in climate scenario analysis is that the scenarios are described clearly, but the business implications look broadly the same.
For example, if a higher warming pathway, a middle of the road pathway, and a net zero-aligned emissions pathway all produce similar conclusions, the analysis may not be testing resilience in a meaningful way.
The value comes from understanding where the futures diverge. To continue with the above example:
In a net zero-aligned scenario, transition drivers such as carbon pricing regulation, energy mix, technology shifts or customer demand may create both costs and opportunities.
In a higher-warming scenario, however, physical hazards may become more prominent, with implications for assets, supply chains, operations and insurance.
The analysis should make those different futures visible.
Additionally, ISSB S2 is interested in both resilience and exposure. A useful scenario output should help you to answer the following questions:
Where is the organisation most sensitive to climate change?
Which assumptions drive the results?
What would management need to monitor or change if the external environment moved in a particular direction?
We can help you reduce future costs and make informed decisions by understanding how climate impacts might affect your organisation over time. To find out more, fill out the form below to browse our service document on climate risk assessments.
Insight #2: Climate metrics need to explain financial exposure, not sit beside it
ISSB S2 brings climate disclosure closer to enterprise value. This creates a practical challenge: climate metrics must do more than demonstrate activity or coverage. They must now help explain how climate-related risks and opportunities could affect the organisation’s financial position, financial performance and cash flows. Here are some examples:
Emissions data could inform carbon cost exposure.
Energy use could indicate sensitivity to price volatility or decarbonisation investment needs.
Site-level hazard scores could identify where adaptation planning would protect operational continuity.
Market and product indicators could highlight where climate transition creates opportunities as well as risks.
A strong disclosure narrative is: "these indicators help us understand where value could be affected, how material those effects could be, and what we are doing in response".
This creates a bridge between scenario analysis and investor-useful reporting.
It's also worth using the same language lenders and insurers use when they assess resilience: cash reserves, cost of capital, insurance premiums, etc. Metrics that connect to these terms are what make a disclosure credible to the people deciding whether to finance or insure the business.
For more on this topic, we recommend our recent article breaking down effective ways to make a business case for decarbonisation to CFOs and finance teams.
Insight #3: Assumptions are part of the disclosure, not just the spreadsheet
Scenario analysis relies on judgement. Organisations need to decide:
which scenarios to use;
which time horizons are relevant;
which sites, products or value-chain areas to prioritise;
how to translate climate drivers into business impacts; and
how to treat management actions such as decarbonisation or adaptation investment.
These assumptions should not disappear into a model. Under ISSB S2, users need to understand the information, inputs and assumptions used to assess climate resilience. This does not mean disclosing every calculation but instead being clear about the basis of the analysis and where uncertainty sits.
Here is where the challenges are:
If a company assumes the same decarbonisation pathway across all scenarios, the analysis can flatten the difference between futures.
If physical risk scoring is disconnected from asset value or operational sensitivity, the output may identify exposure but not financial relevance.
If assumptions are not documented appropriately, the analysis is harder to repeat, assure or explain to senior stakeholders.
It's worth getting expert advice on refining your disclosures. Fill out the form below to download our ESG data and reporting service brochure and find out how we can support you with this.
Insight #4: Opportunities need the same rigour as risks
Physical hazards, carbon prices and regulatory pressures are concrete and often easier to model. Opportunities can feel less precise, particularly where they depend on customer demand, product development, market positioning or avoided costs.
ISSB S2 goes beyond risk disclosure, asking organisations to explain climate-related risks and opportunities that could reasonably be expected to affect prospects. Opportunities should be assessed with the same discipline. Ask:
What is the driver?
What part of the business could benefit?
What evidence supports the opportunity?
What time horizon is relevant?
What would need to be true for it to materialise?
This is particularly important for organisations whose transition exposure is not only a cost story. Where lower-carbon products, resource efficiency, energy optimisation or resilient supply chains create strategic opportunities, scenario analysis can help bring them into the same conversation as risk management and financial planning.
The MyPathways module of our MyVerco platform can help with scenario analysis. Once your decarbonisation projects have been uploaded, they can be grouped into scenarios and assessed against each other. The platform gives you the ability to drill into each scenario through interactive reporting, allowing you to understand the consequences of different choices and identify the most effective route to achieve your decarbonisation goals.
From disclosure requirement to resilience capability
ISSB S2 will push climate disclosures towards greater consistency, but the real value comes when organisations use the standard to build a clearer view of climate resilience. This includes:
where value could be affected;
how material the impact could be;
how confident the organisation is in its assumptions; and
what actions would strengthen its position.
This is what will make ISSB S2-aligned reporting credible. More importantly, it's what will make the organisation easier to finance, insure and invest in, at a credible disclosure-aligned level.
Breathe easier: Chat to the experts
We can help you assess climate-related risks and opportunities, develop ISSB S2-aligned scenario analysis, quantify financial impacts, strengthen metrics and targets, and translate technical findings into credible climate disclosures.
Even if you're not sure where to start, we offer a free, 30-minute consultation to talk through your next steps.
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