Three futures, one strategy
Updated: 4 hours ago
IFRS S2 requires climate-related scenario analysis; the simplified ESRS E1 makes it optional. What must a resilience assessment show under each, and how should its results relate to the numbers in the financial statements?
The physical evidence keeps moving. Copernicus reported that 2025 was 1.47°C above pre-industrial levels, after 1.60°C in 2024, and that 2023–2025 was the first three-year period to average more than 1.5°C (Copernicus, January 2026). The IPCC's best estimate is that warming reaches 1.5°C in the near term, and its modelled pathways that limit warming to 1.5°C with no or limited overshoot cut global greenhouse gas emissions by 43% from 2019 levels by 2030 (IPCC AR6 Synthesis Report, 2023, B.1, B.6 and Table SPM.1).
For a company, those numbers are not forecasts but inputs. They describe the range of futures its strategy must survive. Scenario analysis is how a company tests that, and the reporting standards now treat it differently: IFRS S2 requires it, while the simplified ESRS adopted in 2026 leave it to the undertaking.
Why the issue arises
A resilience assessment asks whether the strategy and business model can absorb climate-related change: a carbon price that rises faster than planned, a flood that closes a depot, a customer that switches supplier. Scenario analysis makes that question concrete by running the business through several plausible futures rather than one expected one.
The difficulty is that two rulebooks, and two versions of one of them, ask for different things. ESRS paragraph numbers differ between the 2023 set (Delegated Regulation (EU) 2023/2772) and the 2026 set (Delegated Regulation (EU) 2026/1563), so each reference below names its set.
What is clear
IFRS S2 requires scenario analysis. The entity shall use climate-related scenario analysis to assess its resilience, with an approach commensurate with its circumstances (IFRS S2.22, B1–B2). It discloses the results, including the implications for strategy, the significant areas of uncertainty and its capacity to adapt (IFRS S2.22(a)), and how the analysis was done: scenarios, whether one is aligned with the latest international agreement on climate change, assumptions, time horizons and scope (IFRS S2.22(b)).
Proportionality is built in. A qualitative narrative may be enough for an entity without the skills or resources for quantitative work, but an entity with high exposure and the necessary resources must use a more advanced quantitative approach (IFRS S2.B17).
Frequency differs by element. The analysis can follow the strategic planning cycle, but the resilience assessment itself is updated every reporting period (IFRS S2.B18).
The 2023 set of ESRS requires it too. Climate hazards are identified considering at least high-emission scenarios, transition events considering at least a 1.5°C scenario with no or limited overshoot, and the undertaking explains how it used scenario analysis (ESRS E1.20–21, 2023 set), with resilience results disclosed under ESRS 2 SBM-3 (ESRS E1.19, 2023 set).
The 2026 set makes it optional. The undertaking may use scenario analysis (ESRS E1 AR 6, 2026 set). If it does, it discloses the scenarios, including whether a high-emission and a 1.5°C scenario were used, the scope, assumptions and timing (ESRS E1.17, 2026 set). The resilience disclosure remains (ESRS E1.19, 2026 set), but need not be re-performed annually unless the risk assessment is updated (ESRS E1 AR 9, 2026 set).
The 2026 set applies to financial years beginning on or after 1 January 2027. For 2026, an undertaking may stay on the 2023 set, adopt early, or use the 2023 set with listed reliefs (Delegated Regulation (EU) 2026/1563, Article 2).
The competing readings
For an EU company moving to the 2026 set, two readings are argued.
Reading 1: drop it. Scenario analysis is now optional, so the cost can go and the resilience disclosure can rest on the risk assessment alone.
Reading 2: keep a proportionate version. The resilience disclosure must still explain the implications for strategy, the significant uncertainties and the capacity to adapt (ESRS E1.19, 2026 set), and the anticipated financial effects disclosures still ask for assets at transition risk and potential stranded assets against a 1.5°C scenario (ESRS E1.40(a), 2026 set).
Reading 1 fails for many companies. It is open to an undertaking with low exposure. But a company that also reports under IFRS S2, voluntarily or because a lender or a non-EU listing requires it, has no choice (IFRS S2.22). And a company with material transition risk still needs a 1.5°C scenario for ESRS E1.40(a) (E1-11 paragraphs 39(a)–(b) and 40(a)–(b) are excluded from the phase-in reliefs). Optional in the standard does not mean unnecessary in the file.
Worked example: Fennrock Haulage Ltd
Fennrock Haulage Ltd runs 420 diesel trucks from depots in Carlow and Waterford, with a 31 December year-end and operating profit of €11.0m. Its Scope 1 emissions are 52,000 tonnes of CO2e a year. It tests its strategy against three 2030 scenarios, each with an illustrative carbon cost passed through in fuel and a fleet transition assumption.
Scenario | €/tCO2e | 2030 tCO2e | Cost €m |
|---|---|---|---|
Orderly 1.5°C | 140 | 31,200 | 4.4 |
Delayed transition | 200 | 44,200 | 8.8 |
Current policies | 45 | 49,400 | 2.2 |
The emissions follow the fleet assumptions: a 40% cut in the orderly scenario (52,000 × 60% = 31,200 tonnes), 15% when the transition is delayed (52,000 × 85% = 44,200) and 5% under current policies (52,000 × 95% = 49,400). The costs are 31,200 × €140 = €4.4m, 44,200 × €200 = €8.8m and 49,400 × €45 = €2.2m.
The current policies scenario is also Fennrock's high-emission case for physical risk. Under it, the Waterford depot, which sits in a flood zone, is expected to lose more operating days each year.
The result that matters is the delayed transition. A late, sharp carbon price on a fleet that has not changed costs €8.8m, 80% of today's operating profit (8.8 ÷ 11.0). The orderly path costs half as much, because the fleet has moved. Fennrock's resilience disclosure says so, explains how flexible its fleet replacement cycle is, and explains the funding it would need to accelerate (IFRS S2.22(a)(iii)).
How it connects to the financial statements
Scenario analysis explores plausible futures; the impairment test uses one. Value in use is based on reasonable and supportable assumptions that represent management's best estimate, giving greater weight to external evidence (IAS 36.33(a)). Fennrock's budget assumes a carbon cost between the current policies and orderly cases, and that is what its impairment test uses.
The two must still be reconciled. IFRS S1 requires data and assumptions to be consistent with the financial statements to the extent possible (IFRS S1.23), and the connections between them to be explained (IFRS S1.21). The haulage unit carries goodwill, so if a reasonably possible change in the carbon cost assumption would remove the headroom, IAS 36 requires the sensitivity to be disclosed (IAS 36.134(f)). In November 2025 the IASB published illustrative examples on reporting uncertainties, using climate scenarios, to improve how existing requirements are applied. They support the application of existing requirements and have no effective date, but the IASB expects companies to make any resulting changes on a timely basis.
What the auditor will look at
The scenario set: sources, whether it includes a 1.5°C and a high-emission case, and why those scenarios suit the business (IFRS S2.22(b); ESRS E1.17, 2026 set).
Proportionality: whether the approach matches the exposure, and whether a qualitative approach is still justified (IFRS S2.B17).
Timing: when the analysis was last run and whether the resilience assessment was updated this period (IFRS S2.B18).
Consistency with the impairment test, useful lives and going concern, and an explanation where assumptions differ (IFRS S1.23).
Sensitivity disclosures for goodwill units where carbon costs are a key assumption (IAS 36.134(f)).
Work it through with our tools
IAS 36 in the Learning Hub: value in use, key assumptions and sensitivity disclosures.
IAS 16 in the Learning Hub: reviewing useful lives when a fleet must be replaced early.
Our IFRS disclosure checklist for FY2026 and FY2027 lets you check the impairment and estimation disclosures item by item.
More Carbon Copy posts are on the Unaddressed! series page.
Scenario analysis does not predict which future arrives. It shows whether the business would survive the ones that might, and it gives the impairment test a frame to be judged against. The 2026 set of ESRS makes it optional; for a company with real exposure, the evidence behind its resilience disclosure still depends on it.
First published in August 2023 and rewritten in October 2026. Fennrock Haulage Ltd and its carbon prices are fictional and illustrative.
