Climate And Sustainability Risks And Opportunities (Part 2 Of 2)
Make Climate Scenario Analysis Your Friend
BY NGIAM SHING SHIAN
19 Aug 2026
TAKEAWAYS
IFRS S2 requires companies to use climate-related scenario analysis to assess business resilience and inform strategic interventions, but it does not prescribe the scenarios, modelling approach or output metrics.
Disclosures by many Singapore-listed companies remain narrative and qualitative in nature. This article looks at the various approaches that can help companies move toward financial impact quantification.
Part 1 of this article discusses the role of extra-financial data in assessing a company. This article continues the conversation.
While IFRS S2 requires companies to use climate-related scenario analysis to assess business resilience and inform strategic interventions, it does not prescribe the scenarios, modelling approach or output metrics. In fact, IFRS S2 has dropped TCFD’s specification of a “2°C or lower scenario”.
Scenario analysis is not scary. It is your friend. It should help your business beyond mere compliance. If it doesn’t, chances are, you are not doing it right. But fret not, there is grace in this journey.
Through the proportionality principle, an entity with limited data or skills can use a qualitative narrative assessment. The expectation is that through an iterative learning process, companies will develop capabilities over time, and move toward a more quantitative approach.
APPROACHES TO CLIMATE SCENARIO ANALYSIS
Today, most disclosures by companies in Singapore remain narrative and qualitative rather than quantified financial-impact figures. In general, financial institutions are more mature in their reporting because of the Monetary Authority of Singapore (MAS) regulations. The Environmental Risk Management (ENRM) Guidelines (2020) drove financial institutions toward climate stress-test and Value at Risk (VaR)-type metrics, for example, capital and credit portfolio impact under scenarios. In March this year, MAS issued three Guidelines on Environmental Risk Management – Transition Planning for banks, insurers and asset managers. These will take effect from September 2027.
Not surprisingly, across the board globally, companies report a wide variety of metrics that represent the highest exposure to climate-related risks and opportunities for their particular contexts. Some indicative, non-exhaustive financial metrics include:
Earnings at Risk: EBITDA, EBIT or profit exposed to climate-related risks;
Operating Cost Impact: Increase in operating expenditure (for example, energy, insurance, maintenance);
CapEx Required: Capital investment required for mitigation or adaptation;
Transition Cost: Cost of complying with decarbonisation policies;
Asset Impairment/Write-down Exposure: Potential reduction in carrying value of assets under scenarios, stranded assets;
Risk Premium Cost: Increase in financing cost that scales with risk exposure;
Insurance Cost Increase: Higer insurance premiums due to climate risk;
Green Revenue: Revenue from low-carbon products and services;
Energy Efficiency Improvement: Reduction in energy consumption or intensity;
Climate VaR: Potential financial losses to an asset, company or investment portfolio caused by physical climate hazards and low-carbon economic transitions.
HOW TO DO CLIMATE SCENARIO ANALYSIS
So how do we arrive at such metrics, if we want to advance beyond purely qualitative scenario analysis?
Step 1: Assess your circumstances and understand your portfolio
List your portfolio of business units or activities, mapped them to the respective industries and geographies. This helps to contextualise the possible physical and transition risks and opportunities.
Research and think through what these main risks and opportunities are, according to your defined short-, medium- and long-term time periods.
The most impactful risks and opportunities should surface, usually based on scale, severity and likelihood.
If you discover a high level of exposure to these risks, you might want to invest more resources to do a more comprehensive study and quantify the impacts.
Step 2: Select inputs and scenarios
Select scenarios that include these main risks and opportunities that you have identified. For example, if energy cost is a key risk, then perhaps IEA’s scenarios would be suitable. If you have significant assets situated in places with high flood risk, then physical risk modelling using data sets that provide sufficient granularity might be your immediate priority.
Understand the assumptions behind the various publicly available climate scenarios before selecting the right one for your analysis.
If you have your own data and projections, such as customer demand, they should be used to supplement these scenarios to better meet your own needs.
You can analyse your physical and transition risks separately and then combine their impacts.
Step 3: Determine the analytical choice. Besides a qualitative analysis, here are some quantitative approaches:
Sensitivity analysis: Vary one variable while holding everything else constant. Start with a key climate variable (example, electricity price). Choose a sensitivity range (example, up to 20% increase), estimate the operational impact, then estimate the financial impact. This is the simplest and most transparent approach, although it does not consider the interactions and dependencies among the factors.
Asset-level physical risk modelling: For companies with significant real estate, asset-level physical risk modelling can be prioritised. There are global models such as Coupled Model Intercomparison Project (CMIP). Where greater granularity is needed, there are also regional models such as SINGV-RCM and various tools including commercial ones like MSCI, S&P and XDI.
Scenario financial modelling:
This entails changing an entire future world instead of just one variable. Taking NGFS as an example, there are online data explorers such as NGFS IIASA Scenario Explorer and NGFS Climate Impact Explorer. The NGFS scenarios have key model outputs under transition risk variables, chronic physical risk variables and macro-financial variables, giving you a coherent macro/transition pathway, but you still have to layer physical risk models and perhaps your own demand assumptions, for example, to meet your own analysis needs.
Climate VaR is a quantitative risk metric that estimates potential financial losses to an asset, company or investment portfolio caused by physical climate hazards and low-carbon economic transitions. Institutional investors sometimes express this as the present value of climate-adjusted costs relative to enterprise value. (In MAS Notice 637, VaR is defined “in relation to a portfolio of instruments, means the maximum expected loss on the portfolio of instruments resulting from market movements over a given time horizon at a particular confidence level”.)
Suitable valuation models such as the Discounted Cash Flow (DCF) can be deployed in the quantification of climate-related impacts. There are other valuation models including Monte Carlo DCF and Real Options Valuation. DCF is one of the most common valuation approaches now. It has four main components: business plan, terminal year normative cash flow, long-term annual growth rate (LTGR), and weighted average cost of capital (WACC). These components forecast cashflows, timing and industry-specific risk exposure.
Step 4: Use the results of scenario analysis to assess climate resilience
Identify potential response.
Assess the implications for company strategy and business model, as well as capacity to adjust or adapt.
Disclose how and when the scenario analysis was carried out including inputs used, and key assumptions.
STRATEGIC VALUE FOR LEADERSHIP ACTION
Early reporters deploying scenario analysis have already surfaced some useful lessons. Capacity and skills-related challenges include incorrect understanding of climate pathways, difficulty in translating global climate scenarios into business-relevant impacts, and then translating impacts to financial or operational consequences. There could also be a tendency to cherry-pick scenarios that are easier or rosier rather than what are truly business-relevant.
Company leaders are understandably beleaguered by rapidly advancing AI technology, lacklustre macroeconomic conditions and geopolitical tensions, so immediate survival is top of mind. The prevalent sentiment is well-captured by this statement from one of our clients, “How to talk about the future if I cannot survive tomorrow?”
Indeed, current business planning horizons conflict with the long-term nature of climate scenario. This is a real tension. Nonetheless, it must be overcome as the prevalent short-termism of businesses is what has brought us to where we are today.
To top it off, there is still the fear of alarming stakeholders with a high Climate VaR if your assumptions are too conservative – and, on the other hand, the fear of being accused of greenwashing if you are too optimistic.
This is where we need to appreciate the value of a scenario analysis done correctly. The scenario process provides the time and space for views to be aired, shared and debated. Doing so helps management teams understand their changing worlds, build consensus, and act on their insights. Bounded rationality, siloed thinking, groupthink and short-termism – common maladies of organisations – are hopefully sufficiently curbed in such an exercise through agreed openness and skilled facilitation. Indeed, the key to scenarios is the power to open and change mindsets of decision makers so that they pay attention to novel, less comfortable or weaker signals of change and prepare for discontinuity and surprise.
While the direction of the current trajectory of climate change might not be a surprise, given the many clear signals, what might catch companies on the back foot might be the speed and intensity of this change.
It can look daunting, but we can all start from where we are, as long as we start. ISSB standards and climate models are also still evolving, still improving. While we cannot be perfect, we can use it as our north star.
Delve deeper into financial impact quantification, and why climate scenario analysis should have a strategic role in every business.
