Climate scenario analysis (TCFD and IFRS S2): a tool for risk management

Climate change is no longer an external variable or a distant risk: it shapes the strategy, profitability and continuity of companies. Increasingly frequent physical events, accelerated regulatory change and the transformation of markets force organisations to anticipate developments and make decisions based on plausible future scenarios.

In this context, climate scenario analysis, popularised by the framework of the Task Force on Climate-related Financial Disclosures (TCFD), has established itself as a key tool to identify risks and opportunities, assess their financial impact and reinforce business resilience. In this article we explain what it is, where it stands today after the TCFD was wound down, and how to apply it in practice.

What is the TCFD and why do we now talk about IFRS S2?

The Task Force on Climate-related Financial Disclosures (TCFD) was a working group created in 2015 by the Financial Stability Board (FSB) that published recommendations in 2017 for disclosing climate-related risks and opportunities with a financial impact, structured around four pillars: governance, strategy, risk management, and metrics and targets.

It is important to know where it stands today: the TCFD completed its mandate and was disbanded in 2023. Since 2024, monitoring of corporate climate disclosure has been taken over by the IFRS Foundation through the ISSB (International Sustainability Standards Board). The TCFD recommendations are now fully incorporated into the IFRS S2 (climate-related financial disclosures) and IFRS S1 standards, which have become the global baseline for climate risk disclosure, adopted or in the process of being adopted by more than 30 jurisdictions.

In practice this means scenario analysis remains just as relevant: a company applying IFRS S2 meets the TCFD recommendations. In Europe, this same approach is reflected in the ESRS E1 standard of the CSRD. That is why, throughout this article, we refer to the "TCFD framework" as the reference methodology, now continued by IFRS S2 and the ISSB.

What is climate scenario analysis?

Climate scenario analysis is a structured methodology that allows companies to assess how different plausible climate futures affect their business model, financial position and strategy.

It is not a theoretical exercise, but an advanced risk management mechanism that translates climate variables (temperature, regulation, carbon pricing, resource availability) into quantifiable financial impacts. Organisations that apply it properly identify vulnerabilities before they materialise and make decisions based on forward-looking data.

Why is it key for corporate risk management?

Climate change introduces systemic climate risks that simultaneously affect operations, supply chains, physical assets and access to financing. Scenario analysis makes it possible to assess them in a structured, comparable way, reducing exposure to extreme events, avoiding investments that may become obsolete and reinforcing the organisation's financial resilience.

What types of climate risk does the TCFD framework analyse?

The framework distinguishes two main categories of risk:

Physical risks

These stem from the direct impacts of climate change:

• Rising average temperatures
• Prolonged droughts
• Floods and extreme weather events
• Water stress

They directly affect facilities, logistics, workforce productivity and the availability of raw materials.

Transition risks

These arise from the shift towards a low-carbon economy:

• Stricter climate regulation
• Rising carbon prices (for example, through the emissions trading system)
• Accelerated technological change
• Evolving customer and investor preferences

Carbon-intensive companies are the most exposed, but no sector is exempt.

Which climate scenarios should you use?

The framework recommends analysing at least three contrasting climate scenarios. The aim is not to predict exactly how the climate will evolve, but to assess the robustness of the corporate strategy against different regulatory, physical and market contexts.

1.5°C scenario: rapid and orderly transition

• Accelerated implementation of climate and regulatory policies.
• Greater fiscal and regulatory pressure on emissions.
• Strong push for technological innovation and decarbonisation.
• Implications: the need for early investment, transformation of the business model and a competitive advantage for the most agile organisations.

2°C scenario: gradual transition

• Progressive introduction of regulatory and market measures.
• Phased changes in demand and value chains.
• Greater room for adaptation for carbon-intensive sectors.
• Implications: progressive adjustments in costs, operations and positioning.

Above 3°C scenario: climate inaction

• Significant delay in adopting mitigation policies.
• Increase in extreme climate events and physical risks.
• Greater market volatility and operational disruption.
• Implications: severe impacts on assets, supply-chain disruptions and increased financial and insurable risks.

Why analyse several scenarios?

• It lets you identify risks and opportunities under divergent contexts.
• It helps test the resilience of the strategy.
• It improves medium- and long-term decision-making.
• It strengthens the credibility of the analysis with investors, regulators and auditors.

How is a climate scenario analysis carried out step by step?

Carrying out a scenario analysis requires a structured approach that connects climate data with strategic decisions. These are the key steps:

1. Define the scope and time horizon

The analysis should cover own operations, the supply chain and key markets, with short-term (5 years), medium-term (10-15 years) and long-term (up to 30 years) horizons.

2. Identify the relevant climate variables

You select critical variables such as the carbon price, energy demand, water availability or regulatory costs.

3. Translate climate impacts into financial impacts

This is where the biggest step in maturity occurs: risks are converted into financial metrics (EBITDA, CAPEX, OPEX and asset valuation).

4. Assess strategic resilience

You analyse whether the current strategy is viable under each scenario and what adjustments are necessary.

What is the relationship between the TCFD framework, IFRS S2 and the CSRD?

The TCFD framework is the methodological basis of both IFRS S2 and the European ESRS standards on climate risk. Companies subject to the CSRD must carry out a double materiality assessment that integrates climate scenarios consistent with this approach. Implementing scenario analysis today accelerates future regulatory compliance and reduces reporting costs.

Common mistakes in climate scenario analysis

Although it is a powerful tool, applying it incorrectly can limit its value. The most frequent mistakes are:

• Treating scenarios as narrative exercises with no financial impact.
• Using time horizons that are too short.
• Failing to integrate the results into decision-making.
• Outsourcing the analysis without internal knowledge transfer.

Leading companies integrate scenarios directly into their strategic and financial planning.

Scenario analysis as a pillar of corporate resilience

Climate scenario analysis, born with the TCFD and now continued by IFRS S2 and the ISSB, has established itself as a key tool for turning climate uncertainty into competitive advantage. Organisations that integrate it systematically anticipate physical and transition risks, improve the quality of their decisions and strengthen their financial stability. In an increasingly demanding regulatory environment, applying it is no longer optional and becomes a differentiating factor.

Frequently asked questions about climate scenario analysis

Is the TCFD still in force?

The TCFD as a working group was disbanded in 2023, but its recommendations remain fully in force, now incorporated into the ISSB's IFRS S2 and IFRS S1 standards and reflected in the ESRS E1 standard of the CSRD.

Is it mandatory to carry out climate scenario analysis?

It depends on the applicable framework. For companies subject to the CSRD or reporting under IFRS S2, scenario analysis is a requirement; for the rest, it is a highly recommended practice that is increasingly demanded by investors.

How often should it be updated?

It is advisable to review it at least every two years, or whenever significant regulatory or market changes occur.

Can scenario analysis be automated?

Yes. Specialised digital tools make it possible to model scenarios, connect primary data and generate auditable reports.

Platforms such as Manglai's carbon footprint platform make it possible to connect climate scenarios with real emissions, energy and water data to comply with IFRS S2 and the CSRD.