Which scenarios and time horizons to use

What this means in practice

Scenario analysis is the part of ASRS reporting where you make the most choices of your own, and where you have to explain the most about why you made them. So there are two things to keep apart: what the standard requires, and how Trace goes about meeting it.

What the standard requires. At least two possible future states: one consistent with limiting warming to 1.5°C, and one at a level well above 2°C. Then, for the analysis itself: which scenarios you used and where they came from, whether they align with the latest international agreement on climate change, why you chose them, the inputs and assumptions, the time horizons, the scope of operations covered, and the reporting period in which the analysis was carried out. The approach is also to be commensurate with your exposure and with the skills, capabilities and resources available to you, which is where proportionality does real work.

What Trace uses, and why. SSP1-RCP2.6 as the 1.5°C-consistent pathway: aggressive transition, strong and early policy action, so transition risk is elevated and physical risk is contained. SSP2-RCP4.5 as the high-warming pathway, described as approximately 3°C: broadly a continuation of current policy, so physical risk intensifies and transition pressure is milder. For Australian physical risk, NARCLiM provides regional projections that map onto these pathways.

Two useful cross-references if your auditor or your board asks how this relates to more familiar frameworks. SSP2-RCP4.5 corresponds closely to the NGFS Current Policies scenario as modelled in REMIND-MAgPIE, so if someone asks whether you have used NGFS, the honest answer is that your high-warming pathway is aligned with it. And the pairing produces the analytical contrast the standard is designed to surface: a transition-heavy future against a physical-risk-heavy one.

Every risk is assessed under both pathways. This is Trace's method, for two reasons. The disclosure has to show how exposure changes between the two future states, and a risk assessed under only one of them has no change to show. And an assurance provider following the analysis will ask why a risk appears under one pathway and not the other, which is a much easier question to answer if it appears under both.

Proportionality applies to the depth of each assessment, not to the coverage. A risk that is genuinely immaterial under a pathway gets a line recording that conclusion and the reason. It does not get a blank.

Time horizons. AASB S2 does not mandate specific years. It requires you to specify the horizons you used and to explain how they are defined and how they connect to your strategic planning and capital allocation cycles. Trace's standard set:

• Short term, to 2030
• Medium term, to 2040
• Long term, to 2050

Two adjustments worth making. Where you hold long-lived assets, extend the long-term horizon to capture the tail: railways, pipelines, port and water infrastructure, and real estate all have useful lives that run past 2050, and for those a 2100 horizon on physical risk is appropriate and increasingly expected. Where operations are highly adaptable, as in most professional services, 2050 is sufficient and extending further adds no information.

The horizons should also line up with how the business actually plans. If your capital planning runs on a five and fifteen year cycle, say so and relate the horizons to it, because the standard asks how the horizons connect to strategic planning rather than just what they are.

Reusing TCFD or third-party scenario analysis. You do not need to start again. Existing work can carry a substantial part of the requirement, and the test has four parts:

Coverage. Does it include a pathway consistent with 1.5°C and one well above 2°C? Two mid-range scenarios do not satisfy the requirement however well executed they are.

Currency. Was it done recently enough that the inputs still hold, and does it reflect your current footprint rather than a materially different one?

Scope. Does it cover the operations you intend to disclose against? A group-level analysis that omits a division you now have to report on leaves a gap.

Traceability. Can you state the source, the inputs and assumptions, why those scenarios were chosen, and the period in which the analysis was carried out? Those are disclosure requirements in their own right, and third-party work often has the analysis without the provenance.

Where it passes, map each identified risk to the relevant findings, add analysis for risks the earlier work did not cover, and document why the existing analysis is appropriate. Where it fails on coverage, it is still a strong starting point for the risk list even if the scenario layer has to be redone.

How ratings should move. In outline: transition risks generally rate higher under 1.5°C, physical risks higher under the high-warming pathway, and litigation exposure tends to follow transition. This is a pattern and not a rule, and a departure from it is fine where the analysis genuinely points that way and you say why.

What evidence you need

1. A statement of the two pathways used, their source, and why they were chosen
2. The inputs and assumptions, including any regional physical risk dataset and the version or vintage of it
3. The time horizons and how they were defined, with the link to your planning and capital allocation cycles
4. The scope of operations the analysis covered, and anything deliberately excluded
5. The reporting period in which the analysis was carried out
6. A rating for every risk under both pathways across each horizon, with the reasoning where a rating moves
7. Where a risk is assessed as immaterial under a pathway, the recorded conclusion rather than a blank
8. Where third-party or prior analysis was reused, the assessment of why it is appropriate, against coverage, currency, scope and traceability

Common mistakes

• Using one scenario. Two is the minimum.
• Two scenarios without genuine contrast. Two mid-range pathways produce similar answers and defeat the purpose of the exercise. One of them has to be 1.5°C-consistent.
• Identical ratings across both pathways. Reads as though the scenario layer was not really applied, and it is the first thing a reviewer checks.
• Identical ratings across all horizons. Same problem in the time dimension: it implies no forward-looking analysis was done.
• Transition risk rated higher under the high-warming pathway with no explanation. Sometimes correct, usually an error, always challenged when unexplained.
• Describing the scenario pair as what the standard requires. The requirement is two pathways, one consistent with 1.5°C and one well above 2°C. SSP1-RCP2.6 and SSP2-RCP4.5 is one way of meeting it, and the disclosure is stronger when it says why those two were chosen.
• Blanks where a risk was not assessed under a pathway. A recorded conclusion of immaterial is compliant. A gap is a gap.
• Reusing third-party analysis without its provenance. The source, inputs, assumptions and period are themselves disclosure requirements.
• Horizons that do not reach the life of the assets. A 2050 long-term horizon on infrastructure with a sixty-year life understates the physical exposure by construction.

Trace's viewpoint and approach

Keep the requirement and the choice visibly separate. The standard asks for two pathways, one consistent with 1.5°C and one well above 2°C. SSP1-RCP2.6 and SSP2-RCP4.5 is our answer to that, not the question, and saying so in the disclosure is better than leaving it implied, because the standard asks why the scenarios were chosen.

Assess every risk under both pathways. Where a risk is genuinely immaterial under one of them, record that as the conclusion and the reason rather than leaving it blank. Depth scales with exposure; coverage does not.

Match the horizons to the assets, not to convention. Three horizons to 2050 suits most businesses. It systematically understates exposure for anything with a multi-decade asset life, and that is the sector where physical risk matters most.

Rating consistently across pathways is the part that most benefits from someone who does this repeatedly. Deciding whether a given risk gets worse, better or stays flat between a 1.5°C world and a 3°C one, for your assets in your region, is a judgement that needs climate and sector context rather than effort, and inconsistent movements across a register are visible to a reviewer reading it as a whole.

Scenario work is the most reusable thing in the whole assessment. Choose the pair and the horizons on the basis that you will still be using them in year three, because changing them later means explaining a change in method as well as a change in rating.

Frequently asked questions

Q: Do we have to use the NGFS scenarios? No. AASB S2 does not mandate any scenario set. It requires one pathway consistent with limiting warming to 1.5°C, a second well above 2°C, and enough disclosure for a reader to understand what you used and why. NGFS scenarios are widely used and well understood by assurance providers, which makes them a defensible choice. For what it is worth, SSP2-RCP4.5 corresponds closely to the NGFS Current Policies scenario as modelled in REMIND-MAgPIE, so a high-warming pathway built on it is aligned with NGFS whether or not you describe it in those terms.

Q: Can we assess physical risks only under the high-warming pathway, and transition risks only under 1.5°C? It is a reasonable question and we are asked it regularly, because that is broadly where each type of risk concentrates. Our method is still to assess every risk under both pathways. The disclosure has to show how exposure changes between the two future states, and a risk rated under only one of them has no change to show. An assurance provider following the analysis will also ask why a risk appears under one pathway and not the other. The saving is better made on depth than on coverage: where a risk is genuinely immaterial under a pathway, record that conclusion and the reason in a line rather than analysing it in full.

Q: How far out do we need to look? To 2050 for most businesses, using short, medium and long horizons at 2030, 2040 and 2050. Extend the long-term horizon where you hold long-lived assets, such as infrastructure, pipelines, port facilities or property, because the physical risk tail sits beyond 2050 and a shorter horizon understates it by design. Whatever you choose, explain how the horizons relate to your strategic planning and capital allocation.

Q: How often do we need to redo the scenario analysis? There is no prescribed frequency. Review it annually as part of the assessment update, and revise it substantively when new regional physical risk data becomes available, when your operating footprint changes materially, or when a rating no longer looks right. Keep a record of what changed, because the Risk Management disclosures ask whether and how your processes have changed since the prior period.

Q: We have a TCFD report from two years ago. Is it usable? Possibly, and the answer turns on four things: whether it covers a 1.5°C-consistent pathway and one well above 2°C, whether the inputs and your footprint are still current, whether its scope matches what you now have to report on, and whether you can state its source, inputs, assumptions and the period it was carried out in. That last one is where third-party work most often falls short, because the analysis exists and the provenance does not.

Relevant links

• What materiality threshold should you use?