Abstract
This paper critically examines the use of climate-related scenario planning in organizations. Scenario planning is a crucial tool for managing climate risk, strategic development, and organizational learning. However, these benefits can be compromised by low-quality processes and inconsistencies in methods and data. Examination of corporate reporting from 24 major Australian companies reveals significant variability in scenario quality and transparency of scenario planning processes, with implications for stakeholder communication, risk management, and greenwashing. We provide practical recommendations for improving the use of scenario planning to better meet evolving corporate management standards, regulatory reporting requirements, and stakeholder expectations.
Keywords
Climate change mitigation has been recognized as the defining challenge of our time, occupying the attention of governments, corporations, investors, nonprofits, and the community. 1 Failure to successfully navigate the transition to a low-carbon economy will have devastating impacts on society and natural environments. 2 Cascading effects include environmental degradation, heightened social inequality, and economic instability ultimately impacting communities, governments, and ecosystems. 3 Responding to climate change brings both threats and opportunities, including market shifts, operational disruptions, regulatory changes, and opportunities for innovation. 4 Responding to these changes requires organizations to manage for agility to respond to unpredictable regulatory and market developments, 5 enabling them to build resilience to market shocks. Managers who fail to navigate the climate challenge are likely to see major changes to business valuations through stranding of assets, market volatility, altered investor preferences, and physical climate challenges. 6 Furthermore, where investors do not have access to information required to assess climate risk (green-hushing), or when the climate response is misrepresented (greenwashing), informed investment choices cannot be made. 7
In this paper we focus on climate-related scenarios with defined parameters tied to physical climate change and mitigation actions (e.g., specific temperature increases). This form of climate-related scenario planning is a major tool through which companies manage risk and develop strategy and investors in financial markets achieve informed decision-making. 8 Scenarios are not forecasts or predictions; they are coherent narratives about the future. 9 Scenario planning, unlike forecasting, embraces uncertainties and enhances learning rather than focusing on prediction. 10 When done well, scenario planning can enable sensemaking, break down cognitive biases and business-as-usual mindsets, and build capability to make decisions in uncertain environments. 11 Scenarios also provide a context for managers to stress test current strategies and operations under a range of potential narratives 12 representing diverse versions of the future. Understanding risks and opportunities presented through these futures supports a planned transition process and builds climate resilience within companies. 13
Over and above these intrinsic benefits, scenario planning plays a growing role in external communications. 14 For example, stakeholders can better understand the potential impact of different futures on the organization’s financial performance, and the exposure of their investment, when the organization has reported sufficiently detailed transition plans. 15 Indeed, scenario planning is increasingly mandated as part of regulatory reporting requirements. 16 Despite this, existing reporting standards leave details of the scenario planning process to reporting companies themselves. This presents several potential problems: poor-quality processes, lost opportunities for learning, stakeholder confusion, and greenwashing. 17
Without a stronger connection between purpose and methodology, there is also a genuine risk that scenario analysis may become a negative influence on organizational management and stakeholder transparency. For example, when corporate disclosures lack standardization, companies may use them to greenwash by cherry picking scenarios. Overly optimistic scenarios used to complete risk assessments, establish the resilience of strategy, and predict climate impacts could mislead investors and other stakeholders.
In this paper, we illustrate the challenges of scenario planning by critically examining public reporting of climate-related scenario use from 24 Australian companies. We draw on this analysis to summarize how scenarios are currently being used by organizations and to present practical guidance on future scenario use in financial reporting. Before doing so, we provide a historical summary on the use of scenario planning in organizations, with a particular focus on planning for climate change.
Evolution of Climate-Related Scenario Planning
The emergence of scenario planning in business strategy can be traced to the 1960s with the work of Herman Kahn. 18 Employed at the RAND Corporation at the time, Kahn defined a scenario as a “hypothetical sequences of events constructed for the purpose of focusing attention on causal processes and decision-points.” 19 Scenario planning was further popularized by Shell in the 1960s and 1970s; scenario planning was credited with improving the company’s preparation for future disruptions, such as the oil crisis, with retrospective links to preparedness ahead of geopolitical shocks. 20 These early scenario efforts were typically organization-specific and constructed from organic processes. Scenarios have since been used for different purposes over the years and focused on a variety of topics, most recently to support decision-making in response to COVID-19. 21 Other uses of scenario planning include issues related to the military and national security, telecommunications, and sustainability and climate change. 22 As argued by Haigh, “scenario planning is eerily and perfectly suited to climate change, because many climate change trends are long and systemic.” 23
Over the last 50 years, numerous entities have developed scenarios relating to climate change, each fulfilling a specific purpose and therefore not easily substitutable. Scenario planning in the global climate change arena has been evident from the First Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) released in 1990 24 and in every IPCC report subsequently. Over time, international scenario development evolved to form the Representative Concentration Pathways 25 and Shared Socioeconomic Pathways, 26 shaping recent IPCC assessment reports. These scientifically grounded scenarios have proven critical to how society understands climate change and its impacts. 27 Around the world, these IPCC-aligned scenarios are now used by policymakers, business, and academia to guide our knowledge of the mitigation and adaptation requirements associated with climate change. 28
In the last three decades, several organizations—most notably the International Energy Agency (IEA) 29 and the Network for Greening of the Financial System (NGFS) 30 —have developed climate scenarios that apply to a specific sector, offering more granulation than the global scenarios. The IEA scenarios analyze future energy trends (supply and demand) considering the influence of climate change and its mitigation. 31 The NGFS scenarios focus on the financial sector, assisting members to examine potential financial risks and opportunities brought by climate change and the transition to a decarbonized economic future. 32 Some organizations, such as the New Zealand Aotearoa Circle, 33 provide even more granularity, developing sector-level scenarios specific to a nation. Designed to foster a shared vision of New Zealand’s future, the Aotearoa Circle scenarios explore climate change and potential futures of key economic sectors. 34 Scenario narratives constructed at a sector level for a specific nation, which also include some high-level data, are easier to apply to a given business context for strategic planning and policy development.
Operating at an even more granular level are scenario planning processes geared toward an individual organization. Organization-level scenario planning for climate change was pioneered in the 1970s, with 50% of U.S. Fortune 1000 companies reporting that they were using scenario planning by 1981. 35 In the ensuing decades, climate-related scenario planning became more mainstream in the corporate world and accelerated quickly following the 2015 United Nations Climate Change Conference. 36 This conference inspired the release of policies, regulations, and initiatives, such as the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). 37 Adoption of voluntary reporting on climate through the TCFD is now widespread among listed companies. 38 Stakeholders increasingly expect organizations to disclose and manage their climate change risks, opportunities, impacts, and actions, 39 and scenario planning is a foundational component of this process. Building from the TCFD, the recently released International Financial Reporting Standards (IFRS) S2 Climate-related Disclosure standards 40 have cemented the role of climate-related scenarios in contemporary corporate life.
Despite the acknowledged benefits of scenario planning, it is not without its critics, including those who highlight its methodological complexity and lack of consensus on strategic application. 41 A 2023 global survey found that 19% of executives reported using scenarios and contingency planning in their organizations, down from over 60% two decades earlier. 42 Although decreasing numbers of global executives were using scenarios in their strategic management, those who did were increasingly satisfied with the process. 43
Quality Matters: A Critical Look at Scenario Planning Practices
Increased frequency of black-swan events (unforeseen and surprising events that have significant impact 44 ), such as those associated with climate change, require moving away from rigid, risk-averse management systems 45 and building operational agility. 46 There is a view, however, that many businesses are sleepwalking while their operating environment is dramatically shifting. 47 For example, many large energy companies are not significantly diversifying their business models, and neither are the retailers who sell their products. 48 Organizations that fail to keep pace with rapidly changing market conditions put in jeopardy not only their own viability but also our ability to limit global warming. 49 Effective decision-making is required to break through inertia and move organizations forward in uncertain environments.
When conducted with fidelity, scenario planning can be an important supporting tool to make decisions in high-velocity, uncertain environments as characterized by the physical and economic disruption of climate change. 50 Scenario planning promotes dynamic capabilities by fostering cognitive development and reframing alongside a more intuitive decision-making style. 51 Although intuition is sometimes contrasted with rational analysis and can lead to overreliance on past experience, 52 in the context of scenario planning it refers to expert intuition—the ability to quickly recognize patterns and make informed judgments in complex, uncertain environments. By immersing participants in rich, simulated futures, 53 scenario planning builds mental models that allow decision makers to draw on tacit knowledge and adapt flexibly when facing novel situations. 54 In this sense, intuition developed through lived scenario experiences enhances rather than undermines strategic decision-making under uncertainty. 55 Now a vital tool in the strategic management arsenal of many organizations, scenario planning is known to stimulate strategic thinking and break paralysis by creating multiple futures. 56
In sum, researchers argue that scenario planning contributes to three key areas of organizational management: (1) strategic planning and decision analysis (e.g., by exploring potential alternative futures and their implications), (2) risk, resilience, and sensitivity analysis (e.g., by supporting the evaluation of eventualities such as a high level of global warming), and (3) organizational learning (e.g., by immersing individuals within the exploration process). 57 In addition, a fourth area of corporate communications through reporting should be added: as companies become more adept at using scenarios in their reporting, the role of scenarios as a corporate communication tool for stakeholders will become clear.
However, the ability of scenario planning to fulfill these potential contributions to organizational management depends on how scenarios are constructed, presented, 58 and applied. There needs to be quality in both the process and the content. 59 The issue of quality becomes particularly salient when one considers the lack of standardization of process (i.e., the absence of commonly accepted approaches or frameworks) and the relative lack of guidance available. Literature highlights several markers of high-quality or well-constructed, valid scenarios: plausibility (capable of happening), coherency (ties together as a narrative), transparency (for credibility), internal consistency (makes logical sense), creativity (challenges conventional expectations of the future), and relevance (connected to the context being considered). 60
To this list, we suggest an additional marker of quality for when scenarios are to be used in financial reporting: comparability. Users of financial reports make investment choices based on assessments of risk versus opportunity. When companies use inconsistent methods and techniques in their scenario development and assessment processes, assessments of risk and opportunity may be flawed and may impact investment outcomes. In the context of rising shareholder activism, inconsistency can also leave companies exposed to reputational and legal damage. 61 Climate-related disclosure is increasingly mandated by government regulators and securities laws, stock exchange listing requirements, and financial reporting standards. 62 These trends highlight the importance of understanding current preparedness and gaps in scenario planning methodology adoption, as well as how scenarios are being incorporated into corporate strategic management. To further this understanding, we have reviewed corporate reporting of the development and application of climate-related scenarios within 24 of Australia’s largest companies from six critical market sectors. 63
Method
Context
The Australian business context was chosen because it is especially vulnerable to transition and physical risks resulting from climate change. From a transition standpoint, Australia is one of the largest global exporters of coal, 64 and many rural and regional economies rely on cattle farming, 65 industries increasingly under scrutiny for their contributions to climate change. 66 From a physical risk standpoint, Australia is already experiencing the effects of climate change, with increased heat waves and flooding, observable ocean rise and warming, and increasingly dangerous and frequent wildfire seasons. 67 Extreme weather events and harsh environmental conditions are expected to increasingly threaten operations and impede productivity. 68
While Australia has historically lagged on climate-related action (ranking 50 out of 57 countries for the 2024 Climate Change Performing Index 69 ), it is now one of the first countries to introduce IFRS-based mandatory climate reporting standards for businesses. The Australian Accounting Standards Board (AASB) issued the Australian Sustainability Reporting Standards AASB S2 Climate-related Disclosures in September 2024, with the establishment of mandatory reporting from January 1, 2025. 70 These standards are closely aligned to the IFRS S2 Climate-related Disclosures. To meet the standards, certain Australian entities are required to include a climate resilience assessment using scenario analysis against at least two possible futures.
There are several practical implications of the change. First, specifying climate-related temperature outcomes increases consistency among scenarios used by different organizations. Second, the process may constrain development to methods and levels of warming that vary from those otherwise intended for use by the organization. Third, in some cases the requirements may be challenging to meet when data is not readily available for a 1.5°C future for an entity’s context. Although the new reporting standards were not yet in force at the time of this study, business engagement during the lead up to their introduction offered entities early insight into requirements, including the necessity of scenario analysis. Given the recency of these regulatory developments, the findings in this paper should not be interpreted as a measure of compliance, but as an opportunity to examine pre-compliance behavior of Australian firms.
Data Collection and Analysis
We reviewed 24 of the largest companies by market capitalization as of June 2024 from the Australian Securities Exchange Limited (Australia’s major securities market). We selected companies to represent each of six major industries—banking, energy, transportation, resources, consumer staples and food-and-beverage, and utilities—based on their exposure to climate-related risks and opportunities, as well as their economic significance within Australia. To provide a balanced cross-section, we selected the four companies with the highest market capitalization in each sector. The resulting analysis provides an overview of current reporting of scenario planning practices against markers of quality and transparency. With mandatory climate reporting beginning in 2025 for Australian organizations, it can reasonably be expected that the companies examined would already have taken steps to bring disclosures in line with expectations. These companies also had the largest market value when the analysis was conducted, so they had more resources available to implement best practice reporting than smaller companies with less disposable income.
We accessed and reviewed publicly available reporting documents for the financial years 2022 and 2023 (the most recent data available at the time of the analysis), identifying any report that detailed the organization’s approach to scenario planning. Reports containing the most recent and complete information were the main focus of analysis, with the remaining reports checked for additional information. Because the new regulations are reporting-focused, corporate reports were chosen as the primary data source. However, we acknowledge limitations, including potential omissions, framing bias, or strategic presentation of information, and recognize that such documents may reflect aspirational narratives as much as actual practice (Table 1).
Summary of Extracted Data for Analysis. a
While we extracted a broad range of data categories to enable a comprehensive review of scenario development and application, not all categories were included in the final analysis. We focused on the dimensions most relevant to our research questions, prioritizing those that offered the greatest insight into the quality, transparency, and strategic integration of scenario planning in corporate reporting.
To validate our findings, we cross-checked organization disclosures with Carbon Disclosure Project (CDP) submissions for the corresponding reporting years. Only seven of the 24 companies submitted CDP responses, and various discrepancies were found between the content of the CDP and the annual reporting, highlighting inconsistent disclosure practices across channels.
Results
All except two of the 24 companies included some detail about scenario analysis in their reporting. While it is promising that most of these companies already report some form of scenario planning, our review identified sources of concern that point to opportunities for improvement. We categorized findings based on how these sources of concern might hinder the ability of stakeholders to assess and compare climate risk information effectively, as well as how they could limit companies’ ability to benefit from scenario planning.
Scenario Purpose
Most companies stated the purpose of their scenario development. The most common reasons were the assessment of physical and transition risk. As one example, Company K wrote, “The analysis considered both transition and physical risks and opportunities for the business under different scenarios and provided a preliminary assessment of the financial implications of these risks.” Some companies placed greater emphasis on physical risk assessment. For example, Company F stated that it “has conducted a physical climate risk assessment to understand the potential impact on assets and infrastructure across Australia resulting from changes in weather conditions. The process assessed the risk and potential impact of physical climate risks, cyclones, flooding, storms and bushfires on assets and critical infrastructure in high-risk geographical areas.” Several companies mentioned additional reasons for undertaking scenario analysis. For example, Companies E and H from the energy sector cited assessing portfolio resilience and anticipating future product demand as key motivations.
Scenario Process Assessment
Scenario construction methods
Overall, there was a lack of detailed methodologies supplied. Many companies referred to the use of data sources, and some explained that workshops were conducted or supplied very high-level details of the process, but overall, there was very limited detail about scenario development methods. It is also noteworthy that no report described the method of constructing scenarios from the ground up (e.g., as described in Haigh 72 or Wade and Piccinini 73 ) in a way that would allow for replication or quality assessment.
Company U provided the most detail by stating, “Following the establishment of the focal question and timeframes, the STEEP (Social/Technological/Economic/Environmental/Political) framework was used to build out our climate scenarios and draft our scenario narratives described on the following page.” Literature details a multitude of methodologies for developing scenarios. 74 Detailing the method of scenario construction or selection is necessary for readers to evaluate the quality of analysis and establish a standard across companies. Without it, scenario planning is subject to methodological chaos 75 rendering many findings baseless, without clear guidelines and/or with subpar construction. We note, however, that while robust methodologies are outlined in academic literature, they may not be widely accessible to practitioners in the field. The absence of such methodologies in corporate reports indicates organizations may not have tools to implement robust climate risk assessments.
Scenario developers and reliance on external consultants
A known benefit of scenario planning is its psychological impact: by involving participants in the development process, it fosters sensemaking, engagement, and ownership. These psychological effects are critical because they strengthen commitment to implementing strategic insights. Without this engagement, scenario planning risks becoming a detached exercise, weakening its ability to drive organizational change. 76
Potentially reducing the psychological benefits to the organization, consultants were often used for the scenario process: of the 22 companies that recorded instances of scenario planning, nine reported engaging a consultant for some portion of the scenario process, and two companies reported conducting the scenario planning in-house. For the remaining 11 companies, it is unclear whether they performed the process in-house or used consultants.
Consultants can offer expertise and methodologies in scenario analysis, which is particularly important in early-stage and resource-constrained firms. Although consultants can contribute to capacity building when individuals within firms engage with the process, the inclusion of consultants in the scenario planning process can also be problematic. Overreliance on consultants can reduce internal learning by outsourcing thinking and can lead to lack of internal ownership over the scenarios. A methodological bias may also occur: rather than scenarios being developed through processes optimized for the planned purpose, they may be developed through a given consultancy’s standard framework (e.g., Oxford Futures or proprietary tools). Furthermore, the consultancy’s business model and the consultant’s specific area of expertise may bias them to craft scenarios that lead clients to their broader service offerings, for example by highlighting specific risk types that position them to sell additional consulting services.
Scenario Content Assessment
Scenario detail including diversity of temperature outcomes examined
Although the IFRS S2 standard does not specify scenario temperature outcomes for inclusion, changes to Australian laws dictate that reporting entities must include at least two possible scenarios in their analysis, with at least one aligned with keeping warming to 1.5°C or less and another examining warming of 2.5°C or higher. Contrary to this requirement, the lowest temperatures of reported scenarios ranged from 1.5°C to 2.7°C of warming across companies, and the highest temperatures of scenarios ranged from 1.7°C to 4.8°C. For some applications, companies only listed one temperature for either single or multiple scenarios (Companies H, S, and L), which ranged from 1.5°C to 3.7°C. Many companies did not explicitly list the temperature but named a particular existing scenario, which has an associated temperature range that the reader may not know off hand. For example, Company S listed RCP8.5 in its site-specific analysis but did not provide the reader with guidance beyond “ . . . the worst-case or business-as-usual scenario (RCP8.5) . . . is most reflective of the current trajectory of emissions and the most appropriate scenario to ensure we are prepared and consider the worst-case projected impacts of climate change.” Most investors will not know these temperature ranges, which limits the value and understanding they can glean from these reports.
Variation in scenario temperatures is problematic for at least three reasons. First, it makes comparisons between or among companies difficult. Second, it creates opportunities for businesses to cherry pick favorable or uninformative scenarios. For example, if a company does not use a Paris Agreement-aligned scenario (keeping warming to 1.5°C or less 77 ), it is impossible to understand what risks the organization faces assuming an on-track response to climate change. Third, without using a scenario that includes at least 2.5°C of warming, companies may underestimate the risks associated with a disorganized or ineffective global response to climate change. In practice, this means that if one organization only uses a 1.5°C scenario while another only uses a 2.7°C scenario, it becomes difficult for investors to accurately compare their climate risks, leading to potential misjudgments about each organization's preparedness. In this instance, some companies may underestimate the risks of higher warming, leaving them vulnerable to unforeseen climate impacts, while others are unprepared for a future where society aligns with the Paris Agreement to limit warming. Prescribing temperature outcomes for analysis has positive outcomes for comparability, but there is a concern that standardizing approaches may lead to companies limiting their creativity or engagement with other possible futures. 78 Companies may experience tension between meeting external requirements, aligning scenarios with their internal beliefs, and maintaining a sense of ownership over the process—particularly as some firms have begun to backtrack on their net-zero commitments.
Parameters and assumptions used in scenarios
Firms have a responsibility to disclose material information that may influence investor or stakeholder decisions. The principles applied to newly developed standards for climate-related disclosures are transparency, accountability, and decision utility. Not providing detailed assumptions for scenarios violates these principles. Interpreting scenario analysis requires clear information about assumptions, including carbon pricing, policy changes, technology development, and shifts in market and consumer behavior.
A key finding of our research is that firms rarely provide detailed assumptions. Although many companies stated the names of existing scenarios, they did so without specifying details. For example, in one of its applications, Company H stated that it has “ . . . analyzed scenarios published by the IPCC where the global temperature increase is limited to 1.5 degrees with low or no overshoot,” with two versions of three scenarios (six total) plotted for gas demand through 2050. While the scenarios are listed by name and the temperature stated, the meaning of these scenarios and the assumptions underlying them were not explained. This lack of detail may be linked to the prior point, where consultant-led scenarios have inhibited deep engagement with assumptions. As a positive example, Company J (which conducted the scenario development in-house) detailed key assumptions for each scenario used, including the associated temperature and weather patterns, price of carbon, attitudes toward high-carbon activities, state of national biodiversity, government regulation, and level of technology development. Without this level of detail in assumptions, disclosures risk becoming performative exercises, serving to promote legitimacy rather than offering useful information for investors. 79
Scenario reference data
Companies used a variety of data sources for their scenario analyses, and in some cases did not supply details about sources. In terms of referencing existing scenario data or narratives, Shared Socioeconomic Pathways and Representative Concentration Pathways were most common, but IEA and NGFS scenarios were also employed. These datasets vary in their assumptions and framing. There are also different scenarios produced by these sources, further limiting the ability of users to trace data and understand scenarios. Even when drawing on existing data and narratives, companies selected different warming levels and scenario characteristics, leading to inconsistencies.
Excessive variability in reference data reduces comparability between reporting of different companies, making it difficult for stakeholders to consistently assess the severity of climate risks or opportunities. This inconsistency undermines the usefulness of the scenario analysis, as it prevents clear comparisons across firms in terms of how they assess climate impacts and transition pathways. The inclusion of additional source data was sometimes vague. For example, Company B states, “We begin with global scenarios, drawn from global climate models and global macroeconomic projections. These are downscaled to Australia and New Zealand, translating the data to a more granular level,” without specifying which global models and projections were used and how they were downscaled to a national level. Additionally, many companies stated a source without specifying which data they used, for example, “climate-related scenario analysis draws on publicly available information from the Intergovernmental Panel on Climate Change (IPCC) for physical risks and the Network for Greening the Financial System (NGFS) for transitional risks,” (Company I). In such examples, the effectiveness of climate-related disclosures is diminished, and comparability across firms is compromised. This can lead to confusion among investors about the organization’s true exposure to climate-related risks. Furthermore, cherry picking of data opens the door to strategic selectivity where firms may act to present a more favorable picture of future risk, greenwashing their disclosures. As a positive example, some companies listed more specific use and source of data; for example, Company U details the use of “data sources including [System Operator]’s demand forecasts, [Government Climate Body] temperature and rainfall forecasts and global predictions of carbon price rises were used in the creation of these scenarios.”
Integration of scenario analysis into decision-making
Although our analysis cannot verify whether these stated actions were implemented in practice due to scenario planning, the disclosures nonetheless provide insight into how companies claim to link scenario analysis with decision-making. As mandated scenario analysis becomes more widespread, these public disclosures represent the primary source of information available to stakeholders assessing corporate climate preparedness.
The depth of scenario integration varied significantly across the dataset. Apart from some notable exceptions, the reporting of altered strategic and operational decisions due to scenario analysis was often general or lacking the substantive detail required to interpret the degree to which companies will build resilience to climate risks. For example: “[Company]’s disciplined capital allocation supports resiliency by providing the financial flexibility required to deal with the risks presented under this scenario,” (Company N). Overall, companies more regularly provided details on operational changes linked to physical climate impacts than on strategic changes. Company I presented a table with key physical and transition risks, identifying under which scenario the risk was highest, with corporate mitigations and response to each risk. For example, Company I listed a key physical risk of “major flooding impacts on our roads,” with one example of the five responses being “adapting program of infrastructure upgrades and renewals (e.g., pavement renewal).”
Substantive strategic changes, including clear business model change, reallocation of capital or altered investment strategies, were identified in a subset of companies. One example, Company M, from the resources sector, discussed strategic investments in developing transition-aligned clean energy products. The company also referenced issuance of green bonds against its activities, demonstrating a strategic approach with a monitoring framework in place: “core to our capital structure is our Sustainable Financing Framework, enabling the issuance of Green Bonds or Loans . . . we continue to allocate eligible projects under this Framework.” Company U also mentioned the issuance of green bonds in connection with its strategic investment in renewable energy.
Company O, also from the resources sector, discussed the continued investment in assets delivering metals/minerals required for the transition. However, the assets mentioned were already owned by the company, so it is unclear what form this investment takes. Involvement in research and development of low emissions technologies for the company’s assets was also discussed, although it is difficult to gauge the significance of the investment from the details given.
Other companies outlined investment in alternative fuels—such as sustainable aviation fuel (Company K) and biofuels and hydrogen (Company F)—but again in some cases it is difficult to judge whether this is a significant strategic change due to the limited details provided. Company F clarified that this pilot project investment “creates the flexibility for [Company] to recalibrate its focus as greater certainty emerges over specific pathways,” indicating that the investment may not be a currently meaningful strategy toward a decarbonized future. Company F also discussed the leveraging of retail assets for electric vehicle charging as a strategic opportunity. However, examining data available outside the annual report, it became clear that this has currently occurred for less than 1% of the company’s retail assets.
When companies do not specify the implications of scenario analysis on business decisions, the practical value of the disclosures is diminished. Without clear, actionable outcomes from the scenarios, investors and other stakeholders cannot easily gauge how well companies are preparing for climate-related risks and opportunities. For example, if an organization only states that results will inform long-term planning without outlining concrete actions, investor confidence may fall because the organization has not made clear whether it is genuinely preparing for future climate risks or merely engaging in minimal compliance.
Variability among sectors
Variability between and among sectors in corporate approaches to scenario planning was evident. For example, outsourcing or involving consultants in scenario planning was particularly prevalent in the energy sector relative to others, while utilities stood out for using the widest range of reference data sources—ten in total—compared to eight in banking, the next most diverse sector. Utilities were also the most concerned with evaluating both risks and opportunities. However, even within energy, most companies (seven out of nine) referred only to general changes in response to scenario analysis, whereas companies in the transport sector were more specific, with all of them identifying specific changes implemented. This variability may be the result of sector-specific factors such as operational timelines and data availability. However, it further highlights the challenge of applying standardized scenario frameworks across diverse industries.
Implications for Organizations
A defining theme in our analysis was inconsistency: companies relied on different reference sources and applied different methodologies to the construction of scenarios, using different assumptions. The lack of standardization in scenario development, content, and application compromises the integrity and utility of these processes. We elaborate on the implications for entities below.
Implications for Risk Assessments and Strategic Planning
A broad range of well-designed scenarios presents an organization with a more thorough understanding of risks and opportunities, 80 leaving the organization better prepared for regulatory, legal, and market shifts, technological changes, and shifting societal expectations. A narrow or incomplete range of scenarios may lead to underestimation of risk and a suboptimal stress test when it comes to managing climate change. In contrast, good scenario planning can support strategic opportunities through diversification, divestment, investment, and engagement. Treating scenario planning as a disclosure obligation rather than as a strategic tool diminishes some of these benefits. A balance is needed between achieving transparency and consistency, while allowing organizations to develop scenarios in ways that realize strategic benefits.
Failing to assess risk against a range of scenarios not only leaves organizations ill-prepared for change but may also make them vulnerable to disciplinary action. In 2020, for example, a complaint was brought against an Australian bank by an activist group for failing to publish a scenario analysis relating to its entire investment portfolio, contravening Organization for Economic Cooperation and Development Guidelines for Multinational Enterprises. 81 More recently, energy company Woodside has been sued for providing misleading reporting as its net-zero plan did not include the emissions arising from its product (i.e., Scope 3 emissions). 82
Impact on Stakeholder Communications
Lack of unified approaches to constructing and applying scenarios can complicate communication with stakeholders. In the absence of standardized guidance on scenario construction or selection, organizations must clearly explain their rationale for their choice of scenario to ensure investors and other stakeholders understand their climate exposure and strategies. When disclosures are perceived as minimal or insufficient, stakeholders may suspect that organizations are only releasing information to appear compliant rather than fully transparent. This aligns with legitimacy theory, which suggests that organizations sometimes provide just enough information to meet societal expectations, rather than offering meaningful insights. 83 As a result, poorly standardized scenario reporting can unintentionally reinforce stakeholder doubts about the organization’s intentions. Following the uptake of new reporting standards on climate disclosure from the IFRS, stakeholders will likely increase their climate literacy and expectations. Once stakeholders become aware of the role of scenarios in assessing future potential risk and opportunities for organizations, organizations that are not transparent about scenario development and application may find that the credibility of their analysis and confidence in their sustainability initiatives fall. On a wider scale, this trend may erode growth in sustainability-related products and services.
A lack of standardization also opens up the potential for greenwashing through the cherry picking of scenarios. Greenwashing, or “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical,” 84 is a focus of regulators, not-for-profits, and investor groups globally. Internationally, regulators are increasingly cracking down on greenwashing due to its potential to erode trust and misallocate capital. In the United States, the Securities and Exchange Commission has introduced proposals to enhance climate-related disclosures, aiming to curb exaggerated sustainability claims. 85 Similarly, the European Union has implemented the Sustainable Finance Disclosure Regulation, mandating transparency in environmental, social, and governance-related reporting. 86 In Australia, the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission are actively addressing greenwashing and green-hushing to protect investor interests and ensure accountability in sustainability reporting. 87
To understand how this can be done better, we can look beyond our dataset to reporting entities in New Zealand that have already commenced formalized mandatory climate reporting. 88 Indeed, within our dataset, Companies J, U, and W are also subject to New Zealand’s reporting requirements. We note that these three companies stood out as having clear reporting: all had clear explanations of whether the scenario process was in-house or external; all provided assumptions of scenario content (reference scenarios, key assumptions, and additional source data stated), and all reported the subsequent risks identified and listed specific changes to their operations. The quality of these companies’ scenario reporting relative to the remainder, who are solely bound by Australian reporting standards, may point to opportunities to learn from other nations’ reporting standards.
Need for Standardized Reporting Guidelines for Inclusion of Scenarios
The introduction of mandatory climate-related financial disclosures internationally is powerful because it supports transparency. As it stands, however, further guidance is required on core components of the IFRS climate reporting framework. Organizations may legitimately argue that there is no consistent methodology for either the development of scenarios for reporting or the associated resilience assessment. Methods for conducting scenario development and analysis vary, and it is vital that both organizations and stakeholders have access to an authoritative document presenting different methodologies with examples that illustrate implementation. A further area where guidance is required is reputable sources of data relating to physical and transition climate-related risk. Such a document could also provide markers of quality and reinforce the need to understand underlying assumptions for any datasets used.
There are hundreds of quantitative scenario datasets available, each with unique sets of assumptions and different levels of granularity. The International Institute for Applied Systems Analysis database holds over 900 scenarios from the Integrated Assessment Modeling groups supporting the IPCC reporting. 89 In addition, there are scenario datasets from the IEA and others. 90 The IFRS standard advises that entities should choose scenarios that are material to their specific context (location, sector, business model, etc.). 91 The IFRS standard also allows reporting entities to consider their own circumstances at the time the scenario analysis is completed, with those who are at greater risk of impact from climate change to undertake more quantitative and technically sophisticated scenario development. This standard requires details of the scenario used and the rationale for its selection, the methodology applied in developing the scenarios, and how the outcomes of the scenario analysis inform risk management, strategy, and financial planning. Although the standards required by the IFRS are an important step forward, the complexity of the scenario planning process necessitates that further supplementary guidance be provided for use by organizations and investors.
Navigating Climate Scenario Development: Questions for Managers
Below we offer a practical framework for how managers can navigate the scenario development process. We frame our discussion around six questions that managers should ask themselves. To support practical implementation, Figure 1 provides an overview of scenario design choices across different organizational purposes and uses: learning, risk management, strategic planning, and investor disclosure. Table 2 presents a step-by-step summary of climate-related scenario development practices aligned to the questions below. Decision points, challenges encountered in practice, and implementation strategies are provided along with two examples designed to illustrate how different strategic logics (e.g., compliance-focused vs. learning-oriented) shape the integration of climate scenarios.
Alignment of scenario process with purpose.
Framework for Navigating Scenario Development for Different Purposes.
Note: examples are hypothetical.
What Is the Purpose of this Climate-Related Scenario Exercise, and How Will the Results Be Used?
Organizations need to clarify the intent of the scenario process before selecting a methodology. Considerations include:
Determining whether the primary purpose is internal (e.g., learning, culture-building, or strategy development) or external (e.g., investor reporting or regulatory compliance).
Clarifying how the scenarios will be used (e.g., to spark insight through learning, assess risks, inform strategic planning, or support disclosures).
Defining what success will look like, whether through greater awareness, a clearer strategy, or credible external reporting.
A scenario process designed to maximize learning may not be appropriate for risk assessment and strategy development, and almost certainly will not provide the level of assessment sought by investors reading financial reporting. Scenarios constructed to aid organizational learning have a lesser need for consistency in methodology than those where resulting reports are used by investors to inform investment decisions.
Who Are the Key Stakeholders, and What Do They Need from the Scenario Process?
Different stakeholders, ranging from investors to internal employees, will be looking for different outputs and outcomes from the scenario process. The following points can help tailor outcomes to relevant stakeholders:
Identify who in the organization 92 would benefit from such foresight, and who could provide insight.
Understand the type of information stakeholders expect—be it narratives, quantified impacts, or decision thresholds.
Consider the scenario format that will align with the needs and capabilities of the intended audience.
Understanding stakeholder experience and expectations before starting the scenario development process will lead to more effective outcomes. Such an understanding will shape both methodology and assumptions. Some internal audiences may be seeking knowledge and an engaging process or contributions they can use to develop strategy. Others may require more formal documentation, more detail in the scenario narrative, and supporting data. Consideration should be given to how the scenarios link to internal actions or strategic priorities. A scenario tailored to investors should be linked to the desired internal actions of the organization. Regardless of audience, the core purpose of scenarios is to sharpen managerial thinking and enable decision-making under complexity.
Diversity of views can bring significant benefit when it comes to thinking outside the box. Scenarios should not be predictable or shaped by business-as-usual thinking. All scenario planning processes will benefit from having a diverse team from multiple organizational functions (e.g., operations, finance, strategy, risk, human resources) and individuals of different levels of seniority, from junior staff to executive management. Engaging senior managers early in the scenario development process is critical to ensure ownership is taken of the final output. 93 When diverse teams are brought together, the scenario development process has particularly strong potential to foster strategic flexibility, improved risk management, and organizational agility. 94
Choosing a Method: Should We Build Our Own Scenarios or Adapt Existing Ones, and Why?
The final choice of scenario methodology needs to be carefully considered and tied to purpose, for example:
Where learning or culture building is the desired outcome, custom-built, ground-up scenarios must be prioritized.
Where scenarios are only being developed for reporting purposes, standardization and data clarity are key.
Scenarios for other purposes, such as internal risk management and strategic planning, can be undertaken through either process, depending on requirements and context.
There is considerable value to be gained by organizations who build their own scenarios from the ground up, 95 particularly in terms of deepening knowledge and broadening perspective. In our review, there was no specific mention of scenarios being developed through this type of process. In every instance, companies relied heavily on established scenarios or factor combinations within high-level narratives (e.g., Shared Socioeconomic Pathways). A trade-off can be perceived between optimization and standardization when scenarios are being developed for use in reporting.
Development of scenarios guided by high-level narrative framing provided by the Shared Socioeconomic Pathways and the Representative Concentration Pathways offers a strong alternative to building scenarios from scratch. This approach allows organizations to tailor a narrative to their specific organizational context while maintaining consistency with broader global frameworks, and it provides access to robust, publicly available datasets. Downscaling global or sector level scenarios to organizational narratives offers opportunities for stakeholder engagement and integration.
Which Format and Level of Quantification Is Needed to Support Our Scenario Objectives?
Organizations need to consider whether the scenario should be primarily narrative-driven (for learning) or focused on producing data-driven outputs (for risk assessment or financial modeling). 96 Qualitative (narrative) scenarios are commonly used, but some scenarios can be strengthened and made more rigorous with the inclusion of quantitative data. This distinction has practical implications for how organizations might approach scenario development:
A process to facilitate corporate learning would not necessarily need to include quantitative data.
Organizations that are just beginning to develop and use scenarios may initially start with a qualitative approach, particularly if not highly vulnerable to physical and transitional climate impacts.
Where risk assessment or financial reporting is required, it is ideal if scenarios incorporate more quantitative elements over time, particularly where vulnerable to climate change impacts. A comprehensive quantitative assessment of risk requires data associated with transition and physical characteristics of the scenarios developed.
Consideration needs to be given to what types of data are needed, if access to the necessary datasets is available, or whether proxies will suffice. Many organizations have been assessing the physical impacts of climate change on their business operations and supply chain for some time. Datasets capturing physical climate change impacts are available that can be overlayed against an organization’s sites of operation with Geographic Information Systems in many countries for different levels of warming. 97 Gaining data at a granular level for transition risks, however, is not so straightforward. The International Institute for Applied Systems Analysis holds datasets used in the IPCC modeling that are beneficial for completing transition-related quantification; however, this data is not easily accessible for a layperson, and there are terms of use which need to be met. 98 Furthermore, these datasets often need to be supplemented with localized data for the specific industry and country (e.g., local data available from federal, state, and local government, sector bodies, and academic communities).
What Are the Core Assumptions That Will Shape and Constrain Your Scenarios?
Organizations must identify and align scenario assumptions to ensure internal consistency and contextual relevance. 99 These assumptions may include details such as:
Temperature outcomes.
Time frame.
Regulatory environments.
Technological advancement.
Societal characteristics.
Economic conditions.
When a scenario is built from the ground up, assumptions are derived through the process itself. Where predefined or existing scenarios are used as the basis for scenario analysis, organizations need a thorough understanding of the existing assumptions to account for them in the analysis. This need extends to the use of scenario-linked datasets. For example, if an oil and gas producer chose to use an existing scenario that is heavily reliant on carbon capture and storage (CCS) technologies, the analysis must include investment in these technologies. Using a scenario with CCS without including significant investment in these technologies by the organization itself (or a very sound basis to believe this investment could occur) could lead to an overly optimistic analysis of the impact of the transition on the company’s business model, which could lead to accusations of greenwashing. 100
Regarding these details, organizations must:
Explicitly state key assumptions such as temperature thresholds, technology readiness, and policy paths.
Align assumptions across both physical and transition scenarios.
Avoid misalignment between chosen scenarios and internal capabilities (e.g., assuming CCS without a credible plan to enable or use it).
Although rarely seen in practice, integration of physical and transition scenarios is also ideal. Many organizations conduct scenario analyses for physical and transition climate-related impacts separately, as demonstrated within the data assessment in this article. A high level of warming will still incur transition risks, just as a 1.5°C scenario will retain a level of physical climate risk. Completing the risk and resilience assessments separately, at different temperature levels, may fail to deliver a comprehensive and integrated assessment of risk for a given level of warming.
How Will Integration of Insights from the Scenario Analysis Be Put into Action in Strategic Decisions and Future Planning?
Organizations should ensure the scenario results are actionable and can be embedded in decision-making processes. Consideration should be given to how scenario insights will inform the organization’s long-term strategy and risk-management frameworks. 101 Depending on its purpose, scenario analysis will need to be integrated into governance processes with updates embedded into reporting or planning cycles. To ensure scenario analysis effectively informs decision-making, organizations should take the following actions:
Define how the insights will drive regular updates to resilience assessments, strategy, the organization’s climate action plan, or risk-management framework.
Establish mechanisms (e.g., board reviews, strategy workshops) to ensure that scenario outcomes influence key decisions such as investments, policy advocacy, or operational changes.
As demonstrated in early scenario work by Wack, 102 scenarios can be of significant value to organizations, but they need to be integrated to have an effect.
Conclusion
There are clear benefits to conducting scenario planning to understand the strategic challenges inherent in a future in which the climate is changing. We question whether many organizations are foregoing the positive benefits of scenario planning by merely treating it as a box-ticking reporting exercise, trading off value for expediency. Our analysis of scenario planning practices in 24 Australian companies underscores the need for greater standardization and transparency, particularly in light of increasing regulatory demands and rising stakeholder expectations.
One key takeaway from this study is the lack of consistency in how companies approach scenario planning, both in terms of methodology and level of detail provided. While some organizations have developed robust and transparent scenario processes that incorporate a wide range of climate outcomes, many have failed to meet evolving expectations for detailed, actionable reporting. This inconsistency is concerning because it undermines the credibility of climate disclosures, and it represents a missed opportunity for businesses to prepare effectively for the profound changes that climate change is expected to bring.
Although this article examined the climate-related scenario analysis practices of Australia-listed companies, the findings offer broader international relevance. Australia is unique as a developed economy with significant exposure to climate risk, a strong resources sector, and a history of policy volatility on environmental issues. 103 This policy volatility is now being mirrored in other jurisdictions navigating policy rollbacks and uncertainty (e.g., the U.S. withdrawal from the Paris Agreement 104 and some aspects of European policy, including proposed changes to sustainability reporting regulations 105 ). The observed variability in corporate climate scenario analysis practices reflects not only differences in organizational maturity and sectoral pressures, but also a broader global struggle to align voluntary climate reporting practices to mandatory standards.
As regulatory pressures mount, and as stakeholders demand more transparent, 106 credible, and detailed climate disclosures, organizations that invest in high-quality scenario planning will be better positioned to navigate the uncertainties of a changing global climate. However, to fully realize the potential of scenario planning, it is crucial that organizations match scenario methodology with purpose, decide whether scenarios will be quantitative as well as qualitative, consider whom to involve in the development process, and give thought to the assumptions on which the scenarios are built. With scenarios forming the foundation of climate reporting, greater standardization and transparency will be required. Doing so will not only enhance the accuracy and credibility of climate disclosures but also foster the development of more resilient, forward-thinking organizations with the ability to act on climate issues. By improving scenario planning practices, organizations can move beyond mere compliance and leverage these processes to their strategic advantage, preparing themselves for the disruptive challenges and opportunities presented by the climate transition.
Footnotes
Notes
Author Biographies
Belinda Wade is an Industry Professor at the University of Queensland Business School and co-lead of the Net Zero Observatory. Her research examines organizational decarbonization and climate transitions, with a particular emphasis on applied, practice-informed approaches. She works closely with industry and policy stakeholders to translate research into actionable outcomes.
Sarah MacInnes is a Postdoctoral Research Fellow at the University of Queensland’s Net Zero Observatory, where she examines how trust, climate misinformation, and non-cognitive behavioral drivers shape the success of the climate transition. Sarah’s research sits at the intersection of psychology, sustainability, and behavioral science, with a focus on identifying the cognitive and social drivers of pro-environmental behavior with the aim to develop interventions that foster meaningful climate action.
Matthew J. Hornsey is a social psychologist who publishes on themes of intergroup communication, sustainability, and climate change. Prof. Hornsey is currently co-leading the Net Zero Observatory at the University of Queensland, a multi-disciplinary group of academics and practitioners who design strategies to accelerate industry action and community support for rapid decarbonization.
Saphira Rekker is a Senior Lecturer in Sustainable Finance and ARC DECRA Fellow at the University of Queensland Business School, with a PhD in finance. Her research focuses on translating climate science into corporate accountability frameworks, assessing company performance against temperature scenarios, and decarbonization pathways. She contributes to international standards including ISO Net Zero and the Science Based Targets initiative.
Andrew Griffiths is the Executive Dean of the Faculty of Business Economics and Law at the University of Queensland. His research focuses on corporate sustainability and climate change strategy, with particular attention to how organizations and leaders respond to environmental and strategic challenges.