Explore this subject further: What can a global warming projection tell your business?.
Your business plan depends on assumptions about the future: customer demand, operating costs, access to capital, technology, workforce capability and the markets you serve.
Some assumptions will prove sound. Others may change during the life of an investment, contract or asset.
Climate scenario analysis gives leaders a structured way to test those assumptions against different plausible futures. It does not predict what will happen. It helps identify where a business may be exposed, where opportunities could emerge, and which decisions are worth reconsidering.
AASB S2 requires climate-related scenario analysis to assess climate resilience. But the value to your business goes beyond disclosure: it can help leaders make more informed investment, operating and strategic decisions.
The question for leaders is which business decisions remain valuable across different futures.
Three terms worth keeping separate
- Socioeconomic narrative: A description of how society and the economy might develop, including trade, technology, inequality, institutions and the capacity to adapt.
- Emissions pathway: A possible trajectory of greenhouse gas emissions over time, based on assumptions about economic activity, technology and policy.
- Warming outcome: The estimated change in global average temperature associated with an emissions pathway, relative to a defined baseline and time period.
These three elements answer different questions. A socioeconomic narrative describes the conditions in which businesses may operate. An emissions pathway describes how emissions could evolve. A warming outcome helps indicate the physical climate changes that may follow.
Leaders need to understand which elements of a scenario are relevant to the business decisions they are testing.
The Shared Socioeconomic Pathways, or SSPs, are five narratives developed by international research teams and used in research assessed by the Intergovernmental Panel on Climate Change, IPCC. A label like SSP2-4.5 combines the Shared Socioeconomic Pathway 2 narrative with a level of radiative forcing in 2100, measured in watts per square metre. The number 4.5 describes an effect on the Earth’s energy balance. Warming is expressed separately in degrees Celsius.
Five possible futures and what they could mean for Australian business
The Shared Socioeconomic Pathways describe different ways the world’s economies and societies could develop. They explore how trade, technology, institutions and inequality could shape the ability to reduce emissions and adapt to climate change. A warming outcome depends on the emissions pathway used with the narrative.
These narratives are not forecasts or five fixed temperature outcomes. They offer contrasting assumptions about how economies, institutions, technology and societies may develop. Their consequences for a particular business depend on its operating model, markets and exposure.
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| Socioeconomic future | Possible operating environment | Enterprise decision question |
|---|---|---|
| SSP1 · Sustainability | Countries cooperate more closely. Investment in education, health and cleaner technology supports more inclusive growth. Economies use energy and materials more efficiently, and stronger institutions help communities adapt. | Could demand for lower emissions products and more efficient services open new markets? What capabilities, infrastructure and customer commitments would support the investment? |
| SSP2 · Middle of the road | Economic and social trends broadly follow familiar patterns. Some countries and sectors improve resource efficiency and strengthen institutions, while others progress slowly. Inequality and environmental pressures persist. | Where might customers, suppliers and infrastructure providers move at different speeds? Which assets or products could be upgraded in stages as demand and operating conditions change? |
| SSP3 · Regional rivalry | National security and self sufficiency take priority. Trade and international cooperation weaken as countries focus on securing food and energy. Slower growth and limited investment make emissions reduction and adaptation harder. | How exposed are margins and delivery commitments to imported equipment, concentrated export markets or disrupted freight routes? Could regional sourcing or alternative routes improve reliability at an acceptable cost? |
| SSP4 · Inequality | Capital, skills and advanced technology concentrate among well resourced groups. High technology industries can move towards lower emissions production while poorer communities and businesses have fewer resources to adapt. | Where could uneven access to finance, technology or resilient infrastructure interrupt a supply chain or weaken customer demand? Which critical suppliers could benefit from practical support? |
| SSP5 · Fossil fuelled development | Open markets, rapid innovation and investment in skills drive strong economic growth. Energy and resource use remain high and rely heavily on fossil fuels. Prosperity and technology increase the capacity to adapt, while cutting emissions is harder. | Where could stronger demand support growth? How would returns change if assets, workers and supply chains also faced greater heat, water stress or disruption under a high emissions pathway? |
Use these narratives to challenge the assumptions behind your forecasts for demand, costs, investment and service continuity. Then use Australian climate projections and observations to investigate the hazards that matter to your locations, suppliers and infrastructure.
Sources: IPCC Sixth Assessment Report, Working Group III, Chapter 3, for socioeconomic narratives. Australia’s National Climate Risk Assessment provides national physical risk context. The business questions are Sightlines Advisory illustrations.
A company example: five possible futures
Junction Freight Services
This fictional Australian transport, warehousing and distribution business operates leased depots in western Sydney, Melbourne and Brisbane, with subcontractors providing regional coverage. Its leaders share an interest in reliable delivery, profitable contracts and the company's future competitiveness. They approach decisions from different perspectives: customer relationships and growth, capital allocation, and operational reliability.
The five scenarios below explore how changes in the wider operating environment could influence those priorities. Each executive question identifies an assumption worth investigating, rather than a predetermined response.
These illustrative futures show how different socioeconomic conditions could change Junction’s operating environment. Each executive question reflects a decision the leadership team might face in that future.
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| SSP narrative | What could change for Junction Freight Services | Question from the leadership team |
|---|---|---|
| SSP1 · Sustainability | More freight corridors have charging infrastructure, and reliable low emissions power makes electric freight viable on some routes. Major customers use similar tender criteria that reward efficient, lower emissions delivery. | Priya Bennett, Managing Director: Which contracts could we win or retain through lower emissions delivery, and where could it also improve our margins? |
| SSP2 · Middle of the road | Charging access and customer demand develop unevenly. Electric trucks become viable on some metro routes, while much of the regional network still depends on diesel vehicles and subcontractors. | Daniel Tran, CFO: Which routes justify replacing vehicles first, given expected utilisation, charging access and the remaining life of our fleet? |
| SSP3 · Regional rivalry | Trade becomes more fragmented. Some customers shift towards regional suppliers, changing freight volumes and routes. Longer journeys and higher customer stock levels could increase demand for trucks and warehouse space. | Leanne Walker, Operations Director: Where would we need alternative routes, extra warehouse space or more subcontractor capacity to keep our delivery commitments? |
| SSP4 · Inequality | Large customers and fleet operators invest in better freight tracking and more resilient facilities. Some smaller subcontractors have less access to finance, technology and reliable infrastructure. | Leanne Walker, Operations Director: Which services depend on subcontractors with limited capacity to adapt, and where could shared systems or longer contracts help them keep delivering? |
| SSP5 · Fossil fuelled development | Strong economic growth increases freight volumes. Automation could lift throughput at Junction’s depots, while hotter conditions under a high emissions pathway could increase cooling costs and disrupt work during peak heat. | Daniel Tran, CFO: Would higher throughput justify investing in automation once we account for cooling costs, downtime and the remaining term on our depot leases? |
The scenarios give Junction’s leadership different assumptions to test about customer demand, route margins, fleet investment and regional service. The questions help leaders decide what information they need before committing capital or changing how they serve customers.
From scenario questions to business decisions
Consider Junction's fleet replacement decision.
Under a future with more widespread charging infrastructure and stronger customer demand for lower emissions freight, replacing vehicles earlier could support contract growth and operating efficiency.
Under a future with uneven infrastructure development, a staged replacement program might preserve capital and flexibility.
Under more fragmented trading conditions, the priority could shift towards fleet availability, route flexibility and dependable subcontractor capacity.
None of these outcomes follows automatically from a Shared Socioeconomic Pathway narrative. Junction would need information about vehicle costs, utilisation, energy availability, customer contracts, infrastructure and the remaining life of its assets.
Scenario analysis becomes useful when those assumptions can be compared and translated into choices about investment, timing and flexibility.
Sources: IPCC AR6 Working Group III, Chapter 3 · IPCC AR6 Working Group I, Chapter 1. The company and leadership questions are illustrative.
Other sources for company scenario analysis
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| Organisation or source | Principal contribution |
|---|---|
| Network of Central Banks and Supervisors for Greening the Financial System (NGFS) | Economic, policy and financial conditions under contrasting transition and physical risk scenarios. |
| International Energy Agency (IEA), World Energy Outlook | Energy markets, technologies, demand and supply. |
| Commonwealth Scientific and Industrial Research Organisation (CSIRO) and Australian Bureau of Meteorology | Australian regional physical climate projections. |
| United Nations Environment Programme (UNEP), Emissions Gap Report | Global emissions commitments and associated warming implications. |
Sources: NGFS, IEA, CSIRO and Bureau of Meteorology, and UNEP publications. Confirm current editions and source details before publication.
These sources are complementary rather than interchangeable. Choose information and scenarios suited to the question: socioeconomic assumptions for markets and demand, energy scenarios for technology and energy investment, and national or local projections for physical operating conditions.
Record how the different sources and assumptions have been combined. Do not treat an international scenario as a direct forecast of conditions at an Australian business location.
Choosing scenarios and timeframes for your first disclosure
Use these checkboxes to track your own review as you read. Select a box to mark a step complete; select it again to clear it. Selections are temporary and are not saved or submitted.
0 of 5 steps selected
Start with a decision
Identify a material business decision or assumption to test. Consider a lease renewal, fleet investment, supplier dependency or customer market.
Select contrasting, credible scenarios
Choose published scenarios suited to the enterprise and applicable disclosure requirements. Record their sources, versions and reasons for selection.
Choose decision-relevant timeframes
Use periods that reach budgets, contract renewals, asset replacement, infrastructure lifetimes and longer-term strategic commitments. Record the years.
Connect scenarios with enterprise evidence
Investigate regional climate conditions, customer demand, costs, operating dependencies and financial consequences. Distinguish observed conditions and recorded results from assumptions.
Record conclusions and review triggers
Document uncertainties, implications for resilience, decisions worth reconsidering and information or developments that would prompt a change in response.
For reporting, confirm the applicable scenario analysis and resilience disclosure requirements against AASB S2, including relevant paragraphs 10 and 22. The IPCC Seventh Assessment Report is in development; review findings as they are published and update analysis where new scientific findings affect a business assumption.
Bring the first scenario analysis to your finance, operations and strategy leaders.
Ask each what would need to change in their assumptions, what analysis would support that change, and which decisions could preserve or create enterprise value under different conditions.
The purpose is not to agree on one future. It is to identify the decisions that deserve attention now, the options worth retaining, and the information that would justify acting differently.
Source note: References and quotations are retained in the article text. Verify original publications, figures and any reuse permissions before public release.