Climate Scenario Analysis for IFRS S2: A Step-by-Step Guide for Mexican Companies

IFRS S2 requires companies to conduct climate scenario analysis to assess the resilience of their strategy under different climate futures. For Mexican listed companies (BMV/BIVA), this means selecting at least two climate scenarios — one consistent with 1.5°C or well-below-2°C warming — identifying material physical and transition risks, and disclosing the impact on their business model and financial position. This guide walks through the process step by step.

What Is Climate Scenario Analysis?

Climate scenario analysis is a structured way to explore how different possible climate futures could affect your business. It is not a forecast — it's a tool for testing the resilience of your strategy under a range of plausible futures.

IFRS S2 requires climate scenario analysis because:

• Climate risks are material to financial performance over medium and long time horizons

• Companies need to demonstrate they understand and have planned for these risks

• Investors and regulators need comparable, structured information

Scenarios You Can Use

IFRS S2 doesn't mandate specific scenarios but recommends using publicly available, established scenarios:

Recommendation for Mexican companies: Use IEA NZE 2050 (1.5°C transition scenario) and IEA STEPS or NGFS Current Policies (higher warming / physical risk scenario). This covers both transition and physical risk perspectives.

Step-by-Step Process

Step 1: Scope the analysis

Define:

• Time horizons: short (0-5 years), medium (5-10), long (10-30 years)

• Business units or geographies to include

• Which risks are likely material (based on your industry and operations)

Step 2: Select your scenarios

Choose at least two scenarios — one low-carbon transition (1.5°C or well-below-2°C) and one higher-warming scenario that emphasizes physical risks. Document why you chose those scenarios.

Step 3: Identify climate risks and opportunities

For each scenario, identify which of these apply to your business:

Transition risks (more severe in low-carbon scenarios):

• Policy risks: carbon pricing, emissions regulations, product standards

• Legal risks: climate litigation, regulatory non-compliance

• Market risks: changing customer preferences, shifts in commodity markets

• Technology risks: cost of transitioning to low-carbon technologies

• Reputational risks: perception of climate performance

Physical risks (more severe in high-warming scenarios):

• Acute: hurricanes, floods, wildfires, extreme precipitation

• Chronic: rising sea levels, heat stress, water scarcity, changing precipitation patterns

For Mexico specifically:

Step 4: Assess materiality

Evaluate each identified risk for:

• Likelihood (under each scenario)

• Magnitude of financial impact (on revenues, costs, assets)

• Time horizon when impact would materialize

Document which risks are material and which are not (with reasoning).

Step 5: Quantify where possible, qualify where not

IFRS S2 allows qualitative analysis initially, but progress toward quantification is expected:

• Physical risk: asset exposure mapping (what % of your assets are in flood zones, water-stressed areas?)

• Transition risk: carbon cost exposure (what would a $50/tCO₂e carbon price do to your P&L?)

Step 6: Assess strategic resilience

For each scenario, describe:

• How your current strategy would perform

• What adaptations are planned or under consideration

• Which aspects of your business model are resilient

Step 7: Disclose the results

IFRS S2 disclosures should include:

• Which scenarios were used and why

• Key assumptions made

• Material risks and opportunities identified under each scenario

• Impact on strategy, financial position, and financial planning

• How findings inform your transition plan and targets

Common Mistakes to Avoid

Mistake 1: Treating scenario analysis as a one-time exercise

It should be reviewed annually as scenarios evolve and your business changes.

Mistake 2: Using only one scenario

IFRS S2 explicitly requires at least two scenarios to capture different risk dimensions.

Mistake 3: Only analyzing downside risks

Scenario analysis should also identify climate-related opportunities: renewable energy cost reduction, growing demand for low-carbon products, new markets.

Mistake 4: Keeping it siloed in sustainability

Finance, strategy, and risk management teams need to be involved. Scenario analysis that doesn't connect to financial planning fails the "investor-grade" standard.

Mistake 5: Not documenting assumptions

Every scenario analysis requires clear documentation of assumptions, data sources, and methodologies to support future assurance.

What Tools and Frameworks Help?

• TCFD Scenario Analysis Guidance — foundational methodology document

• WRI Aqueduct — water risk mapping for physical risk assessment

• CLIMADA — open-source platform for quantitative physical risk assessment

• Oliver Wyman Climate Risk Navigator — for financial impact modeling

• Climatta — integrates operational data (Scope 1/2/3 emissions, facility data) with climate risk frameworks

Frequently Asked Questions

Can we do climate scenario analysis in-house or do we need consultants?

Both approaches work. In-house analysis (guided by TCFD and IFRS S2 guidance documents) is feasible for initial qualitative assessment. For quantitative modeling of financial impacts, many companies use specialist consultants for the first year and then internalize the process.

How detailed does the analysis need to be for the 2026 first report?

The CNBV mandate and IFRS S2 allow for proportionality. For the first filing, a well-reasoned qualitative analysis using established scenarios, with documented methodology, is acceptable. Quantification is expected to improve in subsequent years.

Does scenario analysis need to be externally assured in 2027?

Limited assurance (required starting FY2026) will cover quantitative disclosures like GHG emissions. The methodology and qualitative elements of scenario analysis fall under broader consistency and completeness reviews. Building a well-documented process now prepares you for 2027.

We operate in multiple sectors — how do we handle sector-specific risks?

Focus on the segments that represent the most material financial exposure. Use sector-specific scenario tools where available (e.g., IEA scenarios for energy-intensive sectors, physical risk tools for real estate or agriculture).

Climatta integrates your operational emissions data with climate scenario frameworks — connecting the dots between your GHG data and your IFRS S2 strategy disclosures. Request a demo to see how it works for your industry.