Qualitative vs. Quantitative Climate Scenario Analysis: What Is Required Under AASB S2?
Climate Scenario Analysis and AASB S2 Requirements
Climate scenario analysis is a method used to evaluate how various climate change scenarios could affect systems such as economies, industries, and natural environments. It involves creating multiple hypothetical future climate conditions to explore potential outcomes and risks. Companies can use climate scenarios to assess how resilient their policies, strategies, and investments are in the face of an uncertain future.
AASB S2 requires businesses to conduct climate scenario analysis to assess and disclose their climate resilience across a range of plausible future scenarios. Entities reporting under AASB S2 must define their approach to climate scenario analysis, including whether to use qualitative, quantitative, or a combination of both.
Qualitative Analysis vs. Quantitative Analysis – What’s The Difference?
Qualitative climate scenario analysis is a high level, narrative-based approach commonly used by businesses who are in the early stages of their climate scenario journey. It draws on non-numerical sources such as expert judgment, interviews, and narrative-based exploration of potential future outcomes. This method helps companies understand the broader strategic implications of climate change, including shifts in policy, consumer behaviour, and market dynamics.
Quantitative climate scenario analysis, on the other hand, is a more detailed and rigorous approach to climate scenario analysis, often used by companies who have greater experience in the process. This method includes analysis of numerical data for relationships and trends, often utilising advanced scientific models and statistical techniques.
What is Required Under AASB S2 – Qualitative or Quantitative?
AASB S2 does not mandate whether climate scenario analysis should be qualitative or quantitative, recognising that the approach may vary significantly between companies. However, the legislation specifies that a business’ chosen methodology should be guided by the following two criteria:
1. Exposure to climate-related risks and opportunities
The legislation states that “…with all else being equal — the greater the entity’s exposure to climate-related risks or opportunities, the more likely it is the entity would determine that a more technically sophisticated form of climate-related scenario analysis is required.”
In practice, this means that businesses with higher exposure to climate-related risks are more likely to benefit from a rigorous, quantitative approach to inform decision making and meet stakeholder expectations. Conversely, for those with lower climate-related risks, a less technical, qualitative approach may offer more meaningful utility.
Under AASB S2, entities must disclose climate-related risks and opportunities that could reasonably be expected to affect their future prospects, along with the processes used to identify, assess, prioritise, and monitor them. This information can support companies in selecting an appropriate approach to climate scenario analysis based on their risk exposure.
2. Available skills, capabilities and resources
The legislation also requires that an entity’s approach to climate scenario analysis must come without undue cost or effort. In assessing this, companies should consider their internal and external skills, capabilities, and resources, which provide the necessary context for evaluating the feasibility of a climate scenario analysis approach.
For businesses that are new to climate scenario analysis, a quantitative or highly rigorous approach may not be available without undue cost or effort. In this case, it is recommended to start with qualitative scenarios and are gradually developed to become more detailed. Conversely, entities with prior experience in climate scenario analysis are more likely to have the necessary skills, capabilities, and resources to adopt a quantitative approach from the outset.
Additionally, if a business operates in an industry where climate scenario analysis is not commonly used, more time may be needed to procure the necessary skills and capabilities. In contrast, those within industries where it is common practice to use climate scenario analysis, with legislation specifically naming extractives and mineral processing, are more likely to possess the relevant expertise and resources.
How Can Greenbase Help?
At Greenbase, we have been preparing our clients to understand their AASB S2 obligations. If you are unsure about whether qualitative or quantitative scenario analysis is right for your company, please contact us today to find out more.
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