Navigating the New Era of Climate Disclosure: A Practical Guide to Climate Risk Assessment and IFRS S2 Reporting

As we move deeper into 2025, the landscape of climate-related financial disclosure has fundamentally shifted. IFRS S2 Climate-related Disclosures became effective for annual reporting periods beginning on or after 1 January 2024, marking a new era of mandatory climate reporting for organizations worldwide. For businesses across all sectors, this isn’t just about compliance rather it’s about building resilience in an increasingly climate-uncertain world.

Why Climate Risk Assessment Matters More Than Ever

Climate risks are no longer distant concerns—they’re present realities affecting supply chains, operational costs, and investment decisions daily. From extreme weather events disrupting manufacturing to transitional risks from evolving regulations, organizations face an intricate web of climate-related challenges that directly impact their financial performance.

The financial implications are staggering. Physical risks alone—floods, droughts, heatwaves—cost the global economy hundreds of billions annually. Meanwhile, transitional risks from policy changes, technological shifts, and evolving market preferences are reshaping entire industries. Companies that fail to assess and prepare for these risks face not just regulatory penalties, but potentially existential threats to their business models.

Understanding IFRS S2: Beyond Compliance to Strategic Advantage

The requirements of IFRS S2 are structured around four core elements: governance, strategy, risk management and metrics and targets. But what does this mean in practice?

The Four Pillars of IFRS S2 Reporting

Governance: Organizations must disclose how their board and management oversee climate-related risks and opportunities. This goes beyond having a sustainability committee—it requires demonstrating integrated climate governance throughout decision-making processes.

Strategy: Strategy disclosures must distinguish between physical and transitional risks and include disclosure of plans to respond to climate-related risks and opportunities, including how climate-related targets align with business strategy.

Risk Management: Companies need to detail their processes for identifying, assessing, and managing climate-related risks, showing how these integrate with overall risk management frameworks.

Metrics and Targets: This includes greenhouse gas emissions data, climate-related financial metrics, and progress against climate commitments—all requiring robust data management and verification systems.

Building an Effective Climate Risk Assessment Framework

1. Start with Scenario Analysis

Effective climate risk assessment begins with comprehensive scenario analysis. Organizations should model various climate futures—from 1.5°C warming scenarios to higher temperature pathways—to understand potential impacts across different timeframes.

Physical Risk Assessment: Map your assets, operations, and supply chains against climate hazard projections. Consider both acute risks (extreme weather events) and chronic risks (long-term shifts in climate patterns).

Transitional Risk Evaluation: Assess how policy changes, technological developments, and market shifts might affect your business model. This includes carbon pricing, renewable energy transitions, and changing consumer preferences.

2. Integrate Financial Impact Quantification

Climate risks must be translated into financial terms to meet IFRS S2 requirements. This involves:

• Quantifying potential revenue impacts from climate-related disruptions
• Assessing cost implications of adaptation and mitigation measures
• Evaluating asset stranding risks in high-carbon sectors
• Calculating insurance and financing cost changes

3. Develop Robust Data Infrastructure

Quality climate reporting requires quality data. Organizations need systems that can:

• Collect and verify emissions data across Scope 1, 2, and 3 categories
• Monitor climate-related financial metrics in real-time
• Track progress against climate targets and commitments
• Ensure data auditability and third-party verification readiness

Common Implementation Challenges and Solutions

Challenge 1: Data Quality and Availability

Many organizations struggle with incomplete or inconsistent climate data, particularly for Scope 3 emissions and forward-looking metrics.

Solution: Implement phased data collection strategies, starting with high-confidence data and gradually improving coverage. Use industry benchmarks and estimation methodologies where direct data isn’t available, while being transparent about limitations.

Challenge 2: Scenario Analysis Complexity

Climate scenario analysis can seem overwhelming, especially for smaller organizations without dedicated climate expertise.

Solution: Start with simplified scenarios aligned with established frameworks like TCFD recommendations. Focus on the most material risks to your business and build sophistication over time.

Challenge 3: Integration with Financial Reporting

Connecting climate risks to financial outcomes remains challenging for many finance teams.

Solution: Develop clear methodologies for translating climate impacts into financial terms. Work closely with external auditors early in the process to ensure approaches meet professional standards.

The Technology Advantage

Modern climate risk assessment increasingly relies on sophisticated technology solutions:

Climate Data Analytics: Advanced platforms can process vast amounts of climate data, from historical weather patterns to future projections, providing granular insights into location-specific risks.

Digital Twins and Modeling: Virtual representations of assets and operations enable sophisticated scenario testing and impact modeling.

Automated Reporting Systems: Technology can streamline data collection, calculation, and reporting processes, reducing manual errors and improving efficiency.

Satellite and IoT Monitoring: Real-time environmental monitoring provides early warning systems and validates climate impact assessments.

Best Practices for IFRS S2 Success

1. Start Early and Build Gradually

Don’t wait for the last minute. Begin with pilot assessments and build capability systematically.

2. Engage Stakeholders Throughout

Climate reporting isn’t just a finance function—it requires input from operations, strategy, risk, sustainability, and legal teams.

3. Focus on Materiality

Prioritize the climate risks and opportunities most relevant to your business model and stakeholder concerns.

4. Embrace Transparency

Be honest about uncertainties and limitations while demonstrating continuous improvement in your approach.

5. Prepare for Assurance

Build verification and auditability into your systems from the start, as external assurance requirements are likely to expand.

Looking Ahead: The Future of Climate Disclosure

IFRS S2 is just the beginning. We can expect continued evolution in climate disclosure requirements, including:

• Enhanced scope and detail requirements
• Mandatory external assurance
• Integration with nature-related disclosures
• Increased regulatory enforcement
• Growing investor and stakeholder scrutiny

Organizations that treat IFRS S2 as a strategic opportunity rather than a compliance burden will be best positioned for this evolving landscape.

Taking Action

Climate risk assessment and IFRS S2 reporting represent both challenges and opportunities. While the requirements are complex, they also provide frameworks for building more resilient, future-ready organizations.

The key is to start now, build systematically, and view climate disclosure as an integral part of business strategy rather than an add-on requirement. Organizations that embrace this mindset will not only meet regulatory requirements but gain competitive advantages in an increasingly climate-conscious world.

Ready to strengthen your climate risk assessment and IFRS S2 reporting capabilities? Our team of climate data specialists and sustainability experts can help you navigate these complex requirements with confidence. Contact us to learn how we can support your climate disclosure journey.