Climate scenarios: Everyone has a plan until reality delivers the punch

By Carl Prins, Pathzero Insights | September 29, 2025

Mike Tyson famously quipped, "Everyone has a plan until they get punched in the face." In the world of climate risk modelling, that punch arrives not from a heavyweight bout, but from the relentless flux of policy shifts, geopolitical surprises, and weather events that defy our carefully constructed forecasts. For asset owners, this rings especially true as Australia's AASB S2 Climate-related Disclosures standard approaches—finalised just a year ago and mandating adoption in reporting periods beginning on or after 1 January 2025 for Group 1 entities, with Group 2 entities required to report from 1 July 2026 onwards. The standard demands robust, decision-useful disclosures on transition and physical risks across direct holdings and indirect exposures via third-party managers. Yet, the scenarios underpinning these disclosures—venerable frameworks like NGFS and IPCC pathways—offer structure at the expense of agility. They excel in compliance but falter in foresight, leaving asset owners grappling with outdated baselines amid accelerating change.

This article unpacks the promise and pitfalls of these models, spotlights recent "punches" from global policy whiplash, and charts a path to more nimble tools. For asset owners, the goal is clear: transform static scenarios into dynamic defences that meet AASB S2's rigour while navigating the complexities of diversified portfolios.

The backbone of climate risk modelling: Standardised scenarios

Standardised scenarios provide a shared language for assessing climate risks, enabling comparability across institutions and jurisdictions. They integrate socioeconomic narratives, emissions pathways, and impact projections to quantify transition risks (e.g., policy-driven carbon pricing shocks) and physical risks (e.g., acute flooding or chronic heat stress).

At the forefront is the Network for Greening the Financial System (NGFS), which in its Phase IV release (2023) offers seven harmonised global scenarios spanning 2020–2100. These range from "Net Zero 2050" (orderly alignment with 1.5°C goals via gradual decarbonisation) to "Current Policies" (business-as-usual with high physical impacts) and "Delayed Transition" (disorderly late-stage policy interventions). NGFS data includes granular metrics like sectoral carbon prices, GDP impacts, and sea-level rise, making it a cornerstone for financial stress testing.

Complementing this are the IPCC's Shared Socioeconomic Pathways (SSPs) paired with Representative Concentration Pathways (RCPs) from the Sixth Assessment Report (AR6, 2021–2023). SSPs outline five futures—from sustainable "SSP1" (low inequality, green tech dominance) to fossil-fuelled "SSP5"—while RCPs define radiative forcing levels (e.g., RCP2.6 for low emissions). These underpin projections of temperature rises (1.5–4.4°C by 2100) and risks like biodiversity loss or supply chain disruptions.

These tools shine in fostering transparency and consistency—essentials for AASB S2's requirements on scenario analysis (para. 28–30) and Scope 1–3 GHG disclosures (with new AASB guidance issued September 2, 2025). For asset owners, they simplify aggregating risks across direct assets (e.g., owned real estate) and indirect ones (e.g., funds managed by external parties), where data gaps abound.

The punch: When static models meet a dynamic world

Yet herein lies the rub: these scenarios, while architecturally sound, are etched in amber. Built on assumptions from years past, they struggle with near-term volatility, trading precision for uniformity. A "Net Zero 2050" baseline, for instance, assumes linear policy progress—a luxury the real world rarely affords.

Consider Australia's freshly unveiled National Climate Risk Assessment (NCRA) and adaptation plans, released September 12, 2025. This landmark document identifies 12 priority risks—from cascading floods to health system strains—and anchors a revised Nationally Determined Contribution (NDC): 62–70% net emissions cuts below 2005 levels by 2035, up from the prior 43% by 2030 target. Adaptation roadmaps emphasise resilient infrastructure and sectoral safeguards, injecting urgency into timelines that eclipse NGFS's gradualism. For Australian asset owners, this isn't abstract; it recalibrates transition risks for energy and agriculture holdings, demanding Scope 3 recalculations under AASB S2 that third-party managers may lag in providing.

Across the Pacific, the U.S. under a second Trump administration exemplifies policy whiplash. Inaugurated January 20, 2025, the administration's "Unleashing American Energy" executive order has accelerated fossil fuel permitting, slashed clean tech incentives, and dismantled climate science infrastructure—cancelling $6.9 billion in projects by Q1 2025 alone. Drawing from Project 2025's blueprint, it reframes climate action as ideological overreach, revoking GHG regulations and the Council on Environmental Quality's oversight. For global portfolios, this upends transition assumptions: carbon border adjustments falter, renewable subsidies evaporate, and physical risks (e.g., intensified hurricanes) amplify without federal mitigation. Asset owners with U.S. exposures—direct equities or via managers—face AASB S2's governance mandates (para. 15–17) to disclose such sensitivities, yet standard scenarios like NGFS's "Delayed Transition" now feel quaintly optimistic.

Even in Europe, the Corporate Sustainability Reporting Directive (CSRD)—once a beacon of ambition—shows dilution's creep. Draft ESRS updates, published July 31, 2025, propose slashing standards by two-thirds to lighten corporate loads, prompting ECB President Christine Lagarde to warn of counterproductive retreats. Coupled with phased delays (large firms now reporting from 2026, others pushed to 2028+), this erodes the directive's bite on transition disclosures. For asset owners, the message is stark: physical risks, beholden to unscripted weather, demand probabilistic modelling beyond RCPs; transition risks, tethered to politics, require constant recalibration.

These shifts underscore a core tension for AASB S2 compliance: third-party managers often default to generic NGFS runs, obscuring portfolio-specific nuances. Direct holdings might yield proprietary data, but indirect ones trigger aggregation headaches—Scope 3 estimates vary wildly, and governance over manager assumptions feels elusive.

Forging nimble, decision-useful tools: A practical approach

To counter the punch, asset owners must evolve beyond compliance theatre toward accuracy. The solution lies not in wholesale reinvention, but in a pragmatic approach that leverages the infrastructure of standard scenarios— their transparent data layers and timeframes—while embedding flexibility for bespoke futures. This aligns with emerging guidance, such as McKinsey's Planetrics framework, which emphasises modular designs where firms prioritise decision relevance through targeted adjustments.

At its core, this requires a shift in mindset and process. Below are practical steps to build dynamic resilience:

1. Adopt a dynamic mindset: Recognise the world's perpetual flux and embrace ranges of outcomes, including scenarios that seem improbable today—such as accelerated policy reversals or unforeseen technological breakthroughs. This counters the rigidity of fixed baselines, fostering preparedness for AASB S2's emphasis on forward-looking analysis.

2. Reframe financial modelling around duty, not causation: In Australia, superannuation trustees' fiduciary obligations under the Superannuation Industry (Supervision) Act prioritise members' best financial interests, focusing on risk-adjusted returns rather than positioning capital as a direct catalyst for systemic change. Climate modelling should thus strip out prescriptive "cause" elements (e.g., assuming investor activism drives decarbonisation) and centre on quantifiable financial impacts, ensuring alignment with the sole purpose test while integrating risks like those affirmed in the McVeigh v. REST landmark ruling.

3. Build from known models with pragmatic adjustments: Start with NGFS or IPCC frameworks for their proven structure, then methodically vary key variables—e.g., carbon pricing trajectories or emissions peaks—to illuminate risk exposures. This demonstrates a clear understanding and management of transition and physical risks, directly supporting AASB S2's scenario requirements without unnecessary complexity.

4. Discipline transition and physical risks separately: Treat these as distinct streams: transition modelling should interrogate policy and market signals with high-frequency updates, while physical risk assessment relies on probabilistic, asset-specific projections. This bifurcation enhances clarity and avoids conflating controllable (transition) with exogenous (physical) drivers.

5. Leverage technology to animate scenarios: Use digital tools judiciously to operationalise explorations—e.g., interactive dashboards for sensitivity testing or visualisation of "what-if" outcomes—transforming static data into vivid, board-ready insights that inform strategy.

6. Prioritise collaboration: For asset owners delegating to third-party managers, establish joint protocols early: co-develop customised scenario overlays, share deviation rationales, and align on data standards. This mitigates Scope 3 inconsistencies and strengthens governance disclosures under AASB S2.

7. Decouple from broader ESG reporting: Isolate climate risk from the full ESG spectrum to maintain focus; mandatory general sustainability standards (AASB S1) will follow, allowing phased implementation without overload.

8. Localise to region and assets: Narrow the lens to material geographies and holdings—e.g., Australian infrastructure under NCRA risks or U.S. equities amid policy shifts—rather than exhaustive global tracking, which dilutes actionable intelligence.

This approach trades uniformity for utility: generalised data suits audits, but tailored views drive capital allocation—vital when 70% of AASB S2's value lies in strategy (para. 10).

Transparency: The guardrail for credible reporting

Dynamism risks opacity, but AASB S2 demands traceability (para. 31). Best practice: embed deviation logs—e.g., "NGFS carbon price adjusted -15% for U.S. policy risk, rationale: Executive Order dated Jan 20, 2025"—with quantitative impacts on metrics like value-at-risk. This satisfies regulators while signalling stewardship to stakeholders. As the Federal Reserve's 2024 pilot showed, such tracking fosters trust without sacrificing innovation.

A call to agile resilience

Asset owners stand at a pivot: AASB S2 isn't mere box-ticking; it's a mandate to fortify portfolios against the unforeseen. By laying these foundational plans now—integrating dynamic approaches and collaborative foundations—organisations can prepare methodically for mandatory reporting, turning preparation into a competitive edge. Static scenarios built the ring, but a nimble mindset wins the fight—resilient enough for policy haymakers, adaptive enough for weather's wild swings. As global contexts evolve—from Australia's 2035 sprint to America's retreat and Europe's recalibration—the imperative is clear: plan not for certainty, but for enduring value.

At Pathzero, we're advancing this discourse through capabilities that empower such preparation, grounded in the standards that matter. The punch is coming; ensure your guard is up.

For tailored guidance on AASB S2 implementation, connect with our team at Pathzero.com.