The Phase 2 / Phase 3 split: why financial scenario work belongs after the foundations, not alongside them

There is a natural instinct, particularly from a finance perspective, to move quickly to the numbers. Boards ask for financial impact, executives want to understand exposure, and finance jumps into solution-solving mode. Modelling tools are readily available, and this creates an impression that quantification is the logical starting point.

But the first reporting cycle is showing something different. When organisations attempt financial scenario modelling too early, the issue is not that the numbers are wrong. It is that they cannot be defended.

Even under limited assurance in the early years, this is a problem.

Why good teams get this wrong

This is not a capability problem. In most cases, it is the opposite — finance teams are trained to deal with uncertainty. Finance professionals, especially FP&A, thrive when modelling scenarios, applying judgement, and translating assumptions into financial outcomes. When climate enters the conversation, it feels natural to apply the same thinking.

The challenge is that climate reporting introduces a layer of structure that does not yet exist in many organisations. The binding climate language and underlying data structure between operations and finance may not yet be aligned.

Governance is still being defined. Risk taxonomies are still evolving. Data boundaries are not always clear. Assumptions are often implicit rather than documented.

So when modelling starts too early, it is built on foundations that are still shifting. The result is not acceleration — potentially, it is rework.

Not all starting points are the same

It is also important to recognise that not all organisations are starting from the same place.

Some Group 2 entities already have elements of this work underway — emissions data, early scenario thinking, or climate embedded into parts of strategy. Others are at a much earlier stage, still working through governance, risk identification, and data boundaries.

Interestingly, maturity does not remove the challenge.

In some cases, organisations that are further progressed are more exposed to sequencing risk. Early progress can create a sense of readiness, leading teams to move quickly into financial modelling before the underlying structure is fully aligned and evidenced.

For those earlier in the journey, the focus is clarity. Defining governance, identifying risks, and establishing the basic architecture that will support future disclosures.

For those further progressed, the focus is alignment. Ensuring that existing data, scenarios, and initiatives are connected, structured, and capable of standing up under assurance.

Different starting points — but the same discipline applies.

The Phase 2 / Phase 3 split

This is where sequencing becomes critical.

There is a natural divide between what we can think of as Phase 2 and Phase 3 work.

Phase 2 is where the foundations are built. Governance is assigned and evidenced. Climate risks and opportunities are identified and classified. Scenario selection is understood and justified. Time horizons are defined. Data boundaries are established. Assumptions begin to take shape in a structured way.

It is not about perfection — rather, it is about making progress and gaining clarity across the whole organisation and value chain.

Phase 3 is where financial integration begins. Scenario modelling, quantification of impacts, sensitivity analysis, and the connection into forecasts and capital allocation all sit here.

The mistake many organisations make is trying to run both phases at the same time.

In practice, Phase 3 does not fail because of modelling capability. It fails because Phase 2 was incomplete.

What happens when sequencing is ignored

When the foundations are not in place, the pressure shows up later.

Scenario outputs become difficult to reconcile. Assumptions are challenged and cannot be clearly explained. The narrative and the numbers begin to diverge. What looked coherent at a high level starts to fragment under scrutiny.

At that point, the only option is to go back and rebuild the underlying structure — often under time pressure.

What initially felt like progress becomes compression. This is where many first-year disclosures encountered friction. Two examples illustrate where assumptions may not stand under scrutiny.

Why this is familiar territory for finance

What this means in practice is a shift in how evidence is thought about.

This is not about producing more data. It is about being able to demonstrate how a conclusion was reached. Under scrutiny, the questions are relatively simple. Who owns this? How was the approach determined? What assumptions sit underneath it? And does it all connect?

For CFOs, this is familiar territory. We already apply this discipline to impairments, provisions, and valuations. The difference here is that the inputs now extend beyond finance — but the standard of evidence does not.

Disclosures become defensible when the story holds together, the overarching governance is clear, the methodology is consistent, and underlying assumptions are visible.

If not, the challenge is not the number — it is the absence of a process that can be explained.

The opportunity for Group 2 entities

For Group 2 entities, there is a real advantage in observing how this first wave has unfolded.

You can see where the pressure points emerged, start to understand where sequencing broke down, and — importantly — you have time to respond. This is not about delaying progress. It is about directing it.

Building the foundations properly now, starting with the fundamental AASB S2 pillars of governance, risk, data, and assumptions, creates a platform where financial modelling becomes faster, scalable, more meaningful, and far more defensible.

Trying to accelerate by moving straight to quantification rarely delivers that outcome.

The difference between a disclosure that holds up under assurance and one that requires rework is rarely the sophistication of the model.

It is the order in which the work was done. In first-year climate reporting, sequencing is not an operational detail.

It is the successful strategy.