NGFS launches detailed climate scenarios

The Network for Greening the Financial System (NGFS) has released an updated version of its climate scenarios for central banks and supervisors.

The set of six potential climatic and transition pathways offers much more detail than the initial iteration, published in 2020. They include impact mapping by country along with nearly 1,000 economic, financial, transition and physical variables.

Climate scenario analysis is a forward-looking exercise to assess risk, resilience, threats and opportunities under different possible climate-related futures. The NGFS scenarios are the de facto common standard for scenario analysis across many institutions, creating consistency and comparability of results for systemic analysis by central banks and supervisors.

Scenario analysis is also a core part of the Taskforce on Climate-Related Financial Disclosures recommendations for climate risk analysis and disclosure.

The new NGFS climate scenarios, accompanied by a user-friendly educational website, range from business-as-usual – in which currently implemented policies lead to a world at least 3ºC hotter – to one that reaches net-zero emissions around 2050, limiting global warming to 1.5°C.

Other scenarios include one in which all nations meet their current commitments under the Paris Agreement, and one in which the transition to net zero is delayed and so more disruptive.

In a press release announcing the new scenarios, Frank Elderson, NGFS chair and European Central Bank board member, promised ongoing development of what is likely to become a key feature of risk management.

“With these scenarios, the NGFS provides – and intends to regularly update – an important public good for all stakeholders, public and private, to help them engage in forward-looking climate-risk analysis under a common and consistent global reference framework,” he said.

However, others warned against an over-reliance of scenario analysis at the expense of practical and immediate action to reduce emissions. “The bank’s climate scenario analysis may be a useful exploratory exercise, but it’s time to move from exploring to acting,” said Positive Money senior economist David Barmes. “Scenario analysis is incapable of accurately measuring highly complex climate-related financial risks, and we already know enough about the dangers of the climate crisis to justify regulatory action now.”

The NGFS climate scenarios were developed in partnership with a wide academic consortium using a range of climatic, transition and economic models. The network will now focus on their application in central bank case studies and work with industry to ensure the scenarios are suitable for wider use.

A further update is expected in the spring of 2022.