New NGFS scenarios ignore transition risks such as trade wars, recessions and policy battles. © Ronnie Robertson
The new short term climate scenarios from the Network for Greening the Financial System (NGFS) are intended as another step towards more realistic assessments of the of risks and opportunities of the climate transition. Sadly, while the scenarios employ a raft of modelling improvements, the whole exercise remains mired in “model land”, stuck in simulations that bear little resemblance to the real world.
The ongoing failure to consider realistic narratives means that their models are not being asked the right questions. By ignoring crucial risks and interactions, these scenarios barely scratch the surface of the potential range of possibilities we face over the next few years.
The new set of four short-term scenario narratives suffer from two essential problems. The first is that they treat physical and transition risks as strangely separable. Only one of the four scenarios involves both physical and transition risk while the remaining scenarios only examine one or the other, despite the near-inevitability that both types of risk will increase over the next five years.
Indeed, an inevitable consequence of global warming over this decade is increasing extreme weather. Although the precise location and timing of such shocks is uncertain, the fact there will be more is not. And yet in two of its scenarios, the NGFS assumes there will be none.
This is hugely consequential, because while the NGFS might be justified in assuming that the emergence of transition risks will have little impact on physical risks on a five-year horizon, we can be confident that the increasing physical risk in the shape of the intensity and frequency extreme weather events will have implications for transition risks. The mouting damage from storms, fires and floods could trigger profound shifts in political attitudes, climate policy and asset values.
The second, and more important, problem is that the single baseline narrative for the exercise ignores economic, financial, political and policy shocks that could trigger much bigger transition risks than the NGFS scenarios care to consider. Instead, the NGFS team boils down transition risk simply to climate policy, and then only to an arbitrary one-off delay in a smoothly rising pathway for carbon prices.
Leaving aside the lack of plausibility of this narrative, this approach completely ignores other sources of transition risk. Recessions, market crashes, wars, policy battles and surprising tech breakthroughs could all trigger transition risks and tipping points over the next five years. As it has in the past, the NGFS is structurally understating the range of climate-related financial risks.
NGFS scenarios contain lack of alternative pathways
The heart of the problem is that the whole exercise is based on a single smooth pathway for economic activity. In place of the shared socio-economic pathway 2 (SSP), produced by the International Panel on Climate Change and used for the NGFS’s long-term scenarios, these new short-term scenarios are based on a two-year-old forecast profile from the International Monetary Fund (IMF).
Yet the NGFS provides no justification for failing to consider the impact of alternative macro pathways. It was for good reason that the IPCC produced five different SSPs, with radically different trajectories for economic activity, policy, finance and technology. Macrofinancial volatility is not just a consequence of transition risk, but a primary cause.
Booms and busts in the economy and markets have dramatic effects on the profitability and prices of the climate-related assets that are ultimate focus of climate financial risk scenarios. This source of transition risks continues to be a blind spot for the NGFS.
To see the significance of this, consider that the four new NGFS short-term scenarios have outcomes for world GDP in 2030 that all fall within a range of less than 2.5%. While non-trivial, this is less than the average absolute error on the IMF’s GDP forecasts for just one year ahead, which is 2.7%.
And lest you think that year-to-year errors on GDP forecasts cancel out over time – they don’t. On average, between 2010 and 2020 the IMF’s annual forecasts were too optimistic to the tune of 1.5% per year, a cumulative decadal error of 16%. This abysmal record suggests it would be plausible to consider scenarios each with different GDP baselines varying in range by 5-10% over a five-year period.
The point here is not to single out the IMF for criticism for its forecast errors (other forecasters are just as bad), but rather to highlight that GDP could be far more volatile than the NGFS cares to consider. This is crucial because it means economic activity, asset prices, geopolitics, climate policy, energy prices, investment and innovation could follow very different paths in each scenario. And year-to-year volatility, nearly invisible in the IMF forecasts, is hugely consequential for financial risk.
In other words, most of the things that really matter for realistic climate scenarios are still missing from the NGFS’s simplified model land.
This page was last updated May 14, 2025
Written by
Mark Cliffe an economic consultant specialising in sustainability. He is also currently a visiting professor at the London Institute of Banking & Finance, a visiting fellow at the Global Systems Institute at the University of Exeter, and associate business fellow at the UK Centre for Greening Finance and Investment. Previously, he was chief economist at ING Group.
