NGFS Climate Scenarios: pushing financial players into taking a risky gamble

This report from think tank and advocacy group Reclaim Finance assesses the credibility of the Network for Greening the Financial System’s (NGFS) latest climate scenarios for central banks and supervisors, released in June, 2021. The study focuses on the 1.5C scenarios, finding them heavily reliant on unproven carbon capture and storage at scale and on the unsustainable use of biomass for energy production. The NGFS also fails to acknowledge the need to end investments in new fossil fuels, the analysis shows, pointing to fossil fuel investment levels far out of alignment with the scientific pathway to a 1.5C world.

Inherent uncertainty about future events makes it difficult to assess emerging climate-related risks using standard risk modelling techniques. Scenario analysis, involving a range of possible futures rooted in potential emissions pathways, provides a flexible and forward-looking ‘what-if ’ methodological framework within which to explore climate-related financial risk. NGFS scenarios are used by central banks and financial regulators to conduct climate-related risk analysis.

The NGFS released its first set of scenarios in June 2020 along with a guide to climate scenario analysis for central banks and supervisors. The NGFS’ latest set of six scenarios includes two outlining an orderly transition, two focusing on a disorderly transition and two “hot house world” scenarios in which significant global heating continues and results in severe physical risk and irreversible impacts. The Reclaim Finance analysis focuses on the two 1.5C scenarios, one orderly and one disorderly.

The fundamental weaknesses of both scenarios is over-reliance on fossil fuels enabled by a “dangerous bet” on unproven carbon dioxide removal (CDR) at vast scale, the report finds. This use of yet-to-be-invented technology somehow deployed and operated at a global scale within the next three decades, allows the NGFS scenarios to preserve fossil fuel investment while balancing the scientifically-determined carbon budgets necessary to stay within the “safe” 1.5C target of the Paris Agreement. This represents an enormous and unrealistic gamble with the planet’s future, say the authors.

The report also criticises the NGFS for implying a significant use of biomass in its 1.5C scenarios, without examining the potential for generating this biomass sustainably. There is also a failure to acknowledge the limitations of scenario analysis itself, the report finds, as well as the limitations of the integrated assessment models used to explore the economic and financial implications of the various emissions pathways.

The NGFS 1.5C scenarios are not aligned with the Paris Agreement and are not sustainable, the report finds. A credible and low risk pathway forward requires the removal of all or most CDR from NGFS scenarios and an acknowledgment of the need to end investment in new fossil fuels, it says, calling for the NGFS to stop branding higher CDR scenarios as less risky or “orderly”.

The NGFS should also adopt a precautionary approach to biomass use, the report concludes, avoiding additional land use staying within sustainable boundaries.