The Network for Greening the Financial System (NGFS) has this week published its first set of scenarios of the potential near-term impacts of climate policies and climate change on financial stability and economies.
Sabine Mauderer, chair of the NGFS and first deputy governor of the Deutsche Bundesbank, described the new scenarios as “a milestone in enhancing our understanding of climate-related risks”.
According to Livio Stracca, chair of the NGFS workstream on scenario and design analysis and deputy director general for financial stability at the European Central Bank, the scenarios “address the question of how climate may matter already in the in the next five years” and that they were a tool “that nobody else has in the world apart from the NGFS”.
“The short-term scenarios mark a significant step forward in supporting institutions to prepare for adverse, but plausible, climate developments and policies,” he also said.
He explained that the NGFS had developed four scenarios, two transition scenarios and two physical risk scenarios, “the second combined with supply chain disruptions that also make the green transition more costly”.
Mainstream climate scenarios such as those developed by the NGFS have been criticised for their narrowness and inadequate treatment of tipping points.
Finance Watch, an NGO, welcomed the NGFS’s continued focus on upgrading the toolkit for climate-related financial risk and said its new work on short-term scenarios was “a welcome attempt to align climate risk assessment more closely with existing risk management practices, offering more tangible guidance for financial institutions and supervisors”.
It said the NGFS had made some improvements to its modelling, adding features such as compound risk of multiple climate events, real economy financial-sector feedback loops, and more granular outputs across 50 sectors and 46 countries.
However, it said that significant improvements were still needed to ensure the scenario tools “are both credible and actionable”.
The NGFS says that users should be aware that the group “is constantly working to further improve the scenarios, including with regard to physical risks or the consideration of polycrises”.
“Users should take into account tail risks of climate change, along with other risks such as nature-related ones, which are not necessarily captured by these scenarios, or the uncertainty around the occurrence of tipping points in the long term,” it adds in a disclaimer.
“While the NGFS climate scenarios are a helpful tool, they do not alleviate the responsibility of banks and other (financial) organisations to design and implement their own risk management frameworks, adapting them as they see appropriate.”
Stracca said the short-term scenarios were a developing product and that the NGFS was keen for feedback as to what could be improved.
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