The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), announced today the launch of its first set of short-term scenarios, aimed at enabling central banks and financial sector supervisors to analyze the near-term impact of climate change and climate-related policies on the stability and resilience of economies and financial systems.
The NGFS was established in 2017, with the purpose of helping to strengthen the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development.
The organization provides science-based insights aimed at helping financial systems to navigate climate and nature-related risks. The NGFS’s key tools include its long-term climate scenarios – reflecting possible future climate policies, and assessing physical risks, including heat, drought and floods, and short and long-term risks stemming from the transition to a greener economy such as increasing carbon prices – which are used by many central banks worldwide in climate stress tests for banking and financial systems.
According to the NGFS, the new short-term scenarios focus on a five- year time horizon, and offer detailed sector analysis and extensive coverage of financial risk and macroeconomic variables, exploring the interaction of factors including climate policies, extreme weather, economic trends and sectoral shifts.
Among the key feature of the new scenarios highlighted by the NGFS include the accounting of compound physical climate risks, exploring how a sequence of extreme weather events such as heatwaves, floods, wildfires, and storms could impact economies, including supply chain breakdowns. The scenarios also integrate climate policy, extreme weather events, economic trends and sectoral dynamics to provide scenarios that reflect the interaction of climate risks and business cycles, the organization added.
In a presentation announcing the launch of the scenarios, the NGFS said:
“With a focus on the next five years, the scenarios are particularly useful for financial sector applications, such as stress testing, risk assessment, and guiding policy calibration.”
The new release includes four sets of scenarios, including one focusing only on physical risk, two transition risk only scenarios, and one scenario combining physical and transition risks. “Disasters and Policy Stagnation,” the physical risk scenario explores the economic and financial consequences of extreme but plausible weather events. The transition only scenarios include “Highway to Paris” which envisions an orderly, technology-driven gradual transition, and “Sudden Wake-Up Call,” in which there is a sudden change in policy preferences and consumer and investor preferences towards green sectors. “Diverging Realities,” considering physical and transition risk, sees advanced economies pursuing a “Highway to Paris” aligned scenario, while other economies are hit by extreme weather events, creating supply chain disruptions and raising the cost of the low-carbon transition.
In the presentation on the new scenarios, NGFS Chair Sabine Mauderer and Chair of the workstream on Scenario Design and Analysis Livio Stracca said:
“Robust and actionable climate risk analysis is essential for the global economy to navigate the climate challenge. Financial actors and policymakers must gain a deeper understanding of climaterelated risks in order to prepare for them appropriately. The NGFS short-term scenarios are hence a vital instrument for conducting risk assessments and making informed decisions with greater confidence.”
