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Scenario Analysis “May Understate” Climate Risks

The Financial Stability Board (FSB) and Network for Greening the Financial System (NGFS) have warned in a report that current climate scenario analysis exercises “may understate” climate exposures and vulnerabilities. The report provides an evaluation of the findings from climate scenario analysis exercises from financial authorities at firm, sector and system level. While a majority of these exercises rely on NGFS scenarios, significant variations in scope and objectives make it difficult compare results. The “overarching message” of these initial exercises is that the impacts of climate risks appear to be concentrated in certain sectors and overall contained from the perspective of domestic financial systems. Klaas Knot, the FSB’s Chair, said: “This joint report underscores the importance of work to enhance the understanding of the financial system vulnerabilities from climate-related risks, through improved and more forward-looking metrics for assessing financial institutions’ exposures to climate-related shocks. A key priority going forward will be to enhance the understanding of how first-round and second-round effects under different scenarios could give rise to financial stability concerns”. The report has been sent to the Group of Twenty leaders ahead of the Bali Summit. 

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