NGFS Publishes Scenarios for Climate Risk Assessments

The publications will allow NGFS members and the FIs they supervise to better identify, quantify and mitigate climate risks in the financial system.

The NGFS  (Network for Greening the Financial System) has published a set of documents to help facilitate forward-looking climate risk assessments by central banks and supervisors.

The NGFS, launched at the Paris One Planet Summit in December 2017, is a group of central banks and supervisors that voluntarily share best practices and contribute to the development of environmental and climate risk management in the financial sector. seeking to mobilise mainstream finance to support the transition toward a sustainable economy.

“Changes to our climate are unprecedented. To understand the financial risks and economic costs they bring, we need to look forwards not backwards,” the NGFS says. “To determine the right actions to take today, we need to look ahead over decades, not just the next few years. Scenario analysis enables us to do that.”

A first set of climate scenarios has been published, providing a common reference framework for analysing climate risks and exploring the transition and physical impacts of climate change under varying assumptions. This first iteration explores eight scenarios which are consistent with the framework published by the NGFS in its First Comprehensive Report in April 2019.

The set includes three representative scenarios: ‘Orderly’ (early, ambitious action to a net-zero CO2 emissions economy); ‘Disorderly’ (action that is late, disruptive, sudden and/or unanticipated); and ‘Hot house world’ (limited action leading to significant global warming and heightened exposure to physical risks).

guide to climate scenario analysis is also published, offering practical advice on using scenario analysis to assess climate risks to the economy and financial system. Aimed at advancing the discussion on the methodologies used, the guidance is based on the initial experiences of NGFS members and observers.

The guide provides a four-step process: (1) Identify objectives and exposures; (2) Choose climate scenario; (3) Assess economic and financial impacts; and (4) Communicating and using results.

Also published is a report examining the possible effects of climate change on monetary policy, based on a comprehensive review of existing literature and expert analyses. It explains how climate change affects key macroeconomic variables as determinants of monetary policy, monetary transmission channels, and central bank policy assessments.

The report finds that climate change and its mitigation will increasingly affect macroeconomic variables essential to the conduct of monetary policy. It highlights the need for central banks to strengthen their analytical toolkits and integrate climate risks into their economic models and forecasting tools.

An additional research report setting out and discussing the NGFS research priorities has also been published, focusing on the analysis of the macroeconomic and financial stability impacts of climate change.

The document is intended to inform NGFS members’ own research efforts, and to serve as a catalyst to mobilise and coalesce global research partners and the broader research community around the NGFS research priorities.

The NGFS has also announced that the Asian Development Bank joined the NGFS as an observer this month. To date, the NGFS has 66 central banks and supervisors as members and 13 observers – representing supervision of over three-quarters of G-SIBs and two-thirds of G-SIIs.

Looking ahead, the NGFS will continue to develop the scenarios to make them more comprehensive, with the aim to be as relevant as possible for economic and financial analyses. Specifically, it will look to refine and expand the scope of the scenarios to account for further risk dimensions in modelling, improve regional coverage and sectoral granularity, calculate probabilistic losses from acute climate impacts, and expand the set of macroeconomic outputs.

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