NGFS Publishes Second Set of Scenarios for Climate Risk Assessment
NGFS published the second vintage of the climate scenarios and a dedicated website for scenarios, both aimed at fostering the integration of climate-related risks into the work of central banks and supervisors. The new set of climate scenarios have been brought up to date, including by incorporating countries’ commitments to reach net-zero emissions. They have also been enriched with an expanded set of macroeconomic variables and additional country and sector-level granularity. The new NGFS scenarios website provides interactive visualization of the scenarios and background resources, along with the link to a new climate impact explorer where users can explore and download detailed physical risk data. NGFS also announced that the Finnish FSA recently joined NGFS as a member.
Since the release of the first set of scenarios in June 2020, NGFS has engaged with stakeholders and benefited from numerous valuable inputs. A key point of user feedback has been about how to navigate uncertainty in climate scenarios. The NGFS scenarios are explicitly designed to support an assessment of uncertainty both by providing results across a range of scenario assumptions and models and through regular updates of the underlying data and methodologies. The scenarios also highlight the increased macro-financial risks that could crystallize in scenarios with divergent policies or delay, followed by stronger action, and from physical risks. The scenarios provide a framework to assess and manage the future financial and economic risks that changes to climate might bring. They provide a coherent set of transition pathways, climate impact projections, and economic indicators at country-level, over a long time horizon and under varying assumptions. NGFS scenarios provide a foundation for scenario analysis across many institutions, creating much needed consistency and comparability of results. NGFS explores a set of six scenarios that are consistent with the NGFS framework published in the first NGFS Comprehensive Report covering the following dimensions:
- Orderly scenarios that assume climate policies are introduced early and become gradually more stringent. Both physical and transition risks are relatively subdued.
- Disorderly scenarios that explore higher transition risk due to policies being delayed or divergent across countries and sectors; for example, carbon prices would have to increase abruptly after a period of delay.
- Hot house world scenarios, which assume that some climate policies are implemented in some jurisdictions, but globally efforts are insufficient to halt significant global warming. The scenarios result in severe physical risk including irreversible impacts like sea-level rise.
The scenarios were chosen to show a range of lower and higher risk outcomes. The scenarios have been further refined since the first iteration that was published in June 2020 to leverage the latest versions of models, reflect the shifts in climate policy since 2018, and reflect the near-term IMF growth projection from COVID-19. The scenarios highlight a few important themes, including rapid decarbonization of electricity, increasing electrification, more efficient uses of resources, and a spectrum of new technologies to tackle remaining hard-to-abate emissions. While developed primarily for use by central banks and supervisors, the scenarios are also useful to others including the financial, business, and academic communities. Scenarios highlight some key themes that can be used to help set more granular targets, enhance strategic thinking, and form a part of climate-related financial disclosures.
Looking forward, NGFS will continue to develop and enrich its scenarios to make them more comprehensive, including by adding further sectoral granularity and improving the integration of the suite of models, with the aim to be as relevant as possible for economic and financial analyses. In addition, NGFS will present a number of case studies illustrating the use of scenarios by NGFS members and share key learnings related to the methodology of scenario based risk assessment. NGFS will also keep collaborating with industry to ensure the scenarios are suitable for wider use.
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Keywords: International Banking Insurance Securities Climate Change Risk Climate Change Scenarios Net Zero Economy Transition Risk Physical Risk ESG NGFS
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