NGFS Publishes First Set of Scenarios for Climate Risk Assessment
The Network for Greening the Financial System (NGFS) published a first set of climate scenarios for forward-looking climate risk assessment, along with a user guide. The scenarios have been developed to provide a common starting point for analyzing climate risks, while the guide provides practical advice on using scenario analysis to assess the climate risks to the economy and financial system. NGFS also published two reports: one report presents research priorities with respect to the analysis of the macroeconomic and financial stability impact of climate change while the other report examines the possible effects of climate change on monetary policy. Additionally, NGFS announced that the Asian Development Bank joined the NGFS as an observer in June 2020.
The NGFS scenarios explore the transition and physical impacts of climate change under varying assumptions, with the aim to provide a common reference framework for central banks and supervisors to understand these future risks. This first iteration of the scenarios explores climate and policy pathways that are consistent with the NGFS framework that was published in the first NGFS comprehensive report in April 2019. The scenarios were chosen to show a range of low and high risk outcomes. A key guiding principle of the project has been embracing the uncertainty inherent in scenario modeling. This has been captured in two ways. First, five alternate scenarios have been published to help users explore how specifying different key assumptions would change the results. Second, for each scenario, multiple models have been used to provide a range of estimates. While developed primarily for use by central banks and supervisors, these scenarios may also be useful to broader financial, academic, and corporate communities. The NGFS climate scenarios were selected in partnership with an academic consortium, including the Potsdam Institute for Climate Impact Research (PIK), the International Institute for Applied Systems Analysis (IIASA), the Center for Global Sustainability at the University of Maryland (UMD), and Climate Analytics.
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. In addition, NGFS will continue to work with a consortium of academic partners to refine and expand the scope of the scenarios. Areas of focus will include expanding the scenario modeling to explore further dimensions of the risks, improving regional coverage and sectoral granularity, calculating probabilistic losses from acute climate impact, expanding the set of macroeconomic outputs, and improving the NGFS scenario database and portal. The guide to climate scenario analysis for central banks and supervisors provides practical advice on using scenario analysis to assess climate risks to the economy and the financial system. It is based on the initial experiences of NGFS members and observers and aims to advance the discussion on the methodologies used.
Keywords: International, Banking, Insurance, Securities, Climate Change Risk, Stress Testing, Physical Risk, Transition Risk, ESG, NGFS
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