The Network for Greening the Financial System (NGFS) published the third iteration of climate scenarios for forward-looking climate risk assessment. NGFS recently issued five other related publications, all of them aiming to foster integration of climate-related risks into the work of central banks and supervisors.
This third version of the NGFS scenarios explore a set of six scenarios that are consistent with the NGFS framework published in the First NGFS Comprehensive Report. The scenarios explore the impact of climate change and climate policy with the aim of providing a common reference framework. Each NGFS scenario explores a different set of assumptions for how climate policy, emissions, and temperatures evolve. The scenarios consist of a set of climate-related and macro-financial variables available for each model, scenario and geography. The NGFS scenarios provide a range of data on transition risks, physical risks, and economic impacts via a suite of models aligned in a coherent way.
As part of the current publication, NGFS scenarios have been brought up-to-date with new economic and climate data, policy commitments, and model versions. For the first time, the scenarios include projections of the potential losses from extreme weather events (in particular, cyclones and river floods), to complement the specific impact of chronic climate changes on the macroeconomy in the previous iteration. Moreover, transition risks have been represented with increased granularity in certain sectors. The NGFS Scenarios show that immediate coordinated transition will be less costly than inaction or disorderly transition in the long run. They also show that physical risks in hot house world scenarios (Current Policies or Nationally Determined Contributions scenarios) will lead to the strongest negative impacts on GDP with economic cost diverging significantly after 2040.
In addition to the scenarios for central banks and supervisors, NGFS published the following documents:
- A technical document on the two datasets behind the NGFS scenarios, with the intent to answer technical questions for those who want to perform analyses on the datasets. The document first presents key technical features of NGFS scenarios and introduces the NGFS Scenario Explorer dataset, including technical details and assumptions for the modeling of the transition pathways. It then introduces y the Inter-Sectoral Impact Model Inter-comparison Project (ISIMIP) climate impact data that are relevant for assessing physical risks, including details on model and scenario assumptions and information on variables available in the datasets and their definitions.
- A technical analytical document on the climate scenario sensitivity analysis to macroeconomic policy assumptions. This document explores the policy conditionality of the updated set of NGFS scenarios and assesses the sensitivity of the results to assumptions related to fiscal and monetary policy.
- A guidance note outlining practical lessons for the development of climate scenarios with extreme weather events from emerging markets and developing economies. The note aims to complement the existing climate risk assessment literature by providing central banks and prudential supervisory authorities with a practical framework for assessing physical climate risks with extreme weather events.
- A note that is prepared by an ad-hoc group led by Luiz Awazu Pereira da Silva (Bank of International Settlements and that demonstrates the relevance of the NGFS scenarios to the current situation and examines the feasibility of achieving the objectives of the Paris Agreement as well as the narrow but unique opportunity presented by current events.
- A note exploring the effects of the current energy crisis stemming from the war in Ukraine and how these effects relate to the latest iteration of the NGFS scenarios published yesterday. The note argues that the current crisis presents a narrow but unique opportunity to accelerate the transition to net zero.
Keywords: International, Banking, Insurance, Securities, Climate Change Risk, ESG, Scenario Analysis, Stress Testing, Climate Scenarios, NGFS
Previous ArticleEBA Issues Multiple Regulatory Updates for Regulated Entities
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
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