NGFS unveils second set of climate change scenarios

New scenarios use NiGEM macro model and take much more granular approach, officials say
capital-modelling

The Network for Greening the Financial Sector unveiled the second version of its scenarios that model climate change’s impact on global finance today (June 7).

NGFS chair Frank Elderson, a member of the European Central Bank’s governing council, and Bank of England official Sarah Breeden, presented the new scenarios. The NGFS officials said this represented a “huge step forward”.

They said the new approach incorporated a macroeconomic model, and had increased the number of reference scenarios to six. The scenarios were also much more granular than their predecessors, with a lot of variables available at country level, they added.

“These exercises will obviously help prepare financial firms for climate risks, but there is much more to them,” Breeden and Elderson wrote in an article for Central Banking today.

“Financial firms that understand the risks of tomorrow take better decisions today – and that includes helping their customers to reduce emissions and build resilience to physical climate risk. So risk management turns into active stewardship towards a net-zero economy.”

The BoE’s Breeden heads the the NGFS’s “workstream two”, which led the work, carried out by officials seconded from other central banks and regulators. The NGFS worked on the scenarios with several economics consultancies and public-sector research bodies, including the UK’s National Institute of Economic and Social Research.

The new scenarios use the NIESR’s National Institute Global Economic (NiGEM) model, to model the macroeconomic impacts of climate change. Dawn Holland, of the NIESR, said the publicly available model’s main feature was its flexibility. 

The macroeconomic projections showed that an orderly transition to net zero carbon emissions could have benefits to economic growth, Breeden said. The NGFS also modelled several delayed or disorderly transitions as part of the scenarios.

She added that the scenarios were not just improved, but had been brought “entirely up to date”, to examine what officials thought were the most relevant policy pathways. The NGFS had used the latest data from climate science and models, including information reflecting the economic impact of the Covid-19 pandemic, Breeden said.

She praised the quality of the work, but added that the NGFS had “much to learn”. Economists and officials seeking to learn how to model climate change were “just out of base camp”, she stated, using a mountaineering metaphor.

The NGFS, a consortium of 91 central banks and regulators, said it had created a data portal and website to allow institutions to use the new scenarios. Breeden called this a “fabulous resource”.

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