NGFS climate change response evaluation

𝗧𝗵𝗲 𝗡𝗚𝗙𝗦 𝗷𝘂𝘀𝘁 𝗿𝗲𝗹𝗲𝗮𝘀𝗲𝗱 𝘀𝗼𝗺𝗲𝘁𝗵𝗶𝗻𝗴 𝗯𝗶𝗴— for the first time, we now have 𝘴𝘩𝘰𝘳𝘵-𝘵𝘦𝘳𝘮 𝘤𝘭𝘪𝘮𝘢𝘵𝘦 𝘴𝘤𝘦𝘯𝘢𝘳𝘪𝘰𝘴 tailored for 𝘀𝘁𝗿𝗲𝘀𝘀 𝘁𝗲𝘀𝘁𝗶𝗻𝗴, 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝘀𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆, 𝗮𝗻𝗱 𝗻𝗲𝗮𝗿-𝘁𝗲𝗿𝗺 𝗺𝗮𝗰𝗿𝗼 𝗿𝗶𝘀𝗸. 🔸 This isn't about 2050. It's the next five years, i.e. 𝟮𝟬𝟮𝟱–𝟮𝟬𝟯𝟬. 🔸 This isn't abstract. It's 𝗚𝗗𝗣 𝘀𝗵𝗼𝗰𝗸𝘀, 𝗰𝗿𝗲𝗱𝗶𝘁 𝗿𝗶𝘀𝗸, 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻, 𝗮𝗻𝗱 𝘂𝗻𝗲𝗺𝗽𝗹𝗼𝘆𝗺𝗲𝗻𝘁. 𝗧𝗵𝗲𝘀𝗲 𝗮𝗿𝗲 𝘁𝗵𝗲 𝘀𝗵𝗼𝗿𝘁-𝘁𝗲𝗿𝗺 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀: 1.  A smooth transition ("Highway to Paris") 2.  A delayed, abrupt policy shift ("Sudden Wake-Up Call") 3.  Physical risk disasters without transition ("Disasters & Policy Stagnation") 4.  A fragmented world with climate chaos and policy misalignment ("Diverging Realities") These scenarios are a wake-up call for taking short-term climate risks seriously. ➤ Delaying climate action could increase global 𝗚𝗗𝗣 𝗹𝗼𝘀𝘀𝗲𝘀 𝗯𝘆 𝗼𝘃𝗲𝗿 𝟯𝘅, and unemployment spikes by 1.3 percentage points (Sudden Wake-Up Call vs Highway to Paris). ➤ Climate disasters aren’t just regional anymore. Floods, fires and droughts in Asia or Africa can cut European 𝗚𝗗𝗣 𝗯𝘆 𝟭.𝟳%, driven by supply chain exposure. ➤ Credit risk spreads explode in carbon-intensive sectors. In some cases, default probabilities jump by 20–30 percentage points, stressing banks and insurers alike. ➤ Green sectors could lose out if the transition is abrupt, fragmented, or disrupted by physical shocks. 𝗛𝗲𝗿𝗲 𝗶𝘀 𝘄𝗵𝘆 𝘁𝗵𝗲𝘀𝗲 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 𝗮𝗿𝗲 𝗮 𝗴𝗮𝗺𝗲-𝗰𝗵𝗮𝗻𝗴𝗲𝗿 ➤ For the first time, compound hazards—droughts, floods, wildfires—are modelled together, showing how climate risk can become systemic through trade, finance, and supply chains. ➤ Monetary policy is now integrated, so climate shocks affect interest rate paths, inflation dynamics, and macroeconomic volatility. ➤ Financial contagion is now factored in. Using advanced modelling, the framework maps how climate-related losses feed into default risk, cost of capital, and sectoral investment flows. ➤ Sector-by-sector and region-by-region outcomes now include asset-level exposure, probability of default, and sovereign bond repricing, offering tools fit for risk management. 𝗠𝘆 𝘁𝗮𝗸𝗲 This release is a step-change in how we understand and model climate risk. These scenarios are critical because they model economic and financial impacts on business over the next five years. A timeline relevant for senior management, boards and shareholders. Because these scenarios capture dynamic feedback loops, sector-specific capital costs, and second-round effects that ripple through the financial system, the risk science is taken to a whole new level. These real-world complexities have been missing from science to date, which is why these scenarios are so critical. #NGFS #NetZero #ClimateRisk _____________ For updates, follow me on LinkedIn: Scott Kelly

🌍 BloombergNEF released its assessment of the NGFS short-term scenarios. 🔎 What’s new compared to the NGFS long-term scenarios: ● Annual timeframe, narrative-based physical risk, more sectors (now 50), and, for the first time, the release of financial metrics such as default probabilities and asset valuation. ● On physical risk, the scenarios explore low-probability, high-amplitude weather events, with compounding disasters in 2026–2027. In the case of the US, the GDP impact is comparable to the pandemic or the Great Financial Crisis (see picture below). ● Regarding transition risk, the reliance on shadow carbon pricing oversimplifies the complex structure of the low-carbon transition. Real-world policies, such as fuel economy standards, heat pump subsidies, coal phase-outs, renewable auctions and technology shifts cannot be properly modelled via blanket carbon prices. ● In addition, the scenario baseline is quite optimistic, in my view. It assumes that countries meet their policy targets a priori. This means part of the disruption due to the transition is not on NGFS’ radar. 📊 The bottom line: These new scenarios are a step forward for financial regulators and institutions, offering better granularity, addressing some shortcomings of the long-term scenarios. There is room to strengthen the analysis of transition risk in future vintages. See “Climate Stress Tests Bolstered by New NGFS Scenarios” co-authored with Maia (Maeva) Mésanger, Claudio Lubis and Estella Agyepong BNEF users: https://lnkd.in/efAk-RJA Terminal BBA users: {NSN SYOBN5DWRGG0 <GO>} NGFS new scenarios: https://lnkd.in/ed5JitWH For BNEF’s bottom-up transition scenarios, see the New Energy Outlook (NEO): https://lnkd.in/e9GY48r7

📗 𝐓𝐡𝐞 𝐍𝐆𝐅𝐒 𝐒𝐡𝐨𝐫𝐭-𝐭𝐞𝐫𝐦 𝐒𝐜𝐞𝐧𝐚𝐫𝐢𝐨𝐬 𝐚𝐫𝐞 𝐡𝐞𝐫𝐞! The group of over 100 central banks and supervisors just published a first-of-its-kind, publicly available tool to analyse the near-term impacts of climate policies and climate change on financial stability and economic resilience. 🖍 𝗛𝗲𝗿𝗲'𝘀 𝘄𝗵𝗮𝘁 𝘆𝗼𝘂 𝘀𝗵𝗼𝘂𝗹𝗱 𝗸𝗻𝗼𝘄: 𝐓𝐡𝐞 #𝐍𝐆𝐅𝐒 𝐬𝐡𝐨𝐫𝐭-𝐭𝐞𝐫𝐦 𝐬𝐜𝐞𝐧𝐚𝐫𝐢𝐨𝐬 𝐚𝐫𝐞 𝐡𝐢𝐠𝐡𝐥𝐲 𝐫𝐞𝐥𝐞𝐯𝐚𝐧𝐭 𝐟𝐨𝐫 𝐜𝐥𝐢𝐦𝐚𝐭𝐞 𝐫𝐢𝐬𝐤 𝐚𝐧𝐚𝐥𝐲𝐬𝐢𝐬 𝐚𝐧𝐝 𝐩𝐨𝐥𝐢𝐜𝐲𝐦𝐚𝐤𝐢𝐧𝐠. The four different scenarios show that: ➡️ regional extreme weather events generate temporary but material GDP losses, with effect on the global economy, and could increase the cost of transition; ➡️ delaying transition efforts increase the economic costs of transitioning and could cause additional financial stress. 𝗟𝗲𝘁'𝘀 𝗹𝗼𝗼𝗸 𝗮𝘁 𝘁𝗵𝗲𝘀𝗲 4 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀: 1. 𝗛𝗶𝗴𝗵𝘄𝗮𝘆 𝘁𝗼 𝗣𝗮𝗿𝗶𝘀: A technology-driven and orderly transition unfolds gradually. (Transition risk in a relatively orderly transition). 2. 𝗦𝘂𝗱𝗱𝗲𝗻 𝗪𝗮𝗸𝗲-𝗨𝗽 𝗖𝗮𝗹𝗹: A world of widespread climate unawareness is challenged by a sudden change in policy preferences. (Transition risk in a more disorderly transition) 3. 𝗗𝗶𝘃𝗲𝗿𝗴𝗶𝗻𝗴 𝗥𝗲𝗮𝗹𝗶𝘁𝗶𝗲s: Advanced economies pursue a net-zero transition in line with Highway to Paris. The rest of the world is hit by a sequence of extreme weather events. (Partial transition with mounting physical risks). 4. 𝗗𝗶𝘀𝗮𝘀𝘁𝗲𝗿𝘀 𝗮𝗻𝗱 𝗣𝗼𝗹𝗶𝗰𝘆 𝗦𝘁𝗮𝗴𝗻𝗮𝘁𝗶𝗼𝗻: A sequence of region-specic extreme weather events result in capital destruction, reduced productivity and production, and cascading economic impacts. (Stalled transition and severe physical risks) 𝗛𝗼𝘄 𝗺𝗶𝗴𝗵𝘁 𝘁𝗵𝗲𝘆 𝗯𝗲 𝘂𝘀𝗲𝗱? These scenarios are 𝐩𝐚𝐫𝐭𝐢𝐜𝐮𝐥𝐚𝐫𝐥𝐲 𝐰𝐞𝐥𝐥-𝐬𝐮𝐢𝐭𝐞𝐝 𝐟𝐨𝐫 𝐜𝐥𝐢𝐦𝐚𝐭𝐞 𝐬𝐭𝐫𝐞𝐬𝐬-𝐭𝐞𝐬𝐭𝐢𝐧𝐠 𝐞𝐱𝐞𝐫𝐜𝐢𝐬𝐞𝐬 and for analysing financial risks that may materialise within a business-planning, policy-relevant timeframe. They also provide users with granular outputs across a wide range of financial variables, sectors and countries. 𝐓𝐡𝐞 𝐬𝐡𝐨𝐫𝐭-𝐭𝐞𝐫𝐦 𝐬𝐜𝐞𝐧𝐚𝐫𝐢𝐨𝐬 𝐚𝐫𝐞 𝐚 𝐦𝐚𝐣𝐨𝐫 𝗮𝗱𝘃𝗮𝗻𝗰𝗲 𝐢𝐧 𝗳𝗶𝗻𝗮𝗻𝗰𝗲'𝘀 𝘁𝗼𝗼𝗹𝗸𝗶𝘁 𝗳𝗼𝗿 𝐮𝐧𝐝𝐞𝐫𝐬𝐭𝐚𝐧𝐝𝗶𝗻𝗴 𝐜𝐥𝐢𝐦𝐚𝐭𝐞-𝐫𝐞𝐥𝐚𝐭𝐞𝐝 𝐫𝐢𝐬𝐤𝐬. While climate change is a long-term challenge, sudden events and policy shifts can already have a significant impact within a policy-relevant timeframe. The next five years will be important in mitigating climate change, and the NGFS short-term scenarios can help you navigate through these uncertain times. 💡 Stay tuned as we will have lots more analysis on the new scenarios in the weeks ahead! Access the full dataset here: https://lnkd.in/ePrs6hZV #climate #climaterisk #financialrisk #risk #finance #climatescenarios #climatedata

As indicated on the European Central Bank Blog a few days ago, 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗖𝗵𝗮𝗻𝗴𝗲 is no longer “the Tragedy of the Horizon" as Mark Carney put it, but an 𝗶𝗺𝗺𝗶𝗻𝗲𝗻𝘁 𝗱𝗮𝗻𝗴𝗲𝗿. In the next five years, extreme weather events could already put up to 5% of the euro area’s economic output at risk, according to the new short-term scenarios of the Network for Greening the Financial System (#NGFS). Integrating climate risk into credit risk management involves assessing and quantifying the potential financial impacts of climate change on lending and investment decisions. This includes both physical risks (like extreme weather events) and transition risks (like policy changes). By incorporating these factors into credit risk models, financial institutions can better understand and manage their exposure to climate-related financial risks. In the UK, integrating climate-related risks into credit risk assessment is a growing priority for financial institutions and regulators. The Bank of England is actively working on incorporating climate risks into its monetary policy operations and is encouraging firms to enhance their climate risk management capabilities. The deadline for responding to the UK Prudential Regulation Authority's (#PRA) consultation on its updated climate risk management expectations is July 30, 2025. This consultation paper, CP10/25, focuses on enhancing how banks and insurers manage climate-related risks. The PRA's key findings as to areas for improvement by banks included: (1) scope to expand the range of loan portfolios subjected to a climate risk assessment, to pick up impacts on underlying collateral, refinance risk and ability to repay; (2) enhancement of data granularity and working towards embedding climate risk in loan-level credit risk assessments; and (3) expanding the range of climate scenarios considered, to better identify borrowers and sectors implicated by climate risk Climate risks can impact the probability of default (#PD) and the loss given default (#LGD) on loans, 𝗽𝗼𝘁𝗲𝗻𝘁𝗶𝗮𝗹𝗹𝘆 𝗹𝗲𝗮𝗱𝗶𝗻𝗴 𝘁𝗼 𝗵𝗶𝗴𝗵𝗲𝗿 𝗰𝗿𝗲𝗱𝗶𝘁 𝗹𝗼𝘀𝘀𝗲𝘀 for lenders. Climate risks can also affect the value of collateral, particularly in sectors heavily exposed to climate change impacts.  This compilation addresses this important topic highlighting the latest research and insights covering both credit risk integration and accounting implications of climate change. #riskmanagement #climaterisk #transitionrisk #physicalrisk #ECL #IRB #probabilityofdefault #creditrisk #lossgivendefault #recoveryrate #impairment #defaultrisk #riskassessment #riskmanagement #riskmeasurement #granularity #dataquality #stresstesting #scenarioanalysis #financialstability #globalwarming #climatechange #emissions #netzero #loanportfolio #borrowerdefault #creditloss #information #research #knowledge #resources #futurerisk #emergingrisk #novelrisk