The NGFS (Network for Greening the Financial System) report shares 30 NGFS members’ experiences of conducting climate scenario analysis, highlighting a diversity of design choices and approaches.
At the time of publication of the report, NGFS have defined a suite of scenarios and associated models and methodologies, completed and published the result of 4 climate stress-test exercises, with 21 more exercises due to complete in the next 12 months.
Although the NGFS acknowledge that the approaches to climate scenario analysis are not fully aligned across all members, the report highlights a few trends:
1- Scenario analysis is already conducted by financial authorities on six continents, and is likely to continue to be an indispensable tool for the assessment of climate risks.
2- The availability of climate scenarios is a core building block for these exercises. To date, 22 survey respondents are using the NGFS scenarios in their exercise.
3- Many central banks and supervisors consider that doing climate scenario analysis is as much about building capabilities as it is about assessing the risks. Data gaps are a particular area of attention.
4- Top-down and bottom-up analyses are equally popular, and each have distinct benefits. Going forward, it is likely that a combination of these approaches remains valuable as they address different objectives
5- Despite challenges with implementation, many exercises consider a relatively long scenario time horizon to adequately capture climate-related risks…. Exercises often adopt a static balance sheet assumption, but many survey respondents thought a
dynamic balance sheet assumption could be preferable if modelled reliably.
6- Collaboration is critical in climate scenario exercises, between central banks and supervisors, financial institutions, and third party model and data providers.
7- No exercises have, to date, drawn out quantitative implications for prudential policy actions. These exercises are exploratory. However, there is interest in how future exercises could be used to define quantitative actions [such as adjusted capital requirements].
The address for NGFS report is: https://www.ngfs.net/en/scenarios-action-progress-report-global-supervisory-and-central-bank-climate-scenario-exercises
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