Climate Scenario Analysis by Jurisdictions: Initial findings and lessons
Forward-looking assessment approaches are crucial to adequately account for the unprecedented nature of climate change. Against this backdrop, scenario analysis is a critical tool for assessing the potential implications of climate change on economies and financial systems.
As part of the FSB’s Roadmap for Addressing Climate-Related Financial Risks, and as a follow up of the NGFS “Scenarios in Action” progress report, this Financial Stability Board (FSB) and Network for Greening the Financial System (NGFS) joint report focuses on climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.
This joint report provides an overview of scenarios, models, data and metrics used by FSB and NGFS member authorities in their climate scenario analysis exercises. It also attempts to evaluate the implications of climate-change-related developments for the financial system as depicted in climate scenarios. In doing so, it draws lessons for effective climate scenario analysis and aims to contribute to capacity building by advancing a common understanding of the impact of climate change on financial stability, putting together a global perspective from various national and regional climate scenario analysis exercises.
Further development of the use of climate scenario analysis will help inform supervisory and regulatory actions. For financial stability purposes, further developments in models, data risk metrics are necessary to come to a truly system-wide approach to climate-related financial risks that covers key financial sectors, interdependencies and systemic risk aspects such as indirect exposures, risk transfers, spillovers and feedback loops, including with the real economy. This report represents a contribution towards this ultimate goal.
The scarcity of data and limitations in modelling pose hurdles in conducting risk exposure and impact assessments robustly. The report describes the main identified data gaps and approaches for addressing them. It calls for greater cross-border cooperation on scenario design, modelling approaches and data – particularly at this early stage of climate scenario work. It notes that sharing knowledge and practices, in addition to the issuance of robust guidelines on how to conduct climate scenario analysis, would decisively support capacity building efforts, and stresses the important role that international organisations can play in that regard.