Investors and regulators are analysing more and more to climate-scenario, specially when seeking to understand banks' and insurers' climate-risk exposures. That is when enhanced stress tests and risk models became extremly important.
At the Paris “One Planet Summit” in December 2017, eight central banks and supervisors established the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). The groups' purpose is to help strengthening the global response required to meet the climate goals and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development. Since then, the number of NGFS members has been growing significantly.
About one year ago, in October 2021, NGFS ublished its report "Scenarios in Action: A progress report on global supervisory and central bank climate scenario exercises". More specifically, the report includes:
Key features of climate scenario analysis ("How 31 NGFS members are using climate scenarios to identify, assess and understand climate risks in their economies and financial systems")
Macroeconomic modelling in scenario analysis ("Climate change will affect different economies in different ways, reflecting the unique nature of each economy’s exposures to physical climate risks, differences in the mitigation policies, and differences in industry structure")
Designing sectoral pathways ("Economic sectors rely heterogeneously on fossil fuels or on other natural resources (including agriculture), they are affected unevenly by climate change and climate change mitigation policies")
Balance sheet assumptions ("To assess transition and physical risk impacts for financial institutions, one needs to make an assumption about how institutions’ balance sheets evolve over the course of the scenario horizon")
Scenarios for macroprudential analysis ("For example, a sudden increase in carbon prices may trigger not only financial losses, but also a broader loss of confidence on financial markets and a sharp and disorderly repricing of assets")
Click to download the full report.