NGFS adjusts climate scenarios to allow for disorderly transition, divergent policy

Central banking body updates climate scenarios, slammed as 'activist' by Republicans in Congressional hearing.

Illustration of a businessperson looking into a telescope. There is a gold coin at the end of the telescope

Prospects for an orderly green transition with minimal transition risks are diminishing, according to the latest batch of climate scenarios issued by the Network for Greening the Financial System (NGFS).

The reworked suite of scenarios, now in its fourth vintage, reflects “a more pronounced disorderly future considering the delayed implementation of climate policies, persistently high emissions, and the consequences of the war in Ukraine on energy system trajectories”, according to release notes by the NGFS.

Both of the central banking body’s most optimistic climate scenarios – aligned to 1.5 and 2C global temperature rises – have been amended to capture greater transition risks and reflect the costs of stronger climate policies needed to compensate for the slow pace of decarbonisation to date.

The NGFS has also scrapped a scenario introduced last year which would see the world achieve a successful but costly transition to 1.5C by the end of the century as a result of rapid and uncoordinated implementation of climate policies.

A replacement and contrasting scenario, named “Fragmented world”, assumes that divergent climate policies ambitions will instead result in some countries partially meeting their climate targets and others continuing with their current policies, putting the world on a 2.3C trajectory.

Other updates to the scenarios include the addition of physical risk modelling for two new climate hazards, drought and heatwaves, in addition to the NGFS’s existing modelling on floods and cyclones. They have also been updated to account for the latest GDP and national-level climate targets as of March this year.

The release could go some way towards addressing concerns over the effectiveness of the climate scenarios, which have intensified in the year since the last NGFS update.

Despite their usage reaching an all-time high, critics have noted that supervisory stress tests based on the scenarios have come to very benign conclusions compared to the economic devastation widely associated with runaway climate change.

Central banks such as the ECB have in turn acknowledged the disconnect, warning that these exercises “significantly understate the actual risk”.

Questions have also been raised over the design of the scenarios themselves, particularly regarding the lack of modelling on climate tipping points and the knock-on effects to the economy caused by climate change. Users additionally found it difficult to formulate short-term climate actions based on the 50+ year time horizon which underpin the scenarios.

The NGFS has issued an accompanying note to the latest scenarios, which sets out steps it could take to explore the feedback loops between climate hazards and the economy, but stops short of setting out a project timeline or deliverables.

The network also published a conceptual outline of shorter-term climate scenarios last month, covering a three to five year horizon, which it is currently developing.

The release of the latest scenarios come as the NGFS was criticised by Republicans during a Congressional hearing on new Basel III global banking rules held on Tuesday, in the latest example of the political stalemate over climate action and ESG in the US.

The central banking network was described by the chair of the House Financial Services Subcommittee, Andy Barr, as “a global governance body dedicated to climate activism” which had more influence on US regulatory agencies “than does Congress”.

“The NGFS, as the increasingly vocal global governance body for climate, concerningly allows for outside activist funding of its so-called workstreams, including development of climate models and data, with funding channels tied to political and activist interests,” Barr added.