NGFS climate scenarios ‘weakened by lack of investment data’

Scenarios used by global central banks to assess climate readiness are hampered by a lack of investment and financial data, according to a paper published by Banco de España (BdE) on Friday.

Climate scenario analysis is an emerging area of supervision but has already shot up the agenda of central banks worldwide, with more than 30 currently on track to complete individual assessments. However, the limitations and theoretical assumptions that underpin the exercise are still poorly understood, the researchers said.

Under the scenarios – developed by members of the Network for Greening the Financial System (NGFS), and the climate economic and impact modelling community – the financial sector is excluded. This means that, for example, corporate access to capital within emerging markets is not taken into account, even though it would impact the pace of the green transition.

The researchers said the importance of this information means a limited set of scenarios, which do not consider the role of finance, may not be able to effectively inform policy and investment decisions, since financial markets could both enable or delay the climate transition.

Central banks should also include broad indicators to capture evolving geopolitical and socioeconomic conditions, according to the paper, as the current scenarios have not been updated since 2017 and do not account for developments such as covid-19 and the war in Ukraine.

Finally, researchers called for a comparison framework for 2050 net zero climate scenarios across different providers, noting that fossil fuel phase-outs varied across those issued by the NGFS, the International Energy Agency and the IPCC.

The paper was issued in response to the second vintage of the climate scenarios issued by the NGFS, of which the Spanish central bank is a member. A third vintage, issued by the green network in late 2022, is now available but has not made progress on the areas highlighted by BdE.

The research was authored by EDHEC climate finance professor Irene Monasterolo, BdE senior adviser María Nieto, and Bloomberg’s head of climate products, Edo Schets.

The NGFS has separately launched a call for feedback on the latest set of scenarios as part of its first user survey announced on Monday.

It comes as independent research from the UK’s Grantham Institute found that the same NGFS scenarios could imply future bottlenecks for minerals that are critical to the development of clean energy and storage, raising “the potential for transition risks that jeopardise the realisation of a Paris-aligned transition”.

Nine transition-critical minerals were identified as most vulnerable to demand-induced pressures, with prices expected to rise at least seven-fold between 2021 and 2040.