Are central banks underestimating the effects of climate change?
The Network for Greening the Financial System (NGFS) studied the practices of central banks and supervisors in conducting climate scenario analysis.
The report presents the findings of a survey of 40 central banks and supervisors from around the world:
- Economic modelling is paramount to translate climate-specific information into financial impacts, but there is still significant heterogeneity in methodologies and results.
- Further research is required to account for the dynamic adjustments between economic sectors, the climate, macro-financial feedback loops, and interconnectedness within the financial system.
- There is little consensus on the most relevant data to use in scenario analysis, the most common ones being GHG emissions, sector-specific transition pathways, climate-related factors, projections of macroeconomic variables, and energy variables.
- Data availability issues concerning Scope 3 emissions limit the use of such data in scenario analysis exercises despite their major potential contribution.
- Data gaps clearly limit the accuracy of scenario analyses, whose results must be interpreted cautiously as they tend to underestimate the impact of climate change.
This study has implications for investment professionals, who need to place greater emphasis on the reliability of the data and methodologies used in scenario analysis exercises so as not to underestimate the impacts of climate change.
Exploring the impact of climate-related risks on financial institutions and systems across a wider range of industries and markets could help provide a more comprehensive understanding of the role of climate scenario analysis in evaluating and managing investments.