NGFS climate scenarios help map the risks, capital buffers are needed to contain them

07 May 2025 - 17:16 h

Media Alert

The NGFS today released its first-ever short-term climate scenarios, designed to help financial institutions and supervisors understand how climate risks might unfold over the next 3 to 5 years. The NGFS’s continued focus on upgrading the toolkit for climate-related financial risk is positive.

Despite some improvements to NGFS modelling, short-term climate scenarios cannot be interpreted as a policy solution. Climate change impacts are long-term, systemic and irreversible. Short-term scenarios cannot capture the scale or nature of the climate crisis and will lead to an underestimation of the most significant effects.

“While these scenarios may help financial institutions anticipate some climate impacts, they don’t reflect the full reality of climate risks. We necessarily need a long-term view with a precautionary approach, and that means gradually building up capital buffers. It’s the safest way to ensure the resilience of financial institutions and protect the real economy.”

Julia Symon, Head of Research and Advocacy

Climate change’s impact on the economy is incredibly complex, and we cannot afford to wait for models to be perfectly calibrated or sufficiently prescriptive. Given the nature of the crisis, that level of precision may never be possible. The financial risks are already materialising. If financial institutions remain overexposed to vulnerable sectors, such as fossil fuels, they face the risk of collapse as these investments lose value. And once again, the cost will be borne by society. When systemic risks go unaddressed, taxpayers foot the bill.

“Bringing the analysis of climate risk into a policy-relevant timeframe is helpful, but it’s not the answer to the growing threat climate change poses to financial stability. We cannot ignore the long-term view, where the physical impacts of climate change will be much greater and, crucially, irreversible. That’s why we need precautionary risk mitigating actions already now.”

Julia Symon, Head of Research and Advocacy

The NGFS’s new work on short-term scenarios is a welcome attempt to align climate risk assessment more closely with existing risk management practices, offering more tangible guidance for financial institutions and supervisors.

New features, such as compound risk of multiple climate events, real economy financial-sector feedback loops, and more granular outputs across 50 sectors and 46 countries, are an improvement. But NGFS short-term scenarios still can’t reflect the tangled web of real-world financial risk, where climate impacts interact with economic downturns, geopolitical shocks and systemic feedback loops across markets.

Focusing on the near-term, without fully capturing the extent of climate risks, gives supervisors and financial institutions false comfort and encourages inaction. Significant improvements are still needed to ensure these tools are both credible and actionable.