Dive Brief:
- The Network of Central Banks and Supervisors for Greening the Financial System — a climate coalition of global central banks — released Wednesday what it said is the first public tool with “a dedicated framework to analyze the potential near-term impacts of climate policies and climate change on financial stability and economic resilience.”
- The tool is designed to complement NGFS’ long-term scenario planning platform and focus on the effects climate change will have in a five-year time horizon.
- “Climate change is not a distant threat — it is a current reality reshaping our economies and financial systems,” the foreword in an explanatory presentation released May 7 said. “Understanding the immediate impact of climate-related risks has thus become an urgent necessity for central banks and other financial actors.”
Dive Insight:
The NGFS short-term climate planning tool will be able to operate off four different sets of assumptions, including one scenario only focused on physical risks, two focused only on transition risks and a scenario that combines transition and physical risks, according to a summary document released Wednesday.
NGFS found that, in the short term, regional extreme weather events create “temporary but material” losses of gross domestic product, affect the global economy and could make the transition to a low-carbon economy more expensive. Additionally, the coalition that looks to mobilize green finance and develop recommendations for climate-risk management in the financial sector, said the short-term planning scenarios show that “delaying transition efforts increase the economic costs of transitioning and could cause additional financial stress.”
The scenarios will provide the financial industry and policymakers with a framework to better conduct risk assessments and gain a deeper understanding of the near-term consequences climate change could have on the economy, according to the foreword by NGFS Chair Sabine Mauderer and Livio Stracca, chair of the workstream on scenario design and analysis.
“By bridging the gap between understanding the long-term risks arising from climate change and the benefits and costs of the green transition, the short-term scenarios address immediate policy needs and enhance our ability to respond effectively to climate-related challenges,” Mauderer and Stracca wrote.
The planning tool will allow for the modeling of multiple extreme climate hazards occurring simultaneously; incorporate short term effects of the transition and physical risks on trade and finance; and integrate climate policy, extreme weather events, economic trends and sectoral differences to allow users to study how climate risks and business cycles intersect. Additionally, users will be able to focus on the timeframe relevant to specific policies, and the tool will provide “granular” data for across sectors and countries.
The organization said its long-term scenarios remain most appropriate for tasks like undertaking longer term risk assessments, understanding structural economic changes and assessing the long-term impact of policy and business decisions on financial institutions’ risks. However, NGFS said the various scenarios and features included in the short-term scenario planning tool will make it “particularly well-suited for climate stress-testing exercises.”
Like other global financial sector climate coalitions, NGFS has dealt with its share of defections over the past year. Several U.S. financial regulators have left the organization since January, coinciding with President Donald Trump’s inauguration, and the group’s membership fell from over 160 central banks and observers as of March to around 145 banks and observers as of May 7, according to a landing page for the short-term scenario tool.
Over the first two months of 2025, the U.S. Federal Reserve Board, the Federal Deposit Insurance Corporation, the Treasury Department and Office of the Comptroller of Currency all left NGFS. At the time of their respective exits, the financial regulators said the coalition no longer falls within their agencies’ remits under the new administration. The Federal Reserve also noted that the work of NGFS “has increasingly broadened in scope” to include issues outside of the board’s purview.
