Scenarios for Assessing Climate-Related Risks: New Short-Term Scenario Narratives by UNEP FI and NIESR

Climate scenarios play a key role in helping policymakers, regulators, and financial institutions analyse the potential impact of climate and mitigation policies on the real economy and the broader financial system. Currently, climate-related risks are often looked upon as long-term risks by financial actors but in recent years, ever more institutions are considering short-term scenarios as part of their climate risk toolkit. However, the availability of these scenarios remains limited. The majority of publicly available scenarios for use look at the long-term horizon, typically covering the period to 2050 in five-year time steps. Long-term scenarios are key to understanding the costs of the transition as well as the long-term benefits coming from mitigating physical risks. However, long-term scenarios only provide a limited picture of the potential transition and acute physical risks that could arise in the near term. Identifying such short-term risks can be important for central banks to inform their financial stability responsibilities. For financial institutions, meanwhile, it can assist with accounting for climate risks in their near-term planning cycles, as well as assessing severe climate risks and identifying potential vulnerabilities to a rapidly changing world. For these reasons, the integration of short-term climate scenarios has become important for financial institutions looking to improve their understanding of the potential f inancial impacts associated with the shift towards a net-zero economy. The severity of short-term scenarios makes them useful for stress testing, which aids financial institutions in aligning their short-term strategies for climate risk mitigation with their business planning horizons. Spanning a one-to-five-year time frame, short-term scenarios can address the limitations of assessing climate risks through scenario analysis focusing on medium- to long-term horizons (Table 1). Short-term scenarios also enable a translation of shocks to short-term impacts, incorporating the role of expectations and readiness of the financial system concerning both mitigation policies and the impact of climate change itself (NGFS, 2023).

source :

https://www.unepfi.org/themes/climate-change/scenarios-for-assessing-climate-related-risks-new-short-term-scenario-narratives-by-unep-fi-and-niesr