IIASA researchers help central banks to assess climate risks in the financial sector

A changing climate brings about unprecedented environmental risks and pressure on the global economy. Recently, IIASA scientists helped to develop new long-term climate macro-financial scenarios for climate risks assessment, which will help assessing and strengthening the resilience of the financial sector.

“Central banks obligate commercial banks to use our scenarios for climate financial stress testing and to assess the stability of the financial system against climate transition risk and climate physical risk,” explains Bas van Ruijven, IIASA Sustainable Service Systems Research Group Leader, who was involved in this work. “These scenarios will help banks make the economy more resistant to climate stress and navigate the financial sector toward the green transition.”

The updated scenarios were recently published by the NGFS — a group of 127 central banks and supervisors, as well as 20 observers, who are committed to sharing best practices for the development of climate– and environment–related risk management in the financial sector.

Introduced as a novel tool in 2020, the NGFS scenarios have been consistently refined and updated over four annual iterations. The main development of the new fifth phase is an updated assessment of physical risk. It now incorporates a new damage function, which captures the effects of climate change on the economy much more comprehensively. The update emphasizes that a timely and coordinated transition will be significantly less costly, compared to the negative impacts of unabated climate change on GDP.

IIASA scientists made a major contribution to this project, providing inputs on the climate impacts side, data hosting for the mitigation scenarios, and country-level downscaling. In addition, the IIASA MESSAGEix-GLOBIOM model was used to provide fundamental updates to the scenarios, with major contributions from IIASA researchers Yiyi Ju, Fabio Sferra, Philip Hackstock, Carl Schleussner, and Bas van Ruijven.

“The latest NGFS long-term scenarios are an important guidepost for the financial sector in thinking about climate change,” highlights Livio Stracca, Chair of the NGFS workstream “Scenario and Design Analysis” and Deputy Director General Financial Stability at the European Central Bank. “This update clearly demonstrates that insufficiently ambitious climate policies worldwide make the transition even more challenging. The lack of policy ambition creates a vicious circle; increasing costs of mitigation policies complicate their implementation, resulting in further unabated emissions, climate damage and thus necessitate more ambitious future policies. Hence, this further increases economic losses stemming from a warming climate. The scenarios also show that climate change is becoming a first order factor for our economies.”

As part of this project, researchers worked in partnership with an academic consortium from the Potsdam Institute for Climate Impact Research (PIK), University of Maryland (UMD), Climate Analytics (CA), and the National Institute of Economic and Social Research (NIESR). This work was made possible by grants from Bloomberg Philanthropies and ClimateWorks Foundation.

Learn more about the NGFS Scenarios.