Financial services scenarios

The Financial Services scenarios were developed alongside the Financial Services Council (FSC). The scenarios were developed to support fund managers, life insurers, and health insurers to better understand and assess climate-related risks and opportunities.

Scenarios explore three possible futures

• An orderly scenario where there is steady and constant change to support a transition to a lower emissions economy. Physical risks remain relatively low under this scenario while transition risks start off high and reduce over time.
• A too little to late scenario where physical risks climb steadily resulting from delayed action to transition to a low carbon economy. Efforts to reduce emissions occur mid-century but the changes are too late to prevent wide ranging acute and chronic physical climate impacts.
• A hot house scenario where there is minimal action to transition to a low carbon economy. While transition risks remain low, physical risks increase exponentially out to the long term as emissions continue to rise.

Narratives describe anticipated climate change impacts under each scenario

These include but are not limited to:

• projected emissions pathway
• New Zealand average temperature
• global average temperature
• number of hot days
• precipitation levels.

Socioeconomic trends explored

These include:

• global population
• economic growth
• carbon price
• renewable energy
• electricity.

Anticipated impacts on the financial services sector are discussed throughout the scenario narratives. Impacts include, for example, disruption to service provision, stranded assets, disruption to supply chain and operations, changing preferences of stakeholders and customers, and litigation risks.

For limitations of the financial services scenarios see page 5 of Climate scenario narratives for the financial services sector [Financial Services Council NZ website] 

There are a total of three Financial Services scenarios, each with a different narrative and emissions trajectory.

Orderly

The Orderly scenario represents collective action towards a low carbon global economy. In this scenario, there are steady and constant societal changes related to technology, policy, and behaviour to support the transition to a lower emissions economy. This is matched by an increasing carbon price that reinforces low carbon behaviour change.

The coordinated and timely action around the world to curb greenhouse gases prevents the worst predicted impacts of climate change, however, the long-term chronic impacts from historic greenhouse gas (“GHG”) emissions still occur, although not severely.

Too little too late

The Too Little Too Late scenario represents a misaligned and delayed transition to a low carbon economy between different parts of the world. In this scenario, some countries are early movers on the transition to a low emissions economy, introducing policy that brings about net zero emissions by 2050.

In other parts of the world, however, there is very little action towards a low emissions future with fossil fuelled development continuing throughout much of the remaining first half of the century.

• From mid-century, global efforts to address climate change begin to align and exceed those by the early movers.
• Large increases in carbon price will drive a rapid improvement in low emissions technology efficacy and uptake.
• This shift is partly driven by the increasing evidence and awareness of the social, economic, and environmental degradation caused by a continued increase in fossil fuelled development.

Despite making a concerted effort to reduce emissions and move to a low emissions economy at mid-century, the changes come too late to prevent wide ranging acute and chronic physical climate impacts.

Hot House

This scenario represents minimal action towards a low carbon global transition. Despite an increasing level of social, economic, and environmental degradation, there is little shift in social and political traction towards a low emissions future.

As a result, there is little behaviour change and a lack of low carbon emissions technology development. This leads to:

• a continued and increasing level of fossil fuel use
• strong globalisation
• increasing consumption
• materialism

The impact of these activities continues to drive emissions higher throughout the remaining 21st century leading to significant materialisation of acute and chronic physical risks.

In the first half of the 21st century this physical risk sees increasing severity of extreme weather which is accompanied by rising sea levels in the latter half of the 21st century. This threatens coastal developments worldwide, placing pressure on global relations.