Short-term scenarios are a significant step towards better understanding the near-term macro-financial impacts of the transition toward a net zero global economy and of severe but already likely physical risks over the next three to five years.
The Network for Greening the Financial System (NGFS) recently published a report on its soon to be released short-term climate scenarios.
The short-term scenarios are being developed to address the need for detailed scenarios with a focus on macroeconomic and financial risk analysis.
Short term scenarios are particularly important for:
Specifically, they can:
Modelling for the NGFS short-term scenarios has not yet been published.
Read more about the proposed modelling approaches for the NGFS short-term scenarios [NGSF website] on page 32 of the Conceptual Note report.
For more on the limitations of climate scenarios in the financial services sector, including the long-term NGFS scenarios, see The Emperor’s New Climate Scenarios from the University of Exeter (PDF, 10 MB) [Institute and Faculty of Actuaries website].
There are five short-term scenarios, each with a different narrative and emissions trajectory.
The five scenarios each fall into one of three different scenario types:
Transition risk:
Transition and physical risk:
Physical risk:
Transition risk - Paris aligned.
Transition risk:
Transition and physical risk:
Physical risk:
Transition risk - Paris aligned.
In this scenario there is a boom in green public investment which leads to a rapid reallocation of capital across sectors and internationally via cross-country capital flows and lending patterns.
Increased levels of uncertainty of fossil energy supply leads governments to implement an ambitious mitigation pathway in a timely and anticipated fashion.
Technology advances lead to a quick transition, resulting in disorderliness. Green prudential policies prevent financial turmoil albeit with losses in some sectors due to stranded assets.
This scenario depicts a world where governments are unable to implement ambitious mitigation policy due to uncertainty in the fossil energy supply.
Green regulation overtakes government policies in driving the transition, leading to a glut of green private investment and the build-up of a green credit “bubble”. A sunspot/an unrelated random event leads to the burst of the bubble, a sharp rise in risk premia and a confidence crisis.
In this scenario elevated levels of uncertainty related to fossil energy supply limits governments in their ability to implement ambitious mitigation policy.
Driven by an event that triggers a sudden change in public opinion such as a severe natural disaster, an unanticipated and accelerated transition occurs.
The abrupt policy change sets off shock waves through the economy and financial system resulting in:
Severe acute physical disasters hit exposed jurisdictions. Investors price in a sizeable risk premium, which freezes private investment, and reduce their exposure to the jurisdictions and sectors whose assets are at greatest risk of disaster losses.
Households consume less and save more due to the increase in uncertainty and insurance costs increase.
The world aims to avoid the worst impacts of global warming. However, severe natural disasters in the emerging market and developing economies and listed investment companies and a lack of external financing leads to recovery traps, a lack of fiscal space for affected regions to transition.
Meanwhile, the disruption of transition-critical mineral supply chains originating in disaster-prone regions hampers the speed of the global transition.
Other aspects of this scenario include: