Newly published climate scenarios for the financial system: Timely, coordinated transition needed

To better assess the risks arising from climate destabilization, central banks and financial market regulators in collaboration with PIK and other research institutes have been working with climate scenarios. The scenarios by the the Network for Greening the Financial System (NGFS) explore the transition and physical impacts of climate change, over a long-time horizon and under varying assumptions. The new climate scenarios from the NGFS provide a more comprehensive framework for evaluating climate risks and their impact on the economy and financial system.

The main development of this fifth phase is an updated assessment of physical risk. It now incorporates a new damage function which allows for a more comprehensive representation of the impacts of climate change on the economy. This function shows that the economy will not immediately recover if affected by climate shocks from extreme weather events. New data from the updated climate models MAgPIE and REMIND have also been integrated into the scenarios by PIK scientists.

The NGFS scenarios offer valuable insights for policymakers and businesses that must prepare for the physical and economic risks of climate change. Long-term climate adaptation measures, the consideration of tipping points, and the indirect socioeconomic impacts of climate change, such as migration, have not yet been incorporated into the scenarios. This means that the actual impacts of climate change on the economy could be more severe than the scenarios currently predict.