On 23 January 2024, the Network for Greening the Financial System (NGFS) published a technical document, NGFS scenarios: Purpose, use cases and guidance on where institutional adaptations are required.
The NGFS scenarios were introduced in 2020 and have been refined and updated over four iterations. They have assisted central banks, supervisors, and other financial actors in exploring various potential future outcomes of climate change and the transition. However, the NGFS scenarios are not an end-state toolkit and users need to review assumptions and validate scenarios.
The technical document sets out the purposes and practical applications of the NGFS scenarios, as well as acknowledges the need for scenario users to clarify what they intend to achieve and to consider how the scenarios they use allow them to meet their objectives and/or specific requirements. The technical document also contains frequently asked questions about the scenarios.
The frequently asked questions include how the NGFS would suggest that institutions adapt the scenarios if they so choose. The NGFS suggests that how to adapt the scenarios depends on the country context, purpose of the exercise, and the chosen methodology. A non-exhaustive list of options is provided but institutions can consider other approaches to use and adapt the scenarios. The non-exhaustive list of options includes that users could consider adding hazards that are relevant to their scope, such as wildfires, for dense forestry areas, or coastal flooding, for coastal areas. In addition, they could consider increasing the severity of physical damages to explore tail risk events. Changing the timeframe of the exercise could have a similar impact, as physical risk impacts in the distant future are likely to be more severe than those with a short-term horizon, which are typically used in risk assessments. From the perspective of a longer timeframe, the NGFS suggests that institutions might also opt to include a tipping point in their analysis and explore the potential impacts of such risks materialising. Moreover, users could combine, align, or change existing scenarios to develop a custom scenario that suits their needs best.