On 13 December 2023, the Network for Greening the Financial System (NGFS) published a Technical Document providing recommendations toward the development of scenarios for assessing nature-related economic and financial risks.
The NGFS is a group of central banks and supervisors, which on a voluntary basis share best practices and contribute to the development of environment and climate risk management in the financial sector, and to mobilise mainstream finance to support the transition toward a sustainable economy.
The Technical Document is structured as follows:
- Chapter 2 provides a comprehensive overview of the challenges related to the development of nature related narratives of scenarios, in view of the specific and complex features of nature that end up creating a “local-global trade-off”. It then proposes approaches to developing narratives that could overcome this trade-off and consequently serve as starting points for the assessment of nature-related financial risks, distinguishing between approaches for physical risks and approaches for transition risks.
- Chapter 3 reviews a range of modelling approaches for scenarios of two main types, namely nature-economy models, and biophysical models. It assesses the extent to which those approaches are able to integrate the outputs of nature-specific narratives as inputs to a modelling exercise and the extent to which they account for the transmission channels through which specific nature-related hazards can propagate in the economy.
- Chapter 4 examines alternative approaches to the examined models to assess nature-related financial risks, with a focus on those that are able to both represent multiple hazards in multiple sectors and capture the indirect (cascading) impacts of these hazards throughout value chains. It therefore mostly analyses the insights and limitations of Multi-Regional Input-Output (MRIO) tables and models, without excluding the possibility of exploring other approaches. It develops two case studies connecting nature-related narratives to MRIOs to give an example of how these tables and models can be used.
- Chapter 5 concludes with a list of options for central bankers and supervisors, to help them moving forward with the development of quantified nature-related scenarios both in the short-term and within a longer-term program.