On June 8, 2021, the Network for Greening the Financial System (NGFS)1-a group of 91 central banks and supervisors and 14 observers-issued the second iteration of its climate scenarios, noting that such scenarios are "a true milestone in the race to better understand the risks from climate change." The NGFS also stated that because "climate scenario analysis is a vital tool that helps [.] prepare for a range of future pathways" and the "challenges and costs of creating such scenarios are beyond most individual firms or institutions," the NGFS has designed its climate scenarios "to act as a foundation for analysis across many institutions, creating much needed consistency and comparability of results."

The NGFS chose six different climate scenarios to "show a range of lower and higher risk outcomes." The scenarios have been refined from the June 2020 iteration to "leverage the latest versions of models, reflect the shifts in climate policy since 2018, and reflect the near-term IMF growth projection from COVID-19." The six scenarios and how they compare for risk are shown in the chart below from the NGFS' report:

1080816a.jpg

The NGFS climate scenarios are characterized by "their overall level of physical and transition risks," which are driven by "the level of policy ambition, policy timing, coordination and technology levers." This NGFS chart provides addition details on the risks for each:

1080816b.jpg

The NGFS' 51-page report includes further descriptions of the scenarios and their respective transition and physical risks and economic impacts.

The NGFS climate scenarios were developed as a common starting point for analyzing climate risks to the economy and financial system, and, while developed primarily for use by central banks and supervisors, the scenarios may also be useful to the broader private sector, government and academia.

Footnote

1. The NGFS says that it is "committed to sharing best practices, contributing to the development of climate- and environment-related risk management in the financial sector and mobilizing mainstream finance to support the transition toward a sustainable economy."

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe - Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2020. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.