NGFS on Measuring Climate Risk

The NGFS (Network for Greening the Financial System) develops climate scenarios to evaluate risks posed by climate change. These scenarios use Integrated Assessment Models (IAMs) to assess economic, environmental, and financial impacts under different policy and emissions pathways. They examine how physical and transition risks affect financial stability, guiding policymakers, central banks, and financial institutions in decision-making. The NGFS updates its models regularly, incorporating new scientific data and economic insights to refine projections and inform climate policies.

The November 2024 NGFS scenarios reveal that failing to act on climate change could lead to a 15% drop in global GDP by 2050 due to physical risks, whereas strong climate policies could reduce this loss to 7%. This demonstrates that proactive climate action is not just necessary for environmental reasons but is also economically beneficial.

The findings emphasise that physical risks, such as extreme weather and rising sea levels, will have a far greater economic impact than the costs of transitioning to a low-carbon economy. In the Net Zero 2050 scenario, transition-related costs result in just a 1.3% GDP decline, compared to much larger losses from physical risks. This highlights that delaying action increases financial instability and economic uncertainty.

Moreover, the NGFS warns that uncoordinated or late policy changes will lead to market disruptions, stranded assets, and higher transition costs. By acting early, governments and businesses can manage risks more effectively, ensuring a more stable shift towards sustainability. The findings reinforce the need for data-driven decision-making and immediate climate action to minimise long-term financial damage.

Climate stress tests evaluate how climate risks could destabilise economies, affecting jobs, savings, and the cost of goods. They guide financial institutions in managing risk and help policymakers design resilient economic strategies.

Beyond finance, stress tests influence business operations, investment decisions, and infrastructure planning. Understanding them enables individuals to anticipate economic shifts, advocate for sustainable policies, and make informed personal and professional choices that contribute to a more resilient and sustainable future.