NGFS Launches First Short-Term Climate Scenarios for Economic Stress Testing

On May 7, 2025, the Network for Greening the Financial System (NGFS) released its first-ever short-term climate scenarios, a groundbreaking tool to assess how climate events and policies could disrupt economies by 2030. Designed for central banks, financial institutions, and policymakers, the freely available dataset offers high-resolution insights into near-term physical and transition risks, marking a pivotal step in climate risk management.

A New Tool for Near-Term Risks

Unlike the NGFS’s long-term scenarios, which span decades, these short-term scenarios focus on a five-year horizon, capturing immediate impacts from extreme weather and policy shifts. Developed with CLIMAFIN, E3-Modelling/RICARDO, and IIASA, the tool includes four scenarios:

• Highway to Paris: A gradual, tech-driven transition with orderly policies.
• Sudden Wake-Up Call: A sharp policy shift toward green sectors after delays.
• Disasters and Policy Stagnation: Extreme weather events with minimal policy action.
• Combined Risks: Both physical disasters and uneven global transition efforts.

These scenarios model sectoral and macroeconomic pathways, integrating climate policy, extreme weather, economic trends, and supply chain dynamics.

“Extreme weather and abrupt policy changes can hit economies hard in the short term,” said Sabine Mauderer, NGFS Chair and Deutsche Bundesbank First Deputy Governor.

Read more: Microsoft Boosts World’s Largest Carbon Removal Deal to 5M Tons

Key Features and Applications

The dataset emphasizes granular financial and sectoral metrics, ideal for stress testing and risk assessments. It accounts for compound physical risks—like sequential heatwaves, floods, and wildfires—and their economic fallout, such as GDP losses and trade disruptions. For instance, the “Disasters” scenario projects temporary but significant GDP declines from regional weather events.

“This tool is crucial for investment decisions and financial supervision,” said Livio Stracca, NGFS Scenario Design Chair and ECB Deputy Director General.

Institutions can use it to evaluate portfolio exposures, test resilience, and align with regulatory requirements.

Why It Matters?

With global warming at 1.2°C and extreme weather costing $200 billion annually (NOAA), delaying climate action amplifies risks. The NGFS scenarios show that procrastination raises transition costs, with shadow carbon prices potentially hitting $300/tCO2 by 2035 in a disorderly transition. The tool’s focus on near-term risks fills a critical gap, as 83% of investors demand robust climate strategies, per a 2024 PwC survey.

Despite its strengths, the tool has limitations. It excludes tipping points, migration, and nature loss, potentially underestimating impacts. The NGFS acknowledges these gaps and plans refinements by 2026.

Looking Ahead

Available for download, the dataset equips stakeholders to anticipate climate shocks and strengthen financial resilience.

“Delaying action will only increase economic damages,” Mauderer warned.

As central banks like the ECB integrate these scenarios into stress tests, the tool could shape monetary policy and green investment, paving the way for a more stable, sustainable economy.

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