NGFS climate change response evaluation

𝗧𝗵𝗲 𝗡𝗚𝗙𝗦 𝗷𝘂𝘀𝘁 𝗿𝗲𝗹𝗲𝗮𝘀𝗲𝗱 𝘀𝗼𝗺𝗲𝘁𝗵𝗶𝗻𝗴 𝗯𝗶𝗴— for the first time, we now have 𝘴𝘩𝘰𝘳𝘵-𝘵𝘦𝘳𝘮 𝘤𝘭𝘪𝘮𝘢𝘵𝘦 𝘴𝘤𝘦𝘯𝘢𝘳𝘪𝘰𝘴 tailored for 𝘀𝘁𝗿𝗲𝘀𝘀 𝘁𝗲𝘀𝘁𝗶𝗻𝗴, 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝘀𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆, 𝗮𝗻𝗱 𝗻𝗲𝗮𝗿-𝘁𝗲𝗿𝗺 𝗺𝗮𝗰𝗿𝗼 𝗿𝗶𝘀𝗸. 🔸 This isn't about 2050. It's the next five years, i.e. 𝟮𝟬𝟮𝟱–𝟮𝟬𝟯𝟬. 🔸 This isn't abstract. It's 𝗚𝗗𝗣 𝘀𝗵𝗼𝗰𝗸𝘀, 𝗰𝗿𝗲𝗱𝗶𝘁 𝗿𝗶𝘀𝗸, 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻, 𝗮𝗻𝗱 𝘂𝗻𝗲𝗺𝗽𝗹𝗼𝘆𝗺𝗲𝗻𝘁. 𝗧𝗵𝗲𝘀𝗲 𝗮𝗿𝗲 𝘁𝗵𝗲 𝘀𝗵𝗼𝗿𝘁-𝘁𝗲𝗿𝗺 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀: 1.  A smooth transition ("Highway to Paris") 2.  A delayed, abrupt policy shift ("Sudden Wake-Up Call") 3.  Physical risk disasters without transition ("Disasters & Policy Stagnation") 4.  A fragmented world with climate chaos and policy misalignment ("Diverging Realities") These scenarios are a wake-up call for taking short-term climate risks seriously. ➤ Delaying climate action could increase global 𝗚𝗗𝗣 𝗹𝗼𝘀𝘀𝗲𝘀 𝗯𝘆 𝗼𝘃𝗲𝗿 𝟯𝘅, and unemployment spikes by 1.3 percentage points (Sudden Wake-Up Call vs Highway to Paris). ➤ Climate disasters aren’t just regional anymore. Floods, fires and droughts in Asia or Africa can cut European 𝗚𝗗𝗣 𝗯𝘆 𝟭.𝟳%, driven by supply chain exposure. ➤ Credit risk spreads explode in carbon-intensive sectors. In some cases, default probabilities jump by 20–30 percentage points, stressing banks and insurers alike. ➤ Green sectors could lose out if the transition is abrupt, fragmented, or disrupted by physical shocks. 𝗛𝗲𝗿𝗲 𝗶𝘀 𝘄𝗵𝘆 𝘁𝗵𝗲𝘀𝗲 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 𝗮𝗿𝗲 𝗮 𝗴𝗮𝗺𝗲-𝗰𝗵𝗮𝗻𝗴𝗲𝗿 ➤ For the first time, compound hazards—droughts, floods, wildfires—are modelled together, showing how climate risk can become systemic through trade, finance, and supply chains. ➤ Monetary policy is now integrated, so climate shocks affect interest rate paths, inflation dynamics, and macroeconomic volatility. ➤ Financial contagion is now factored in. Using advanced modelling, the framework maps how climate-related losses feed into default risk, cost of capital, and sectoral investment flows. ➤ Sector-by-sector and region-by-region outcomes now include asset-level exposure, probability of default, and sovereign bond repricing, offering tools fit for risk management. 𝗠𝘆 𝘁𝗮𝗸𝗲 This release is a step-change in how we understand and model climate risk. These scenarios are critical because they model economic and financial impacts on business over the next five years. A timeline relevant for senior management, boards and shareholders. Because these scenarios capture dynamic feedback loops, sector-specific capital costs, and second-round effects that ripple through the financial system, the risk science is taken to a whole new level. These real-world complexities have been missing from science to date, which is why these scenarios are so critical. #NGFS #NetZero #ClimateRisk _____________ For updates, follow me on LinkedIn: Scott Kelly

Climate Disclosure Is No Longer About Reporting- It’s About Risk Architecture. I’ve just reviewed Bank of America’s 2025 ISSB IFRS S2 Climate Disclosure, and one thing is clear: Leading financial institutions are no longer treating climate as a CSR topic. They are embedding it into enterprise risk, capital allocation, and long-term strategy. Here are the executive-level insights that matter: ▮Climate Governance is Now Board-Level Business Climate oversight sits within core board committees - Risk, Audit, Governance- not in a standalone sustainability silo. That’s a signal: climate = financial materiality. ▮Climate Risk Is Integrated Across All Risk Types Credit. Market. Liquidity. Operational. Strategic. Reputational. Physical and transition risks are assessed through the same rigorous frameworks used for financial risk management. This is what IFRS S2 intended. ▮Scenario Analysis Is Becoming a Strategic Tool - Not Just a Compliance Exercise Using NGFS pathways (Net Zero 2050, Delayed Transition, NDC), the bank stress-tests portfolios across sectors and geographies. Key insight? Climate combined with macroeconomic stress compounds impact. Second-order effects matter. ▮Operational Emissions Are Under Control- But Financed Emissions Are the Real Story Scopes 1 & 2: materially reduced and carbon neutral. Scope 3 (financed emissions): sector-specific intensity targets across energy, aviation, cement, steel, power, shipping and auto manufacturing. This is where transition credibility lives. ▮Intensity vs. Absolute Emissions - Both Matter Intensity improvements can coexist with rising absolute emissions. Serious disclosures now report both. ▮Carbon Credits Are Used- But Framed Carefully Offsets are positioned as supplementary, with increasing focus on high-integrity removal credits. The market will continue scrutinizing this balance. Climate disclosure is evolving from sustainability storytelling to: • Capital exposure mapping • Sectoral decarbonization alignment • Insurance risk assessment • Transition finance positioning • Regulatory preparedness The question is no longer “Are we reporting?” It’s “Are we structurally resilient?” For banks and large corporates in emerging markets including the Middle East and Africa, the implication is clear: Global standards (ISSB, NGFS, PCAF) are becoming the language of capital access. And capital increasingly flows toward credible transition pathways. Climate strategy today is not about restriction. It is about intelligent repositioning. #Sustainability #ClimateRisk #IFRSS2 #ISSB #ESG #SustainableFinance #RiskManagement #NetZero #TransitionFinance #BoardGovernance

For risk managers: How to integrate adaptation into your planning: 5 important considerations. As climate disasters mount and consensus on adaptation needs builds, I’m frequently asked by risk managers, how do we think about both physical and transition risks together? I try to guide them to an effective framework for translating both types of risks into financial impacts as a starting point. However, we need to go farther than that and actively consider how future strategies are influenced by the need for adaptation. In a recent workshop for risk managers, I took the new report from the NGFS about integrating adaptation into transition plans and showed how the 5 pillar framework of the ISSB and TPT can be leveraged to ensure adaptation is well considered. Here’s what that looks like for each pillar: 1. Governance- Existing governance mechanisms used for climate mitigation should also oversee adaptation objectives and monitor progress against adaptation targets once they are set. 2. Foundations- Institutions should set clear adaptation objectives focused on managing exposure to physical climate risks and, where appropriate, identifying business opportunities that enhance resilience. 3. Implementation Strategy- Based on physical risk and opportunity assessments, institutions should determine their risk and investment appetite and embed responses (e.g. avoid, accept, reduce, transfer, or invest) into business strategy and operations. 4. Engagement Strategy- Build on existing mitigation-related engagement to support a cohesive approach while fostering an internal and external environment conducive to increased climate resilience. 5. Metrics and Targets- Develop metrics starting with data stocktakes and baseline measures, then advancing to output-based metrics that assess the effectiveness of adaptation in managing physical risk. Drop me a message or comment to learn how we are helping risk managers tackle both adaptation and transition challenges! #climaterisk #adaptation #transitionplans #climateregulation #risk

As indicated on the European Central Bank Blog a few days ago, 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗖𝗵𝗮𝗻𝗴𝗲 is no longer “the Tragedy of the Horizon" as Mark Carney put it, but an 𝗶𝗺𝗺𝗶𝗻𝗲𝗻𝘁 𝗱𝗮𝗻𝗴𝗲𝗿. In the next five years, extreme weather events could already put up to 5% of the euro area’s economic output at risk, according to the new short-term scenarios of the Network for Greening the Financial System (#NGFS). Integrating climate risk into credit risk management involves assessing and quantifying the potential financial impacts of climate change on lending and investment decisions. This includes both physical risks (like extreme weather events) and transition risks (like policy changes). By incorporating these factors into credit risk models, financial institutions can better understand and manage their exposure to climate-related financial risks. In the UK, integrating climate-related risks into credit risk assessment is a growing priority for financial institutions and regulators. The Bank of England is actively working on incorporating climate risks into its monetary policy operations and is encouraging firms to enhance their climate risk management capabilities. The deadline for responding to the UK Prudential Regulation Authority's (#PRA) consultation on its updated climate risk management expectations is July 30, 2025. This consultation paper, CP10/25, focuses on enhancing how banks and insurers manage climate-related risks. The PRA's key findings as to areas for improvement by banks included: (1) scope to expand the range of loan portfolios subjected to a climate risk assessment, to pick up impacts on underlying collateral, refinance risk and ability to repay; (2) enhancement of data granularity and working towards embedding climate risk in loan-level credit risk assessments; and (3) expanding the range of climate scenarios considered, to better identify borrowers and sectors implicated by climate risk Climate risks can impact the probability of default (#PD) and the loss given default (#LGD) on loans, 𝗽𝗼𝘁𝗲𝗻𝘁𝗶𝗮𝗹𝗹𝘆 𝗹𝗲𝗮𝗱𝗶𝗻𝗴 𝘁𝗼 𝗵𝗶𝗴𝗵𝗲𝗿 𝗰𝗿𝗲𝗱𝗶𝘁 𝗹𝗼𝘀𝘀𝗲𝘀 for lenders. Climate risks can also affect the value of collateral, particularly in sectors heavily exposed to climate change impacts.  This compilation addresses this important topic highlighting the latest research and insights covering both credit risk integration and accounting implications of climate change. #riskmanagement #climaterisk #transitionrisk #physicalrisk #ECL #IRB #probabilityofdefault #creditrisk #lossgivendefault #recoveryrate #impairment #defaultrisk #riskassessment #riskmanagement #riskmeasurement #granularity #dataquality #stresstesting #scenarioanalysis #financialstability #globalwarming #climatechange #emissions #netzero #loanportfolio #borrowerdefault #creditloss #information #research #knowledge #resources #futurerisk #emergingrisk #novelrisk

🌍 BloombergNEF released its assessment of the NGFS short-term scenarios. 🔎 What’s new compared to the NGFS long-term scenarios: ● Annual timeframe, narrative-based physical risk, more sectors (now 50), and, for the first time, the release of financial metrics such as default probabilities and asset valuation. ● On physical risk, the scenarios explore low-probability, high-amplitude weather events, with compounding disasters in 2026–2027. In the case of the US, the GDP impact is comparable to the pandemic or the Great Financial Crisis (see picture below). ● Regarding transition risk, the reliance on shadow carbon pricing oversimplifies the complex structure of the low-carbon transition. Real-world policies, such as fuel economy standards, heat pump subsidies, coal phase-outs, renewable auctions and technology shifts cannot be properly modelled via blanket carbon prices. ● In addition, the scenario baseline is quite optimistic, in my view. It assumes that countries meet their policy targets a priori. This means part of the disruption due to the transition is not on NGFS’ radar. 📊 The bottom line: These new scenarios are a step forward for financial regulators and institutions, offering better granularity, addressing some shortcomings of the long-term scenarios. There is room to strengthen the analysis of transition risk in future vintages. See “Climate Stress Tests Bolstered by New NGFS Scenarios” co-authored with Maia (Maeva) Mésanger, Claudio Lubis and Estella Agyepong BNEF users: https://lnkd.in/efAk-RJA Terminal BBA users: {NSN SYOBN5DWRGG0 <GO>} NGFS new scenarios: https://lnkd.in/ed5JitWH For BNEF’s bottom-up transition scenarios, see the New Energy Outlook (NEO): https://lnkd.in/e9GY48r7

What the updated NGFS Guide means for banks and potentially for companies’ cost of capital Climate risks are now financially material. This update is important because it gives a much stronger, more realistic tools to understand how climate change can threaten financial stability in both the near term and long term. The updated NGFS guidance raises expectations on how climate risks are priced into pricing, valuations, and capital planning. This has direct consequences for cost of capital, lending decisions, and credit valuations. Banks will face increasing pressure to price climate risks explicitly. Interestingly, this will sharpen their methods to identify risks related to climate which translate to: 1. Higher cost of capital for climate-exposed sectors. The more detailed transition and physical-risk pathways mean banks must recognise greater risk for: • high-emission sectors, • businesses with weak transition plans, • borrowers in climate-vulnerable regions. This results in higher loan spreads, tighter lending terms, shorter maturities, and reduced credit availability for riskier clients. Also, low-carbon or well-aligned firms may see more stable or lower funding costs. 2. Credit valuations increasingly include climate-adjusted risks. Banks are expected to incorporate climate impacts directly into default probabilities, loss estimates, and collateral valuations. We do already see how national authorities are looking after the EBA implementation. Transition shocks, policy changes, and physical events must now be reflected in near-term pricing, not just long-horizon models. This raises credit risk metrics in exposed sectors and widens credit spreads. 3. Capital requirements rise where climate risks are material as scenario outcomes feed into banks’ internal capital processes. Where climate pathways produce higher expected losses, banks will need to increase capital buffers, adjust provisions, and recognise higher risk-weighted assets. This reinforces the rise in funding costs for borrowers with significant climate exposures. 4. Lending portfolios shift toward lower-risk segments. With scenario analysis embedded in risk management: • Lending to carbon-intensive or climate-vulnerable sectors becomes more expensive and selective, • Banks gradually reallocate toward climate-resilient industries and clients with credible transition strategies, • Credit supply becomes more differentiated, with pricing reflecting detailed sectoral and regional climate risk assessments. 5. Short-term climate scenarios sharpen near-term repricing. The introduction of short-term NGFS scenarios means banks must prepare for climate-related shocks within their normal planning horizon. This leads to more frequent repricing of loans, higher volatility in valuations, and earlier recognition of potential losses. These rising expectations for clarifies what “good practice” looks like and supports consistent global standards.

In its 2024 Climate and nature disclosures Norges Bank Investment Management included the results of new, internal top-down modelling to stress test the exposure of its US equity portfolio under the NGFS 3C Current Policies Scenario. The findings were significant: "We find that the present value of average expected losses from physical climate risk on our US equity investments under a Current Policy scenario is 19 percent (and 27 percent at the 95th percentile) when using the top-down approach" NBIM also concluded that the 19% loss was an underestimate due to: ⛔ Very limited inclusion of acute impacts in the NGFS damage function ⛔ Exclusion of "feedback loops between the climate system and the natural carbon cycle, and between the real economy and financial markets" ⛔ Exclusion of "tipping points and other cascading effects" ⛔ Exclusion of "climate impacts on natural resources and ecosystem services" ⛔ Exclusion of "the amplification effects of multiple climate and non-climate shocks happening concurrently i.e. polycrises" NBIM should be commended for these efforts to strengthen its approach to portfolio stress testing AND for acknowledging the known blind spots in its analysis so openly. We look forward to seeing what the fund does next to both act on the findings and to strengthen them further. See link in comments. Martin Norman Dimitri Lafleur Australasian Centre for Corporate Responsibility (ACCR)