To this end, the NGFS committed to publish the first-of-its-kind Guide on climate scenario analysis for central banks and supervisors. The forward-looking nature of climate risks and the inherent uncertainty about future events make it difficult to assess them using standard risk modelling methodologies. Scenario analysis offers a flexible ‘what-if’ methodological framework that is better suited to exploring the risks that could crystallise in different possible futures.
This Guide provides practical advice on using scenario analysis to assess climate risks to the economy and financial system. It is based on the initial experiences of NGFS members and observers and also aims to progress discussion on the methodologies used. While mainly aimed to central banks and supervisors, many aspects of the Guide might also prove informative to the wider community.
The Guide provides a four-step process. It recognises that this field is still relatively in its infancy and there is no universally agreed approach.