NGFS publishes first short-term scenarios on the financial impacts of climate change

The Network for Greening the Financial System ( NGFS ) has presented the first climate scenarios that show and analyze the economic and financial impacts of climate change in the short term . This is a significant development for central banks, regulators and financial institutions that need to assess the vulnerability of the economic system to imminent climate events.

Unlike the more well-known long-term scenarios, these new models focus on the period up to 2030 , thus considering a time frame of five years, with the aim of providing practical tools for stress-testing exercises and for the assessment of macroeconomic risks associated with extreme weather events or accelerated political and technological transitions . Among the main features of these scenarios is the inclusion of compound physical climate risks, to understand how a sequence of extreme weather events (such as heatwaves, floods, forest fires and storms) can profoundly affect economies, causing potential disruptions in supply chains and devastating impacts on global production.

In detail, the set includes four distinct scenarios : one focuses exclusively on physical risk, two focus solely on transition risk, and one combines both. The “Disasters and Policy Stagnation” scenario analyses the economic and financial repercussions of plausible but extreme weather events, while the “Highway to Paris” imagines an orderly transition driven by technology. The “Sudden Wake-Up Call” considers a sudden shift in public policies and consumer preferences, with a rapid shift towards low-carbon technologies that, while beneficial for the environment, generates turbulence in financial and sectoral markets. Finally, the “Diverging Realities” scenario analyses a scenario in which advanced economies follow an orderly transition, while others face extreme weather events, causing further disruptions in supply chains and increasing the costs of the transition to a low-carbon economy.

The results show that transition risk generates a limited impact on GDP (-0.5%) and a moderate increase in unemployment (+0.7 percentage points) when ambitious policies are implemented in an orderly manner (“Highway to Paris”). However, sudden and disorderly policy changes (“Sudden Wake-Up Call”) increase the economic costs, leading to a reduction in GDP of 1.3% and an increase in unemployment of 1.3 percentage points in 2030.

Physical risk impacts from extreme and compound weather events (affecting only one region of the world at a time) cause large but temporary contractions in output. For example, global GDP may decline by up to 1% in 2026 following extreme weather events in Europe and by up to 2.1% in 2027 following similar events in Asia (“Disasters and Policy Stagnation”).

In the “Diverging Realities” scenario, frequent and compound climate shocks, coupled with disruptions to supply chains and transition efforts in some regions, lead to global (and lasting) GDP losses of up to 2.8% and an increase in unemployment of up to 1.7 percentage points in 2028.

Livio Stracca , head of the NGFS scenario working group, stressed the importance of this analysis: “Financial institutions need a more concrete and timely view of how climate and environmental policies can affect macroeconomic stability. These scenarios help quantify plausible risks in the short term, providing valuable guidance for investment strategies, risk management and financial supervision.”

All scenarios ( found here ) have been developed in collaboration with a consortium of academic experts and modellers, including CLIMAFIN, E3-Modelling/Ricardo and the IIASA (International Institute for Applied Systems Analysis).