Ricardo contributes to first-of-its-kind report showing climate risk to banking industry

Delaying climate transition will increase the overall economic costs of transitioning, generate material GDP losses and result in impacts to global supply chains, finds a recently launched report looking at four short-term climate change response scenarios on the real economy, labour markets, financial institutions, and the broader financial system.

The first-of-its-kind report, released by the Network for Greening the Financial System (NGFS), assesses the near-term impacts of climate policies and climate change on financial stability and economic resilience, primarily developed as an input for climate stress-testing and risk to financial institutions' investment portfolios.

The scenarios range from immediate and swift action to policy stagnation, showing that immediate action to curtail climate change has the lowest impact on financial systems.

Global environmental and strategic consultancy, Ricardo’s award-winning GEM-E3 model was central to the development of the report. Ricardo used GEM-E3 to assess climate change and energy demand variables against countries' macroeconomic data, including GDP, productivity, and population, to produce the scenario outcomes.

Additional modelling, provided by Climate Finance Alpha and the International Institute for Applied Systems Analysis, was also incorporated into the final scenarios produced through GEM-E3.

Ricardo’s GEM-E3 model is a state-of-the-art, large-scale, multi-regional, multi-sectoral model that provides details on the economy and its interaction with the environment and the energy system. The model is global and provides detailed results for all key economic and energy system variables.  Allowing the comparative analysis of policy scenarios on the performance of firms, household consumption patterns, government spending and international trade, decision makers can make better informed decisions. Equally, the analysis and the resulting report will be valuable for organisations receiving investment, helping them to gain better insight into potential climate risks and the expectations that will likely be placed upon them by institutional investors.

Ricardo's Director of Energy and Economic Modelling, Leonidas Paroussos: “The development of these scenarios provides, for the first time, short-term impacts of key climate response scenarios. It will be an invaluable tool for decision makers and creates an industry standard for financial institutions and the private sector. Thanks to this initiative, Ricardo’s experts are readily able to support central banks and financial institutions to prepare for different climate scenarios, creating resilience in their investment portfolio and supporting long-term viability.”

Sabine Mauderer, Chair of the NGFS and First Deputy Governor of the Deutsche Bundesbank: "The new NGFS short-term climate scenarios are a milestone in enhancing our understanding of climate-related risks. Extreme weather events and abrupt changes in transition policies can significantly affect our economies and financial sectors in the short run. This new NGFS tool offers the financial community valuable insights into the implications of adverse climate scenarios in the near-term, with impressive sectoral and geographical granularity. The results remind us that reducing or delaying climate action will likely worsen future economic damages."

Livio Stracca, Chair of the NGFS workstream “Scenario and Design Analysis” and Deputy Director General Financial Stability at the European Central Bank:  “The NGFS short-term scenarios represent a key addition to the analytical toolkit for understanding climate-related macroeconomic and financial risks. This new set of scenarios helps to describe the more immediate impacts of climate shocks and policy shifts, in a timeframe and level of detail that is especially relevant for investment decisions, financial supervision, monetary policy, and risk management. The short-term scenarios mark a significant step forward in supporting institutions to prepare for adverse, but plausible, climate developments and policies.”

The free short-term scenarios report and findings are part of a growing toolkit being developed by the NGFS to support central banks and their supervisors assess and minimise risks of climate change.