Dr Nicola Ranger, Resilience and Development Programme Lead and Senior Researcher is part of the analytical team who’ve created new global guidance to help Central Banks and financial institutions analyse and manage climate-related risks to the economy and financial systems, drawing up research by several ECI scientists.
Compounding physical climate risks are financially material and should be included within scenario analysis. Not doing so, risks "severe underestimation" of losses. This is the clear conclusion of our paper with the Network for Greening Financial System (NGFS).
Recent years have seen a cascade of polycrises with major social, economic and financial implications that will last for many years. Based on a survey of twenty-six NGFS members this year, we found broad consensus on the urgency of considering compound risks when analysing climate change impacts. Many of the existing modelling approaches used for physical climate risk, including those utilized for the NGFS scenarios, do not yet capture compounding effects, which may contribute to a potentially severe underestimation of losses.
Recent advances in climate, catastrophe risk, network, and macroeconomic modelling, such as those developed by the ECI, show promise in filling the gaps in modelling compound risks. However, further work is needed to develop appropriate methods for incorporating compound shocks within financial risk assessment.
We recommend: - Compound climate shocks should be considered within climate scenario analysis - Central banks and supervisors should work closely with the scientific community to help identify the most relevant plausible compound climate shocks - In parallel, there is a need for further development of models to capture compound shocks. We make recommendations on next steps for NGFS.
Such a pleasure to collaborate with Michaela Dolk and Olivier Mahul at the The World Bank, Andrej Ceglar at European Central Bank and Kai Kornhuber at Climate Analytics on this research. Thank you also to the Network for Greening the Financial System and to all the Central Banks who participated in the research and formation of recommendations. These recommendations build upon long-term collaborative research with wonderful colleagues such as Irene Monasterolo, Stefano Battiston, Monica Billio, Andrea Mazzocchetti and Nepomuk Dunz.
Further information on the report and contributory documents from NGFS