Guide to climate scenario analysis for central banks and supervisors
Climate change, and our response to it, will have a significant impact on economic and financial systems. The impacts will be far-reaching in breadth and in magnitude; subject to tipping points and irreversible changes; and are uncertain yet at the same time totally foreseeable. In particular, while we do not know now exactly what physical and transition risks will materialise, we do know for sure that we will face some combination of those risks. And, crucially, we also know that the size and balance of these future financial risks and economic costs will depend on the actions we take today.
If we act now, then we maximise our chances of achieving an orderly transition to a carbon neutral economy. By acting early we minimise transition risks, and by limiting global warming to a range of 1.5˚C to 2.0˚C relative to pre-industrial levels, we simultaneously minimise the extent to which the physical risks from climate change materialise. If instead meaningful adjustment is delayed, then the greater will be its disruption – whether from higher physical risks, or from a more disorderly transition, with markets potentially repricing sharply, and the provision of financial services perhaps disrupted. And of course, if we fail to act at all, that puts us on a path to global warming of 3.0˚C or more, leaving us all exposed to the potentially catastrophic physical risks that arise with an ever hotter planet.