Blog | 15 Jul 2024

Going beyond the NGFS and IPCC climate scenarios

Matthew Winning

Head of Climate Research

This blog post emphasises the critical need for a comprehensive analysis in climate risk management, recognising the value of NGFS and IPCC scenarios while advocating for tailored, nuanced approaches that leverage additional insights and data.

Going beyond the NGFS and IPCC climate scenarios

With climate-related risks becoming increasingly significant for financial services and other industries, the use of climate scenarios has become a fundamental tool in risk management and strategic planning. The Network for Greening the Financial System (NGFS) and the Intergovernmental Panel on Climate Change (IPCC) are two of the most prominent sources of climate scenarios. While their contributions are invaluable, it’s crucial to understand their limitations and build upon them to develop a robust risk management framework.

This blog post explores these limitations and highlights the importance of integrating comprehensive analysis into climate risk management.

The limitations of the IPCC approach

The IPCC scenarios are a synthesis of the academic climate mitigation literature using a wide range of models and are an extensively used tool in climate risk analysis. They are built on extensive scientific research and provide a range of potential future climate.

One of the main criticisms of the IPCC scenarios is the relatively infrequent updates. Given the rapid pace of climate change and the evolving nature of associated risks, the time lag between updates can create gaps in the relevance and applicability of the scenarios. This means several IPCC scenarios already start several years in the past and use underlying socioeconomic data that are now out of date. This limitation poses a significant challenge for organisations that require real-time data and projections to inform their decision-making processes.

Another limitation is that many models – referred to as Integrated Assessment Models (IAMs) – used in the IPCC analysis only have a fairly rudimentary representation of the economy and finance.

The role and limitations of the NGFS

The NGFS was developed to offer a consistent and robust framework for understanding the effects of climate change mitigation, or lack of, on the economy and in particular the financial system. This is undertaken by extending the typical IPCC modelling framework by linking various IAMs to a macro model called NiGEM. Scenarios are then run using this framework to explore a variety of combinations of physical and transition risks.

However, the NGFS emphasises that because each company has unique risk exposures and strategic priorities, their annual scenarios should be supplemented with further analysis to effectively manage climate-related risks. They explicitly mention, “Users should use the scenarios as a foundation for their work to build upon whilst needing to supplement their risk management with further analysis. Scenarios do not provide an off-the-shelf package that organisations can use. They are for providing the basis for analysis only.”

Therefore, while NGFS scenarios are an essential starting point, they must be enhanced with additional data, tools and methodologies to create a comprehensive risk assessment.

The need for comprehensive analysis

Given the limitations of both IPCC and NGFS scenarios, organisations must adopt a comprehensive approach to climate risk management. This involves augmenting foundational scenarios with additional analysis, leveraging a range of data sources and employing advanced modelling techniques.

At Oxford Economics, we recognise the importance of building on foundational scenarios to create a comprehensive climate risk management strategy. We have further developed our long-standing macroeconomic model to include climate-specific considerations. This is used in our Global Climate Solution to undertake a set of quarterly climate scenarios exploring physical and transition risks to provide timely assessments using the latest data and allow for the possibility of fully customised solutions addressing specific needs of organisations. When compared directly with the NGFS, our economically robust approach provides added industry and regional granularity.  

Conclusion

While IPCC and NGFS scenarios play a pivotal role in informing climate risk management, their limitations necessitate a more comprehensive approach. By augmenting these scenarios with additional analysis and tailored insights, organisations can develop a robust risk management framework that addresses their unique exposures and priorities. At Oxford Economics, we are committed to providing – with our Global Climate Solution – the expertise, tools and bespoke approaches required to address the various challenges of climate risk.

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