The UN Environment Programme Finance Initiative (UNEP FI) has launched a new tool that allows investors to test their own assumptions about short-term climate outcomes, rather than relying on centralised climate scenarios. Developed in collaboration with the UK’s National Institute of Economic and Social Research (NIESR), the tool enables users to select a combination of climate-related shocks across various severities to generate climate scenarios for internal use.
The use of climate scenario analysis for testing investment portfolios’ resilience has become widespread due to regulatory disclosure initiatives, particularly those adapting the TCFD and ISSB frameworks, as well as prudential requirements.
To date, financial institutions have primarily relied on climate scenarios developed by organisations like the Network for Greening the Financial System (NGFS), the IEA, and the IPCC. These scenarios generally follow similar trajectories based on commonly accepted plausible outcomes and focus on long-term horizons of 50-plus years, making immediate climate action formulation challenging.
“While long-term scenarios are vital for understanding transition costs and benefits, they offer only a partial view of near-term risks,” stated UNEP FI in the tool’s release notes. Recognising short-term risks is crucial for central banks to fulfill their financial stability duties and for financial institutions to integrate climate risks into their near-term planning. UNEP FI also noted that existing scenarios have been criticised for not adequately reflecting worst-case scenarios.
This open-access tool allows users to explore the effects of shocks caused by macroeconomic factors, as well as transition and physical risks. These scenarios can be modified based on individual risk appetites and future predictions. Scenarios modeled by the tool include outcomes where the green transition leads to increased nationalism and regional rivalry, or where climate hazards result in migration from hotspots like Sub-Saharan Africa. The scenarios cover a one- to five-year time horizon.