NGFS technical paper - Recommendations toward the development of scenarios for assessing nature-related economic and financial risks
The NGFS released a new technical document in December 2023, Recommendations toward the development of scenarios for assessing nature-related economic and financial risks. It sets out NGFS’ recommendations on the development of scenarios that will support central banks and supervisors to assess how economies and financial systems might be affected by various nature-related physical risks and transition policies. Built on an extensive literature review, with input from external experts, the document’s recommendations lay the foundation for future development of nature-related scenarios.
The document is part of NGFS’ effort to mainstream the consideration of nature-related risks, by providing tools to guide action by central banks and financial supervisors.
Recommendations toward the development of scenarios for assessing nature-related economic and financial risks:
- States that ENCORE is “a good starting point to get familiarised with nature-related risks” for central banks and financial services supervisors, ahead of a “full-fledged risk analysis relying on a transparent set of plausible hypotheses regarding the future”.
- Highlights how De Nederlandsche Bank and the Banque de France have used the ENCORE methodology to support estimations of their financial systems’ impacts and dependencies on nature.
- Suggests that by linking the Environmental Sustainability Gap – Strong Environmental Sustainability index (ESGAP) to ENCORE, research can provide a snapshot in time of ecosystem integrity and dependency. This builds understanding of which sectors, in which countries, are most exposed to particular forms of environmental degradation based on their dependence on particular ecosystem services.
- Outlines how ENCORE dependency scores by sector have been used by the Oxford Integrating Nature-Climate Scenarios & Analytics for Financial Decision-Making (INCAF) project to map forward potential material hazards, generated by nature loss and degradation of ecosystem system services, onto economic impacts.
- Deploys ecosystem services from the ENCORE knowledge base to assess how various modelling frameworks represent the link between ecosystems and the economy.
Read the NGFS’ technical document, Recommendations toward the development of scenarios for assessing nature-related economic and financial risks.
NGFS Occasional Paper - The Green Scorpion: The Macro-criticality of Nature for Finance
In December 2023, NGFS also released an occasional paper, The Green Scorpion: The Macro-Criticality of Nature for Finance - Foundations for scenario-based analysis of complex and cascading physical nature-related financial risks. The report develops scenario approaches for nature-related financial risks to support assessment of the macro-criticality of nature for financial institutions, and to inform action by central banks and financial institutions. It also presents a preliminary assessment of the relative scale of risks across countries.
The Green Scorpion: The Macro-Criticality of Nature for Finance offers an “evidence-based set of building blocks for constructing physical nature-climate scenarios for financial risk assessment and a methodology for preliminary risk screening that can work across all countries”. It demonstrates the approach the NGFS took to risk screening against five ecosystem services included in the ENCORE knowledge base. Additionally, the paper’s authors used ENCORE dependency scores by sector to generate estimates of scope 1 and scope 3 nature-related maximum exposures for countries by using the EXIOBASE input-output modelling approach.
Read the NGFS’ Occasional Paper - The Green Scorpion: The Macro-Criticality of Nature for Finance
“With the adoption of the Kunming-Montreal Global Biodiversity Framework and launch of the Taskforce on Nature-related Financial Disclosures’ Final Recommendations, there is increasing recognition of the risks - both physical and systemic - associated with nature and biodiversity loss to the global economy. Central banks and regulators have a critical role to play in managing those risks and the ENCORE tool provides an excellent entry point in identifying the economy’s key potential dependencies and impacts on nature. Understanding the financial system’s exposure can lead to better climate and environmental management practices, supporting the transition to a nature-positive economy.”
Lisa Petrovic, ENCORE Lead at Global Canopy
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