To support the work of these committees and the broader work throughout the Federal Reserve System, we are investing in new research, data, and modeling tools. In light of the high uncertainty inherent in estimating climate-related shocks, scenario analysis may be a helpful tool to assess the effects on the financial system under a wide range of assumptions.
16 Climate scenario analysis identifies climate-related physical and transition risk factors facing financial firms, formulates appropriate stresses of those risk factors under different scenarios, and measures their effects on financial intermediaries and the financial system. This analytic approach gives us a structured way of uncovering the parts of the financial system where physical, transition, and other risks may have outsized effects through potential spillovers.