Federal Reserve staff are participating in a new Network for Greening the Financial System (NGFS) workstream on “Bridging the Data Gaps.” The workstream will create a detailed list of gaps in data items at the macroeconomic level, the market level, and the financial market participant level needed to model climate risk. 23 Climate change also poses distinct modelling challenges.
The several decades over which climate risks are projected to materialize far exceed a bank’s typical risk management and planning time horizon. Moreover, financial risk models are often backward-looking and extrapolate historical trends, which, in the case of climate, may be unreliable predicators of future outcomes. New tools and forward-looking approaches will be required.