And of course the future path of the climate risks themselves is subject to huge uncertainty. But given the urgency of our challenge, we cannot let uncertainties and complexities lead to inertia and inaction. Scenarios are generally comprised of three key components:   Transition models that set out how energy production and land-use can adjust to lower emissions and meet a given carbon budget or temperature target;    Physical models that set out projections for how living conditions and extreme weather would shift given a pathway for emissions; and    Economic models that quantify the potential impacts from both transition and physical risk on the economy. This is unfamiliar territory for most central banks, businesses and the financial sector. It is however territory we all need to get familiar with if we are to find the right climate path. Our desire to improve our understanding and capability to measure and monitor these risks inspired us to launch a project to co-design climate scenarios together with world leading climate scientists and 60 other central banks and supervisors that are part of the macrofinancial workstream of the Network for Greening the Financial System or NGFS.4  It has been a truly interdisciplinary effort. We have had to integrate a suite of models across each of the areas – physical, transition, economic, financial – to deliver insights [figure 3].
The scenarios the NGFS have produced pull together, for the first time, both transition risks and physical risks, and their economic and financial consequences, in a coherent way. As a result, they are decision-useful, reflecting the totality of risks we will face. A guiding principle has been to try to shine a light on some of the uncertainties that exist. We have focused on multiple scenarios and multiple models to highlight the range of potential outcomes. Since modelling these impacts is subject to significant uncertainty and extensive academic debate, our work is open source and we seek your expertise and challenge. 4  The NGFS was founded by 8 central banks and supervisors including the Bank of England in 2017. Members are committed to sharing best practices, contributing to the development of climate and environment-related risk management in the financial sector and mobilising mainstream finance to support the transition towards a sustainable economy. It is currently comprised of 90 members and 14 observers. The first iteration of these scenarios, published in June 2020, drew from the existing work on mitigation pathways, climate change and adaptation that supported the Intergovernmental Panel on Climate Chance (IPCC) Special Report on Global Warming of 1.5°C.5 The NGFS will next month release an update, which will include bespoke scenarios, detailed macroeconomic modelling and a new online portal that can be used to explore physical risks. Insights from the design of the NGFS climate scenarios I would like to share some of the insights I’ve gleaned from this work.