Even where we manage to limit the rise in global mean temperatures to 1.5 degrees, physical risks are likely to dominate the potential impacts of transition. And if instead we continue on our current trajectory, losses just from the impact on productivity could be as high as 13% of GDP.8  In addition, many of the leading studies, including those we used in the NGFS, start from past correlations and so find it hard to put an accurate number on the type of low-probability, high impact events that will become more common. As high levels of warming will be unprecedented, we don’t yet fully understand the delicate balance between the climate, living conditions, ecosystems and the economy - for example, the level at which ice melts might accelerate; or methane stores under permafrost might be unlocked. What is clear is that investment is needed now to help adapt to these inevitable changes. And that we should recognise the gaps in our understanding of how large changes to our climate might affect our economies. Challenges in applying scenarios  While these key themes are clear, I know from our own experience, and from the firms we supervise, that applying the scenarios in practice is not straightforward. The models, data and analytical frameworks are new, and the transmission channels are complex and subject to much uncertainty. The results can be sensitive to input assumptions and type of model used.
Either because temperatures continue to rise as the transition is eluded; or because we face a disorderly transition - a so-called climate Minsky moment – as a significant number of otherwise productive assets have to be abandoned; or as asset prices adjust whilst risk and return are repriced. To avoid such outcomes, financial firms need to manage these risks not as they materialise but instead by looking ahead over much longer time horizons than they are used to. And, as our supervisory expectations of banks and insurers make clear, they need to act strategically and pre-emptively, taking different decisions today, well before the consequences of inaction become clear.3  Climate scenario analysis  Climate scenario analysis provides us with the toolkit for doing just that. To look forwards not backwards, with a horizon of decades not years. In recognition of the uncertainty we face about what might happen to our planet and our economy, some scenarios show the most efficient pathway to net zero, while others highlight the risks of fragmented policies or insufficient action. They can all help guide actions today. 3  See PRA supervisory expectations on the financial risks from climate change. Plotting the transmission channels of climate risks into economic and financial risks is a fiendishly complicated task [figure 2]. The channels from climate to financial risk are numerous, with significant interdependencies. The data and methodologies to translate climate outcomes into macroeconomic and financial risks are incomplete and inadequate.