Climate change will affect economies through physical risks such as rising sea levels and transition risks such as higher energy costs and changes in energy consumption. As the threats from climate change mount, businesses are focusing on quantifying what these physical and transition risks mean for them.
Using the Moody’s Analytics Global Macroeconomic Model, we have produced climate risk scenarios that enable organizations to analyze business impacts and stress their portfolios for the risks posed by climate change. Covering more than 18,000 macroeconomic variables, this expansive scope of climate-related macroeconomic data allows for selection from an extensive array of climate scenarios to accurately quantify both physical and transition risks.
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Short-term climate scenarios
Climate risks are not exclusively a concern of the distant future; they are immediately pertinent to macroeconomic performance and business continuity. Understanding the near-term impact of climate risk has become an urgent concern for businesses, governments and financial institutions. The publication of the NGFS’s short-term scenarios furthers this goal meaningfully. Short-term climate risk scenarios allow for the assessment of climate risk during a time frame pertinent for business planning. While long-term climate risk scenarios are key in assessing the total impact of climate change on the economy, moving shocks forward in the time horizon allows businesses to assess the immediate impact of climate on balance sheets.
Long-term climate scenarios
Transition and chronic risk are more evident in long-term climate scenarios. This is when industries transition to a lower carbon footprint and new energy-efficient industries emerge. Chronic factors such as temperature rise begin to take a toll on worker health and productivity, and crops are impacted. Catastrophic weather events also become more intense and more frequent. The NGFS-based long-term scenarios present a variety of paths over the next 50 years, ranging from no action to net zero by 2050.
Moody’s Analytics climate scenarios go above and beyond NGFS
Broad coverage and detailed insight into the economic impacts of climate risk not matched by the scenarios obtained directly from NGFS or other sources.
A Flexible and Transparent Solution
Moody’s Analytics starts with the NGFS parameters for top-line variables, then expands the scenarios to extrapolate additional variables using our Global Macroeconomic Model.
A key to incorporating climate risk into traditional macroeconomic variables is including the trajectory for carbon prices. Carbon prices flow through the model via price channels, raising inflation rates, and central banks’ reaction functions. As governments increasingly adopt carbon tax policies to limit the amount of carbon dioxide in the atmosphere, some industries are affected more adversely. These industrial transition risks are reflected in the forecasts produced by the Global Macroeconomic Model.
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