NGFS Climate Scenarios
NGFS climate scenarios are standardized, forward-looking pathways used by central banks, regulators, and financial institutions to assess climate-related risks across economies, sectors, and assets.
Origin: developed by the Network for Greening the Financial System
Purpose: provide standardized climate pathways for financial modeling
Users: banks, regulators, investors, and corporates
Application: core input for scenario analysis and stress testing
In 30 Seconds
NGFS scenarios provide a set of internally consistent, long-term climate and economic pathways that allow financial institutions to model how climate change could affect economies and asset values. These scenarios combine climate science, policy analysis, and economic modeling into standardized frameworks that enable comparison across institutions and markets. The scenarios are designed specifically for financial applications, with variables calibrated to support risk modeling and capital allocation decisions.
Multiple Scenarios
Range of possible futures from orderly to disorderly transition
Standardized
Common assumptions enable comparison across institutions
Globally Adopted
Used by central banks and financial institutions worldwide
NGFS scenarios enable comparability across institutions and markets—providing the common language for climate risk assessment.
Why NGFS Scenarios Matter (Deep Section)
Climate risk is fundamentally forward-looking and requires modeling approaches that can capture long-term, uncertain outcomes. Financial institutions cannot rely on historical data alone because climate change is creating conditions that have never been experienced before. At the same time, individual institutions developing their own scenarios leads to inconsistent assumptions and non-comparable results. This creates systemic risk in the financial system, as different institutions may be making capital allocation decisions based on incompatible views of climate exposure.
NGFS scenarios address these challenges by providing standardized assumptions that enable consistent risk assessment across the financial system. Central banks and regulators can compare stress test results across institutions. Investors can assess climate risk consistently across portfolios. Corporates can align their scenario analysis with regulatory expectations. The NGFS framework has achieved near-universal adoption because it provides the common foundation needed for effective climate risk management.
Without standardized scenarios, climate risk analysis becomes inconsistent and non-comparable—creating systemic risk and undermining effective risk management.
Structure of NGFS Scenarios (Core Framework)
🌍 Scenario Dimensions
NGFS scenarios combine climate outcomes, policy responses, and economic impacts into coherent pathways that can be modeled over time. The scenarios are designed to be internally consistent—each scenario represents a plausible future where climate, policy, and economic variables evolve together in a logically coherent manner. This consistency is essential for financial modeling, as it ensures that assumptions about carbon prices, energy transitions, and physical outcomes are compatible.
Temperature Outcomes
Each scenario is associated with a temperature outcome, typically ranging from 1.5°C to well above 3°C by 2100. Temperature outcomes result from the interaction of climate dynamics and policy action, and they determine the severity of physical climate impacts over the scenario horizon.
Policy Timing and Intensity
Scenarios differ in when climate policy is implemented and how stringent it becomes. Early, gradual policy action produces different financial outcomes than delayed, sudden policy intervention. The timing and intensity of policy determines the magnitude and distribution of transition costs.
Economic Transitions
Scenarios model how economies transition away from carbon-intensive activities toward low-carbon alternatives. These transitions include energy system changes, industrial restructuring, and shifts in consumption patterns. The pace and smoothness of transition determines economic disruption and sectoral winners and losers.
⚖️ Scenario Categories
NGFS scenarios are organized into three categories that represent fundamentally different futures. Each category includes multiple specific scenarios with different assumptions, but the categories share common characteristics that determine the nature of financial exposure. Understanding these categories is essential for interpreting scenario results and developing appropriate responses.
Orderly Transition
In orderly transition scenarios, climate policy is implemented early and gradually, giving economies time to adjust. Carbon prices increase steadily but predictably. Energy systems transition from fossil fuels to renewables over extended timeframes. Economic disruption is limited, and stranded assets are managed through long planning horizons. This scenario produces lower overall economic cost but requires early action.
Disorderly Transition
In disorderly transition scenarios, climate policy action is delayed, leading to sudden and disruptive changes. Carbon prices remain low initially but spike when policy is finally implemented. Energy transitions occur rapidly, creating stranded assets and economic volatility. This scenario produces higher overall economic cost due to the need for rapid adjustment, even though ultimate temperature outcomes may be similar to orderly scenarios.
Hot House World
In hot house world scenarios, climate policy remains limited, and warming continues toward or beyond 3°C. Physical climate impacts intensify over time, creating severe damage to assets, infrastructure, and economic activity. While transition costs are avoided, physical damage costs accumulate and eventually exceed transition costs. This scenario represents the high physical risk pathway that financial models must consider.
The difference between scenarios lies in timing and intensity of transition—early action limits physical risk but creates transition costs, while delayed action avoids transition costs but increases physical risk.
Key Variables Modeled (Very Important)
NGFS scenarios model a wide range of variables that link climate change to financial outcomes. These variables are designed specifically for financial applications, with sufficient detail to support risk modeling at the asset, portfolio, and systemic levels. Understanding the key variables is essential for interpreting scenario outputs and integrating them into financial decision-making.
Carbon Prices
Carbon prices — trajectory of carbon pricing across regions and sectors, used to calculate compliance costs
Price trajectories — how carbon prices evolve over time under different policy scenarios
Energy System
Energy mix — transition from fossil fuels to renewables across regions and timeframes
Technology costs — cost trajectories for renewable energy and clean technologies
Macroeconomic Variables
GDP impact — how climate change and transition affect economic growth across regions
Sectoral output — changes in production across industries under different scenarios
Employment effects — labor market impacts of transition and physical climate change
Physical Climate
Emissions pathways — trajectory of greenhouse gas emissions under different scenarios
Physical outcomes — temperature rise, sea level change, and extreme event frequency
Damage costs — economic losses from physical climate impacts under different scenarios
These variables feed directly into financial modeling and risk assessment—NGFS scenarios translate climate and policy assumptions into financial model inputs.
How NGFS Scenarios Flow into Financials
NGFS scenarios translate macro-level climate and economic changes into company-level financial impact. Understanding these pathways is essential for integrating NGFS scenarios into financial decision-making. The financial impacts vary significantly across scenarios—orderly transitions create different exposure than disorderly transitions or hot house worlds.
Revenue Impact
Sector demand changes — scenario-driven shifts in demand for carbon-intensive vs low-carbon products
Geographic exposure — regional economic growth varies by scenario based on climate impacts and transition dynamics
Market access — scenario-specific trade and supply chain dynamics affect revenue opportunities
Cost Impact
Carbon pricing — direct costs from carbon taxes and emissions trading under different scenarios
Energy costs — fuel and electricity costs vary by energy mix transition pathway
Transition investment — capex requirements for decarbonization vary by scenario pace
Asset Impact
Stranded assets — fossil fuel and carbon-intensive assets lose value under transition scenarios
Infrastructure damage — physical climate impacts damage assets under hot house scenarios
Impairment — asset values adjust based on scenario-specific risk profiles
Capital Impact
Risk premium — required return varies by scenario risk profile
Cost of capital — financing costs adjust with perceived climate risk
Capital access — financing availability varies by scenario and sector
NGFS scenarios translate macro changes into company-level financial impact—enabling consistent risk assessment across portfolios and institutions.
Key Financial Mechanisms (Advanced)
These mechanisms explain how NGFS scenarios translate into financial system-wide outcomes. Understanding the transmission channels from climate to finance is essential for interpreting scenario results and developing appropriate risk management responses.
Macroeconomic Transmission Mechanism
Climate change affects the broader economy, which flows through to individual sectors and companies. NGFS scenarios model how temperature pathways, policy responses, and physical impacts affect GDP growth, inflation, and employment across regions. These macroeconomic changes create the context for company-level financial performance, affecting demand, costs, and risk perception across the entire economy.
Policy Cost Mechanism
Carbon pricing and climate regulation directly increase costs for carbon-intensive activities. NGFS scenarios provide carbon price trajectories that financial institutions use to calculate compliance costs for exposed portfolios. The timing and intensity of carbon pricing determines when and how significantly costs increase, affecting margins and competitive position.
Asset Repricing Mechanism
Scenario outcomes affect asset values through multiple channels—stranded asset risk, physical damage potential, and transition readiness. NGFS scenarios enable financial institutions to reprice assets based on scenario-specific risk profiles, affecting portfolio values and capital requirements. This mechanism is essential for stress testing and risk-adjusted return calculations.
Risk Premium Mechanism
Uncertainty about climate outcomes and transition pathways affects required returns across financial markets. NGFS scenarios provide the framework for assessing this uncertainty and its implications for capital costs. Higher-risk scenarios increase risk premiums and financing costs, affecting valuation and capital allocation decisions throughout the financial system.
These mechanisms determine how climate risk is priced across financial systems—NGFS scenarios provide the foundation for understanding systemic climate exposure.
Real Financial Pathways (Critical)
These pathways illustrate how NGFS scenarios translate into specific financial outcomes. Each pathway represents a distinct mechanism through which scenario assumptions create financial impact across the economy and financial system.
Orderly Transition Pathway
Early action → stable costs → gradual adjustment → limited disruption
Disorderly Transition Pathway
Delayed action → sudden policy shock → cost spike → market volatility
Hot House Pathway
No transition → high physical damage → asset loss → economic disruption
Carbon Price Pathway
Carbon price rise → cost increase → margin compression → strategic repositioning
Capital Repricing Pathway
Higher risk → higher discount rate → lower valuation → capital reallocation
How Financial Institutions Use NGFS Scenarios
Financial institutions use NGFS scenarios across multiple applications to assess and manage climate risk. The scenarios provide standardized inputs that enable consistent analysis across portfolios, institutions, and jurisdictions. Understanding how institutions apply NGFS scenarios is essential for corporates engaging with financial stakeholders.
Stress Testing
Financial institutions use NGFS scenarios to evaluate portfolio resilience under different climate futures. Stress tests assess capital adequacy, liquidity, and profitability under scenario-specific conditions, helping institutions identify vulnerabilities and develop mitigation strategies.
Portfolio Analysis
NGFS scenarios enable sector and geographic exposure analysis under different climate futures. Institutions can identify which portfolio segments are most vulnerable to transition and physical risk, informing rebalancing decisions and risk limits.
Capital Allocation
Scenario outputs inform capital allocation decisions, including lending limits, investment guidelines, and insurance underwriting criteria. Institutions use scenario results to shift capital toward climate-resilient activities and away from exposed positions.
Risk Management
NGFS scenarios support enterprise-wide risk management by providing consistent inputs for credit, market, and operational risk models. Institutions integrate scenario outputs into risk appetite frameworks and limit structures.
NGFS scenarios are used to test resilience under different futures—enabling financial institutions to develop robust risk management frameworks.
Link to Climate Scenario Analysis
NGFS scenarios provide the standardized input for climate scenario analysis, but they are not the analysis itself. The relationship between NGFS scenarios and company-level scenario analysis is one of input and application—NGFS provides the macro scenarios, while companies and financial institutions apply those scenarios to assess exposure and financial impact.
This division of labor enables both standardization and customization. NGFS scenarios ensure that all institutions are working from common assumptions about climate futures, enabling comparability and consistency. At the same time, institutions can apply these scenarios to their specific portfolios, geographies, and business models, generating insights that are relevant to their particular circumstances.
NGFS provides the scenarios—companies provide the exposure and financial impact. This division enables both standardization and customization in climate risk analysis.
Limitations & Challenges
NGFS scenarios, while providing essential standardization, have limitations that users must understand. The scenarios represent a range of possible futures, but they cannot capture all possibilities. Results depend heavily on scenario assumptions, and small changes in assumptions can produce large changes in outcomes. Understanding these limitations is essential for appropriate interpretation and use of scenario results.
Long time horizons — NGFS scenarios extend to 2100, creating deep uncertainty about distant futures
Uncertainty — climate and economic systems involve fundamental uncertainty that scenarios cannot eliminate
Assumption sensitivity — results depend heavily on scenario assumptions and modeling choices
Coverage gaps — not all sectors and regions are modeled with equal granularity
Results depend heavily on scenario assumptions—appropriate interpretation requires understanding the limitations and uncertainties inherent in long-range scenario modeling.
Strategic Importance
Understanding NGFS scenarios is increasingly critical for institutional decision-making. Regulators in major jurisdictions now require financial institutions to use NGFS scenarios for climate stress testing and disclosure. Investors use scenario outputs to assess climate risk and inform engagement strategies. Corporates that can demonstrate alignment with NGFS scenarios are better positioned to access capital and manage regulatory relationships.
The strategic importance of NGFS scenarios extends beyond compliance. Institutions that develop sophisticated scenario analysis capabilities can identify risks and opportunities earlier than competitors. They can engage more effectively with regulators and investors on climate risk. They can make more informed capital allocation decisions. In contrast, institutions that lag in scenario analysis capabilities face both regulatory and competitive disadvantage.
Understanding NGFS scenarios is critical for institutional decision-making—regulatory expectations and investor usage make scenario literacy essential for financial institutions.
Key Takeaways
NGFS scenarios = global standard — the Network for Greening the Financial System provides the benchmark for climate risk scenarios
Provide structured climate pathways — orderly, disorderly, and hot house scenarios cover the range of possible futures
Used by financial institutions — banks, regulators, and investors apply NGFS scenarios for risk assessment
Enable scenario analysis — standardized scenarios provide input for institution-specific analysis
Critical for risk and strategy — understanding NGFS scenarios is essential for climate risk management
NGFS scenarios are the language through which financial markets understand climate risk.