WS2 - Macrofinancial workstream

Mandate and workplan from April 2020 to April 2022

Chair of the workstream: Sarah Breeden (Bank of England)

Members of the Secretariat: Thomas Allen and Antoine Boirard (Banque de France)

A. Objective
The objective of workstream 2 is to size the impact of climate change on the economy and financial
stability.
To achieve this objective, workstream 2 has developed a multi-year programme to:
 Develop reference climate policy scenarios for central banks and supervisors;
 Provide guidance to central banks and supervisors on integrating climate risk analysis into
macroeconomic and financial stability surveillance; and
 Size the macro-financial impact of these risks (both in the central case and in the event of tail
scenarios).
Its work needs to be coordinated with workstream 1 on supervisory practices and workstream 3 on
the impact of climate change on monetary policy analysis.

B. Relevance to the work of the NGFS

1. Develop reference climate policy scenarios
Scenario analysis is an analytical framework that is used to size the impact of different climate
policy scenarios on the macroeconomy and financial system. While many scenarios exist, they
are not usually suitable for the purposes of central banks and supervisors. They may not
explore the outcomes, which would create the biggest risks, have sufficient depth across
relevant sectors and geographies, or be produced with the necessary credibility and
independence. These factors drive an ongoing need for the NGFS to produce its own scenarios.
The first phase of this work, which will conclude in June 2020, focuses on delivering an aligned
set of physical and transition variables for each NGFS scenario and making this data available
to end users. The next phase will focus on updating the scenarios to incorporate forthcoming
findings from the IPCC 6th Assessment report, expanding the number of macro-financial
variables that these models can provide and providing more geographic and sectoral
 resolution. This will help to close the gap between the scientific modelling community and the
traditional models used by central banks.

2. Provide guidance on integrating climate risk analysis into macro-financial assessment

Methods for conducting climate risk analysis are continuing to evolve as different central banks
and supervisors pilot different approaches. Workstream 2 can play an integral role in
synthesizing examples of best practice for the design, calibration and execution of these
exercises. This will further practically support central banks and supervisors in sizing the risks.
Workstream 2 is planning to publish the first edition of the Scenario Guide in June 2020. For
the next phase of the workstream mandate further insights could be drawn from the practical
experiences of central banks and supervisors, whether using NGFS scenarios or not. A number
of exercises to assess climate risk are planned for 2020-2021 and could culminate in the
publication of case studies in an updated guide and/or feed into a publication by another
standard setter such as BCBS/IAIS/FSB.

3. Size the macro-financial impact of these risks

In the first workstream 2 Technical Report (published in July 2019), the NGFS identified a
number of gaps in the evidence base and issues with some of the underlying models and
methodologies. This led to a number of research priorities to be identified. Since publication,
a fair amount of academic research has been done to build the theoretical channels and
empirical evidence in the literature.
In the next phase of work, workstream 2 could publish an updated assessment of the global
macro-financial risks. It would consider a more focused assessment of the most material
physical and transition risks that are likely to feed through to the real economy and financial
system, considering the second round effects and feedback loops in both the central case and
tail risks. Ahead of this report, and where possible in cooperation with other NGFS
workstreams, workstream 2 could issue a call for papers and hold a research conference to
spur on further academic research. It could also possibly build on analytical work undertaken
by the workstream using the NGFS scenarios. This could also include further development of
Key Risk Indicators.

C. Tasks and expected deliverables

1. Leveraging the existing structure, three sub-groups are suggested to address each of the
questions.
A first sub-group would focus on ‘Reference scenarios’, aiming to further develop qualitative
narratives and quantitative parameters for a reduced set of reference scenarios, as well as
structure a portal that could serve as a repository platform for relevant data and models.
A second sub-group would collect and shape ‘Best practices’, aiming to produce evidence-
and practice-based guidance on how to conduct climate-related financial stability and
macroeconomic assessment. It would aim at fostering the links between scenario
 development and central banks and supervisors’ objectives and missions, and provide support
to central banks in conducting climate-related analyses.
A third sub-group – building on the existing Research sub-group – would further investigate
the theoretical and empirical transmission channels between climate change, the transition
to a low carbon economy and the macroeconomy and financial stability. It could potentially
include further analysis of Key Risk Indicators too.

D. Coordination with other (external) groups

Workstream 2 will work in coordination with a number of international standard setting bodies,
research institutions and other public bodies and technical experts to take forward this work. This
includes:
First subgroup: the existing scenario providers (IAMC, IIASA, ISIMIP, CLIMADA consortium) and new
partners to further advance the usefulness of the NGFS scenarios. Engage with other scenario experts
such as the IEA, IRENA as critical friends to ensure the robustness of the scenarios.
Second subgroup: link to central banks and supervisors undertaking these exercises, other key
stakeholders such as TCFD and potentially also IOSCO/SFN. It may also be beneficial to build a better
understanding of some of the scenario analysis tools being developed (2DII, Carbon Delta, TruCost,
427, Vigeo Aeris) and learn from the experience of financial firms that have undertaken scenario
analysis.
Third subgroup: coordinate with the FSB, IMF and World Bank, as well as with the new NGFS Research
workstream, on research and analysis, leveraging a standardized assessment framework as far as
possible to ensure comparability of results. Engage with our research partners including INSPIRE and
GRASFI to leverage leading academics in this field.

E. Tentative timeline of work

 20 April 2020 – The Guide on Scenario Analysis is shared with Steering committee members;
 11 May 2020 – The scenario provider consortium provides final deliverables;
 28 May 2020 – The NGFS Scenarios Presentation is shared with Steering committee members;
 24 June 2020 – Publication of the NGFS scenarios Presentation and the Guide on Scenario
Analysis. Release of the first batch of data of the NGFS reference scenarios;
 November 2020 – Updated release of the NGFS reference scenarios;
 May 2021 – NGFS academic conference;
 2021 – Review of the NGFS reference scenarios and publication of an updated guide including case
studies from NGFS members;
 2022 – Review of the NGFS reference scenarios and publication of an updated assessment of the
macro-financial risks.