Acknowledging short-term risks is crucial for central banks to uphold financial stability and for financial institutions to incorporate climate risks into their near-term strategies. The integration of short-term scenarios, which typically span one to five years, is becoming critical for financial institutions to grasp the financial implications of transitioning to a net-zero economy. These scenarios are valuable for stress testing and aligning short-term strategies with climate risk mitigation and business planning, addressing the gaps in medium- to long-term scenario analysis. Additionally, they enable the translation of shocks into immediate effects, considering both mitigation policies and the evolving impact of climate change on the financial system. However, the availability of short-term scenarios is limited, with most focusing on the longer-term outlook of 2050 and beyond.
This report, along with the Short-term Climate Scenarios tool developed in collaboration with the National Institute of Economic and Social Research (NIESR), provides financial institutions with an additional resource for conducting short-term scenario analysis of climate risks. The report explores the implications of short-term scenarios and examines how a series of macroeconomic, transition, and physical shocks develop and impact the economy (Figure 1). The accompanying tool allows users to explore short-term shocks related to macroeconomic events, transition risks, and physical risks, either individually or in combination, over a five-year period for various regions and jurisdictions. Users can select a combination of shocks and varying severities to create customized potential shock scenarios for internal use (Figure 2). The methodology, assumptions, and key results of the shocks are detailed in the report.
