NGFS Short-Term Scenarios for central banks and supervisors

Executive Summary

On 7th May 2025, the Network for Greening the Financial System (NGFS) released its first set of short-term climate scenarios, covering the period from 2025 to 2030. These scenarios mark a pivotal step in supporting financial institutions and supervisors in evaluating the immediate macro-financial risks posed by both climate transition policies and extreme weather events. 

Unlike the long-term NGFS scenarios, which span to 2050 and beyond, this new set is calibrated for short-term financial stability monitoring, climate stress testing, and capital planning. The scenarios offer granular data at a country/region and sectoral level, helping institutions quantify sectoral risks, default probabilities, and investment flows in a climate-constrained future.

Introduction 

The release of the NGFS short-term scenarios reflects the growing urgency to integrate climate-related risks into near-term financial supervision and decision-making. While the long-term NGFS scenarios remain essential for strategic planning and decarbonisation pathways, they are not tailored to evaluate short horizon impacts on economic growth, credit risk, monetary policy, or capital markets. To fill this gap, the NGFS has introduced a suite of forward-looking, scenario-based tools that capture the complex interplay between policy, climate events, and financial outcomes within a five-year horizon. These short-term scenarios are particularly suited to support financial institutions in meeting regulatory expectations under frameworks such as the ICAAP, EBA Pillar 3 disclosures, and climate-related financial risk supervision by the ECB and other national authorities.

Scenario Framework and Modelling Approach

The scenarios provide a structured analysis of how short-term climate policy choices, physical climate events, and macroeconomic developments might interact. They are calibrated to reflect realistic climate pathways and acute events within a five-year horizon, while capturing their ripple effects through the real economy, financial system, and global trade networks. Importantly, they are the first publicly available scenarios to simulate compound climate risks and feedback loops between the financial sector and the economy. Built on a robust modelling framework, the NGFS short-term scenarios use three interlinked models:

1)   GEM-E3: a Computable General Equilibrium Model for Economy-Energy-Environment used to determine the dynamics of real macro variables and climate related variables at a high level of granularity.

2)   EIRIN: a Stock-Flow Consistent behavioural model used to project inflation and monetary policy.

3)   CLIMACRED: a climate credit risk model that allows for scenario-contingent valuation of bonds and equity and of the associated costs of capital.

Together, these models cover 50 sectors across 46 countries (GEM-E3 and CLIMACRED) and 5 macro-regions (EIRIN), generating a wide range of variables to assess both transition and physical climate risks across interconnected systems. Cyprus is included among the 46 countries covered (explicitly included in GEM-E3 and covered indirectly through its inclusion in the GEM-E3 dataset in CLIMACRED), meaning country-level projections- such as GDP impact, sector stress or investment shifts- are available. This allows financial institutions in Cyprus to extract directly relevant insights for ICAAP, credit risk, and stress testing purposes.

Scenario Narratives

Key Findings

The NGFS short-term scenarios show that different climate risk pathways-orderly transitions, abrupt policy shifts, and extreme weather events-can lead to significantly different macro-financial impacts. The figures below reflect the worst deviations from baseline across scenarios, highlighting peak stress points over 2025-2030.

• GDP declines by up to -2.8% in 2028 under Diverging Realities, the most disruptive scenario combining uncoordinated transitions and climate disasters.
• Unemployment peaks at +1.7pp in 2028 under Diverging Realities, due to global supply chain disruptions.
• Default probabilities rise by up to +30pp by 2028 in coal, power, and agriculture sectors under Disasters & Policy Stagnation.
• Green investment grows by $800B by 2030 in Highway to Paris, with renewables reaching nearly 60% of global power generation.
• Cost of capital increases by up to +10pp in 2028 for brown sectors under Disasters & Policy Stagnation.
• Inflation and interest rates spike in 2027 under Sudden Wake-Up Call, leading to policy rate hikes of up to +2pp.
• Global exports fall sharply in 2027, in Disasters & Policy Stagnation, with delays in clean tech export growth into 2028 under Diverging Realities.

Application & Use for Financial Institutions

The NGFS short-term scenarios are highly relevant for practical risk management. They offer financial institutions a ready-made framework to conduct climate-related stress tests, estimate short-term capital adequacy impacts under the ICAAP, and refine their transition risk strategies. They provide inputs for updating credit risk models, particularly by adjusting sector-level PDs and cost of capital to reflect different climate trajectories. These scenarios can also inform loan origination standards and client engagement strategies. By identifying vulnerable sectors and regions, banks can adjust lending criteria, promote green investments, and assess the resilience of their counterparties under climate stress. Moreover, the inflationary and interest rate signals embedded in the scenarios can be used to refine interest rate risk models and asset-liability management practices. In the context of regulatory expectations, the scenarios support compliance with EBA Pillar 3 disclosure requirements, as well as climate-related reporting under IFRS S2 and the upcoming ECB and national supervisory stress tests.

Limitations and Outlook

While the NGFS short-term scenarios offer detailed insight into near-term climate risks, their scope is focused on acute physical events, such as floods or heatwaves, rather than longer-term chronic changes like sea-level rise or biodiversity loss. They do not account for tail risks or systemic tipping points, and country-specific policy responses, such as fiscal buffers or guarantees, are not explicitly modelled, especially in the CLIMACRED framework. Looking ahead, the NGFS plans to expand future iterations to address nature-related risks and polycrises - interacting crises that compound systemic vulnerabilities.

Conclusion

The NGFS short-term climate scenarios represent a significant advancement in climate risk modelling, providing financial institutions and supervisors with actionable insights over an operationally relevant time horizon. Their structure allows for the simulation of real-world policy and physical shocks, bridging the gap between strategic foresight and immediate risk management needs. To support practical implementation, the NGFS has also published a Technical Documentation detailing the modelling framework, assumptions, and data sources, as well as a Main Takeaways document summarising the main findings for decision-makers, apart from the Presentation. Together, these materials form a robust package for institutions looking to incorporate climate risk into financial planning, supervisory compliance, and stress testing processes. As climate-related financial supervision intensifies, the availability of short-term data and forward-looking risk metrics will be essential for building resilient portfolios and meeting evolving regulatory standards. Institutions are encouraged to explore the scenarios via the NGFS IIASA Scenario Explorer and integrate them into their internal risk frameworks.

How Grant Thornton Can Help

Grant Thornton helps financial institutions navigate the integration of NGFS climate scenarios-both short-term and long-term-into their risk management, strategy, and regulatory processes. We support the design and implementation of climate stress testing frameworks, assess sectoral exposures and transition pathways, and help quantify impacts on credit, capital, and investment planning. Our experience spans ICAAP/ILAAP alignment, Pillar 3 disclosures, and broader supervisory expectations under the ECB and EBA frameworks. We translate complex scenario outputs into practical, institution-specific insights that support resilient decision-making and forward-looking risk governance.

Article by 
Andreas Spyrides, Quantitative Risk Services Leader
Kyveli Kyriacou, Consultant, Quantitative Risk Services