Climate Risk Macroeconomic Forecasting
Moody’s Analytics is expanding its capabilities to enable institutions to assess risks posed by climate change.
As early as this year, many regulators across the world are requiring financial institutions to provide a self-assessment or to stress-test their balance sheets with respect to climate change risk. Constructing climate change scenarios starts with a trajectory for carbon dioxide emissions, the necessary policies to reduce these emissions, and the corresponding change in global temperatures.
Moody’s Analytics is expanding its capabilities to enable institutions to assess risks posed by climate change. The physical and transition impacts on the economy of temperature change are determined using our model of the global economy. Our scenarios are consistent with Orderly, Disorderly, and Hot House World scenarios by the Network of Central Banks and Supervisors for Greening the Financial System. We employ our modelling framework to generate climate change scenarios for the U.S. and the U.K.
More specifically, we first provide an overview of the relevant regulatory landscape, focusing on the U.K. and the U.S. We then summarize our methodological approach, which is complementary to scenarios produced by Integrated Assessment Models.
The approach leverages our modelling framework initially designed for standard macroeconomic forecasting and for producing stress-testing scenarios for various regulatory purposes. We then discuss how the framework is employed to account for the long-term physical risk associated with climate change and then altered to incorporate risks linked to the transition to a carbon-neutral economy. The newly constructed transition mechanism block includes a carbon dioxide tax in the system of simultaneous equations.
Finally, we generate climate change scenarios for the U.K. and the U.S. consistent with published NGFS scenarios using the updated modelling setup.
Read the full paper here.
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