While recent headlines have focused on the Federal Reserve's withdrawal from NGFS and changing political winds around climate priorities, climate risk must remain an important consideration for commercial lenders.
ONCI has updated its climate risk tool to reflect the latest NGFS Phase 5 scenarios released in November 2024.
To help banks navigate this evolving space, we’ve detailed the most recent NGFS updates and dived into why understanding them should remain a priority for banks.
What is NGFS?
The Network for Greening the Financial System (NGFS) is an influential coalition of central banks and supervisory authorities to strengthen the global financial sector’s response to environmental issues.
NGFS acts as an important knowledge-sharing network, developing comprehensive climate scenarios that help institutions assess and manage physical and transition risks from climate change. These scenarios integrate the latest macroeconomic data, technological developments, and policy commitments, providing a scientific foundation for climate risk management in the financial sector.
Key changes in Phase 5 NGFS
The fifth phase of NGFS introduces significant updates to reflect evolving climate realities and economic conditions.
Key changes include:
- Improved physical risk modelling that provides for temperature and rainfall fluctuations and severe weather patterns, enabling more detailed analysis
- Integration of the latest climate and economic projections, including updated Shared Socioeconomic Pathways (SSP2, version 3.0)
- More comprehensive assessment of physical risks with the revised damage function indicating substantially higher economic impacts than previously estimated - up to three times the previous projections by 2050 under the Current Policies scenario
- Higher projected peak temperatures due to delayed climate action, with the Net Zero scenario now showing a 1.7°C peak and requiring more aggressive carbon pricing measures
ONCI product updates
We have updated our climate risk tool based on these Phase 5 changes.
Details of the product updates include:
Higher carbon prices:
Carbon prices in the Phase 5 Net Zero scenario are higher compared to Phase 4. Specifically, the carbon price is $817.0/t CO2e in 2050 under Net Zero for the US vs. $526.4/t CO2e in Phase 4. Similarly, the carbon price in the Delayed Transition scenario is $802.7/t CO2e in 2050 as compared to 547.5/t CO2e in Phase 4. The Current Policies scenario has carbon price of $23.2/t CO2e in Phase 5 vs. $16.9/t CO2e in Phase 4
Higher energy prices:
Oil prices will be higher in all scenarios by 2050, with a steeper increase in the disorderly scenarios. The updated oil price under Net Zero for the US is $15.5/GJ in 2050 as compared to $14.5/GJ in Phase 4
Energy demand:
Energy consumption is higher in Phase 5 as compared to Phase 4. Oil demand is 5.8 EJ/year in 2050 under Net Zero for the US vs. 4.2 EJ/year in Phase 4. Similarly, natural gas demand is 1.9 EJ/year in 2050 under Net Zero for the US, as compared to 1.0 EJ/year in Phase 4.
Slower emission reductions:
The slow implementation of climate policies has led to higher emissions in the near term. In the Net Zero scenario, greenhouse gas emissions for the US decline by 16% from 2020 to 2025 in Phase 5, as compared to 19% in Phase 4 for the same period
Should U.S. commercial banks still care about NGFS?
The Federal Reserve's departure from NGFS in January 2025, followed by the FDIC's withdrawal and shifting priorities around climate initiatives in the U.S., has raised questions about the focus on climate risk for financial institutions.
While the Fed cited NGFS's broadened scope as extending beyond its mandate, and this move aligns with broader shifts in the regulatory landscape, there are several important reasons why U.S. commercial banks must continue to consider NGFS frameworks:
Regulatory integration:
Multiple U.S. regulatory bodies, including the Office of the Comptroller of the Currency (OCC), Federal Housing Finance Agency (FHFA), and Federal Insurance Office (FIO), remain active NGFS members. These agencies continue to incorporate NGFS scenarios into their strategic planning, making them relevant for regulated institutions
Global standard setting:
The NGFS scenarios serve as the primary reference point for climate risk assessment in the global financial landscape. For American banks with international operations or global counterparties, understanding and aligning with these standards remains critical for risk management and business relationships
Investor expectations:
Despite political transitions, institutional investors and stakeholders continue to demand granular-level insight into credit risk, which includes climate risk. The NGFS scenarios provide a credible, globally-accepted framework for meeting these expectations
Operational resilience:
Recent extreme weather events demonstrate that physical climate risks are already impacting business operations and credit risk. NGFS scenarios help banks understand and prepare for these growing challenges, regardless of the regulatory environment
The bottom line? The latest NGFS scenarios demonstrate that climate risk is more complex and impactful than ever. Even as the regulatory landscape shifts, lenders face a clear business imperative: they need robust tools and frameworks to understand and manage their exposure to climate risk.
To learn more about how these updates impact your bank's risk management strategy or to schedule a demo, reach out to our team at hello@onci.com.