Statement regarding physical risk estimates in Phase V of NGFS long-term scenarios

The Network for Greening the Financial System (NGFS) aims to support its members in addressing the implications of climate change for central bank and supervisory mandates, and the NGFS scenarios are a key tool in this endeavor.

The NGFS approach is to regularly update and enhance its scenarios to integrate state-of-the-art climate data and models, relying on the most recent available scientific evidence in a context of uncertainty. Following this approach, the NGFS used the Kotz et al. (2024) damage function^[1] in the Phase V of its long-term scenarios, resulting in key methodological improvements^[2]. The chronic physical risk estimates deriving from the damage function, however, still presented limitations, which were highlighted in NGFS documentation^[3].

Last August, when Kotz et al. (2024) - the academic paper underpinning the damage function used in Phase V of the NGFS long-term scenarios - received academic critiques (“Matters Arising”^[4]) as part of the post-publication review process at Nature, the NGFS published a disclaimer on its website to inform users of the issue. The NGFS notes that the paper has been retracted from Nature today. The authors of the Kotz et al. (2024) study are planning to resubmit a new version of the paper for peer review.

The NGFS scenarios are not forecasts, but are accessible tools intended to illustrate plausible pathways. Users should be aware of the retraction of the Kotz et al. (2024) paper when interpreting and applying Phase V results, alongside the broader limitations of physical risk estimates already detailed in NGFS documentation.

It should be noted that the scenario outputs which do not incorporate physical loss estimates from Kotz et al. (2024) remain unaffected^[5]. Also, the outputs of NGFS short-term scenarios are not impacted, as they do not rely on the Kotz et al. (2024) paper.

The NGFS welcomes the academic debate and looks forward to new contributions toward a better understanding of the micro and macroeconomic impact of climate change. The NGFS will keep monitoring developments in this critical area of research and an updated methodology will be used for the next iteration of long-term scenarios, to be published end of 2026.

The NGFS continuously works to ensure that the governance of its scenario production is robust and independent and strives for the utmost transparency in its methodology. For the upcoming iterations of its scenarios, the NGFS will benefit from the expertise of a newly established independent scientific advisory committee.

Disclaimer

Neither the NGFS, nor its member institutions, nor any person acting on their behalf, is responsible or liable for any reliance on, or for any use of the NGFS scenarios and/or supplementary documentation. This also applies to the use of the data produced under the scenarios – see section 5 in https://data.ene.iiasa.ac.at/ngfs/#/license. Thus, while the NGFS climate scenarios are certainly a helpful tool, they do not alleviate the responsibility of users, including banks and other (financial) organisations, to design and implement their own risk management frameworks.

About the NGFS

The Network for Greening the Financial System (NGFS), launched at the Paris One Planet Summit on 12 December 2017, is a group of central banks and supervisors, which on a voluntary basis is willing to share best practices and contribute to the development of environment and climate risk management in the financial sector, and to mobilize mainstream finance to support the transition toward a sustainable economy. The NGFS brings together 147 central banks and supervisors and 23 observers. The NGFS Chair is Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, and its Vice Chair is Fundi Tshazibana, Deputy Gouvernor of the South African Reserve Bank and CEO of the Prudential Authority. The Secretariat, headed by Yann Marin, is provided by Banque de France.