NGFS and Bank of England miss an opportunity on net zero

The much-anticipated emergence of global standard-setting scenarios, released this month, had the potential to galvanize the global investment community into action. This would have shown much-needed leadership to inform and drive the “race to net zero”. However, Cambridge Econometrics and their strategic partner, Ortec Finance, see an opportunity missed and the risk of widespread complacency based on highly optimistic assumptions.

Earlier this month climate change scenarios were published by two big players in the financial system: the Network for Greening the Financial System (NGFS) a group of 91 central banks and supervisors, and the Bank of England (BoE), which published its Climate Biennial Exploratory Scenarios (CBES).

The updated NGFS publication sets out six possible climate scenarios ranging from early, orderly and ambitious action to a ‘current policies’ scenario leading to 3˚C of global warming.

The BoE’s updated scenarios are broadly aligned and explore an Early Action, a Late Action and a No Additional Action scenario.

János Hidi, Sustainable Investment Manager at Cambridge Econometrics says:

We welcome the emergence of global standard-setting scenarios by central bankers. It is a clear signal to the global financial market that climate-related risks and opportunities should be fully integrated into investment decision making.

Nevertheless, Cambridge Econometrics, together with independent climate scenario specialists Ortec Finance, are concerned about the implied messaging of two of the NGFS scenarios: the Disorderly, Delayed Transition and the Hothouse World, Current Policies and, by extension, the CBES Late Action scenario. They are both highly optimistic on the time left to transition and ‘orderliness’ of such transition.

These scenarios assume that the transition will only start in earnest after 2030. Yet they still succeed in limit global warming to below 2°C – placing the target transition date well out of the average investment horizon and political election cycle. This undermines a sense of urgency.

Also, the assumptions made are highly optimistic estimates of:

  • the time left before the world needs to transition;
  • how fast the world can transition; and
  • the ‘orderliness’ (e.g. volatility and sentiment shocks in financial markets) of such a transition.

It is hard to identify a historic precedent for this level of financial, economic and social change in such a compressed timeframe. Therefore, the plausibility of this scenario is questionable.

In our view, by effectively rubberstamping a delayed transition, the NGFS and BoE may push the transition beyond a time horizon that is relevant for investors. It discourages the early and ambitious action required to stay below 2°C and understates the plausible near-term transition risks and opportunities.

For further analysis of the scenarios please see this document.