Introduction to the NGFS

Patricia Sanchez Juanino

In this video, Patricia explores the growing importance of climate risk management. She explains the two main types of climate risks: physical risks, like floods and wildfires, and transition risks, which arise from economic changes as countries shift to greener policies and technologies. She further highlights how these risks threaten economies, industries, and financial stability worldwide, making proactive risk assessment crucial. She also introduces key tools like cost-benefit analysis, financial stress testing, and Integrated Assessment Models that help policymakers and businesses prepare for a more sustainable future.

Climate Crisis

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Introduction to the NGFS

11 mins 8 secs

Key learning objectives:

Understand the distinction between physical and transition climate risks and their global impact
Identify the importance of climate risk assessment for governments, businesses, and financial institutions

Overview:

Climate risks are growing as extreme weather events become more frequent. These risks fall into two categories: physical risks (direct impacts like floods and wildfires) and transition risks (economic shifts due to climate policies and green technologies). Climate change threatens economies, ecosystems, and financial stability, making risk assessment essential. Methods like cost-benefit analysis, stress testing, and Integrated Assessment Models (IAMs) help policymakers and businesses prepare. Understanding climate risks is key to proactive adaptation and sustainable economic growth.

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Summary

What are climate risks, and why do they matter?

Climate risks refer to the financial, social, and environmental consequences of climate change. Physical risks include extreme weather events like floods, heatwaves, and rising sea levels.

Transition risks stem from shifts in policies, markets, and technologies as economies move toward sustainability.

These risks can disrupt industries, financial markets, and global economies, making climate risk management critical for long-term stability and adaptation.

How do physical and transition risks affect economies and industries?

Physical risks cause direct damage, such as infrastructure losses due to floods or agricultural declines from drought. Transition risks emerge as industries adapt to regulations, carbon pricing, and technological shifts, potentially stranding assets and creating economic uncertainty.

Businesses and governments must balance reducing emissions with the costs of adapting to climate-driven disruptions. However, tackling climate risks also presents opportunities for innovation, investment, and resilience-building.

What methods are used to assess climate risks?

Climate risk assessment relies on multiple analytical tools.

Cost-benefit analysis weighs the costs of adaptation measures against potential long-term savings, helping policymakers justify investments in resilience.

Sector-specific assessments examine how climate disruptions in industries like agriculture or energy cascade into supply chains and financial markets.

Financial stress testing evaluates how climate risks impact financial institutions, ensuring they account for potential asset losses.

Integrated Assessment Models (IAMs) link economic, environmental, and policy factors to predict long-term climate outcomes.

Scenario analysis, such as NGFS models, simulates different policy pathways, highlighting the economic benefits of early climate action versus delayed response.

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Patricia Sanchez Juanino

Patricia Sánchez Juanino, an economist at the National Institute of Economic and Social Research, has over seven years of experience in macroeconomics and monetary policy analysis. Her research focuses on climate economic modelling, exploring the connections between climate policies and the macroeconomy, particularly in addressing climate change challenges and influencing policy decisions.

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