Banks, insurers, and central banks need a shared language for climate risk. Without it, every institution runs different assumptions, different time horizons, and different definitions of what counts as a bad outcome. NGFS climate scenarios — also called NGFS scenarios — solve that problem. Developed by the Network for Greening the Financial System, these six scenarios give the financial sector a common framework for modeling how climate change and climate policy could reshape economies over the next three decades.
NGFS scenarios are now the default input for climate stress testing at the ECB, Bank of England, and dozens of other supervisory bodies. Understanding what each scenario assumes and how they map to financial risk is essential for any institution preparing for climate scenario analysis or regulatory disclosure.
What Are NGFS Scenarios?
NGFS stands for the Network for Greening the Financial System, a consortium of more than 130 central banks and financial supervisors. Founded in 2017, the network’s primary output is a set of climate scenarios designed specifically for financial risk analysis. Unlike SSP scenarios built for climate science, NGFS climate scenarios model the economic and financial consequences of different climate futures.
The framework organizes six scenarios into three families based on the level of transition risk (policy disruption) and physical risk (climate damage) each future produces. Orderly scenarios assume early, coordinated climate action. Disorderly scenarios assume delayed or fragmented policy responses. Hot House World scenarios assume minimal action, allowing physical climate impacts to escalate.
Each scenario feeds into Integrated Assessment Models (IAMs) that translate policy assumptions into macro-financial variables: GDP growth, carbon prices, energy prices, sectoral output, and temperature pathways. Banks use these variables to stress test their loan portfolios, investment holdings, and insurance liabilities against each future.
The Six NGFS Scenarios Compared
| Scenario | Family | Transition Risk | Physical Risk | Warming by 2100 |
|---|---|---|---|---|
| Net Zero 2050 | Orderly | Low | Low | ~1.5 C |
| Below 2 C | Orderly | Low | Low | ~1.7 C |
| Divergent Net Zero | Disorderly | High | Low | ~1.5 C |
| Delayed Transition | Disorderly | High | Medium | ~1.8 C |
| NDCs | Hot House World | Low | High | ~2.5 C |
| Current Policies | Hot House World | Low | Very High | 3+ C |
Orderly Scenarios
Net Zero 2050 and Below 2 C assume climate policy ramps up immediately and consistently across all major economies. Carbon pricing rises steadily, clean energy investment accelerates, and fossil fuel demand declines on a predictable curve. Because the transition is gradual and anticipated, markets have time to adjust. Asset repricing happens slowly rather than in sudden shocks.
Financial institutions face manageable transition risk under these scenarios. Carbon-intensive sectors lose value over decades, not overnight. Physical risk stays contained because warming stays below 2 degrees, limiting the severity of floods, heat waves, and other climate hazards.
Disorderly Scenarios
Divergent Net Zero and Delayed Transition reach similar warming endpoints as the orderly scenarios but through a rougher path. Divergent Net Zero assumes policies differ sharply across sectors and regions. Some industries decarbonize rapidly while others lag, creating winners and losers that are difficult to predict. Carbon prices spike in some jurisdictions while remaining low in others.
Delayed Transition is the scenario that keeps risk managers up at night. Global action stalls until 2030, then governments impose abrupt, aggressive policies to catch up. Carbon prices jump from near-zero to over $200 per ton within a decade. Coal, oil, and gas assets lose value rapidly. Banks holding concentrated fossil fuel exposure face sudden credit losses, and insurers see correlated claims across energy-dependent portfolios.
Hot House World
NDCs and Current Policies assume the world does little beyond existing commitments. Transition risk is minimal because policies barely change. But physical risk escalates dramatically. Under Current Policies, warming exceeds 3 degrees Celsius by 2100, intensifying every physical climate hazard: more frequent flooding, longer droughts, rising seas, and more destructive storms.
For financial institutions, Hot House World means growing credit losses from climate-damaged assets, rising insurance claims, and declining property values in exposed regions. The damage compounds over time because physical risk is cumulative and largely irreversible.
NGFS Scenarios vs SSP and RCP
NGFS scenarios often get compared with SSP scenarios and RCP scenarios, but they serve different audiences and answer different questions.
| Feature | NGFS Scenarios | SSP Scenarios | RCP Scenarios |
|---|---|---|---|
| Developed by | Central banks (NGFS) | Climate scientists (IPCC AR6) | Climate scientists (IPCC AR5) |
| Primary audience | Banks, insurers, supervisors | Climate researchers | Climate modelers |
| Risk types covered | Transition + Physical | Physical only | Physical only |
| Output variables | GDP, carbon price, energy price, sectoral output | Temperature, precipitation, wind | Radiative forcing, temperature |
| Number of scenarios | 6 (3 families) | 5 (SSP1 through SSP5) | 4 (RCP 2.6, 4.5, 6.0, 8.5) |
| Latest version | Phase 5 (Nov 2024) | CMIP6 (IPCC AR6, 2021) | CMIP5 (IPCC AR5, 2013) |
The key difference: NGFS scenarios model the financial system’s response to climate policy and physical damage. SSP and RCP scenarios model the climate system’s response to emissions. A bank running a climate stress test typically uses NGFS scenarios for transition risk (policy shocks, carbon pricing, stranded assets) and feeds physical risk data from SSP-based climate projections into the same analysis.
Most regulatory stress tests now require NGFS scenarios specifically. The ECB, Bank of England, and Australian Prudential Regulation Authority all reference the NGFS framework in their supervisory guidance. TCFD-aligned disclosures can use either NGFS or SSP scenarios, but NGFS provides the macro-financial variables that make portfolio-level stress testing possible.
NGFS Phase 5: What Changed
The NGFS released Phase 5 of its scenario framework in November 2024, bringing several updates that affect how financial institutions run their analyses.
Country-level policy commitments now reflect Nationally Determined Contributions (NDCs) submitted through March 2024. Renewable energy cost curves have been revised downward, reflecting the acceleration in solar and wind deployment over the past two years. Energy market assumptions incorporate the structural shifts triggered by the war in Ukraine, including Europe’s pivot away from Russian gas and the acceleration of electrification.
Phase 5 also introduced short-term scenario variants with a 2025 time horizon, designed for institutions that need to assess near-term transition risk rather than long-term climate trajectories. The short-term scenarios capture policy risks that could materialize within existing lending cycles, making them useful for credit risk teams evaluating 3-to-5-year exposures.
The underlying IAMs (GCAM, MESSAGEix-GLOBIOM, and REMIND-MAgPIE) were all updated to their latest versions, improving sectoral granularity and regional resolution. Financial institutions running stress tests should update their inputs to Phase 5 to align with the latest supervisory expectations.
Climate Stress Testing with NGFS Scenarios
Climate stress testing applies the NGFS scenario framework to a specific institution’s balance sheet. The goal is to measure how climate-related shocks could affect asset values, credit quality, and solvency under each scenario pathway. Regulators use the results to assess whether banks hold enough capital to absorb climate-driven losses, and institutions use them internally to identify concentrated exposures before they become problems.
Unlike traditional bank stress tests that model recessions or market crashes over 1-to-3-year horizons, climate stress tests extend to 2050 or 2100. The longer time horizon means the analysis must account for both the speed of policy change (transition risk) and the accumulation of physical climate damage (physical risk) across an institution’s entire portfolio.
ECB Climate Stress Test
The European Central Bank conducted its first dedicated climate stress test in 2022, covering 104 significant banks across the euro area. The exercise used three NGFS scenarios (Orderly, Disorderly, Hot House World) and focused on banks’ exposures to carbon-intensive industries, real estate in flood-prone areas, and sovereign debt from climate-vulnerable countries.
The ECB found that most banks lacked granular data on the climate exposure of their loan books. Many could not identify which borrowers operated in flood zones or how much of their mortgage portfolio sat in areas projected for severe heat stress. The exercise was not a pass/fail test, but the results fed directly into the ECB’s Supervisory Review and Evaluation Process (SREP), where climate risk management capabilities now factor into capital guidance.
Bank of England CBES
The Bank of England’s Climate Biennial Exploratory Scenario (CBES), completed in 2022, tested the UK’s largest banks and insurers against three NGFS-aligned scenarios over a 30-year horizon. The exercise revealed that climate losses could consume 10-15% of annual profits for some banks under the Hot House World scenario, with the highest losses concentrated in commercial real estate and unsecured lending to energy-intensive sectors.
The Fed and Climate Scenario Analysis
The US Federal Reserve launched a pilot climate scenario analysis in 2023 with six of the largest US banks, using a subset of NGFS scenarios. The exercise focused on physical risk to residential and commercial real estate portfolios. In early 2025, the Fed announced it would not continue climate-specific stress testing as a supervisory exercise, drawing criticism from climate risk advocates and praise from industry groups that viewed the tests as premature.
The Fed’s withdrawal does not mean US banks can ignore climate risk. SEC disclosure requirements, state-level regulations like California’s SB 253 and SB 261, and investor pressure through TCFD-aligned reporting all require some form of climate scenario analysis. Many US banks continue running NGFS-based stress tests voluntarily for internal risk management.
The Physical Risk Data Layer
NGFS scenarios provide the macro-financial assumptions, but stress testing also requires granular physical risk data at the asset level. A bank needs to know not just that flooding will increase under a Hot House World scenario, but which specific properties in its mortgage book are in flood-prone locations and how their risk ratings change across time horizons. Continuuiti’s climate risk assessment for banks provides this location-level physical risk layer, covering 12 hazards across multiple SSP scenarios with projections to 2050. NGFS scenarios are one of three authoritative scenario sources (alongside IPCC and IEA) named by the ISSB for IFRS S2 paragraph 22 resilience analysis.
How Banks Use NGFS Scenarios in Practice
Portfolio-level stress testing with NGFS scenarios typically follows a structured process. Risk teams start by mapping the institution’s exposures to sectors, geographies, and asset classes. They then apply the NGFS macro-financial variables (carbon prices, GDP impacts, energy price shifts) to estimate how transition risk affects each sector’s creditworthiness.
Physical risk enters through a separate channel. Banks overlay location-specific climate projections onto their real estate and infrastructure exposures to estimate damage probabilities and expected losses under each warming pathway. The physical and transition risk estimates are combined to produce a net impact on the institution’s capital adequacy ratio under each NGFS scenario.
The results inform several decisions. Capital allocation teams use them to identify sectors or regions where concentrated climate exposure warrants de-risking. Credit risk teams adjust lending policies for high-exposure sectors. Disclosure teams use the scenario outputs to populate TCFD-aligned reports with quantitative forward-looking metrics. And strategy teams use the scenario comparison to evaluate whether the institution’s business model remains viable across the range of plausible climate futures.
Worked Sample
See a Full IFRS S2 Banking Disclosure Sample
A sample bank’s IFRS S2 disclosure walked across all 17 paragraphs, with cohort findings from KPMG FAST 30, PwC, NZ FMA, and Deloitte first-wave reviews.
Frequently Asked Questions
What are NGFS scenarios?
NGFS scenarios are a set of six climate scenarios developed by the Network for Greening the Financial System, a consortium of over 130 central banks and supervisors. They model how climate policy (transition risk) and physical climate damage (physical risk) could affect the financial system under different futures, ranging from orderly decarbonization to a hot house world with minimal climate action.
How many NGFS scenarios are there?
There are six NGFS scenarios organized into three families. Orderly scenarios include Net Zero 2050 and Below 2 degrees C. Disorderly scenarios include Divergent Net Zero and Delayed Transition. Hot House World scenarios include Nationally Determined Contributions (NDCs) and Current Policies. Phase 5 also added short-term scenario variants for near-term risk assessment.
What is the difference between NGFS and SSP scenarios?
NGFS scenarios are designed for the financial sector and model both transition risk (policy changes, carbon pricing) and physical risk with macro-financial variables like GDP and energy prices. SSP scenarios are designed for climate science and model socioeconomic pathways that drive emissions and physical climate outcomes. Banks typically use NGFS for transition risk analysis and SSP-based projections for physical risk data.
What is climate stress testing?
Climate stress testing measures how climate-related shocks could affect a financial institution’s balance sheet under different NGFS scenarios. Regulators like the ECB and Bank of England use climate stress tests to assess whether banks hold enough capital to absorb climate-driven losses from both transition risk (policy shifts, stranded assets) and physical risk (flood damage, heat stress, sea level rise).
Are NGFS climate stress tests mandatory?
It depends on jurisdiction. The ECB requires euro area banks to participate in its climate stress test exercises, and results feed into supervisory capital assessments. The Bank of England has run mandatory exploratory scenarios. The US Federal Reserve conducted a voluntary pilot in 2023 but discontinued climate-specific exercises in 2025. TCFD, ISSB, and regional disclosure mandates effectively require climate scenario analysis even where stress tests are not formally mandated.
What is NGFS Phase 5?
Phase 5 is the November 2024 update to the NGFS scenario framework. It incorporates updated country-level NDC commitments through March 2024, revised renewable energy cost curves, post-Ukraine energy market shifts, and new short-term scenario variants with a 2025 horizon. The underlying Integrated Assessment Models were also updated to their latest versions with improved sectoral and regional granularity.
Conclusion
NGFS scenarios have become the standard framework for climate stress testing across the global financial system. The six scenarios, spanning orderly transitions to hot house outcomes, give banks and regulators a shared basis for assessing how climate policy and physical damage could reshape portfolios over the coming decades. With Phase 5 now incorporating the latest policy commitments and energy market shifts, financial institutions that align their climate risk analysis with the NGFS framework position themselves for both regulatory compliance and more resilient investment decisions.
