New Climate Scenarios Highlight Short-Term Financial and Macro-Economic Risks.

Climate change is increasingly understood not only as an environmental challenge but also as a potential source of instability in the global financial system [5,8]. Disruptions arising from a too late and sudden transition to a low carbon economy and from the physical impacts of climate change have become financially material risks at a short-term horizon. However, a quantitative framework to assess the short-term financial and macro-economic implications of climate risks is missing. Existing integrated assessment models (IAMs) have a long-term focus, lack the granularity fit for financial risk assessment, neglect the role of expectations and of feedback loops between the real and financial spheres, and often overlook the correlated and compounding nature of risks [1,2,3]. Here we develop an integrated modelling framework that bridges climate impacts, macroeconomics and financial risk to assess how climate-related shocks could impact asset values and propagate through the real-financial interface. Working closely with a network of international regulators, we analyse climate scenarios that reflect both policy-driven transitions and evolving physical risks. We find substantial scenario contingent impacts on short-term economic and financial risks. The risk of sovereign default increases over a percentage point in most countries and up to thirty percentage points in certain sectors. When the feedback e ects of these financial impacts on macro-economic dynamics are factored in, we find that estimates of GDP losses are amplified by a third on average and up to a factor of two for certain regions and scenarios, including China and the US in the most adverse physical risk scenarios.