Delaying climate transition will increase the overall economic costs of transitioning, generate material GDP losses and result in impacts to global supply chains, finds a recently launched report looking at four short-term climate change response scenarios on the real economy, labour markets, financial institutions, and the broader financial system.

The first-of-its-kind report, released by the Network for Greening the Financial System (NGFS), assesses the near-term impacts of climate policies and climate change on financial stability and economic resilience, primarily developed as an input for climate stress-testing and risk to financial institutions’ investment portfolios.

The scenarios range from immediate and swift action to policy stagnation, showing that immediate action to curtail climate change has the lowest impact on financial systems.

Global environmental and strategic consultancy, Ricardo’s award-winning GEM-E3 model was central to the development of the report. Ricardo used GEM-E3 to assess climate change and energy demand variables against countries’ macroeconomic data, including GDP, productivity, and population, to produce the scenario outcomes.

Additional modelling, provided by Climate Finance Alpha and the International Institute for Applied Systems Analysis, was also incorporated into the final scenarios produced through GEM-E3.

Ricardo’s GEM-E3 model is a state-of-the-art, large-scale, multi-regional, multi-sectoral model that provides details on the economy and its interaction with the environment and the energy system. The model is global and provides detailed results for all key economic and energy system variables.  Allowing the comparative analysis of policy scenarios on the performance of firms, household consumption patterns, government spending and international trade, decision makers can make better informed decisions. Equally, the analysis and the resulting report will be valuable for organisations receiving investment, helping them to gain better insight into potential climate risks and the expectations that will likely be placed upon them by institutional investors.

Ricardo’s Director of Energy and Economic Modelling, Leonidas Paroussos: “The development of these scenarios provides, for the first time, short-term impacts of key climate response scenarios. It will be an invaluable tool for decision makers and creates an industry standard for financial institutions and the private sector. Thanks to this initiative, Ricardo’s experts are readily able to support central banks and financial institutions to prepare for different climate scenarios, creating resilience in their investment portfolio and supporting long-term viability.”

Sabine Mauderer, Chair of the NGFS and First Deputy Governor of the Deutsche Bundesbank: “The new NGFS short-term climate scenarios are a milestone in enhancing our understanding of climate-related risks. Extreme weather events and abrupt changes in transition policies can significantly affect our economies and financial sectors in the short run. This new NGFS tool offers the financial community valuable insights into the implications of adverse climate scenarios in the near-term, with impressive sectoral and geographical granularity. The results remind us that reducing or delaying climate action will likely worsen future economic damages.”

Livio Stracca, Chair of the NGFS workstream “Scenario and Design Analysis” and Deputy Director General Financial Stability at the European Central Bank:  “The NGFS short-term scenarios represent a key addition to the analytical toolkit for understanding climate-related macroeconomic and financial risks. This new set of scenarios helps to describe the more immediate impacts of climate shocks and policy shifts, in a timeframe and level of detail that is especially relevant for investment decisions, financial supervision, monetary policy, and risk management. The short-term scenarios mark a significant step forward in supporting institutions to prepare for adverse, but plausible, climate developments and policies.”

The free short-term scenarios report and findings are part of a growing toolkit being developed by the NGFS to support central banks and their supervisors assess and minimise risks of climate change.

ricardo Contributes to First-of-Its-Kind Report Showing Climate Risk to Banking Industry | 2025 | press Releases | News and Insights

In a landmark growth for the financial sector, a groundbreaking report detailing the escalating climate risks facing the banking industry in 2025 has been released. The report,hailed as the first of its kind,offers a complete assessment of the physical,transitional,and liability risks stemming from climate change and their potential impact on banking operations,stability,and profitability. Ricardo, a leading expert in environmental and sustainability consulting, played a pivotal role in the report’s development, bringing their expertise to bear on critical areas of risk assessment and mitigation.

understanding the Scope of Climate Risk to banking

The report addresses a wide array of climate-related challenges that banks will increasingly face in the coming years.These challenges are categorized into three main areas:

• Physical Risks: These stem directly from the physical impacts of climate change, such as extreme weather events (floods, droughts, wildfires), sea-level rise, and changes in temperature. These can damage bank assets, disrupt operations, and impact the creditworthiness of borrowers.
• Transitional Risks: These are associated with the shift towards a low-carbon economy.Policy changes, technological advancements, market shifts, and changing consumer preferences can all impact the value of assets and increase the cost of doing business.For example, stricter regulations on carbon-intensive industries could lead to loan defaults.
• Liability Risks: These risks arise from legal claims against banks for their contribution to climate change or for failing to adequately disclose climate-related risks to investors.

The report emphasizes that these risks are not theoretical possibilities but rather present and growing threats to the financial health of the banking sector.Ignoring these risks could have severe consequences for individual institutions and the global financial system as a whole.

Ricardo’s Contributions: A Deep Dive

ricardo’s contributions to the report were instrumental in several key areas, including:

• risk Assessment Methodology: Ricardo helped develop a robust methodology for assessing the climate-related risks faced by banks, taking into account both quantitative and qualitative factors.This methodology allows banks to identify their most significant vulnerabilities and prioritize risk management efforts.
• Scenario analysis: Ricardo conducted scenario analysis to explore the potential impact of different climate pathways on the banking sector. This analysis helps banks understand the range of possible outcomes and prepare for a variety of future scenarios.
• Best Practices for Risk Management: Ricardo provided guidance on best practices for managing climate-related risks, including the integration of climate considerations into risk management frameworks, stress testing, and disclosure processes.
• Expert Insights: Ricardo’s team contributed expert insights based on years of experience in climate science, environmental economics, and financial risk management.

ricardo’s involvement ensured that the report is grounded in rigorous science and sound financial principles. Their expertise lends credibility to the report’s findings and recommendations.

Key Findings of the Climate Risk Report

The report highlights several key findings:

• Climate change poses a significant and growing threat to the banking industry.
• Both physical and transitional risks are relevant and require proactive management.
• Banks are not adequately prepared for the challenges posed by climate change.
• Improved risk management practices, stress testing, and disclosure are essential.
• Collaboration between banks, regulators, and policymakers is crucial to address climate-related financial risks.

the report underscores the urgency for banks to take action to address climate-related risks. Delaying action will only increase the potential for financial losses and systemic instability.

Practical Tips for Banks to manage Climate Risk

The report provides recommendations for banks to mitigate and manage climate risks. Hear are a few practical tips:

1. Integrate climate risk into risk management frameworks: Climate risk should be considered a core component of enterprise risk management, encompassing credit risk, market risk, operational risk, and liquidity risk.
2. Conduct climate stress tests: Banks should perform stress tests to assess their resilience to different climate scenarios, including extreme weather events and policy changes.
3. Enhance climate risk disclosure: Banks should transparently disclose their exposure to climate-related risks, following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
4. Engage with stakeholders: Banks should engage with customers, investors, regulators, and other stakeholders to understand their concerns about climate change and to develop collaborative solutions.
5. Invest in climate resilience: Banks should invest in measures to enhance their resilience to the physical impacts of climate change,such as upgrading infrastructure and diversifying their loan portfolios.
6. Develop sustainable finance products: Banks can capitalize on the transition to a low-carbon economy by developing and offering sustainable finance products, such as green bonds and loans for renewable energy projects.

Benefits of Proactive Climate Risk Management

while addressing climate risk might seem like a burden, it offers several benefits for banks:

• Improved Risk Management: A proactive approach helps banks identify and mitigate potential risks, reducing the likelihood of financial losses.
• Enhanced Reputation: Demonstrating a commitment to sustainability enhances a bank’s reputation and strengthens its brand.
• New Business Opportunities: The transition to a low-carbon economy creates new opportunities for banks to offer sustainable finance products and services.
• Increased Investor Confidence: Investors are increasingly demanding that companies address climate change. Banks that demonstrate a commitment to sustainability are more likely to attract investment.
• Regulatory Compliance: Regulators around the world are increasing scrutiny of climate-related financial risks. Proactive risk management helps banks comply with evolving regulations.

Case Studies: Banks Leading the Way in Climate Risk Management

Several banks are already taking proactive steps to manage climate risk. Here are a couple of brief examples:

• Example 1: A major European bank has integrated climate risk into its credit risk assessment process,requiring borrowers in high-risk sectors to disclose their carbon emissions and climate adaptation plans.
• Example 2: A North American bank is investing in renewable energy projects and offering green mortgages to customers.

These case studies demonstrate that it is possible for banks to address climate risk while also achieving their business objectives.

First-Hand Experience: From the Experts

Insights from Ricardo’s team involved in the report highlight the challenges and opportunities encountered during the research process. One expert noted, “The biggest challenge was the lack of consistent and reliable data on climate-related risks. We had to develop innovative methodologies to fill the data gaps and ensure the rigor of our analysis.”

Another team member emphasized the importance of collaboration: “This report was a collaborative effort between experts from diverse fields, including climate science, finance, and risk management. This interdisciplinary approach was essential to developing a comprehensive and actionable assessment of climate risk to the banking industry.”

The Report: A Call to Action for the Banking Industry

The release of this report marks a significant moment in the fight against climate change. It serves as a clear call to action for the banking industry to take immediate steps to address climate-related risks. By integrating climate considerations into their risk management frameworks, conducting stress tests, enhancing disclosure, and investing in sustainable finance, banks can protect themselves from the financial impacts of climate change and contribute to a more sustainable future.

Useful Resources and Further Reading

• Task Force on Climate-related Financial Disclosures (TCFD): [Link to TCFD website]
• The Network for Greening the Financial System (NGFS): [Link to NGFS website]
• Relevant publications from regulatory bodies (e.g., central banks, financial supervisory authorities)

Visualizing Climate Risk

Understanding climate risk requires visualization. The table below shows the risk levels for differents factors on the banking industry in 2025.