Building blocks for central banks to develop nature scenarios

Building blocks for central banks to develop nature scenarios

Models and scenarios are increasingly being adopted by central banks and financial supervisors as a tool to support the assessment of climate risks, but existing scenarios currently do not sufficiently incorporate broader environmental risks, such as nature-related risks, into such assessments.

Nature scenarios are used in models to describe plausible future developments of all elements of nature, the development of socioeconomic variables and policies, and the interactions between them. A significant drawback is that outputs from nature–economy models and scenarios cannot readily be used by the financial sector.

In reviewing a selection of models currently used in economic and nature loss assessments, this briefing identifies five key issues for model and scenario development: input data needs; model assumptions; uncertainty around nature–economy interactions; the choice of global or local scenarios; and usability for financial institutions. While there are ways to address some of these challenges, more research is required to operationalise the solutions.

Overcoming these challenges could enable the introduction of more targeted monetary policies and prudential policies, and more effective financial sector risk management. It could also contribute towards shifting financing away from nature-harming investments.


SOAS Centre of Sustainable Finance, LSE Grantham Research Institute on Climate Change and the Environment

Published January 24, 2023