“All scenarios are wrong, but some are useful”—Toward a framework for assessing and using current climate risk scenarios within financial decisions

In response to a growing awareness of the potential impact climate change on financial stability, academics, institutions (FIs), central banks and supervisors (CB&S) have developed suite scenarios analytical tools assess forward-looking climate-related risks, inform macro-prudential policies, counterparty risk management business planning decisions. Climate scenario analysis brings new challenges vs. traditional by FIs, particularly given limitations, uncertainties, trade-offs inherent in data, models, methods for such assessments. We argue that all are wrong, but this does not necessarily mean they cannot be useful if used expanded upon with full limitations. paper, we analyze those limitations context specific requirements FIs propose an approach construction expansion complement existing increase their suitability decision making key use cases. Importantly, current likely closer lower end range plausible future both physical transition risk. This has implications stress testing management, planning. advocate harnessing breadth narratives avoid accumulation systemic risks our framework provides initial step toward this. Finally, call CB&S, research work closely together develop more comprehensive taxonomy help navigate material under uncertainty. JEL codes Q51, Q43, G21, G32.