Climate Scenarios in Finance
Climate change and low carbon transition scenarios are becoming a usual feature in the financial sector. The use of scenarios is consistent with the nature of the phenomena considered (deep uncertainty). However, this use should be subject to reasoned thinking: scenario based approaches are fundamentally at odds with the probabilistic approach that underpins economics and finance. We discuss the use of scenarios for finance-driven purposes and examine three issues pertaining to “green finance” (the use of “normative” scenarios, the design of scenarios for stress tests and the development of scenarios suited for the needs of financial decision making).