The NGFS Gets Practical on Transition Plans
August 13, 2025
By guest contributor Mark Cliffe, Visiting Fellow at the Global Systems Institute, University of Exeter
The Network for Greening the Financial System (NGFS) has effectively responded to pressure from the financial sector to prioritise financial materiality over impact. But while it admits to limitations in its long-term reference scenarios, which are based on linear modelling, it continues to recommend their use.
The two reports, ‘Target setting and Transition plans’ and ‘Interactions between Climate Scenario Analysis and Transition Plans’, are full of sensible and practical recommendations. To paraphrase, they are calling on financial institutions to:
Set credible and feasible targets aligned with the real economy transition
Produce bespoke scenarios tailored to their business
Use a range of scenarios to address different use cases
Integrate risk management into the transition planning process
Where the papers fall short is in drawing out the implications of these recommendations. While the NGFS notes that this an ‘emerging’ topic, a number of longstanding and fundamental issues are raised by their current approach:
Interim targets are unlikely to be aligned with Paris Agreement goals
The NGFS highlights that climate scenarios are currently primarily used in the setting of decarbonisation targets. Yet in emphasising the need for targets to be credible and feasible, and for transition plans to be integrated with risk management, it is essentially arguing for prioritising inbound financial risk (single materiality) over outbound impact materiality (the other leg of double materiality). Since, as it notes, many financial institutions share the widespread belief that the world is falling behind in the race to net zero, this implies that transition plans are likely to be centred on less ambitious scenarios and targets.
Here we see the tension inherent in corporate sustainability. While managing financial risks is obligatory, net zero commitments, interim decarbonisation targets, and the implementation of transition plans are all, for now, voluntary. Although efforts are underway to make plans mandatory in some jurisdictions, including the UK and (from July 2028) the European Union, many financial institutions have been backtracking on climate commitments with impunity. This gives the lie to the idea that reporting obligations alone will create sustainable momentum towards decarbonisation.
Existing reference scenarios are unfit for most use cases
The NGFS encourages financial institutions to use its own long-term reference scenarios for climate-related workflows, despite the fact that their limitations (which are acknowledged by the NGFS itself) make them unfit for most use cases. Importantly, these scenarios lack realism in their narratives and models. The end result are smooth global warming pathways that structurally understate the risks and opportunities of climate change. Thankfully, their recently released set of short-term scenarios, which rightly switch the focus to extreme weather and at least consider financial shocks, have partly addressed these limitations.
For most purposes, financial institutions need scenarios with time horizons of five years or less. They need to be bespoke to their business, with a relevant geography, asset allocation, and product focus. They need to better incorporate volatility, so institutions can assess the range of financial risks and opportunities. Remember, political, economic, and financial volatility are drivers of transition risk, not merely products of it. They also need to factor in the potential for greater technological disruptions. An example of such an approach was set out in the ‘No Time To Lose’ report published by the University of Exeter and USS in 2023 (full disclosure: I was the lead author). By contrast, even the NGFS short-term scenarios are based on a single, smooth, economic pathway based on an IMF forecast from 2023.
Climate scenario analysis is a tool, not an end in itself
The premise of the NGFS paper: ‘Interactions between Climate Scenario Analysis and Transition Plans’ confuses means with ends. Climate scenario analysis is a tool which, as the paper itself goes on to elaborate, can be used for multiple use cases – not just transition planning. Thus it is valuable, and in some cases essential, for strategic planning, impact target setting, stress testing, and risk management. What’s important to remember is that the use cases define the most appropriate scenario design and framework, including relevant narratives, modelling, methods, and data.
The NGFS comes down in favour of ‘credible’ and ‘feasible’ transition plans. These are plans that are coherent with a firm’s business strategy and prioritise interim targets that take on board realistic risks and opportunities. The great virtue of this approach is that a core set of scenarios can be used for strategic planning as well as transition planning, with variants of downside scenarios being used for risk management and stress testing. But, as noted above, the implication is that off-the-shelf reference scenarios from the NGFS, or indeed the likes of the International Energy Agency (IEA), are clearly of limited relevance. Instead, priority needs to be given to bespoke scenarios designed to address firms’ own unique risks and opportunities rather than impact goals which are largely outside their control and are in any case voluntary – for now, at least.
Systemic risk needs to be clearly distinguished from business risk
While these NGFS papers side with the International Sustainability Standards Board (ISSB) in prioritising financial risk in target setting, strategic and transition planning, and risk management, they are still dancing around the distinction between idiosyncratic business risk and systemic or societal risk. This is obvious from the outset, when it defines transition planning as a process “to develop a transition strategy to deliver climate targets and/or prepare a long-term response to manage the risks associated with a transition”. The “and” in that quotation highlights the problem. As the papers go on to note, there is clear tension between these two use cases. Thus the delivery of aspirational climate targets (which contribute to societal goals) may present financial risks to a particular business in the real world.
In its discussion of “ineffective” targets, the NGFS notes that there are financial risks from targets that are “overly ambitious” or are “overly misaligned with the real economy transition”. Yet it does not explore the obvious implication that targets need to be set not just in the light of the business’s own behaviour, but also that of others. It is possible to lose money from decarbonising too quickly as well as too slowly. The key point here is that from the perspective of an individual business, the financial risks depend not just on whether it meets its own goals but also on what others are doing.
Put simply, targets need to be set in relative, not absolute terms. And in order for this to happen, a business needs to form a judgement based on a range of scenarios that depict various transition pathways.
This need to distinguish between idiosyncratic and systemic risks is also revealed in the paper’s criticism of divestment, pejoratively labelled as ‘paper decarbonisation’, as a means of meeting a firm’s financed emissions goals. Divestment of fossil fuel assets can be a very swift and effective way of reducing a firm’s own financial risks. This goes unacknowledged in the paper. Instead, it argues that “it does not necessarily remove emissions from the economy […] which could drive larger increased risks to the firm”. That may or may not be true, but even in the case where it does lead to increased systemic risk (say because the assets go to a less responsible or unregulated player) the resulting increase in risk to the firm itself would surely be marginal in relation to the direct reduction in risk from the divestment. It then argues that divestment “may only be a plausible strategy for a few firms in the short term as the FIs [financial institutions] would need to find a buyer”. Yet that might not be a deterrent to FIs selling. Indeed, it could trigger a rush for the exit – a ‘fire sale’ – if expectations suddenly change. Moreover, the record on divestment of coal assets shows that buyers can generally be found, not least in the private market.
For all these reservations, financial institutions should warmly embrace the basic recommendations from the NGFS. Basing decisions on realistic, bespoke, short-term scenarios will enable them to truly embed the transition into their businesses. In doing so, they will no doubt encourage the NGFS to continue on its journey towards realism.