Fundamental Flaw in Climate Scenario Risk Analysis

Responding to the Open Consultation of the Office of the Superintendent of Financial Institutions

“RCP8.5 does not provide a physically consistent worst case [Business-as-Usual] BAU trajectory that warrants continued emphasis in scientific research. Accordingly, it does not provide a useful benchmark for policy studies.”

Ritchie and Dowlatabadi (2017)


On Oct. 16, 2023, the Office of the Superintendent for Financial Institutions released is Standardized Climate Scenario Exercise (SCSE) methodology for consultation.

“The SCSE aims to increase federally regulated financial institutions’ (FRFIs) understanding of their potential exposures to climate-related risks. It also aims to build their capacity to conduct climate scenario analysis and risk assessments. As a fully standardized exercise, the SCSE will also give OSFI a comparable quantitative assessment of climate-related risks across FRFIs.”

This report provides a response to that consultation prepared by Friends of Science Society.

Standardized Climate Scenario Exercise

There is ever more pressure on banks, financial institutions and corporations to report on climate risks related to their investments and operations, particularly as market pressures grow such as potential litigation for failing to properly report climate risk, ever more climate regulation – particularly on the fossil fuel sector, rising carbon prices and the advent of Carbon Border Adjustment levies in some jurisdictions.

Thus, the OSFI has developed this Standardized Climate Scenario Exercise (SCSE) to attempt to help financial institutions under its supervision to understand their climate risks and to provide a standardized tool.

OSFI describes the exercise as follows:

“The SCSE aims to measure climate risks that are arguably not reflected using traditional risk quantification techniques, e.g., models that use historical experience to measure risks. The SCSE will consider characteristics associated with individual exposures that are not typically used in risk quantification today but may provide strong risk discrimination under future climate scenarios. The SCSE will not consider broad impacts of macroeconomic stresses since FRFIs’ stress testing and capital requirements already consider the impact of a stressed macroeconomic environment.” [Bold emphasis added]

Fundamental Flaw

The OSFI employs a series of computer simulated scenarios known as the “Representative Concentration Pathways” as baseline scenarios claiming that the RCPs ‘describe future emissions patterns’ and that ‘each scenario makes a different assumption about global average temperatures.’

This is how the RCP scenarios look in relation to one another.

Figure 1    

The stated objective of NetZero targets is to keep global warming below 1.5 degrees Celsius (over pre-industrial temperatures) as per the Paris Agreement.  Few people realize that the 1.5°C target is a political, not a scientific goal.[1]

According to the creators of the RCP scenarios, these scenarios are not meant to be used as policy prescriptive instruments, but this is what the OSFI is doing, as is the Bank of Canada, and the Bank for International Settlements (BIS),[2] which means that international finance is being skewed by improper use of the RCP scenarios. Here the authors of van Vuuren et al (2011) caution against the misuse of the RCP scenarios:

Climate policy analyst and long-time insurance industry advisor on disaster risk,[3] Roger Pielke, Jr. and his research colleague, Justin Ritchie have detailed how the misuse of these scenarios is distorting our understanding of climate science and the view of our climate future.[4]  Pielke, Jr. directly addresses the scenarios of the Network for Greening the Financial System (NGFS)[5] in this presentation;[6] he describes them as ‘wildly implausible and of questionable practical utility.’