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GRA · Climate and Nature Financial Risk

Spatial financeWhere capital meets hazard, exposure and transition

Model and measurement gaps

Climate and nature financial risk is measured with models that leave much out: tipping points, compound and cascading events, nature, social and political responses, and the feedback between finance and the economy. Gaps can lead institutions and supervisors to understate risk. This page sets out where the main gaps are, how they arise, what research is closing them, and who decides how to treat what is unknown.

02The question

Model and measurement gaps: how the risk develops.

Geolocation, uncertainty and aggregation. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.

Mechanism

Tipping points are excluded

Abrupt changes such as ice sheet loss or forest dieback are rarely in economic damage functions, so severe outcomes are underweighted.

Mechanism

Compound events are missed

Simultaneous or sequential hazards, such as drought then fire, and their effects on supply chains are harder to model than single perils.

Mechanism

Second-round effects are thin

Few models capture how financial losses reduce lending, which slows the economy and raises losses further.

Mechanism

False precision

Point estimates from complex chains of models look precise. Without uncertainty ranges, users treat them as more reliable than they are.

03Spatial finance

From a satellite tile to an exposure update.

How satellite radar turns a flood into an exposure update. Synthetic scene; no real event or place.

How satellite radar maps a flood and updates the count of affected buildings.Synthetic scene and schematic model; no real event or place.
04Indicators

What is measured, and how well.

Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.

IndicatorUnitCadenceSource typeLabel
Scenario exercises including tipping pointscountannualSupervisor and research publicationsREPORTED
Disagreement between physical risk providerscorrelation of scoresper studyComparison studiesESTIMATED
Models with second-round effectscount in supervisory exercisesannualExercise documentationREPORTED
Nature risk metrics in usecount by frameworkannualFramework reviewsREPORTED
Uncertainty ranges reported with resultsshare of published resultsper reviewDisclosure reviewsOBSERVED
Research outputs on climate-financial modellingcountannualBibliographic databasesREPORTED
05Monitor

Nature risk screening.

The screen a team would use to follow this subject: its measures, states and decisions. Names are examples and values are illustrative.

Nature risk screening

Model and measurement gaps · Nature-sensitive sectors · LEAP cycle 2

Evaluate phaseGRA · Climate and Nature Financial Risk

LEAP

  1. Locateborrower sites
  2. Evaluatedependencies · impacts
  3. Assesscredit and reputational risk
  4. Preparetargets · disclosure

Dependencies by sector

Agriculture3HighHighHighHigh
Food processing1HighMediumMediumMedium
Mining1HighLowMediumMedium
Real estate15MediumLowLowLow
Nature risk screening: the screen's structure, terms and states for Model and measurement gaps.Example names and illustrative values; a design, not a record or a live system.
06Sources

Where the evidence comes from.

Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.

SourceWhat it givesLicence class
NGFS technical documentation and researchScenario limitations and research agendaFree, NGFS terms
IPCC Sixth Assessment Report chapters on tipping points and compound eventsAssessed evidence on low-likelihood high-impact outcomesFree, IPCC terms
Institute and Faculty of Actuaries reports on climate scenariosCritiques of scenario damage estimatesFree to read, terms to check
FSB and BCBS reports on climate data and methodologiesGaps in data and methodsFree, FSB and BIS terms
Academic comparisons of physical risk scoresDivergence among providersFree to read, terms per publisher
07Twin and cascade simulator

Trace a shock in model and measurement gaps to the balance sheet.

Assembled from the Nexus Standards area profile Climate risk standards: the shocks it names, the systems and sectors that carry the loss, the controls that dampen it and the data that observe it. Pick an initiating shock and step through the cascade to see which exposures it reaches and where losses could concentrate. The Map view places the run on an example geography with open data. Every weight is a stated assumption. An exercise, not a forecast, a valuation, a rating or investment advice. To model a place of your own choosing, open the full System Builder.

Hazards

  • Sea-level rise
  • Coastal flood (set off downstream)
  • Storm surge (set off downstream)
  • High-tide flooding (set off downstream)
  • Coastal erosion (set off downstream)
  • Saltwater intrusion (set off downstream)
  • Estuary flood (set off downstream)
  • Coastal habitat squeeze (set off downstream)
  • Wetland loss (set off downstream)
  • Mangrove loss (set off downstream)
  • Groundwater flood (set off downstream)
  • Climate-driven migration and relocation (set off downstream)
  • Mass displacement (set off downstream)

Controls

  • NS-0 Constitution and principles
  • NS-1 The UNI and the artefact catalogue (grammar v0.2: domain, sector, region and environment segments)
  • NS-3 Risk record UNIs (grammar, legacy crosswalk, allocation authority)
  • NS-3b Dataset and product metadata profile (STAC, DCAT, PROV-O)
  • NS-9 Contextual UNIs (deployments, instances, programme instances)
  • NS-11 Verification and monitoring (evidence, attestations, zero-trust conformance observation)
  • NS-14 Conformance and crosswalk to external standards
  • NRS-H65 Hazard family: Planetary boundary transgressions (NHS-1 planet.boundary)
  • NRS-H62 Hazard family: Compound and multi-hazard events (NHS-1 sys.compound)
  • NRS-H71 Hazard family: Deep-time and cosmic catastrophes (NHS-1 planet.deep-time)
  • NRS-H79 Hazard family: Mental health crises (NHS-1 health.mental)
  • NRS-H75 Hazard family: Climate-sensitive illness (NHS-1 health.climate-sensitive)
  • NRS-H7 Hazard family: Large-scale circulation anomalies (NHS-1 atmo.climate-mode)

Observation

  • ERA5 reanalysis (Copernicus Climate Data Store) (listed for reference)
  • CMIP6 climate projections (Copernicus Climate Data Store) (listed for reference)
  • NGFS Scenario Explorer (listed for reference)
  • INFORM Risk Index (listed for reference)
  • Number of deaths, missing persons and directly affected persons attributed to disasters per 100,000 population
  • Total greenhouse gas emissions per year
  • Direct economic loss attributed to disasters in relation to global GDP

Example geography

  • Pacific Island states: 150 hexagonal cells
  • Night lights tonight, outages (VIIRS Day/Night Band), NASA GIBS
  • Surface water through cloud, 30 m (OPERA DSWx-S1 radar), NASA GIBS
  • Rain rate, last half hour (IMERG), NASA GIBS
  • Vegetation disturbance alerts, 30 m (OPERA DIST-ALERT), NASA GIBS
08Decisions

Who decides, and what the evidence serves.

Climate and Nature Financial Risk prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.

Who decidesThe questionEvidence this page serves
Supervisors and the NGFSHow to incorporate tail risks and second-round effectsResearch findings and exercise experience
Risk functionsHow much judgement overlay to apply to model resultsGap analysis and uncertainty evidence
Research fundersWhich modelling gaps to prioritiseGap assessments and user needs
BoardsHow to use results whose uncertainty is largeRanges, scenario spreads and limitations

Outputs this topic produces

  • Guide to known gaps in climate-financial models
  • Method note on presenting uncertainty with model results
  • Brief on tipping points and compound events for financial users
  • Questions for boards relying on model output
09Exposure, loss and capital

What model and measurement gaps means for exposure, loss and capital.

The exposure, loss, scenario and capital views a risk officer, supervisor or ministry of finance would ask for, with the frameworks they report against. Structures follow supervisory and actuarial practice. Values are illustrative: never prices, ratings or advice.

Scenario pathways

How model and measurement gaps could be stressed under the scenario families central banks and supervisors use.

OrderlyDisorderlyHot house world202520302035204020452050highlow
Scenario familyTransition riskPhysical riskWhat a stress test asks
OrderlyEarly, gradual policyLowerCan the book absorb a steady repricing?
DisorderlyLate, abrupt policyLower to mediumWhat breaks under a sudden repricing and credit migration?
Hot house worldLimited policyHigh and risingWhere do physical losses concentrate in collateral and insurance?
Scenario families as defined by the NGFS; the curves are an illustrative combined pressure index, not NGFS variables or forecasts.
NGFS climate scenarios · Network for Greening the Financial SystemIFRS S2 Climate-related Disclosures · ISSBTCFD recommendations · Financial Stability Board TCFDPrinciples for the effective management of climate-related financial risks · Basel Committee on Banking Supervision
10Core questions

What model validators ask.

  • How accurately are exposed assets located, and how much does location error change results?
  • How is uncertainty in hazards, damage functions and scenarios propagated and reported?
  • Does aggregation across assets and portfolios hide concentration or create false precision?
  • How are models validated when the future differs from the past?
11Mechanisms

Where errors enter.

Physical risk depends on precise location: a few metres of elevation can determine whether a building floods. Yet financial data often record only an address, a postcode or a company headquarters rather than the operating assets. Hazard data vary in resolution and may not reflect future climate. Damage functions relating hazard to loss are uncertain and often derived from limited data.

Errors compound as models are chained: climate projections feed hazard models, which feed damage models, which feed financial models. Aggregating results into a single score can conceal both the uncertainty and the concentration that matter most.

12Methods and data

Addressing the gaps.

  1. 01

    Geolocation improvement

    Linking assets to precise locations, using spatial statistics and geostatistics and Earth observation. Coverage remains incomplete.

  2. 02

    Uncertainty quantification

    Reporting ranges and sensitivity rather than single values. Communicating uncertainty clearly is difficult.

  3. 03

    Model validation

    Comparing models with observed losses and with each other, using scenario design and stress testing. Validation against the future is impossible.

  4. 04

    Aggregation review

    Checking whether aggregation hides concentration or tail risk.

14Questions

Questions and answers.

Why might climate stress tests understate risk?
Because many damage functions omit tipping points and compound events, balance sheets are held static and second-round effects are limited. Supervisors and actuarial bodies have noted these gaps.
What is a compound event?
A combination of hazards occurring together or in sequence, such as heat and drought, whose combined impact exceeds the sum of each alone.
How should uncertain results be used?
With ranges and scenarios shown, judgement documented and decisions tested for robustness across outcomes, not optimised for one point estimate.
Why does asset location matter so much?
Because physical hazards vary over short distances. A small location error can change estimated exposure substantially.
What is false precision?
Presenting uncertain results as exact numbers or scores, which can lead decision-makers to place more confidence in them than is justified.
Does the platform validate commercial models?
No. It publishes guidance on model and measurement gaps and does not assess or endorse any model or vendor.
Can models be validated for future climate?
Not directly. They can be tested against past events, compared with each other and checked for plausibility, with their limits stated.
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