Council on Energy, Environment and Water Integrated | International | Independent
Suggested Citation: Malik, Aman, Vaibhav Chaturvedi, and Rishabh Varma. 2026. Transition Risk Scenarios for India's Financial Sector: Adapting Global Frameworks to National Realities and Financial Stability Risks. New Delhi: Council on Energy, Environment and Water.
As climate-related financial risks become an increasingly important concern for central banks and financial regulators, scenario analysis has emerged as a key tool for assessing how the transition to a low-carbon economy could affect financial stability. While the Network for Greening the Financial System (NGFS) scenarios have become the global benchmark for climate risk assessment, they are designed as harmonised reference scenarios and may not adequately capture India's development priorities, energy system characteristics, or policy context.
This issue brief argues that India requires transition risk scenarios tailored to its own economic structure and financial system. Drawing on an extensive review of international climate stress- testing exercises, India-specific net-zero studies, and stakeholder consultations with financial sector experts, the study proposes a framework for designing India-specific transition scenarios. It identifies the key scenario drivers, modelling assumptions, and financial indicators needed to support climate stress testing by banks and financial institutions, while also illustrating how these elements can be translated into practical scenarios for the Indian context.
Scenario analysis has long been used by energy system modellers to explore the pace, costs, and technological pathways of the energy transition and to assess their impacts on energy use, emissions, and temperature outcomes. Over the past decade, it has also become an important tool for the financial sector to assess how physical climate impacts and the transition to a lowcarbon economy can give rise to physical and transition risks that can materially affect financial stability. The Network for Greening the Financial System (NGFS) scenarios are among the most widely used reference scenarios for climate risk assessment (NGFS 2024b). They provide a harmonised set of long-term scenario narratives that link policy ambition and timing, technological change, and international coordination to emissions and temperature outcomes.
While this standardisation is valuable for cross-country comparability, the limited contextual specificity of NGFS scenarios, as well as their inability to accurately capture national characteristics and development priorities, can constrain their usefulness for country-level risk assessments. NGFS itself notes that users may need to adapt scenarios to suit their needs (NGFS 2024b). Evidence suggests that a significant share of financial authorities already modify NGFS scenarios before applying them (NGFS 2024b). Supervisory exercises have similarly highlighted that while standardised scenarios improve comparability, they can obscure portfolio- and countryspecific risks, which reduces their relevance for nationallevel decision-making (NGFS 2024b). This study explores key design elements for constructing India-specific scenarios.
Beyond arguing for greater adaptation of existing national scenarios, this paper contends that transition risk scenarios developed for the financial sector should differ from traditional long-term decarbonisation scenarios. This is because financial-sector scenarios are intended to assess the resilience of financial institutions to transition-related risks, rather than to evaluate pathways for achieving decarbonisation goals. In particular, financial-sector scenarios should place greater emphasis on near-term shocks, geopolitical uncertainty, technology disruptions, policy uncertainty, and stranded assets that threaten financial stability. The paper, therefore, proposes a framework that links India-specific scenario drivers to financially relevant variables for climate stress testing and transition risk assessment. The proposed framework draws on two complementary sources of evidence. The scenario design elements are synthesised from the review of international transition risk exercises and Indiaspecific net-zero studies, while the financial indicators are informed by stakeholder consultations to reflect the variables considered most relevant for climate stress testing in the Indian financial sector.
This study reviews scenario frameworks used in transition risk assessments, including NGFS and a range of bespoke or modified scenario approaches used by central banks and financial institutions. It also reviews India-focused netzero and deep decarbonisation studies (see Annexure 1) to identify key drivers shaping India’s emissions and energy pathways. Across this literature, several India-relevant uncertainties emerge consistently. These include the ambition and timing of climate policy; macroeconomic growth trajectories (including the composition of growth); the availability and cost of critical technologies such as carbon capture and storage (CCS) and green hydrogen; and physical and resource constraints, including land, water, and critical minerals. While social and political constraints are frequently acknowledged, they are often not explicitly embedded in scenario design.
Based on this literature review as well as conversations with experts, the study outlines key design considerations for an India-specific scenario framework.
First, scenario narratives should include sufficiently divergent pathways, including the possibility of large shocks, particularly in the near term, given the role of scenario analysis in stress testing and the non-linear nature of climate and transition risks. Second, policy ambition and timing, along with technology availability and adoption, should remain core drivers of scenarios, but they should be tailored to India’s circumstances and aligned with national development objectives. Third, geopolitical developments and international policy coordination may be as important as domestic policy, particularly for exportoriented, emissions-intensive sectors that may be exposed to external policy shifts and trade-related transition risks.
The paper highlights that it is important for the financial sector to understand the impact of mitigation policies on (i) economic growth; (ii) revenue and operational costs (mediated through carbon prices); and (iii) stranded assets. It then proposes key aspects that could affect these three variables, identifies exogenous variables that could be varied in models and scenarios to reflect these aspects, and finally presents illustrative scenarios based on variations in the exogenous variables that could be relevant for the financial sector.
Overall, while the NGFS scenarios are a useful starting point and provide an important basis for standardisation, India’s climate risk assessment needs would be better served by a tailored scenario framework that reflects its domestic priorities, constraints, and near-term uncertainties. At the same time, given the widespread adoption and ongoing evolution of NGFS scenarios, India should also engage with NGFS to improve India-specific assumptions, sectoral representation, and policy coverage within global scenario frameworks. Finally, this study argues that the scenarios required for the financial sector should differ from those used in other exercises. Financialsector scenarios should centre on issues that could lead to direct shocks to the financial sector as well as affect it through various macroeconomic channels, such as investments and inflation, rather than issues that have traditionally been central to the broader India-specific scenario literature, which often focus on objectives such as equity, renewable energy deployment, or energy security.
Climate-related transition risks are becoming increasingly important for financial institutions as governments adopt policies to decarbonise their economies. Most climate stress-testing exercises currently rely on the NGFS scenarios, which were developed as globally harmonised reference scenarios. This study examines how adequately these scenarios reflect India's unique economic and energy transition context and proposes a framework for designing India-specific transition scenarios.
India's development priorities, energy mix, industrial structure, and policy objectives differ substantially from those of many advanced economies. Factors such as continued growth in energy demand, reliance on coal in several sectors, and evolving climate policy mean that global scenarios may not accurately capture the risks faced by Indian financial institutions. Tailoring scenarios to the Indian context can therefore improve the relevance and credibility of climate stress testing.
The framework is based on three complementary sources of evidence: a review of international transition risk assessment literature, an assessment of India-specific net-zero and energy transition studies, and stakeholder consultations with representatives from the Reserve Bank of India, commercial banks, and energy system modelling experts. Together, these inputs informed the proposed scenario design framework.
The framework recommends developing transition scenarios around key sources of uncertainty, including economic growth, technology costs, mitigation ambition, policy certainty, geopolitical developments, global climate policy, trade measures, and climate finance. It also proposes linking these scenarios to financial indicators such as GDP growth, carbon prices, energy prices, and stranded assets to support climate stress testing.
The framework is intended for financial regulators, commercial banks, financial institutions, and researchers involved in climate-related financial risk assessment. It is particularly relevant for institutions undertaking climate scenario analysis and stress testing as part of emerging disclosure and risk management requirements.
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