Climate risks and impact metrics for investors’ portfolios

Abstract

There is growing awareness among investors, central bankers and regulators about the negative implications of climate change on prices and financial stability. On the one hand, climate change could induce financial losses for the insurance and the banking sector as a result of climate-related events (such as droughts, hurricanes and floods). On the other hand, the transition to a low-carbon economy could lead to a re-pricing of carbon-intensive assets and thus to financial problems for companies whose revenues depend directly or indirectly on fossil fuels, with wider implications for financial stability.

Market-based solutions to climate change and climate-aligned regulations have been widely advocated to foster a smooth transition to a low-carbon economy, and to provide investors incentives to reallocate their portfolios to green investments. However, traditional economic and financial pricing models are not adequate to factor climate into financial risk assessment. At this regard, we need to answer to three main research questions: i) To what extent are investors exposed to and contributing to climate risks? ii) What is their climate Value-at-Risk? iii) under which conditions could investors’ exposure to climate risks affect financial stability?

The seminar will present recent methodological advances on climate risk and impact metrics for climate-related financial disclosure that contribute to answer our research questions. First, two complementary indicators of investors’ exposure to carbon-intensive assets and investors’ market share weighted for their carbon content will be introduced to address the question of imperfect information on portfolios’ exposure to climate-related risks. Then, the first climate stress-test methodology of financial portfolios will be presented, along with the results of the recent applications to development banks. The climate-finance metrics proposed are transparent (thus replicable) and concise yet able to capture the relevant dimensions and information for policy making. Therefore, they contribute to our understanding of the relation between climate risks and financial stability in particular in relation to the ongoing development of the climate-finance market.

L’Organizzatore                                                                                                         Il Direttore
Prof. Silvia Romagnoli                                                                                        Prof. Angela Montanari