“A climate stress-test of the financial system” published in Nature Climate Change

Climate change brings new risks for financial investments, but the impact of climate policies on the financial system has remained unclear so far. Several organizations, including the G20 Financial Stability Board, have called for improving both data and methodologies to better disclose the climate risks faced by public and private investors in financial markets.

An international team coordinated by the Department of Banking and Finance at the University of Zurich – and including Irene Monasterolo of the Frederick S. Pardee Center for the Study of the Longer-Range Future – developed a novel “climate stress-test” methodology to assess climate risks of financial institutions’ investments portfolios. The study, published today in the journal Nature Climate Change, seeks to understand the degree to which financial actors’ investments are exposed to climate risk. The authors analyze the impact of green (or brown) investment strategies and find that investors’ portfolios in equity holdings bear large exposures to climate-policy-relevant sectors, and that pension funds are particularly affected.

In the context of the policy discussion around the guidelines from the G20’s Financial Stability Board Task Force on Climate-related Financial Disclosure, the results suggest that disclosure of climate-relevant financial information is necessary to improve risk estimations and create the right incentives for investors. However, because combined exposures are large, better disclosure may not be sufficient to mitigate risk. The timing and credibility of the implementation of climate policies matter: an early and stable policy framework would allow for a smoother adjustment of asset prices and for the emergence of net winners and losers in the transition to a low-carbon economy.

Web link to the paper
Web link to infographics
Correspondence e-mail: stefano.battiston (at) uzh.ch

Publication authors:
Stefano Battiston (1), Antoine Mandel (2), Irene Monasterolo (3), Franziska Schütze (4), and Gabriele Visentin (1)

Affiliations:
(1) FINEXUS Center for Financial Networks and Sustainability, Department of Banking and Finance, University of Zurich, Andreasstr. 15, 8050 Zürich, Switzerland.
(2) Université Paris 1 Panthéon-Sorbonne, Centre d’économie de la Sorbonne, Maison des sciences économiques, 106-112 Boulevard de l’hôpital, 75647 Paris Cedex 13, France.
(3) Frederick S. Pardee Center for the Study of the Longer-Range Future, Boston University, 67 Bay State Road, Boston, Massachusetts 02215, USA.
(4) Global Climate Forum, Neue Promenade 6, 10178 Berlin, Germany.

Funding:
The work was funded by the EU grants FET Project SIMPOL nr. 610704, FET project DOLFINS nr 640772.