The exposure of financial institutions to risks from a transition to a low-carbon economy

This workshop shall address some of the limitations in current modelling approach, with a focus on transition risks. The programme will be divided into two consecutive sessions: Session I focuses on scenario applications for evaluating transition risks for financial institutions and Session II is orientated around scenario calibration and modelling methodologies.
Contributions from: Gregor Semieniuk – UMASS;
Rick Van Der Ploeg – University of Oxford;
Edo Schets -Bank of England;
Stephane Dees – Banque de France;
Ulrich Volz – SOAS
Stefano Battiston – UZH
David Carlin – UNEP-FI
Maarten Vleeschhouwer -2 Degrees Investing Initiative
Christophe McGlade – IEA
Christoph Bertram – PIK
Massimo Tavoni – PoliMi), Alex Koberle (Imperial College London), James Edmonds (PNNL), Michael Grubb (UCL) and Jean-Francois Mercure (University of Exeter)

Assessing forward-looking climate risks in investors’ portfolios: from theory to practice

Climate-related financial risk is characterised by endogeneity and deep uncertainty. The inadequacy of standard financial risk approaches to deal with these dimensions is a challenge for a smooth transition to a low-carbon economy. Across the last five years, we have developed a stream of work addressing this issue using a framework for climate financial risk management under uncertainty. This framework has been applied to the analysis of climate risk of financial portfolios, in collaboration with financial supervisors.

With this project, we aim to mainstream such a framework in microprudential and macroprudential policies implemented by financial supervisors and financial institutions belonging to the NGFS. We have engaged with relevant NGFS stakeholders through bilateral meetings, focus groups, and international conferences to co-develop narratives related to two main questions:

  • How can the available scientific knowledge on climate change mitigation be best applied to identify relevant scenarios of disorderly low-carbon transition?
  • What are the implications of scenario selection for investor decisions and for financial stability?

We found there is great importance to foster central banks’ and financial regulators’ understanding about:

  • Climate change mitigation scenarios (e.g., those co-developed and used by the NGFS), their limits and opportunities, and the conditions to use them to inform climate stress tests exercises;
  • The endogeneity of climate-related financial risks in climate stress test; and
  • The conditions for finance to be a driver or a barrier to the transition.

NGFS Scenarios Portal

Changes to our climate are unprecedented and so past data are a poor guide to the risks that may materialise in the future. The NGFS scenarios provide a framework to assess and manage the future financial and economic risks that changes to our climate might bring. They provide a coherent set of transition pathways, climate impact projections, and economic indicators at country-level, over a long time horizon and under varying assumptions. The NGFS scenarios provide a foundation for scenario analysis across many institutions, creating much-needed consistency and comparability of results.