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Nyhetsartikel21 januari 2022

How to assess the climate risk of financial portfolios?

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Investments in environmentally harmful activities are becoming more and more risky from a financial perspective. European Commission Strategy for financing the transition to a sustainable economy stresses the need to identify and manage sustainability risks and avoid related financial losses. To advance the understanding of climate related risks to financial stability, the JRC has just published a set of scientific papers.

Estimating the exposure of financial portfolios to climate transition risks

Two sides of the same coin: Green Taxonomy alignment versus transition risk in financial portfolios” proposes a methodology to estimate the exposure of financial portfolios to climate transition risk, i.e. the risk arising from the transition to a low carbon economy. For example, there is a different risk in an investment linked to the extraction of coal, which will require significant transformation to align its activity to climate targets, than in an investment linked with manufacturing vehicles, where companies are already producing electric vehicles. The paper analyse the portfolios of Euro Area investors in 2020, and provide sector-level coefficients for transition risk. The paper also proposes a methodology to estimate the share of the economic activities that are currently aligned to the EU Taxonomy for sustainable investments. It provides Taxonomy Alignment Coefficients (TAC) for each economic sector under the climate change mitigation objective using publicly available information, e.g. official statistics, reports of the relevant authorities and agencies, sectoral studies and industry reports.

How to channel private finance to sustainable business

A second focus of the newly available research lies on how to channel private finance to more sustainable businesses. “When do investors go green? Evidence from a time-varying asset-pricing model” analysed the evolution of the greenium, i.e. the risk premium linked to firms' greenness and environmental transparency, in stock returns after the Paris Agreement, the first Global Climate Strike and the announcement of the EU Green Deal.

Evidence of effects related to the Paris Agreement

In the paper “Over with carbon? Investors’ reaction to the Paris Agreement and the US withdrawal”, researchers studied a confidential database of securities holdings of the European Central Bank and provide evidence of several effects related to the Paris Agreement. Results highlight that investors tend to accept lower returns to hold greener assets as well as to reduce their exposure to carbon intensive assets when the transition becomes more tangible.

This research will be included in a publication on climate risk monitoring by the European Systemic Risk Board.

Background

JRC research supports the implementation of the EC Strategy for financing the transition to a green economy, adopted by the Commission in July 2021. Read more about Sustainable finance research at the JRC.

Related Content

Two sides of the same coin: Green Taxonomy alignment versus transition risk in financial portfolios

Over with carbon? Investors’ reaction to the Paris Agreement and the US withdrawal

When do investors go green? Evidence from a time-varying asset-pricing model

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Publiceringsdatum
21 januari 2022