A Climate Stress-Test of the Financial System

27 Pages Posted: 3 Feb 2016 Last revised: 12 Jul 2016

Stefano Battiston

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Antoine Mandel

Université Paris I Panthéon-Sorbonne

Irene Monasterolo

Boston University; Vienna University of Economics and Business

Franziska Schuetze

Global Climate Forum

Gabriele Visentin

University of Zurich - Department of Banking and Finance

Date Written: July 11, 2016

Abstract

We propose a novel methodological framework to assess the exposure of the financial system to climate policy risks. We extend the notion of climate policy risk scenarios in order to go beyond the mere fossil fuel production sector and encompass the indirect effects through key economic sectors such as energy-intensive sectors, housing and finance. Our methodology can be applied both bottom-up using micro-economic data and top-down using aggregate macro-economic sectoral data. As an illustration, we conduct and assessment of the exposures of European financial institutions through their portfolio of European and US equity holdings and loans. We find that the direct exposure to fossil fuel production sector and energy-intensive sectors, while limited overall, is important for investment funds. In turn, banks and pension funds have important exposures to investment funds, and thus bear important indirect exposure to fossil fuel. Further, the housing sector can potentially act as a trigger of a shock which then amplifies through the financial system.

Keywords: climate stress-test, climate policy risk, decarbonization, stress-test, stranded assets, carbon risk, climate-sensitive sectors

JEL Classification: C15, C23, G20, G21, G22, G23, G24, G28, H20, Q20, Q28, Q43, Q48

Suggested Citation

Battiston, Stefano and Mandel, Antoine and Monasterolo, Irene and Schuetze, Franziska and Visentin, Gabriele, A Climate Stress-Test of the Financial System (July 11, 2016). Available at SSRN: https://ssrn.com/abstract=2726076 or http://dx.doi.org/10.2139/ssrn.2726076

Stefano Battiston

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Antoine Mandel

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

Irene Monasterolo

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Franziska Schuetze

Global Climate Forum ( email )

Gabriele Visentin (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse, 15
Zürich, 8050
Switzerland

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