A Climate Stress-Test of the Financial System

Battiston, S., Mandel, A., Monasterolo, I., Schütze, F., & Visentin, G. (2017). A Climate stress-test of the financial system. Nature Climate Change, 7(4), 283–288. https://doi.org/doi:10.1038/nclimate3255

Posted: 3 Feb 2016 Last revised: 11 Sep 2020

See all articles by Stefano Battiston

Stefano Battiston

University of Zurich - Department of Banking and Finance; Ca Foscari University of Venice

Antoine Mandel

Climate Finance Alpha; Université Paris I Panthéon-Sorbonne

Irene Monasterolo

EDHEC Business School

Franziska Schuetze

DIW Berlin; Global Climate Forum

Gabriele Visentin

University of Zurich - Institute of Mathematics

Date Written: March 27, 2017

Abstract

The urgency of estimating the impact of climate risks on the financial system is increasingly recognized among scholars and practitioners. By adopting a network approach to financial dependencies, we look at how climate policy risk might propagate through the financial system. We develop a network-based climate stress-test methodology and apply it to large Euro Area banks in a ‘green’ and a ‘brown’ scenario. We find that direct and indirect exposures to climate-policy-relevant sectors represent a large portion of investors’ equity portfolios, especially for investment and pension funds. Additionally, the portion of banks’ loan portfolios exposed to these sectors is comparable to banks’ capital. Our results suggest that climate policy timing matters. An early and stable policy framework would allow for smooth asset value adjustments and lead to potential net winners and losers. In contrast, a late and abrupt policy framework could have adverse systemic consequences.

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 Mandel, Antoine and Monasterolo, Irene and Schuetze, Franziska and Visentin, Gabriele, A Climate Stress-Test of the Financial System (March 27, 2017). Battiston, S., Mandel, A., Monasterolo, I., Schütze, F., & Visentin, G. (2017). A Climate stress-test of the financial system. Nature Climate Change, 7(4), 283–288. https://doi.org/doi:10.1038/nclimate3255, 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

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

Antoine Mandel

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

Climate Finance Alpha ( email )

20 rue de Vintimille
PARIS 9E ARRONDISSEMENT, 75009

Irene Monasterolo

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Franziska Schuetze

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Global Climate Forum ( email )

Gabriele Visentin (Contact Author)

University of Zurich - Institute of Mathematics ( email )

Switzerland

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