Vulnerable Yet Relevant: The Two Dimensions of Climate-Related Financial Disclosure

10 Pages Posted: 23 May 2017

See all articles by Irene Monasterolo

Irene Monasterolo

Boston University; Vienna University of Economics and Business

Stefano Battiston

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

Anthony Janetos

Boston University

Zoey Zheng

Boston University

Date Written: May 22, 2017

Abstract

Market-based solutions to climate change are widely advocated by financial actors and policy-makers in order to foster a smooth transition to a low-carbon economy. A first important limiting factor to this approach is widely recognized to be the imperfect information on investors’ portfolios’ exposure to climate related risks. While better disclosure of climate-relevant information is often recommended as a remedy, the current lack of concise and comparable measures of portfolios’ exposure to climate risk fails to provide major investors with the full incentives to reallocate their portfolio. A second limiting factor arises from the fact that in the context of low-carbon transition, it is not clear how to measure the market share of participants because many economic sectors produce greenhouse gases (GHG) emissions or induce them along the supply chain. The lack of common and concise measures of the relevant market share hampers the ability of policy makers to ensure fair competition policies and the ability of major investors to assess the effects of their own and their competitors’ portfolio reallocation. To address these two gaps, we propose two novel and complementary indices: (i) the “GHG exposure”, capturing the exposure of single investors’ portfolios to climate transition risks; and (ii) “GHG holding”, capturing the market share of each financial actor weighted by its contribution to GHG emissions. We illustrate the use of the indices on a dataset of portfolios of equity holdings and loans in the Euro-Area, and we discuss the policy implications for the low-carbon transition.

Keywords: GHG exposure index, GHG holding index, market-based solutions, climate change, climate-risk disclosure

Suggested Citation

Monasterolo, Irene and Battiston, Stefano and Janetos, Anthony and Zheng, Zoey, Vulnerable Yet Relevant: The Two Dimensions of Climate-Related Financial Disclosure (May 22, 2017). Available at SSRN: https://ssrn.com/abstract=2971987 or http://dx.doi.org/10.2139/ssrn.2971987

Irene Monasterolo (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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

Anthony Janetos

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Zoey Zheng

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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