Climate-Finance and Climate Transition Risk: An Assessment of China's Overseas Energy Investments Portfolio

Abstract

The role of development finance institutions in low-income and emerging countries is fundamental to provide long-term capital for investments in climate mitigation and adaptation. Nevertheless, development finance institutions still lack sound and transparent metrics to assess the exposure of their projects to climate risks, as well as their impact on climate action. This information is crucial to allow them to deliver on their mandate, to preserve their financial position and to align beneficiary countries' economies to the climate goals. We contribute to fill in this gap by developing a novel climate stress-test methodology applied to the portfolios of overseas energy projects of two main Chinese policy banks. We estimate their exposure to two types of shocks, i.e. climate policy and balance sheet shocks, for individual energy projects across regions and energy sectors, under milder and tighter climate policy scenarios. Then, we provide several risk metrics. We find that the negative shocks are mostly concentrated on coal and oil projects and vary across regions between 4.2% and 22% of total loans value. Given the current leverage of Chinese policy banks, these losses are not negligible in comparison to banks' capital.

Keywords: Overseas Energy Finance, Climate Transition Risk, Climate Policy Scenarios, Climate Stress-Test, Climate VaR, Climate-Finance

JEL Classification: G01, G11, G32, G33