CLIMAFIN Handbook: Pricing Forward-Looking Climate Risks Under Uncertainty

31 Pages Posted: 8 Nov 2019

See all articles by Stefano Battiston

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

Date Written: October 28, 2019

Abstract

Aligning finance to sustainability requires methodologies to price forward-looking climate risks and opportunities in financial contracts and in investors’ portfolios. Traditional approaches to financial pricing models cannot incorporate the nature of climate risk (i.e. deep uncertainty, non-linearity and endogeneity), and of financial risks (interconnectedness and complexity). To fill this gap, we developed a transparent, science-based framework to assess and price climate financial risks under uncertainty, the CLIMAFIN tool. It embeds climate scenarios adjusted financial pricing models (for equity holdings, sovereign and corporate bonds), climate scenarios conditioned risk metrics (such as the Climate Spread and the Climate Value-at-Risk). These allow us to introduce forward-looking climate risk scenarios in the valuation of counterparty risk, in the probability of default and largest losses on investors’ portfolios. This handbook is intended to support investors in the assessment of forward-looking climate risks in their portfolios and in the identification of portfolios’ risk management strategies, and financial supervisors in the analysis of risk exposures that could have implications for systemic risk and in the design of prudential measures to mitigate such risk.

Keywords: CLIMAFIN, forward-looking climate transition risk, climate deep uncertainty, financial contracts, financial pricing models, Climate Spread, Climate Value at Risk, Climate Stress-test

JEL Classification: G01, G11, G32, G33

Suggested Citation

Battiston, Stefano and Mandel, Antoine and Monasterolo, Irene, CLIMAFIN Handbook: Pricing Forward-Looking Climate Risks Under Uncertainty (October 28, 2019). Available at SSRN: https://ssrn.com/abstract=3476586 or http://dx.doi.org/10.2139/ssrn.3476586

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 (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

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