The double materiality of climate physical and transition risks in the euro area

62 Pages Posted: 11 Oct 2021 Last revised: 14 Apr 2022

See all articles by Régis Gourdel

Régis Gourdel

WU Vienna University of Economics and Business

Irene Monasterolo

EDHEC Business School

Nepomuk Dunz

WU Vienna; World Bank

Andrea Mazzocchetti

Ca' Foscari University of Venice

Laura Parisi

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2021

Abstract

The analysis of the conditions under which, and extent to which climate-adjusted financial risk assessment affects firms’ investment decisions in the low-carbon transition, and the realisation of the climate mitigation trajectories, still represent a knowledge gap. Filling this gap is crucial to assess the “double materiality” of climate-related financial risks. By tailoring the EIRIN Stock-Flow Consistent model, we provide a dynamic balance sheets assessment of climate physical and transition risks for the euro area, using the climate scenarios of the Network for Greening the Financial System (NGFS). We find that an orderly transition achieves important co-benefits already in the mid-term, with respect to carbon emissions abatement, financial stability, and economic output. In contrast, a disorderly transition can harm financial stability, thus limiting firms’ capacity to invest in low-carbon activities that could decrease their exposure to transition risk and help them recover from climate physical shocks. Importantly, investors’ climate sentiments, i.e. their anticipation of the impact of the carbon tax across NGFS scenarios, play a key role for smoothing the transition in the economy and finance. Our results highlight the importance for financial supervisors to consider the role of firms and investors’ expectations in the low-carbon transition, in order to design appropriate macro-prudential policies for tackling climate risks.

Keywords: climate physical risk; climate transition risk; Network for Greening the Financial System scenarios; double materiality; Stock-Flow Consistent model.

JEL Classification: E44, G28, Q54

Suggested Citation

Gourdel, Régis and Monasterolo, Irene and Dunz, Nepomuk and Mazzocchetti, Andrea and Parisi, Laura, The double materiality of climate physical and transition risks in the euro area (October 10, 2021). Available at SSRN: https://ssrn.com/abstract=3939895 or http://dx.doi.org/10.2139/ssrn.3939895

Régis Gourdel

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1, Building D1, 3rd Floor
Vienna, 1020
Austria

Irene Monasterolo (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Nepomuk Dunz

WU Vienna ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Andrea Mazzocchetti

Ca' Foscari University of Venice ( email )

Laura Parisi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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