Climate-Related Financial Risk Assessment on Energy Infrastructure Investments

Abstract

This study assesses climate-related financial risks on energy infrastructure investments. We conduct an asset-level and forward-looking risk assessment on three downstream energy assets: natural gas, coal, and solar photovoltaic power plants. We first identify climate risk factors (physical and transition) that an asset is highly exposed to with its specific asset type, geographic location, time frame, and financing structure and build plausible climate risk scenarios using single or multiple risk factors. We then project an energy asset's cash flow and estimate the asset's probability of default under the built scenarios. We compare the financial impacts of varying climate risk scenarios by analyzing the time and size of the losses due to the given default. We observe climate-related financial risks that are systematic and idiosyncratic: some scenarios affect certain energy assets negatively and others positively, while others negatively affect multiple asset types simultaneously. Our comparative case study results also show that renewable energy investments are likely to be more resilient to climate change than fossil fuel-based energy assets.

Keywords: climate risk assessment, financial impact assessment, energy infrastructure investment, project financing, climate risk scenario, cash flow modelling, climate resilience, stranded asset