Climate-Related Financial Risk Assessment on Energy Infrastructure Investments

59 Pages Posted: 25 Feb 2022 Last revised: 7 Sep 2023

See all articles by Soh Young In

Soh Young In

Korea Advanced Institute of Science & Technology (KAIST); Stanford University - School of Engineering

Berk Manav

Stanford University - Department of Civil and Environmental Engineering

Clothilde M.A. Venereau

Stanford University

Luis Enrique Cruz Rodriguez

Stanford University

John Weyant

Stanford University

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

Suggested Citation

In, Soh Young and Manav, Berk and Venereau, Clothilde M.A. and Cruz Rodriguez, Luis Enrique and Weyant, John, Climate-Related Financial Risk Assessment on Energy Infrastructure Investments. Available at SSRN: https://ssrn.com/abstract=4043744 or http://dx.doi.org/10.2139/ssrn.4043744

Soh Young In (Contact Author)

Korea Advanced Institute of Science & Technology (KAIST) ( email )

291 Daehak-ro, Yuseong-gu
Daejeon, 34141
Korea, Republic of (South Korea)

Stanford University - School of Engineering ( email )

Stanford, CA 94305-9025
United States

Berk Manav

Stanford University - Department of Civil and Environmental Engineering ( email )

CA
United States

Clothilde M.A. Venereau

Stanford University ( email )

Stanford, CA 94305
United States

Luis Enrique Cruz Rodriguez

Stanford University ( email )

Stanford, CA 94305
United States

John Weyant

Stanford University ( email )

Stanford, CA 94305
United States

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