Asset-Level Climate Physical Risk Assessment and Cascading Financial Losses

25 Pages Posted: 14 Apr 2022 Last revised: 6 Sep 2022

See all articles by Giacomo Bressan

Giacomo Bressan

WU Vienna University of Economics and Business

Anja Duranovic

EDHEC Business School

Irene Monasterolo

EDHEC Business School

Stefano Battiston

University of Zurich - Department of Banking and Finance; Ca Foscari University of Venice

Date Written: March 20, 2022

Abstract

The physical component of climate-related financial risk attracts increasing attention of scholars and practitioners. Yet, science-based and transparent solutions to assess and price climate physical risks are still missing. We provide an asset-level methodology that covers all the steps to compute how climate physical risks trans- late into economic and financial risks for investors. Asset-level shocks are computed conditional to the geolocation of firms’ assets, such as productive plants, their exposure to both chronic and acute impacts (hurricanes), and across any chosen set of IPCC climate scenarios. We illustrate the methodology in an application to the equity portfolios of European investors that are exposed to listed firms owing productive plants located in Mexico. We show that using asset-level data, as opposed to aggregate firm data, can lead to over 53% increase in estimated portfolio losses.

Keywords: Geolocalized physical assets, climate physical risk, cascading losses, equity value adjustment, Climate Discount Dividend Model, portfolio losses.

JEL Classification: G00, G32, Q54

Suggested Citation

Bressan, Giacomo and Duranovic, Anja and Monasterolo, Irene and Battiston, Stefano, Asset-Level Climate Physical Risk Assessment and Cascading Financial Losses (March 20, 2022). Available at SSRN: https://ssrn.com/abstract=4062275 or http://dx.doi.org/10.2139/ssrn.4062275

Giacomo Bressan

WU Vienna University of Economics and Business ( email )

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

Anja Duranovic

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Irene Monasterolo (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Stefano Battiston

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

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