Asset-Level Climate Physical Risk Assessment and Cascading Financial Losses

38 Pages Posted: 14 Apr 2022

See all articles by Giacomo Bressan

Giacomo Bressan

WU Vienna University of Economics and Business

Anja Duranovic

WU Vienna University of Economics and Business

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

We develop a methodological framework for asset-level climate physical risk assessment that connects for the first time asset-level information (financial, extra-financial and climate), to firms’ revenues, macroeconomic dynamics, financial valuation and investor’s risk. We combine the acute and chronic impacts of climate change. Shocks on physical assets are translated into adjustments in the financial valuation of the equity contracts by means of a Climate Dividend Discount Model, and then into an adjustment of investors’ Expected Shortfall. We apply the methodology to the assessment of cascading risk for European investors who hold equities of firms that have assets located in Mexico and exposed to hurricanes. Results confirm the importance of the asset-level approach for financial risk assessment. While expected annual impacts of chronic risk at sector level are generally low (-1.29% on average), important shocks emerge when we consider acute impacts on individual assets, and higher return periods (RP), reaching up to -13.07% for RP 250.
In addition, the Expected Shortfall of the investor increases considerably up to -12.48% for RP 250. Thus, comprehensive asset-level physical risk assessment should be a main concern for investors and financial supervisors.

Keywords: Geolocalized physical assets, climate physical risk, cascading losses, equity holdings, Climate Discount Dividend Model, Expected Shortfall.

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

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
797
Abstract Views
1,962
rank
42,970
PlumX Metrics