A re-evaluation of the financial risks of the net zero transition

Abstract

This paper examines the potential impact of climate change on financial risk and the uncertainty surrounding the outcomes of different mitigation scenarios. We use a consistent climate stress test model to evaluate the effect of three possible net zero scenarios on companies' valuations and financial investments. We find that the impact of the transition to net zero emissions could vary greatly for the same target (below 2°C) based on how the transition may unfold. We suggest that a wider range of scenarios and assumptions could help to better understand the uncertainty of the effects of climate change and the net zero transition on the financial system and discuss some of the implications.

Keywords: sustainable finance, climate change, stress testing, scenario analysis, risk management, financial risk

JEL Classification: Q51, Q43, G21, G32