Measuring Transition Risk in Investment Funds

41 Pages Posted: 1 Jun 2023

See all articles by Ricardo Crisóstomo

Ricardo Crisóstomo

Comisión Nacional del Mercado de Valores (CNMV); National Distance Education University (UNED)

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Date Written: November 1, 2022

Abstract

We develop a comprehensive framework to measure the impact of the climate transition on investment portfolios. Our analysis is enriched by including geographical, sectoral, company and ISIN-level data to assess transition risk. We find that investment funds suffer a moderate 5.7% loss upon materialization of a high transition risk scenario. However, the risk distribution is significantly left-skewed, with the worst 1% funds experiencing an average loss of 21.3%. In terms of asset classes, equities are the worst performers (-12.7%), followed by corporate bonds (-5.6%) and government bonds (-4.8%). We discriminate among financial instruments by considering the carbon footprint of specific counterparties and the credit rating, duration, convexity and volatility of individual exposures. We find that sustainable funds are less exposed to transition risk and perform better than the overall fund sector in the low-carbon transition, validating their choice as green investments.

Keywords: Climate change, Low-carbon transition, Asset allocation, Investment funds, NGFS scenarios

JEL Classification: G11, G12, G17, G32, Q54

Suggested Citation

Crisóstomo, Ricardo, Measuring Transition Risk in Investment Funds (November 1, 2022). CNMV Working Paper No. 81, Available at SSRN: https://ssrn.com/abstract=4465908 or http://dx.doi.org/10.2139/ssrn.4465908

Ricardo Crisóstomo (Contact Author)

Comisión Nacional del Mercado de Valores (CNMV) ( email )

C/ Edison, 4
Madrid, Madrid 28006
Spain

National Distance Education University (UNED)

Calle Bravo Murillo, 38
Madrid, Madrid 28015
Spain

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