From Climate Stress Testing to Climate Value-at-Risk: A Stochastic Approach

182 Pages Posted: 5 Jul 2023

See all articles by Baptiste Desnos

Baptiste Desnos

Ecole Centrale de Nantes; Audencia Business School

Théo Le Guenedal

Amundi Technology

Philippe Morais

Amundi Institute; Amundi Technology

Thierry Roncalli

Amundi Asset Management; University of Evry

Date Written: July 1, 2023


This paper proposes a comprehensive climate stress testing approach to measure the impact of transition risk on investment portfolios. Unlike most climate stress testing models, which are designed for the banking industry and follow a top-down approach, our framework considers a bottom-up approach and is mainly relevant for the asset management industry. In this paper, we model the distribution function of the carbon tax, provide an explicit specification of indirect carbon emissions in the supply chain, introduce pass-through mechanisms of carbon prices, and compute the probability distribution of potential (economic and financial) impacts in a Monte Carlo setting. Rather than using a single or limited set of scenarios, we use a probabilistic approach to generate thousands of simulated pathways. We can then examine the impact of transition risk at the economic level and analyze inflation, growth and earnings risks at the sector and country level. We also propose a framework for modeling earnings-at-risk and asset-return shocks at the issuer level. Finally, by combining value-at-risk and stress testing approaches, we define appropriate risk measures for managing climate risk in investment portfolios and asset allocation.

Keywords: Climate change, stress testing, value-at-risk, carbon tax, input-output analysis, cost-push price model, dual Leontief matrix, pass-through, indirect emissions, inflation risk, risk contribution, substochastic matrix, Neumann series, directed graph, copula, Monte Carlo simulation

JEL Classification: C6, G11, Q5

Suggested Citation

Desnos, Baptiste and Le Guenedal, Théo and Morais, Philippe and Roncalli, Thierry, From Climate Stress Testing to Climate Value-at-Risk: A Stochastic Approach (July 1, 2023). Available at SSRN: or

Baptiste Desnos

Ecole Centrale de Nantes ( email )


Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312

Théo Le Guenedal

Amundi Technology ( email )


Philippe Morais

Amundi Institute

Amundi Technology

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex

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