Assessing the impact of climate risks on the financial system

In the wake of 2015 Climate Paris Agreements to limit global temperature below 2°C above pre-industrial levels, many governmental and private stakeholders have advocated for the introduction of policies to mitigate climate change. This would affect directly only the fossil-fuel and utility sector, but it would also expose indirectly many other economic sectors, in particular the energy-intensive sectors. The financial system can be affected due to its exposure to firms in the form of equity shares, bonds holdings and loans. However, the impact of climate policies on the financial system has remained unclear so far. A stress-test to assess climate risks of investments portfolios. An international team of researchers lead by Stefano Battiston, Professor at the Department of Finance of the University of Zurich, has developed a novel network-based climate stress-test methodology to assess climate risks of investments portfolios, conditional to policy scenarios. "Our method allows to extend familiar financial statistics of risk for individual institutions, such as the Value at Risk, to account for the risks deriving from climate change and climate policies both through direct and indirect exposures across the network of financial contracts," says Battiston.