Taming the Green Swan: How to improve climate-related financial risk assessments

Julia Anna Bingler () and Chiara Colesanti Senni ()
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Julia Anna Bingler: Center of Economic Research (CER-ETH), ETH Zurich, Switzerland

No 20/340, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: Climate-related financial risks might have the potential to trigger the next systemic financial crisis, as recently stated by the Bank of International Settlements. In consequence, understanding these so-called Green Swan risks should be a key priority in financial decision-making and supervision. However, a systematic approach and a comprehensive theory on climate-adjusted financial risk metrics is still missing. This study is a first step to fill this gap, with a focus on transition risks. Drawing on insights from climate science, economics and finance research, we derive a set of important criteria to ensure that climate risk tools provide high quality, comparable, and decisionrelevant results. We then use a sample of 16 climate transition risk tools and conduct two lines of research: First, by aid of descriptive analysis, we assess the tools’ coverage of risk sources and financial assets, their inputs (i.e. underlying climate scenarios), and their outputs (i.e. climate-adjusted financial metrics). Second, we use the previously defined criteria for an in-depth analysis of the quality, comparability and decision-relevance of the tools. The results will be presented at the individual tool level, and at the meta level. Based on the results of our descriptive and criteria-based analysis, we derive potential next steps for tool provider, conclusions for potential tool users, and guidelines for supervisory authorities. The analysis could be used as starting point for building a comprehensive theory of meaningful climate-related financial risk indicators, aid practitioners to select the tools best suited to their needs and use cases, and inform regulatory processes on financial climate risk assessment principles.

Keywords: Financial risk models; Financial pricing models; Transition risks; Climate risk tools; Climate-adjusted financial risk indicators (search for similar items in EconPapers)
JEL-codes: C83 D53 D81 G12 G32 Q54 (search for similar items in EconPapers)
Pages: 155 pages
Date: 2020-07
New Economics Papers: this item is included in nep-env, nep-hme and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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