Measuring Transition Risk in Investment Funds

Ricardo Crisóstomo

CNMV Working Papers from CNMV- Spanish Securities Markets Commission - Research and Statistics Department

Abstract: We develop a comprehensive framework to measure the impact of the climate transition on investments portfolios. Our analysis is enriched by including geographical, sectorial, company an ISIN-level data o 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 excperiencing an average loss of 21.3%. Imnterms of asst 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 transitions 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 (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 G32 Q54 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ene, nep-env and nep-rmg
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Working Paper: Measuring Transition Risk in Investment Funds (2022)
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