Non-banks contagion and the uneven mitigation of climate risk

Régis Gourdel and Matthias Sydow

No 2757, Working Paper Series from European Central Bank

Abstract: This paper develops a framework for the short-term modelling of market risk and shock propagation in the investment funds sector, including bi-layer contagion effects through funds’ cross-holdings and overlapping exposures. Our work tackles in particular climate risk, with a first-of-its-kind dual view of transition and physical climate risk exposures at the fund level. So far, while fund managers communicate more aggressively on their awareness of climate risk, it is still poorly assessed. Our analysis shows that the topology of the fund network matters and that both contagion channels are important in its study. A stress test on the basis of granular short-term transition shocks suggests that the differentiated integration of sustainability information by funds has made network amplification less likely, although first-round losses can be material. On the other hand, there is room for fund managers and regulators to consider physical risk better and mitigate the second round effects it induces, as they are less efficiently absorbed by investment funds. Improving transparency and setting relevant industry standards in this context would help mitigate short-term financial stability risks. JEL Classification: C62, G23, G17, Q54

Keywords: climate finance; investment funds; stress testing; systemic risk (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ban and nep-env
Note: 3210316
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222757

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