Irene Monasterolo gave a Seminar entitled “A Climate Risk Assessment of Sovereign Bonds’ Portfolio” at the Stanford University’s Energy Seminar series.
A 2°C aligned transition could generate opportunities for sustainable growth, competitiveness and financial stability. Nevertheless, a disordered low-carbon transition could create new sources of uncertainties and financial risks for investors. Traditional financial and credit risk models are not able to price portfolios’ (mis)alignment with the 2°C target. Irene Monasterolo and Stefano Battiston are developing a novel climate risk assessment methodology to price climate transition risks in the value of individual financial contracts by developing asset-specific (e.g., sovereign bonds) climate financial pricing models under feasible climate policy scenarios by 2030. Then, by building on the financial network-based climate stress-test by Battiston et al. (2017), Monasterolo and Battiston introduce climate risk in standard financial risk metrics and compute the climate Value at Risk and the climate spread and assess the largest losses on investor’s portfolios that could have systemic financial instability effects. Their approach is modular and works with forward looking climate risk scenarios and with micro-level financial and emissions data. They apply it to the Austrian National Bank’s non-monetary policy portfolio and estimate the changes in sovereign bonds’ value by 2030, considering country-specific fiscal and debt conditions, and the carbon-intensity of their GDP and revenues. Monasterolo and Battiston find that largest negative shocks (losses) are associated to carbon-intensive activities, while positive shocks (gains) are associated to low-carbon ones. Overall, the alignment to a credible 2°C trajectory can strengthen the country’s fiscal and financial position, while a misalignment to 2°C trajectory can increase sovereign bonds’ yield (climate spread). Their analysis is intended to support decision-makers’ understanding of the conditions for the onset of climate-related financial risk and strategies for their mitigation.
Video and slides available at: