A Climate Stress-Test of the Financial System

Battiston, Stefano; Mandel, Antoine; Monasterolo, Irene; Schuetze, Franziska; Visentin, Gabriele

doi:10.2139/ssrn.2726076

Cited by 114 publications

(171 citation statements)

References 34 publications

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“…The production structure including capital and services is close to the seminal contribution of Barro (1990). The paper topic has parallels to the financial market analysis of carbon exposure and the possibly destabilizing effects of climate change and uncertain policy on the financial system (Battiston et al 2017). Similar to policy private divestment campaigns can affect financial markets and investment behavior.…”

Section: Contribution To the Literaturementioning

confidence: 96%

“…Deviating from first-best optimal solutions, political reality is better characterized by a process in which pending issues like climate change are debated for a period of time while the implementation of concrete policy measures happens suddenly and unexpectedly. 1 These measures may include new government regulations that limit the use of fossil fuels, 2 a change in demand for fossil fuels due to a shift towards subsidized renewable energy, 3 or legal action banning certain polluting or harmful activities. 4 If in a sector asset conversion is constrained by irreversibilities or high adjustment costs, some assets lose part of their value or become completely stranded (McKibben 2011).…”

Section: Policy Uncertaintymentioning

confidence: 99%

“…2 Examples are emission standards for vehicles or heating technologies. 3 These subsidies are broadly used in different countries because carbon pricing is politically difficult or even not feasible (Kalkuhl et al, 2013); they are only second-best and may give rise to time-inconsistency problems, see Rezai and van der Ploeg (2017). 4 Like the decisions on a nuclear phaseout in Germany and Switzerland and the possible ban of diesel vehicles in European cities like Copenhagen; Berlin, and Paris to combat air pollution.…”

Section: Policy Uncertaintymentioning

confidence: 99%

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Stranded Assets: How Policy Uncertainty Affects Capital, Growth, and the Environment

Bretschger

Soretz

2018

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Standard environmental economics prescribes policies which are optimal and implemented immediately. The paper argues that, in reality, environmental policy often deviates from the optimum and implementation is not deterministic but subject to major uncertainty and frequent change. We present a model with a stochastic policy process that affects investors' decisions and the composition of capital. We assume that pollution is reduced by private green services and public abatement. The government subsidizes green services and taxes dirty capital albeit at a rate which may become random, causing unexpected capital write-offs. Tax jumps depend on environmental degradation and the share of green services. We show how policy uncertainty affects capital valuation and how it alters individual portfolios, green services, and economic growth. Terms of use: Documents in EconStor mayJEL Classification: Q52, Q54, O10

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Section: Contribution To the Literaturementioning

confidence: 96%

Section: Policy Uncertaintymentioning

confidence: 99%

Section: Policy Uncertaintymentioning

confidence: 99%

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Stranded Assets: How Policy Uncertainty Affects Capital, Growth, and the Environment

Bretschger

Soretz

2018

SSRN Journal

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“…In the academic literature, several recent papers have experimented with stress tests and models that attempt to shed light on the implications of environmental risks to financial stability. Battiston et al (2016) have examined the exposure of European financial institutions to fossil fuel production and energy-intensive sectors through their portfolios of European and U.S. equity holdings and loans. The authors find that European asset managers have the largest direct exposure to the securities of the fossil fuel production sector and energy-intensive sectors.…”

Section: %mentioning

confidence: 99%

“…They find that the exposures to fossil fuels are approximately 5 percent of total assets for pension funds, 4 percent for insurance companies, and 1.4 percent for banks. Unlike Battiston et al (2016), the Weyzig study focuses solely on fossil fuel exploration and production companies. It concludes that while a carbon bubble is unlikely to threaten overall financial stability, such a shock would be harder to absorb during a period of economic fragility in Europe.…”

Section: %mentioning

confidence: 99%

Stranded Assets: A Climate Risk Challenge

Caldecott¹,

Harnett²,

Cojoianu³

et al. 2016

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Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.

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Carbon emissions and the cost of debt in the eurozone: The role of public policies, climate‐related disclosure and corporate governance

Palea

Drogo

2020

Bus Strat Env

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Over time, investors have become increasingly aware of the risks associated with a transition to a low-carbon economy. This study investigates the association between carbon emissions and the cost of debt financing for a sample of firms from the eurozone in the period 2010-2018. The results provide evidence that the risk premium required by lenders increases with carbon emissions. However, although the most polluting sectors were already charged before the Paris Agreement, and not further penalised in the subsequent period, our results indicate that the less polluting sectors started being charged a higher spread for their emissions only in the period after the Agreement. The Paris Agreement appears to be a turning point around which lenders have become aware of the strong commitment taken by policymakers in fighting climate change. Our findings also suggest that increased levels of disclosure on climate-related issues can mitigate corporate carbon risk. On the other hand, the results are not compelling when we consider the effect of control mechanisms, such as external verification for emissions, board oversight of carbon risk and the presence of emission reduction targets, on the cost of debt. Taken as a whole, the results demonstrate the effectiveness of public policies in driving lenders' allocation decisions as well as the role of climate-related disclosure in mitigating the corporate cost of capital. As such, our findings have important implications for both policymaking in environmental regulation and managerial strategies.

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A Climate Stress-Test of the Financial System

Cited by 114 publications

References 34 publications

Stranded Assets: How Policy Uncertainty Affects Capital, Growth, and the Environment

Stranded Assets: How Policy Uncertainty Affects Capital, Growth, and the Environment

Stranded Assets: A Climate Risk Challenge

Carbon emissions and the cost of debt in the eurozone: The role of public policies, climate‐related disclosure and corporate governance

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