A climate stress-test of the financial system

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

doi:10.1038/nclimate3255

Cited by 517 publications

(154 citation statements)

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“…This can be explained by the market pricing the risk of stranded assets and increasing climate change related regulations, such as cap-and-trade mechanisms as systematic risks for the fossil fuel industry (Ansar et al, 2014;Battiston, Mandel, Monasterolo, Schuetze, & Visentin, 2017;Rubin, 2016). Consequently, being a member of the fossil fuel industry is correlated with higher financial risks.…”

Section: Resultsmentioning

confidence: 99%

Fossil Fuel Divestment Strategies: Financial and Carbon-Related Consequences

Hunt

Weber

2018

Organization & Environment

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Fossil fuel divestment is discussed controversially with regard to its financial consequences and its effect on decarbonizing the economy. Theory and empirical studies suggest arguments for both, financial underperformance and outperformance of divestment. Therefore, our first research objective is to understand the financial effect of divestment. The second objective is to analyze the influence of divestment strategies on the carbon intensity of portfolios.Empirically, our analysis is based on the Canadian stock index TSX 260 for the time between 2011 and 2015. The results of the study suggest higher risk-adjusted returns and lower carbon intensity of the divestment strategies compared to the benchmark. We conclude that divestment is not only an ethical investment approach, but that it is able to address financial risks caused by climate change and, at the same time, is able to reduce the carbon exposure of investment portfolios.

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Section: Resultsmentioning

confidence: 99%

Fossil Fuel Divestment Strategies: Financial and Carbon-Related Consequences

Hunt

Weber

2018

Organization & Environment

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“…Regarding the increased exposure in the particular case of the financial sector, one possible explanation is that portfolios of large banks, hedge funds and pension funds are composed of assets in sectors linked to fossil fuels and linked to the energy sector. In this context, in an analysis of European markets, [63] identified that aggregate exposures of investment funds, insurance and pension funds, banks, other credit institutions and other financial services were close to 32.4 trillion dollars, equivalent to 58.7% of total market capitalization, with a large part of these companies' portfolios being composed of assets from companies related to the energy and fossil fuels sector. As a result, it is natural that major fluctuations in oil prices directly affect European financial institutions, since a large part of their capital is allocated to companies in the energy sector, especially those related to the oil sector.…”

Section: Discussion and Policy Implicationsmentioning

confidence: 99%

“…So, greater dependence on oil prices implies that any possible shock could cause instability in several sectors of the European economy, as oil products are present in key sectors such as transport, medicines, food and petrochemicals, among others, where there are few alternatives [64]. Additionally, [63] found that the largest banks in the Eurozone have higher levels of direct and indirect exposure to sectors that could be affected by that dependence, with possible adverse systemic consequences if such a shock occurs.…”

Section: Discussion and Policy Implicationsmentioning

confidence: 99%

The Exposure of European Union Productive Sectors to Oil Price Changes

Ferreira

Pereira

2020

Sustainability

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Oil is one of the most important products in the world, being used for fuel production but also as an input in several industries. After the oil shocks of the 1970s, which caused great turbulence, the interest in the analysis of this particular product grew. The analysis of the comovements between oil and other assets became a hot topic. In this study, we propose an analysis of how oil price correlates with several industry indexes. The detrended cross-correlation analysis coefficient (ρDCCA) is used, with data from 1992 to 2019, and we analyze not only the correlation between oil and several Euro Stoxx indexes during the whole sample, but also how that correlation evolved for the different decades (1990s, 2000s and 2010s). Naturally, oil and gas are the sectors that correlate the most with crude oil, with correlation coefficients reaching levels higher than 0.6 in some cases. However, the results also indicate that all sectors are now more exposed to oil price variations than in the past, with the financial sector as one of the sectors with the greatest increase in correlation.Sustainability 2020, 12, 1620 2 of 16 importance for the economy as a whole, but also because price shocks are common, having an impact on the economy. Moreover, and because oil is not only a very important raw material but also a non-renewable resource, the study of its behavior, in this case the comovements of its price with stock markets, could go towards a better understanding of how financial stock markets can be related with sustainability (see, for example, [12,13] for some discussion on this topic).In this study we propose an analysis of how oil price correlates with several of the Euro Stoxx industry indexes. The objective is to understand how the correlation differs among 10 different sectorial indexes: oil and gas, basic materials, industrials, consumer goods, health care, consumer services, telecommunications, utilities, financials and technology. Despite the large body of literature analyzing comovements between oil price and other assets, we found some need of work analyzing the possible dynamics of the relationship between crude oil prices and sectoral indexes in the EU. This kind of analysis could contribute to energy policies to reduce European countries' dependence on oil.Despite the existence of several approaches to the study of correlations between oil and different sectors, we propose a different approach. Basing our study on the detrended cross-correlation analysis coefficient (ρDCCA), and with data from 1992 to 2019, we analyse not only the correlation between oil and the chosen indexes during the whole sample, but we also make an analysis for each decade, i.e., the 1990s, 2000s and 2010s. With this, and based on the difference in the correlation between different periods (∆ρDCCA), it is possible to analyze the evolution of correlations over time and understand if those indexes' exposure to possible oil shocks increased or not, something of great importance for all the agents mentioned above.Our main findings point ...

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“…A part of these assets would occur as a result of an already ongoing technological trajectory, irrespective of whether or not new climate policies are adopted [29]. Such risks may not only lead to economic losses and unemployment, but could also affect the market valuation of the companies that own these assets, thus negatively impacting their investors [25,30]. And should China and European countries adopt stringent new climate policies to reach the 2°C target of the Paris Agreement, then the negative impacts on the fossil fuel sector could be amplified [29].…”

Section: Challenges To Meet the Investment Gapmentioning

confidence: 99%

A comparison of low carbon investment needs between China and Europe in stringent climate policy scenarios

Zhou

McCollum

Fricko

et al. 2019

Environ. Res. Lett.

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The radical change in recent global climate governance calls for China and Europe to ramp up their efforts in leading the world to reach the long-term climate goals. By analyzing the results from the state-of-the-art global integrated assessment model, MESSAGEix-GLOBIOM, this paper aims to understand the future levels of financial investment needed for building and maintaining energyrelated infrastructure in the two regions for fulfilling stringent targets consistent with 'well below 2°C'. The results indicate that a rapid upscaling and structural change of these investments towards decarbonization are necessitated by the climate stringent scenarios. China and Europe need to increase their low carbon investments by 65% and 38% in a scenario reaching the 2°target relative to their respective reference scenarios which assume no such target from 2016-2050. In a more stringent climate policy scenario of the 1.5°target, these investment needs will increase by 149% and 79% for China and Europe respectively. Among all the energy sectors, energy efficiency, renewable electricity generation and electricity transmission and distribution are the three largest investing targets for the two regions. However, those investments will not likely be realized without strong policy incentives. Implications for green finance and multilateral cooperation initiatives are discussed in the context of the scenario results.

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A climate stress-test of the financial system

Cited by 517 publications

References 20 publications

Fossil Fuel Divestment Strategies: Financial and Carbon-Related Consequences

Fossil Fuel Divestment Strategies: Financial and Carbon-Related Consequences

The Exposure of European Union Productive Sectors to Oil Price Changes

A comparison of low carbon investment needs between China and Europe in stringent climate policy scenarios

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