Transition risks and market failure: a theoretical discourse on why financial models and economic agents may misprice risk related to the transition to a low-carbon economy

Thomä, Jakob; Chenet, Hugues

doi:10.1080/20430795.2016.1204847

Cited by 71 publications

(20 citation statements)

References 42 publications

(27 reference statements)

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“…To date, policies dealing with climate risks have focused on the provision of climate-related disclosures by companies to market participants (European Commission, 2020;HM Treasury, 2020;TCFD, 2017). Such disclosures are expected to address under-pricing of these risks (Thomä & Chenet, 2017), allowing markets to price them correctly and allocate capital accordingly (Christophers, 2017;Cullen, 2018). However, given the growing market share of passive funds, the efficacy of these policies could be limited, with passive investors buying securities based on index eligibility rather than risk characteristics.…”

Section: Discussion: Implications and Further Researchmentioning

confidence: 99%

Breaking the Bond: Primary Markets and Carbon-Intensive Financing

Wilson

Caldecott

2021

SSRN Journal

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Aligning finance with sustainability is a necessary condition for tackling the environmental and social challenges facing humanity. It is also necessary for financial institutions and the broader financial system to manage the risks and capture the opportunities associated with the transition to global environmental sustainability.The University of Oxford has world-leading researchers and research capabilities relevant to understanding these challenges and opportunities. The Oxford Sustainable Finance Programme (OxSFP) is the focal point for these activities and is situated in the University's Smith School of Enterprise and the Environment. OxSFP is a multidisciplinary research centre working to be the world's best place for research and teaching on sustainable finance and investment.OxSFP is based in one of the world's great universities and the oldest university in the Englishspeaking world. We work with leading practitioners from across the investment chain (including actuaries, asset owners, asset managers, accountants, banks, data providers, investment consultants, lawyers, ratings agencies, stock exchanges), with firms and their management, and with experts from a wide range of related subject areas (including finance, economics, management, geography, data science, anthropology, climate science, law, area studies, psychology) within the University of Oxford and beyond. Since our foundation we have made significant and sustained contributions to the field, including in some of the following areas:• Developing the concept of "stranded assets", now a core element of the theory and practice of sustainable finance.We would like to thank Dariusz Wójcik, Thom Wetzer, Ulf Erlandsson, and Ellen Quigley for discussions, engagement, and feedback on this topic, as well as the internal and external reviewers who provided many insightful comments.

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Section: Discussion: Implications and Further Researchmentioning

confidence: 99%

Breaking the Bond: Primary Markets and Carbon-Intensive Financing

Wilson

Caldecott

2021

SSRN Journal

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“…But incorporating climate-related risk into investment decisions remains a significant challenge. Major obstacles include finding ways to quantify climate-related risks (Bender et al, 2019) and stranded asset potential (Buhr, 2017), limitations of established financial risk models (Thomä & Chenet, 2017) and lack of information (TCFD, 2017;Thomä et al, 2019). Some power sector investors may choose to put faith in technological development to mitigate risk, such as carbon capture and storage from coal plants (Byrd & Cooperman, 2018).…”

Section: Incorporating Climate-related Risk Into Investment Decisionsmentioning

confidence: 99%

“…In order to understand how climate-related risks are factored into decisions to invest in power plants in Southeast Asia, we applied a climate-related risk framework based upon the work of TCFD (2017) and Clapp et al (2017). The framework, shown in Figure 1, follows the literature in categorizing direct and indirect climaterisks as 'physical' and 'transition' risks, respectively (Bender et al, 2019;Clapp et al, 2017;TCFD, 2017; see Thomä & Chenet, 2017).…”

Section: A Framework For Analyzing Climate-related Risksmentioning

confidence: 99%

Perceptions of climate-related risk in Southeast Asia’s power sector

Johnson

Pont²,

Gueguen-Teil³

2020

Climate Policy

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Given the growing international pressure to mitigate climate change and increasing fears around climate impacts, current expectations of continued investment in fossil fuels in Southeast Asia's power sector appear puzzling. This paper explores how power sector investors perceive climate-related risks and how they factor these risks into investment decision-making. In doing so, we seek to explain why countries in Southeast Asia are making plans forand investors are continuing to invest inpredominantly fossil fuel-based power generation at the expense of renewable or clean generation options, and what it would take to substantially shift investment from fossil fuel-based generation into renewable options in the region. Analysis of 17 interviews with industry experts suggests that there is a significant gap between the need to integrate climate-related risks within investor decisionmaking, and the way these risks are currently being integrated and addressed in the Southeast Asia power sector. Climate-related risk appears to be either not a significant factor, ignored in light of other concerns, or only superficially integrated into decision-making. The results of this research point to an urgent need for action targeted at energy-sector investors in the region in order to shed light on climaterelated risks, share information on the likelihood and magnitude of risks, lay out clearly the potential for stranded assets in a 10-15-year time frame, and encourage transparent, open and respectful dialogue and discussion on these critical issues. Key policy insights. Power sector investors in Southeast Asia generally do not consider climate-related risks as a significant factor when making investment decisions.. Dominance of established routines and mindsets lead to omission of in-depth analysis of climate-related risks and skewed perceptions of risk in renewable energy investments.. Pressure to commit large sums through recognized investment channels creates path dependency towards continued financing of large-scale fossil fuel projects.. Financial governance mechanisms generally have very low compliance requirements regarding reporting on and mitigating climate-related risks.. Policy and regulatory action is needed to raise awareness of climate-related risks, lay out potential for stranded assets and create opportunities for investing in renewable energy.

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“…One of the core sources involves a literature review of market studies related to climate accounting services provided by data providers and consultants, two of which the lead author was involved in writing [1,18]. These market studies provide a holistic overview of climate accounting principles as applied by investors, since all investors engaged in climate accounting rely in one form or another on the services from data providers and consultants covered in these market studies.…”

Section: Methodsmentioning

confidence: 99%

A Taxonomy of Climate Accounting Principles for Financial Portfolios

Thomä¹,

Dupré²,

Hayne³

2018

Sustainability

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Climate accounting for financial portfolios has seen growing prominence in the past years, thanks to both private and public sector initiatives. Over 200 financial institutions have conducted some form of portfolio analysis. In the context of this growing prominence, the academic and practitioner's discussion of climate accounting has largely focused on questions of climate data quality and choices for estimation models. Missing in this debate is an analysis of the underlying accounting principles related to climate data. There is no overview of the climate accounting principles and the implications of choosing different principles and rules. This article provides a taxonomy of key accounting choices currently applied for climate accounting of financial portfolios, notably regarding units of accounting, boundaries of accounting, normalization rules, and allocation rules. Based on a review of data providers accounting approaches in practice, as well as sample applications of different accounting principles, it distills key accounting categories and highlights the potential sensitivity of the ultimate results to these choices. The article concludes that climate assessments of portfolios may be equally sensitive to accounting choices as to the quality of underlying data, suggesting more attention and standards are needed.

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Transition risks and market failure: a theoretical discourse on why financial models and economic agents may misprice risk related to the transition to a low-carbon economy

Cited by 71 publications

References 42 publications

Breaking the Bond: Primary Markets and Carbon-Intensive Financing

Breaking the Bond: Primary Markets and Carbon-Intensive Financing

Perceptions of climate-related risk in Southeast Asia’s power sector

A Taxonomy of Climate Accounting Principles for Financial Portfolios

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