The Heat Is on: A Framework for Measuring Financial Stress Under Disruptive Energy Transition Scenarios

By R. Vermeulen, Edo Schets, Melanie Lohuis, Barbara Kolbl, D. Jansen, Willem Heeringa. Social Science Research Network, 2019

112 citations recorded by the source corpus.

This paper presents a comprehensive framework for analyzing financial stress under scenarios with a disruptive transition to a low-carbon economy. This stress testing framework is designed to be readily applied by macroprudential supervisors or financial institutions. First, we construct stress scenarios using two dimensions: climate policy and energy technology. Then, we rely on various modeling approaches to derive macroeconomic and industry-specific implications. These approaches include a novel methodology for capturing industry-specific transition risks. Third, we disaggregate EUR 2.3 trillion in assets of more than 80 Dutch financial institutions by industry. Finally, our calculations show that financial losses can be sizeable, as portfolio values can decline by up to 11%. These outcomes suggest that climate-transition risks warrant close and timely attention from a financial stability perspective.

View Paper: https://www.semanticscholar.org/paper/48bf7c6e2df422b19d7d1d7cbd0e6c88ef4319d7

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Citations in the corpus

• Central bank mandates, sustainability objectives and the promotion of green finance (2019, background): “…De Nederlandsche Bank has implemented a macroprudential climate stress test, focusing on the energy transition and identifying mining, petrochemical and utilities industries as the most vulnerable sectors that would could cause sizable losses for the financial system (Vermeulen et al., 2018).”