This was part of Systemic Risk and Stress Testing

An analytical framework for assessing climate transition risks

Laurent Clerc, Autorité de contrôle prudentiel et de résolution
Banque de France

Thursday, April 7, 2022

Abstract: This paper proposes an analytical framework to quantify the impacts of climate transition narratives on a consistent set of macroeconomic, sectoral and financial variables required for financial risk assessment. Focusing on transition risks, the modelling framework relies on a suite of models, calibrated on some the high-level reference scenarios of the Network for Greening the Financial System (NGFS). Its modular structure and coverage of variables ensure a comprehensive assessment of the financial implications of disorderly transition scenarios to a low-carbon economy, from the identification of climate-sensitive sectors to the quantification of the impacts on financial risk metrics. An application to France provides estimates of the impacts on financial markets and credit risk parameters. Results indicate that the sectoral disruptions associated with a disorderly transition to a low-carbon economy can be substantial and translate into material financial risks. The study offers further grounds for encouraging policy-makers and financial institutions to support and prepare for an early and orderly transition.