Taming the Green Swan: How to improve climate-related financial risk assessments

156 Pages Posted: 22 Mar 2021

See all articles by Julia Anna Bingler

Julia Anna Bingler

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Chiara Colesanti Senni

ETH Zürich

Date Written: 2020


Climate-related financial risks might have the potential to trigger the next systemic financial crisis, as recently stated by the Bank for International Settlements. In consequence, understanding these so-called Green Swan risks should be a key priority in financial decision-making and supervision. However, a systematic approach and a comprehensive theory on climate-adjusted financial risk metrics is still missing. This study is a first step to fill this gap, with a focus on transition risks. Drawing on insights from climate science, economics and finance research, we derive a set of important criteria to ensure that climate risk tools provide high quality, comparable, and decision-relevant results. We then use a sample of 16 climate transition risk tools and conduct two lines of research: First, by aid of descriptive analysis, we assess the tools’ coverage of risk sources and financial assets, their inputs (i.e. underlying climate scenarios), and their outputs (i.e. climate-adjusted financial metrics). Second, we use the previously defined criteria for an in-depth analysis of the quality, comparability and decision-relevance of the tools. The results will be presented at the individual tool level, and at the meta level. Based on the results of our descriptive and criteria-based analysis, we derive potential next steps for tool provider, conclusions for potential tool users, and guidelines for supervisory authorities. The analysis could be used as starting point for building a comprehensive theory of meaningful climate-related financial risk indicators, aid practitioners to select the tools best suited to their needs and use cases, and inform regulatory processes on financial climate risk assessment principles.

Keywords: Financial risk models, Financial pricing models, Transition risks, Climate risk tools, Climate-adjusted financial risk indicators, Criteria-based analysis, Forward-looking scenario analyses, Investment decisions under deep uncertainty

JEL Classification: C83, D53, D81, G12, G32, Q54

Suggested Citation

Bingler, Julia Anna and Colesanti Senni, Chiara, Taming the Green Swan: How to improve climate-related financial risk assessments (2020). Available at SSRN: https://ssrn.com/abstract=3795360 or http://dx.doi.org/10.2139/ssrn.3795360

Julia Anna Bingler (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092

Chiara Colesanti Senni

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
+41766062605 (Phone)

HOME PAGE: http://www.resec.ethz.ch/people/person-detail.html?persid=220754

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