Article | Published:

A climate stress-test of the financial system

Nature Climate Change volume 7, pages 283288 (2017) | Download Citation

Abstract

The urgency of estimating the impact of climate risks on the financial system is increasingly recognized among scholars and practitioners. By adopting a network approach to financial dependencies, we look at how climate policy risk might propagate through the financial system. We develop a network-based climate stress-test methodology and apply it to large Euro Area banks in a ‘green’ and a ‘brown’ scenario. We find that direct and indirect exposures to climate-policy-relevant sectors represent a large portion of investors’ equity portfolios, especially for investment and pension funds. Additionally, the portion of banks’ loan portfolios exposed to these sectors is comparable to banks’ capital. Our results suggest that climate policy timing matters. An early and stable policy framework would allow for smooth asset value adjustments and lead to potential net winners and losers. In contrast, a late and abrupt policy framework could have adverse systemic consequences.

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Acknowledgements

The authors would like to thank J. E. Stiglitz and A. C. Janetos for fruitful comments on an early version of the paper, M. D’Errico for precious suggestions on macro-network data from the ECB Data Warehouse, and J. Glattfelder for help on equity holdings data extraction from Orbis. We also would like to thank A. Barkawi, P. Monnin and M. Tanaka for their comments during the Bank of England conference on Climate Change and Central Banking. S.B. acknowledges financial support from the Swiss National Fund Professorship grant no. PP00P1-144689. All the authors acknowledge the support of the European Projects Future and Emerging Technologies (FET) SIMPOL (grant no. 610704) and DOLFINS (grant no. 640772), and the European Project SEI Metrics (grant no. 649982).

Author information

Affiliations

  1. Department of Banking and Finance, University of Zurich, Andreasstr. 15, 8050 Zürich, Switzerland

    • Stefano Battiston
    •  & Gabriele Visentin
  2. Université Paris 1 Panthéon-Sorbonne, Centre d’économie de la Sorbonne, Maison des sciences économiques, 106-112 Boulevard de l’hôpital, 75647 Paris Cedex 13, France

    • Antoine Mandel
  3. Frederick S. Pardee Center for the Study of the Longer Range Future, Boston University, 67 Bay State Road, Boston, Massachusetts 02215, USA

    • Irene Monasterolo
  4. Global Climate Forum, Neue Promenade 6, 10178 Berlin, Germany

    • Franziska Schütze

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Contributions

All authors contributed to the writing of the manuscript, as well as material and analysis tools. G.V. and S.B. also performed the data analysis.

Competing interests

The authors declare no competing financial interests.

Corresponding author

Correspondence to Stefano Battiston.

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DOI

https://doi.org/10.1038/nclimate3255

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