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A Climate Risk Assessment of Sovereign Bonds' Portfolio

Irene Monasterolo

A 2°C aligned transition could generate opportunities for sustainable growth, competitiveness and financial stability. Nevertheless, policy uncertainty creates new sources of risks. Traditional financial and climate economics models are not able to price countries’ (mis)alignment with the 2°C target. We develop a novel climate stress-test methodology to price climate transition risks and opportunities in individual financial contracts and we apply it to the Austrian National Bank’s portfolio. First, we develop asset-specific models to price in climate transition risk in today’s value of equity, loans, corporate, sovereign bonds under feasible climate policy scenarios by 2030. Then, we introduce the climate spread metric and we estimate the changes in sovereign bonds’ value by 2030, considering country-specific fiscal and debt conditions, and the carbon-intensity of their GDP and revenues. We focus on sovereign bonds because they provide a proxy of countries’ competitiveness and financial stability. Finally, we identify the largest gains and losses for investors that could have systemic effects. The alignment to a credible 2°C trajectory can strengthen the country’s fiscal and financial position, while a misalignment to 2°C trajectory can increase sovereign bonds’ yield (climate spread). Negative shocks are induced by the inability of policy makers to timely introduce effective policies, and of investors to timely adapt their business. Largest negative shocks (losses) are associated to carbon-intensive activities, while positive shocks (gains) are associated to low-carbon ones. Our analysis is intended to support decision-makers' understanding of the conditions for the onset of climate-related financial risk and strategies for their mitigation.

Speaker: Irene Monasterolo, Vienna University of Economics and Business

Monday, 04/22/19


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Stanford University Energy Seminar

Huang Science Center
NVIDIA Auditorium
Stanford, CA 94305

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