MIT Scenarios for Assessing Climate-Related Financial Risk

Joint Program Report
MIT Scenarios for Assessing Climate-Related Financial Risk
Landry, E., C.A. Schlosser, Y.-H.H. Chen, J. Reilly and A. Sokolov (2019)
Joint Program Report, 72 p., December

Report 339 [Download]

Abstract/Summary:

Climate change has been recognized as a source of risk for the financial sector. The nature of climate change, however, poses some challenges not traditionally encountered by general macro-economic and financial risk assessments. Climate-related risks are slowly evolving and span decades to centuries. This suggests the need for a different approach for evaluating climate-related financial risk than has been used for conventional stress testing of financial institutions. A goal of this paper is to investigate a range of climate policy scenarios to develop various metrics—such as carbon and fossil fuel prices, levels of sectoral production, and estimates of the value of stranded assets associated with a range of energy transitions—that can then be used in further analysis to help identify climate-related financial risk in the specific investment portfolios of individual financial institutions. A second goal is to lay out a set of methods appropriate for evaluating the physical risk of climate change, using an existing set of studies to illustrate challenges and necessary considerations.

Citation:

Landry, E., C.A. Schlosser, Y.-H.H. Chen, J. Reilly and A. Sokolov (2019): MIT Scenarios for Assessing Climate-Related Financial Risk. Joint Program Report Report 339, 72 p., December (http://globalchange.mit.edu/publication/17392)
  • Joint Program Report
MIT Scenarios for Assessing Climate-Related Financial Risk

Landry, E., C.A. Schlosser, Y.-H.H. Chen, J. Reilly and A. Sokolov

Report 

339
72 p., December
2019

Abstract/Summary: 

Climate change has been recognized as a source of risk for the financial sector. The nature of climate change, however, poses some challenges not traditionally encountered by general macro-economic and financial risk assessments. Climate-related risks are slowly evolving and span decades to centuries. This suggests the need for a different approach for evaluating climate-related financial risk than has been used for conventional stress testing of financial institutions. A goal of this paper is to investigate a range of climate policy scenarios to develop various metrics—such as carbon and fossil fuel prices, levels of sectoral production, and estimates of the value of stranded assets associated with a range of energy transitions—that can then be used in further analysis to help identify climate-related financial risk in the specific investment portfolios of individual financial institutions. A second goal is to lay out a set of methods appropriate for evaluating the physical risk of climate change, using an existing set of studies to illustrate challenges and necessary considerations.

Posted to public: 

Tuesday, December 31, 2019 - 14:15