Climate Financial Risks: Assessing Convergence, Exploring Diversity

Central banks, financial supervisors, asset managers and investors are increasingly aware of the risks related to climate change, and are considering the integration of climate risk metrics into their risk management processes. However these metrics are provided by a variety of sources using different methodologies and with results expressed in a variety of units and scales. This makes it difficult to compare different providers and their results.

This discussion note from the Council on Economic Policies is the first study to examine how climate-related transition risks are assessed across different providers of risk metrics. The authors find that climate risk assessments of individual companies across metrics is diverse, but with more agreement on companies most and least exposed to transition risks.

The analysis involved an assessment of the climate-related financial risk to 287 companies represented in the European Central Bank’s corporate bond portfolio, spread across 10 sectors. The assessments were made by 13 providers of risk metrics and these different outputs were compared by ranking each firm in terms of risk exposure within each provider’s results, and then comparing the rankings to allow comparison across different units and scales.

After describing the data sources and methodology, the paper explores the convergence between metric providers on the exposure to climate risk of the companies in the sample. Convergence among providers was examined across 12 separate risk metrics and rankings produced by the same metric under different transition scenarios were also examined.

The results show that risk assessments of individual companies are largely heterogeneous, differing according to methodology, assumptions used and data input, including temperature targets and the time horizon of the scenario employed. However rankings tend to converge on which firms are most exposed to climate transition risks (such as fossil fuel companies) and least exposed (such as renewables). In other words, while the results of assessments of most companies are diverse, there is more agreement at the extremes.

The paper concludes with recommendations for central banks and supervisors, and for investors. Assessments should use a set of metrics to assess exposure to climate transition risk rather than just a single one, the authors suggest, and it is important to understand the underlying methodology and the assumptions behind the scenario used.