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Two sides of the same coin: Green Taxonomy alignment versus transition risk in financial portfolios

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  • Alessi, Lucia
  • Battiston, Stefano

Abstract

We develop the first top-down method to estimate the greenness of financial portfolios, in terms of alignment to the EU Taxonomy for sustainable activities. We also develop a method to estimate, at the same time, the portfolio exposure to climate transition risk. We provide sector-level, standardized and transparent coefficients for both estimates, based on definitions of greenness and transition risk that are applicable across countries. We analyse the portfolios of Euro Area investors in 2022, based on the confidential Securities Holdings Statistics of the European Central Bank. We find that, overall, the greenness of Euro Area investors’ portfolios is lower than their exposure to transition risk (2.8% vs. 11.7%).

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  • Alessi, Lucia & Battiston, Stefano, 2022. "Two sides of the same coin: Green Taxonomy alignment versus transition risk in financial portfolios," International Review of Financial Analysis, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:finana:v:84:y:2022:i:c:s1057521922002708
    DOI: 10.1016/j.irfa.2022.102319
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    Cited by:

    1. Davide Radi & Frank Westerhoff, 2024. "The green transition of firms: The role of evolutionary competition, adjustment costs, transition risk, and green technology progress," Papers 2410.20379, arXiv.org.
    2. Collender, Sierra & Gan, Baoqing & Nikitopoulos, Christina S. & Richards, Kylie-Anne & Ryan, Laura, 2023. "Climate transition risk in sovereign bond markets," Global Finance Journal, Elsevier, vol. 57(C).
    3. Helena Redondo & Elisa Aracil, 2024. "Climate‐related credit risk: Rethinking the credit risk framework," Global Policy, London School of Economics and Political Science, vol. 15(S1), pages 21-33, March.
    4. Dafermos, Yannis & Nikolaidi, Maria, 2022. "Greening capital requirements," Greenwich Papers in Political Economy 37779, University of Greenwich, Greenwich Political Economy Research Centre.
    5. Donia Aloui & Brahim Gaies & Rafla Hchaichi, 2023. "Exploring environmental degradation spillovers in Sub-Saharan Africa: the energy–financial instability nexus," Economic Change and Restructuring, Springer, vol. 56(3), pages 1699-1724, June.
    6. Hoepner Andreas G. F. & Schneider Fabiola I., 2022. "EU Green Taxonomy Data – A First Vendor Survey," The Economists' Voice, De Gruyter, vol. 19(2), pages 229-242, December.
    7. Hilbrich, Sören & Berensmann, Kathrin & Artmann, Giovanna & Ashman, Sam & Herbold, Theresa & Lötters-Viehof, Steffen & Monti, Agnese & Paffhausen, Felix & Roigk, Stephanie & Steenkamp, Lee-Ann, 2023. "The implementation of sustainability taxonomies: The case of South Africa," IDOS Discussion Papers 15/2023, German Institute of Development and Sustainability (IDOS).
    8. Pablo Fernández-Arias & Diego Vergara & Álvaro Antón-Sancho, 2023. "Bibliometric Review and Technical Summary of PWR Small Modular Reactors," Energies, MDPI, vol. 16(13), pages 1-15, July.
    9. Ricardo Crisostomo, 2022. "Measuring Transition Risk in Investment Funds," Papers 2210.15329, arXiv.org, revised Dec 2022.
    10. Teti, Emanuele & Etro, Leonardo L. & Pausini, Lorenzo, 2024. "Does greenwashing affect Company's stock Price? Evidence from Europe," International Review of Financial Analysis, Elsevier, vol. 93(C).
    11. Martijn Boermans & Rients Galema, 2023. "Carbon home bias of European investors," Working Papers 786, DNB.
    12. Aloui, Donia & Benkraiem, Ramzi & Guesmi, Khaled & Vigne, Samuel, 2023. "The European Central Bank and green finance: How would the green quantitative easing affect the investors' behavior during times of crisis?," International Review of Financial Analysis, Elsevier, vol. 85(C).
    13. Martijn Boermans, 2022. "A literature review of securities holdings statistics research and a practitioner’s guide," Working Papers 757, DNB.

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    More about this item

    Keywords

    Greenness; Climate transition risk; Climate-related financial disclosures; EU Taxonomy; Green financial flows;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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