The effects of climate transition risk on an investment portfolio

This paper introduces a method for climate change stress testing for financial institutions. Assuming a portfolio of equities and corporate bonds of European companies, this method can assess how the portfolio value changes under a transition toward a carbon-free economy. We use the current policies and delayed transition scenarios of the Network for Greening the Financial System to project transition vulnerability factors, as introduced by the Dutch central bank. These factors are applied to project equity prices and corporate bond ratings over the period 2024–50. The stress test reveals a strong decline in equity prices and downgrades of bonds for the chemicals, energy, gas and air conditioning supply, and transport sectors. Financial institutions and legal, accounting and consultancy firms are less severely hit by transition measures.