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Measuring Transition Risk in Investment Funds

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  • Ricardo Crisóstomo

Abstract

We develop a comprehensive framework to measure the impact of the climate transition on investments portfolios. Our analysis is enriched by including geographical, sectorial, company an ISIN-level data o assess transition risk. We find that investment funds suffer a moderate 5.7% loss upon materialization of a high transition risk scenario. However, the risk distribution is significantly left-skewed, with the worst 1% funds excperiencing an average loss of 21.3%. Imnterms of asst classes, equities are the worst performers (12.7%), followed by corporate bonds (5.6%) and government bonds (-4.8%). We discriminate among financial instruments by considering the carbon footprint of specific counterparties and the credit rating, duration, convexity and volatility of individual exposures. We find that sustainable funds are less exposed to transitions risk and perform better than the overall fund sector in the low-carbon transition, validating their choice as green investments

Suggested Citation

  • Ricardo Crisóstomo, 2023. "Measuring Transition Risk in Investment Funds," CNMV Working Papers CNMV Working Papers no. 8, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    • Handle: RePEc:cnv:wpaper:dt_81en
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    References listed on IDEAS

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    More about this item

    Keywords

    Climate change; Low-carbon transition; Asset allocation; Investment funds; NGFS scenarios;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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