Climate risk, a new investment fundamental?

By Svetlana Borovkova, Head of Quantitative Modelling

Climate risk is now firmly on the agenda of financial regulators. In September 2021, the ECB published the results of its wide-ranging climate stress test.

The most important conclusions were that the impact of climate risk can be quite severe, but also that this impact is unevenly distributed among geographical locations and sectors of the economy. On the other hand, this stress test also demonstrated that firms can clearly benefit from adopting climate risk mitigation policies.

Climate risk is an important issue for asset owners and asset managers. Understanding how climate risk impacts a certain firm or a sector of the economy can help investors protect their portfolios against adverse effects of extreme climate events. At the same time, asset owners can choose to tilt their portfolios towards firms that will benefit from the transition to a greener, carbon-neutral economy.