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FINEXUS: Center for Financial Networks and Sustainability

Nature Climate Change Publication: A Climate Stress-Test of the Financial System

March 27, 2017


Climate change brings new risks for financial investments, in particular for pension funds. An international team coordinated by the Dept. of Banking and Finance of the Univ. of Zurich develops a “climate stress-test” for financial institutions. Results suggest that while better disclosure of climate-relevant financial information can improve risk estimation, the early introduction of stable climate policies is needed to mitigate risk. The article was published in the scientific journal "Nature Climate Change" on Monday, March 27, 2017. Click here to go to the article or here for online infographics.



  • There is growing consensus on the fact that climate change will have adverse effects on society many parts of the planet, e.g. due to increased frequency of floods and droughts, soil desertification, famine and climate induced migration.
  • In the wake of 2016 Climate Paris Agreements to limit global temperature below 2 degrees above pre-industrial levels, many governmental and private stakeholders have advocated for the introduction of policies to mitigate climate change, e.g. a carbon tax to limit greenhouse gas emissions.
  • The introduction of climate policies would affect directly only the fossil-fuel and utility sector, but it would also affect indirectly many other economic sectors, in particular the energy-intensive sectors. The financial system can be affected due to its exposures to firms in the form of equity shares, bonds holdings and loans.
  • However, the impact of climate policies on the financial system has remained unclear so far. Several organizations, including the G20 Financial Stability Board, have called for improving both data and methodologies to better disclose the climate risks faced by public and private investors in the financial markets.


Novelty of research

  • An international team of researchers lead by Prof. Battiston in the Univ. of Zurich has developed a novel climate stress-test methodology to assess climate risks of investments portfolios, conditional to policy scenarios. Their method allows to extend familiar financial statistics of risk for individual institutions (such as the Value at Risk) to account for the risks deriving from climate change and climate policies both through direct and indirect exposures across the network of financial contracts.



  • Results are based on 1) microlevel data on equity holdings of all EU and US listed companies held by individual financial investors (from Bureau Van Dijk Orbis); 2) balance-sheet data for the top 50 listed European banks (from Bureau Van Dijk Bankscope); 3) financial exposures at the sectoral level from the ECB Data Warehouse.



  • Exposures of all financial investors’ types to the fossil sector on their equity portfolios are limited (i.e. 4%-13%). In particular, the direct exposure of the top EU banks to the fossil-fuel and utility sectors is small (i.e. VaR on average 1% of banks’ capital and maximal loss about 7% of capital across banks), including when taking into account amplifications through the network of interbank obligations. This  implies that even severe climate policies would not cause, directly, defaults and systemic domino-effects in the banking system.
  • Combined exposures of financial investors’ equity portfolio to the climate-policy relevant sectors is large (i.e. 45%-47% across types). Moreover, exposures of financial investors to each other also matter because they amplify risk. In particular pension funds hold indirect exposures through their holdings in investment funds.


Policy implications

  • The direct effect of climate policies on the fossil-fuels and utilities sectors is unlikely to cause banks’ defaults nor systemic risk in the financial system. Therefore EU banks should not fear the introduction of climate policies.
  • In the context of the policy discussion around the guidelines from the G20’s Financial Stability Board Task Force on Climate-related Financial Disclosure, the results suggest that the disclosure of climate-relevant financial information is necessary to improve risk estimations and create the right incentives for investors. However, because combined exposures are large, better disclosure may not be sufficient to mitigate risk. The timing and credibility of the implementation of climate policies matter: an early and stable policy framework would allow for a smoother adjustment of asset prices and for the emergence of net winners and losers in the transition to a low-carbon economy. 


Further details on the results of the paper:

Weblink to the paper:

Weblink to infographics:

Correspondence e-mail: stefano.battiston (at)


Publication authors:

Stefano Battiston1, Antoine Mandel2, Irene Monasterolo3, Franziska Schütze4 and Gabriele Visentin1



1. FINEXUS Center for Financial Networks and Sustainability, Department of Banking and Finance, University of Zurich, Andreasstr. 15, 8050 Zürich, Switzerland.

2. Université Paris 1 Panthéon-Sorbonne, Centre d’économie de la Sorbonne, Maison des sciences économiques, 106-112 Boulevard de l’hôpital, 75647 Paris Cedex 13, France.

3. Frederick S. Pardee Center for the Study of the Longer Range Future, Boston University, 67 Bay State Road, Boston, Massachusetts 02215, USA.

4. Global Climate Forum, Neue Promenade 6, 10178 Berlin, Germany.


Funding: The work was funded by the of the EU grants FET Project SIMPOL nr. 610704, FET project DOLFINS nr 640772.