Navigation auf


FINEXUS: Center for Financial Networks and Sustainability

Climate change and finance: metrics to assess risks and opportunities

Climate change and finance: metrics to assess risks and opportunities

PhD and Master-level course; Spring semester.




Climate change is considered as one of the most important challenge for humanity in the next decades. What are the risks for public and private finance? How can the financial sector contribute to climate change mitigation and adaptation? 
In the wake of the 2015 Paris Agreement on Climate Change there has been growing attention by financial supervisors and central bankers on the potential implications of climate risk for financial stability. In particular, the Financial Stability Board and the European Commission have set out initiatives to improve the climate risk disclosure, create a taxonomy of green assets and foster the awareness of existing metrics for climate-related financial risk. As a result, practitioners of both public and private financial institutions are increasingly interested in the implications for risk management of both climate-induced physical risk and policy risks associated with the transition to the low carbon economy. 

Learning Outcome

This intensive block seminar course draws from the recent developments on science-based climate-related financial metrics and provides the students with (i) an understanding of the main notions, main actors and open issues in climate financial risk, (ii) a first-hand know-how on the computation of metrics of climate financial risk on empirical portfolio data, and (iii) ability to assess their implications for policy and risk management.



Day 1: From climate science to climate economics

Lecture 1. 11:00 - 12:30 Climate Risk
•    Climate change and finance: views among policy makers and financial industry practitioners about financial risk related to climate change: G20 TCFD, IMF, EC, ECB, NGFS.
•    Summary of main result from IPCC reports. Climate tipping points. Global warming: average in time and space versus extreme values. Climate mitigation versus adaptation. 
•    Climate-related financial risk. Transmission channels of climate-related risk into financial portfolios.

Classwork 1.  13:00 – 14:30
Throughout all classwork sessions students are encouraged to work in small teams, unless specified otherwise. In this session they:
•    Examine documentation about selected case-studies of climate physical risk (hazards/policy/market) that illustrate specific channels through which physical risk can materialize as financial loss. 
•    Draw flow diagram (e.g. in PowerPoint or other software or by hand) of possible events leading to financial losses, draw the network of actors and risk exposures, look up and report available estimates of financial losses in a table, comment on financial implications for the actors involved. Drawing, the table and the comments should be included in a short report.  
•    Report on Classwork 1: to be handed in by the end of the session.

Lecture 2. 14:45-16:15 Climate economics
•    Why climate economics. Taxonomy of modeling approaches. 
•    Notions of carbon budget, social cost of carbon. 
•    Integrated Assessment Models (IAM): optimal policies versus cost-effective transition pathways, Nordhaus’s DICE model.
•    Pindyke’s and Weitzman’s critiques, the debate on policy relevance of climate economic modeling,
•    The debate of the discount factor. 

Classwork 2.  16:30 – 18:00 
Students work on one of the following topics
•    Topic 1. Use the DICE online tool to study impact of key parameters (e.g. in damage function and discount factor) on optimal policy outcome, compare trajectories and collect results in a short report. 
•    Topic 2. Prepare short report about a question of choice concerning the debate in climate economics (e.g. discount factor, damage function), summarizing the logic argument and the points of disagreement among scholars. 
•    Report on Classwork 2: to be handed in by the end of the session.

Day 2: From climate policies to finance

Lecture 3. 11:00 - 12:30 Climate transition risk: working with data
•    Climate physical risk versus transition risk. The value chain of energy. Green-house gas (GHG) emissions throughout economic sectors. GHG accounting and scope 1-2-3. 
•    Existing economic sector classifications ESA2010, NAICS, NACE Rev2. 
•    Climate-relevant technologies: fossil fuels versus renewable energy technologies. Climate policy relevant sectors (CPRS). Analysis of exposures to CPRS across EU financial sectors.
•    Working with climate relevant data: GHG emissions data at sector level and firm level. ESG versus climate relevant information. Climate-relevant information from main data providers: BvD, Bloomberg and Thomson Reuters. 

Classwork 3.  13:00 – 14:30
Students are provided example portfolios of equity/bonds securities in excel, they carry out a classification according to CPRS and EU taxonomy as presented in class, as well as the computation of basic statistics and aggregations along several dimensions of climate relevant information. They produce selected charts to be included in the next session Classwork 4. 

Lecture 4. 14:45 - 16:15 Climate financial risk: policy landscape and developments
•    Main developments on international cooperation about climate, the United Nations Framework Convention on Climate Change (UNFCCC), the COPs conferences and the emergence of the role of finance. The 2015 Paris Agreement. 
•    Recent developments in policy and practice relevant to financial investing. Climate policies, regulation and its impact on financial risk and investment objectives. 
•    G20 Financial Stability Board Task Force on climate-related financial disclosure (TCFD): guidelines and implications. Market-based and non-market solutions to climate mitigation. 
•    NGFS and main points of 2020 report. Climate change and financial stability: climate change and central banking: the debate on the role of monetary policies. Green supporting versus brown penalizing factors. 
•    Towards climate stress-tests: the discussion on objectives and challenges at key actors such as ECB, EIOPA, EBA, BoE and other supervisors.
•    Regulatory developments in the EU: the EU Taxonomy of Sustainable Finance.  
•    Climate financial investments. The network of actors, instruments and financial flows in the climate finance landscape; most relevant public and private financial institutions, regulators and stakeholders; main financial instruments and markets.

Classwork 4.  16:30 – 18:00
Students carry on the classwork 3 by building on the material from Lecture 4. They prepare a short report to be discussed in class on challenges and solutions for climate-related financial disclosure and risk management in the context of the policy and regulatory developments presented in class. Reports should be handed in by the end of the session.
•    Report on Classwork 3-4: to be handed in by the end of the session, includes the results from classwork 3 and 4.

Day 3: Science-based climate-related financial metrics (I)

Lecture 5. 11:00 - 12:30 Climate policy scenarios 
•    Modern generation IAMs: model structure, analysis of cost-effective transition pathways, GHG emissions trajectories versus energy transition scenarios, 2-degrees climate policy scenarios, technological investment scenarios. 
•    Notion of Shared Socio-economic Pathways.
•    Absence of explicit financial sector in IAM, implications for the transition scenarios.  
•    Risk management issues. Decision under uncertainty. 
•    Structure of IAM scenario databases, exploring IAM transition scenarios through online tool. 

Classwork 5.  13:00 – 14:30
Students learn how to explore IAM transition scenarios through the online tool developed by IIASA The objective of the session is to produce charts comparing future scenarios for the composition of the EU energy sector under selected models and parameters, collect the results in a short report to be handed in by the end of the session.  
•    Report on Classwork 5: to be handed in by the end of the session.

Lecture 6. 14:45 - 16:15 Climate financial risk management under uncertainty
•    Rethinking the conceptual framework: climate financial risk as a problem of financial risk management under uncertainty. 
•    From climate policy scenarios to financial risk: how to leverage on the knowledge from IAM trajectories to derive financial shocks from trajectories. Financial risk associated with disorderly transition scenarios. 
•    Application to corporate and sovereign bonds: adjusting financial valuation metrics and pricing for climate policy shocks: climate spread

Classwork 6. 16:30-18:00. 
Students build on the work done in classwork 4-5. They should now apply the methodology presented in class to compute adjustments in corporate bonds value and spread. The computation can be carried out by hand, or with software tools such as Excel or Matlab (available also online). Results should be displayed in simple charts to be discussed in class and included in a short report.  
Report on Classwork 6: to be handed in by the end of the session.

Day 4: Science-based climate-related financial metrics (II)

Lecture 7. 11:00 - 12:30 Climate policy scenarios 
•    Basic notions on risk metrics and coherent risk metrics: Value at Risk, Expected Shortfall. 
•    Risk metrics adjusted for climate policy shocks: scenario-conditional Climate Value at Risk.
•    Application to a simple equity valuation model.
•    Application to a climate stress-test of EU financial institutions.

Classwork 7. 13:00-14:30 
Students can use online software tools such as Matlab online or spreadsheet to compute the Value at Risk and Expected Shortfall for a given sample of losses obtained from an underlying distribution function. They should compare if/how these metrics vary when key parameters of the distribution function are changed.  
•    Report on Classwork 7: to be handed in by the end of the session.

Classwork 8. 14:45-16:15
Students build on Classwork 6 to compute the Climate Value at Risk on the bond portfolio, conditional to a given climate policy shock (provided). Results should be displayed in charts and collected in a short report to be discussed in class. 
•    Report on Classwork 8: to be handed in by the end of the session.

Classwork 9. 16:30-18:00
The purpose of this session is to help students achieving their learning goals according to their different preferences:
•    Consolidate their preparation for the test session on the next day: students can work in small teams to review notions and methods presented in the lectures and can ask the instructor questions on previous Classwork sessions. 
•    Work on the preparation of a proposal for the final project work. The student will present the proposal the next day and they will work on the project during the week after the end of the lectures.

Day 5: Exam and presentation of project proposals

Classwork 10. 11:00-12:30
The purpose of this session is to finalise preparation for the following exercise session at 13:30. Students work in small teams to review a list of selected notions and methods presented in the lectures, as well as challenges and solutions discussed during the previous classwork sessions. 

Classwork 11 13:00-14:30
Students work in small teams. The purpose of this session is to prepare and discuss in class a proposals for the final project work on which the students will devote approximately one more week, after the end of the lectures. In the project, they will expand on one topic of their choice among those covered in the course and prepare a short paper of 4-10 pages. The paper should have the following structure: 
•    Introduction and motivation, covering the most relevant background context in terms e.g. of policy developments in climate finance, and/or the scientific debate in climate economics
•    Statement of the chosen research question, its relevance and implications
•    A proposal on how to address the question, based on existing methods and data or based on extensions proposed by the students
•    Results of preliminary analyses, including at least some example calculations
•    Discussion of possible results and implication. 
Each team will present its project proposal and provide feedbacks to the other teams. 

Classwork 12. 14:45-16:15 
Completion of the round of project proposal presentations and feedback from the instructor. Final Q&A session. 

Classwork 13. 16:30-18:00 
Written exercise. The purpose of this session is to consolidate and confirm the achievement of the  learning objectives of the course. Students work individually on a written exercise involving questions and short calculations based on notions and methods presented in the lectures.

Assessment: group class work, individual in-class test and final homework (short project paper to be submitted within two weeks after the end of the block seminar.
Final homework: students combine the work done in class into a short individual report to be submitted within two
weeks after the end of the block seminar.


  1. Bressan, G., Monasterolo, I. and Battiston, S., 2022. Sustainable investing and climate transition risk: a portfolio rebalancing approach. The Journal of Portfolio Management, forthcoming, earlier version ssrn 
  2. Battiston, S., Monasterolo, I., Riahi, K. and van Ruijven, B.J., 2021. Accounting for finance is key for climate mitigation pathways. Science372(6545), pp.918-920.
  3. Alessi, L., Battiston, S. and Melo, A.S., 2021. Travelling down the green brick road: a status quo assessment of the EU taxonomy. Macroprudential Bulletin15.
  4. Battiston, S., Mandel, A., Monasterolo, I., Schütze, F. and Visentin, G., 2017. A climate stress-test of the financial system. Nature Climate Change7(4), pp.283-288.
  5. Monasterolo, I., Battiston, S., Janetos, A. C. A. C., & Zheng, Z. (2017). Vulnerable yet relevant: the two dimensions of climate-related financial disclosure. Climatic Change, 145(3–4), 495–507.
  6. Monasterolo, I., Zengh Jiani, I., & Battiston, S. (2018). Climate-finance and climate transition risk: an assessment of China’s overseas energy investments portfolio. China and the World Economy, 26, 6(116–142).
  7. Karpf, A., Mandel, A., & Battiston, S. (2018). Price and Network Dynamics in the European Carbon Market. Journal of Economic Behavior & Organization, 153, 103–122.
  8. Final report of the European Commission High-Level Expert Group on Sustainable Finance
  9. TCFD Financial Stability Board - Climate related financial disclosures