The Introduction of a Climate Risk Taxonomy with an Impact Study on the Financial Risks of Climate Change to Corporations.

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In this paper we put forward the need to develop a clear understanding of the risks related to climate change for financial institutions. We propose the construction of a taxonomy that can be straightforwardly embedded in the capital framework of banks, insurers and other regulated financial institutions around the world. The approach presented builds on approaches commonly adopted by banks and provides a prudential means to identify and capitalise the relevant risks. We highlight the dangers of potential miss-pricing of risk that could occur under a pure green-taxonomy if risk weights are reduced for assets deemed green. Furthermore we investigate a number of the risks namely asset values (equity) and credit risks for European electrical utility companies and highlight how financial organisations would be able to capture the risks within their current framework. The approach utilises a long term simulation framework from an integrated assessment model that drives company investment choices over the simulation horizon. This approach gives rise to estimates of equity valuation, bond prices, credit ratings and default probabilities that can be used to assess long term credit exposures or potential shifts in current market valuation.