Abstract
Market-based solutions to climate change are widely advocated by financial actors and policy makers in order to foster a smooth transition to a low-carbon economy. A first important limiting factor to this approach is widely recognized to be the imperfect information on investors’ portfolios’ exposure to climate-related risks. While better disclosure of climate-relevant information is often recommended as a remedy, the current lack of concise and comparable measures of portfolios’ exposure to climate risk fails to provide major investors with the full incentives to reallocate their portfolios. A second limiting factor arises from the fact that in the context of the low-carbon transition, it is not clear how to measure the market share of participants because many economic sectors produce greenhouse gases (GHG) emissions or induce them along the supply chain. The lack of common and concise measures of the relevant market share hampers the ability of policy makers to ensure fair competition policies and the ability of major investors to assess the effects of their own and their competitors’ portfolio reallocation. To address these two gaps, we propose two novel and complementary indices: (i) the “GHG exposure,” capturing the exposure of single investors’ portfolios to climate transition risks, and (ii) “GHG holding,” capturing the market share of each financial actor weighted by its contribution to GHG emissions. We illustrate the use of the indices on a dataset of portfolios of equity holdings and loans in the Euro-Area, and we discuss the policy implications for the low-carbon transition.
Highlights
Both business and financial actors, and policy makers have been increasingly advocating for market-based solutions to climate change
In order to fill in these two gaps, we propose two novel and complementary indices to characterize a financial actor’s portfolio: (i) its BGHG exposure,^ capturing the exposure of the portfolio to climate transition risks, and (ii) its BGHG holding,^ capturing the market share of each financial actor weighted by its contribution to greenhouse gas (GHG) emissions
As the two most critical dimensions for market participants, we have focused on the problem of measuring their vulnerability, in terms of exposures of their portfolios to climate transition risk, and their relevance, in terms of their effective market share, in the context of the low-carbon transition
Summary
Both business and financial actors, and policy makers have been increasingly advocating for market-based solutions to climate change. In the context of the transition to a low-carbon economy, it is not clear how to measure the market share of participants because financial actors invest at the same time in many economic sectors, which are potentially exposed to climate risk via the GHG emissions that they either produce directly or induce along the supply chain. In order to fill in these two gaps, we propose two novel and complementary indices to characterize a financial actor’s portfolio: (i) its BGHG exposure,^ capturing the exposure of the portfolio to climate transition risks, and (ii) its BGHG holding,^ capturing the market share of each financial actor weighted by its contribution to GHG emissions By looking at these two dimensions simultaneously, we can identify those actors who are, at the same time, the most exposed to climate risks, and who are likely to have the largest influence both on price adjustments in the low-carbon transition and on the introduction of decarbonization policies. Such an incentive framework would make the achievement of the COP21’s target more likely and would reduce the risk for financial actors, governments, and citizens
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