The carbon footprint can be a building block in forward-looking measures
Published: 12 April 2022
To obtain a more comprehensive analysis of the climate risks of asset portfolios, we need to supplement backward-looking measures of greenhouse gas emissions – such as carbon intensity – with forward-looking measures of transition risks. Such measures are intended to capture the amount and cost of the transition required in a country to reduce emissions, or to measure the degree to which a country is on track to meet various climate targets such as the Paris Agreement. Such measures can be based on country and regional data on greenhouse gas emissions, combined with climate change forecasts. For example, stress tests or scenario analyses can be carried out, thus accounting for the transition risk for an asset portfolio. Another example could be to see how large a share of the countries in a portfolio of bonds have set climate targets.
However, one problem with these measures is that they tend to be more complex and sensitive to assumptions in the calculations than, for example, the carbon footprint. There is at present no single measure that can show the size of the transition risks for a country, but this is being developed.
Transition risks may also need to be supplemented by measuring physical climate risks. In addition, a country can also be affected by environmental risks, such as loss of biodiversity, which can ultimately lead to a reduction in economic activity.
Economic Commentary
NO. 4 2022, 12 April
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