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The double materiality of climate physical and transition risks in the euro area

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  • Gourdel, Régis
  • Monasterolo, Irene
  • Dunz, Nepomuk
  • Mazzocchetti, Andrea
  • Parisi, Laura

Abstract

We analyse the double materiality of climate physical and transition risks in the euro area economy and banking sector. First, by tailoring the EIRIN Stock-Flow Consistent behavioural model, we provide a dynamic balance sheet assessment of the Network for Greening the Financial System (NGFS) scenarios. We find that an orderly transition achieves early co-benefits by reducing CO2 emissions (12% less in 2040 than in 2020) while supporting growth in economic output. In contrast, a disorderly transition worsens the economic performance and financial stability of the euro area. Further, in a disorderly transition with higher physical risks, real GDP decreases by 12.5% in 2050 relative to an orderly transition. Second, we analyse how firms’ expectations about climate policy credibility (climate sentiments) affect investment decisions in high or low-carbon goods. Firms that trust an orderly policy introduction do anticipate the carbon tax and switch earlier to low-carbon investments. This, in turn, accelerates economic decarbonization and decreases the risk of carbon-stranded assets for investors. Our results highlight the crucial role of early and credible climate policies to signal investment decisions in the low-carbon transition.

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  • Gourdel, Régis & Monasterolo, Irene & Dunz, Nepomuk & Mazzocchetti, Andrea & Parisi, Laura, 2024. "The double materiality of climate physical and transition risks in the euro area," Journal of Financial Stability, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finsta:v:71:y:2024:i:c:s1572308924000184
    DOI: 10.1016/j.jfs.2024.101233
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    More about this item

    Keywords

    Double materiality; NGFS climate scenarios; Climate sentiments; Policy credibility; Stock-Flow Consistent model;
    All these keywords.

    JEL classification:

    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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