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Measuring Transition Risk in Investment Funds

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  • Ricardo Crisostomo

Abstract

We develop a comprehensive framework to measure the impact of the climate transition on investment portfolios. Our analysis is enriched by including geographical, sectoral, company and ISIN-level data to assess transition risk. We find that investment funds suffer a moderate 5.7% loss upon materialization of a high transition risk scenario. However, the risk distribution is significantly left-skewed, with the worst 1% funds experiencing an average loss of 21.3%. In terms of asset classes, equities are the worst performers (-12.7%), followed by corporate bonds (-5.6%) and government bonds (-4.8%). We discriminate among financial instruments by considering the carbon footprint of specific counterparties and the credit rating, duration, convexity and volatility of individual exposures. We find that sustainable funds are less exposed to transition risk and perform better than the overall fund sector in the low-carbon transition, validating their choice as green investments.

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  • Ricardo Crisostomo, 2022. "Measuring Transition Risk in Investment Funds," Papers 2210.15329, arXiv.org, revised Dec 2022.
    • Handle: RePEc:arx:papers:2210.15329
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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