An analytical framework for assessing climate transition risks: an application to France

Abstract

This paper proposes an analytical framework to quantify the impacts of climate transition narratives on a consistent set of macroeconomic, sectoral and financial variables required for financial risk assessment. Focusing on transition risks, our set-up relies on a suite of models, calibrated on the high-level reference scenarios of the Network for Greening the Financial System (NGFS). Its modular structure and variable coverage ensure a comprehensive assessment of the financial implications of disorderly transition scenarios to a low-carbon economy, from the identification of climate-sensitive sectors to the quantification of the impacts on financial metrics. An application to France evaluates the impacts on financial markets and credit risk parameters. Results indicate that the sectoral disruptions associated with a disorderly transition to a low-carbon economy can be substantial and translate in material financial risks. The study offers further grounds for encouraging policy-makers and financial institutions to support and prepare for an early and orderly transition.