Method Transparency for Green Bonds: Learnings from Climate Transition Risk Metrics

Abstract

This chapter will focus on the impact of metrics in measuring climate-related risk. Climate risks are now fully recognized as financial risks. Against this background, a rapidly growing number of market participants and financial authorities are exploring which metrics to use to capture climate risks, to what extent the use of different metrics delivers heterogeneous results, and which factors impact the assessment of risk. The analysis of transition risks metrics shows that firms’ risk assessments across metrics are relatively heterogeneous but display some degree of convergence, with convergence between metrics significantly higher for the firms most exposed to transition risk, and that metrics’ characteristics—the scenario and methodology they rely on—have an impact on the estimated risks. These findings suggest that available metrics provide useful information to risk managers to address high climate risk exposures and that risk managers must understand how metrics are built to choose those most appropriate to their needs.