Climate transition risks and financial stability

Abstract: We assess how climate transition risk, through its effects on asset prices, could impact financial stability. We introduce three systemic risk metrics: climate transition expected returns, climate transition value-at-risk, and climate transition expected shortfalls, which account for average and tail effects for the value of financial firms from climate transition scenarios in which asset re-pricing impacts widely differ. We find that European banks and real estate firms experience the highest and lowest systemic impacts from a disorderly transition, and that the cost of rescuing more risk-exposed financial firms from climate transition losses is relatively manageable.