Asset-level analysis of corporate value adjustment against climate transition risks: A comparison of stress test methodologies for the global power sector

Combating climate change requires significant decarbonization across economic sectors, creating substantial risks for many assets—especially those with high emissions footprints. This includes the early retirement of certain assets, which can materially affect company valuations and creditworthiness. By incorporating IPCC scenarios into a microeconomic firm model with asset-level information, we examine valuation risks for power-sector companies under global net-zero action. This granular dataset allows us to directly incorporate firms’ production planning into our stress-testing methodology, which is critical for modelling plant retirements by asset age, since older assets are typically more emissions-intensive and often complete their financial life well before their technical lifetime. We estimate firm-level transition costs by valuing how climate-scenario production declines and stranded-asset exposure affect firms’ excess capacity using company- and asset-level features. We benchmark our bottom-up results against leading top-down approaches that ignore firm strategy and asset-age heterogeneity. Our results show that fossil fuel assets, under any temperature-target climate scenario, are expected to lose value relative to a business-as-usual baseline; however, losses vary widely across firms due to differences in asset heterogeneity, geographic region (i.e., resource abundance), and fossil fuel technology intensity. We find that the estimated transition cost is approximately 7% lower when using highly granular asset-level data to assess transition risks to companies, compared with a stress test that does not incorporate companies’ ownership of assets and asset-specific features.