Market-based solutions to climate change are widely advocated by financial actors and policy-makers in order to foster a smooth transition to a low-carbon economy.

A first important limiting factor to this approach is widely recognized to be the imperfect information on investor portfolio exposure to climate related risks. While better disclosure of climate-relevant information is often recommended as a remedy, the current lack of concise and comparable measures of portfolio exposure to climate risk fails to provide major investors with the full incentives to reallocate their portfolio.

A second limiting factor arises from the fact that in the context of low-carbon transition, it is not clear how to measure the market share of participants because many economic sectors produce greenhouse gases (GHG) emissions or induce them along the supply chain. The lack of common and concise measures of the relevant market share hampers the ability of policy makers to ensure fair competition policies and the ability of major investors to assess the effects of their own and their competitors portfolio reallocation.

To address these two gaps, we propose two novel and complementary indices:

  • the GHG exposure, capturing the exposure of single investors portfolios to climate transition risks
  • GHG holding, capturing the market share of each financial actor weighted by its contribution to GHG emissions.

We illustrate the use of the indices on a dataset of portfolios of equity holdings and loans in the Euro-Area, and we discuss the policy implications for the low-carbon transition.

By: Irene Monasterolo, Boston University; Vienna University of Economics and Business, Stefano Battiston, University of Zurich – Department of Banking and Finance, Anthony Janetos, Boston University, and Zoey Zheng, Boston University

You can read the very interesting SSRN article here