The Methodologies of Climate and Environmental Risk Analysis and Measurement

The chapter outlines global and European initiatives to raise awareness of the consequences of climate change in the world of finance. After describing physical climate risk and transitional climate risk and their possible impact on the financial system, we explain the inherent characteristics of climate risk and the difficulties related to its assessment. Climate economy models that are useful for understanding the interactions between the economy and climate and for constructing scenarios for stress tests have been then examined. Finally, we illustrate the impact of climate risks on stock and bond markets and how climate risk can be managed through hedging portfolios.