Franziska Schuetze, Irene Monasterolo, Gabriele Visentin, Stefano Battiston, Antoine Mandel, Centre d'Analyse et de Mathématique sociales (CAMS), École des hautes études en sciences sociales (EHESS)-Centre National de la Recherche Scientifique (CNRS), Department of Banking and Finance, Universität Zürich [Zürich] = University of Zurich (UZH), Centre d'économie de la Sorbonne (CES), Université Paris 1 Panthéon-Sorbonne (UP1)-Centre National de la Recherche Scientifique (CNRS), Paris School of Economics (PSE), Université Paris 1 Panthéon-Sorbonne (UP1)-École normale supérieure - Paris (ENS-PSL), Université Paris sciences et lettres (PSL)-Université Paris sciences et lettres (PSL)-École des hautes études en sciences sociales (EHESS)-École des Ponts ParisTech (ENPC)-Centre National de la Recherche Scientifique (CNRS)-Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement (INRAE), Frederick S. Pardee Center for the Study of the Longer-Range Future, Boston University [Boston] (BU), Global Climate Forum, European Project: 610704,EC:FP7:ICT,FP7-ICT-2013-10,SIMPOL(2013), European Project: 640772,H2020,H2020-FETPROACT-2014,DOLFINS(2015), European Project: 649982,H2020,H2020-EE-2014-3-MarketUptake,SEI Metrics(2015), University of Zurich, Battiston, Stefano, École des Ponts ParisTech (ENPC)-École normale supérieure - Paris (ENS Paris), Université Paris sciences et lettres (PSL)-Université Paris sciences et lettres (PSL)-Université Paris 1 Panthéon-Sorbonne (UP1)-Centre National de la Recherche Scientifique (CNRS)-École des hautes études en sciences sociales (EHESS)-Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement (INRAE), and Centre National de la Recherche Scientifique (CNRS)-École des hautes études en sciences sociales (EHESS)
The authors would like to thank J. E. Stiglitz and A. C. Janetos for fruitful comments on an early version of the paper, M. D’Errico for precious suggestions on macro-network data from the ECB Data Warehouse, and J. Glattfelder for help on equity holdings data extraction from Orbis. We also would like to thank A. Barkawi, P. Monnin and M. Tanaka for their comments during the Bank of England conference on Climate Change and Central Banking. S.B. acknowledges financial support from the Swiss National Fund Professorship grant no. PP00P1-144689. All the authors acknowledge the support of the European Projects Future and Emerging Technologies (FET) SIMPOL (grant no. 610704) and DOLFINS (grant no. 640772), and the European Project SEI Metrics (grant no. 649982). International audience The urgency of estimating the impact of climate risks on the financial system is increasingly recognized among scholars and practitioners. By adopting a network approach to financial dependencies, we look at how climate policy risk might propagate through the financial system. We develop a network-based climate stress-test methodology and apply it to large Euro Area banks in a ‘green’ and a ‘brown’ scenario. We find that direct and indirect exposures to climate-policy-relevant sectors represent a large portion of investors’ equity portfolios, especially for investment and pension funds. Additionally, the portion of banks’ loan portfolios exposed to these sectors is comparable to banks’ capital. Our results suggest that climate policy timing matters. An early and stable policy framework would allow for smooth asset value adjustments and lead to potential net winners and losers. In contrast, a late and abrupt policy framework could have adverse systemic consequences.