Pricing Climate Risks of Energy Investments: A Comparative Case Study

This study assesses climate-related risk exposure of three downstream energy assets: natural gas, coal and solar PV power plants. We project a combined impact of climate-related risks (physical and transition risks) and investigate how it would affect the asset’s financial resiliency. Using cash flow modelling and stress test methodologies, we estimate an energy asset’s probability of default due to climate-related risks and the size and time of the losses by the given default. This study presents a new methodology, which can demonstrate the application of increasingly available asset-level datasets. It will align finance (and the real economy) with sustainability and transform the ability of investors to better assess and manage climate-related risks. The value of this study comes from its asset-level granularity: while previous climate risk assessments are mostly on investor, security or portfolio levels, this study provides comprehensive information on the potential risks due to future climate change impacts on a financial asset.