Climate risks in investment portfolios

Climate risks (including physical risk and transition risk) are among the most important financial risks for pension funds’ and insurance companies’ investment portfolios. New EU regulations require pension funds to include climate risk in their “own-risk assessment”.

Climate risks are systematic (given their pervasive effects) and difficult to measure (Knightian uncertainty). Historical data are of little use. Pension funds and insurers are developing several approaches to measure and manage climate risks. Simultaneously, they have started to look for investment opportunities with a positive impact on climate change. Furthermore, initial results from Netspar Theme Grant research by Rob Bauer indicates that pension fund members tend to have a preference for sustainable investments

Our aim is to develop and empirically validate new methods for measuring and managing climate risks. Academic articles and industry papers on climate risk measurement as well as on the pricing of climate risk and “green bubbles” will provide pension funds and insurers with insights and concrete tools to help them cope with the uncertainty surrounding climate risks. Analyses of climate risk at the sector-level will support the supervisor (DNB) in monitoring financial stability.

Next, we will identify effective methods for engagement on climate and other environmental, social, and governance (ESG) issues. Engagement has the potential to mitigate climate risks by making companies more sustainable. A detailed survey among Dutch institutional investors will uncover best practices. Finally, our research will assess the impact of the United Nations’ Sustainable Development Goals (SDGs) more generally on other asset classes than equities.

Read all project publications here.