Research outputs that includes publications, working papers and project deliverables


Accounting for finance is key for climate mitigation pathways

Reference – Battiston, S., Monasterolo, I., Riahi, K., van Ruijven, B. (2021). Accounting for finance is key for climate mitigation pathways.

Science DOI: 10.1126/science.abf3877


The climate mitigation scenarios developed by the platform of financial authorities known as Network for Greening the Financial System (NGFS) have been a major step to provide investors with forward-looking views on how economic activities, low and high-carbon, could evolve in the next decades. However, currently these scenarios do not account for the role of financial actors and their expectations. 

Not modeling the feedback loop between the financial system and climate mitigation scenarios limits our understanding of the dynamics and the feasibility of the low-carbon transition, and the ability to inform policy and investment decisions. This could also lead to an underestimation of risk across mitigation scenarios and trajectories of orderly and disorderly transition. 

Our new study published in the journal Science develops a framework that complements current climate mitigation scenarios with scenarios that capture the interdependence among investors’ perception of future climate risk, the credibility of climate policies, and the allocation of investments across low and high carbon assets in the economy.

By conditioning the investment decisions to the credibility of climate policy scenarios, the study considers how the role of the financial system as enabling or hampering can reverse the ordering of costs and benefits of climate mitigation policies, which are currently distorted by not considering the financial system.

Figure: Four main climate transition scenarios are shown. Solid curves are the same in top and bottom panels and represent stylized trajectories from existing integrated assessment model (IAM) scenarios of electricity production from coal or renewable energy. Dashed curves represent stylized trajectories from the IAM–climate financial risk (CFR) framework of electricity production and asset values. The di‚erence between solid and dashed curves is the e‚ect of accounting for the role of the financial system

Blind to carbon risk? An analysis of stock market reaction to the Paris Agreement

Authors: Irene Monasterolo (WU), Luca De Angelis (Unibo)

Ecological Economics, Volume 170, 2020, 106571, ISSN 0921-8009


A main barrier to portfolios’ decarbonization is the lack of conclusive evidence on whether low-carbon investments add value to a portfolio, and on whether markets react to climate announcements by rewarding (penalizing) low-carbon (carbon-intensive) assets. To fill this gap, we develop an empirical analysis of the low-carbon and carbon-intensive indices for the EU, US and global stock markets. We test if financial markets are pricing the Paris Agreement (PA) by decreasing (increasing) the systematic risk and increasing (decreasing) the portfolio weights of low-carbon (carbon-intensive) indices afterwards. 

We find that after the PA the correlation among low-carbon and carbon-intensive indices drops. The overall systematic risk for the low-carbon indices decreases consistently, while stock markets’ reaction is mild for most carbon-intensive indices. 




Figure: Optimal portfolio weights for low-carbon (green) and carbon-intensive (brown) indices. Results obtained from the Markowitz’s portfolio optimization for expected return objectives of 0.35% per month (4.2% annually) and 0.5% per month (6% annually)

Systemic financial risk indicators and securitised assets: an agent-based framework

Authors: Mazzocchetti, A., Lauretta, E., Raberto, M., Teglio, A., Cincotti, S., 

Journal of Economic Interaction and Coordination, 15, 9–47 (2020)


The article presents an agent-based model of a credit economy which includes a securitisation process and a bailout mechanism for bank bankruptcies. 

The impacts of this mechanism are investigated by means of computational experiments for different levels of banks’ securitisation propensity and a set of systemic risk indicators are analyzed with the aim of assessing the imbalances in the financial system.

Results show that higher securitisation propensity weakens the financial stability of banks with relevant effects on different sectors of the economy. Most importantly, the analysis of systemic risk reveals the important issue of designing suitable systemic risk indicators for predicting incoming financial crises, finding that an essential feature of these indicators should be to integrate banks’ off-balance sheet assets.

Figure: Time evolution of four systemic risk indicators computed through computational experiments. We distinguish two types of indicators: a first one, reported in Fig. 10a and 10c, which considers only assets in the balance sheet of the bank (on-BS), and a second one, reported in Fig. 10b and 10d, which includes also off-balance sheet assets (off-BS). The indicators in the upper row (Fig. 10a, 10b) represent bank leverage, computed as the ratio between bank’s risk-weighted assets and equity. The indicators in the middle row (Fig. 10c, 10d) focus on the ratio between mortgages and GDP.

A science-based climate-stress testing framework to integrate forwardlooking climate transition risk into existing supervisory tools

Authors: Stefano Battiston, Irene Monasterolo

In: report of the Joint JRC – EBA workshop on Banking Regulation and Sustainability (2020) edt. by Alessi, L.


We have developed a scientific framework to allow financial supervisors to conduct a climate stress-test to account both for direct impact of climate policy shocks and for amplification effects due to financial interconnectedness. Our approach builds on a stream of peer-reviewed publications by an international consortium of academic institutions. The framework has been implemented at several policy institutions as a collaborative effort between researchers in financial risk, researchers in climate-economics and financial supervisors. We are currently working with the Network for Greening the Financial System to collect comments from stakeholders in order to foster the mainstreaming of climate-related financial risks among financial institutions.

Figure: Diagram illustrating the information flow in the CLIMAFIN’s climate stress-test framework

Pricing forward-looking climate risks in financial contracts

Authors: Irene Monasterolo, Stefano Battiston

In: report of the Joint JRC – EBA workshop on Banking Regulation and Sustainability (2020) edt. by Alessi, L.


We have developed the first transparent and science-based climate financial risk pricing model to embed forwardlooking climate shocks (stemming from a disorderly transition) in the Probability of Default (PD) and in value of bonds. Then, we introduced and calculated the Climate Spread on individual sovereign bonds and the Climate Value at Risk, i.e. the worst-case losses (Climate VaR, within a chosen confidence level) of a bond portfolio, conditioned to feasible climate transition shock scenarios. By applying the methodology to the sovereign bonds’ portfolio of a central bank and of European insurance companies, we find that the level of (mis)alignment of a country’s economy and the contribution of fossil fuels to its Gross Value Added can (negatively) positively affect the value of the sovereign bond and its Climate Spread. This result has two implications. On the one hand, investments’ misalignment affects the country’s refinancing conditions on the market and its financial solvability. On the other hand, the revaluation of sovereign bonds impacts on the risk profile of the investor who is exposed to them in her portfolio (e.g. via the Climate VaR).




Figure: Diagram illustrating the information flow in the CLIMAFIN’s climate financial risk pricing framework

Climate risk assessment of sovereign bonds’ portfolio of European insurers

Authors: Stefano Battiston, Petr Jakubik, Irene Monasterolo, Keywan Riahi, Bas van Ruijven

In: European Insurance and Occupational Pension Authority (EIOPA) Financial Stability Report, December 2019.


In this first application of the CLIMAFIN tool with a financial supervisor (EIOPA), we price forward-looking climate transition risk in the bonds’ portfolios of EU insurance solos. First, we analyses the shock on the market share and profitability of carbon-intensive and low-carbon activities under climate transition risk scenarios. Second, we define the climate risk management strategy under uncertainty for a risk averse investor that aims to minimise her largest losses. Third, we price the climate policies scenarios in the probability of default of the individual sovereign bonds and in the bonds’ climate spread. Finally, we estimate the largest gains/losses on the insurance companies’ portfolios conditioned to the climate scenarios. We find that the potential impact of a disorderly transition to low-carbon economy on insurers portfolios of sovereign bonds is moderate in terms of its magnitude. However, it is non-negligible in several scenarios. Thus, it should be regularly monitored and assessed given the importance of sovereign bonds in insurers’ investment portfolios.





Figure: Distribution of impact on sovereign holdings of European insurers conditioned to the country of the holder, across climate policy shock scenarios and under the adverse scenario on market conditions.

Working papers

Natural Disasters, Cascading Losses, and Economic Complexity: A Multi-layer Behavioral Network Approach

Authors: Asjad Naqvi, Irene Monasterolo

Ecological Economic Papers, 24. WU Vienna University of Economics and Business, Vienna


Climate-led disasters could compound with other sources of socio-economic and financial risk, giving rise to indirect losses and cascading effects that could amplify the initial shock. To provide a comprehensive picture of how climate-led shocks cascade and how indirect losses can be measured, we develop a multi-layer behavioral network composed of multiple spatially-explicit layers populated by heterogeneous interacting agents. Then, by introducing a new multi-layer risk measure called vulnerability rank, or VRank, we quantify the stress in the aftermath of a shock in a food-trade network. Our results show that (i) socio-economic vulnerability to climate-led disasters is cyclical, (ii) the distribution of shocks depends critically on the network structure and on the speed of supply-side and demand-side responses. This information is crucial to inform effective post-disaster policies aimed to build resilience to climate shocks in bread-basket regions.



Figure: A stylised multi-level network framework composed of trade, production, households and migration.


Climate Sentiments, Transition Risk, and Financial Stability in aStock-Flow Consistent Model

Authors: Nepomuk Dunz, Asjad Naqvi and Irene Monasterolo

Forth. on Journal of Financial Stability, special issue “Climate risks and financial stability”


We analyse how investors’ reaction to the climate policy announcements (i.e. their climate sentiments) affect the policies’ implementation, by developing a Stock-Flow Consistent (SFC) behavioral model of a high-income country that embeds an adaptive forecasting function of banks’ climate sentiments. We analyze the risk transmission channels from the credit market to the economy via loans contracts, and the reinforcing feedback impacts that could result in cascading negative macro-financial shocks. Our results suggest that a Green Supporting Factor contributes to the scale-up of green investments only in short-run, while introducing potential trade-offs on financial stability. To foster the low-carbon transition, while preventing unintended effects on firms’ non-performing loans, and households’ budget, the introduction of a Carbon Tax should be complemented with redistribution welfare policies.

Finally, the introduction of climate sentiments in banks’ lending decisions could allow for a smooth low-carbon transition by allowing investments to align with future policies.




Figure: Climate policy scenarios classified according to their impacts on the economy and banking sector.
The table provides a classification of climate-aligned policy scenarios analyzed in terms of their impact on GDP, relative prices, green capital share, CAR, and sector-specific NPLs. indicates no significant impact, whereas and represent increases and decreases of variable values compared to the BAU, respectively. The number of arrows shows the relative impact strength of the scenario compared to the other scenarios.

Climate change and the financial system

Author: Irene Monasterolo

Forth. on Annual Review of Environment and Resources, vol. 12, 2020.


We present climate-related financial risks, we discuss why traditional economic approaches don’t allow to integrate such risks in financial valuation and risk management strategies, and why it matters for the implementation and feasibility of climate policies. Then, we introduce science-based, transparent climate-related financial risk metrics and methods (Climate Value at Risk, Climate Spread, Climate Stress-test) that help financial actors and policy makers to assess investments’ exposure to forward-looking climate risks, to price such risks in financial contracts and portfolios, and to evaluate the largest losses that could lead to financial instability.

Forthcoming on Vol. 12, 2020.