This report seeks to explore options around integrating transition risk into mainstream stress-test scenarios used by financial supervisory authorities. It analyses options for integration into macroeconomic, asset-class and sector risk factors. It focuses in particular around the implications of considering the shock described in the ‘too late, too sudden’ paper of the ESRB advisory scientific board (2016).
The paper concludes by recommending the development of a specific monitoring process and infrastructure for assessing the potential systematic mispricing of long-term, non-cyclical, non linear risks (e.g. disruption related to the energy transition, to automation, etc.) by financial markets. For the purpose of this report, a hypothetical impact of 75% on the share price of the sum total of companies accounting for ~80% of GHG emissions (Scope 1 and Scope 2, sectors include energy, utilities, materials, industrials, based on Exane 2015) was assumed.
The objective is to understand how potentially highly disruptive impacts on transition risk compare to existing stock market level shocks in the scenarios. Hence, this report sought to highlight the capacity of transition risk scenarios to be integrated into traditional risk models. The results suggest that while the exercise follows the ‘right direction’, it involves the ‘wrong equipment’.