The implementation of this agenda is not easy, in view of the data and modelling requirements to calculate the mapping between physical risks and macro-financial outcomes.x Vermeulen et al (2018) provide an important example that considers a range of climate stress tests for the Dutch financial system, corresponding to the various scenarios outlined above.
Importantly, the macroeconomic outcomes that are triggered by the climate risk scenarios are generated by a multi-country macroeconometric model, since financial firms are exposed to foreign risks as well as domestic risks.xi In this study, the authors approximate the carbon exposures in the bond and equity portfolios of Dutch banks, insurance companies and pension funds (plus the corporate loan books of major banks) by calculating transition vulnerability indicators for fifty-six industries.xii In addition to these sectoral exposures, asset values are also affected by the shifts in risk-free interest rates associated with each scenario.