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The Exposure of Investments to Climate and Environmental Risks

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Part of the Contributions to Finance and Accounting book series (CFA)


The management of the portfolio exposure to climate and environmental risks has become increasingly important among investors. Central banks have stepped up their efforts towards the measurement and disclosure of the exposure of their portfolios. This chapter describes the indicators available for the measurement of climate risks for bonds and equities. It distinguishes the available indicators for the assessment of the climatic and environmental risks of public sector issuers and corporate issuers, respectively. The chapter outlines the environmental sustainability profile of the Bank of Italy’s euro-denominated investment portfolios and foreign currency reserves. It describes the sustainable investment strategy of the Bank and the remarkable improvement in the climate-risk exposure of recent years.


  • Climate change
  • Climate and environmental risk
  • Risk measurement
  • Carbon emission intensity and footprint
  • Crowdfunding in public sector

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  1. 1.

    For example, it is extremely complex to assess the exposure of a country to physical risks, because they tend to be concentrated in specific areas of a country. The international comparison is even more complex. For a European comparison, see Peseta IV; for an international comparison, see Notre Dame Global Adaptation Initiative.

  2. 2.

    The emission classification standard is defined by the World Resource Institute’s Greenhouse gas protocol, supported by various organizations and data providers. Based on this protocol, GHG emissions are divided into three categories: direct emissions, i.e. produced by proprietary or controlled sources, are classified as scope 1; indirect emissions, deriving from the purchase and consumption of energy (electricity, steam, heating, and air conditioning) are classified as scope 2; all remaining indirect emissions (other than scope 2) along the value chain, downstream and upstream, are classified as scope 3. Consequently, the overall emissions of a product/service are given by the sum of scopes 1, 2, and 3 emissions. Typically, the scope 3 emissions of a single company make up the majority of its total emissions; however, they may overlap with the scope 1 emissions of another company, resulting in double counting.

  3. 3.

    Estimating and using these emissions is anything but simple. The available studies indicate that this information, even when available, has serious quality issues. See for example Busch et al. (2020).

  4. 4.

    Global Warming Potential (GWP) is a measure of how much a given greenhouse gas (in addition to CO2, CH4, HFCs, NF3, SF6, N2O, and PFCs) contributes to global warming, using CO2 as a reference, and considering the combined effect of the residence time in the atmosphere and the ability to absorb the infrared radiation emitted by the earth (and therefore to retain heat). The overall unit of measurement of greenhouse gases (or GHG) is the CO2 equivalent (CO2e), whereby each greenhouse gas is converted into CO2 by means of its GWP.

  5. 5.

    A survey of the literature on how climate risks can affect the value of government bonds is beyond the objectives of this paper. Among the studies measuring the effects of climate risks, Volz et al. (2020) identify six transmission channels of climate risk to country risk: (1) fiscal effects of environmental disasters; (2) tax effects of adaptation and mitigation policies; (3) macroeconomic implications; (4) risks to the financial system; (5) effects on international trade and capital flows; (6) effects on political stability. Battiston and Monasterolo (2020) find that countries with a higher share of the less carbon-intensive sectors benefit from lower government bond yields. Cevik and Tovar Jalles (2020), examining 98 countries, also find that vulnerability and resilience to climate risks affect—negatively and positively, respectively—the cost of government funding.

  6. 6.

    For a description of the macroeconomic impacts of climate factors on the developed countries, see also Burke et al. (2015).

  7. 7.

    Angelova et al. (2021) criticize the methodologies employed by rating agencies for the integration of climate risks into the assessment of government bond risks.

  8. 8.

    The scope 3 emissions, which include all indirect emissions that occur in a company’s value chain, are not considered. Even if they provide useful information (for example because the emissions reductions in the developed countries are partly due to relocation strategies increasing the imported goods from developing countries), a standard measure of this type of emissions does not exist; only some papers assess the carbon emissions attributed to net imports (see for example Peters et al. 2011).

  9. 9.

    The data are provided by Eurostat based on the firms’ location, including airline and shipping companies, and according to the Statistical Classification of Economic Activities in the European Community (NACE). The data refer to the emissions of the so-called Kyoto basket, that encompasses the following six greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), the F-gases (hydrofluorocarbons and perfluorocarbons), and sulphur hexafluoride (SF6).

  10. 10.

    Eurostat provides UNFCCC data about National Inventories, where the emissions are assigned to the country where they are produced. Eurostat releases a link-table that accounts for the differences between the two systems.

  11. 11.

    For example, in Italy the 2017 emissions were equal to 427.7 million of tons of CO2 according to the UNFCC methodology, while the emission attributed to residents were 445.5 million.

  12. 12.

    See footnote 4.

  13. 13.

    See Statistical Review of World Energy by BP for a complete, up-to-date and freely accessible database of the emissions.

  14. 14.

    The official exchange rate does not provide an accurate assessment of the purchasing power of two currencies for those goods that are not involved in international trade (non-tradable goods). Therefore, to compare the standard of living between different countries, it is appropriate to take into account the general price level of each country. To this end, the exchange rate against the US dollar is adjusted for the different country price indices and GDP is expressed in PPP (Purchasing Power Parity) in USD terms.

  15. 15.

    The primary energy demand equals the total energy demand of a country excluding losses during transformation in other types of energy and energy carriers used for non-energy purposes (for example used for the refining of the oil products).

  16. 16.

    Italy is one of the few EU countries that achieved all three of the Europe 2020 objectives, in terms of containing greenhouse gas emissions, reducing energy demand and increasing renewable energy deployment (EEA 2020).

  17. 17.

    The Integrated Climate-Energy Plan submitted to the Commission at the end of 2019 considers a strategy based on achieving by 2030 a 30 per cent share of renewables in gross final energy consumption, a reduction by 43 percent in energy use compared to the trend and a 40 per cent decrease in GHG emissions compared to 1990. The plan will be revised to integrate the new targets.

  18. 18.

    In September 2020, as part of the European Green Deal, the Commission proposed raising the target and reducing greenhouse gas emissions by 2030 to 55 per cent. The Commission started the process for the detailed legislative proposals in July 2021.

  19. 19.

    The NGFS is a global network of central banks and supervisory authorities that promotes the sharing of experiences and best practices in the management of environmental risks (with specific attention to climate risks) in the financial sector.

  20. 20.

    According to some estimates based on the assumptions of the United Nations Intergovernmental Panel on Climate Change (UN IPCC), to have half the probability of staying within a 2 °C increase by the end of the century, the carbon budget should be equal to 1200 billion tons (Gt) of emissions, compared to 2910 Gt of emissions embedded in the reserves of fossil fuels. Therefore 59 per cent of these reserves would be unburnable. The budget would be even more stringent (464 Gt) in the case of a global temperature target of 1.5 °C, making 80 per cent of the reserves unburnable.

  21. 21.


  22. 22.

    The environmental footprint of a product or policy is a multidimensional indicator that summarizes the environmental impact through specific indicators, such as greenhouse gas emissions, water consumption, and resource depletion.

  23. 23.

    See Berg et al. (2019).

  24. 24.

    See Rogers and Serafeim (2020).

  25. 25.

    See Kotsantonis and Serafeim (2019).

  26. 26.

    Specifically, it has been observed that the information is often qualitative, the time horizon of the analysis and the forecasts is short and medium term, and still few companies set quantitative sustainability targets. See 2 Degrees Investing Initiative (2017).

  27. 27.

    On 21 April 2021, the European Commission published a proposal for a directive on sustainability communication (Corporate Sustainability Reporting Directive—CSRD) to supplement and update the current directive on non-financial communication. Sustainability information will be reported according to the standards developed by the European Financial Reporting Advisory Group (EFRAG). According to the current forecasts on the approval process of the CSRD, large enterprises could be required to comply from 2024, while small- and medium-sized enterprises should start from 2027.

  28. 28.

    To be considered as environmentally sustainable under the European taxonomy, an activity must comply with three main conditions: (a) provide a substantial contribution to the achievement of at least one of six environmental objectives of the European Union; (b) do not cause significant damage to any of the other environmental objectives (so-called do not significant harm principle—DNSH); (c) ensure compliance with minimum ethical and social principles (so-called minimum safeguards), verified by the compliance with specific international standards and conventions.

  29. 29.

    The term carbon footprint is often referred to as the amount of GHG emissions produced by a good, a service or an organization; in this case, GHG emissions of companies and countries financed by the portfolio are measured in an absolute or normalized way. The TCFD of the Financial Stability Board has defined as carbon footprint of a financial portfolio a specific indicator (sometimes also referred to as capital carbon footprint); such indicator normalizes GHG emissions of the portfolio by its market value in a single currency.

  30. 30.

    The financial risk arising from the energy transition required to keep the global temperature rise below 2 °C can materialize through several channels, such as: (a) the imposition of taxes or restrictions on CO2 emissions that would cause a significant increase in costs for less efficient organizations; (b) a sudden technological innovation that disrupts some sectors including, potentially, those related to fossil fuels (which have the highest intensity values); (c) more or less rapid changes in the expectations and/or preferences of economic agents. Transition risk could affect companies through all of these channels.

  31. 31.

    See footnote 2.

  32. 32.

    Based on the data for 2020, in February 2021 the Italian EPA (ISPRA) estimated a reduction in Italy’s GHG emissions by 9.8 per cent; this value is greater than the drop in GDP (−8.9 per cent). This is due to a set of pandemic-related facts: (a) the reduction of emissions from power generation (−12.6 per cent) for lower energy demand; (b) the reduction of energy consumption in other sectors, such as manufacturing (−9.9 per cent) and transport (−16.8 per cent), due to the reduction of private transport in urban areas, and of heating (−5.8 per cent) for the partial or total closure of public buildings and commercial activities.

  33. 33.

    In the following, we consider consolidated gross public debt and real GDP in euro at constant 2008 prices.

  34. 34.

    These data cover the annual CO2 emissions of individual countries and not those of all greenhouse gases, as with Eurostat data.

  35. 35.

    Austria, Belgium, Estonia, Finland, France, Germany, Ireland, Italy, Latvia, Lithuania, Luxemburg, Netherlands, Portugal, Slovakia, Slovenia and Spain.

  36. 36.

    This variable is provided by MSCI ESG Research LLC.

  37. 37.

    This variable includes seismic risk, which, though very significant for Italy, is not related to climate change.


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Correspondence to Enrico Bernardini .

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Faiella, I., Bernardini, E., Di Giampaolo, J., Letta, S., Nasti, D., Fruzzetti, M. (2023). The Exposure of Investments to Climate and Environmental Risks. In: Scalia, A. (eds) Financial Risk Management and Climate Change Risk. Contributions to Finance and Accounting. Springer, Cham.

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