CLIMATE-ECONOMIC SCENARIOS AND MODELS: A READING GUIDE FOR SUSTAINABLE FINANCE (O&D)

The climate emergency is unfortunately becoming ever more acute, as shown by recent meteorological phenomena around the planet. These extreme events have, regrettably, exacted a heavy toll, both human and material. And many experts believe that their frequency will increase unless there is a major reduction in greenhouse gas emissions. Yet the first part of the most recent IPCC (Intergovernmental Panel on Climate Change) report gives little cause for optimism.

In this worrying situation, climate risks, both physical and transition-related, are set to increase. This growing threat amounts to a sword of Damocles for finance, a sector which is particularly exposed and which has an obligation, therefore, to help fund the low-carbon economy. At the Institut Louis Bachelier, our ambition is to contribute – modestly, in accordance with our resources – to the emergence of appropriate responses to the problem of global warming. One of the areas studied in our research, as part of the Green and Sustainable Finance Programme, is the modelling of climate scenarios in finance. Characterised by very high levels of uncertainty and long-term time horizons, such scenarios call for significant changes to and adaptations of methodologies compared to traditional
financial risk management.

This issue of Opinions & Débats, produced by researchers and experts in modelling and sustainable finance, provides an analytical framework for better understanding the challenges facing businesses and the financial sector. Without a thorough understanding of the models and the scenarios arising from them, it will be more difficult to keep global warming below two degrees. This new edition of O&D is a welcome opportunity to review the different methodologies used and to provide the financial community – and the academic community – with ways forward.

Enjoy your reading!