Sustainable Finance Risks

From Open Risk Manual

Definition

Sustainable Finance Risks are emerging risks associated with the transition to sustainable economies

Nature

The Energy Transition implies raised interest for certain investments in green assets (and certain actions and technologies) and reduced interest in others. Increased demand for green products might generate a decorrelation between asset valuation and its fundamental value. A green bubble might have adverse consequences for the financing of sustainable projects in the long term and for the market from a financial stability point of view. [1]

However, it is important to highlight that the Taxonomy proposal is incorporated in the broader framework of EU climate strategy, which aims to generate more opportunities related to a low-carbon economy and therefore generate more sustainable activities that fulfil demand.

On the contrary, the activities which are not considered sustainable might be considered less attractive by investors. However, the risk of creating Stranded Assets (e.g. assets which might be subject to a price depreciation resulting from the implementation of climate policies, prior to the end of their economic life, and to the attached investment) does not result from the Taxonomy, but rather from the implementation of climate policies (especially in the case of a disorderly transition) and the lack of long-term perspectives from the investors.

Overall, the EU Sustainable Finance Taxonomy might signal activities which are less exposed to transition risks a and therefore it can help preserving long-term financial stability.

See Also

References

  1. Technical Expert Group on Sustainable Finance Taxonomy, Technical Report, June 2019