The double materiality of climate physical and transition risks in the euro area

Regis Gourdel, Irene Monasterolo*, Nepomuk Dunz, Andrea Mazzocchetti, Laura Parisi

*Corresponding author for this work

Publication: Working/Discussion PaperWorking Paper/Preprint


The analysis of the conditions under which, and extent to which climate-adjusted financial risk assessment affects firms’ investment decisions in the low-carbon transition, and the realisation of the climate mitigation trajectories, still represent a knowledge gap. Filling this gap is crucial to assess the “double materiality” of climate-related financial risks. By tailoring the EIRIN Stock-Flow Consistent model, we provide a dynamic balance sheets assessment of climate physical and transition risks for the euro area, using the climate scenarios of the Network for Greening the Financial System (NGFS). We find that an orderly transition achieves important co-benefits already in the mid-term, with respect to carbon emissions abatement, financial stability, and economic output. In contrast, a disorderly transition can harm financial stability, thus limiting firms’ capacity to invest in low-carbon activities that could decrease their exposure to transition risk and help them recover from climate physical shocks. Importantly, firms’ climate sentiments, i.e. their anticipation of the impact of the carbon tax across NGFS scenarios, play a key role for smoothing the transition in the economy and finance. Finally, the impact on GDP of orderly and disorderly transitions are highly influenced by the magnitude of shocks in NGFS scenarios. Our results highlight the importance for financial supervisors to consider the role of firms and investors’ expectations in the low-carbon transition, in order to design appropriate macro-prudential policies for tackling climate risks.
Original languageEnglish
PublisherEuropean Central Bank
ISBN (Electronic)978-92-899-5114-2
Publication statusPublished - 2022

Publication series

SeriesECB Working Paper Series


  • climate physical risk
  • climate transition risk
  • Network for Greening the Financial System scenarios
  • double materiality
  • Stock-Flow Consistent model

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