Sensitivity analysis of climate-related transition risks in the German financial sector

Climate-related risks arising from the transition to a low-carbon economy may expose potential vulnerabilities in the financial system. In this article, we develop and describe a set of tools for analysing these risks and apply them to the German financial system. The use of longterm, consistent climate scenarios that have been developed as part of the joint work of the Network for Greening the Financial System (NGFS) allows the effects of the transition to be modelled and then mapped to the financial system. We use a comprehensive dataset in terms of the financial intermediaries and financial instruments reviewed, and demonstrate that the aggregated potential portfolio losses from an unexpected change in climate policy are within the low to medium single-digit percentage range for individual financial sectors. Individual financial intermediaries are more severely affected by transition risks. Uncertainty about the current expectations of market participants leads to results that may deviate by up to 40% from the potential portfolio losses calculated.