NGFS occasional paper: A case study of environmental risk analysis methodologies: CARIMA – a capital market-based approach to quantifying and managing transition risks (UA & VfU)

The impact of uncertainty associated with the ongoing transition towards a green and in particular low-carbon economy affects virtually all financial market participants. If the transition process accelerates compared to current expectations, the values of carbon-based firms are likely to decline, while the values of low-carbon firms will tend to benefit from this development. On the other hand, if the transition process decelerates unexpectedly, the reverse could happen. The central goal of CARIMA is to quantify exactly those types of risks as well as opportunities for firm values via a capital-market based approach. Using a factor model, carbon risks are simply “extracted” from the historical returns of global stock prices using the Carbon Risk Factor BMG (Brown-Minus-Green) return time-series. The CARIMA concept is essentially directed towards key players in the financial industry, such as portfolio managers, who want to take carbon risks in their asset management process into account. CARIMA also addresses further stakeholder groups, such as firms, regulatory authorities, politicians, and finally scientists.

Görgen, M., Wilkens, M. & Ohlsen, H. (2020) CARIMA – a capital market-based approach to quantifying and managing transition risks (UA & VfU) in: NGFS occasional paper: a case study of environmental risk analysis methodologies, ed. By Ma Jun, Ben Caldecott and Ulrich Volz, 540-559 (NGFS: Paris, 2020)

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