A Multi-model Analysis of Climate-related Financial Risk Disclosure and De-carbonization Investment Portfolios Piloting to the TCFD

Abstract

This research explores climate related financial risk disclosure by quantifying climate related transition risk and physical risk, creating cost-benefit analysis for businesses, industries and financial institutions with business as usual model (BAU) and alternative models of an updated carbon emission reduction scheme, constructing carbon emission-induced cost function and benefit function models, as well as multi-dimensional climate damage function models. This research integrates frameworks based on carbon shadow price, carbon emission abatement costs and climate damage costs, social costs of carbon with climate change scenarios for assessing climate financial risk, as well as its asymmetric and nonlinear impact on financial equilibrium. The heterogeneity of climate financial risk scenarios are built up on implementing national determined commitment (NDC) for a predefined temperature target 1.5-2 ⁰C above pre-industrial levels under carbon neutrality target of Paris climate agreement and the United Nations Framework Convention on Climate Change (UNFCCC). The model functions, selected parameters and cost-benefit simulation construct a cost-effective optimal pathway for driving future carbon emissions reduction and building climate resilience to manage and mitigate climate related financial risk.