A climate stress test model for credit spreads

In Kürze

Stress tests are a key tool for assessing the risk of climate change and mitigation measures to the economy and financial markets. They were initially developed for regulatory purpose and are proving useful also to individual intermediaries willing to fine tune their asset allocation and risk management.



  • Climate mitigation policies have varying impacts across sectors, which may not be fully accounted for in top-down scenarios. This limitation hinders the comprehensive assessment of their effects on a credit portfolio.
  • In order to analyse the influence of climate scenarios on sectoral credit performance, we have developed an econometric model that establishes a link between a set of macroeconomic variables, financial market metrics, sector-specific expected and actual default probabilities, and finally credit spreads (by industry and rating class)
  • This model enables us to evaluate the impact of both standard and climate-related economic scenarios on a wide range of credit spreads. The results can then be incorporated into Strategic Asset Allocation (SAA) and/or Asset and Liability management (ALM) tools. Additionally, risk management teams can leverage these findings to integrate climate stress testing capabilities. 
  • To illustrate the effectiveness of our approach, we simulated three macro climate scenarios using the same methodology employed by various central banks and the Network for the Greening of the Financial System (NGFS). Our findings reveal that delayed or uncoordinated climate risk mitigation policies could lead to increases of over 100 basis points in high yield (HY) spreads compared to baseline.
  • The modelling approach, which follows the logic of the widely used NGFS scenarios developed by a group of central banks, is based mostly on the historical relationships between variables. It has come under criticism as it may deliver too smooth, muted and in the end too reassuring responses of financial prices to the structural shift implied by climate change. We acknowledge this criticism and will tackle it in the development of our climate scenarios.
  • In a companion paper, we will analyse in more detail the modelling of equities.


Read the full publication below


© Generali Investments, alle Rechte vorbehalten. Diese Website wird von der Generali Investments Holding S.p.A. als Holdinggesellschaft der wichtigsten Vermögensverwaltungsgesellschaften der Generali Gruppe zur Verfügung gestellt, die direkt oder indirekt die Mehrheitsbeteiligung an den unten aufgeführten Gesellschaften hält (im Folgenden gemeinsam "Generali Investments"). Diese Website kann Informationen über die Tätigkeit der folgenden Gesellschaften enthalten: Generali Asset Management S.p.A. Società di gestione del risparmio, Infranity, Sycomore Asset Management, Aperture Investors LLC (einschließlich Aperture Investors UK Ltd), Plenisfer Investments S.p.A. Società di gestione del risparmio, Lumyna Investments Limited, Sosteneo S. p.A. Società di gestione del risparmio, Generali Real Estate S.p.A. Società di gestione del risparmio, Conning* und unter deren Tochtergesellschaften Global Evolution Asset Management A/S - einschließlich Global Evolution USA, LLC und Global Evolution Fund Management Singapore Pte. Ltd - Octagon Credit Investors, LLC, Pearlmark Real Estate, LLC sowie Generali Investments CEE. *Einschließlich Conning, Inc, Conning Asset Management Limited, Conning Asia Pacific Limited, Conning Investment Products, Inc, Goodwin Capital Advisers, Inc. (zusammen "Conning").