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Cambridge Institute for Sustainability Leadership (CISL)

27 May 2019 – Earlier this month, the Centre for Sustainable Finance hosted a workshop on quantifying climate-related transition risks to the UK financial system. The workshop was organised by the consortium behind the project FRANTIC – Financial Risk and the Impact of Climate Change.

strandedThe consortium includes University of Cambridge Department of Land Economy, the Open University, the University of Exeter, SOAS University of London, Cambridge Econometrics, as well as the University of Cambridge Institute for Sustainable Leadership’s (CISL) Centre for Sustainable Finance.

In March, the Governor of the Bank of England reiterated a stark warning that both the impacts of climate change and those of climate policies could have pronounced effects on the UK’s financial and insurance industries. While climate policy seeks to avoid long-term physical damages from climate change, it may also negatively affect financial markets as the demand for fossil fuels, and the valuation of fossil fuel-related financial assets falls. Such assets could become ‘stranded’ by the transition to net-zero economy. The financial risks arising from this transition, including the related stranding of fossil-fuel assets, have been termed ‘transition risks’.

The FRANTIC project aims to develop a robust characterisation, quantification and communication of climate-related transition risks using highly specialised software tools and a consultative analytical procedure. As highlighted in a recent speech from the Bank of England the project/FRANTIC recently estimated the potential global loss in value of fossil-fuel assets to be $1-4tn, and with potentially much larger macroeconomic impacts. The FRANTIC model represents the first of a new generation designed to assess the impacts of detailed climate policy packages on global and national economies. To address the issue of financial contagion, triggered by fossil-fuel asset devaluation, the project will map out the network of ownership of fossil-fuel assets to create a form of “fossil-fuel financial geography”. The ultimate goal is to identify and explore risks and assess strategies and responses that could reduce climate-related transition risks and improve the UK’s economic resilience.

The workshop had dual aims. The first was to provide insights into scenarios that are used to model technology based transition. The second was to explore potential approaches to modelling the impact of stranded assets on the financial system and solicit feedback from the practitioner community on the most useful approaches to take. In this regard, the workshop presented a unique opportunity to connect practitioners from banks, asset managers, insurance companies and regulatory bodies with the FRANTIC team at the start of the project. The timing of the workshop enabled the research and practitioner communities to share insights and co-design the research methodology. Now the FRANTIC team will synthesise the insights gained and conduct the necessary modelling to estimate the impact to the UK financial system.

Closer to the end of the project in February 2020, the Centre for Sustainable Finance will conduct another workshop to discuss findings.



If you would like more information about the project please contact the Research Director of the Centre, Dr Nina Seega.