Scope ESG’s Macroeconomic Climate Stress Test (MCST) explores two important climate risks.

First, MCST looks at physical risks associated with temperature (chronic risk) and river flooding and droughts (acute risk). Secondly, MCST examines transition risks across the entire economic value chain, in other words accounting for the so-called scope-1, scope-2 and scope-3 greenhouse gas emissions.

The MCST projects climate risks in the three climate scenarios developed by the Network for Greening the Financial System (NGFS), namely orderly (early and gradual), disorderly (delayed), and hot-house (inaction) scenarios.

Stress testing Europe’s big economies finds Italy vulnerable, Germany less risky

“Applying the MCST to Europe’s five largest economies – Germany, France, Italy, Spain, and the Netherlands -- we find that Italy is the large EU economy most at risk in an adverse climate-change scenario in the decades ahead. Climate change under a delayed transition could cost a hypothetical EUR 17.5trn between 2020 and 2050, representing 14.5% of GDP,” says Dr. Hazem Krichene, Senior Director climate economist at Scope ESG.

“In contrast, we find that Germany is the least climate-risk exposed country, where in a scenario of delayed transition could cost EUR 7.1trn, representing 3.2% of cumulative GDP between 2020 and 2050,” says Dr. Krichene (Figure 1).

Figure 1. Climate change-related impact measured in loss-to-GDP (%), cumulative 2020-2050

Notes: values on the y-axis represent for the period 2020-2050 the cumulative discounted losses driven by climate change relative to cumulative GDP without climate change (baseline scenario). We use a discount rate of 3% based on the spot rate of all bonds according to the ECB. Source: Scope ESG Analysis

Scope’s results show a dispersion of climate risks across the largest EU economies

Transition risks are the most important in these countries, so a delayed transition (disorderly scenario) could lead to the highest revenue losses compared with the orderly or hot-house scenarios. Except for the Netherlands – partly because of its low exposure to physical risk given significant existing investment in flood-prevention – the orderly transition would lead to the lowest climate costs among the largest EU economies.

“However, with an achieved transition to net-zero by 2050 (orderly and disorderly), EU economies will not face additional transition risk in the second half of the century and could limit the physical risk impact to +2°C (or +1.5°C) compared with the hot-house scenario, where physical risk is expected to be five times higher by the end of the century according to NGFS projections,” says Tetiana Markiv, analyst at Scope ESG.

“A costly transition in the first half of the century would allow the EU big five countries to avoid possibly catastrophic and irreversible economic damage of the hot-house scenario in the second half of the century, projections for which are beyond the scope of our MCST model,” says Markiv.

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