Climate Value at Risk (Climate VaR)

Climate Value at Risk estimates the potential financial impact of climate risks on an asset or portfolio, aggregating the physical risk component and the transition risk component under different warming scenarios. It translates heterogeneous hazards into monetary value loss: rising physical damage, carbon cost, stranded asset write-downs, low-carbon technology opportunities. Methodologically it draws on classic financial value at risk but over a long horizon and with much greater model uncertainty, since it depends on socio-economic pathways projected over several decades. Insurers and investors use it to stress-test balance sheets and feed prudential reporting. Its main limitation is the sensitivity of results to scenario assumptions, which can shift the estimate by a large factor depending on the chosen pathway.