Hanken Insights: Rethinking stress testing for a more complex world
Aspholm stated that traditionally, we have tended to analyse risks separately, but the real world does not work that way.
“The world we actually live in is shaped by interconnected risks, where climate change, geopolitical tensions, energy security, trade, supply chains and economic uncertainty all influence and reinforce one another.”
Researchers increasingly talk about compound risks, non-linear effects and feedback loops.
”That means the combined consequences can be different and potentially much greater than we would expect from looking at each risk separately.”
Shorter-term scenarios needed
According to Aspholm, recent empirical work has found significant interactions among geopolitical risk, climate-policy uncertainty and financial stress, with particularly pronounced effects in carbon-intensive sectors.
“We need shorter-term climate scenarios that can interact with the financial cycle, while recognising that long-term scenarios remain important.”
Aspholm describes the Network for Greening the Financial System’s short-term scenarios as a significant step forward, as they recognise that risks are shaped by geopolitical, economic and technological developments, as well as different financial shocks and policy response.
“We need to start asking more realistic ‘what if?’ questions. What if a major climate event strikes during an energy crisis, or trade restrictions slow the green transition? The question is no longer whether a climate scenario materialises, but what happens if it does so at the worst possible geopolitical moment.”
The event, Hanken Insights - Shaping the Future of Sustainable Investing: Building Resilient Investment Strategies, took place at Hanken on 22 September. Other speakers included Hanna Silvola, associate professor in accounting at Hanken, Tra Tham and Elina Hokkanen, doctoral researchers at Hanken, Sari Lounasmeri, CEO at the Finnish Foundation for Share Promotion and Sirkku Palmuaro, sustainability & finance director at Verkkokauppa.com.
Text: Jessica Gustafsson
Photo: Matilda Saarinen