Publication / 29 Mar 2017

Internalization of Environmental Costs for Investment Stress Testing

Trucost and the Industrial and Commercial Bank of China (ICBC) have developed a tool for investors to assess the potential internalized costs and environmental risks of their investments in the aluminum sector.

Green finance in China has grown tremendously over the past few years. Despite receiving policy priority and broad anticipation by the market, green finance still faces several challenges to implementation at scale, including environmental externalities, inadequate funding for long-term investment, information asymmetry and lack of a “green” definition and analytical capacity.

This report continues the collaboration between Trucost and ICBC by focusing on one sector – aluminum – and developing a sensitivity analysis tool for investors to assess the potential internalized costs and environmental risks of their investments in this sector. This assessment framework could help investors incorporate environmental risks into their investment stress testing.

ICBC has pioneered environmental stress testing in China since 2015, which not only facilitates interest and awareness in assessing environmental risks in investment decision making, but also contributes to knowledge building in this field for the banking sector around the world. Building on ICBC’s experience, the Green Finance Committee encourages other financial institutions to look into environmental stress testing, marking a crucial milestone in green finance development in China.

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