In 2DegreesInvesting/r2dii.climate.stress.test: Climate Transition Risk Stress Test for Listed Equity, Corporate Bond and Corporate Loan Portfolios

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Reading and understanding the output files

This vignette gives a brief overview of the files that are generated by the climate transition risk stress test provided in r2dii.climate.stress.test and proceeds to explain in depth how to read the data in each of the files.

Overview of output files

The source code generates three result (output) files after completing the transition or litigation risk stress test for a given set of parameters. They principally contain estimates of the market risk of companies in the portfolio and of the credit risk of said companies in a corporate loan book. The source code additionally outputs a log file which holds information on the settings of the current transition risk stress test run.

If the user follows the recommended data folder structure the output files will be found here:

• example_project/
  • output

The output files are:

Log file

• log_file_\<suffix>.txt

Crispy output

• crispy_output_\<suffix>.csv

Company trajectories

• company_trajectories_\<suffix>.csv

Content of output files

In this section, we look at each result file and what each of the variables they contain mean. The set of input parameters, common to all result files, is described at the end of the following list. Special attention at the end is also dedicated to the slight differences in the format of results created from a sensitivity analysis.

log_file_\<suffix>

This is a text file that contains information on the settings of the stress test run that created the results files. The user can check on the:

• the paths to the input ( input_path_project_) and output (output_path) directories.
• next, a full list of the values of the input parameters for the stress test analysis as described here.
• finally, information on the companies that were excluded from the analysis due to cases of unsuccessful matching of PAMS results on the company financial data.

crispy_output_\<suffix>

This file contains

• company_name: Name of the company that was analyzed.
• sector: Sector of the production assets analyzed.
• business_unit: Name that highlights the use of the carbon budget.
• company_name: Name of the company that was analyzed.
• roll_up_type:
• scenario_geography: Region for which the analysis was run. This refers to the location of assets considered as well as the regional break down of the scenario targets used.
• baseline_scenario:
• shock_scenario:
• ldg:
• risk_free:
• discount_rate:
• dividend_rate:
• growth_rate:
• shock_year:
• net_present_value_baseline:
• net_present_value_shock:
• net_present_value_difference:
• term:
• pd_baseline: Probability of default under the baseline scenario.
• pd_shock: Probability of default under the shock scenario.
• pd_difference:

company_trajectories_\<suffix>

This result file contains

• scenario_name: Name that highlights the use of the carbon budget compensation mechanism and the year of the introduction of a transition policy.
• company_name: Name of the company that was analyzed.
• year: Calendar year.
• scenario_geography: Region for which the analysis was run. This refers to the location of assets considered as well as the regional break down of the scenario targets used.
• ald_sector: Sector of the production assets analyzed.
• ald_business_unit: The ald_business_unit can be understood as a sub-sector. These must be in line with the technologies, for which the scenarios provide production pathways.
• production_plan_company_technology:
• phase_out:
• production_baseline_scenario:
• production_target_scenario:
• production_shock_scenario:
• company_id: Unique company number, based on an Asset Resolution classification.
• pd: Probability of default.
• net_profit_margin:
• debt_equity_ratio:
• volatility:
• price_baseline_scenario:
• price_shock_scenario:
• net_profits_baseline_scenario:
• net_profits_shock_scenario: Net Profits of a company under shock scenario.
• discounted_net_profits_baseline_scenario: Discounted net profits of a company under baseline scenario.
• discounted_net_profits_shock_scenario: Discounted net profits of a company under shock scenario.
• baseline_scenario_arg: Name of the baseline scenario.
• shock_scenario_arg: Name of the Shock scenario.
• lgd_arg: Loss given default applied in the calculation of the expected loss. *risk_free_rate_arg the risk free interest rate. Input parameter to the Merton credit risk model.
• discount_rate_arg the annual rate at which future cash flows are discounted when calculating the net present value of companies in the loan book. Since the net present values are indirect inputs into the Merton credit risk model, this parameter my be relevant.
• growth_rate_arg the perpetual 'economic' growth rate used in the discounted cash flow model for the calculation of terminal value of each firm in end_year + 1. Must be positive and strictly smaller than discount_rate.
• div_netprofit_prop_coef_arg coefficient that indicates what share of the net present value should be considered to derive the equity value of a company.
• shock_year_arg year in which the policy is introduced, that adjusts the production values of companies to stay in line with carbon budgets.
• scenario_geography_arg:
• start_year_arg:

While there may be some redundancy to this information, it is there to ensure the results remain reproducible and straightforward for the user to understand given magnitudes in the model results. In the standard run of the stress test, with a single value specified for each input parameter, this implies that the argument columns just contain one value each (as opposed to sensitivity analysis where the user can set multiples values of input parameters).

Sensitivity Analyses

Running a sensitivity analysis produces as many sets of results as the number of input parameters selected for the variable of interest.To keep the ensuing analysis as simple as possible, the results files are named with a suffix indicating the parameter that was varied in the particular run and saved in a new output folder. Apart from the indicative naming suffix the sensitivity analysis results files produced have the same format as described above but contain the results of multiple runs in a single file.

The variation is observed in the argument column of the parameter that was iterated over. Instead of just one value, it will contain values for every iteration of the sensitivity analysis, be it two or more.

2DegreesInvesting/r2dii.climate.stress.test documentation built on June 6, 2024, 8:23 a.m.