Climate value-at-risk (climate VaR)

Climate value-at-risk estimates how much climate change could reduce the value of an investment portfolio or asset, expressed as a percentage or currency loss under a given scenario and time horizon. It extends the traditional financial value at risk concept, which estimates potential loss from market moves, to climate-specific drivers.

Climate VaR is typically decomposed into physical risk, losses from more frequent or severe weather and long-term climate shifts affecting assets or operations, and transition risk, losses from policy, technology and market changes as the economy decarbonizes, such as a carbon price or stranded fossil-fuel assets. These components are usually generated by running climate scenario analysis pathways through asset- or sector-level financial models, rather than measured directly like market VaR.

Investors and asset owners use climate VaR to compare portfolios, screen holdings, and meet disclosure expectations under frameworks such as the TCFD, feeding into broader ESG reporting and double materiality assessments. Because it depends on scenario choice, discount rates and modeling assumptions that vary by provider, climate VaR figures from different vendors for the same portfolio can differ substantially; it should be read as one modeled estimate among several, not a precise, uniquely correct number.