Scenario stress testing for planetary risk evaluates the financial consequences if currently unreported environmental exposures (such as water scarcity, marine pollution, e-waste leakage, and chemical discharge) are suddenly recognized and priced by markets and regulators. This approach quantifies how sector and company valuations, cost of capital, credit spreads, and green bond eligibility would shift if these shadow risks became material.
The process involves modeling the sensitivity of market capitalization and financing costs to the inclusion of specific risk factors, such as shadow water liabilities or marine system degradation, across sectors like AI/cloud, semiconductors, logistics, and utilities. It highlights how unreported risks can have a disproportionately large impact on financial performance compared to already disclosed risks, with potential for significant market cap losses, bond yield spread increases, and downgrades in ESG ratings.
Stress testing also reveals the scale of investor outflows and recovery timelines following a shock, providing a forward-looking assessment of resilience and vulnerability. By integrating asset-level data, sectoral scenarios, and standardized risk factors, this analysis supports more robust risk management, regulatory planning, and capital allocation decisions in the face of evolving environmental disclosure standards and planetary boundaries