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Definition

Climate VaR

Climate VaR estimates how climate-related costs and opportunities could change an asset's or portfolio's value under a stated scenario, time horizon, discount rate, and valuation method.

What is Climate VaR?

Climate value at risk, or Climate VaR, estimates a valuation change under a stated climate scenario. It can combine transition costs, technology profits, and physical-risk costs into a currency amount or percentage. There is no universal formula, so record the provider, model version, valuation basis, scenario, and horizon.

Why does Climate VaR matter to you?

An investor or risk committee may use Climate VaR to compare holdings or test an allocation. A result of -4% means a modelled valuation decrease under stated assumptions, not a 4% expected loss. Keep the input file, result date, and approval record.

How is Climate VaR calculated?

Methods differ by provider. MSCI reports company Climate VaR as a percentage of market value across multiple scenarios and separates technology opportunities, policy risks, and physical risks. For a portfolio result, confirm the weighting method and holding coverage. Before comparing outputs, match the formula, sign convention, included components, scenario, horizon, discount rate, and asset coverage.

What mistakes should you avoid?

  • Reporting a percentage without its scenario, model version, valuation date, and denominator.
  • Presenting modelled downside as a forecast, expected loss, or accounting impairment.
  • Combining physical risk, transition risk, and opportunities without showing each component.

Is Climate VaR the same as financial VaR?

No. Traditional financial VaR usually estimates a loss threshold for a holding period and confidence level. Climate VaR may instead show a scenario-based valuation change over decades. Check the provider's definition.

What should you ask for before using a Climate VaR result?

Ask for the scenario name and version, temperature pathway, base date, time horizon, discount rate, valuation basis, covered hazards, emissions data, opportunity treatment, portfolio weights, limitations, and a reproducible calculation file.

Example

Suppose a hypothetical software and IT services firm in Italy has a market value of EUR 80 million on 31 December 2026. Under its internal Orderly Transition 2035 scenario, version 1, the model uses a 6% discount rate and estimates EUR 2.4 million of present-value transition costs, EUR 0.8 million of present-value physical-risk costs, and EUR 1.2 million of present-value technology-opportunity profits.

Net climate cost is EUR 2.4 million + EUR 0.8 million - EUR 1.2 million = EUR 2.0 million. Using a negative sign for devaluation, Climate VaR is -EUR 2.0 million / EUR 80 million x 100 = -2.5%. Excluding the opportunity would produce -EUR 3.2 million / EUR 80 million x 100 = -4.0%, showing why component coverage must accompany the result. These are hypothetical inputs, not forecasts of Italian conditions.

Where it comes up

MSCI company and security Climate VaR percentage across multiple scenariosMSCI Sustainability and Climate Symbols & Definitions, Climate Value-at-Risk, page 18Official sourceMSCI scenario analysis for transition and physical Climate VaRMSCI Scenario Analysis, Explore Climate Value-at-Risk and Climate Value-at-Risk sectionsOfficial source

Related terms

Climate scenario analysis

Climate scenario analysis tests how your strategy, business model and financial performance could change under several plausible climate futures, including physical hazards and policy, market and technology shifts.

Climate-related financial effects

A climate-related financial effect connects a climate risk or opportunity to a specific consequence for financial position, financial performance, or cash flows in the reporting period or a defined future horizon.

Physical climate risk

Physical climate risk is the potential for acute events or chronic climate shifts to damage assets, interrupt operations, disrupt supply chains, and change revenue, costs, cash flows, financing, or insurance.

Climate-related transition risk

Climate-related transition risk is the financial risk that policy, legal, technology, market, or reputation changes create as economies move towards lower greenhouse gas emissions.

Implied temperature rise

Implied temperature rise is a modelled estimate, expressed in degrees Celsius, of the warming associated with an entity's or portfolio's projected emissions path relative to a chosen climate benchmark.

Sources

  • MSCI

    Company and security Climate VaR, percentage range, scenario basis, and technology, policy, and physical components

    2026-08-21

  • MSCI

    Climate VaR as a forward-looking metric for transition and physical risk across scenarios

    2026-08-21

Last verified 2026-08-21

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Climate VaR Definition | Keslio