EDHEC-Risk Climate Newsletter - July 2024 Issue Delivering Research Insights Double Materiality to the Financial Community
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Transitioning to low emissions and resilient economies “to secure a liveable and sustainable future for all” requires prompt action and considerable investment in climate change mitigation and adaptation. While substantial, the required investments are within the realm of global financial capabilities: their total amount pales relative to world GDP, government expenditures, and naturally, the accumulated wealth or the stock of financial assets. However, private investments and public funds directed towards mitigation and adaptation projects need to increase many times over current levels. The Paris Agreement, now close to a decade old, aims to catalyse this shift, but the systemic alignment of financial resources―whether public or private, domestic or international―with the goals of climate change mitigation and adaptation is still far off.
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EDHEC-Risk Climate Impact Institute's Scientific Director, Riccardo Rebonato, presents key findings from new research titled "How Does Climate Risk Affect Global Equity Valuations? A Novel Approach," supported by Scientific Beta. This work addresses limitations in current climate-aware valuation approaches and offers new insights into the impact of climate risk on asset valuations. The research introduces a novel framework that integrates asset pricing techniques with Integrated Assessment Models. It features a fully probabilistic treatment of economic and climate uncertainties, state-dependent discounting, and a consistent analysis of transition costs and physical damages. Key findings reveal that equity valuations are significantly affected by the aggressiveness of emission abatement policies, the presence of climate tipping points, and central banks' ability to lower rates during economic distress. The study shows potential valuation impacts ranging from less than 10% with robust abatement actions to over 50% in scenarios with minimal action and tipping points. This pioneering research highlights the critical importance of aggressive emission abatement policies to mitigate financial impacts, providing valuable insights for policymakers, investors, and financial institutions integrating climate risks into their valuation models. |
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Interview |
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In this interview, Rob Arnold, Sustainability Research Director at EDHEC-Risk Climate Impact Institute, discusses the creation of a new body of knowledge on decarbonization and climate resilience strategies in infrastructure sectors. He explains the necessity and beneficiaries of this knowledge, the project's structure, and how it addresses climate risks. Rob also talks about his collaboration with EDHEC Infra & Private Assets Research Institute on sustainable infrastructure taxonomies, the relevance to non-financial companies and investors, and the challenges in collecting climate risk data. Drawing on his experience as a senior advisor to the UK Government, he shares insights on supporting global transition and resilience efforts. |
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Companies are increasingly called to collaborate in the fight against climate change in a context of rising public awareness for the need to accelerate decarbonisation and of an emerging global climate governance. New tools for climate mitigation are emerging to assist with the delivery of corporate greenhouse gas (GHG) emissions objectives, with internal carbon pricing (ICP) becoming a widespread practice globally. ICP is a voluntary method for companies to internalise the social cost of their GHG emissions, even when all or part of their operations are out of the scope of external carbon regulations. Understanding internal carbon pricing is thus becoming essential to corporates and investors alike. The authors study the relationship between internal carbon price reporting and carbon footprint to assess the credibility of corporates' disclosures. Specifically, they study whether ICP adoption helps companies deliver on carbon footprint reduction or whether it is just a greenwashing exercise.
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The SSP/RCP framework is a powerful construct which has been central to how policymakers develop mitigation strategies and which has been embraced by the financial community. However, the authors believe that the scenarios which are developed using a series of models should be subject to scrutiny using well established model risk management approaches. Specifically, the framework is deliberately built as a set of scenarios with no associated probabilities, which is challenging for investors to use meaningfully with no view as to likelihood, dispersion and risks around the single paths. They highlight areas where the design might lead to an underestimation of the risk, potentially giving rise to a false sense of security on the impacts of climate change and how transition might unfold. |
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To fully decarbonize the economy by mid-century, abatement initiatives are required for which unsubsidized private intervention is less likely to provide financing than has been the case so far. Public involvement will have to take the form of higher taxation or higher debt. In the present condition of unprecedentedly high public debt, and of reluctance to accept higher taxation, this creates a trilemma between public debt, level of taxation, and level of abatement. If the second phase of the green transition is mainly financed by debt, the global debt burden could rise by as much as 40%, putting pressure on interest rates. This would have direct repercussions on the price of government bonds, and an indirect effect on equity valuation via the discounting channel.
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EDHEC-Risk Climate – Practitioner Publications |
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The study, conducted within the research chair established by EDHEC Business School and Scientific Beta, introduces an innovative approach to understanding the impact of climate change and climate change policies on global equity valuations. Sensitivity analyses reveal that the severity of the impact on equity markets depends on the pace of abatement, on the precise location of tipping points, and on the continued ability by Central Banks to counter periods of economic distress by lowering rates. The study finds that even in the absence of tipping points, failure to take abatement action can reduce global equity valuation by over 40%. |
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The inaugural EDHEC-Risk Climate Impact Institute issue of the EDHEC Research Insights supplement to Investment & Pensions Europe analyses climate scenarios, scrutinizes the IPCC RCP/SSP framework, examines the next decarbonization phase, discusses the lack of correlation between internal carbon price disclosure and carbon intensity reduction, explores the materiality of value chain emissions, and investigates how extreme weather events influence mutual fund managers’ investment decisions.
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This policy report offers comprehensive insights into accounting for greenhouse gas emissions throughout companies’ value chains, and the challenges this process poses to companies and investors. Regulators are caught up in the contentious debate between investors and environmental NGOs who favour disclosure and business organisations and politicians representing fossil fuel interests who oppose it. The report explains how fiduciaries can ensure that consideration of value chain emissions issues is fit for purpose and how standard setters can avoid abetting greenwashing. It concludes with recommendations to companies, investors, and policymakers to enhance the quality, relevance, and cost-efficiency of disclosures.
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EDHEC-Risk Climate – Working Papers |
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The authors use an adaptation of a popular Integrated Assessment Model, according to which the carbon intensity, the rate of growth of the population and the cost of abatement technologies all strongly fall with GDP per capita to explore whether this implies that the end-of-century temperature will vary with states of high or low economic output. They find that, despite what they call the 'technological optimism' of the model, high (low) temperature outcomes are strongly associated with high (low) states of GDP or GDP per person. They also find that a robust abatement policy can effectively reduce temperature increases, even along paths of high GDP per person, strengthening the case for aggressive abatement policy. |
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The authors argue that what is usually referred to as climate 'transition risk' can be more usefully decomposed in an expectation part and a variability around this central value. They show the strong inverse relationship between the expectation component of transition costs and the expectation of physical damages, as well as a method of how to estimate this relationship. Results indicate that the uncertainty in transition costs decreases as the abatement policy becomes more aggressive (and physical damage decreases) but remains large as a fraction of the expectation component. |
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EDHEC Research Beyond EDHEC-Risk Climate |
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Sustainable investment funds have blown up in size in the last decade. However, many funds that claim to be sustainable still contain stocks of companies involved in greenhouse gas-intensive industries. In this article, Scientific Portfolio (an EDHEC Venture) researchers present their latest study in which they analyse the impact of the exclusion of these controversial stocks on the performance and risk profile of these funds. |
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In this paper, the authors introduce a decomposition method that enables the disentanglement of five factors that influence the emissions of a portfolio. The method can be applied to different climate impact metrics such as emissions intensity, footprint, or absolute emissions. The analysis can be historical or cross-sectional and can help decision makers achieve reduction targets compatible with climate objectives. It can also be used to uncover greenwashing in portfolio decarbonisation. |
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This report is part of the Consolidated Alignment Performance Analytics research project, developed and led by the Institut Louis Bachelier Labs in partnership with Scientific Portfolio (an EDHEC venture), and financed by the French environmental agency ADEME. The results build on the findings presented in the report “The Alignment Cookbook 2 - A technical panorama of the alignment methodologies and metrics used by and applied to the financial sector, with a view to inform consolidated alignment assessments”. This report introduces a framework for conducting sensitivity analyses of design choices in calculating a company's or financial portfolio's implied temperature rise (ITR), highlighting the impact of different carbon budget allocations on decarbonization benchmarks. |
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The survey revealed significant apprehensions and knowledge gaps among respondents. Concerned investors emphasised the urgent need for better data and information regarding physical climate risks in infrastructure investments. Importantly, the survey confirms that despite the recognised importance of physical climate risk, investors and managers lack sufficient tools and knowledge to assess its impact on their portfolios effectively. |
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This paper examines the role that green taxonomies play in defining and identifying sustainable infrastructure investments. The urgency of climate change and the global effort to transition to low-carbon economies has seen the development of multiple frameworks, taxonomies, and standards. This report analysed the challenges of using and interpreting an activity-based taxonomy to categorise infrastructure assets as sustainable (or not) and proposes key improvements that can support the applicability of such taxonomies to the infrastructure asset class. |
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The authors study the impact of unexpected climate shocks on banks' individual and systemic risks. Employing climate risk measures developed using the Billion-Dollar Weather and Climate Disasters data from the National Oceanic and Atmospheric Administration (NOAA) and Dealscan syndicated lending data, they find that climate risk exposure acquired through cross-state lending increases banks' individual and systemic risks. They also find that bank profitability helps offset some of the adverse effects of climate risk. Banks reduce lending and increase loan loss reserves after the experience of an unexpected climate shock. |
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Videos & Podcasts |
EDHEC-Risk Climate Research Presentations |
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Scientific Portfolio, an EDHEC Venture |
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EDHEC Speaker series "The Future of Finance" |
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EDHEC has confirmed its leading position in international finance education. This remarkable achievement reaffirms EDHEC's commitment to providing top-tier finance education and aligns perfectly with its "Generations 2050" strategic plan, which emphasizes the importance of sustainable finance.
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EDHEC’s executive programmes continue to move up in the Financial Times business school rankings. The new FT ranking highlights the loyalty of companies working with EDHEC to develop their top managers and executives, as well as participant satisfaction. EDHEC is committed to providing education with real-world impact, equipping executives with the skills and expertise needed to navigate the challenges of climate change and technology, ensuring their organizations can achieve financial resilience and growth. |
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As we move into the Summer, a period of reflection and anticipation, EDHEC-Risk Climate Impact Institute takes a moment to look back at the most-read articles in the past six months. These articles cover a diverse range of topics at the heart of our expertise (climate change, climate risks, climate scenarios analysis, greenwashing regulation, double materiality, sustainability reporting, Scope 3 emissions, and carbon pricing). |
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EDHEC Business School has unveiled its new strategic plan, "Generations 2050," focusing on addressing global challenges and fostering a sustainable future. A key highlight of this ambitious plan is the establishment of a dedicated "Climate Finance School," led by the EDHEC-Risk Climate Impact Institute. This initiative aims to consolidate expertise, disseminate best practices in climate finance, and prepare students and stakeholders to tackle climate finance challenges effectively. |
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Frédéric Ducoulombier, Director of EDHEC-Risk Climate Impact Institute contributed to a panel discussion titled "ESG data: meeting the evolving needs of responsible investors” at Responsible Investor’s annual European conference. This event was held in front of 600+ leading institutional investors to discuss the fast-changing sustainability regulations, the need to take decarbonization to the next stage, and the tools to support that transition even in uncertain political times. |
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Although the financial players have begun to change in response to the urgent need to tackle climate change, they are far from doing so quickly enough and to the right extent. But how can they be supported and equipped? This month, in the new issue of the #EDHECVox newsletter, our professors and researchers present their thoughts and concrete proposals on this subject. |
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Rob Arnold took part in a panel discussion on "Reporting standards to address resilience for investors” at the OECD Infrastructure Forum: Infrastructure for Resilience in Paris. Expert panelists discussed the integration of project-level certification with company-level reporting standards, focusing on enhancing sustainability and resilience in infrastructure investments.
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Existing climate scenarios, inspired by the IPCC framework, provide invaluable insights but were not designed for financial uses. During the webinar, attended by over 700 professionals, R. Rebonato and D. Kainth presented findings from their latest foundational white paper titled “Climate Scenario Analysis and Stress Testing for Investors: A Probabilistic Approach”, exploring approaches to enrich the existing framework with probabilistic information. |
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![](https://docs.climateimpactedhec.com/nwl_july_2024/calendar.png) |
30 September 2024 |
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Frédéric Ducoulombier will participate in two panel discussions at the Sustainable Investment Stage during Sustainability Europe 2024. Drawing from his experience in sustainable finance regulation, he will discuss the evolving regulatory landscapes, focusing on the SFDR's future and the importance of consistent regulatory interpretations. He will provide insights on the latest regulatory developments and their implications for sustainable investment strategies.
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![](https://docs.climateimpactedhec.com/nwl_july_2024/calendar.png) |
27 November 2024 |
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Riccardo Rebonato will discuss the impact of climate change on global equity valuation. Drawing from new research by EDHEC-Risk Climate Impact Institute, supported by Scientific Beta, he will discuss the effects of climate tipping points, the importance of state-dependent discounting, and the influence of risk premia on equity valuations under different climate scenarios.
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EDHEC-Risk Climate has been cited widely in the business and industry press. A selection of articles may be found below. |
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- "The problems with climate scenarios, and how to fix them", The Conversation (19/06/2024)
- "With A Forward-Looking Strategic Plan, France’s EDHEC Cements Focus On Climate & Sustainability", Poets & Quants (16/06/2024)
- "Il green bond certificato conviene: investitori pronti a pagare un premio extra", Il Sole 24 Ore (13/06/2024)
- "Webinar Announcement: Analyzing Climate Risk Effects On Global Equity Valuations", Rebellion Research (01/06/2024)
- "Evaluating the Impact of Climate Change on Investments", CIO Magazine (15/04/2024)
- "How companies calculate their carbon footprints", The Conversation (19/04/2024)
- "Opponents of mandatory Scope 3 reporting are ‘confusing the symptom for the cause’", Sustainable Views – FT (19/04/2024)
- "A powerful tool for businesses", Euro Day (08/04/2024)
- "Le prix interne du carbone : un outil puissant pour les entreprises", The Conversation (08/04/2024)
- "Research for Institutional Money Management", P&I (29/04/2024)
- "Scope 3 : Les données actuelles sont “inadaptées” à la construction de portefeuille", L’Agefi (29/03/2024)
- "France’s EDHEC Business School Launches An Online MBA", Poets & Quants (20/03/2024)
- "Best Sustainable Finance / ESG Courses & Certifications (2024)", Bankers By Day (15/03/2024)
- "Crisi Esg, negli Stati Uniti c’è chi vuol fare diventare reato l’investimento green", Il Sole 24 Ore (10/03/2024)
- "SEC approves long-awaited climate disclosure rule", IPE (07/03/2024)
- "SEC adopts landmark — but weakened — climate disclosure rules", The Banker - FT (07/03/2024)
- "Revolutionary Research Offers Probabilistic Tools for Climate Scenario Analysis in Finance", Rebellion Research (05/03/2024)
- "Impact of climate change news on stock portfolios", Absolut Research (26/02/2024)
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