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EDHEC-Risk Climate Inaugural Newsletter - May 2023 Issue
Delivering Research Insights Double Materiality to the Financial Community
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Humanity is at a junction. The track record of political inaction; the power of vested interests; the weight of our legacy infrastructure provide excellent reasons to despair. However, legislative progress; the first successes of climate litigation and climate equity and growing support for bold climate action; the emergence of resources-efficient technologies and green economic interests offer glimmers of hope.
Despite the high likelihood of breaching the 1.5°C global warming threshold in the near future, a global economic reorganisation could still limit future damage and enable a transition towards sustainable resource management. Climate change action calls for a major role for finance – however, funding flows are not materialising at the scale needed as governments are neither directing these investments nor providing coherent signals that may prompt private actors to undertake these investments. The lack of coherent signals is also hampering the ability of economic agents to manage the risks arising from climate change.
In this context, there is a lot that financial economists and an applied finance research centre like EDHEC-Risk Climate Impact Institute can do. |
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Integrated assessment models (IAMs) are ambitious descriptions of the whole economy and of the Earth's climate, designed to give policy recommendations about the most cost-efficient course of action to counter the effects of climate change. After enjoying an initial popularity, they have been severely criticised for being of little use – and perhaps even dangerous. The author argues that, if made fit for purpose, IAMs can provide extremely useful policy guidance. In particular, their modern versions show that the target of 1.5–2°C warming by the end of the century can be justified as an optimal, not just an 'aspirational', goal. He also shows how ambitious the optimal policy would be: abatement would have to accelerate at an unprecedented rate and buck all existing trends. |
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Recent literature has sought to investigate the correlation between climate news and equity market performance, with the aim of quantifying a measure of a so-called 'climate beta'. Using a variety of language models and high-quality English-language newspaper sources, including the Financial Times and New York Times, the authors construct an unexpected climate news index (UCNI) for each model and source. They measure the impact of these UCNIs, plus an aggregate UCNI over all the news sources, on a range of Low Carbon Intensity (LCI), High Carbon Intensity (HCI), and Low-minus-High Carbon Intensity (LmHCI) equity portfolios, constructed by sorting S&P 500 firms based on their carbon intensity. |
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Interview |
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In this exclusive interview, we speak to Timothée Jaulin, Head of ESG Development and Advocacy at Amundi, about sustainable finance. We cover a range of topics, including the key issues facing the investment management industry, Amundi's research agenda, and the company's support for leading research initiatives on climate change mitigation and adaptation. Timothée also discusses Amundi's support for EDHEC-Risk Institute's transition into EDHEC-Risk Climate and the objectives of the research chair jointly funded by Amundi and the EDHEC Endowment, titled "Measuring and Managing Climate Risks in Investment Portfolios". |
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In 2019, Gianfranco Gianfrate, Professor of Finance at EDHEC Business School and Research Director at EDHEC-Risk Climate Impact Institute, was invited to contribute to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). In this short piece, we review the role and organisation of the IPCC, look at the main observations of the IPCC in relation to Climate Finance, zoom in on the contribution of Professor Gianfrate, and conclude. |
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Action by MFIs is urgently needed to deliver better climate finance. To do so, they need a theory of change, one which recognises that climate risks are forward-looking and that, in transition scenarios, the risk of carbon-intensive projects is higher than for low-carbon ones. Risk differential across scenarios should be reflected in the climate financial risk assessment of projects. Many MFIs that invest in climate finance have not yet internalised climate risks, with varying results in terms of climate impact. |
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Launched more than 30 years ago as the ‘Community Eco-label’, the EU Ecolabel is a world-renowned voluntary label of environmental excellence for goods and services helping consumers identify better options in terms of sustainability. In this contribution, the author reviews the results of a recent study of proposed EU Ecolabel criteria carried out by the European Securities and Markets Authority (ESMA, 2022) and suggests directions to get out of the fix in which the EU Ecolabel extension remains some five years after it was identified as a near-term priority by the HLEG.
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EDHEC-Risk Climate Publications |
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The report by Adaptation Without Borders rings the alarm bell on transboundary climate risks. It provides new evidence on ten transboundary climate risks of global importance that affect critical sectors and regions. Chapter 2.6 "Transboundary #climaterisks and finance" assesses transboundary climate risks in global financial systems, with a specific focus on risks to foreign direct investment (FDI). The authors explore climate risk assessment methods to better integrate these risks in the international financial network. |
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The March 2023 issue of the EDHEC Research Insights supplement to IPE is a "climate and finance" dedicated edition featuring contributions on the modelling of climate change for financial analysis, the development of a forward-looking measure of transition risks, and the detection of the impact of climate change on asset prices. Along four contributions by EDHEC-Risk Climate Impact Institute, the supplement includes articles by researchers from EDHEC Infrastructure & Private Assets Institute (a 2016 offshoot of EDHEC-Risk Institute and the research institute at the origin of the leading provider of index data, benchmarks and analytics in the unlisted infrastructure universe), and Scientific Portfolio (an early-stage technology initiative continuing the investment analysis and portfolio construction legacy of EDHEC-Risk Institute). |
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Using a modification of the DICE model, the authors analyse the optimal use of emissions abatement and removal as policy responses to climate change. After calibrating the marginal costs of abatement and CO2 removal to the latest scientific information, they find that carbon removal must play a very important role in an optimal policy. If this policy is followed, they find that the Paris-Agreement 1.5-2 C warming by 2100 target is not just aspirational, but optimal. |
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The authors study whether the US stock market is pricing exposures to climate risks through the lense of a latent linear factor model with time-varying betas estimable by an extension of the instrumented principal component analysis (IPCA) of Kelly, Pruitt, and Su (2019). They are able to extract latent factors from a panel of returns and a set of observable firm-level characteristics and to interpret their factors as purely "green" or "financial" factors. |
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Selected Academic Publications |
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In this chapter of the Handbook of Energy Policy, the authors apply a Markowitz portfolio optimization approach and show that, given certain conditions, technological diversification can improve the risk-return profile of mini-grid portfolios, thus making the investments more attractive to potential funders. Policymaking should address the conditions that facilitate diversification allowing the enhancement of risk-adjusted investment returns. |
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The role of climate finance policies and instruments in scaling up and derisking low-carbon investments has received growing research attention. However, financial actors' reaction to climate finance initiatives, and their implications on decarbonization of the economy and on inequality, has not been assessed yet. The article contributes to addressing this knowledge gap by analysing under which conditions governments' climate finance policies and investors' climate risk adjustment can affect the success of the low-carbon transition and the ability to close the green investment gap. |
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The author develops an asset pricing model with partial segmentation and heterogeneous preferences to describe the effects of exclusionary screening and integration practices by sustainable investors on expected asset returns. By estimating this model for sin stock exclusion and green investing, he shows that the exclusion and taste premia significantly affect asset returns. He also finds evidence for the cross effects of exclusion and tastes between investable and excluded stocks. |
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EDHEC-Risk Climate Research Presentations |
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EDHEC Speaker series "The Future of Finance" |
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EDHEC Business School moved up three spots in the 2022 Financial Times Top 10 Best European Business Schools ranking to assume the #7 position. |
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EDHEC's Global MBA rose 26 spots to #47 worldwide in the FT's prestigious annual ranking. The Global MBA offers sustainable finance courses in collaboration with EDHEC-Risk Climate, and incorporates ESG topics. |
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The Journal of Portfolio Management has named Riccardo Rebonato "PMR Quant Researcher of the Year" for 2022. He is recognised as having pioneered the application of Bayesian networks to stress testing and asset allocation. |
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On December 1st, Gianfranco Gianfrate presented his paper "Executive Ownership and Sustainability Performance" at the Social Impact Investments International Conference (SIIIC). |
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At the 7th edition of the Green Finance Research Advances conference, Irene Monasterolo received the 2022 Banque de France "Young Researchers in Green Finance" award for her research work aimed at better understanding the role of finance in achieving climate objectives and better assessing the associated financial risks and opportunities, particularly through her pioneering work on climate change stress tests, which are crucial for financial stability. |
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Adaptation finance is still lagging despite increasing climate risks and impacts. Co-organised by Professor Monasterolo, EDHEC-Risk Climate and Chatham House, the COP27 side-event gathered over 500 people registered to learn from top experts on climate physical risk adaptation strategies. |
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29 June 2023 |
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Establishing whether “green” and carbon-intensive assets carry a positive or negative risk premium matters a lot for investment managers, because it determines whether these assets act as hedges, or they add to equity risk. Unfortunately, attempts to estimate the climate risk premium empirically have met with near-insurmountable difficulties and leave the practitioner puzzled.
At this webinar, Riccardo Rebonato, Scientific Director, EDHEC-Risk Climate Impact Institute and Professor of Finance, EDHEC Business School, will explain what one may learn about the climate risk premium by employing a state-of-the-art integrated modeling approach, and discuss investment implications. |
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Press Review |
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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- "Climate regulation and financial risk: The challenge of policy uncertainty", VoxEU (10/05/2023)
- "Finance durable : "Il est absolument indispensable de relier un scénario climatique à une probabilité d'occurrence" (EDHEC-Risk Climate)", RSE Datanews (11/04/2023)
- "Rencontre: Irene Monasterolo, Directrice de l'Edhec Risk Climate Impact Institute Programme", L'Actuariel (28/03/2023)
- "NGFS Climate Scenarios 'weakened by lack of investment data'", Responsible Investor (06/02/2023)
- "EDHEC Dean Emmanuel Métais Wants Grads To Lead On Climate & Impact", Poets & Quants (08/02/2023)
- "EU'S Ecolabel Needs a Rethink?", ETF Stream (24/01/2023)
- "Viewpoint: And if we trusted the market to improve ESG information?", Investment & Pensions Europe (20/01/2023)
- "Climate finance: what is reasonable to expect from MDBs?", The Banker (16/01/2023)
- "Forget net-zero: to halt global heating, aim for net-negative", The Conversation (11/12/2022)
- "Letter: Even children in Italy know ‘lo spread' matters", Financial Times (25/11/2022)
- "Irene Monasterolo : « Il devient urgent que la finance internationale fasse sa révolution »", Le Monde (18/11/2022)
- "COP27: Development banks must do more on climate", Le Monde (09/11/2022)
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