Pioneering work has examined the link between climate news and equity market returns with a view to isolating "climate beta" that could be used to construct climate-risk hedging portfolios. This study, which benefited from the support of Amundi, applies the latest natural language processing methods to construct climate news indices from newspaper articles. It uncovers a statistically significant negative relationship between climate concerns and the performance of high carbon intensity portfolios. It also finds evidence that these concerns impact the longer-term performance of low minus high carbon intensity portfolios. However, the size of the economic impact has disquieting implications.

A large number of studies has failed to date to identify a robust and economically significant climate risk premium or climate beta, either at the aggregate or at the sectoral level. The author examines several explanations of why this may be the case, and finds that a mispricing of climate risk is the most likely explanation. If this is true, price adjustments will eventually occur, either in a gradual or in an abrupt way. This is a novel source of risk, which should be on the radar screen of long-term investors.

The April 2023 issue of the EDHEC Research Insights supplement to P&I 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 with four contributions by EDHEC-Risk Climate Impact Institute, the supplement includes articles by researchers from EDHEC Infrastructure & Private Assets Institute and Scientific Portfolio (an early-stage technology initiative continuing the investment analysis and portfolio construction legacy of EDHEC-Risk Institute).

As disclosures of environmental performance receive increasing attention, reporting entities have higher incentives to disclose strategically. The authors propose a novel set of measures to capture greenwashing and they investigate the association between greenwashing and corporate governance features that traditionally mitigate agency problems.

Do SFDR Art 9 funds induce more significant inflows than Art 8 funds? Using the industry-wide reclassification of SFDR labels in 2022 as a natural experiment, the authors find statistical evidence that SFDR labels matter in attracting flows. They see a substantial and statistically significant effect of, on average -10.27% reduced flows in the immediate month following reclassification. Their results confirm the regulator's view that SFDR labels help to channel capital flows into greener funds.

The authors consider the case of a risk manager or policymaker who does not know the true climate and economic parameters of the Dynamic Integrated Climate Economy (DICE) model and who, because of political or social constraints, cannot act optimally. They find that the impact of parameter uncertainty on economic outcomes is much more pronounced away from optimality than along an optimal path. They also find that for this non-omniscient and politically constrained actor the most desirable of the feasible courses of actions depends strongly on the source of uncertainty.

In 2021, EDHECinfra & Private Assets Research Institute launched an ambitious $10M investment project to create science-based climate and social risk and impact metrics for infrastructure investors. Leveraging eight years of experience collecting financial data and creating internationally recognised benchmarks for infrastructure investors, the research centre is producing a body of research and investment knowledge on sustainability and infrastructure investment. We highlight recent contributions on physical risks, emissions estimation, green infrastructure, renewable energy and their financial relevance.

In this new paper - forthcoming in The Journal of Impact and ESG Investing – 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.

The transition to a low-carbon economy generates new risks for the financial sector. Recent research has investigated the impact of these risks on market prices by constructing dedicated factors. In this paper, forthcoming in The Journal of Impact and ESG Investing, the authors propose a new climate-transition factor that captures both the sector and intra-sector dimensions of the transition. Rather than adding this factor to a multi-factor model, they propose to disentangle the effect of climate-transition risks from traditional risks. Their approach enables investors to quantify and optimise the amount of risk coming from their exposure to transition sensitive instruments.

The summer 2023 issue of the EDHEC Research Insights supplement to IPE is a special infrastructure investment issue featuring contributions on how to proxy for TCFD disclosures; how to value infrastructure assets conditional on a climate-scenario; how to apply Natural Language Processing (NLP) techniques to produce social acceptance indices from social media data. It concludes with an analysis of the alignment of European infrastructure assets with the EU green taxonomy.

The authors uncover evidence of widespread sustainability ratings manipulation by mutual funds. Their analysis finds that ESG fund portfolios exhibit 31% higher ESG exposure immediately before mandatory portfolio disclosure than immediately afterwards. As a result, disclosed portfolios receive substantially higher ratings than actual portfolios would. They document that ESG manipulators earn higher risk-adjusted returns and attract more investor flows. At the asset level, they find that high-ESG (low-ESG) stocks rise (fall) in the days before fund portfolio disclosure and revert afterwards. They discuss whether ESG manipulation is optimal for investors and document similar behaviour by non-ESG funds, albeit more limited.

This paper evaluates the effectiveness of portfolio mandates on capital allocation. The authors argue that a firm's cost of capital is not a good measure of mandate effectiveness. Instead, evaluating the real impact of mandates requires examining their effect on sectoral capital allocation. Contrary to the prediction of endowment-based models, they show that mandates may have a negligible impact on the cost of capital and yet significantly influence the allocation of physical capital across sectors.

Riccardo Rebonato: “Beyond DICE- What the New-Generation Integrated Assessment Models Can Teach Us About the Optimal Abatement Policy", Fields Institute

"Climate Reporting for Infrastructure and Private Assets", ESG Investor and EDHECInfra & Private Assets webinar

Raul Leote De Carvalho (BNP Paribas): "Estimating Corporate Carbon Emissions with Machine Learning"

Speaker: Laurens Swinkels (Robeco & Erasmus University Rotterdam)

Moderator: Teodor Dyakov (EDHEC, EDHEC-Risk Climate).

In the heart of the conference's second day, our experts will take the stage to provide a genuinely critical state-of-the-art of the data, concepts, and techniques in the area of sustainable investing and also outline the prospects for better evaluation of the financial consequences of climate change. Frédéric Ducoulombier will discuss the quality of climate data in the session “Does Climate Data Meet the Challenge of the Climate Transition?” while Professor Rebonato will delve into the challenges in measuring climate risk in the plenary session “Beyond Climate Risk Scenarios”.

Speaker: Alejandro Lopez Lira (University of Florida)

Moderator: Dominic O'Kane (EDHEC, EDHEC-Risk Climate).

"More meaningful corporate sustainability reporting required", The Banker (12/09/2023)