Are Finance and Sustainability Really Compatible?

In this month's interview, Gianfranco Gianfrate, Associate Professor of Finance at EDHEC Business School and Director of the Research Programme “Impact on Climate Change of Financing and Investment Decisions” at EDHEC-Risk Institute, discusses his recent nomination as Director of GRASFI, the Global Research Alliance on Sustainable Finance and Investment. He showcases EDHEC’s Sustainable Finance thought leadership throughout the research, teaching and initiatives he is involved in. He also underlines the complementarity between finance and sustainability. Finally, he tells us about EDHEC-Risk’s upcoming projects on sustainable finance.

What is your role at EDHEC?

Gianfranco Gianfrate:

I am professor of finance at EDHEC Business School. I lead a research programme on the financing of the climate transition at EDHEC-Risk Institute. I am also director of GRASFI, the Global Research Alliance on Sustainable Finance and Investment.

I teach courses in finance with a particular focus on climate change finance and the valuation of companies.

What is the Global Research Alliance for Sustainable Finance and Investment?

Gianfranco Gianfrate:

The Global Research Alliance for Sustainable Finance and Investment is an initiative by leading international universities in the field of sustainable finance and investment. Its objective is to coordinate the research efforts by leading international universities with a strong presence in the field of climate change finance to promote better research and improve the ways sustainability and climate finance is taught at universities.

This initiative is encouraging universities to integrate teaching on sustainability and climate change finance in a more effective way for undergraduates and graduate programmes.

What is the relationship between EDHEC & GRASFI?

Gianfranco Gianfrate:

EDHEC Business School joined GRASFI in 2020, and this was an important achievement because it is a formal recognition of the effort that EDHEC Business School has made on research and teaching in topics such as sustainability in investment or the integration of climate change risks into the decision-making process at companies and leading financial institutions.

So it was very important for EDHEC and we are very proud to have joined this phenomenal club of leading research and teaching institutions. We now look forward to collaborating with the other GRASFI members to deliver better research and develop new initiatives, including the annual Conference on Sustainability. We are also planning other events that we will be promoting in coming months.

I am very honoured to having been appointed director of GRASFI for one year as an initial appointment, and I look forward to promoting the collaboration between EDHEC Business School and the other members of the alliance.

The driving force behind the decision to join GRASFI was EDHEC-Risk Institute. Lionel Martellini and I in particular led the process.

This is recognition of the effort that EDHEC-Risk Institute has put into the integration of innovative investment techniques and portfolio strategies in recent years.

Of course, sustainability is the new standard in the investment world, and EDHEC-Risk Institute has been leading the process to study and explore the extent to which sustainability can be integrated into portfolio allocation and investment decisions. We have a clear objective to be a leader in the field of applied research on sustainability and including climate change in the investment process.

Are finance and sustainability really compatible?

Gianfranco Gianfrate:

Finance and sustainability are not opposed to one another. Sustainability concerns are the present and future of our societies. As such, finance needs to understand how to incorporate the sustainability footprint and climate change risks into the decision process regarding investments and the financial decisions taken by corporates.

Finance and sustainability need to work together. This is a two-way process. On the one hand, finance needs to recognise the risks associated with sustainability and needs to incorporate those risks into the investment process and portfolio allocation. On the other, finance can help sustainability by, for example, channelling capital towards public and private investments that can address the climate change challenge.

What recent research outputs on sustainable finance are worth mentionning?

Gianfranco Gianfrate:

At EDHEC-Risk Institute, we have been conducting an intensive research programme over the last two years on integrating climate change concerns into the investment process and on the extent to which institutional investors can act in terms of their sustainability footprint.

As for research outputs, we have published several papers in leading academic and practitioner journals. For example, we recently published two papers on the topic of internal carbon prices. Internal carbon prices are a way for companies to integrate climate risk concerns into their internal investment process.

In the last year, EDHEC has published a paper on the relationship between exposure to climate risk and credit risk. This paper received a lot of attention, not only in academic circles but also from supervisory authorities and central banks, because its implication is that central banks need to act and factor in climate considerations when making decisions about the banking system and the way monetary policies are designed and implemented. So this was an important achievement for EDHEC.

What are the applications of this research in the financial industry?

Gianfranco Gianfrate;

Most of the research currently available is focused on equities. The research that EDHEC is carrying out on credit is showing the importance of climate considerations also for fixed income and loans. Therefore, we actually plan to continue our research on the relationship between sustainability and credit. We believe this is the next big thing in sustainable finance.

What are the next projects of EDHEC-Risk on sustainable finance?

Gianfranco Gianfrate;

We have several research projects on the way at EDHEC.

First, we are exploring how companies are integrating climate risks into their internal investment process.

Second, we are investigating how institutional investors can help the climate transition by integrating climate metrics and climate concerns into the way they build their portfolio and interact with the companies they invest in.

We are continuing our research on the relationship between climate risks and credit. We plan to do this at the level of both firms and financial institutions.

Finally, we are studying greenwashing. We believe that for sustainable finance it is essential to measure greenwashing and understand how and why companies and investors are misreporting their sustainability performance. They are misrepresenting their sustainability footprint.

In December 2020, we were part of a panel at a conference entitled “Recent advances in green finance” that was organized by Banque de France and Institut Bachelier. This conference featured leading experts from the academic world, but also from the policymaking world. Its objective was to discuss and reflect on the extent to which climate concerns should inform the decisions made at the level of investors, but also at policymaking level.

EDHEC-Risk Institute, whose newly refreshed website will go online in January 2021 (check it out!), is working on several research and teaching initiatives as well as events open to the general public and the investor community, but also the policymaking community.

We are working on four different MOOCs that cover the entire spectrum of issues and opportunities related to climate change and sustainability. So we are going to tackle, for example, the extent to which the natural sciences are predicting the future prices of financial assets. We are also covering how corporate finance and project finance can contribute to the transition towards a low-carbon economy, as well as looking at the interaction between climate-related political risks and risks measured by scientists. How do they influence the decisions of financial actors?

This new online programme will be released in September 2021. We hope you will join us and enjoy it.

About Gianfranco Gianfrate

Gianfranco Gianfrate is Associate Professor of Finance at EDHEC Business School. He writes and researches on topics related to innovation financing, corporate valuation, and climate change finance. Prior to joining EDHEC Business School, he held teaching and research positions at Erasmus University (Netherlands), Harvard University (USA), and Bocconi University (Italy). Gianfranco also has extensive experience in the financial industry, having worked, among others, for Deloitte Corporate Finance (Italy), Hermes Investment Management (UK), and iStarter (UK). Gianfranco holds a BA and a PhD in Business Administration from Bocconi University and a Master in Public Administration from Harvard University. For detailed information, please consult the conference programme.