This supplement, prepared by EDHEC-Risk Climate, EDHECinfra and Scientific Portfolio, aims to provide institutional investors with an academic research perspective on the most relevant issues in the industry today. It contains articles of particular relevance to asset owners on topics such as climate, economics and finance.
Written on 25 Apr 2023.
Since 2001, EDHEC Business School has been implementing an ambitious research policy combining academic excellence with practical relevance. This includes furthering scientific research in those areas where the school excels in terms of expertise and research results and highlighting practical implications and applications to decision makers. This is complemented by business ventures accelerating the transfer of innovation to the industry.
This policy was spearheaded by risk and investment management research centre EDHEC-Risk Institute, which has now become EDHEC-Risk Climate Impact Institute, illustrating the strategic priority the School assigns to sustainability issues. The mission of this new institute is to help private and public decision makers manage climate-related financial risks and make the best use of financial tools to transition to low-emissions and climate-resilient economies.
In the lead article of this issue, EDHEC-Risk Climate Scientific Director Professor Riccardo Rebonato, the latest recipient of the PMR Quant Researcher of the Year Award, describes how the oft-criticised models linking the economy and the planet's climate can be upgraded to include the latest advances of science. Professor Rebonato presents original simulation work showing that targeting 1.5–2°C of warming can be justified as an optimal goal from an economic standpoint. He also shows that while the emissions abatement pace implied by such an objective is technically possible, it is improbable and should not be considered a ‘central’ scenario.
In the second article, the core team of Scientific Portfolio describes how they developed a factor that captures both the sectoral and intra-sectoral dimensions of transition risks. The authors find that, while their factor is forward looking, it efficiently identifies funds considered as 'green' or 'brown'.
In the third article EDHECInfra analyzes the outperformance of low-carbon energy infrastructure investments over the past decade and find that it is largely explained by excess demand. After controlling for risk factors, the authors find no persistent 'green' risk factor, but instead a 'green price premium' that investors have been willing to pay.
In the fourth article, we use advanced econometric methods to explore the relationship between stock returns and proxies for environmental footprint. We identify a latent environmental factor with significant explanatory power in the energy sector and find that emissions-related metrics are the main drivers of stocks' exposure to this factor.
In the penultimate article of this special issue, we use a variety of language models to construct climate news indices. We find that returns of high carbon intensity portfolios show a strongly statistically significant negative association with a climate-news index constructed from the aggregation of sources. This research benefits from the support of Amundi.
Finally, we introduce and discuss the characteristics of long-term climate scenarios, such as those developed by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), we look at their operationalization for climate-financial risk assessment, their current limitations and their potential for further development.
The first issue of the EDHEC Climate and Finance Research for International Money Management supplement to P&I proposes the following articles: