EDHEC-Risk Research Highly Commended for the Best Quant Paper 2021
Written on 07 Dec 2021.
We are very delighted to announce that EDHEC-Risk research paper "Measuring and Managing ESG Risks in Sovereign Bond Portfolios and Implications for Sovereign Debt Investing" has been Highly Commended for the Best Quant Paper 2021 in Savvy Investor Awards 2021.
Savvy Investor Awards celebrate the best investment contents and thought leadership for the past year. The selection process begins with the creation of a preliminary shortlist of around 250 papers. The quality of these papers is assessed by Savvy Investor judging panel, based on many elements including the substance and depth, presentation and prose, readability, objectivity, and of course, its appeal and relevance to their institutional investor audience.
View the official announcement of all awards winners here: Savvy Investor Awards 2021: The Best White Papers.
Quantitative finance applications have continued to grow in popularity across the institutional investment world in 2021. Despite the ‘Covid-quake’ of March 2020, this year has seen increased institutional interest in quant – whether for risk management, portfolio construction, or asset allocation strategies. As quant continues its consolidation across themes such as factor investing and ARP, new areas of research are further developing the art of quant whether in stock-bond correlations, quant ESG, or quant credit.
View the official announcement of all awards winners in the Best Quantitative paper 2021 category.
In the awarded publication, "Measuring and Managing ESG Risks in Sovereign Bond Portfolios and Implications for Sovereign Debt Investing", EDHEC-Risk Institute, with the support of Amundi ETF, Indexing & Smart Beta, develops a formal framework for incorporating environmental, social and governance (ESG) criteria into risk management and investment decisions involving sovereign bonds.
The main objective is to assess whether it is possible to incorporate ESG constraints through a significant improvement of the portfolio ESG score without a substantial increase in absolute and relative risk budgets, or a substantial decrease in expected performance.
Lionel Martellini and Lou Salomé Vallée, authors of the study draw four major conclusions:
- Higher environmental scores for developed countries and higher social scores for emerging countries are associated with lower costs of borrowing for issuers and consequently with lower yields for investors.
- Negative screening leads to more diversified portfolios and lower levels of tracking error, while positive screening leads to higher levels of improvement of ESG scores, at the cost of an increase in absolute and relative risk budgets.
- A dedicated focus on absolute or relative risk reduction at the selection stage allows investors to reduce the opportunity costs along the dimension that is most important to them.
- ESG momentum strategies in sovereign bond markets can be used to further reduce some of the aforementioned opportunity costs.
The results suggest that sound risk management practices are critically important in allowing investors to incorporate ESG constraints into investment decisions at an acceptable cost in terms of dollar or risk budgets.
Commenting on this research, Lionel Martellini, Professor of Finance at EDHEC Business School and Director of EDHEC-Risk Institute, said:
"This paper contributes to the ESG-investing literature on the importance of ESG considerations across asset classes by exploring the impact of ESG factors on the risk and return of sovereign bonds from an investor perspective and, in particular, investigating how to measure and manage EGS risks in sovereign bond portfolios and their implications for sovereign bond portfolio strategies."
Commenting on the results of the survey, Laurent Trottier, Global Head of ETF, Indexing and Smart Beta Management at Amundi, said:
"Supporting EDHEC-Risk on this research harnesses Amundi’s expertise in fixed income indices and leadership in sustainable investing. As passive investors increasingly seek to incorporate ESG into their fixed income allocations, this research identifies important practical implications which address sovereign bond investors’ need for a more systematic approach to determining their exposure and the potential investment risk of ESG factors."
You can access an exclusive 2-page summary of the publication outlining the authors’ main insights here: https://risk.edhec.edu/measuring-and-managing-esg-risks-sovereign-bond
You can access the full publication here: “Measuring and Managing ESG Risks in Sovereign Bond Portfolios and Implications for Sovereign Debt Investing”.
This paper, was also published in the September 2021 special issue on Novel Risks of the Journal of Portfolio Management.
This research was supported by Amundi as part of EDHEC-Risk Institute’s “ETF, Indexing and Smart Beta Investment Strategies” research chair.
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
