What were EDHEC-Risk Climate’s top 10 most read articles in 2023?

A year in research: focus on climate and finance: climate change, climate risks, scenarios analysis, double materiality, sustainability reporting, ESRS, SFDR, carbon pricing and ESG

As we enter a new year, EDHEC-Risk Climate Impact Institute takes a look back at the most read articles in 2023, covering a diverse range of topics that are at the heart of its expertise.

#1 Portfolio Losses from Climate Damages: A Guide for Long-Term Investors

In this piece Riccardo Rebonato carefully examines the (de)merits of the advice given to pension trustees and engages with critics who assert that pensions are being put at risk by the flawed research and groupthink of climate economists.

His research concludes that pension trustees have indeed been poorly served by their consultants. He also concurs with critics’ views that the estimates of likely portfolio losses due to climate change in the authorities’ reports are implausibly tame. However, Professor Rebonato’s research offers a different and more nuanced perspective about how these conclusions have been reached and the use of dynamic integrated climate-economy (DICE) models. 

By Riccardo Rebonato, Scientific Director, EDHEC-Risk Climate Impact Institute and Professor of Finance, EDHEC Business School

#2 ASLEEP AT THE WHEEL? THE RISK OF SUDDEN PRICE ADJUSTMENTS?

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.

In the paper, Professor Riccardo Rebonato discusses the emergence of climate risks as new factors influencing asset prices.

The latest recipient of the PMR Quant Researcher of the Year award considers the potential underestimation of the effects of long-term physical climate risk on the cash flows of companies and government revenues, and the risk of repricing. 

By Riccardo Rebonato, Scientific Director, EDHEC-Risk Climate Impact Institute and Professor of Finance, EDHEC Business School

#3 Why We Need a New Generation of Climate Scenarios

Climate change presents unprecedented challenges to investors, policy makers and regulators. Adaptation, avoidance and remedial action all require knowledge of what may lay ahead of us, but unfortunately, with climate change we cannot say that “we have been here before”. This is why climate scenario analysis (and its cousin, stress testing) must play a particularly important role in guiding our responses to climate change. As we explore this unchartered territory, we are faced with greater challenges than traditional financial stress testing presents because we have much less data to draw on and shaky models linking temperature increases to economic damage. Yet, despite these difficulties, we are forced to also do something we usually dispense with when handling macrofinancial scenarios: we must assign at least order-of-magnitude probabilities to the various climate occurrences.

This edito by Riccardo Rebonato, Scientific Director of EDHEC-Risk Climate, has been originally published in the October newsletter of the Institute.

#4 SIX QUESTIONS ON INTERNAL CARBON PRICING

Companies are increasingly called upon to collaborate in the fight against climate change in the context of emerging global climate governance and rising public awareness for the need to accelerate decarbonisation. Corporate involvement in climate mitigation is crucial as over two thirds of global emissions since the start of the industrial revolution are attributed to large companies. For the same reason, corporates are particularly exposed to the risk that government at different levels will impose policies and regulations aimed at reducing emissions. New tools are emerging to assist with the delivery of corporate greenhouse gas (GHG) emissions reduction objectives, with internal carbon pricing (ICP) becoming a widespread practice globally (Aldy and Gianfrate, 2019). ICP is a voluntary method for companies to internalise the social cost of their GHG emissions, even when all or part of their operations are out of the scope of external carbon regulations. 

Understanding ICP becomes all the more relevant for corporates and investors alike with the recent inclusion of ICP in the cross-industry metrics whose disclosure is required for compliance with the updated guidance of the Task Force on Climate-related Financial Disclosures (TCFD, 2021).

This article by Gianfranco Gianfrate, Research Director at EDHEC-Risk Climate and Professor of Finance, EDHEC Business School, has been originally published in the October newsletter of the Institute.

#5 DOES CLIMATE NEWS IMPACT GREEN AND BROWN STOCKS?

Investors need to be mindful of the potential impact of climate change on asset prices. Following pioneering work by Nobel Prize Robert Engle, a number of papers have 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 with easy-to-trade assets. However, this study applies the latest natural language processing methods to construct climate news indices from newspaper articles. Linguistic dictionary, lexical sentiment-based techniques, and state-of-the-art transformer-based models are used to capture climate change concerns in leading newspapers over the 2005-2021 period. In this article, Professor Dominic O’Kane, Research Director, EDHEC-Risk Climate, and his co-author investigate the use of climate news as a measure of climate risk.

The research from which this article was drawn was produced as part of Amundi “Measuring and Managing Climate Risks in Investment Portfolios” research chair at EDHEC-Risk Climate Impact Institute.

#6 SUSTAINABILITY REPORTING AND MATERIAL DELUSIONS

Corporate reporting on sustainability matters is grossly inadequate. Despite clarifications by global accounting and auditing bodies, discussion and quantification of financially material sustainability risks and opportunities remain largely absent from statutory financial reporting. And, owing to the lack of legally binding standards pertaining to non-financial reporting, companies selectively disclose information in sustainability reports to weave self-serving narratives that too often bear little relationship to their actual impacts.

Frédéric Ducoulombier answers key questions about recent developments in Environmental, Social, and Governance (ESG) reporting and the concept of “double materiality.” In particular, he sheds light on the European Sustainability Reporting Standards (ESRS), adopted by the Commission in July 2023. What are their implications? What are the challenges and opportunities in the field of sustainability reporting? And can sustainability reporting contribute to real-world progress?

This interview with Frédéric Ducoulombier, Founding Director of EDHEC-Risk Climate, has been originally published in the October newsletter of the Institute.

#7 WHAT INTEGRATED ASSESSMENT MODELS CAN TELL US ABOUT ASSET PRICES

This paper explains what Integrated Assessment Models (IAMs) are, why they are useful to analyse the impact of climate change, and how the criticisms levelled at the early versions have largely been addressed.

With the new-generation IAMs, the Paris Agreement 1.5-2°C target emerges as an optimal, rather than 'aspirational', goal.

The paper also shows that following this optimal path requires an unprecedented change in emission trajectory. As a consequence, there is ample scope for negative surprises, which may currently be only imperfectly reflected in asset prices.

This paper by Riccardo Rebonato, Scientific Director of EDHEC-Risk Climate, has been originally published in the Investment & Pensions Europe (IPE) and Pensions & Investments (P&I) - special EDHEC Risk Climate supplements.

#8 RESEARCH IS ESSENTIAL TO SUSTAINING INNOVATION IN RESPONSIBLE INVESTMENT

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".

The chair aims to investigate whether it is possible to identify a measure of climate-change risk and, if so, to investigate whether it can be used to construct optimal portfolios with respect to climate-change risk. The first part involves the creation of a climate change news index, using a variety of language models and high-quality English-language newspaper sources (including the Financial Times for the first time in the literature). The second part aims to use this index to create climate-change risk hedged portfolios.

This interview with Timothée Jaulin, Head of ESG Development and Advocacy at Amundi, has been originally published in the inaugural newsletter of the Institute.

#9 GREEN LABELLING: HOW VALUABLE IS THE SFDR CATEGORISATION?

The European Union Sustainable Finance Disclosure Regulation (SFDR) aims to increase transparency on the integration of sustainability risks and the consideration of sustainability impacts by the financial services sector with a view to helping investors to make informed choices and steering private capital towards investments with progressive sustainability contributions. Under SFDR, asset managers (and other financial market participants) are required to explain how they integrate environmental, social and governance (ESG) considerations into their investment processes and to provide sustainability-related information with respect to financial products. Three types of sustainability disclosures are required for financial products: sustainability risks (financial materiality lens), principal adverse impacts (impact materiality lens), and proof of sustainability claims. In the latter respect, products that either “promote” environmental or social characteristics or have “sustainable investment“ as their objective are subjected to additional disclosures, as per SFDR Article 8 and Article 9, respectively. 

This article by Dr Bernd Scherer and Milot Hasaj has been originally published in the October newsletter of the Institute.

#10 OPTIMAL CLIMATE POLICY WITH NEGATIVE EMISSIONS

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.

When an important role is played by NETs to control global warming, the decrease in carbon emissions can be more gradual, reducing transition risk and social dislocations. they examine the impact on the economy of large-scale carbon removal programmes, the potential for moral hazard and the logistic problems associated with the storage of the removed carbon.

By Dherminder Kainth, Research Director, EDHEC-Risk Climate, Lionel Melin, CEO, MacroLucid Research, Dominic O’Kane, Research Director, EDHEC-Risk Climate, Riccardo Rebonato, Scientific Director, EDHEC-Risk Climate.

Stay tuned on our website to be informed on EDHEC-Risk Climate Impact Institute future research.

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