Editorial

Table of Contents

Measuring and Managing ESG Risks in Sovereign Bond Portfolios

Over the past decade, sustainable and responsible investing have gained momentum and continue to grow in popularity among investors, and it is increasingly recognised that the financial system has a particularly important role to play in the transition towards a low-carbon and climate-resilient economy. The integration of sustainability considerations into the decision-making process for investments, as measured by Environmental, Social and Governance (ESG) indicators, has been driven by investor demands, fiduciary duty, climate change and the development of new regulations and values. Sustainability in the financial sector is becoming mainstream and is reshaping global markets. In a recent paper, we explore the impact of ESG factors on the risk and return of sovereign bonds from an investor perspective, in particular investigating how to measure and manage EGS risks in sovereign bond portfolios and their implications for sovereign bond portfolio strategies.

Diversification and Insurance: Which Should Come First?

The authors find that for a given insurance payoff (CPPI or OBPI), the choice of the diversification scheme matters in the sense that equal weighting, variance minimisation, risk parity and maximum diversification lead to different outcomes. Conversely, for a given diversification scheme (equal weighting, variance minimisation, risk parity and maximum diversification), the choice of the non-linear insurance payoff matters in the sense that CPPI and OBPI lead to different outcomes. While diversification and insurance are most often performed independently from each other, the findings suggest that a closer analysis of the interaction between these fundamental risk management techniques may lead to welfare improvements for investors.

A Holistic Goals-Based Investing Framework for Analysing Efficient Retirement Investment Decisions in the Presence of Long-Term Care Risk

The authors present a flexible framework developed to provide personalised advice on retirement investment decisions in the presence of life event risk. This article shows an application of this framework in a simple setting with two assets, a 50%/50% stock/bond balanced fund and an immediate annuity with a 2% COLA indexation. The analysis presented can be extended in a number of directions involving the use of alternative welfare functions or the introduction of additional assets such as target date funds or variable annuities.

Green(ish) Bonds - Is the Growth Sustainable?

On the 25th February, 2021, Justine Leigh-Bell, Deputy CEO of Climate Bond Initiative, together with Professor Gianfranco Gianfrate, professor at EDHEC Business School, held an online debate on the topic of "Green Bonds" and climate change finance. The debate, focused on the value and development of the "Green Bonds" market. Indeed, there has been an increasing focus in the past years on the numerous issues related to climate change and the environment, a focus that has spread through the financial markets. On one side, there is a strong effort for developing instruments that incentivise, or at least price correctly, initiatives that have in mind a positive effect on the environment. On the other side, as with any new movement in the market, there is the concrete risk of it being a momentary trend, perhaps even a bubble.

EDHEC-Risk Institute has been cited widely in the business and industry press. A selection of articles may be found below.

• "New EDHEC-Risk Institute Paper Explores The Impact Of ESG Factors on Risk and Return of Sovereign Bonds", Mondovisione (30/03/2021)
• "Europe's most SFDR-friendly asset managers", Ignites Europe (24/03/2021)
• "Greenwashing in finance: Europe's push to police ESG investing", Financial Times (10/03/2021)
• "EDHEC-Risk Institute: A Rather Positive Month For Hedge Fund Strategies, Despite A Bumpy Market", Mondovisione (10/03/2021)
• "Scenari 2021 e sostenibilità nel nuovo numero di Stay On Track, magazine di Amundi ETF", Yahoo (04/02/2021)
• "EDHEC Business School Launches MSc In Climate Change & Sustainable Finance", Business Because (01/02/2021)
• "The inflation dragon is threatening a comeback", Treasury Today (28/01/2021)
• "Book Review: Advances in Retirement Investing", Enterprising Investor - CFA Institute (21/01/2021)

Director EDHEC Risk Climate Impact Institute (ERCII)

EDHEC's ambition is to make the EDHEC Risk Climate Impact Institute an international centre of reference in the area of fundamental and applied research on measuring the impact of climate change on asset prices and on the financial industry's participation in mitigating climate change. The Director will participate in building a team of researchers and development support staff of around 15 people. The director will have direct responsibility for the implementation of the institute's outreach, whether it involves organising presentation events and promoting the research to the industry or scientific cooperation with the industry. To apply, please send your CV and a cover letter to [email protected].