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January 2020 - Special Sustainable Investing Issue
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January 2020 - Special Sustainable Investing Issue
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Editorial
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Thoughts and Afterthoughts on the EDHEC Climate Change Finance Conference
All those involved, participants and speakers alike, agreed that the conference was a great success, with over 50 scholars attending the academic session (December 16) and 140 professionals in attendance at the plenary conference (December 17), including delegates from investment and wealth management companies, banks, institutional investors and academics. Our mandate was to explore the current state of the art - of both theoretical research and investment practice - when it comes to quantifying and managing climate change financial risks and opportunities. The remarkable level of engagement from all participants, which was facilitated by the chosen format, made it uniquely enjoyable and instructive for all.
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Feature
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Climate Change Finance: The Big Picture
The transition towards a low-carbon economy will require profound innovations in the way the global financial system manages climate-related risks. The initiatives to enhance the transparency of climate exposures of banks and asset managers are only the first step in the process of making the financial system resilient to climate risks. However, financial markets do appear to lack the tools and instruments needed by investors and financial intermediaries to effectively deal with climate risks. Policymakers should create the conditions to facilitate climate-related financial innovations.
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Interview
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"For Better Transparency and Accuracy in Responsible Finance"
In this month's interview, Frédéric Samama, Head of Responsible Investment at Amundi, discusses the evolution of responsible investing in the approaches adopted by institutional investors and reflects on the most effective ways for investors to enhance the materiality of investment decisions. He also tells us how to move towards more universally accepted norms for ESG reporting and explains how EDHEC-Risk Institute's research can help the industry to cope with these challenges.
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Industry Analysis
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Scientific Beta Low Carbon Option: Supporting the transition to a low carbon economy and protecting multi-factor indices against transition risks
Faced with the climate emergency, it is conservative to assume that there will be growing ecological, socio-political, and economic pressure on governments to set and enforce climate policies that materially reduce the gap between current emissions and the levels required to mitigate climate change. For most companies, this political response is a major component of the risks of a transition to a low carbon economy, which also include the impact from evolving technology, social norms and consumer behaviour. These risks could materially affect the financial positions of companies through balance sheet and income statement effects.
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The Market Price of Carbon Emission
ESG investing has gained significant importance in the investment community around the world. While in principle the idea of scoring firms by ESG characteristics is formidable, its implementation has proven challenging, primarily because of the difficulty in measurement. Using MKT MediaStats media information reservoirs, including tens of millions of articles, a particular component of ESG, the Carbon Emission narrative, is carefully measured and quantified daily. Individual stock daily return sensitivities to changes in narrative discussion (narrative betas) are computed using historical rolling windows.
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EDHEC-Risk European ETF, Smart Beta and Factor Investing Survey 2020
2019 was another record year for the European ETF industry. The rising demand for SRI/Ethical ETFs and significant interest in fixed-income Smart Beta solutions were two major recent trends examined in the 12th edition. Against this backdrop and following the growing appetite of investors for ETFs, we would like to invite you to participate in the 13th ETF, Smart Beta and Factor Investing survey. This survey continues to analyse European investor practices, perceptions in terms of challenges and benefits, and future plans for investing into Exchange Trade Funds (ETF), with an increased emphasis on ESG factors.
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Research Publications
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Scientific Beta Low Carbon Option - Supporting the Transition to a Low Carbon Economy and Protecting Multifactor Indices against Transition Risks
The Low Carbon fiduciary option applicable across Scientific Beta's flagship offering allows ethical and socially responsible investors to dissociate from companies with significant coal involvement and further promote the transition to a low carbon economy by reorienting their investments towards less carbon-intensive activities and companies. From a socially responsible investment perspective, the benefits of this reallocation are demonstrated by the material reductions in the coal-asset exposure of derived indices and in the carbon footprints of these indices, notably as measured by financed emissions to financed revenues.
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Shelter from the Storm: Which Safe Asset for Climate Disasters
Hurricanes give rise to flight-to-safety episodes during which equity market realised volatility increases and stock prices are depressed. Using an event study, the authors show that High Tech stocks consistently behave differently from stocks in other industries. Converting their abnormal, risk-adjusted returns into a certainty equivalent, they show that it is systematically greater than the short-term bond return. High Tech stocks' prices include a safety premium of at least 3.75% annualised and peaks at 16% annualised for periods of up to 20 days after hurricanes made landfall. This safe asset feature and the safety premium attached to it has strengthened in the period since the 2008 Global Financial Crisis.
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Scientific Beta Enhanced ESG Reporting - Supporting Incorporation of ESG Norms and Climate Change Issues in Investment Management
As business-case investors incorporating ESG dimensions to enhance returns and/or strengthen risk management join traditional values-based investors imposing non-financial constraints and/or objectives to align their investments with personal values or social norms, the motivations for incorporating ESG data into investment management have never been so diverse. Scientific Beta recognises the diversity of these motivations and its ESG and Low Carbon Fiduciary Options as well as the Enhanced ESG Reporting are designed to serve the needs of ethical and socially responsible investors as well as those of business-case ESG investors.
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Market-pull Policies to Promote Renewable Energy: A Quantitative Assessment of Tendering Implementation
Policymakers ideally select the support mechanism that better foments renewable energy production at the lowest cost to comply with international climate agreements. The authors assess the effect of the introduction of auctions in accelerating the addition of renewable capacity through three econometric models: fixed-effects multivariate regression, statistical matching and synthetic control. The dataset includes 20 developed countries, spanning from 2004 to 2014, and both macroeconomic and policy drivers. Results show that tendering has the strongest effects to promote net renewable capacity compared to other mechanisms like feed-in tariffs.
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News
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A Year in Research: What were EDHEC-Risk's top 10 Most Read Articles of 2019?
As we enter a new decade, EDHEC-Risk Institute takes a look back at the most read articles of 2019, covering a diverse range of topics that are at the heart of its expertise, including: sustainable investing, factor investing, machine learning and retirement investing.
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Lionel Martellini Invited to Join the Institutional Investors' Committee of Paris EUROPLACE
Since 12 December 2019, Lionel serves as the only representative from the academic world. The Paris financial marketplace plays a key role in financing the economy. The association aims to cover funding needs and favour high-performance and sustainable investments.
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How to Design Efficient Investment Solutions Consistent with Sustainable Investing Principles
EDHEC-Risk Institute now embraces sustainability in its asset allocation expertise on Factor Investing, Liability-Driven Investing and Sustainable Investing. Through a combination of lectures, discussions and case studies, this seminar will enable you to improve asset allocation and risk management processes, and develop new products and solutions.
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How Can Finance Positively Affect Climate Change?
The ever-greater damage being done to people and property by climate change and the increasingly stringent climate policies being introduced by governments around the world have prompted the financial sector to pay much greater attention to climate-related issues. The financial system will be crucial to supporting and accelerating investments in clean energy and the technologies needed to decarbonise the economy.
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EDHEC-Risk Institute and FirstRand Launch a Research Chair to Design and Implement Welfare-improving Investment Solutions for Institutions and Individuals
EDHEC-Risk Institute and FirstRand Limited are partnering for the first time to launch a three-year research chair entitled "Designing and Implementing Welfare-Improving Investment Solutions for Institutions and Individuals" to expand the scientific literature on investor welfare-enhancing methodologies for portfolio construction in a goals-based investing framework.
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Events
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Press Review
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EDHEC-Risk Institute has been cited widely in the business and industry press. A selection of articles may be found below.
- "IFAs are 'decades behind' portfolio climate risk", CityWire (23/01/2020)
- "Developing ETF Trends and Innovations - EDHEC Risk Research", Kiwi Investor (12/01/2020)
- "The business school for the financial industry", The European (06/01/2020)
- "ETF Insight: Consistent ESG data needed for sustainable investing to avoid greenwashing issues", ETF Stream (06/01/2020)
- "2019's Most Popular Online Courses According to Class Central", IBL News (31/12/2019)
- "Les hedge funds surfent sur l'envolée mondiale des marchés", Les Echos (27/12/2019)
- "PGGM's van Dam sees inflated expectations of sustainable finance", IPE (19/12/2019)
- "EDHEC-Risk Institute and FirstRand launch research chair", Money Marketing (19/12/2019)
- "Immobilier: les Français continuent à se ruer sur la pierre papier", Le Figaro (22/11/2019)
- "Poor returns underline smart beta's structural problems", Financial Times (04/11/2019)
- "Smart beta investors see corporate bonds as next growth area", ETF Stream (28/10/2019)
- "Investors call for more innovation in fixed income and SRI ETFs", ETF Strategy (14/10/2019)
- "Retraites: le nouveau PER est arrivé, plus simple et… compliqué", Challenges (14/10/2019)
- "Les 8 MOOC indispensables du mois d'octobre", Les Echos (07/10/2019)
- "EDHEC-Risk Institute launches factor investing in bond markets research programme", ETF Stream (21/05/2019)
- "Growing demand for SRI/Ethical ETFs and significant interest in fixed-income Smart Beta solutions", MoneyMarketing (26/09/2019)
- "Designing a new Retirement System and Goal-Based Wealth Management", Kiwi Investor (23/09/2019)
- "Smart Beta Bond ETFs May Be Beginning to Attract Attention", ETF Trends (23/09/2019)
- "Buzz around factor investing in fixed income is growing", Financial Times (23/09/2019)
- "EDHEC-Risk Institute: The (Many) Problems of an Inverted Yield Curve", Mondovisione (09/09/2019)
- "Smart Beta Fixed Income: A Promising Start, but more Work is Needed", ETF Stream (Q3 2019)
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Stay tuned for more research, outreach, education and industry partnership developments on investment solutions for institutions or individuals
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About EDHEC-Risk Institute:
Part of EDHEC Business School and established in 2001, EDHEC-Risk Institute has become the premier academic centre for industry-relevant financial research. In partnership with large financial institutions, its team of permanent professors, engineers, and support staff, and research associates and affiliate professors, implements seven research programmes and six research, industrial partnerships and private research projects focusing on asset allocation and risk management. Additionally, it has developed an ambitious portfolio of research and educational initiatives in the domain of investment solutions for institutional and individual investors. As part of its "Make an Impact" signature, EDHEC-Risk plays a noted role in furthering applied financial research and systematically highlighting its practical uses.
EDHEC-Risk Institute
393 Promenade des Anglais, BP 3116,
06202 Nice Cedex 3, France
E-mail: [email protected]
Telephone: +33 493 187 887
Web: https://risk.edhec.edu
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