Where is the Climate Risk Premium?
Establishing whether "green" and carbon-intensive assets carry a positive or negative risk premium matters a lot for investment managers, because it determines whether these assets act as hedges, or they add to equity risk. Unfortunately, attempts to estimate the climate risk premium empirically have met with near-insurmountable difficulties and leave the practitioner puzzled.
Riccardo Rebonato, Scientific Director, EDHEC-Risk Climate Impact Institute and Professor of Finance, EDHEC Business School, explains what one may learn about the climate risk premium by employing a state-of-the-art integrated modeling approach, and discuss investment implications. Topics covered include:
- The climate risk premium: what it is and why investors should care
- Hedging climate risk: when is it possible and when should one hedge?
- Are "green" assets hedges or do they add to equity risk?
- What is the term structure of the climate risk premium: are long- or short-dated assets more strongly affected?
- How does the climate risk premium depend on future abatement policies?
- How 'robust' are these results to climate uncertainties and model limitations?
- Is the market asleep at the wheel?
For practioners you wish to gain more insight into the research led by Professor Rebonato, we invite you to read some of his recent contributions:
- an op-ed in the Financial Times calling for new tools to model climate risks.
- an article on What integrated assement models can tell us about asset prices that appeared in the EDHEC Climate+Finance supplement to Investment & Pensions Europe and Pensions & Investments and in our inaugural Newsletter.
- the working paper version of the article titled Asleep at the Wheel? The Risk of Sudden Price Adjustments for Climate Risk, forthcoming in the Journal of Portfolio Management.
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.
