EDHEC-Risk Climate: the fourth newsletter is out!

In October 2022, EDHEC-Risk Institute became EDHEC-Risk Climate Impact Institute (EDHEC-Risk Climate) reflecting the commitment of EDHEC Business School to advancing the integration of sustainability imperatives across economic activities.

Its fourth newsletter, released this summer, includes articles, research findings, and project updates on the most current issues in sustainable finance. Read the EDHEC-Risk Climate news dedicated to this newsletter.

Finance of Transition, Transition of Finance

By Frédéric Ducoulombier, Director of EDHEC-Risk Climate

Transitioning to low emissions and resilient economies “to secure a liveable and sustainable future for all” requires prompt action and considerable investment in climate change mitigation and adaptation. While substantial, the required investments are within the realm of global financial capabilities: their total amount pales relative to world GDP, government expenditures, and naturally, the accumulated wealth or the stock of financial assets. However, private investments and public funds directed towards mitigation and adaptation projects need to increase many times over current levels. The Paris Agreement, now close to a decade old, aims to catalyse this shift, but the systemic alignment of financial resources―whether public or private, domestic or international―with the goals of climate change mitigation and adaptation is still far off... Read this editorial

Feature - Sizing Up the Climate Threat to Global Equity Values – A Novel Approach

By Riccardo Rebonato, EDHEC Professor, Scientfic Director of EDHEC-Risk Climate

Riccardo Rebonato, presents key findings from new research titled "How Does Climate Risk Affect Global Equity Valuations? A Novel Approach," supported by Scientific Beta. This work addresses limitations in current climate-aware valuation approaches and offers new insights into the impact of climate risk on asset valuations. The research introduces a novel framework that integrates asset pricing techniques with Integrated Assessment Models. It features a fully probabilistic treatment of economic and climate uncertainties, state-dependent discounting, and a consistent analysis of transition costs and physical damages. Key findings reveal that equity valuations are significantly affected by the aggressiveness of emission abatement policies, the presence of climate tipping points, and central banks' ability to lower rates during economic distress. The study shows potential valuation impacts ranging from less than 10% with robust abatement actions to over 50% in scenarios with minimal action and tipping points. This pioneering research highlights the critical importance of aggressive emission abatement policies to mitigate financial impacts, providing valuable insights for policymakers, investors, and financial institutions integrating climate risks into their valuation models... Read this feature

Interview - Tech-Driven Resilience: Evaluating ESG Impacts and Risks in Infrastructure Investments

With Rob Arnold, Sustainability Research Director at EDHEC-Risk Climate

Rob Arnold delves into the development of a new body of knowledge on decarbonization and climate resilience strategies in the infrastructure sector. He explains the necessity of this research and its beneficiaries, outlining the structure of the project and its approach to addressing climate risks. Rob also discusses his collaboration with the EDHEC Infrastructure & Private Assets Research Institute on creating sustainable infrastructure taxonomies, the relevance of this work to non-financial companies and investors, and the challenges associated with collecting climate risk data. Drawing on his extensive experience as a senior advisor to the UK Government, he shares insights on supporting global transition and resilience efforts... Read this interview

Industry Analysis

Internal Carbon Pricing: Impact or Greenwashing?

By Gianfranco Gianfrate, EDHEC Professor, Research Director at EDHEC-Risk Climate

Companies are increasingly called to collaborate in the fight against climate change in a context of rising public awareness for the need to accelerate decarbonisation and of an emerging global climate governance. New tools for climate mitigation are emerging to assist with the delivery of corporate greenhouse gas (GHG) emissions objectives, with internal carbon pricing (ICP) becoming a widespread practice globally. 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 internal carbon pricing is thus becoming essential to corporates and investors alike. The authors study the relationship between internal carbon price reporting and carbon footprint to assess the credibility of corporates' disclosures. Specifically, they study whether ICP adoption helps companies deliver on carbon footprint reduction or whether it is just a greenwashing exercise... Read this analysis

Assessing the RCP / SSP Framework for Financial Decision Making

By Dherminder Kainth, Research Director at EDHEC-Risk Climate

The SSP/RCP framework is a powerful construct which has been central to how policymakers develop mitigation strategies and which has been embraced by the financial community. However, the authors believe that the scenarios which are developed using a series of models should be subject to scrutiny using well established model risk management approaches. Specifically, the framework is deliberately built as a set of scenarios with no associated probabilities, which is challenging for investors to use meaningfully with no view as to likelihood, dispersion and risks around the single paths. They highlight areas where the design might lead to an underestimation of the risk, potentially giving rise to a false sense of security on the impacts of climate change and how transition might unfold... Read this analysis

Dealing with Climate Change: Asset Pricing Implications of Monetary and Fiscal Choices

By Riccardo Rebonato, EDHEC Professor, Scientfic Director of EDHEC-Risk Climate

To fully decarbonize the economy by mid-century, abatement initiatives are required for which unsubsidized private intervention is less likely to provide financing than has been the case so far. Public involvement will have to take the form of higher taxation or higher debt. In the present condition of unprecedentedly high public debt, and of reluctance to accept higher taxation, this creates a trilemma between public debt, level of taxation, and level of abatement. If the second phase of the green transition is mainly financed by debt, the global debt burden could rise by as much as 40%, putting pressure on interest rates. This would have direct repercussions on the price of government bonds, and an indirect effect on equity valuation via the discounting channel... Read this analysis

Recent EDHEC-Risk Climate Publications

How Does Climate Risk Affect Global Equity Valuations? A Novel Approach

The study, conducted within the research chair established by EDHEC Business School and Scientific Beta, introduces an innovative approach to understanding the impact of climate change and climate change policies on global equity valuations. Sensitivity analyses reveal that the severity of the impact on equity markets depends on the pace of abatement, on the precise location of tipping points, and on the continued ability by Central Banks to counter periods of economic distress by lowering rates. The study finds that even in the absence of tipping points, failure to take abatement action can reduce global equity valuation by over 40%.

EDHEC Research Insights Supplement with IPE

The inaugural EDHEC-Risk Climate Impact Institute issue of the EDHEC Research Insights supplement to Investment & Pensions Europe analyses climate scenarios, scrutinizes the IPCC RCP/SSP framework, examines the next decarbonization phase, discusses the lack of correlation between internal carbon price disclosure and carbon intensity reduction, explores the materiality of value chain emissions, and investigates how extreme weather events influence mutual fund managers’ investment decisions.

Scope for Divergence

This policy report offers comprehensive insights into accounting for greenhouse gas emissions throughout companies’ value chains, and the challenges this process poses to companies and investors. Regulators are caught up in the contentious debate between investors and environmental NGOs who favour disclosure and business organisations and politicians representing fossil fuel interests who oppose it. The report explains how fiduciaries can ensure that consideration of value chain emissions issues is fit for purpose and how standard setters can avoid abetting greenwashing. It concludes with recommendations to companies, investors, and policymakers to enhance the quality, relevance, and cost-efficiency of disclosures.

Decarbonization and the Pace of Economic Growth

The authors use an adaptation of a popular Integrated Assessment Model, according to which the carbon intensity, the rate of growth of the population and the cost of abatement technologies all strongly fall with GDP per capita to explore whether this implies that the end-of-century temperature will vary with states of high or low economic output. They find that, despite what they call the 'technological optimism' of the model, high (low) temperature outcomes are strongly associated with high (low) states of GDP or GDP per person. They also find that a robust abatement policy can effectively reduce temperature increases, even along paths of high GDP per person, strengthening the case for aggressive abatement policy.

The Link Between Physical and Transition Risk

The authors argue that what is usually referred to as climate 'transition risk' can be more usefully decomposed in an expectation part and a variability around this central value. They show the strong inverse relationship between the expectation component of transition costs and the expectation of physical damages, as well as a method of how to estimate this relationship. Results indicate that the uncertainty in transition costs decreases as the abatement policy becomes more aggressive (and physical damage decreases) but remains large as a fraction of the expectation component.

This fourth EDHEC-Risk Climate newsletter features more content: a selection of academic publications, of industry publications, videos of presentations and webinars replays, news, a press review...

To browse this newsletter entirely, go to the dedicated webpage

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