We bring together practitioners, consultants and scholars to present their latest R&D in sustainable investing.Tuesday, February 9th, 2021
How can investors incorporate climate alignment into portfolio construction? Lionel presented an innovative three dimensional optimizer that allows investors to minimize climate impact while maximizing expected returns and minimizing risk. With climate awareness rising, this kind of tools will become widespread in the investment industry.
What is the impact of climate risk on investment portfolios? Clarisse Simonek discussed the economic and financial impacts of climate risk over the next five years to help investors identify opportunities for reducing climate-related investment risks. The presentation covered portfolio construction and diversification across different asset classes, regions and portfolios.
What is the impact of climate change on the default probability of corporate bonds and loans? Gianfranco Gianfrate discussed the relationship between a firm’s exposure to climate risks, measured as level of CO2 emissions and carbon intensity, and Merton’s distance-to-default, a measure of creditworthiness widely used by rating agencies and investors. He also addressed the policy implications and the threat the exposure to climate risks poses to the global financial stability.
How does exclusionary screening and ESG integration affect asset returns? To answer this, David Zerbib develops an asset pricing model with partial segmentation and disagreement. A taste premium clarifies the relationship between ESG and financial performance. Two exclusion premia drive the exclusion effect. The annual taste effect ranges from -1.09% to +0.11% for different industries and the average exclusion effect is 3%.
How can asset allocators fight climate change? We develop a global climate alignment database for asset allocators. We find that selecting firms with best climate practices across many sectors is as important to fight climate change as investing in “green” sectors. Hence, asset allocators can fight climate change while diversifying risks. Moreover, engagement can shave up to 1.3°C off a firm’s temperature. We discuss how asset allocators can use our results to design climate-friendly portfolios.
How can shareholders optimise their impact? Pierre-Yves answers this by sharing the key factors of successful engagement practices EthiFinance has identified. Choosing a theme with a lever for action, being precise about the expectations and creating conditions for dialogue are part of the answer. He illustrates these findings through case studies on improving working conditions in manufacturing in China and in nursing homes in France.
They discuss the impact-based incentive structure developed for I&P’s latest fund. This innovative system links incentives (carried interest) to financial and impact performance (including the promotion of African entrepreneurship, decent job creation and access to basic goods/services). Their presentation also addresses specific features of tools for impact investing: setting and monitoring of impact objectives and independent evaluation of impact.
Sycomore AM, in collaboration with I Care & Consult and Quantis, developed this comprehensive environmental indicator over 4 years. It provides an aggregated view of an issuer’s degree of alignment with the environmental transition. The NEC is designed to take into account 5 key environmental issues (climate change, water, resources/waste, biodiversity and air quality) and is based on a life-cycle assessment approach. To fully unlock this powerful change driver, the NEC will be available on an open-source platform: the NEC initiative – come discover it!
Antoine elaborated on the indicators available to track environmental performance at a portfolio level. He discussed how such indicators can be integrated into investment strategies by introducing new ways to construct portfolios. Finally, he analysed the trade-off between financial performance, risk and environmental impact and what this means for asset owners and asset managers.
Many tools are available for investors looking to assess their carbon impacts and exposure to climate risks, from carbon footprinting to alignment with climate scenarios. Mirova’s presentation attempts to bring clarity to these subjects. First, Samantha will address the key issues to consider in carbon evaluations of investments, including lifecycle and avoided emissions. This will be followed by an in-depth discussion on the method for assessing portfolio compatibility with the 2°C scenario.
Major changes are underway across the world’s economy. Algorithms can recognise faces with human-level accuracy. Self-driving cars are on their way. China plans to dominate the technology landscape. Hamburgers are being made from lab-grown meat. Solar and wind are out-competing coal and gas. Bumble bees are disappearing. Wild fires are breaking out. Children are striking for climate action. Carbon emissions keep on rising. Howard provided us with a fascinating narrative weaving together these many different themes.