Green Finance: Core Notions

Objectif

The course “Green Finance: Core Notions” delves into how investors can navigate environmental challenges. Specifically, it emphasizes how investors can (i) channel financial capital to projects that bolster sustainable development and (ii) strategize around environmental financial risks. This course is structured into 11 chapters, organized within three modules. It will present the landscape of sustainable finance, shedding light on the prevailing practices and fundamental principles of incorporating environmental risks and opportunities into financial decisions. Specific quantitative approaches for risk and portfolio management will be discussed in the follow-up course “Green finance: risk and portfolio management.”

Module one probes the intersection of investment and sustainability, examining both the financial and ethical reasons guiding investor decisions. It initiates with an exploration of how environmental risks influence businesses and financial markets. After foundational sessions on environmental risks, and the basics of asset allocation and pricing, the module delves into the transmission mechanisms of environmental risks in finance. It not only investigates the financial significance of these risks but also the repercussions of sustainable investors factoring in future potential negative externalities on asset valuations.

Module two focuses on investor strategies, examining how investors can (i) mitigate environmental risks through ESG (Environmental, Social, Governance) screening and integration and (ii) influence corporate environmental practices (particularly pertaining to their environmental footprint) via asset allocation and shareholder engagement. This module will also delve into the tools at investors' disposal, like green bonds, and the metrics for gauging environmental risks, such as carbon intensity, 2-degree alignment, and ESG scores among others.

The final module, module three, evaluates the current state of sustainable investing while highlighting pivotal issues and anticipated challenges. This involves an examination of present regulations, standards, and central banking practices in sustainable finance. Key concepts like the “just transition” will be discussed, underscoring its importance given the profound societal transformations required. The module ends by discussing how to rethink the position of finance and economics in our societies, especially in the context of ecosystem conservation.

The course assessment will be twofold: an in-class presentation and a project to be submitted by the end of the semester. The presentation will focus on greenwashing, and the project will involve creating a financial innovation that generates both environmental and financial benefits.

Plan

Module 1: Why should finance care about the environment? What are the asset pricing implications?

1

Anthropogenic disturbances. Why should finance care about the environment?
- Anthropogenic disturbances, climate change and ecosystems
- Introduction to financial markets
- Introduction to ESG/sustainable finance
- Why should finance care about environmental issues? Non-pecuniary and pecuniary motives

2

Introduction to portfolio allocation and asset pricing
- Recap of the Modern Portfolio Theory
- Recap of the Capital Asset Pricing Model

3

Sustainable asset pricing
The effect of environmental risks and preferences on asset prices and companies' cost of capital from
- an empirical standpoint
- a theoretical standpoint

Module 2: How should finance care about the environment?

4

Sustainable investors' practices I: Values-aligned investing
- Major practices of different types of investors
- Values-aligned investing: focus on ESG screening and exclusion
- Active and passive investing

5

Sustainable investors' practices II: Impact investing
- Different approaches to impact investing
- Focus on impact investing through (i) asset allocation on listed assets and (ii) shareholder engagement

6

Green assets
- "Green" assets and labels available to investors
- Focus on green bonds: valuation and impact

7

Measuring the environmental impact of investments
- Different metrics available to investors to assess the environmental impact of their investments: carbon footprint, green and brown shares, avoided emissions, 2 degrees alignment, ESG scores, Net Environmental Contribution

Module 3: Beyond green investing - Key challenges for the future

8

Regulations and greenwashing
- New regulations on disclosure and taxonomy
- Future regulation challenges in sustainable finance

9

Just transition
Definition and challenges

10

Central banking and green finance
- Why should Central Banks care about environmental issues?
- The tools available to Central Banks to support the ecological transition
- Focus on the Network for Greening the Financial System (NGFS)

11

Beyond sustainable finance
- Imbrication and hierarchy of ecological, societal, economic and financial systems
- Wrap up

Références

Ardia, D., Bluteau, K., Boudt, K., and Inghelbrecht, K. (2022), Climate change concerns and the performance of green versus brown stocks, Management Science.

Avramov, Doron, Si Cheng, Abraham Lioui, and Andrea Tarelli (2022), Sustainable investing with ESG rating uncertainty, Journal of Financial Economics 145 (2), 642-664.

Barnett, Michael, William Brock, and Lars Peter Hansen (2020), Pricing uncertainty induced by climate change, Review of Financial Studies 33, 1024-1066.

Berg, F., Koëlbel, J. F., and Rigobon, R. (2022), Aggregate Confusion: The Divergence of ESG Ratings, Review of Finance.

Berk, Jonathan B., and Jules H. van Binsbergen (2021), The impact of impact investing, Working Paper.

Bolton, P. and Kacperczyk, M. (forthcoming), Global Pricing of Carbon-Transition Risk, Journal of Finance.

Bolton, P. and Kacperczyk, M. T. (2021), Do investors care about carbon risk?, Journal of Financial Economics 142, 517–549.

Broccardo, E., Hart, O., and Zingales, L. (2022), Exit vs. Voice, unpublished working paper, Journal of Political Economy, 130(12), 3101-3145.

Chava, S. (2014), Environmental externalities and cost of capital, Management Science 60, 2223–2247.

De Angelis, T., Tankov, P., and Zerbib, O. D. (2022), Climate Impact Investing, Management Science.

Green, D. and Roth, B. (2021), The Allocation of Socially Responsible Capital, Working Paper.

Hartzmark, Samuel and Kelly Shue (2023), Counterproductive sustainable investing: The impact elasticity of brown and green firms, Working Paper.

Heeb, Florian, and Julian Kölbel (2020), The investor's guide to impact, Technical report, University of Zurich, Center for Sustainable Finance & Private Wealth.

Heeb, Florian, and Julian Kölbel, Falko Paetzold, Stefan Zeisberger (2023), Do Investors Care about Impact?, Review of Financial Studies 36 (5):1737–1787.

Heinkel, R., Kraus, A., and Zechner, J. (2001), The effect of green investment on corporate behaviour, Journal of Financial and Quantitative Analysis 36, 377–389.

Hong, H. and Kacperczyk, M. (2009), The price of sin: the effects of social norms on markets, Journal of Financial Economics 93, 15–36.

Hsu, P.-H., Li, K., and Tsou, C.-Y. (2023), The pollution premium, Journal of Finance, 78 (3), 1343-1392.

In, S., Park, K., and Monk, A. (2019), Is ’being green’ rewarded in the market?: An empirical investigation of decarbonization and stock returns, Working Paper.

Kölbel, Julian and Adrien-Paul Lambillon (2022), Who pays for sustainability? An analysis of sustainability-linked bonds, Working Paper.

Krüger, P. (2015), Corporate goodness and shareholder wealth, Journal of Financial Economics 115, 304–329.

Krüger, Philipp, Zacharias Sautner, and Laura Starks (2020), The importance of climate risk for institutional investors, Review of Financial Studies, 33, 1067-1111.

Landier, A. and Lovo, S. (2020), ESG Investing: How to Optimize Impact?, Working Paper.

Oehmke, M. and Opp, M. (2023), A Theory of Socially Responsible Investment, Working Paper.

Pastor, L., Stambaugh, R., and Taylor, L. (2022), Dissecting Green Returns, Journal of Financial Economics, 146, 403-424.

Pastor, L., Stambaugh, R. F., and Taylor, L. A. (2021), Sustainable investing in equilibrium, Journal of Financial Economics 142, 550–571.

Pedersen, L. H., Fitzgibbons, S., and Pomorski, L. (2021), Responsible investing: The ESG efficient frontier, Journal of Financial Economics 142, 572–597.

Riedl, Arno, and Paul Smeets (2017), Why do investors hold socially responsible mutual funds?, Journal of Finance 72, 2505-2550.

Sato, Misato, Glen Gostlow, Catherine Higham, Joana Setzer and Frank Venmans (2023), Impacts of climate litigation on firm value, Grantham Research Institute Working Paper.

Sautner, Z., van Lent, L., Vilkov, G., and Zhang, R. (2023), Firm-level Climate Change Exposure, Journal of Finance, 78 (3), 1449-1498.

Zerbib, Olivier David (2019), The effect of pro-environmental preferences on bond prices: Evidence from green bonds, Journal of Banking and Finance 98, 39-60.

Zerbib, Olivier David (2021), A Sustainable Capital Asset Pricing Model (S-CAPM): evidence from green investing and sin stock exclusion, Review of Finance 27 (6), 1345-1388.