No summary is available for this article.
Every day global warming is becoming a more pressing concern for political decision-makers, but also for economic decision-makers. Finance is no exception to this rule, and in the last few years there have been some striking developments. To the extent that today we may speak of the existence of climate finance both because of the importance it has assumed in decisions about financing and because of the forms such financing takes. This issue of the Review provides a comprehensive overview of the changes taking place in the financial sector and of their recent evolution. Five main themes are covered: risk measurement and control from the point of view of both financial stability and portfolio management; climate finance practices and policies from the perspectives of companies and investors; climate finance indicators, which are essential for any action; and finally, the concrete practices of central banks and portfolio managers.
The column on financial history is devoted to the evolution of the government share spent on funding in education in Spain since 1850. Finally, one miscellaneous article deals with the ethical performance of Islamic banks and a second with the links between IPOs and the external growth of French SMEs.
publication : December 2020 354 pages
This article addresses in a very synthetic way the physical principles of climate change, starting from the concept of the Earth energy balance, essential mechanism defining the temperature of the Earth and its evolution in connection with human activities. It presents the fundamentals of numerical modeling and simulation protocols developed to understand the climate system and its evolution. It introduces the concept of climate sensitivity, a fundamental property of the climate system and a diagnosis of the magnitude of global warming in response to cumulative greenhouse gas emissions. The magnitude of global climate change is illustrated by geophysical variables whose link to global warming is unmistakable, then the regional responses and impacts of global climate change are discussed.
Classification JEL : Q54
This article explores the potential implications on financial stability of new global and systemic ecological risks (“Green Swans”), including climate-related risks and the Covid-19 pandemic. Rather than proposing a single policy tool (such as a supposedly optimal carbon tax or measurement of climate-related risks) to address extremely complex and non-linear phenomena, it explores broader analytical frameworks that can better embrace the radical uncertainty and the need for structural transformations associated with contemporary ecological risks. An unprecedented level of cooperation among multiple players, including central banks, will be required. Such cooperation raises new challenges. In particular, it requires making difficult trade-offs between the quest for more efficiency and the need for more resilience in the governance of our complex socio-ecological systems.
Climate change and low carbon transition scenarios are becoming a usual feature in the financial sector. The use of scenarios is consistent with the nature of the phenomena considered (deep uncertainty). However, this use should be subject to reasoned thinking: scenario based approaches are fundamentally at odds with the probabilistic approach that underpins economics and finance. We discuss the use of scenarios for finance-driven purposes and examine three issues pertaining to “green finance” (the use of “normative” scenarios, the design of scenarios for stress tests and the development of scenarios suited for the needs of financial decision making).
The concept of portfolio alignment to a temperature trajectory has gained momentum among investors and regulators since the 2015 Paris Agreement recognized the importance of the financial sector for the low carbon energy transition. Yet, a clear definition and a transparent methodology for portfolio temperature alignment, are presently lacking and few academic studies have addressed this question. This paper provides a definition of portfolio temperature alignment, reviews the key methodological steps, and highlights the main scientific challenges, with the aim to stimulate further research on this topic. We review, analyze and place in context the main findings of the recent technical review of portfolio temperature alignment assessment methodologies by Institut Louis Bachelier.
As demonstrated by the yellow vests movement, most citizens believe that climate change is a serious matter, but they are not ready to sacrifice much to prevent it. Could corporations and financial intermediaries be substitutes to these sleepwalkers? In spite of the recent enthusiasm for climate finance, this is far from an easy task. Competition inhibits responsible firms to switch to more expensive greener alternative without losing market shares. Moreover, when a bank divests from coal, two others invest in it. At best, financial markets can anticipate the emergence of a more punitive climate policy. And responsible investors should use an internal carbon price to optimize their potfolio.
The hydrocarbon energy sector is the largest source of greenhouse gas emissions in the economy. Private companies in this sector have also played a key role in shaping climate policies, notably by promoting carbon pricing in their practices and discourses. In a currently tense context, it is important to consider limits and possibilities of its decarbonization, through carbon pricing or other climate policies.
Do institutional investors engage with companies on corporate externalities such as greenhouse gas emissions? We study voting at shareholders meetings by two emblematic global investors: BlackRock, a major asset manager, and the Norway Fund, a responsible sovereign wealth fund. Our data cover 2014 and include the two institutions' votes on 35,382 resolutions at 2,796 corporations across the world. Both of these so-called universal owners oppose management significantly more often on externality than on financial issues. The Norway Fund is more active on shareholders resolutions concerning externalities related to environmental and social issues rather than governance issues. The difference between the two investors' voting behaviour is larger when we focus on resolutions related to greenhouse gas emissions, a clearly identified externality.
The risks linked to global warming are among the first concerns of investors: physical, regulatory, or stranded asset risk, they affect all companies. This first translated into a demand for more transparency on the possible consequences of climate change and the measurement of the carbon footprint. Investors, in particular institutional investors and socially responsible investment funds, are now adopting a more active behavior. By excluding certain company stocks deemed too polluting from portfolios, by engaging in dialogue with companies or by submitting climate resolutions to the agendas of general meetings, they help make companies more responsible. Activism appears to be welcomed by financial markets and does not come at the expense of shareholder value.
In this article, we examine the rates, disclosure regimes and levels of corporate carbon emissions in the major European stock market indices from 2002 to 2017. We find an increase in the rate of disclosure and a decrease in the level of carbon emissions. The decrease in the level of carbon emissions is mainly due to the decrease in emissions from companies belonging to the FTSE 100 and the CAC 40 - two indices in which companies are subject to mandatory disclosure. For companies belonging to other stock market indices - which are generally subject to less prescriptive disclosure regimes - carbon emissions decrease slightly or increase. Finally, we show that the relationship between disclosure rates and carbon emissions levels is negative : within an index, the higher the number of companies disclosing their carbon emissions, the lower the average carbon emissions.
After presenting the main existing environmental indicators and their limitations, we propose a definition of the characteristics of a relevant and efficient metric in a holistic approach: encompassing all environmental issues, analyzing the entire life cycle, using physical measures, covering a global scope of analysis, being computable across all asset classes, being modular, operational, readable, neutral, transparent, stable over time and using the information already available, given the environmental emergency. Finally, we review the main available methods for aggregating environmental indicators with their advantages and drawbacks.
Through an analysis of the link between corporate transparency and the implementation of the transition through the prism of information as an element of accountability, the objective of this article is to demonstrate the extent to which the currently diffuse and fragmented nature of corporate extra-financial information requires standardization associated with a revision of the law in force. Extra-financial information is indeed a fundamental prerequisite for the development of sustainable finance, alongside a common language of transition and sustainability.
This article analyzes the development of green and socially responsible labels in Europe over the past decades, their construction dynamics, and questions the real benefits of a proliferation of labels in this industry. Does the multiplicity of factors contributing to the development of labels achieve the desired end or does it encumber the market with loud but uncertain signals? While household savings are at their highest and there is a demand for financing the ecological transition, does the proliferation of labels not complicate the readability of the market? We show that, instead of simplifying the choice of agents, the multiplication of labels tends to increase the noise provided by each of the quality signals and deteriorate confidence. Economic agents have less interest in benefiting from a generic label but are looking for less demanding labeling at a lower cost. The whole system can therefore play in a counterproductive way, each actor minimizing the intrinsic effort provided. As the number of labels grows, the information asymmetry grows and end investors may therefore turn away from labeled products. Only regulator can counter this trend.
Stress tests have been, since the Great Financial Crisis of 2008, one of the tools of choice for supervisors to assess the risks and vulnerabilities to which financial institutions are exposed. However, their use is still limited to assess the financial risks associated with climate change. Based on the example of the pilot exercise implemented in 2020 by the French Prudential Control and Resolution Authority, this article presents the essential features of these climate stress tests, the scenarios on which they are based, the challenges that supervisors and the financial institutions that implement them face as well as some of their limitations.
Climate change is one of the major challenges central banks are facing, potentially affecting the macroeconomic variables used to underpin their monetary decisions and the channels through which these decisions are transmitted to the real economy. Climate change could affect the policy space central banks have to fulfil their mandate and, owing to increased uncertainty, it could also lead them to consider some of the trade-offs to be faced in a monetary inflation targeting regime. As a result, central banks should not only integrate the effects of climate change into their analyses and models, but also take climate-related risks into account in the development of the instruments used to implement monetary policy.
More and more investors the world over are basing their investment choices on an appreciation of climate risk. Several approaches have been developed to include the issue in the investment analysis and portfolio construction process. In this article, we analyse two standard strategies for optimising a portfolio's carbon footprint: exclusion and optimisation. Our simulations show that optimisation considerably reduces a portfolio's CO2 content, without increasing portfolio risk and yet with a low sectorial bias. Optimisation both enhances the portfolio's overall ESG risk profile while addressing investors' climate-related qualms. The optimisation approach should, in our opinion, shortly become the norm.
The Covid-19 crisis has served as a reminder of the importance of sustainable development. Jean-Philippe Desmartin, Head of Responsible Investments at Edmond de Rothschild Asset Management (France), and Johnny El Hachem, CEO, Edmond de Rothschild Private Equity, explain their strategies to combat climate change. Back in 2017, Edmond de Rothschild Asset Management (France) adopted a climate road map to take climate issues into account with the objective of gradually decarbonising investments. Private Equity takes a long term approach and can therefore act as a conduit towards a more resilient world. Climate change risks and challenges are huge but they also offer numerous investment opportunities.
This paper summarizes the evolution of financial instruments with a sustainable development goal. It highlights the risk of green washing induced by the lack of common binding standards for issuers. The paper then presents the specific methodology developed by LBPAM to analyse the various categories of bonds linked to sustainable development (green bonds, transition bonds and SDG-linked bonds) and to assess their impact.
The purpose of this study is to analyze the drivers of the Islamic banking ethical performance as measured by its compliance with the "Shariah" principles. Through a questionnaire administered to clients of Islamic banks, we measure the relative importance of the different factors impacting the Islamic banks' ethical performance. We rely on a multinomial logistics regression to assess whether of the religious factor is strongly correlated to the ethical performance.
The initial public offering is a key step in a firm's growth process. However, few studies investigate the relationship between initial public offerings and firm's external growth strategy. Our results highlight that many French SMEs implement an external growth strategy after their listing, even if they don't have a previous acquisition experience, hereby suggesting a two-step growth strategy. Thus, financial and strategic decisions appear to be intermingled in the initial public offering context.