Climate Finance & Economics Workshop

This workshop aims to restart the academic discussion on climate finance and economics, bringing together top experts from around the world.

Programme

Time	Speaker / Title
8.45-9.00	Introduction - Radu Tunaru
9.00-9.55	Christian Gollier, Toulouse School of Economics Title: Some economics of green finance
10.00-10.55	Marcin Kacperczyk, Imperial College London Title: Signalling through carbon disclosure
11.00-11.55	Martina Linnenluecke, Macquarie University Title: Environmental finance: research challenges and opportunities following the COVID-19 recovery
12.00-12.55	Cameron Truong, Monash University Business School Title: Climate risk: the price of drought
13.00-14.00	Lunch break
14.00-14.55	Natalie Packham, Berlin School of Economics and Law Title: Structured climate financing: valuation of CDO's on inhomogeneous asset pools
15.00-15.55	Johannes Stroebel, New York University Title: Hedging climate change
16.00-16.55	Richard S.J. Tol, University of Sussex Business School Title: Testing the dismal theorem
17.00-17.45	Round Table: Future directions of research in climate finance and economics Chair: Richard Tol  Panel: Douglas Cumming, Christian Gollier, Marcin Kacperczyk, Natalie Packham
17.45-18.00	Review of Corporate Finance - Douglas Cumming, editor Workshop Closes.

• Speaker biographies and abstracts

  Some economics of green finance
  

  Abstract: Climate finance is a poor substitute for state-controlled climate policies within the state jurisdiction. Responsible finance principles should be based on an internal carbon price, to be used by responsible investors, financial intermediaries and central banks. Other covered topics for this talk include greening recovery plans, sharing the risk of the cost of the ecological transition, reshaping the composition of equity market indices, a discussion of the efficacy and role of the divestment movement and a discussion of the role of central banks.

  Christian Gollier is an internationally-renowned professor of decision theory under uncertainty, with applications in climate economics, finance and cost-benefit analysis and a special interest in long term (sustainable) effects. He is a fellow of the Econometric Society, and received an ERC Advanced Grant in 2011. He founded the Toulouse School of Economics alongside Jean Tirole, where he has served as director (2007-2015), vice-president (2017), and director again since December 2017. He is currently president-elect of the European Association of Environmental and Resource Economists (EAERE). In recent years, he has held visiting sabbatical positions at Harvard (2013) and Columbia (2015-2016). He has published more than 100 articles in top journals in economics, is one of the lead authors of the last two IPCC reports, and is the author of several books published by MIT Press, Princeton University Press and Columbia University Press. His most recent outreach book in French (Le climat après la fin du mois, PUF, 2019) on the importance of acting to mitigate climate change, has met with wide success in France, and is currently under translation into English.

  Signalling through carbon disclosure

  Abstract: We estimate effects of voluntary and mandatory disclosure of carbon emissions on stock returns, volatility, and turnover. We find that voluntary disclosure of scope 1 emissions by companies results in lower stock returns relative to non-disclosing companies. However, a cost of disclosing emissions is increased divestment by institutional investors. We also find that U.K. mandatory carbon disclosure rules for publicly traded companies resulted in lower stock-level uncertainty. The effect of these mandatory disclosure rules also spilled over into other markets, especially those with close geographic and economic proximity, and companies in the same industry.

  Marcin Kacperczyk is a Professor of Finance at Imperial College London with research interests in the areas of sustainable investments, information economics, financial intermediation, and artificial intelligence. His research has been published in leading academic and practitioner journals, including Econometrica, Quarterly Journal of Economics, Journal of Finance, Journal of Financial Economics, Journal of Monetary Economics, and Review of Financial Studies. Marcin is a Research Associate at the Center for Economic Policy Research, and former Faculty Research Fellow at the National Bureau of Economic Research. He is the Editor of the Review of Finance, and Associate Editor for Financial Management, the Journal of Financial and Quantitative Analysis, and Management Science. Marcin’s work has been widely covered by media, such as CNN, CNBC, Bloomberg, WSJ, FT, NYT, Business Week, U.S. News, and Washington Post. He is a current holder of the European Research Council research grant and former President of the European Finance Association. He is also a research advisor at the European Central Bank.

  Environmental finance: research challenges and opportunities following the COVID-19 recovery

  Abstract: The year 2020 has shown the nature of global interconnected risks: the outbreak of the COVID-19 pandemic has had significant social and economic impacts globally. Current fiscal stimulus packages already greatly surpass the rescue packages during the 2007/2008 Financial Crisis and are meant to revive failing economies. However, the impacts from COVID-19 are likely not an isolated occurrence, with societies globally facing significant future risks from the impacts of climate change and resource depletion. This presentation takes a critical look at progress towards achieving sustainable development and examines challenges and opportunities for environmental finance research in the post-pandemic era.

  Martina Linnenluecke leads the Centre for Corporate Sustainability and Environmental Finance at Macquarie University which brings together an interdisciplinary team of leading experts in the areas of corporate sustainability and environmental finance. The Centre has worldwide reach and impact by demonstrating a financial case for action on environmental and social change, with projects focusing on stranded asset risk, ESG investing, climate policy impacts, as well as adaptation and resilience to global environmental change. Professor Linnenluecke's research interests focus on the strategic and financial implications of corporate adaptation and resilience to climate change impacts. Her expertise in the field has been demonstrated through a number of prestigious awards, such as the Carolyn Dexter Best International Paper Award at the Academy of Management Conference, the leading conference in the management field. She is the author of the book "The Climate Resilient Organization", and has extensive experience in working with government and industry related to organisational climate adaptation strategies, assessments and planning. Professor Linnenluecke is a contributing author to the Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report (AR6 WGII).

  Climate risk: the price of drought

  Abstract: We document a significant positive relation between drought risk and the cost of equity capital. Our estimation shows that the cost of equity capital is 92 basis points higher for firms affected by severe drought conditions. We provide evidence that when firms are affected by droughts, firms with higher local institutional holdings exhibit a higher cost of equity capital. This result supports the well-known local bias of institutional investors, and suggests that diversification cannot fully eliminate the loss in wealth caused by droughts. Consistent with theoretical predictions, we find that drought duration and drought intensity further increase a firm’s risk premium. However, for firms with diversified cash flows/investments, geographically dispersed business operations, and high cash holdings, the impact of drought on the expected return is significantly lessened. Overall, our findings show that investors require a higher rate of returns on firms affected by droughts and offer implications on how firms can mitigate the impact of droughts on their cost of capital

  Cameron Truong is a Professor in the Department of Accounting at Monash University. Cameron has published in journals such as Journal of Accounting Research, The Accounting Review, The Review of Accounting Studies, Contemporary Accounting Research, Auditing: a Journal of Practice and Theory, Journal of Business Finance and Accounting, Financial Analyst Journal, Journal of Financial Markets, Journal of Banking and Finance, Journal of Financial Research, among others. Cameron current research focuses on climate risk, pandemic-induced risk, and disaster risk in capital markets.

  Structured climate financing: valuation of CDO's on inhomogeneous asset pools

  Abstract: Recently, a number of structured funds have emerged as public-private partnerships with the intent of promoting investment in renewable energy in emerging markets. These funds seek to attract institutional investors by tranching the asset pool and issuing senior notes with a high credit quality. Financing of renewable energy (RE) projects is achieved via two channels: small RE projects are financed indirectly through local banks that draw loans from the fund's assets, whereas large RE projects are directly financed from the fund. In a bottom-up Gaussian copula framework, we examine the diversification properties and RE exposure of the senior tranche. To this end, we introduce the LH++ model, which combines a homogeneous infinitely granular loan portfolio with a finite number of large loans. Using expected tranche percentage notional (which takes a similar role as the default probability of a loan), tranche prices and tranche sensitivities in RE loans, we analyse the risk profile of the senior tranche. We show how the mix of indirect and direct RE investments in the asset pool affects the sensitivity of the senior tranche to RE investments and how to balance a desired sensitivity with a target credit quality and target tranche size.

  Natalie Packham is Professor of Mathematics and Statistics at Berlin School of Economics and Law. Natalie has several years of industry experience as a front office software engineer at an investment bank, and is frequently involved in industry-related research and consulting projects. Her research expertise includes Mathematical Finance, Financial Risk Management and Computational Finance, and her academic work has been published in Mathematical Finance, Finance & Stochastics, Quantitative Finance, Journal of Applied Probability and many other academic journals. She is associate editor of “Methodology and Computing in Applied Probability” and co-chair of the GARP Research Fellowship Advisory Board. Natalie holds an M.Sc. in Computer Science from the University of Bonn, a Master’s degree in Banking & Finance from Frankfurt School, and a Ph.D. in Quantitative Finance from Frankfurt School.

  Hedging climate change

  Abstract: We propose and implement a procedure to dynamically hedge climate change risk. To create our hedge target, we extract innovations in climate news series that we construct through textual analysis of high-dimensional data on newspaper coverage of climate change. We then use a mimicking-portfolio approach to build climate change hedge portfolios using a large panel of equity returns. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. The resulting hedge portfolios outperform alternative hedging strategies based primarily on industry tilts. We discuss multiple directions for future research on financial approaches to managing climate risk.

  Johannes Stroebel is the David S. Loeb Professor of Finance and the Boxer Faculty Fellow at the New York University Stern School of Business. He joined NYU in 2013 from the University of Chicago Booth School of Business, where he was the Neubauer Family Assistant Professor of Economics. Professor Stroebel conducts research in finance, macroeconomics, real estate economics, and climate finance. He has won numerous awards, including the AQR Asset Management Institute Young Researcher Prize and the Brattle Award for the best paper published in the Journal of Finance. He has also won an Alfred P. Sloan Research Fellowship in Economics. Professor Stroebel is an Associate Editor at the Journal of Political Economy, the Review of Economic Studies, Econometrica, and the Journal of Finance. Professor Stroebel read Philosophy, Politics, and Economics at Merton College, Oxford, where he won the Hicks and Webb Medley Prize for the best performance in Economics. He earned a Ph.D. in Economics at Stanford University, where he held the Bradley and Kohlhagen Fellowships at the Stanford Institute for Economic Policy Research.

  Testing the dismal theorem

  Abstract: Weitzman’s Dismal Theorem has that the expected net present value of a stock problem with a stochastic growth rate with unknown variance is unbounded. Cost-benefit analysis can therefore not be applied to greenhouse gas emission control. We use the Generalized Central Limit Theorem to show that the Dismal Theorem can be tested, in a finite sample, by estimating the tail index. We apply this test to three integrated assessment models commonly used to estimate the social cost of carbon, and to previously published estimates. Two of the three models do not support the Dismal Theorem, but the third one does for low discount rates. The meta-analysis cannot reject the Dismal Theorem.

  Richard S.J. Tol is a Professor at the Department of Economics, University of Sussex and the Professor of the Economics of Climate Change, Institute for Environmental Studies and Department of Spatial Economics, Vrije Universiteit, Amsterdam, the Netherlands. He is a member of the Academia Europaea. Previously, he was a Research Professor at the Economic and Social Research Institute, Dublin, the Michael Otto Professor of Sustainability and Global Change at Hamburg University and an Adjunct Professor, Department of Engineering and Public Policy, Carnegie Mellon University, Pittsburgh, PA, USA. He has had visiting appointments at the Canadian Centre for Climate Research, University of Victoria, British Colombia, at the Centre for Social and Economic Research on the Global Environment, University College London, and at the Princeton Environmental Institute and the Department of Economics, Princeton University. Richard received an M.Sc. in econometrics (1992) and a Ph.D. in economics (1997) from the Vrije Universiteit Amsterdam. He is ranked among the top 150 economists in the world, and has over 200 publications in learned journals (with 100+ co-authors), one book, three edited volumes, and many minor publications. He specialises in the economics of energy, environment, and climate, and is interested in tourism and scientometrics.

Contact

For more information, please contact the workshop organisers: Radu Tunaru (r.tunaru@sussex.ac.uk) and Panagiotis Tzouvanas (p.tzouvanas@sussex.ac.uk)