Foreword xiii
Fiona FRICK
Chapter 1 The Financial Materiality of Climate Change: Evidence from a Global Survey 1
Amir AMEL-ZADEH
1.1 Introduction 1
1.2 Survey design and demographic data 4
1.2.1 Survey design 4
1.2.2 Demographic data 5
1.3 Survey results 8
1.3.1 Importance of climate change for investment decisions 9
1.3.2 Financial materiality of climate risk 12
1.3.3 Challenges for the disclosure and use of climate change information 19
1.4 Summary and conclusion 25
1.5 References 26
Chapter 2 Looking Forward with Historical Carbon Data 29
Steffen BIXBY, Alfie BRIXTON and Lukasz POMORSKI
2.1 Introduction 29
2.2 Data 32
2.3 How stale is historical carbon data? 33
2.4 Are historically brown firms getting greener? Might green firms become browner? 35
2.5 Nowcasting financed emissions using historical data 38
2.6 Conclusion 43
2.7 Appendix 44
2.7.1 Measures of portfolio greenhouse gas emissions 46
2.8 References 46
Chapter 3 Portfolio Construction with Climate Risk Measures 49
Theo LE GUENEDAL and Thierry RONCALLI
3.1 Introduction 49
3.2 Climate risk measures 51
3.2.1 Carbon footprint 51
3.2.2 Carbon transition pathway 58
3.2.3 Other metrics 62
3.3 Portfolio optimization 63
3.3.1 General framework 63
3.3.2 Portfolio decarbonization 64
3.3.3 Portfolio alignment 72
3.4 Conclusion 83
3.5 Appendices 84
3.5.1 Appendix 1: Scope 3 emissions 84
3.5.2 Appendix 2: Data 84
3.6 References 85
Chapter 4 Hedging Climate Risks: A Cross-asset Approach 87
Emmanuel JURCZENKO and Jerome TeilETCHE
4.1 Introduction 87
4.2 Factor-mimicking portfolios methodology 89
4.2.1 General FMP approach 89
4.2.2 Errors-in-variable estimates 91
4.3 Hedging climate risk factors 94
4.3.1 Setup 94
4.3.2 Climate textual risk factors data 94
4.3.3 Base assets data 97
4.3.4 In-sample hedging results 99
4.3.5 Out-of-sample hedging results 102
4.4 Conclusion 104
4.5 Appendices 104
4.5.1 Appendix 1: General FMP portfolio optimization program 104
4.5.2 Appendix 2: Principal components instrumental variables FMP estimator 105
4.6 References 107
Chapter 5 A Framework for Achieving Net-Zero-Carbon Alpha Portfolios 109
Sebastian LANCETTI
5.1 Introduction 109
5.2 Carbon emission in the capital market 111
5.3 Passive approach to zero-carbon portfolios 111
5.4 Active approach to zero-carbon portfolios 114
5.4.1 Backward-looking data: carbon efficiency 115
5.4.2 Present-time data: nowcasting of environmental news 116
5.4.3 Forward-looking data: corporate climate alignment and adaptation plans 116
5.4.4 Case study: sustainable global equity strategy from PanAgora Asset Management 117
5.5 Carbon offsets 118
5.6 Conclusion 120
5.7 Appendix 121
5.8 References 121
Chapter 6 Active Paris-aligned Equity Investing 123
Katharina SCHWAIGER, Jim SNOW, Viktoria-Sophie WENDT and Andrew ANG
6.1 Introduction 123
6.2 Standards of Paris-aligned benchmarks 124
6.3 Climate-aware alpha drivers 126
6.3.1 Carbon resource efficiency 126
6.3.2 Green patents 127
6.3.3 Corporate target setting 127
6.4 Empirical results 128
6.4.1 Decarbonization pathway 129
6.4.2 Climate-aware alpha 129
6.4.3 Incorporating climate-aware alphas and decarbonization 131
6.4.4 Systematic active Paris-aligned strategies 133
6.5 Conclusion 137
6.6 Appendix: Paris-aligned equity strategy screens 137
6.7 References 139
Chapter 7 Green Alpha 141
Yin LUO
7.1 Introduction 141
7.2 Research methodology 141
7.2.1 Region classification 142
7.2.2 ESG-specific industry classification 143
7.2.3 Common style factors 144
7.2.4 Backtesting methodology 145
7.3 MSCI ESG rating 146
7.3.1 MSCI ESG data 146
7.3.2 Data coverage and average rating 147
7.3.3 An overview of MSCI ESG rating methodology 148
7.3.4 ESG pillars, themes and key issues 149
7.4 Characteristics of ESG - a factor perspective 151
7.4.1 The basics 151
7.4.2 Difference across sectors 153
7.4.3 Factor exposure 157
7.5 ESG as stock-selection factors 161
7.5.1 Aggregated ESG rating and the three pillars 161
7.5.2 Revenue, country and industry adjustment 162
7.5.3 Other adjustment 165
7.5.4 ESG momentum 165
7.5.5 Performance of aggregate ESG and three pillar scores 165
7.6 Environmental factors 170
7.6.1 Zooming into clean technology 170
7.6.2 Carbon emissions along the supply chain 174
7.7 ESG signals are additive to traditional stock-selection factors 179
7.7.1 Performance comparison with traditional stock-selection factors 180
7.7.2 Correlation with traditional factors 182
7.7.3 The diversification benefit offered by ESG factors 183
7.8 Conclusion 188
7.9 References 188
Chapter 8 Enhancing Environment-driven Portfolios with Traditional Factors 191
Guillaume COQUERET, Christian MORGENSTERN, James KELLY, Sascha STIERNEGRIP, Johannes FREY-SKOETT and Bjoern OESTERBERG
8.1 Introduction 191
8.2 Framework 193
8.2.1 ESG overlays: the classic overlay 193
8.2.2 The factor embedding - the factor overlay 195
8.3 Empirical tests 197
8.3.1 Data and protocol 197
8.3.2 Baseline results 199
8.3.3 Statistical significance 202
8.3.4 Sector exposure 204
8.3.5 Transfer coefficients 205
8.4 Robustness checks 206
8.4.1 The sample size 206
8.4.2 A more passive benchmark 207
8.5 Conclusion 208
8.6 Appendix: Distribution of variables 209
8.7 References 210
Chapter 9 Enhancing the Accuracy of Firm Valuation with Multiples Using Carbon Emissions 213
Martin NERLINGER
9.1 Data 218
9.1.1 Carbon data 218
9.1.2 Financial data 219
9.2 Multiple construction methodology 219
9.2.1 Identifying and composing suitable peer group 220
9.2.2 Constructing and aggregating multiples 220
9.2.3 Determining firm valuation errors 222
9.3 Constructing new multiples using carbon data 222
9.4 Constructing peer groups using carbon data 228
9.5 Combining carbon emission multiples and carbon emission enhanced peer groups 233
9.6 Robustness 236
9.7 Recommendation for using carbon emissions for multiples and further research 239
9.8 References 240
Chapter 10 Risk Management Challenges in Sustainability Themed Portfolios: An Application to GHG-constrained Portfolios 245
Ryan M. BROWN, Harindra DE SILVA and David W. KRIDER
10.1 Introduction 245
10.2 Methodology 248
10.3 Data description 253
10.4 Results 258
10.5 Conclusion and implications 264
10.6 References 265
Chapter 11 Absolutely Sustainable Investing Across Asset Classes with Paris-aligned Benchmarks: An Application to AP2 267
Claes EKMAN, Andreas G.F. HOEPNER, Peter MANNERBJOERK, Tomas MORSING and Gabija ZDANCEVICIUTE
11.1 Introduction 267
11.2 The climate benchmarks 269
11.2.1 Minimum benchmark requirements 270
11.2.2 Benchmark decarbonization and inflation adjustment 272
11.3 Absolutely sustainable investing 273
11.4 Case study: implementation of PAB at Andra AP-fonden 274
11.4.1 The Swedish pension system and the AP-funds 274
11.4.2 Development of sustainability integration and benchmarks at AP2 275
11.4.3 Implementing the EU Paris-aligned Benchmark at AP2 278
11.4.4 Specific aspects 285
11.4.5 Discussion 288
11.5 Conclusion 291
11.6 References 292
Chapter 12 Delegated Philanthropy in Mutual Fund Votes on Climate Change Externalities 295
Marie BRIERE, Sebastien POUGET, Martin SCHMALZ and Loredana URECHE-RANGAU
12.1 Introduction 295
12.2 Sample, data sources, variables and descriptive statistics 298
12.2.1 Mutual fund votes 298
12.2.2 Mutual fund characteristics 299
12.2.3 Mutual fund holdings 300
12.2.4 Descriptive statistics 300
12.3 Empirical analysis 302
12.3.1 Impact of the percentage of SRI on the support for climate resolutions 302
12.3.2 Resolutions on other corporate externalities 304
12.3.3 Drivers of support for climate change resolutions 307
12.3.4 Robustness 311
12.4 Conclusion 318
12.5 Appendix: Classification of shareholder resolutions 319
12.6 References 321
Chapter 13 Creditworthiness and Buildings' Energy Efficiency in the Mortgage Market 325
Monica BILLIO, Michele COSTOLA, Loriana PELIZZON, Francesco PORTIOLI, Max RIEDEL and Daniele VERGARI
13.1 Introduction 325
13.2 Portfolio analysis 327
13.2.1 Energy efficiency 327
13.2.2 Descriptive statistics 330
13.3 Methodology 333
13.3.1 Logit regression 334
13.3.2 Cox proportional hazards model 335
13.4 Results 337
13.4.1 Estimates from the logit regression 337
13.4.2 Estimates from the Cox regression 339
13.4.3 Additional findings 343
13.5 Conclusion 343
13.6 Appendix 346
13.7 References 346
Chapter 14 The Thesis for Green Investing and Other ESG through the Looking Glass of China and the US 349
Brad CORNELL and Jason C. HSU
14.1 Introduction 349
14.2 Who and what does Green investing impact? 350
14.3 Who should set the Green investing agenda? 351
14.3.1 Should Green Initiatives be determined by elected civil servants or by rating services, investment funds and corporate CEOs? 351
14.3.2 The Milton Friedman take on who should drive ESG 351
14.3.3 American ESG in conflict with American democracy? 354
14.3.4 Who drives environmental protection policy and other ESG issues in China? 354
14.3.5 Good intentions but bad skills? 356
14.4 Earning a Green alpha?! 357
14.5 Market efficiency and ESG 361
14.6 Conclusion 362
14.7 References 363
List of Authors 365
Index 369
