Green & sustainable finance: what trends and questions are international researchers exploring?
In May, IÉSEG hosted a workshop (on its Paris campus) bringing together around 30 international researchers who shared and presented their ongoing work linked to different trends in the fields of sustainable, green, climate and international finance. Co-organized with Audencia, EDHEC and the University of Vaasa (Finland), more than 15 research papers were presented and discussed. Together with experts from the school’s finance faculty, we look back at a selection of the questions and trends that international researchers are currently studying.
09/24/2024
8 min
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“It was a pleasure for IÉSEG to host international researchers on its premises for the very first edition of the Workshop on Recent Trends and New Developments in Sustainable, Green and International Finance.”, says Renaud BEAUPAIN, Head of the Finance Department at IÉSEG, and who co-organized the event.
“The topic of the workshop aligned perfectly with the INSPIRE-CONNECT-TRANSFORM strategic plan of the school, whereby we notably aim to instill the importance of sustainability into our research and teaching activities, so that we can empower our students to transform organizations. The workshop was a great opportunity to exchange and stay abreast of the latest developments in the field.”
Climate Finance: the impact of climate change on household loan performance and credit ratings…
Climate finance, a subset of green finance, refers to the financial resources allocated to initiatives aimed at mitigating the impact of climate change and supporting organizations efforts to adapt to these changes. Examples include funding for projects that reduce greenhouse gas emissions or enhance organizations climate resilience.
A first presentation looked at two channels through which climate change can result in risks for financial institutions: physical risk and transition risk. On the one hand, physical risk can be associated with extreme weather events, such as floods, and wildfires, which can impact the cash flows of households and firms and the value of the assets they own.
On the other hand, transition risk includes the financial losses that can directly or indirectly result from the process of adjusting to a low-carbon and more environmentally sustainable economy. Against this background, Prof. Oskar KOWALEWSKI from IÉSEG presented his work looking at the potential implications of the impact of these risks on the creditworthiness of firms.
A second presentation by Conghui CHEN from Nottingham Business School (UK) focused on the impact of climate change on households’ loan performance – i.e. the likelihood of defaulting on a loan agreement. Based on evidence from a rural bank in China, the work looked at the impact for example of abnormal temperatures and rainfall on loan repayments (including agricultural loans) and potential avenues for helping borrowers facing stemming from climate-related disruptions.
View from an IÉSEG Expert
Professor Dilyara SALAKHOVA notes “It is now clear that climate change will bring and already bringing significant losses due to more frequent and extreme natural disasters, and that economic agents such as firms and financial institutions need to integrate these risks in their risk management. Nevertheless, we do not see the level of actions matching the seriousness of the risk.
Financial institutions, including European banks, are far from having their portfolios aligned with Paris objectives and lack necessary processes in place to address both transition and physical risks, according to the ECB assessment*. Neither markets correctly price such risks.
As multiple studies, including those by IÉSEG Professor Hugues CHENET, suggest climate-related financial risks are characterized by radical uncertainty and thus markets fail to discover an “efficient” price. In addition, the use of largely backward-looking risk-based models create a false state of certainty and predictability that prevents more ambitious actions.”
Sustainable Finance: ESG ratings, trade-offs, and gender differences in responsible investments
Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.
The session on sustainable finance was largely focused on topics related to the ESG ratings or scores. These are ratings that measure a company’s performance in these three key areas and are used by investors to assess how well a company is managing risks and opportunities related to these factors.
ESG rating agencies are currently under scrutiny in terms of their transparency and their methodologies. For example, the EU recently agreed a new regulation on ESG rating activities that seeks to ensure that investors and other stakeholders have access to reliable and comparable information about the ESG ratings objectives (what they assess) and methodologies (how they assess). And other regions/jurisdictions are looking at ways to enhance the transparency of these ratings.
Leyla YUSIFZADA from Corvinus University (Hungary) presented work looking at the trade-offs between environmental and social pillars of ESG scores. Prior research has shown that firms doing well on the social dimension also improve their environmental outcomes, for example, due to more green innovations and better decision-making by more inclusive, diverse, and highly skilled human capital (Liu, 2018). However, environmental initiatives may potentially come at a cost to society in terms of the loss of employment or higher cost of services and goods.
Therefore, research on potential trade-offs and/or negative impacts are therefore important in terms of asset pricing, investment decisions and policy making.
Thuy LINH VU from Esade Business School (Spain) then presented some work looking at investment in fintech by investment banks and the impact on their ESG ratings and risk ratings (and whether the impact is greater or less during the years of the Covid pandemic).
Barbara KURBUS from the University of Ljubljana (Slovenia) presented work on the legal origins of ESG ratings. By exploring the effects of legal origins on ESG divergence, her research seeks to improve understanding whether regulatory approaches to sustainability add value by reducing asymmetry of ESG information.
Finally, VITALY ORLOV from the University of St. Gallen (Switzerland) presented research focusing on female managers and socially responsible investment decisions. The authors investigated whether female mutual fund managers were more likely than their male counterparts to focus on sustainability practices, by examining how gender influences their social preferences and affects their investment choices.
View from an IÉSEG Expert
Professor Mohammed ZAKRIYA notes “Despite growing criticism of ESG ratings offered by third-party agencies, investor reactions, particularly among major investors, have remained subdued. Investors often stick with their preferred ESG rating agencies due to status quo bias—reluctance to switch agencies mid-investment—and authority bias, given their lack of ESG expertise.
These biases are reflected in a recent report from ERM’s SustainAbility Institute, where top agencies like CDP, ISS-ESG, Sustainalytics, and S&P Global ESG were deemed “useful” and “high quality.” Hence, in the absence of a universally agreed-upon ESG rating definition, the diverse methodologies of these agencies may actually benefit them by allowing them to cater to different client needs.
Moreover, investors are adopting a cautious approach, awaiting clearer ESG disclosure regulations, which may eventually reduce their reliance on current rating providers. Lastly, the adoption of AI and machine learning by ESG rating agencies shows promise for improving rating reliability, provided transparency issues are addressed.”
Green finance: spillovers from bond markets, the impact of green policies on innovation..
Green finance refers to financial activities (including loans, debt mechanisms and investments and fiscal policies such as environmental taxes or subsidies) that are designed to improve environmental outcomes. The global green bond market, for example, reached new heights in 2023: according to Bloomberg green bond sales from corporates and governments, climbed to $575 billion in 2023, a step up from 2022 and just beating 2021’s $573 billion figure.
Against this backdrop Mahmoud HASSAN from Bordeaux School of Economics, University of Bordeaux, presented work on the impact of green financial and fiscal policies on innovation. Using data from Europe and OECD countries the work looks at the short-term and long-term impact of such policies on both environmental innovation and non-environmental innovation.
Jelena JOVOVIĆ, from the University of Montenegro, presented work on the relationship between the US green bond market with the conventional bond market, the energy market, and the clean energy market. The research has been studying spillover effects between the green bond market and the conventional bond market, as well as between the green bond market and the broader energy market, encompassing both conventional and renewable segments.
In developing countries, the shift to cleaner energy is expected to significantly affect the energy, agriculture, and transportation sectors. Alain SOLIMAN (PRISM Sorbonne) presented work looking at how this energy transition impacts the returns and risks in these sectors.
Parisa PAKROOH, a Research Fellow at Fondazione Eni Enrico Mattei (Italy) and his coauthors have been studying the factors that drive CO2 emissions globally. By analysing data from 1965 to 2022 in countries classified as low, middle, and high income according to the United Nations (UN), they have looked at the variables that can be used to predict these emissions per capita.
View from an IÉSEG Expert
Professor Dilyara SALAKHOVA notes “Green finance should and can be a force for good that can foster financing of the transition to a low-carbon economy. The risk though remains high that green financial instruments become just another type of financial instruments with the objective of providing return and attracting new customers without delivering any real world impact. For example, green bonds have shown a significant growth; however, evidence of the positive environmental impact remains scarce. ESG investment funds attract inflows and demand higher fees, though assessing their positive contribution is even more challenging.
In order for green finance to contribute to solving real world challenges, the focus of the profession and research should be on the impact of green investments, and in particular, on physical and not monetary units. For instance, it is key to distinguish between a reduction in in emissions due to the closing of a polluting subsidiary or the building of new green capacities, and changes from selling or purchasing activities. In the latter case, assets simply change hands without any reduction in global emissions or benefit to the planet.”
The full programme of presentations can be found here: https://www.ieseg.fr/wp-content/uploads/2024/05/Updated-Workshop-Programme-final.pdf
The Workshop was financially supported by the French Institute in Finland, the Embassy of France in Finland, the French Ministry of Higher Education and Research, the Finnish Society of Sciences and Letters, and the OP Group Research Foundation.
*Risks from misalignment of banks’ financing with the EU climate objectives – Assessment of the alignment of the European banking sector (europa.eu); Good practices for climate-related and environmental risk management (europa.eu)
