ENSAE Paris - École d'ingénieurs pour l'économie, la data science, la finance et l'actuariat

Green finance

Enseignant

TANKOV Peter

Département : Finance

Objectif

The objective of this course is to explain how financial actors must grasp the environmental issue both (i) to redirect financial flows towards projects with low environmental impact in order to support and strengthen the environmental transition and (ii) to control and mitigate the financial risks represented by the environmental transition.

To understand the modeling of environmental risks, we shall provide a basic introduction to climate change modeling. The aim is not to give full details of the models but to enable the students to understand what kind of information about the future climate and the related risks can be extracted from state-of-the art climatological models and how to quantify the associated uncertainties. The link of CO2 concentration with the climate change and the role of the energy sector in climate transition will be addressed. We shall also briefly discuss the integrated assessment models to understand how the climate dynamics can be coupled to the dynamics of the economy, and insist on the role of the financial sector in this process.

This transformation of finance requires an understanding of (i) the assets that finance sustainable development, (ii) the metrics used to understand their environmental impact, and (iii) the practices implemented by sustainable financial players.

This course is designed to provide students with the tools to understand and support the greening of the financial system by articulating concrete examples, academic papers and latest regulations.

Skills acquired during the course:
• Understanding of main climate risks underlying financial assets
• Basic understanding of climate models and ability to manipulate climate scenarios

• Identification of the environmental impact of financial assets
• Knowledge of various methods and practices of environmental investing

• Knowledge of the latest environmental finance regulations

Evaluation: multiple-choice test + essay/presentation on a topic to be chosen from a list which will be provided to the students

Plan

Class 1. ESG Investing (Thierry, 3h)

  • Definition and statistics
    • Historical perspective
    • Financial ecosystem
    • Market of ESG investing
  • ESG scoring
    • Extra-financial data
    • Scoring systems
    • Rating systems
  • ESG strategies
    • Generic strategies
    • Active management
    • Passive management
    • Momentum strategy
  • ESG risk premium
  • Theory of skewness risk premium
  • Expected return vs. realized return
  • Investment flows
  • ESG. vs Green risk premium
  • Bubble risk

Class 2. Impact Investing (Thierry, 3h)

  • Sustainable financing products
    • Green labels
    • SRI mutual funds & ESG ETFs
    • Green bonds
    • Social bonds
  • Sustainable development goals (SDG)
  • Voting policy, shareholder activism and engagement
  • Cost of capital
    • Theory (shareholder vs. debtholder)
    • Relationship between financing and investing
    • Impact on credit risk

Class 3. Net Zero Investing (Thierry, 3h)

  • Net zero scenarios
    • Carbon emissions vs. carbon intensity
    • Carbon budgets
  • Decarbonization & transition dimensions
    • Net zero carbon metrics
    • Greenness intensity measures
  • Portfolio optimization
    • Integrated approach
    • Core-satellite approach

Class 4. Introduction to climate risks, physical risks (Peter, 3h)

  • Introduction to climate change, climate financial risks and climate finance
  • Physical risks and climate scenarios
    • Climate models, scenarios and data sources
    • Impact of climate change on extreme climate events
    • Case study 1: heatwave risk in the Paris area
    • Case study 2: financial impact of tropical cyclones under changing climate

Class 5: Transition risks and IAM scenarios (Peter, 3h)

  • Integrated assessment models and transition scenarios
  • The DICE model
  • Scenario providers: IEA, NGFS, IPCC
  • Climate stress testing

Class 6: Portfolio alignment to net zero scenarios (Peter, 3h)

  • Company impact vs. investor impact
  • Portfolio alignment to a temperature trajectory
  • Comparing portfolio alignment methodologies
  • How to build aligned portfolios