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

Finance verte


ZERBIB Olivier David

Département : Finance


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 sup- port 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


Class 1. Introduction and Reminders (David 3h)
The aim of this class is to (i) review the fundamentals as regards the functioning of financial markets, including basic notions of asset pricing and portfolio construction, and (ii) take stock of the impact of human activities on the environment, focusing in particular on climate change.

Class 2. The material effect of environmental risks on financial markets (David 3h)
The class reviews recent studies on the physical and environmental transition risks, socially responsible investment and its motivations (Riedl and Smeets (2017)) and the major challenges of environmental finance, especially regarding regulatory projects and the design of guidelines to good practices (TCFD (2017), HLEG (2018)). The academic literature on companies' cost of capital in relation to their environmental impact is
reviewed (Derwall et al. (2005), Renneboog et al. (2008), Sharfman and Fernando (2008), Capelle-Blancard and Laguna (2010), ElGhoul et al. (2011), Chava (2014), Kruger (2015), In et al. (2018), Capelle-Blancard et al. (2019), Zerbib (2020), Pastor et al. (2019), Pedersen et al. (2019)).

Class 3. Investors' environmental and sustainable practices and Financing green assets (David 3h)

This class deals with the practices of institutional investors of several kinds (Kruger et al. (2018)): insurance companies, pension funds, banks and asset managers (Andersson et al. (2016)). It focuses on various methods of sustainable investment, such as exclusion (Hong and Kacperczyk (2009)), ESG screening, corporate engagement (Dimson et al. (2015) and Hoepner et al. (2018)), and impact investing (De Angelis et al. (2020), Landier and Lovo (2020), Oehmke and Opp (2019), Green and Roth (2020), Heeb and Kolbel (2020)). It includes an analysis of telecoupling and investors' responsibility in activities with a high environmental impact (Scholtens (2017) and Galaz et al. (2018)) as well as investors' ability to make corporate practices greener (Heinkel et al. (2001)).

The class also focuses on the various securities available for financing green projects: green bonds (Flammer (2018), Paranque and Revelli (2019), Zerbib (2019)), project bonds, sustainable infrastructure, real estate, green funds and labels.

Class 4. (a) Measuring the environmental impact of investments and (b) Central Banking and Green Finance (David 3h)

Presentation of the metrics available, their strengths and limitations: the carbon footprint, carbon intensity, green share, brown share and stranded asset issues (Trinks et al. (2018)), avoided emissions, 2-degree alignment, and the Net Environmental Contribution (NEC).

This chapter deals with the reasons why central banks are concerned about the environmental impact of investments and financial markets, their ability to integrate the management of this additional systemic risk into their mandate (see Benoît Coeuré's speech at the ECB in November 2018, Campiglio (2016)) and the limitations of this exercise.

Classes 5 and 6. Introduction to climate finance (Peter, 2 x 3h)

Physical risks and climate scenarios
- Climate models and data
- Case study 1: heatwave risk in the Paris area
- Case study 2: financial impact of tropical cyclones under changing climate
Transition risks and IAM scenarios
- The DICE model
- Models vs. scenarios
- Climate stress testing
- ACPR stress testing exercise
Measuring and managing the environmental impact of investments
- Company impact vs. investor impact
- Portfolio alignment to a temperature trajectory
- Comparing portfolio alignment methodologies


  1. 2 Degrees Initiative Investing, 2017. The transition Risk-o-meter. Reference scenarios for financial analysis.
  2. Andersson, Bolton, Samama, 2015. Hedging Climate Risk. Financial Analysts Journal.
  3. Ambec and Lanoie, 2008. Does it pay to be green? A systematic overview. Academy of Management Perspectives.
  4. Battiston, Mandel, Monasterolo, Schutze, Visentin, 2016. A climate stress-test of the financial system. Nature Climate Change.
  5. Campiglio, 2016. Beyond carbon pricing: The role of banking and monetary policy in financ- ing the transition to a low-carbon economy. Ecological Economics.
  6. Campiglio, Dafermos, Monnin, Ryan-Collins, Schotten, Tanaka. Finance and climate change: what role for central banks and financial regulators? Working paper.
  7. Campiglio, Godin, Kemp-Benedict, 2017. How market sentiments shape the transition to low- carbon capital. Working paper.
  8. Chava, 2014. Environmental Externalities and Cost of Capital. Management Science.
  9. Dietz, Bowen, Dixon, Gradwell, 2016. ‘Climate value at risk’ of global financial assets. Nature Climate Change.
  10. Derwall, Guenster, Bauer, Koedjik, 2005. The Eco-Efficiency Premium Puzzle. Financial Ana- lyst Journal.
  11. Derwall, Koedjik and Ter Horst, 2011. A tale of values-driven and profit-seeking social in- vestors. Journal of Banking and Finance.
  12. Dhaliwal, Li, Tsang and Yang, 2011. Voluntary Nonfinancial Disclosure and the Cost of Eq- uity Capital: The Initiation of Corporate Social Responsibility Reporting. The Accounting Review.
  13. El Ghoul, Guedhami, Kwok and Mishra, 2011. Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance.
  14. European Commission, 2018. Action Plan: Financing Sustainable Growth.
  15. EU HLEG, 2018. Final Report 2018 by the High-Level Expert Group on Sustainable Finance.
  16. European Investment Bank, 2017. The need for a common language in Green Finance. To- wards a standard-neutral taxonomy for the environmental use of proceeds.
  17. Flammer, 2018. Corporate Green Bonds. Working paper.
  18. Galema, Plantinga, Scholtens, 2008. The stocks at stake: Return and risk in socially responsible investment. Journal of Banking and Finance.
  19. Hong and Kacperczyk, 2009. The price of sin: The effects of social norms on markets. Journal of Financial Economics.
  20. Krueger, 2015. Corporate Goodness and Shareholder Wealth. Journal of Financial Economics. Porter and van der Linde, 1995. Toward a New Conception of the Environment-Competitiveness
  21. Relationship. Journal of Economic Perspectives.
  22. Renneboog, Ter Horst, Zhang, 2008. Socially responsible investments: Institutional aspects, performance, and investor behavior. Journal of Banking and Finance.
  23. Sharfman and Fernando, 2007. Environmental Risk Management and the Cost of Capital.
  24. Strategic Management Journal.
  25. TCFD, 2017. Recommendations of the Task Force on Climate-related Financial Disclosures
  26. Zerbib, 2018. Is There a Green Bond Premium? The yield differential between green and conventional bonds. Working paper.