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

Green Finance: Core Notions


ZERBIB Olivier David

Département : Finance


The course “Green Finance: Core Notions” delves into how investors can navigate environmental challenges. Specifically, it emphasizes how investors can (i) channel financial capital to projects that bolster sustainable development and (ii) strategize around environmental financial risks. This course is structured into 11 chapters, organized within three modules. It will present the landscape of sustainable finance, shedding light on the prevailing practices and fundamental principles of incorporating environmental risks and opportunities into financial decisions. Specific quantitative approaches for risk and portfolio management will be discussed in the follow-up course “Green finance: risk and portfolio management.”

Module one probes the intersection of investment and sustainability, examining both the financial and ethical reasons guiding investor decisions. It initiates with an exploration of how environmental risks influence businesses and financial markets. After foundational sessions on environmental risks, and the basics of asset allocation and pricing, the module delves into the transmission mechanisms of environmental risks in finance. It not only investigates the financial significance of these risks but also the repercussions of sustainable investors factoring in future potential negative externalities on asset valuations.

Module two focuses on investor strategies, examining how investors can (i) mitigate environmental risks through ESG (Environmental, Social, Governance) screening and integration and (ii) influence corporate environmental practices (particularly pertaining to their environmental footprint) via asset allocation and shareholder engagement. This module will also delve into the tools at investors' disposal, like green bonds, and the metrics for gauging environmental risks, such as carbon intensity, 2-degree alignment, and ESG scores among others.

The final module, module three, evaluates the current state of sustainable investing while highlighting pivotal issues and anticipated challenges. This involves an examination of present regulations, standards, and central banking practices in sustainable finance. Key concepts like the “just transition” will be discussed, underscoring its importance given the profound societal transformations required. The module ends by discussing how to rethink the position of finance and economics in our societies, especially in the context of ecosystem conservation.

The course assessment will be twofold: an in-class presentation and a project to be submitted by the end of the semester. The presentation will focus on greenwashing, and the project will involve creating a financial innovation that generates both environmental and financial benefits.


Module 1: Why should finance care about the environment? What are the asset pricing implications?


Anthropogenic disturbances. Why should finance care about the environment?
- Anthropogenic disturbances, climate change and ecosystems
- Introduction to financial markets
- Introduction to ESG/sustainable finance
- Why should finance care about environmental issues? Non-pecuniary and pecuniary motives


Introduction to portfolio allocation and asset pricing
- Recap of the Modern Portfolio Theory
- Recap of the Capital Asset Pricing Model


Sustainable asset pricing
The effect of environmental risks and preferences on asset prices and companies' cost of capital from
- an empirical standpoint
- a theoretical standpoint

Module 2: How should finance care about the environment?


Sustainable investors' practices I: Values-aligned investing
- Major practices of different types of investors
- Values-aligned investing: focus on ESG screening and exclusion
- Active and passive investing


Sustainable investors' practices II: Impact investing
- Different approaches to impact investing
- Focus on impact investing through (i) asset allocation on listed assets and (ii) shareholder engagement


Green assets
- "Green" assets and labels available to investors
- Focus on green bonds: valuation and impact


Measuring the environmental impact of investments
- Different metrics available to investors to assess the environmental impact of their investments: carbon footprint, green and brown shares, avoided emissions, 2 degrees alignment, ESG scores, Net Environmental Contribution

Module 3: Beyond green investing - Key challenges for the future


Regulations and greenwashing
- New regulations on disclosure and taxonomy
- Future regulation challenges in sustainable finance


Just transition
Definition and challenges


Central banking and green finance
- Why should Central Banks care about environmental issues?
- The tools available to Central Banks to support the ecological transition
- Focus on the Network for Greening the Financial System (NGFS)


Beyond sustainable finance
- Imbrication and hierarchy of ecological, societal, economic and financial systems
- Wrap up


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