Climate-Ready Investing

In 2012, EDHEC set up Scientific Beta on the strength of EDHEC-Risk Institute’s research on the quantitative management of equity portfolios. Sold to the Singapore Stock Exchange at the beginning of 2020, Scientific Beta continues to cooperate with EDHEC, notably through the endowment of a research chair aiming to address the pressing need for fit-for-purpose tools to integrate climate risks into investment management.

Overview

In 2012, EDHEC set up Scientific Beta on the strength of EDHEC-Risk Institute’s research on the quantitative management of equity portfolios. The quality of the research and the intellectual leadership of its team enabled Scientific Beta to rapidly become one of the leaders in the new forms of systematic management of equities. 

Sold to the Singapore Stock Exchange for over EUR 200 million at the beginning of 2020, Scientific Beta continues to cooperate with EDHEC, notably by participating in joint research projects.

Such projects, together with the research conducted by EDHEC-Risk Institute in the area of climate investing, prefigured the creation of a new institute, EDHEC-Risk Climate Impact Institute (ERCII), which was launched in October 2022.

On 5 October, 2023, EDHEC-Risk Climate Impact Institute and Scientific Beta announced the endowment of a research chair entitled "Upgrading Climate Scenarios for Investment Management". This new long-term research effort is part of the EDHEC-Scientific Beta Advanced Climate Investing Initiative and aims to address the pressing need for fit-for-purpose tools to integrate climate risks into investment management.

While climate change increasingly becomes a tangible reality, with more frequent and severe extreme weather events, the bulk of damages to nature, people, and economies remains in the future. This makes historical data and traditional statistical estimation methods largely irrelevant to assess and manage climate risks and explains why climate scenario analysis and stress testing have taken central stage in the investor toolbox.

In their current state however, they are rather crude what-if tools suited to assisting long-term strategic thinking about uncertainty and spotting fragilities to potential shocks. Considerable work is required to extend and repurpose climate scenarios for risk and investment management purposes. The critical challenge is to embed scenario analysis in a coherent probabilistic framework, enabling finance professionals to compute relevant risk and return metrics.

EDHEC-Risk Climate Impact Institute Scientific Director Professor Riccardo Rebonato will lead the research effort. A nuclear physicist by training, Professor Rebonato has made notable contributions to quantitative portfolio theory and risk modelling and management and has held senior research positions in the financial industry.

Publications

• How Does Climate Risk Affect Global Equity Valuations? A Novel Approach
  EDHEC-Risk Climate Impact Institute publication, July 2024
  Riccardo Rebonato, Dherminder Kainth, Lionel Melin
  
  This study addresses limitations in current climate-aware valuation approaches and offers new insights into the impact of climate risk on asset valuations. The research introduces a novel framework that integrates asset pricing techniques with Integrated Assessment Models. It features a fully probabilistic treatment of economic and climate uncertainties, state-dependent discounting, and a consistent analysis of transition costs and physical damages. Key findings reveal that equity valuations are significantly affected by the aggressiveness of emission abatement policies, the presence of climate tipping points, and central banks' ability to lower rates during economic distress. The study shows potential valuation impacts ranging from less than 10% with robust abatement actions to over 50% in scenarios with minimal action and tipping points. This pioneering research highlights the critical importance of aggressive emission abatement policies to mitigate financial impacts, providing valuable insights for policymakers, investors, and financial institutions integrating climate risks into their valuation models.
  
  • Press release on the research: "Aggressive Climate Policies Needed to Preserve Global Equity Values, Warns New Study", 10 July, 2024

  A webinar entitled "Assessing the Impact of Climate Risk on Global Equity Valuations", hosted by Professor Riccardo Rebonato, PhD, Scientific Director of EDHEC-Risk Climate Impact Institute, and moderated by Felix Goltz, PhD, Research Director at Scientific Beta, was held on 2 July, 2024 to present the insights from the paper and to discuss implications for investors:
  
  • Webinar replay
  • Webinar slides
  • Webinar Q&A