Equipping Financial Actors with Tools & Knowledge Enabling Sustainable Decisions

Sustainable finance demands a shift in thinking — and a new set of tools and approaches to bridge this thinking with practice. This is a topic echoed throughout the latest work by the researchers of the Center of Competence for Sustainable Finance. These tools and pathways feature topics such as scenarios to support sustainable investment decisions, measuring physical climate risk, and insights regarding the recent court ruling demanding Shell to significantly reduce its emissions.

With this summer newsletter, I welcome you to explore fresh research paving the way for a sustainable financial system. And before you dive into our research, have a look at our newly set Steering Committee and the composition of our Advisory Board.

Sincerely,
Professor Marc Chesney
Chair of the Center of Competence for Sustainable Finance

Accounting for Finance Is Key for Climate Mitigation — Financial supervisors use climate mitigation scenarios developed by the Network for Greening the Financial System (NGFS) to encourage banks and investors to assess climate-related financial risks. A new paper published in the prestigious journal Science by Stefano Battiston with coauthors Irene Monasterolo, Keywan Riahi, and Bas J. van Ruijven, shows that investors make decisions based on the risk perceived from the scenarios, but can end up investing less than what the scenarios require to reach a 2C target. The paper develops a framework to endogenise the role of investors’ expectations and draft new scenarios that are more consistent in terms of investment levels and carbon budget.

The EBA Mapping of Climate Risks Uses the CPRS Method Co-developed by UZH — The European Banking Authority has published its first mapping exercise of climate risk. The analysis applies the Climate Policy Relevant Sectors (CPRS) classification of economic activities developed in 2017 by the team of authors led by Stefano Battiston.

The Boomerang Effect in Climate Policy: Evidence from Stock Price Responses — In a forthcoming paper titled “Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 US Elections”, Stefano Ramelli, Alexander Wagner, Richard J. Zeckhauser, and Alexandre Ziegler study firms’ stock-price movements after the 2016 and 2020 US elections. As expected, Donald Trump’s election boosted carbon-intensive firms. Surprisingly, firms with climate-responsible strategies also gained support at the time as long-run investors appear to have betted on a “boomerang” in climate policy. Harbingers of a boomerang already appeared during Trump’s term and the 2020 election of Joseph Biden marked its arrival.

Shell Stumbles Over an Old Open Cellar Hatch — In May 2019, Friends of the Earth Netherlands filed a class action lawsuit against Royal Dutch Shell PLC based on a claim that Shell acts unlawfully by emitting large volumes of CO2 through its business operations. In May, in a first-of-its-kind judgment worldwide, the District Court of The Hague ordered Shell to reduce its CO2 emissions by 45% compared to 2019 levels by the end of 2030, including direct and indirect emissions. In a recent article, Andreas Hösli and Tineke Lambooy discuss the case through the lens of human rights, responsibility, and leadership.

Measuring Physical Climate Risks — A New Frontier in ESG? — In a fresh academic working paper “Let’s Get Physical: Comparing Metrics of Physical Climate Risk”, Linda Hain, Julian Kölbel, and Markus Leippold compare existing methods for quantifying companies’ exposure to physical climate risks and find them to vary widely. This results in inconsistency in rankings across sectors and negatively affects the ability to account for climate risks. The researchers identify key sources of uncertainty and offer suggestions on how to bridge the gaps.

Do Investors Care About Impact? — In a new working paper, Florian Heeb, Julian Kölbel, Falko Paetzold, and Stefan Zeisberger find that investors pay for impact, but they pay about the same for a low impact fund and a high impact fund — even if the high impact fund has 10 times more impact. This creates a problem for the development of ESG products with impact: If your customers don’t pay more, why offer more? The results of the paper underscore the need for labels in sustainable finance.

How Disclosing Transition and Physical Climate Risks Affects Credit Default Swaps — Efficient climate risk pricing in capital markets requires companies to adequately disclose specific risks. These can be divided into two broad categories: transition and physical risks. Both types of risk may have significant financial implications for companies. Without their effective and transparent disclosure, the financial impacts of climate change may not be priced correctly — in the long run, this will lead to significantly higher economic costs, making rapid adaptation with destabilising effects on financial markets more likely. The paper by Julian Koelbel, Markus Leippold, Jordy Rillaert, and Qian Wang asks whether regulatory disclosure provides valuable information on companies’ climate risk exposure and whether this is reflected in market prices, particularly in credit default swaps.