EDHEC-Scientific Beta Chair on Advanced ESG and Climate Investing

The EDHEC-Scientific Beta Chair aims to improve knowledge and support research on the integration of ESG and Climate dimensions into the investment, risk management and asset allocation processes of institutional investors.

 

In 2012, EDHEC set up Scientific Beta, a “smart beta” index provider, 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, with a total of more than USD 60 billion in assets under replication and institutional clients not only in Europe but also in North America and Asia.

Sold to the Singapore Stock Exchange for over EUR 200 million at the beginning of 2020, Scientific Beta continues to cooperate with EDHEC, especially by participating in joint research projects and by co-financing a research chair on ESG and climate investing. This research chair, endowed with an annual budget of EUR 1 million, contributes to improving knowledge and supporting research into integrating ESG and climate dimensions into institutional investors’ investment processes, risk management and asset allocation.

This chair, together with the research conducted by EDHEC Risk Institute in the area of climate investing, prefigures the creation of a new institute, the EDHEC Risk Climate Impact Institute (ERCII), which will be officially launched in 2022.
 

A KEY STUDY ON PORTFOLIO GREENWASHING

 

Since its creation, the EDHEC-Scientific Beta research chair has given rise to extensive research and numerous publications geared towards investment professionals. Among these publications, EDHEC has highlighted a particular study that it is seeking to promote widely not only to investors, but also to all stakeholders to the climate question, namely the analysis of greenwashing practices in the construction of portfolios with climate objectives.

Indeed, for many years the financial sector has been positioning itself as part of the solution to the risk of climate change by offering to use its investment capabilities to engage companies on the necessary changes to products and production methods to limit greenhouse gas emissions. This engagement seeks to rely on a dynamic and reflexive process that aims to maximise the impact of investors on greenhouse gas emitters, who are also the issuers of the stocks in which they are invested. It involves not only engaging the companies’ governance on their contribution to climate change, but also, in line with this, to redirect investment flows depending on the responses and improvements observed from these same companies.This movement has been strengthened in recent years with many laws and investor alliances being set up to organise and promote climate investing.

Unfortunately, on can conclude that despite intense communication from the financial industry, the mismatch between the promises of climate investment strategies and the reality of the integration of companies’ climate performance into the funds and indices that represent these strategies is so large that we can speak of genuine portfolio greenwashing. In other words, the communication on the potential impact of the investment strategy on improving the climate situation does not correspond to the allocations promoted by these strategies.

As such, the study on greenwashing in portfolio construction shows that climate scores only correspond on average to 12% of the difference in the weights of stocks in the portfolio for all the strategies that have a primary objective of impacting companies’ climate performance.

This inability of traditional climate investing strategies to significantly take the reality of companies’ climate performance into account to determine the weight of their stocks in the portfolio has very negative consequences for the potential impact of investor engagement on a challenge that has nonetheless been recognized by a very large number of these investors as being fundamental.
 

PUBLICATIONS

 

Sustainable Investing with ESG Rating Uncertainty
September 2021 - Doron Avramov, Si Cheng, Abraham Lioui, Andrea Tarelli
This paper analyses the asset pricing and portfolio implications of a major barrier to sustainable investment - uncertainty about a company's ESG profile.

 

Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing
August 2021 - Noël Amenc, Felix Goltz, Victor Liu
In this study, researchers identify the risks of greenwashing in the construction of portfolios that represent popular climate strategies, particularly those that correspond to net-zero strategies.

 

Chasing the ESG Factor
July 2021 - Abraham Lioui, Andrea Tarelli
In the time series (ordinal ESG) or in the cross section (cardinal ESG)? The authors show analytically that, when an appropriate adjustment is implemented to ensure identical ESG ratings, the difference in factor returns produced by the two methods is just "noise".

 

Does Greenhouse Gas Emissions Disclosure Add Value?
July 2020 - Abraham Lioui
In the wake of the Paris Agreement, companies have come under increasing pressure to disclose their green credentials, including their greenhouse gas emission levels. But are financial markets rewarding them for this transparency?

 

The DeCarbonisation Factor: A New Academic Fiction?
December 2019 - Abraham Lioui
Is there a green factor in the investment universe that would justify the development of offerings that include a low carbon factor in the menu of traditional factors?