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Report : Green Finance Research Advances

Green Finance Research Advances took place on the 14th of December at IFG PARIS – INSEEC GROUP.

The research day aimed to share updated knowledge on Green Finance current academic research and more specifically on the following topics: green bonds, corporate social responsibility, climate transition risks for the financial sector, innovative tools.

The Scientific Committee comprises Jean Boissinot (French Ministry of Finance), Morgan Després (Banque de France), Philippe Dessertine (IAE Paris Sorbonne), Noémie Dié (ILB), Benoît Leguet/Morgane Nicole (I4CE), Charles-Albert Lehalle (CFM, Paris et Imperial College, London), Anne-Claire Roux (Paris EUROPLACE/Finance for Tomorrow), Peter Tankov (ENSAE), Bertrand Villeneuve (Institut Louis Bachelier/Dauphine).

The conference started with welcoming remarks by Eric Lamargue (Sorbonne Business School), Philippe Dessertine (Finagri chair), Arnaud de Bresson (Europlace), Morgan Despres (Banque de France), Jean-Michel Beacco (Institut Louis Bachelier) and Pierre Ducret (CDC, I4CE). All speakers emphasized the need to accelerate research and educational initiatives aimed at combatting climate change, which in particular will allow to make climate thinking mainstream within the banks and attain a stronger involvement of the finance sector in the fight for a sustainable future.

The welcome session was followed by the first session of the conference, focusing on green bonds and related issues, with scientific paper presentations by Patricia Crifo (Paris 10), David Zerbib (ISFA Lion/ Tilburg), Hideki Takada (OCDE) and Marco Migliorelli (Finagri chair).

  • The talk by Patricia Crifo focused on the role of Environmental, Social and Governance (ESG) factors in the performance of sovereign bonds. She introduced quantitative measures of ESG performance and showed that these are negatively correlated with bond spreads. The social and governance factors are most important, while the environmental factors are not adequately priced. The impact is strongest in Europe and during crises.
  • David Zerbib presented an empirical study of the green bond market. Presently, only 2% of all issued bonds are labeled as green, but the strong investor demand allows for a much bigger market. This strong demand explains the negative premium for green bonds, especially in Europe, which is not justified by lower risk levels.
  • The theme of green bonds was continued in the presentation of Hideki Takada, who presented a recent OCDE report quantifying the investment levels necessary to achieve a 2 degrees target.
  • The presentation of Marco Migliorelli, concluding the green bond session, analyzed the obstacles to increasing the size of the agricultural green bond market. Those are due to the limited profitability of the green practices and the information asymmetry between emitters and investors. The latter issue may be resolved by standardization and well as procedures allowing the banks to retain part of the risk.

The scientific paper session was followed by a practitioner roundtable moderated by Philippe Dessertine, where different points of view on green bonds were discussed and debated. The participants were Aldo Romani (EIB), Denis Rouhier (EDF Energies Nouvelles), Frédéric Gabizon (HSBC), Frédéric Samama (Amundi), Chiara Caprioli (Luxembourg Stock Exchange), Carole Sorreau (Invivo), Elena Panomarenko (IFC), Noémie De La Gorce (S&P Global Ratings). After a short presentation by Benoit Leguet of the recent report by I4CE on the contribution of green bonds to the Paris Agreement, and presentations of the participants, Philippe Dessertine introduced the main questions of the round table:

  • What is the current situation in the green bond market from the point of view of practitioners as well as their opinion on its evolution?
  • Would a more precise definition allow to increase issuance?

All participants expressed positive views of the green bond market and favorable opinions on the potential of its further evolution. There is growing support of the green finance in general and of the green bond market in particular among policy makers, and finance is increasingly recognized as the key tool in the fight against the climate change. Global policy shifts are at work, which make this role even more important. For example, in France, Article 173 of the energy transition law requires institutional investors to assess climate change risk of their portfolios. Similar laws may be adopted in other European countries.

 From the investor point of view, the money is there and even a 10-fold increase of the green bond market seems a realistic objective, but new frameworks and stronger taxonomies are needed to improve reporting, transparency and accountability. This will enable investors to compare different issues and ensure market liquidity. An important obstacle is the small size of funds, which makes it difficult for large investors to enter the market. This is changing now as IFC as setting up a large investment fund specializing in green bonds.

To satisfy the growing demand of investors, it is necessary to find more issuers. The main obstacles for issuers are high costs and reputational risk. To increase the size of the market further, one needs to open up the definition of green bonds to the sustainability and social part, and cover issuers, which are not strictly speaking labeled as green, such as renewable investments.

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The afternoon started with four presentations of innovative tools that support the development of green finance.

The meeting continued with a talk by Jean Boissinot, Director of the Financial Stability for of the French Treasury. He emphasized the need to define green finance and to think of the climate transition not only in the long run but also in the short and medium run. He also defined some areas where further academic research should be needed such as the underpricing of green instruments, the management of risk, the scenarios used and the transitional risks. It is important for the academic community to shift from “being normative” to “being positive”, that is, stop saying what the government should do and focus on studying the impacts of specific policies, to give the finance community actionable knowledge.

This talk was followed by the presentation of four academic papers on exposure of financial actors to low-carbon transition risks:

  • First, Elie Bellevrat Senior Energy Analyst for the International Energy Agency, presented the World Energy Outlook 2017, a report recently published that concluded that electrification and digitalisation are the future for many parts of the global energy system. WORLD ENERGY OUTLOOK 2017  Elie Bellvrat 
  • Irene Monasterolo, Vienna University of Economics and Business, presented a paper on a climate stress-test of the financial system. She demonstrated that early transitioners are benefitting from their early shifts and are less impacted by climate policy relevant shocks while « brown » banks and funds suffer even more. She also stressed the need of rigorous standards and of precise data on bonds and loans at the microeconomic level. A climate stress-test of financial institutions Irene Monasterolo
  • Alessandro Ravina, Paris Sorbonne, presented a paper to be published on the assessment of transition risks at microeconomic level with a stress test methodology as an alternative method to the different existing models. He developed a model, based mostly on emission quantification, that assesses the microeconomic facets of transition risks. ASSESSING TRANSITION RISK AT MICROECONOMIC LEVEL WITH A STRESS TEST METHODOLOGY  Alessandro Ravina -­‐ Université Paris 1 Panthéon-­ Sorbonne, CES, Chaire Energie & Prospérité
  • Carmine de Franco from OSSIAM concluded the session with a presentation of his work on the carbon footprint for dynamically rebalanced portfolios. Carbon footprint for dynamically rebalanced portfolios  Carmine de Franco

After giving their presentations, Elie Bellevrat, Alessandro Ravina, Irene Monasterolo and Carmine De Franco joined the round table on « How may financial actors manage their transition risks? » This roundtable, moderated by Morgane Nicol (I4CE), offered an opportunity for researchers and market participants (ACPR, Axa, Banque de France and BNP Paribas) to share and compare the results of their respective works on the management of transition risks. After a brief presentation of the policies undertaken by the supervisors and the financial institutions represented, all participants agreed that there is a room for much collaboration between researchers and practitioners in order to improve the soundness of methodologies to assess transition risks. In this regard, it appears necessary to guarantee a better access to financial data to researchers, and, to exchange information (e.g. ideas but also difficulties) between all relevant stakeholders. It was highlighted that this collaboration would be particularly helpful to elaborate more realistic and relevant stress tests to assess transition risks. Lastly, some participants stressed the benefits of interdisciplinary approach (such as economics, finance, environment, sciences, etc.) for the research on sustainable finance.