EDHEC-Risk Climate: the fifth newsletter is out!

Two years ago, EDHEC-Risk Climate Impact Institute was founded with a clear mission: to integrate climate considerations into financial decision-making. The Institute equips investors, financial managers, and policymakers with cutting-edge research, tools, and insights to navigate the economic transformations driven by climate change and climate action.

Its fifth newsletter, released this winter, features reflections on the evolution of climate scenarios and advancements in integrating state-of-the-art climate science with financial economics, including high-resolution geospatial research for localized insights. This issue also explores the importance of probabilistic climate scenarios to address critical uncertainties, insights into advancing high-resolution climate-economic modeling and localized risk assessments, and an analysis of the challenges and opportunities in scaling transition finance within the EU framework. Read the EDHEC-Risk Climate news dedicated to this newsletter.

Blueprint to Foundations: A New Generation of Climate Scenarios

By Frédéric Ducoulombier, Director of EDHEC-Risk Climate

Two years ago, EDHEC-Risk Climate Impact Institute was established with a clear priority: to advance the integration of climate considerations into financial decision-making. Our mission has been to equip investors, financial managers, and policymakers with the tools to navigate the evolving economic landscape shaped by climate change and climate action. This included modelling interactions between climate change and policies, assessing their economic and financial impacts, and developing better tools for climate-aware investment and risk management.

Eighteen months ago, in a Financial Times editorial, we challenged the financial industry to rethink its approach: existing climate scenarios rigidly link socio-economic narratives to warming outcomes, overlook critical uncertainties-such as variability in climate responses and dynamic policy and economic feedbacks-and remain silent on the relative likelihood of different pathways. Furthermore, global approaches obscure regional and sectoral disparities, limiting their practical value for decision-makers.

In this editorial, we reflect on the progress made in addressing these shortcomings: extending Integrated Assessment Models to incorporate state-of-the-art climate science and align them with financial economics, demonstrating how discount rates can be recovered to price assets under emissions abatement schedules while integrating multiple dimensions of uncertainty into the modelling framework, and creating a methodology to assign probabilities to climate abatement pathways and deliver fully probabilised climate scenarios. These advances, delivered in a modular architecture, are further enhanced by high-resolution geospatial research, which allows us to explore sectoral and geographic implications at a subnational level and refine global damage functions-offering decision-makers a more precise and actionable understanding of climate risks... Read this editorial

Feature - Why We Need Climate Scenario Probabilities and How to Get Them

By Riccardo Rebonato, EDHEC Professor, Scientfic Director of EDHEC-Risk Climate

When investors and policymakers are faced with the garden-variety uncertainty associated with financial quantities, they have at their disposal well-established statistical tools, such as Value-at-Risk or Expected Shortfall. Knowing that there are more things between heaven and earth that are dreamt of in the statisticians' philosophy, the same investors and policymakers often also make use of scenario analysis. The two approaches complement themselves: as the slogan goes, statistical tools are backward-looking and scenarios (can be) forward-looking. Financial scenarios are rarely, if ever, accompanied by explicit probabilities. However, the 'expert knowledge' of the end users allows them to understand whether a given scenario represents a clear and present danger, or whether it belongs to the meteorite-falling-on-Earth category. And, if they so wanted, the same users could avail themselves of a hundred-years-plus of financial data to carry out a formal assessment of the scenario likelihood. So, with financial scenarios, probabilities are at least in the back of the users' mind, and can be brought centre stage with relatively little effort. Climate scenarios are different... Read this feature

Interview - Refining Risk Assessments with High-Resolution Climate Simulations and Advanced Econometric Modelling

With Nicolas Schneider, Senior Research Engineer at EDHEC-Risk Climate

In this interview, Nicolas Schneider, Senior Research Engineer at EDHEC-Risk Climate Impact Institute, explores the advancement of high-resolution climate-economic modelling to assess climate risks at regional and subnational levels. He explains the necessity of moving beyond global averages to uncover localised vulnerabilities and threshold effects, highlighting the innovative methods and data improvements behind this research. Nicolas discusses how this work builds on recent studies, addresses critical gaps in climate models, and delivers actionable insights for policymakers, investors, and financial institutions. He also shares key findings on regional economic impacts, the importance of adaptation strategies, and the role of robust climate data in understanding and mitigating climate-driven risks... Read this interview

Industry Analysis

Charting a Pathway for Transition Finance: Challenges and Opportunities in the EU Framework

By Frédéric Ducoulombier, Director of EDHEC-Risk Climate

Transition finance is increasingly recognised as a critical tool for achieving net-zero targets, enabling high-emission sectors to decarbonise, adopt cleaner technologies, and phase out outdated facilities. Yet, the scale of transition and green investments remains far below what is required to meet the Paris Agreement goals. According to the Intergovernmental Panel on Climate Change (IPCC), mitigation investments must increase three- to six-fold this decade in scenarios that limit warming to 2°C or 1.5°C. Scaling up transition finance is therefore an urgent imperative and, as the IPCC notes, requires "clear signalling and support by governments." Despite its importance, transition finance lacks a globally accepted definition, and few major regulatory frameworks have addressed it comprehensively. Even the European Union, often seen as a pioneer in sustainable finance, faces significant gaps and inconsistencies in its treatment of transition finance, creating barriers to its effective deployment. This article examines the definitional challenges of transition finance, analyses its treatment in the EU Sustainable Finance Framework, and explores the role of private-sector initiatives in bridging these gaps. Finally, it offers policy insights and implications for financial professionals, charting a pathway to properly integrate transition finance into sustainable finance frameworks... Read this analysis

Additionnaly, this fifth EDHEC-Risk Climate newsletter provides more content: a selection of academic publications, of industry publications, videos of presentations and webinars replays, news, a press review...

It also features selected sustainability publications by Scientific Portfolio, EDHEC Infra & Private Assets Research Institute and EDHEC Business School faculty.

To browse this newsletter entirely, go to the dedicated webpage