3 questions to Noël Amenc (EDHEC Climate Institute): will there be a climate problem again with Donald Trump’s new mandate?
In this interview, Noël Amenc, EDHEC Associate professor of finance and Director of the EDHEC Climate Institute, harshly criticises the latest political, economic and financial decisions taken across the Atlantic. He calls for a European intellectual and scientific revival. In his opinion, EDHEC Business School can and must play its part with comparative advantages and remarkable existing and ready to be launched solutions.
Eliminating federal budgets for climate change research, withdrawing from the Paris agreement again, anti-ESG legislation, and eliminating all constraints on exploiting fossil fuels, it seems that President Trump’s second mandate cares little about climate change and as a result climate transition is no longer a first-order objective for the financial industry, as can be seen from the withdrawal of the largest American banks from the Net-Zero Banking Alliance. Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo all announced that they would be leaving the coalition in December 2024 and in early January 2025. In late January, a number of Canadian banks followed their US counterparts. Five of the country’s top banks – TD Bank, Bank of Montreal, National Bank of Canada, Canadian Imperial Bank of Commerce and Scotiabank – also left the alliance.
The situation is the same for asset managers with BlackRock’s withdrawal from the Net-Zero Asset Managers initiative and the suspension of the initiative’s activities in light of the threat of lawsuits for non-compliance with fiduciary obligations with respect to their clients or anti-competitive practices.
In Europe, many voices are being raised to condemn the European Union’s “ecological extremism” and to call into question the green deal, which until now had been considered to be the European Commission’s flagship project. In a world that is supposedly freeing itself from the constraints of environmental protection, the fight against climate change would be synonymous with the deindustrialisation of our continent.
It is in this context that we asked a few questions to the Director of the EDHEC Climate Institute, Professor Noël Amenc.
Regarding this context, is the initiative that you and EDHEC are engaged in with your Singaporean, French and British colleagues within the institute still makes sense?
Noël Amenc: In effect, Donald Trump’s election is not good news for the climate, but reducing the difficulty of mobilising the financial industry on the climate question to this event alone is a bit limited. The United States always has difficulty considering the fiduciary obligations of pension funds beyond the risk/return combination. Unlike in Europe, where investment based on social or environmental criteria is considered to be a response to institutional investors’ fiduciary obligations, on the other side of the Atlantic it is necessary to show that taking extra-financial criteria into account has a real financial benefit, whether involving an increase in return or a reduction in the risk of the investment. This limited fiduciary focus has led the investment industry to make increasing numbers of false promises and to promote research of no value to highlight the alpha of ESG or the reduction in risk.
We still remember the delirious assertions of some asset managers or investors who claimed that ESG protected investors’ portfolios from Covid while hiding the fact that this resilience was in fact due to sector or factor choices and that there was no observable ESG effect once these dimensions had been taken into account.
In the same way, ESG alpha calculations based on methods that did not comply with any academic rule, forgetting the traditional factor dimensions in the equation, were widely promoted by asset managers and ESG index and data providers without any respect for scientific morals or even simply for commercial morals. EDHEC criticised these practices at the time (1) (2) (3) (4).
Of course, when one sells hot air in risk management one can reap a whirlwind, as was seen by the collapse of the Silicon Valley Bank, which preferred to manage the company’s diversity risk rather than its balance sheet risk, or the failure of one of the main Swedish pension funds, Alecta, which was more concerned with promoting its stock picking and ESG engagement capabilities than diversifying the financial risks of its portfolio.
Ultimately, due to the lack of serious work on the financial materiality of ESG, it was perceived not only by many US investors and politicians, but also by some Europeans, as an ideological deviation from what investors’ obligations should be, namely good protective management of savings, and notably pensions.
It is this “ideologicalisation” of ESG investment that is the greatest threat to climate investment today. Even though climate risk is both a scientific and a financial reality, ESG bashing ignores this reality.
For EDHEC and its Climate Institute, working on the financial materiality of climate change is the priority. And we are credible in doing this (5) not only because we have a very large team devoted to this issue but also because over several years, notably with the help of the Singapore government, we have put together a platform with data on exposure to real assets such as infrastructure that characterise and objectivise this materiality of climate risk.
Donald Trump’s mandate, which will have very negative consequences on the fight against climate change, does not delegitimise our research effort. On the contrary, it is an incentive to promote the most precise and robust climate risk data possible, and the importance of managing it, to investors and to companies (6) more generally. We need to remove the climate question not only from denial but also from its false assimilation with wokeism.
In concrete terms, how does the EDHEC Climate Institute intend to highlight this materiality of climate risk?
Noël Amenc: The institute’s first initiative relates to our historical research in the area of the climate risk of infrastructure, which we initiated as part of the EDHEC Infrastructure & Private Assets Research Institute. For almost all infrastructure investments, which equates to more than 6,000 assets today, we are capable of calculating the potential climate exposure, whether it involves transition risk or physical risk. As a complement to these exposures, we can also make calculations to 2035 and 2050 and, by qualifying these assets’ transition and resilience plans, provide the expected destruction of value by integrating the occurrence of various climate scenarios. This capability, which is unmatched anywhere in the world, is allowing us from 2025 to launch a climate risk rating agency that will progressively address asset classes where climate change has a very high level of materiality, whether it involves listed companies or real estate investment.
In a recent publication (7), we had shown that transition risk could represent more than 600 billion dollars in losses for investment in infrastructure alone and that for this same asset class, physical risk could lead to a 50% loss in value for the most exposed portfolios. These figures are considerable and justify attention from both issuers and investors to the climate risk exposure of their assets, whatever the anathemas and ideological fervours of the moment…
But we will not limit our initiatives to the financial valuation of climate risk. The EDHEC Climate Institute also intends to play a leading role in the area of information on the transition and resilience technologies that are available for companies. Today, we have what is probably the most accurate and complete green technology taxonomy. This source of information aims not only to objectively and independently qualify the transition investments of the companies that we will be rating, but also to serve as guidelines for those issuers and investors who wish to avoid the pitfall of technological greenwashing. The idea is to avoid inappropriate or inefficient technologies justifying false alignment or resilience promises.
Climate is a subject that concerns not only the financial industry but also all citizens who are aware that their future on the planet will play out in the coming years. Will the EDHEC Climate Institute be promoting research and initiatives that go beyond climate finance alone, an area in which EDHEC has recognised competence?
Noël Amenc: Yes, EDHEC’s strategic objective, which is set out in the institute’s 2025-2028 strategic plan, is to have a positive impact for the planet and for future generations. While the EDHEC Climate Institute’s contribution to the measurement of the financial risks relating to climate change should play a mobilising role in changing company practices and the financing of the climate transition, we would also like to act directly.
We are currently working with technological partners who have recognised expertise in the space field, in artificial intelligence, in meteorology, and in the modelling of wildfires and flooding so that we can offer innovative solutions in the area of alerts and the management of these risks, which will be increasing and intensifying due to climate change.
The EDHEC Climate Institute intends to become a partner not only of companies but also of governments in order to improve the climate resilience of the regions that are most threatened by the consequences of climate risks. This ambition is part of the strategy of hybridisation of skills between management sciences and engineering that EDHEC has been carrying out for many years.
Ultimately, we wish to respond to the climate denial of the Trump administration, which is based on a refusal of science, with activism that favours science and stands apart from any ideology. Our future and that of our children should be guided by reason and knowledge and it is the purpose of a teaching and research institution to build that knowledge.
References
(1) Amenc, N., G. Bruno and F. Goltz, January 2022, Should ESG Alpha Really be Positive? Assessing the Five Forces that Drive ESG Investment Returns, Scientific Beta Publication.
(2) Bruno, G., M. Esakia and F. Goltz, April 2022, “"Honey, I Shrunk the ESG Alpha”: Risk-Adjusting ESG Portfolio Returns,” Journal of Investing - https://www.pm-research.com/content/iijinvest/31/3/45
(3) Bruno, G., M. Esakia and F. Goltz, May 2023, “Sustainability Alpha in the Real World: Evidence from Exchange-Traded Funds,” Scientific Beta Publication - https://scientificbeta.com/factor/download/file/sustainability-alpha-in-the-real-world
(4) Why climate indices and portfolios (almost) fail to deliver: a look at a pioneering study by EDHEC (2022) EDHEC Vox, N. Amenc, F. Goltz, V. Liu -
(5) Why EDHEC Business School is a major player in Sustainable Finance (2024) EDHEC Vox, N. Amenc, F. Blanc-Brude, F. Ducoulombier, E. Jurczenko, E. Metais - https://www.edhec.edu/en/research-and-faculty/edhec-vox/why-edhec-business-school-major-player-sustainable-finance
(6) Noël Amenc: « We provide finance decision-makers not only with research results but also with accurate tools and concrete solutions » (2024) EDHEC Vox - https://www.edhec.edu/en/research-and-faculty/edhec-vox/noel-amenc-we-provide-finance-decision-makers-research-accurate-tools-concrete-solutions
(7) Amenc, N., F. Blanc-Brude, A. Gupta, B. Jayles, D. Marcelo and J. Orminski, “Highway to Hell: Climate Change will Cost Hundreds of Billions to Investors in Infrastructure”, September 2023, EDHEC Infrastructure & Private Assets Research Institute Publication - https://edhecinfraprivateassets.com/paper/highway-to-hell/
Frédéric Blanc-Brude (EDHECinfra): “Extreme Climate risks for investors in infrastructure are enormous and largely remain unrecognise, but today they can be measured thanks to EDHEC research” (2024) EDHEC Vox - https://www.edhec.edu/en/research-and-faculty/edhec-vox/frederic-blanc-brude-extreme-climate-risks-investors-infrastructure-enormous-unrecognised-measured-edhec-research
