Noël Amenc: « We provide finance decision-makers not only with research results but also with accurate tools and concrete solutions »

• This interview has been published initially in the EDHEC Vox Mag #14, “Pioneering Sustainable Finance” (Dec. 2023)

With increasing sustainable finance issues, what is EDHEC Business School’s position?

We are an independent, academic institution focusing on a scientific approach and we are driven by a quest for truth. We provide decision-makers not only with research results but also with accurate tools and concrete solutions to better assess the ESG risks of financial investments and understand their links with the real economy.

Where does EDHEC’s academic research stand today?

For the last 15 years, we have pursued a disruptive and ambitious research strategy combining academic excellence with practical relevance for businesses. Our different leading research institutes focus on finance and increasingly on climate change, which illustrates that the School’s priority is sustainability issues: EDHEC-Risk Climate Impact Institute (previously EDHEC-Risk Institute); EDHEC Infrastructure & Private Assets Research Institute and EDHEC Scientific Portfolio.

Since their creation, our research institutes have produced extensive research and numerous publications allowing investment professionals to better integrate ESG and climate issues into their investment decisions. With the EDHEC Infrastructure & Private Assets Research Institute we have gone even further in the implementation of research results because today we have the largest database in the world on infrastructure exposure to climate risk and the impact of climate risk on infrastructure. Ultimately, the fight against climate change is a question of having the right data and knowing how to use it. We are helping investors in these two areas.

“We want to give financial players tools

so that they can make no more excuses

about addressing sustainability issues.

In the long term, we want to develop knowledge

and make society progress.”

Your study “Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing” perfectly illustrates the School’s ability to take strong positions: can you tell us more?

In this study (1) (2), we identify greenwashing risks in portfolio construction representing popular climate strategies. We assessed the determinants of portfolio construction between market capitalisation, climate criteria, and ESG rating, and our conclusions are indisputable: the vast majority of institutional funds and agents claiming to have a positive impact on climate, show attractive climate measures in their portfolios which are based on implementing flawed strategies that have a very limited impact on the companies that they hold.

We observed that even though investors and managers communicate extensively on the use of climate data to construct their portfolios, on average this data represents, at most, 12% of the portfolio determinants’ stock weights. We also found that portfolio decarbonisation objectives are often achieved by implementing sector greenwashing, by underevaluating high-emission sectors, like the energy sector. This is problematic because these sectors are essential for our economy and for the energy transition.

The key issue is not how to restrict investment in these industries but to ensure they invest in technology, allowing them to produce the necessary goods and services with minimum GHG emissions. To draw decision-makers’ attention to this problem, we published a press release and organised conferences to inform the financial industry about these greenwashing risks (3). The media covered it widely (4) and we got “punished” with threats not to support our work anymore from some financial players who were also saying that they were at the cutting edge in the fight against climate change.

But ultimately, we made an impact and that is what really counts. I am very proud to have worked on this study because it is our duty as researchers to tell the truth, whatever it takes. As an academy, we are independent and we want to have an impact on the real world. We did just this with the 12% study, and hopefully things will now move in the right direction as we are observing through the close ties that we have with the institutional investor community.

“I also believe that the financial industry

can positively impact climate change

through company commitments

towards more climate resolutions”

Based on the results, how can finance positively influence climate change?

We suggest that when climate considerations represent less than 50% of the determinants of the stocks’ weight in a portfolio, then this portfolio is at a significant greenwashing risk and should not be permitted to claim to be climate-friendly or aligned with net-zero ambitions.

I also believe that the financial industry can positively impact climate change through company commitments towards more climate resolutions. There should be synergies between portfolio construction and company engagement.

At EDHEC, we believe that we need to activate three levers to empower financiers to take efficient climate action: highlight flawed strategies; provide measurement tools for climate change consequences; develop knowledge on climate alignment technologies and their benefits for company impact and companies’ climate risk. We must provide the most robust and transparent information possible to check whether companies’ climate alignment promises are based on choices and technological investments that live up to their promises.

Finally, we need to provide an academic and scientific vision of ESG and climate risk materiality issues to better integrate ESG and climate issues into investment decision making processes.

What role do political decisions play in the transition to sustainable finance?

The carbon tax should have a positive impact by taxing companies that still need to improve their energy efficiency (transition risk). But international debates lead us to question the existence of a sufficiently punitive carbon tax that is really applied, with the risk of the actors neglecting the question of climate transition risk. The French presidency passed a European tax with a border carbon taxation to which industrialists are opposed (5). This is because taxation will not concern finished products but the import of high carbon production not only of iron and steel, cement, fertilisers and electricity, but also hydrogen and certain finished products such as screws and bolts, and in the end, it will simply be a matter of manufacturing abroad!

I believe that there is much hypocrisy in the European Union in introducing numerous financial rules to “exclude the dirty energy sector” and at the same time subsidising the consumption of fossil fuels, as has been the case during the war in Ukraine. We are facing many environmental scandals around the world. In the United States, Mr Biden talks about the Climate Race only to be able to use climate protectionism to subsidise local industrial production!

When many politicians affirm that ecological transition goes hand in hand with growth and an increase in revenues and their proper distribution, they seem to ignore that the fight against climate change is essentially the destruction of a stock of capital and reallocation of this stock. This will have an enormous economic cost. It is a veritable war effort, and the right question is how to distribute this effort, including by reducing consumption, and not by saying that debt or taxes can sort everything out.

Which major research projects are you working on that will help the financial sector progress?

We work on concrete solutions to help companies and financial players limit their impact on climate change. The European regulator constantly multiplies the number of ESG criteria that are often incompatible between themselves and can therefore have a dilutive effect. We have published a study that shows that pursuing ESG objectives can be incompatible with the necessary focus on climate impact criteria (6). At a time when everyone thinks that finance can sort everything out if it becomes more virtuous, this study shows the limitations of “always more” and ESG overkill.

“We work on concrete solutions

to help companies and financial players

limit their impact on climate change”

We are also working on an essential programme to make an alignment technology taxonomy available to investors free of charge. The idea is to look at all the technologies necessary for the economy to function, not just green activities.

Another pivotal EDHEC axis will be to work on materiality, with the primary idea of leaving the analysis and the means of verifying what we call the financial materiality of ESG to scientists (7). Research that has shown ESG portfolio performance superiority is simply short-term or a biased study!

We are also interested in accounting regulations for climate issues. I am convinced that it is important to reflect a company’s failure to meet its climate commitments in its accounts, through accounting provisions on climate issues that would immediately impact company results. This subject refers back to the very question of integrating conditional liabilities into the accounts, and not only into risk disclosures.

To conclude, what do you think about where sustainable finance is going?

We are moving in the right direction, but we could do better! We must remember that the climate transition involves hard decisions, and their consequences will be difficult. It is not the happy road of green innovation and growth that is often sold to us. The electric car, for example, is a solution for the car industry, but not for the climate. The true ecological solution for transport is the train, not a brand-new electric car, the manufacturing of which will have been an ecological disaster with an enormous carbon cost, and the use of which will increase the need for electricity, which can be very dark when the production capabilities are saturated.

Once again, it is all about the 12% issue: we have to stop looking at things from a micro point of view and redefine what the economy should be. The fight against climate change is about sobriety and questioning our way of life.

References

(1) Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing. Noël Amenc, Felix Goltz and Victor Liu from Research Chair Scientific Beta. The study consisted of recalculating and examining stock market indices that claim to be “climate friendly”, based on 2,000 listed companies committed to reducing their gas emissions, as well as a study of 32 different strategies.

• EDHEC’s report (August 2021): https://www.edhec.edu/sites/default/files/2022-10/2021-09-edhec-scibet-esg-chair-doing-good-feeling-good.pdf
• Associated academic article, The Journal of Impact and ESG Investing (April 2022): https://www.pm-research.com/content/pmrjesg/early/2022/04/05/jesg20221045

(2) Why climate indices and portfolios (almost) fail to deliver: a look at a pioneering study by EDHEC. EDHEC Vox, November 2022. Noël Amenc, Felix Goltz and Victor Liu.

(3) The Climate deserves better than 12% (Sept. 2021), webinar - https://climateimpact.edhec.edu/videos/climate-deserves-better-12

(4) Press review (selection): FT.com “Climate change ETFs found to be undermining war on global warming” - Lemonde.fr “Placements en faveur du climat : gare au « greenwashing »“ - IPE.com “Researchers float 50% threshold for ‘genuine climate strategy’ “

(5) Lemonde.fr “EU adopts carbon border tax to fight polluting imports”

(6) Green Dilution: How ESG Scores Conflict with Climate Investing (June 2023). Noël Amenc, Felix Goltz, Antoine Naly (Scientific Beta).

(7) On the triple illusion of double materiality (Oct. 2023). Frédéric Ducolumbier, EDHEC-Risk Climate Impact Institute