Why EDHEC Business School is a major player in Sustainable Finance
Facing colossal investment needs to address climate change and ensure sustainable and inclusive development of the planet, governments have voiced high expectations for the financial sector. At the same time, an increasing share of the population expects investment decisions to integrate environmental and social dimensions. Progress has been made, yet there is still a long way to go to building sustainable finance. EDHEC Business School is committed to actively contributing to this transformation, through research and training programmes as well as through direct involvement in the finance industry.
- This text has been published initially in the EDHEC Vox Mag #14, “Pioneering Sustainable Finance” (Dec. 2023)
A unique asset for future generations
Of all the challenges we face in today’s world, none is as pervasive as climate change in touching every person on our planet.
Taking on such an extraordinary, existential threat requires new ideas and approaches. In recent years, the concept of sustainable finance and the importance of considering environmental, social, and governance factors in investment decisions has emerged as a powerful force.
EDHEC has a central role to play in fully developing and harnessing the power that finance can have in the world’s sustainable transformation. A longstanding focus of research at EDHEC is how management sciences can transform companies and positively respond to the challenges facing the world of tomorrow.
The school’s research in asset management over the last twenty years has become an important reference for finance professionals globally.
The exceptional success we have achieved with the EDHEC-Risk Institute’s Scientific Beta index platform is today enabling EDHEC to invest massively in this climate finance revolution. Starting with the creation of the EDHEC-Risk Climate Impact Institute, endowed with 20 million euros and a dedicated team.
Another initiative, the EDHEC Infrastructure & Private Assets Research Institute, provides indices and analytics to investors in unlisted infrastructure equity and private debt. Recent research from the Institute showed that investors in infrastructure could lose up to 54% of the value of their portfolio by 2050 in the event of runaway climate change (1).
The 14th edition of EDHEC Vox Magazine (2) describes further how EDHEC’s research, courses and programmes are helping companies and policy makers better understand how to drive innovation, invest in promising technologies and incentivise sustainable action by companies and individuals in order to fight climate change.
In continuing as one of the world leaders in pioneering research and education in climate finance, responsible for helping prepare students to meet the challenge of climate change, we can do no less.
Emmanuel Metais, Dean of EDHEC Business School
Scientists are unanimous: climate change is global, rapid, and escalating. And it is unquestionably human activity, primarily through the burning of fossil fuels, which is responsible for global warming (3). Most countries have now committed to climate change mitigation and adaptation targets, and some regulatory measures have been introduced.
However, climate action remains insufficient and global greenhouse gas emissions have scaled new heights (4). “There has never been an energy transition in the history of capitalism. In aggregate, the economy has consumer more of all energy sources in absolute terms every year for the past 300 years, even wood or coal. Furthermore, fossil fuel production and consumption continue to be supported by State budgets”, explains Frédéric Blanc-Brude, Director of the EDHEC Infrastructure and Private Assets Research Institute. “Investments in green energy are making a positive impact as renewable energy production has made it possible to cover additional energy demand over the past decade. But the scale is not right.”
“Emissions mitigation and climate change adaptation consistent with the ambitions of the Paris Agreement (5) would require major funding”, opines Frédéric Ducoulombier, Director of the EDHEC-Risk Climate Impact Institute. “But the flows are not materialising at the needed scale because our governments are neither directing these investments nor providing coherent policy and regulatory signals that may prompt private actors to undertake these investments.” In addition, to play a significant role in reallocating funds and managing sustainability risks, markets and financial institutions must rely on accurate data and tools.
But data remains plagued by quality issues and tools required to manage environmental and social risks including the physical risks from climate change and the various risks arising from transitioning to low-carbon and climate-change resilient economies – are still in their infancy.
“The School’s applied research institutes have published on these issues and the ventures that they have spawned are helping investors by developing new datasets, analytics and investments strategies”, says Frédéric Ducoulombier.
Increased mobilization amongst financial actors
While financial actors do not have direct control over the environmental and social performance of corporates, they can channel capital towards sustainable and responsible projects, e.g. by refusing to finance fossil fuels and investing in renewable energy infrastructure. They can try and convince companies to reduce their environmental footprints and improve their social performance through dialogue and the threat of denial of funding and disinvestment.
The financial industry has registered the growing appetite of investors for climate-friendly and socially progressive investment strategies... but regulators have become concerned about the risks of marketing and communications inflating the environmental and social credentials of investment products or misrepresenting their potential for transformative change. 2022 saw increasing discussions about greenwashing and the first enforcement actions.
Helping investors and decision makers make the best use of financial tools
In 2001, the school established EDHEC-Risk Institute with the ambition of furthering academic research in risk and investment management, and highlighting its practical implications and applications to decision-makers.
This impact ethos was extended to all school activities in 2005 and has been affirmed by the school’s tagline since 2016. EDHEC-Risk Institute which started working on the integration of sustainability issues into investment some 15 years ago, established a research chair on the topic in 2019, incubated research programmes on climate change, and launched a successful online certificate on “Climate Change and Sustainable Investing” in 2021. Reflecting the priority the school assigns to sustainability issues, the Institute became EDHEC-Risk Climate Impact Institute in late 2022 (6). The Institute works on extending the tools used for climate economy modelling and emerging prudential practices with respect to climate risks to make them consistent with asset pricing; it also looks at how finance can support the transition to low greenhouse gas and climate change resilient economies.
Spun out of the Singapore-based operations of EDHEC-Risk Institute in 2016, the EDHEC Infrastructure & Private Assets Research Institute has produced breakthrough research on the valuation of private investments and the assessment of their climate risks and social acceptability. As most infrastructure assets are not listed on the stock exchange, there is a lack of knowledge about these assets and their evolution.
The Institute fills this gap with analysis and indices. “Our indices are built from collecting and cleaning up colossal amounts of data information about each company and applying price modelling to assess their value”, says Frédéric Blanc-Brude. “We have gained a good market understanding and can now calculate prices and returns fairly close to reality. We have created highly recognised indices such as the infra300, which now provides many investors in infrastructure with the carbon intensity and risk-adjusted performance of 300 unlisted infrastructure companies. Another major output is data on the exposure of each infrastructure asset (floods, tornadoes, etc.) to estimate their exposure to climate-induced physical destruction or interruption.”
Growing needs for scientific data, analytics and portfolio construction tools
EDHEC Business School’s impact on financial research and practices is further supported by several initiatives born out of the legacy of EDHEC-Risk Institute that provide investors with data, metrics and portfolio construction tools, and even investment strategies. The work of the EDHEC Infrastructure & Private Assets Institute has led to the establishment of the world’s leading provider of index data, benchmarks, and analytics for infrastructure and private assets.
“We produce scientifically valid and robust data on ESG risks to provide investors with an understanding of the environmental and social risks in the medium to long term, and thus concretely commit to sustainable finance to help financial actors make the most informed decisions possible”, says Frédéric Blanc-Brude. “This information is difficult to find due to externalities, i.e. risks that are not visible right away and that need to be anticipated because they will occur and impact returns.”
Scientific Portfolio, an early-stage technology initiative develops portfolio analysis tools and metrics to help investors integrate financial and nonfinancial information into portfolio management. Scientific Beta is recognised as a pioneer of multifactor investing and of the reconciliation of socially responsible investment and financial performance – since its acquisition by the Singapore Exchange (SGX) (7) it has accelerated its investments in climate investing as part of the SGX Sustainable Exchange strategy and released a new generation of indices designed to promote real-world climate impact.
Going Further
While most actors are positive about the gradual transformation of finance into a more sustainable model, they all admit the need to go much further and faster. “Over the last forty years, finance has been allowed to super-charge a narrowly defined and environmentally destructive version of development. While global indicators have registered unprecedented rises, wealth gaps across countries have remained large and along with environmental stresses are contributing to migration pressures. Combine these with increasing wealth gaps within countries and you have excellent fuel for a rise of illiberal politics. Never has it been more important to approach business and economics with an emphasis on ethics, social responsibility, and concern for human dignity”, states Frédéric Ducoulombier.
“Practitioners approach us for guidance on the integration of environmental, social and governance issues into corporate strategy and operations. Our role, as researchers and educators, is to address pressing conceptual challenges and engage in applied research and executive education to help organisations imagine, plan, and implement major economic transitions.”
Preparing tomorrow’s sustainable finance leaders
EDHEC’s role is to give our students access to the best information and skills training to fully play their roles as change makers. Emmanuel Jurczenko, EDHEC Director of Graduate Finance programmes, tells how sustainable finance is integrated into programmes.
What is EDHEC’s position on sustainable finance?
Our challenge is to ensure that all finance students have a common skills base to understand climate issues, and to offer more specialised training to best prepare students wishing to pursue a career in sustainable finance. In the Master 1 programme, we provide a mandatory 36-hour course “From Climate Science to Climate Finance” to ensure that students understand climate change challenges and the role of finance in supporting the energy transition.
At the MSc Finance level, our strong point is the creation of a 120-hour programme on “Climate Change and Sustainable Finance”, in collaboration with the École des Mines, to prepare students for careers in green finance. And from the start of the new academic year, all our finance programmes will integrate a mandatory 18-hour course on sustainable finance. We also offer compulsory or elective courses specific to certain finance programmes.
What kind of careers are conceivable for students with a sustainable finance background ?
It’s a recent phenomenon, but we are seeing more and more internships or permanent positions as ESG analysts in asset management, sustainable investment analysts in debt or capital markets, in private debt or equity funds, and in impact investing. We are also seeing sales trader or trader positions in renewable energy, Fintech specialised in sustainable finance, or strategic energy consulting positions in large firms such as McKinsey.
Besides the programmes, what do you offer your finance students?
Pre-Master's students can participate in the climate workshops, while all our Finance students can attend our Speakers series on “The Future of Finance” led by academic and professional sustainable finance experts. They can also join our student associations dedicated to the environment, such as “Green Impact, BBA” on the Nice campus, or the upcoming “Just Sea It” for the protection of the seabed.
References
(1) "It's Getting Physical" (August 2023), EDHECinfra - Noël Amenc, Frédéric Blanc-Brude, Abhishek Gupta, Bertrand Jayles, Nishtha Manocha, Darwin Marcelo
(2) EDHEC Vox #14 (Dec. 2023), “Pioneering Sustainable Finance”
(3) What Is Climate Change?, United Nations - un.org
(4) AR6 Synthesis Report: Climate Change 2023, IPCC, 6th Assessment Report
(5) The Paris Agreement, United Nations Climate Change - unfccc.int
(6) Finance climatique, projets à impact positif, campus durables : l’EDHEC se mobilise pour les générations futures, EDHEC press release (June 2022)
(7) The EDHEC Business School Association and its Foundation announce the signature of an agreement for the sale of a 93% interest in Scientific Beta to Singapore Exchange Ltd. EDHEC (January 2020)
