Publication of the "Climate: no news is good news" study conducted by the KEDGE/CANDRIAM Chair

at 01/07/2021
In the framework of the research and teaching Chair called "Finance Reconsidered: Addressing Sustainable Economic Development", a study has been carried out in recent months on the subject of climate finance. This research, entitled "ESG & Fixed-Income – Climate Sensitivity in EURO Corporate Bonds" and conducted by Ricardo Henriquez, a student of the KEDGE MSc Sustainable Finance master’s degree and PhD student within the Chair, aims to understand the link between climate sensitivity and corporate bond yields in the Eurozone (or how the climate change exposure of Eurozone companies affects their bond yields).

"Climate: no news is good news", a study by Ricardo Henriquez, PhD student at KEDGE

Since the Paris agreements in 2015, with the objective of limiting global warming to +1.5°C by 2100, regulations are pushing financial investors to integrate climate risks into their strategy and to report them in a transparent way with an impact requirement.

Recently, the European Union (EU), as part of its plan on sustainable finance, has put in place a strict Sustainable Finance Disclosure Regulation (SFDR) as well as the Green Taxonomy (a classification used to measure the sustainability of 70 economic activities representing 93% of greenhouse gas (GHG) emissions, and serving as a guide for investors to align their savings and investments with this requirement).

The study identifies which bonds best withstand the regulatory climate risks. A portfolio including assets that are more sensitive to climate regulations are more exposed to common risk factors (liquidity risk, default risk, downside risk associated with losses) in the bond market, as the market has not fully incorporated climate risks into bond prices. In a European context that is changing and becoming stricter in terms of objectives, climate sensitivity should no longer be underestimated.
Most often, extra-financial analysis depends on ESG scores from external providers such as specialised rating agencies and financial and ESG data providers.

Due to the lack of consensus on ESG scoring methodologies, valuation becomes even more difficult for corporate bonds as ESG scores are linked to company practices and not to the specific characteristics of the bonds.

To overcome this valuation bias and estimate the climate risk of an asset, the research methodology assesses climate sensitivity through the construction of a Climate Awareness Index, using a series of news items as an external source of climate information. This climate news is taken from the Media and Climate Change Observatory (MeCCO) which monitors 120 sources (newspapers, radio, television) in 54 countries around the world. The sample includes newspaper coverage of climate change and global warming issues at European level (31 newspapers). Thus, the study provides a Climate Change Beta that reflects the climate risk intensity of the corporate bonds in the sample.

Using a multi-factor analysis, the climate sensitivity index data is cross-referenced with yields while controlling the risk levels (liquidity, credit, downside risk, climate change beta) of more than 3100 European corporate bonds over the 2015-2020 period.
Research shows that bonds with a higher Climate Change Beta are associated with lower future returns. The effect of climate risk is most pronounced during periods of high climate sensitivity, in the run-up to and aftermath of global climate conferences.

At the sectoral level, the industries that are the most sensitive to climate change are not the ones that emit the most CO2 (for example, the real estate sector is not the largest emitter, but it is linked to real estate law, which is highly regulated with regard to climate change issues). Finally, longer maturity bonds are more affected by the climate news, in connection with the evolution of the objectives defined by the EU for 2030 and 2050 (with objectives of reducing GHG emissions by at least 55% compared to 1990 levels, and "net-zero" by 2050, bonds with a maturity date prior to these climate deadlines are less affected).

This research study was conducted by Ricardo Henriquez, research assistant at KEDGE, and supervised by Christophe Revelli, Professor at KEDGE and holder of the Chair, and Philippe Bertrand, affiliated professor at KEDGE.

About Ricardo Henriquez

Ricardo Henriquez, a graduate of KEDGE's MSc Sustainable Finance, joined the CANDRIAM/KEDGE "Finance Reconsidered: Addressing Sustainable Economic Development" Chair in September 2020 to work on "ESG and Fixed Income" during his final year internship. He has recently published in 2021 a research study "Climate: no news is good news?", seeking to prove the impact of climate change on the performance of corporate bonds. As an extension of his master's work, Ricardo Henriquez has just started a doctoral thesis within the Chair on the same theme.
Ricardo Henriquez has just been awarded the Young Researcher Award 2021 for his research in sustainable and responsible finance. It was awarded by the French Association of Institutional Investors (Af2i).

About the "Finance Reconsidered: Addressing Sustainable Economic Development" Chair

The CANDRIAM/KEDGE Chair aims to produce fundamental research on an annual basis on topics related to sustainable finance (ESG & Asset Pricing/Factor Investing; influence of international regulation of sustainable finance, macro-economic and monetary policy influences, selection bias of ESG data, etc.). It also aims to create major international educational innovations (the latest being the Impact Investment Challenge) that can be offered to KEDGE students, and more specifically students of MSc Sustainable Finance, a pioneering master's degree in Europe on sustainable finance issues.

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