Quantitative Finance and Insurance

SUSTAINABLE FINANCE

SUSTAINABLE FINANCE

Academic year 2023/2024

Sommario del corso

• Course objectives
• Results of learning outcomes
• Program
• Course delivery
• Learning assessment methods
• Teaching tools
• Course card

Course objectives

Sustainable finance is driving both modern corporate finance and asset pricing or allocation. It is the most evident phenomenon of  the interconnectedness of real and financial markets: climate change and planet sustainability need appropriate investor preferences and market attitudes, so that firms who are truly at the forefront of ESG principles get cheap and easy funding. Finance can substantially help the transition, and prevent disruptions and instability.

Results of learning outcomes

ESG transition is the modern version of the fact  that financial investors belong to different groups,  in terms of access to markets, horizons, but above all  tastes and beliefs. Also firms have different impacts on the environment, as well as different social and governance attitudes. Traditional financial models and data analysis with a representative agent do not do easily justice of this heterogeneity, which instead is key to the understanding of current and future market attitudes and possible policy actions.
   

Program

Part 1 LUCIANO

ESG risks and factors: definition

Markets with ESG assets:  first empirical evidence and basic regulation , theoretical framework
Regulatory interventions (EIOPA, EBA..)

Sustainable funding of the real sector vs window dressing

3 sessions Sept 19, 20, 26

Ref: From Eiopa’s website, https://www.eiopa.europa.eu

• Fine tuning needed to ensure investors contribute to the European Green Deal
• Climate Stress test on IORPS
• European Insurers’ Exposure to physical climate change risks
• Discussion paper on the prudential treatment of insurers’ sustainable assets and activities
• Sustainable Finance for IORPS: risk, return and inclusion properties

Markets with ESG assets: theoretical framework

    Portfolio choice
    Equilibrium

3 sessions: sept 27, Oct 3, 4
 

Ref: Pedersen, L. H., S. Fitzgibbons, and Pomorski.L. (2021). Responsible investing: The ESG-efficient frontier, Journal of Financial Economics 142 (29): 572-597

Pastor, L., Stambaugh, R.F., and L.A. Taylor,  Sustainable Investing in Equilibrium, Journal of Financial Economics, 2021,  142 (2),  550-571

    Avramov, D., Cheng, S., Lioui, A., and Tarelli, A. (2021) Sustainable investing with ESG rating uncertainty. Journal of Financial Economics. 142 (2): 572-597

PART 2 MONETA

ESG data and its challenges

Article 8 and 9 funds

2 sessions: Oct 10, 11 ONLINE on Zoom

Ref: Berg, Florian, Julian F. Koelbel, and Roberto Rigobon. "Aggregate confusion: The divergence of ESG ratings." Review of Finance 26.6 (2022): 1315-1344.

Implications of ESG for firm value: Empirical evidence

Ref: Edmans, Alex, 2011, Does the stock market fully value intangibles? Employee satisfaction and equity prices, Journal of Financial Economics 101, 621-640.

El Ghoul, Sadok, et al. "Does corporate social responsibility affect the cost of capital?." Journal of banking & finance 35.9 (2011): 2388-2406.

Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. The quarterly journal of economics, 118(1), 107-156.

In, Soh Young and Park, Ki Young and Monk, Ashby, Is 'Being Green' Rewarded in the Market?: An Empirical Investigation of Decarbonization and Stock Returns (April 16, 2019). Stanford Global Project Center Working Paper, Available at SSRN: https://ssrn.com/abstract=3020304

Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. the Journal of Finance, 72(4), 1785-1824.

Pastor L, Stambaugh RF, Taylor LA. Dissecting green returns. National Bureau of Economic Research; 2021 Jun 21.

Pedersen, Lasse Heje, Shaun Fitzgibbons, and Lukasz Pomorski, 2021, Responsible investing: The ESG-efficient frontier, Journal of Financial Economics 142, 572-597.

Serafeim, George, and Aaron Yoon, 2022a, Stock price reactions to ESG news: The role of ESG ratings and disagreement, Review of Accounting Studies, forthcoming.

Performance evaluation and evidence on ESG mutual funds

4 sessions: Oct 17, 18, 24, 25 in person

Ref: Ceccarelli, Marco and Ramelli, Stefano and Wagner, Alexander F., Low Carbon Mutual Funds (2023). Forthcoming, Review of Finance

El Ghoul, Sadok, and Aymen Karoui. "Does corporate social responsibility affect mutual fund performance and flows?" Journal of Banking & Finance 77 (2017): 53-63.

Ferson WE. Investment performance evaluation. Annu. Rev. Financ. Econ. 2010 Dec 5;2(1):207-34.

Geczy, Christopher C., Robert F. Stambaugh, and David Levin. "Investing in socially responsible mutual funds." The Review of Asset Pricing Studies 11.2 (2021): 309-351.

Hartzmark, Samuel M., and Abigail B. Sussman, 2019, Do investors value sustainability? A natural experiment examining ranking and fund flows, Journal of Finance 74, 2789-2837

Krueger, Philipp, Zacharias Sautner, and Laura T. Starks, 2020, The importance of climate risks for institutional investors, Review of Financial Studies 33, 1067-1111.

Lan, C., Moneta, F., & Wermers, R. (2023). Holding horizon: A new measure of active investment management. forthcoming Journal of Financial and Quantitative Analysis.

Matos, Pedro, 2020, ESG and responsible institutional investing around the world: A critical review, CFA Institute Research Foundation Literature Reviews.

Ľuboš Pástor, M Blair Vorsatz, Mutual Fund Performance and Flows during the COVID-19 Crisis, The Review of Asset Pricing Studies, Volume 10, Issue 4, December 2020, Pages 791–833,

Renneboog, Luc, Jenke Ter Horst, and Chendi Zhang, 2008, The price of ethics and stakeholder governance: The performance of socially responsible mutual funds, Journal of Corporate Finance 14, 302-322.

Hedging Climate Risk

Engle, R. F., Giglio, S., Kelly, B., Lee, H., & Stroebel, J. (2020). Hedging climate change news. The Review of Financial Studies, 33(3), 1184-1216.

2 sessions: Oct 31, Nov 1 (holiday, to be replaced with another date) 

Sustainable factor investing and ESG factors

Ref: Ananth Madhavan, Aleksander Sobczyk & Andrew Ang (2021) Toward ESG Alpha: Analyzing ESG Exposures through a Factor Lens, Financial Analysts Journal, 77:1, 69-88

Henriksson, R., Livnat, J., Pfeifer, P., & Stumpp, M. (2019). Integrating ESG in portfolio construction. The Journal of Portfolio Management, 45(4), 67-81.

Lo, Andrew W. and Zhang, Ruixun, Quantifying the Impact of Impact Investing (October 18, 2021). Available at SSRN: https://ssrn.com/abstract=3944367

Student presentations, Own modelling and class discussion

Part 3 LUCIANO

Markets with intermediaries/restricted participation, i.e. how (sustainable) finance impacts on macro

3 sessions: Nov 7, 8, 14

Ref:     Brunnermeier, M., and Sannikov, Y.,  Macro, Money & Finance, wp, 2016, selected sections

    He, Z.  and Krishnamurthy, A.,  Intermediary Asset Pricing and the Financial Crisis, Annual Reviews of Financial Economics,  2018, 10,  pp. 173-97

Bolton P, Kacperczyk M. Do investors care about carbon risk?. Journal of Financial Economics. 2021 Nov 1;142(2):517-49.

Heterogeneity in information on ESG: deep dive

Ref: ESG asset demand with information costs, Luciano, E., Tolomeo, A., working paper

3 sessions: Nov 15, 21, 22

    
Economies with production

Green and Brown firms and their impact

Equilibria

Policy interventions on sustainability

Ref: tba

4 Sessions, including student’s presentations: Nov 28, 29, Dec 5, 6

Course delivery

The course will be taught by Elisa Luciano and Fabio Moneta (University of Ottawa, Telfer School of Management). The material consists of slides and articles. 

Learning assessment methods

Assignments will be given and will be graded (Luciano). Own modelling and class discussion (Moneta)

Courses that borrow this teaching

• TOPICS IN MATHEMATICAL FINANCE (SEM0145)
  Quantitative Finance and Insurance

• Teaching material
• Exams and finals
• Class schedule
• Go to Moodle
• Register for the course
• Enrolled students
• Invia email agli studenti registrati
• Export table