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Book review: ‘Climate Investing’ edited by Emmanuel Jurczenko

Published: 9 June 2023

An interesting collection of essays bridging the world of academia and business with a sting in the tail for impact investors, writes Christopher Walker.

‘Climate Investing – New Strategies and Implementation Challenges,’ edited by Emmanuel Jurczenko.

In brief

  • This book has a wide range of authors, bridging the worlds of academia and sustainable investing.
  • Some material will be familiar to impact investors, but is worth repeating, nonetheless.
  • There is a major sting in the tail in the final essay by two US contributors which demonstrates the gathering storm in the US as the ESG backlash acquires intellectual credence.

Emmanuel Jurczenko, the book’s editor, is professor of finance at EDHEC Business School, one of Europe’s leading business schools and an increasing source of important research material for sustainable investors. There is a wider range of contributors here from academia and business.

In her foreword, Fiona Frick, CEO of Ungestion, promises “this ground-breaking book on climate investing clarifies some practical considerations that asset managers should look at when assessing the implications that a net-zero carbon world might have on their portfolios.”

A tall order, but one largely achieved.

Obvious, but deserving attention

Some of the material is rather obvious. In ‘Delegated Philanthropy in Mutual Fund Votes,’ a group of French academics studies shareholder resolutions on climate change externalities, and finds that “fund families that have larger proportions of responsible investments display a larger support for resolutions on climate change”. Are we really surprised?

Also well-known, but deserving attention, are the findings of ‘The Financial Materiality of Climate Change’ by Amir Amel-Zadeh of Oxford. There is “a misalignment of the materiality perception of investors compared with companies. Far fewer companies believe that they are exposed to climate risks and consequently do not make any disclosures about it.” The findings suggest that current disclosure practices do not provide investors with adequate information about climate-related financial risks.

Likewise, Théo Le Guenedal and Thierry Roncalli, of Amundi Asset Management, find that portfolio decarbonisation is “more difficult when we include scope 3 carbon emissions”. In fact, they write, optimising “using the sum of scopes 1, 2 and 3 emissions leads to a portfolio with a higher risk of tracking error than using direct plus first tier indirect carbon emissions”.

They also make the important point that portfolio alignment is more complex than portfolio decarbonisation. “Since aligning portfolios with scope 3 is becoming the standard approach to climate portfolio construction, the impact on portfolio management may be significant, increasing the divergence between carbon investing and traditional investing.”

It is just a shame their conclusions are undermined by the most impenetrable algebra.

The sting in the tail

The essay I found by far the most annoying, and therefore inevitably the most interesting, was ‘The Thesis for Green Investing’, written by Brad Cornell and Jason HSU of UCLA Anderson in the USA. They make two powerful arguments which we in the impact industry must address, especially in the light of the political debate raging in the USA.

Firstly, the authors question the “broad mission” that we seek to impose on corporations, which has been “further complicated by the rise of huge fund managers such as Blackrock and Vanguard, who generally cater to wealthy investors”. While it remains unclear “how such institutions will exercise their massive voting power…it is clearly not consistent with a one-person, one-vote rule. American democracy and ESG seem to be at loggerheads,” the authors note.

Instead they assert that, ideally, the democraticallly “ideally, the democratically elected government should set the appropriate regulations subject to careful consideration of the science and of the cost-benefit trade-off that its citizens would accept”. The authors suggest corporations and fund houses should then “go about their business of maximizing shareholder value subject to those rules. If and when advocacy groups disagree with the environmental policy in place, the democratic approach is to lobby elected representatives to legislate new regulations”.

This is intellectual backing for the US ESG backlash. Although the authors lose credence by suggesting “there is no such uncertainty in China”. The government there is most definitely not “democratically elected”. And while they admit the outcome is “coal currently accounts for almost 60% of electricity generation”, they skate over the existential implications.

Attack on green alpha

As if this isn’t enough, the authors take aim at Blackrock’s suggestion that green efforts will produce “greater value and higher expected returns”, asserting that unfortunately, the reality is “more complicated and not so sanguine”.

They cite a lot of academic research. Apparently Hong and Kacperczyk (2009) and Dimson, Marsh and Staunton (2015, 2020) report that returns on ‘sin stocks’ are much higher. More recently, a detailed study by Pastor, Stambaugh and Taylor (2021) concludes: “Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns.”

They conclude that “media coverage has tended to convey the notion that impressive performance of highly rated green companies during the transition is indicative of future outperformance; however, the opposite is in fact true”. While investors in green companies have “generally reaped a one-time windfall during the boom in sustainable investing, long-run equilibrium risk-adjusted returns for green companies should be no higher than those for brown companies and may well be less”.

I was reminded of some more established Chinese wisdom – ‘know thy enemy’.

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