Climate finance takes center stage at ESG Investing Research Conference

Biodiversity loss is increasing at a shocking rate, one of global warming’s many accelerating effects. Efforts to protect the environment will require conscious innovation in funding models.

Finance faculty researchers and investment professionals examined this imperative in detail at the inaugural Environmental, Social, and Governance (ESG) Investing Conference, hosted by the Cornell SC Johnson College of Business July 20-22. Conference organizer Scott Stewart, clinical professor and faculty co-director of the Parker Center for Investment Research at the Samuel Curtis Johnson Graduate School of Management, said that the event served as a truly successful exercise for both researchers and practitioners.

“Researchers learned how the whole process of ESG investing is a design that hasn’t been finalized yet,” said Stewart. “And the practitioners heard very high-quality research papers that show how we need to look harder at the details.”

Research expertise on ESG investing

Of 60 papers submitted in response to a call for papers sent out to the academic community in mid-February, six were accepted for presentation and focused discussion. At the conference, authors presented their papers followed by discussants, who delivered a prepared response to each paper. Between paper presentations, practitioners from government and industry discussed portfolio management, investment research, and policy.

The six selected papers are described below.

“Is History Repeating Itself? The (Un)predictable Past of ESG Ratings”

Winner of the conference’s Best Paper Prize, sponsored by Avantis Investors

Coauthors: Florian Berg, Massachusetts Institute of Technology, Sloan School of Management; Kornelia Fabisik, Frankfurt School of Finance & Management; and Zacharias Sautner, Frankfurt School of Finance & Management and European Corporate Governance Institute.

Presenter: Florian Berg

Discussant: Ryan Lewis, University of Colorado Boulder.

When professors consult historical databases for a given company, they may be using an ESG score from ten years ago, or one that was revised, which may or may not align with current practice and understanding. Because of this, Berg et al argue, researchers must be particularly discerning when relying on ESG financing analysis.

“Discretionary Information in ESG Investing: A Text Analysis of a Mutual Fund”

Coauthors: Filippos Papakonstantinou, King’s College London; Angie Andrikogiannopoulou, King’s College London; Philipp Krueger, University of Geneva; and Shema Mitali, Ecole Polytechnique Fédérale de Lausanne

Presenter: Filippos Papakonstantinou

Discussant: Simona Abis, Columbia Business School

The authors show that mutual fund investors pay more attention to the text describing a fund than they do to its actual holdings, and that this is true for ESG funds as well.

“Decarbonizing Institutional Investor Portfolios”

Coauthors: Vaska Atta-Darkua, University of Virginia; Simon Glossner, Federal Reserve Board; Philipp Krueger, University of Geneva; and Pedro Matos, University of Virginia

Presenter: Vaska Atta-Darkua

Discussant: Lakshmi Naaraayanan, London Business School

While many institutions (including pension plans and endowments) have reduced their investment in carbon investing via “tilts” in portfolios, these efforts have not had the desired impact on the underlying companies.

“The ESG-Innovation Disconnect: Evidence from Green Patenting”

Coauthors: Lauren Cohen, Harvard Business School; Umit G. Gurun, University of Texas at Dallas; and Quoc Nguyen, DePaul University

Presenter: Lauren Cohen

Discussant: Tony Cookson, University of Colorado Boulder

Measurements evaluated in this paper suggest that some of the greatest innovations in ESG patenting are done by energy companies.

“On ESG Investing: Heterogenous Preferences, Information, and Asset Prices”

Coauthors: Alexandr Kopytov, University of Hong Kong; Itay Goldstein, University of Pennsylvania, Wharton School; Lin Shen, INSEAD; and Haotian Xiang, Peking University, Guanghua School of Management

Presenter:  Alexandr Kopytov

Discussant: Christian Opp, University of Rochester

The authors provide a mathematical model that explores how asset prices are set when investors think about ESG issues in addition to, or instead of, financial rewards.

“Climate Stress Testing”

Coauthors: Hyeyoon Jung Robert Engle, and Richard Berner, all Federal Reserve Bank of New York

Presenter: Hyeyoon Jung

Discussant: Jennifer Dlugosz, Federal Reserve Board

This research works toward a method of forecasting banks’ exposure to climate risk by looking at loan distributions.

Keynote address by the IMF’s Tobias Adrian

Tobias Adrian, financial counsellor and director of the Monetary and Capital Markets at the International Monetary Fund, delivered the event’s keynote address at a farm-to-table dinner celebrating Finger Lakes agriculture and cuisine.

In his introduction, Andrew Karolyi, Charles Field Knight Dean of the SC Johnson College, emphasized Adrian’s expertise, perspective, and diligent presence in the global climate finance community.

“Tobias’s contributions, through his comprehension of the landscape and attention to the full spectrum of causes, effects, and shifts over time, are and will continue to be tremendously informative,” said Karolyi.

Adrian drew his remarks from his recent paper, “The Great Carbon Arbitrage,” which measures the gains from phasing out coal (the world’s biggest carbon emitter) by looking at the social cost of carbon times the quantity of avoided emissions, finding a clear opportunity for financial benefit.

The next grand challenge

Karolyi and John Tobin-de la Puente, professor of practice and academic director of the Grand Challenges program at the Charles H. Dyson School of Applied Economics and Management in the SC Johnson College, collaborated on a paper timed to coincide with the conference. In this work, Biodiversity Finance: A Call for Research for Financing Nature, the authors plainly make the case for decisive commitments to biodiversity funding.

“Closing the financial gap between what is currently spent and what is needed to be spent over the next ten years to mobilize private investment to maintain ecosystem integrity and biodiversity, and the services they provide, is estimated to exceed hundreds of billions per year,” reads the authors’ abstract. “Yet, there are no studies in the top-tier journals in finance that have framed the risks related to biodiversity loss, how those risks might be priced, or how the private financing flows need to be intermediated.“

Hosting the inaugural 2022 Cornell ESG Investing Research Conference was one response to this dilemma. “We all find ourselves here because we see and agree that ESG investing research is the next grand challenge for sustainable finance,” said Karolyi. “We are tremendously encouraged by the quality of research we’ve received and are sharing as part of this conference.”

The ESG Investing conference was co-hosted by the Parker Center for Investment Research, the Center for Sustainable Global Enterprise, and the Investing at Cornell and Business of Sustainability interdisciplinary themes.