Seminar "Selected Topics in Finance" Summer 2020: Climate risk and sustainable investing

Preface

The seminar is open to Master students.

In this seminar, we will study recent finance research related to climate change, decarbonisation, and sustainable investing. 

To successfully pass the seminar you need to write a paper and give a presentation. Papers can be written in either German or English and should have a length of 15-20 (team of two) or 20-25 pages (team of three). For hints on how to write a paper see our guidelines. You need to hand in a printed version and also a digital one (PDF). The seminar talks should be given in English.

Please contact your supervisor to discuss the outline of your paper, your empirical part (if any), and any questions that you may have. For organizational questions, please ask Syed Wasif Hussain.

FAQ & Organisational matters

  • Do we get a grade? Yes. Your paper and your presentation will be graded and lead to one grade (equally weighted). Both the paper and presentation have to be passed.
  • What do we have to hand in? An outline of your paper to discuss the content of your paper and your final paper one week before the presentation.
  • Who is responsible? For content-related questions, please contact your supervisor. For organizational questions, please ask Syed Wasif Hussain.

Time Table

  • Mon. 27.01.2020 - Sat. 01.02.2020 Students must submit their preferences over seminars for the first matching round.
    http://econ.mathematik.uni-ulm.de:3838/semapps/stud_de/
    http://econ.mathematik.uni-ulm.de:3838/semapps/stud_en/
  • Sun. 02.02.2020 1st round of seminar matching.
  • Wed. 05.02.2020 2nd round of seminar matching.
  • Fri. 14.02.2020 General information about Seminar, introductory meeting, 16:00 Heho 18, room: E20 
  • 14.02.2020 Topic allocation (sort the topics on Taddle until 23.02.2020. 23:59)
  • 01.04.2020 - 18.04.2020 Registration at the Higher Services Portal
  • Until 30.04.2020 Meet your supervisor to discuss the outline of the paper
  • 15.06.2020 Submission of the paper until 12:00 noon, HeHo 18, room 1.00 (to Wasif, email and hard copy)
  • 19.06-20.06.2020 Presentations*

*Venue and presentation schedule to be announced later

Topics

 

1. Preferences for sustainable investing and their implications

First outline the return patterns that one would expect if some investors have not only financial but also environmental, social and governance (ESG) objectives. Do this based on the paper by Pastor et al. You do not need to reproduce the formal analysis of that paper.  Then summarize empirical findings on ESG preferences of investors.

Literature to get started:

Pastor, L., Stambaugh, R. F., & Taylor, L. A. (2019). Sustainable Investing in Equilibrium (No. w26549). National Bureau of Economic Research.

Larcker, D. and Watts, E. (2019) Where's the Greenium? Journal of Accounting and Economics (Forthcoming).Available at SRN: https://ssrn.com/abstract=3333847

Riedl, A., & Smeets, P. (2017). Why do investors hold socially responsible mutual funds?. The Journal of Finance72(6), 2505-2550.

      supervisor: Syed Wasif Hussain

 

2. Integrating carbon risk into a factor model

Görgen et al. (2019) suggest an approach that incorporates the risks from the likely transition to a low-carbon economy into a factor model. Present their approach and their results.  Also (i) estimate carbon betas for selected assets in order to illustrate the usefulness of this approach and (ii) test whether the new factor is redundant given the factors of the Fama-French five-factor model, as in Table 6 of Fama/French (2015) “A five-factor asset pricing model”.  We will provide you with the BMG data used in the Görgen et al. paper. For (ii) use data for “Developed Factors” from Ken French’s webpage.

Literature to get started:

Görgen, M., Jacob, A., Nerlinger, M., Riordan, R., Rohleder, M., & Wilkens, M. (2019). Carbon risk. Available at SSRN 2930897.

      supervisor: Niklas Paluszkiewicz

 

3. Hedging against climate change news

The consequences of climate change can be huge, but they are uncertain and difficult to hedge or insure. Engle et al. (2019) propose an approach for hedging news by identifying portfolios that capture this risk. Present their approach and their results. Then examine how the BMB factor of Goergen et al. (see topic “Integrating carbon risk into a factor model”) is related to the climate change indices of Engle et al. We will provide you with data for this exercise.

Literature to get started:

Engle, R. F. et al. (2019). Hedging climate change news. National Bureau of Economic Research. https://www.nber.org/papers/w25734.pdf

      supervisor: Syed Wasif Hussain

 

4. Valuing the effects of climate change and decarbonization

Climate change can lower the value of assets that are physically damaged (e.g. damages to houses due to flooding). The transition to a low-carbon economy can reduce the value of assets such as oil reserves. You shall start by describing how companies assess how the value of their assets will be affected in the future. Do it with the help of selected examples. Then summarize findings of papers that investigate whether physical risks and stranded assets are reflected in market valuations.

Literature to get started:

Example company and analyst reports:

https://www.shell.com/energy-and-innovation/the-energy-future/shell-energy-transition-report/_jcr_content/par/toptasks.stream/1524757699226/3f2ad7f01e2181c302cdc453c5642c77acb48ca3/web-shell-energy-transition-report.pdf

https://www.eulerhermes.com/content/dam/onemarketing/euh/eulerhermes_com/erd/publications/pdf/ESG-stranded-assets.pdf

https://corporate.exxonmobil.com/-/media/Global/Files/energy-and-carbon-summary/2018-Energy-and-Carbon-Summary_archive.pdf?la=en&hash=427480750BFDB15994534A1143D141D96ACEC633

Bernstein, A. et al. (2019). Disaster on the horizon: The price effect of sea level rise. Journal of Financial Economics.

Delis, M. D., de Greiff, K., & Ongena, S. (2019). Being Stranded with Fossil Fuel Reserves? Climate Policy Risk and the Pricing of Bank Loans. Climate Policy Risk and the Pricing of Bank Loans (February 20, 2019). Swiss Finance Institute Research Paper, (18-10).

      supervisor: Syed Wasif Hussain

 

5. Choosing the discount rate for climate investments

When assessing how much a society should invest in climate change abatement, the cost of investing are compared to the present value of the benefits from avoiding damages. Thus, the discount rate plays an important role in the decision on the optimal level of investment.  You shall present an approach for how the discount rate can be estimated. Also explain why different views about the nature of climate change risk can lead to very different conclusions about discount rates.

Literature to get started:

Giglio, S., Maggiori, M., Stroebel, J., & Weber, A. (2018). Climate change and long-run discount rates: Evidence from real estate. Working Paper.

      supervisor: Nenad Ćurčić

 

6. Natural disasters and stock market prices

Global warming increases the risk of natural disasters. Since the realization of such risks is still rare, it is difficult to quantify the consequences objectively. This bears the danger that people underreact to those kind of risks and do not account them in their investment decisions, which might lead to a huge wealth shock in the future. Hong et al. (2019) examine whether markets efficiently price the risk of natural disasters by looking at long-term drought trends and the adverse effects on the food industry. Their findings suggest that parts of long running drought risks of different countries are not identified by market participants. 

In your seminar paper you should focus on the paper of Hong et al. (2019). Describe their approach to measure climate risk and its effect on the stock market. Replicate their main findings for a subsample of countries of your choice. Furthermore, follow their approach to implement a trading strategy to test the hypothesis that markets tend to underreact to climate risk.

Literature to get started:

Hong, H., Li F. W. and Xu J. (2019) Climate risks and market efficiency. Journal of econometrics 208(1), 265-281

      supervisor: Niklas Paluszkiewicz

 

7. Weather, global warming and believe updating

In times of abnormally high temperatures, people tend to pay more attention to global warming and its side effects. This effect is amplified trough increased media coverage during hot periods. Due to the home-bias of investors, this might lead to an overreaction on stock prices of local firms. If investors learn about climate risk in the long term and update their beliefs about high- and low-emission firms, prices might not reverse back to their previous levels. In a recent empirical study, Choi et al. (2019) use Google Search Volume data to show that attention about global warming rises in periods of abnormally high temperatures. This effect goes along with significantly lower returns for high-emission firms. 

Your job is to explain and summarize how Choi et al. (2019) measure attention to global warming and how they identify the effect of temperatures on stock prices. The main part of your work should replicate the effect of abnormal temperatures on global warming awareness and relate it to local stock market returns. Similar to Choi et al. (2019), you should conclude your work with a test whether investors revise their beliefs about climate change after experiencing a prolonged period of hot temperatures.

Literature to get started:

Choi D., Gao Z. and Jiang W. (2019) Attention to global warming. Forthcoming Review of Financial Studies, SSRN https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3180045

      supervisor: Niklas Paluszkiewicz

 

8. Performance of ESG portfolios

Recently, ESG indicators received big attention in the finance literature. Summarize the literature, then replicate and update the study of Auer and Schuhmacher (2016) by using  ESG data from EIKON. You should check if your results support the results from the paper that high(low) ESG stocks do not appear to increase or decrease investment performance relative to the benchmark. Replicate and update relevant parts of tables 1-4 and figure 1 focusing only on US data and the S&P500.

Literature to get started:

Auer, B. R., and Schuhmacher, F. (2016) Do socially (ir)responsible investments pay? New evidence from international ESG data. The Quarterly Review of Economics and Finance, 59, 51-62

      supervisor: Nenad Ćurčić

News

All relevant information to be found on this page. Students will be contacted via e-mail occasionally.

Dates and Room

Please note the detailed timetable.

Module description

This seminar is open for Master students.