The great and the good of academic finance are meeting 5 to 7 January in Philadelphia at the American Finance Association (AFA) Conference.
The topics to be address are broad and include analyses of asset returns, examinations of the implication of “FinTech” and gender issues in finance.
Following hot on the heels of 2017, a year where the US suffered from devastating hurricanes and fires exacerbated by climate change, one would expect finance professors at the AFA Conference to be busily figuring out if climate change has important financial implications. Right?
Wrong. A quick glance at the AFA Conference schedule makes it patently clear that climate change and climate risk is not on the menu. This is all the more surprising since climate finance has become a defining topic in policy and practice. This is reflected in the central role climate finance had in the historic Paris Agreement and the warnings that central bankers and regulators are giving about carbon related risks to the global financial system.
Climate change presents both major risks to the global financial system and an opportunity for investors. Initiatives such as the UN Principles for Responsible Investment (UNPRI) mean that investors holding US$62 trillion in assets across 60 countries consider environmental impact in their investment decision making. More investment was directed towards renewables in 2015 than ever before ($290 billion by some estimates), with much of the growth coming in emerging economies.
On the risk side, many listed companies have sought to voluntarily disclose carbon risk through the Carbon Disclosure Project (CDP). But increasingly investors are forcing the issue of greater disclosure and action. In May 2017, 62% of Exxon Mobil shareholders forced the company to disclose more risk-related information about the Paris Agreement’s goal of holding global warming well below 2C.
Unsurprisingly, leading climate change journals like Nature Climate Change and Climatic Change have engaged with climate finance topics both on the risk and opportunity side. But is climate finance an important topic in finance research? As implied by the 2018 AFA Conference schedule, it would seem not.
In a paper published with colleagues at the Tyndall Centre in Climate Change Research last May, we systematically analyse the content of 20,725 articles published in the leading 21 finance journals between January 1998 and June 2015. We repeat our analysis across a sample of 29 elite business journals spanning accounting, economics, management, marketing and operations research, as well as finance.
We find that for the leading 21 finance journals only 12 articles (0.06%) are related in some way to climate finance. The three elite finance journals (Journal of Finance, Journal of Financial Economics and Review of Financial Studies) did not publish a single article related to climate finance over the 17.5-year period. Six of those were published since 2012 suggesting only a marginal increase in recent interest. Of the top ten journals, only the Journal of Banking and Finance has published climate-related articles (four of them).
We find a similar dearth of published climate finance research in the sample of 29 elite business journals. Elite business journals, in particular in the accounting, economics and operations-research disciplines, have addressed climate finance-related topics to a very slightly greater extent than finance journals, with 25 articles.
Just under half of the 37 climate finance-related articles published in leading finance journals and elite business journals addressed carbon markets; an additional 14% (the “other” category) mainly addressed carbon taxes. This leaves an almost complete absence of research on critically important issues of risk, valuation (including stranded assets) and investment opportunities related to climate change.
It is striking that finance research is so behind the climate curve. This is all the more surprising since all the “core” areas of finance research – assert pricing, corporate finance and investments – are relevant to climate change.
The “asset pricing” branch of finance research, which takes the perspective of traders, could help uncover to what degree investors are pricing carbon risk into asset values and is thus relevant to contemporary debates on stranded assets. “Corporate finance” researchers, who take the perspective of companies, could help establish whether energy majors have the balance sheets to support the financing of a capital-intensive low carbon transition. “Investments” researchers can evaluate if climate-friendly investment funds or bonds outperform their alternatives on a risk-adjusted basis.
Finance research in non-core areas can also contribute to understanding the relationships between private finance and climate change. Finance researchers concerned with insurance, risk management and financial institutions can help answer questions such as:
- what impact will rising sea levels have on real estate assets in large cities?
- what financial instruments can be used to hedge carbon risk in investment portfolios?
- how exposed are banks to carbon risk, and banking systems more generally?
Until the top journals in finance signal that they are receptive to climate finance-related research, the best finance researchers are unlikely to engage. Since the articles from leading finance journals tend to underpin the finance curriculums of undergraduate and especially postgraduate qualifications in finance, perhaps the most prominent impact of the dearth of climate finance-related research in leading finance journals is that the next generation of finance practitioners may be underprepared to tackle climate change-related issues.
Though there are glimmers of hope – one Eastern Finance Association conference has recently asked for climate finance related research, while the Review of Financial Studies (a top-three finance journal) is working on a related special issue likely to come out in 2018 or 2019 – there is a danger that there will be too little, too late.
In our Climatic Change article we make a number of suggestions about what might be done to alleviate this situation. One of these calls on practitioner bodies such as the CFA Institute to take a more active role in promoting the importance of this topic to academics.