M2MO: Modélisation Aléatoire, Finance et Data Science

Master en statistique, probabilités et finance - Université Paris 7 - Paris Diderot


Green Finance

Lecturers: T. Roncalli & P. Tankov
Period: Term 2
Schedule: 3 hours per week (at  ENSAE)


The objective of this course is to explain how financial actors must grasp the environmental issue both (i) to redirect financial flows towards projects with low environmental impact in order to sup- port and strengthen the environmental transition and (ii) to control and mitigate the financial risks represented by the environmental transition.

To understand the modeling of environmental risks, we shall provide a basic introduction to climate change modeling. The aim is not to give full details of the models but to enable the stu- dents to understand what kind of information about the future climate and the related risks can be extracted from state-of-the art climatological models and how to quantify the associated uncertain- ties. The link of CO2 concentration with the climate change and the role of the energy sector in climate transition will be addressed. We shall also briefly discuss the integrated assessment models to understand how the climate dynamics can be coupled to the dynamics of the economy, and insist on the role of the financial sector in this process.

This transformation of finance requires an understanding of (i) the assets that finance sustain- able development, (ii) the metrics used to understand their environmental impact, and (iii) the practices implemented by sustainable financial players.

This course is designed to provide students with the tools to understand and support the green- ing of the financial system by articulating concrete examples, academic papers and latest regula- tions.

Skills acquired during the course:

• Understanding of main climate risks underlying financial assets

• Basic understanding of climate models and ability to manipulate climate scenarios

• Identification of the environmental impact of financial assets

• Knowledge of various methods and practices of environmental investing


• Knowledge of the latest environmental finance regulations


Class 1. Traditional finance and some of its limitations (1h30)

Assets, financial markets, market players, valuation metrics, market rationality limits, recent crises and major lessons from these crises. Definitions of sustainable, environmental, climate finance.

Class 2. Introduction to environmental risks in finance (1h30)

A) Transition risks (including legal risks) vs. Physical risks ; Shareholder vs. Stakeholder theory B) Estimation of environmental and climate priced risks, rewards and cost of capital : a) Stocks, b) Bonds. Impact of ESG metrics on the performance of the financial assets.

Class 3. Environmental financial risks 1/3 (Peter, 1h30)

Introduction to climate change modeling and attribution. Link between CO2 levels in the atmo- sphere and temperature rise. Regional climate scenarios. Difficulty of forecasting local events. GIEC scenarios and the associated uncertainty measures. The 2 degree scenario.

Class 4. Environmental financial risks 2/3 (Peter, 1h30)

From climate scenarios to integrated assessment models. Sector-based scenarios. The role of the energy sector. Asset stranding.

Class 5. Environmental financial risks 3/3 (Peter, 1h30)

The tragedy of the horizons. Evaluating the impact of physical and transition risks on the financial system. Evaluating physical risks along the production chain. Climate stress tests. Role of central banks.

Class 6. The need to build a resilient financial system for the environmental tran- sition (1h30)

Transforming the global economy to limit environmental impact of investments. Public initiatives. Re-directing private capital. Regulations. Environmental finance and development: World Bank Climate Finance initiatives and OECD Climate Finance. Corporate engagement. Etc.

Class 7. Financing green assets and measuring the climate impact of investments (1h30)

Financing green assets

Climate and Green bonds. Project bonds. Real estate labels. Fund labels. The problem of taxonomy: how to define green assets?

Measuring the environmental and climate impact of investments

Definitions ESG/CSR/SRI. Environmental impact KPI. Metrics and tools. Case study with differ- ent scopes. Green funds and ETF. Towards environment-aware accounting.

Class 8. The practice of major players (1h30)

Different major market players (pension fund and insurances, asset managers, banks). Different practices: Exclusion, ESG integration, Corporate engagement, Impact investing. Toward a green optimal asset allocation (Practical application: Andersson, Bolton, Samama (2015)).

Class 9. Practitioner course: Integration of environmental risks into financial asset management (1h30)

Class 10. Practionner course: How do banks deal with environmental risks (1h30) Class 11. The environment: A systemic stake for the financial system (1h30)

Public intervention to integrate the environment into finance. The frontiers of environmental fi- nance: (i) Transparency and taxonomy (Task Force on Climate-Related Financial Disclosures, European Union High Level Group on Sustainable Finance, European Commission Action Plan), (ii) What role for prudential supervision and regulation authorities? (see debate on the Green supporting factor).


Class 12. Practionner course: Central Banks Network for Greening the financial system (1h30)


2 Degrees Initiative Investing, 2017. The transition Risk-o-meter. Reference scenarios for financial analysis.

Andersson, Bolton, Samama, 2015. Hedging Climate Risk. Financial Analysts Journal.

Ambec and Lanoie, 2008. Does it pay to be green? A systematic overview. Academy of Man- agement Perspectives.

Battiston, Mandel, Monasterolo, Schutze, Visentin, 2016. A climate stress-test of the financial system. Nature Climate Change.

Campiglio, 2016. Beyond carbon pricing: The role of banking and monetary policy in financ- ing the transition to a low-carbon economy. Ecological Economics.

Campiglio, Dafermos, Monnin, Ryan-Collins, Schotten, Tanaka. Finance and climate change: what role for central banks and financial regulators? Working paper.

Campiglio, Godin, Kemp-Benedict, 2017. How market sentiments shape the transition to low- carbon capital. Working paper.

Chava, 2014. Environmental Externalities and Cost of Capital. Management Science.

Dietz, Bowen, Dixon, Gradwell, 2016. ‘Climate value at risk’ of global financial assets. Nature Climate Change.

Derwall, Guenster, Bauer, Koedjik, 2005. The Eco-Efficiency Premium Puzzle. Financial Analyst Journal.

Derwall, Koedjik and Ter Horst, 2011. A tale of values-driven and profit-seeking social investors. Journal of Banking and Finance.

Dhaliwal, Li, Tsang and Yang, 2011. Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting. The Accounting Review.

El Ghoul, Guedhami, Kwok and Mishra, 2011. Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance.

European Commission, 2018. Action Plan: Financing Sustainable Growth.

EU HLEG, 2018. Final Report 2018 by the High-Level Expert Group on Sustainable Finance.

European Investment Bank, 2017. The need for a common language in Green Finance. To- wards a standard-neutral taxonomy for the environmental use of proceeds.

Flammer, 2018. Corporate Green Bonds. Working paper.

Galema, Plantinga, Scholtens, 2008. The stocks at stake: Return and risk in socially responsible investment. Journal of Banking and Finance.

Hong and Kacperczyk, 2009. The price of sin: The effects of social norms on markets. Journal of Financial Economics.

Krueger, 2015. Corporate Goodness and Shareholder Wealth. Journal of Financial Economics. Porter and van der Linde, 1995. Toward a New Conception of the Environment-Competitiveness Relationship. Journal of Economic Perspectives.

Renneboog, Ter Horst, Zhang, 2008. Socially responsible investments: Institutional aspects, performance, and investor behavior. Journal of Banking and Finance.

Sharfman and Fernando, 2007. Environmental Risk Management and the Cost of Capital. Strategic Management Journal.

TCFD, 2017. Recommendations of the Task Force on Climate-related Financial Disclosures 

Zerbib, 2018. Is There a Green Bond Premium? The yield differential between green and conventional bonds. Working paper.