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EDHEC-Scientific Beta Research Chair Publication Questions the Existence of a "Green" Factor

Scientific Beta

Press Release Boston, London, Nice, Paris, Singapore, Tokyo, January 21, 2020

EDHEC-Scientific Beta Research Chair Publication Questions the Existence of a "Green" Factor

Study sees no evidence so far to support the existence of such a factor

A new publication from the EDHEC-Scientific Beta "Advanced Factor & ESG Investing" research chair, entitled "The DeCarbonisation Factor: A New Academic Fiction?", by Abraham Lioui, Professor of Finance at EDHEC Business School and member of the EDHEC-Scientific Beta Research Chair, examines two recent papers, Cheema-Fox et al. (2019) and Bolton and Kacperczyk (2019), which looked at the financial market implications of firms’ carbon emissions. The Cheema-Fox et al. paper, entitled "Decarbonization Factors," has been widely marketed and often serves to support the usefulness of considering a green factor in the factor allocation menu. Faced with this assertion, Professor Lioui observed that the second paper contradicted the results of the first one. In fact, the article by Cheema-Fox et al. (2019) maintains that low carbon emission firms outperform high carbon emission ones. Bolton and Kacperczyk (2019), however, conclude that high carbon emissions have a positive impact on returns.

The EDHEC-Scientific Beta research chair publication argues that these studies do not in fact shed enough light on the issue to draw any conclusions and suffer from strong methodological limitations. Whether "DeCarbonisation" is a factor that drives investment returns is a question that is worth asking, but this note shows that it has yet to be definitively answered.

Commenting on the publication, Professor Noël Amenc, CEO of Scientific Beta, said, "What is at stake with climate change goes beyond the existence or otherwise of a factor. The fact that there is no carbon factor should lead us to conclude that while there is no positive risk premium to being low carbon, there is no negative risk premium either. In the current state of scientific knowledge, it is therefore possible, on the basis of traditional, consensus-based, rewarded factors, to construct portfolios while excluding the bad apples of the climate class and ultimately to achieve highly decarbonised portfolios with very good risk-adjusted performance. This approach, which does not make carbon a factor in performance, means that providers and investors should stop overselling green performance to their stakeholders. They should explain instead that there is no harm in doing good and the fight against climate change should not depend on hasty and fragile conclusions on the existence of a carbon factor."

The full publication can be accessed below:

The DeCarbonisation Factor: A New Academic Fiction? December 2019, EDHEC-Scientific Beta Advanced Factor & ESG Investing" Research Chair Publication

As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up Scientific Beta. Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
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