Jo­hannes Stroebel (New York Uni­ver­sity)

A quan­tity-based ap­proach to con­struct­ing cli­mate risk hedge port­fo­lios

We pro­pose a new method­ol­ogy to build port­fo­lios that hedge the eco­nomic and fi­nan­cial risks from cli­mate change. Our quan­tity-based ap­proach ex­ploits in­for­ma­tion on how mu­tual fund man­agers trade in re­sponse to idio­syn­cratic changes in their cli­mate risk be­liefs. We ex­ploit two types of idio­syn­cratic be­lief shocks: (i) in­stances when fund ad­vis­ers ex­pe­ri­ence lo­cal ex­treme heat events that are known to shift cli­mate hange be­liefs, and (ii) in­stances when fund man­agers change the lan­guage in share­holder dis­clo­sures to ex­press con­cerns about cli­mate risks. We use the funds’ ob­served port­fo­lio changes around such idio­syn­cratic be­lief shocks to pre­dict how in­vestors will re­al­lo­cate their cap­i­tal in re­sponse to ag­gre­gate cli­mate news shocks that shift the be­liefs and as­set de­mands of many in­vestors and thus move equi­lib­rium prices. We show that a port­fo­lio that is long stocks that in­vestors tend to buy af­ter ex­pe­ri­enc­ing neg­a­tive idio­syn­cratic cli­mate be­lief shocks, and short stocks that in­vestors tend to sell, ap­pre­ci­ates in value in pe­ri­ods with neg­a­tive ag­gre­gate cli­mate news shocks. Our quan­tity-based port­fo­lios have su­pe­rior out-of-sam­ple hedge per­for­mance com­pared to port­fo­lios con­structed us­ing ex­ist­ing al­ter­na­tive meth­ods. The key ad­van­tage of the quan­tity-based ap­proach is that it learns from rich cross-sec­tional trad­ing re­sponses rather than time-se­ries price in­for­ma­tion, which is par­tic­u­larly lim­ited in the case of newly emerg­ing risks such as those from cli­mate change. We also demon­strate the ver­sa­til­ity of the quan­tity-based ap­proach by con­struct­ing suc­cess­ful hedge port­fo­lios for ag­gre­gate un­em­ploy­ment and house price risk.

Péter Szik­lai, György Fe­gyveres, Le­an­dro Are­nas (Mor­gan Stan­ley)

Cli­mate risk in stress test­ing

Sce­nario analy­sis and stress test­ing is be­com­ing more im­por­tant for in­ter­nal risk man­age­ment and be­ing in the fo­cus of reg­u­la­tors across the globe. It is a use­ful tool for un­der­stand­ing the strate­gic im­pli­ca­tions and as­sess­ing the im­pact from cli­mate re­lated risks and op­por­tu­ni­ties. In this pre­sen­ta­tion, we pro­vide a gen­eral in­sight in the re­lated ter­mi­nol­ogy, key chal­lenges and reg­u­la­tory im­pli­ca­tions.

Nor­bert Pál­mai, Maryna Nazar­ian (Black Rock)

In­cor­po­rat­ing sus­tain­abil­ity into as­set re­turn fore­cast and strate­gic as­set al­lo­ca­tion de­ci­sion

Olga Svi­a­tochevski (Citi)

ESG in Citi

The pre­sen­ta­tion will fo­cus on Citi’s ap­proach to Sus­tain­abil­ity and ESG. In par­tic­u­lar, I plan to fo­cus on: (i) Citi’s com­mit­ment to Net Zero emis­sions by 2050 (ii) Sus­tain­able Progress Strat­egy (iii) En­vi­ron­men­tal & So­cial Risk Man­age­ment & Re­spon­si­ble Busi­ness. ESG and sus­tain­abil­ity are in­te­gral to al­most every part of the bank and there are many other ini­tia­tives that could be men­tioned. Fur­ther­more, each of Citi’s busi­nesses will have their own ap­proach for in­te­grat­ing ESG into the strat­egy.

Mónika Szik­szai (MSCI)

Man­ag­ing cli­mate risk and ex­po­sure

It is widely rec­og­nized that the world needs to re­duce its net emis­sion of green­house gases to zero by 2050 to max­i­mize the like­li­hood of achiev­ing the ob­jec­tive of the Paris Agree­ment. Al­though cli­mate risk man­age­ment is not yet wide­spread among in­vestors or fully stan­dard­ized by reg­u­la­tion, in this talk we will at­tempt to show how the fi­nan­cial in­dus­try started think­ing about the net-zero tran­si­tion. We will walk through case-stud­ies to shed light on the most im­por­tant con­cepts re­lat­ing to fi­nan­cial port­fo­lios’ im­pact on global warm­ing, as well as their risks aris­ing from cli­mate change.

Réka Janosik (MSCI)

The im­pact of cli­mate change on credit risk

Fi­nan­cial reg­u­la­tors, lead by the Bank of Eng­land and the Eu­ro­pean Cen­tral Bank are set­ting the trend in the as­sess­ment of cli­mate-re­lated fi­nan­cial risks, by in­cen­tiviz­ing banks to as­sess their cli­mate-re­lated risks us­ing cli­mate-sce­nario analy­sis. As these stress tests are fo­cus­ing on the bank­ing book, credit risk from lend­ing ac­tiv­i­ties is the most im­por­tant fo­cus. Such credit risk is also rel­e­vant to other fi­nan­cial in­sti­tu­tions that hold cor­po­rate debt, as cli­mate change may cause rat­ing down­grades and a cor­re­spond­ing widen­ing in spreads. In this pre­sen­ta­tion I show how MSCI’s bot­tom-up cli­mate sce­nar­ios can shed light on the im­pact of cli­mate change on de­fault prob­a­bil­i­ties and rat­ings mi­gra­tions.

An­drás Zem­pléni (ELTE and 4-Xtra Tech­nolo­gies)

Up-to-date method­olo­gies for ex­treme value mod­els

In this talk the fo­cus is on the mul­ti­vari­ate peaks-over-thresh­old mod­els, that can be used in mod­el­ling ex­treme cli­matic events. In the first part the method­olog­i­cal as­pects are shown, based on the re­cent pa­pers of Rootzen and his co-au­thors. The sec­ond half is de­voted to the ap­pli­ca­tions, where the ba­sis is the Coper­ni­cus cli­mate data set, which is the re­sult of re­analy­sis and fore­cast for the pe­riod 2011-2040. Both pre­cip­i­ta­tion and tem­per­a­ture-based weather in­di­ca­tors are con­sid­ered. Suit­ably mod­i­fied GANs pro­vided sim­u­la­tions for mod­el­ling the ex­tremes. Cov­er­age re­gions for the rel­e­vant quan­ti­ties are also shown.