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Title: Green factor: Quantifying equity returns' climate risk using green active fund allocations Authors:  Jeanne Gohier - Universite Paris 1 Pantheon Sorbonne - CNRS UMR8174 (France) [presenting]
Thibault Soler - Fideas Capital (France)
Abstract: The shift to a green, low-carbon economy has generated new investment strategies and impacted asset prices. We analyse the climate risk of assets by building a brown-minus-green (BMG) factor and evaluating assets' exposure to this factor. The CARIMA project develops a similar approach on the basis of extra-financial performance (ESG) data only. While it captures significant information datapoints on the exposure to climate risk, it is very arduous to compute and to update, as it requires four different databases. Moreover, there is a significant time lag on ESG data, especially for carbon data (two years) which makes these BMG factors outdated. Here, we develop a new method to evaluate market sentiments by using green funds/ETFs database to build a BMG factor. We first use principal-component analysis to isolate the dark-green component and then compute the sensitivity of asset prices to this dark-green proxy portfolio to build the BMG factor. This methodology improves the evaluation of the assets' individual climate risk, by capturing up-to-date market sentiments which encapsulate both fundamental investor and analyst knowledge on the extra-financial performance of assets. We end by analysing the explanatory power of this BMG factor when added to the Carhart asset pricing model.