The Research Initiative FDIR

For the period 2022-2025, six high priority research projects have been selected by the Scientific Orientation Committee on May 17, 2022 during the deneral assembly.  

Project 1: Social performance indicators, by Patricia Crifo (Polytechnique)

To mitigate the socio-economic impact of the transition in regions and sectors that will be most affected due to their dependence on fossil fuels or energy-intensive industrial activities, it is necessary to define relevant economic and social criteria beyond employment levels in carbon-intensive regions. This project aims at answering the following questions. At the company level, how is extra-financial performance defined, and particularly social performance? What are the interactions between social performance and environmental performance?  
To answer these questions, several types of data can be mobilized: qualitative assessments of social and environmental performance by financial and extra-financial data providers (Moody's, Bloomberg, etc.), quantitative data on the practices adopted, apprehended via public statistics surveys (for example, produced by the Ministry of Labor, Industry or Ecology), or experimental data produced by researchers themselves. Public survey data have the advantage of being based on practices actually implemented by companies, and can question both managers' and employees' practices.
The objective here is to propose social performance indicators that can be mobilized as fair transition criteria by analyzing indicators of human capital, employability and participation.

Project 2: The Value of Green Innovation: Evidence from Climate-Related Patents, by  Ulrich Hege, Sébastien Pouget, and Yifei Zhang (TSE)

Climate change is one of the major environmental and social challenges of our time (see, e.g., IPCC, 2022). Firms are playing an important role in climate change via their greenhouse gas (GHG) emissions (see, e.g., CDP Carbon Majors Report, 2017). Some firms decide to take climate action in order to mitigate their impact. What are the consequences of such climate action? How to make sure that this is not greenwashing? Are these firms recognized as green by Environmental, Social and Governance (ESG) rating agencies? Do these firms attract more (responsible) investors? Do they offer higher returns to their shareholders? Do they emit less GHG than their peers?
Answering these questions is challenging in terms of scientific methodology. Indeed, establishing a causal link between corporate climate action and its consequences is plagued by two issues: reverse causality and omitted variables. To cope with these issues, we propose to use an instrumental variable approach, based on two-stage least square regressions, that enables us to better establish causality. Our identification strategy relies on the granting of climate change mitigation patents in the US. Focusing on patents enables us to mitigate the risk that firms engage in greenwashing and to address an important topic in corporate climate action, namely green innovation. The literature demonstrates that some patent examiners, although they deal with the same field, are more lenient than others, for idiosyncratic reasons, and grant patents more easily (Gaulé, 2018, Sampat and Williams, 2019, Farre-Mensa, Hegde, Ljungqvist, 2020, Melero, Palomeras, Wehrheim, 2020). This offers us the opportunity to study firms that applied for climate change mitigation patents and differentiate them not on the basis of whether they were actually granted a patent but on whether they were (quasi-randomly) assigned to a more or less lenient examiner. We can then verify, in a first-stage regression, that firms that are assigned to a more lenient examiner are indeed more likely to receive a green patent. We then use the predicted probability to receive a green patent as an explanatory variable in second-stage regressions aiming at studying whether climate action impacts firms’ financial and environmental outcomes (ratings, returns, emissions…).

Project 3: The economics of biodiversity and food systems, by Nicolas Treich (TSE, INRAE)

 Biodiversity loss is considered as a major environmental threat. The global food system is the main cause of this trend. For instance, deforestation -which is a major driver of biodiversity loss- is mostly due to the development of animal agriculture and in turn to the demand for meat. However, food systems are also characterized by severe market and political failures. For instance, no country has yet implemented an environmental tax on meat. 
In that context, several instruments can be used to cope with the loss of biodiversity. For instance, the use of food labels may be particularly effective. As exemplified by the Dasgupta Review (2021), the financial sector has also an important role to play to mitigate biodiversity loss, for instance by influencing human food demands and by channeling fundings to enable research and development of greener food innovations. 
This research project will explore how various instruments such as information tools and nudges as well as financial schemes may help mitigate biodiversity loss, in particular through the incentives that are given to the various stakeholders involved in food systems.

Project 4: Green and social finance labels: Evolution and impact in France and Europe, by Patricia Crifo (Polytechnique)

Green and social finance labels aim to guarantee practitioners and savers the ecological and/or socially responsible quality of their investments. Overall, about ten green and social labels have been created in the financial markets of the European Union member states since the creation of the first label in 1997 in France. These labels were attributed to nearly 2700 financial products, demonstrating a quantitative success, particularly in France.
In this project we propose to analyze the evolution of these green and social labels in France and in Europe over the last decades, their emergence and development dynamics, in perspective with national and European regulations, and their impact (financial, extra-financial).
To examine the contribution of such labels to the energy transition we will rely both on economic approaches that model and evaluate labels in terms of informational problems specific to confidence goods (information asymmetry and incompleteness), and on the literature in organizational science that focuses on labels as a category of products.
We will also compare the nature and performance of the investments made by type of label, with a particular focus on compliance with the criteria and the influence of the labeled funds on the investments made, with respect to national and European regulations.

Project 5: Are We Becoming Greener? Life-time Experiences and Responsible Investment, by Milo Bianchi (TSE)

This project aims at studying how individual investors’ characteristics shape their ESG investment behavior and trading over time. We are particularly interested in studying how investors’ pro-social attitudes affect ESG demand, and whether these attitudes are shaped by economic and non-economic life-time experiences, such as growing up in a region with more pro-social values, being exposed to an increased level of pollution or to a natural disaster. 
To do so, we have obtained access to account-level data from the Shanghai Stock Exchange, reporting complete trading records for individual investors over nine years. Preliminary analyses suggest that recent experiences tend to matter more than experiences in the distant past, and that non-economic experiences are particularly important to explain how investors change their attitudes during their trading life. Another interesting insight is that investors seem to display distinct trading patterns between their ESG and non-ESG stocks, which helps explaining stock market dynamics. 
This project will provide original contributions on at least two grounds: first, it will measure to what extent ESG demand by individual investors depends on individual characteristics and experience, which can be of great help for the supply of ESG products; second, it will explore ESG investing in China, which is growing fast but has attracted less focus so far. 

Project 6: Asset management and regulatory framework of long term investment, by Olivier Gossner (Polytechnique)

This project focuses on the management and allocation of risky assets for long-term investments. 
For asset managers whose investments cover long-term commitments, and/or investments that are complex to manage, it is important to consider management costs if one wants to avoid biasing investment strategies by encouraging investors to overweight assets that are relatively inexpensive to manage. 
Moreover, in terms of sustainable development and climate, aligning portfolios with a carbon budget based on scientific data and compatible with keeping the temperature increase below 1.5°C and/or the SDGs is a complex task that requires taking into account several sources of risk and uncertainty (physical and transitional in particular). 
This project will analyze, on the one hand, the role of management costs of risky assets that may apply in the face of Solvency II or IFRS17 type regulations and, on the other hand, the constraints of constructing "zero net emissions" portfolios and/or aligned with the SDGs.