Climate finance

T. Roncalli

Climate risk is certainly one of the greatest challenges facing humanity in the 21st century, affecting the biosphere, natural balances, the distribution of wealth, economic growth and social inequalities. In this context, the repercussions of climate risk on finance are immense: change in investor preferences, impact of transition risk on asset prices, impact of physical risk on insurance capacities, asset allocation, valuation of financial products, modeling of climate risk, liability risk and balance structure of banks and insurers, etc. It is not surprising that the Financial Stability Board (FSB) considers that climate risk is, along with liquidity risk, the two most important factors of systemic risk. Moreover, the financial regulatory authorities (NGFS, BCBS, EBA) are thinking about taking climate risk into account from a prudential and supervisory perspective, with the first climate stress test exercises already scheduled for 2021. However, the impact of climate risk is not limited to the banking and insurance sectors. By its very nature, it affects the investment world even more strongly and is part of a complete overhaul of the latter. Indeed, responsible investment considers that financial criteria must be complemented by extra-financial criteria to allocate capital, notably through the three pillars of ESG investment: Environment, Social and Governance.

This course is an introduction to climate finance and ESG criteria. It is broken down into 6 topics:

  1. ESG investment (definition, scoring and rating system, strategies, risk premium)
  2. Climate finance (definition, socio-economic models, climate scenarios)
  3. Climate risk metrics (emissions and carbon intensity, physical/transitional, static/dynamic, green intensity, net zero metrics)
  4. Asset allocation under climate risk constraints (carbon budget, portfolio decarbonization, net zero alignment, green taxonomy)
  5. Asset valuation and climate risk (credit risk, contagion risk, climate stress tests)
  6. Impact investing (labels, green and social bonds, greenium, sustainable finance products, voting policy, commitment)


  • Barahhou, I., Ben Slimane, M., Oulid Azouz, N., and Roncalli, T. (2022), Net Zero Investment Portfolios, Working Paper.
  • Battiston, S., Mandel, A., Monasterolo, I., Schütze, F., and Visentin, G. (2017), A Climate Stress-test of the Financial System, Nature Climate Change.
  • Berg, F. Koelbel, J.F., and Rigobon, R. (2022), Aggregate Confusion: The Divergence of ESG Ratings, Review of Finance.
  • Coqueret, G. (2022), Perspectives in ESG Equity Investing, CRC Press.
  • Karydas, C., and Xepapadeas, A. (2022). Climate Change Financial Risks: Implications for Asset Pricing and Interest Rates, Working Paper.
  • Le Guenedal, T., and Roncalli, T. (2022), Portfolio Construction and Climate Risk Measures, Climate Investing.
  • Pastor, L., Stambaugh, R.F., and Taylor, L.A. (2021), Sustainable Investing in Equilibrium, Journal of Financial Economics.
  • Raynaud, J., Voisin, S., Tankov, P., Hilke, A., and Pauthier, A. (2021), The Alignment Cookbook: A Technical Review of Methodologies Assessing a Portfolio’s Alignment with Low-carbon Trajectory or Temperature Goal, Institut Louis Bachelier Report.
  • Roncalli, T. (2022), Lectures Notes in Sustainable Finance, forthcoming.