Yale School of Management

International Center for Finance

Providing academic and professional support for research in financial economics.

EarthDay50: Yale SOM Finance Faculty Write About Climate Finance

earthHappy Earth Day!

In honor of the 50th anniversary of Earth Day, we would like to share some of the recent research conducted by Yale SOM finance faculty about climate finance:
 

Is the Risk of Sea Level Rise Capitalized in Residential Real Estate?” by Justin Murfin and Matthew Spiegel
(Published in the Review of Financial Studies special issue: Climate Finance, Volume 33, Issue 3, March 2020)


Abstract

Using a comprehensive database of coastal home sales merged with data on elevation relative to local tides, we compare prices for houses based on their inundation threshold under projections of sea level rise. The analysis separates the sensitivity of housing to rising seas from other confounding characteristics by exploiting cross-sectional differences in relative sea level rise due to vertical land motion. This provides variation in the expected time to inundation for properties of similar elevation and distance from the coast. In a variety of specifications and test settings, we find precisely estimated null results suggesting limited price effects.
 

Hedging Climate Change News,” by Robert F Engle, Stefano Giglio, Bryan Kelly, Heebum Lee, and Johannes Stroebel
(Published in the Review of Financial Studies special Issue: Climate Finance, Volume 33, Issue 3, March 2020)


Abstract

We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. We discuss multiple directions for future research on financial approaches to managing climate risk.

Related: “Researchers Propose New Method to Hedge against the Risk of Climate Disaster” by Yale Insights

Financial markets are supposed to price risk. But there aren’t many financial tools for managing perhaps the biggest risk facing the world: climate change. Finance scholars at Yale SOM and NYU have put forth a proposal to help markets make a difference in combating climate change.


Sea Level Rise and Municipal Bond Yields” by Paul S. Goldsmith-Pinkham, Matthew Gustafson, Ryan Lewis, Michael Schwert



Abstract

This paper examines the effects of climate change on municipal financing costs. Using a sample of bonds issued by school districts in coastal counties, we show that municipal bond markets began pricing sea level rise (SLR) exposure following upward revisions in SLR projections in 2013. The effect is concentrated on the East Coast, where SLR is expected to be twice as large as on the West Coast, is increasing in states' belief in climate change, and is driven largely by a district's exposure to worst-case SLR scenarios. While the pricing effects of SLR are statistically significant, they are economically small and indicate that financial markets do not currently anticipate a high probability of SLR-induced default in the near future.

About the author

Electra Ferriello

Assistant Director ICF