Climate Change, Sustainability, and Financial Markets

Catalog description

This course focuses on understanding how climate change risk could impact the economy and financial markets. We discuss Milton Friedman’s influential article, which outlines why the only objective of a business should be to increase profits for its shareholders, and then review recent critiques of this argument. We examine the macroeconomic effects of climate change, and its impact on specific markets such as equity, bonds, loans, and real estate. The course also covers methods of quantifying and measuring climate exposures. Students will read recent research that examines whether investor ESG preferences affect a firm’s cost of capital and whether investors can do well while doing good. Students will also develop quantitative equity trading strategies related to climate risks and ESG. As part of a group project, students will develop and test a trading strategy designed to hedge climate risks or make greater returns by investing in climate or, more broadly, ESG-friendly assets. Finally, new “green” financial products, the emerging carbon offsets market, and regulatory efforts to limit climate change are discussed.