Climate Change, Sustainability, and Financial Markets

Catalog description

We begin by discussing Milton Friedman’ influential article outlining why the only objective of a business should be to increase profits for its shareholders and also read recent critiques of this argument. We will discuss motivations to invest in sustainable assets including shareholder preferences, screening bad investments, and constructing optimal portfolios for investors with climate risk exposures. We will read recent research that examines whether investor preferences for sustainability affect a firm’s cost of capital and whether investors can do well while doing good. An important goal of this class is to analyze how climate risk impacts the economy. We will do this by studying the macroeconomic effects of climate change and on specific markets such as equity, bonds, loans, and real estate. The course will also cover methods of quantifying and measuring climate exposures. We will discuss equity trading strategies, with the aim of providing a basis for you to develop trading strategies related to climate risks and sustainability. As part of a group project, you will develop and test a trading strategy designed to hedge climate risks or make greater returns by investing in sustainable assets. An alternative project is to discuss an analyze a firm’s sustainability strategies and actions. Finally, we will discuss new ‘green’ financial products and the emerging carbon offsets market as well as discuss regulatory efforts to limit climate change.