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.
 

Project 1: Employees as directors (coordinated by Catherine Casamatta, TSE and Sébastien Pouget, TSE)

Should employees be associated with the management of the firm that employs them? What is the impact on firm value of having employees seating at the board of directors? The objective of this project is to exploit recent changes in the French Law to shed light on these long-standing issues. There are different reasons why the participation of employees at the board of directors can affect firms’ strategy, and their resulting market value. For instance, employee’s board participation can help overcome CEOs’ short-termism and allow the firm to implement more long-term investment strategies (Acharya, Myers, and Rajan, Journal of Finance 2011). Relatedly, the presence of employees at the board can ensure that information flows smoothly between different levels of the hierarchy (either from top to middle management, or from middle management to top). Better information sharing should then lead to more informed board decisions and to a better implementation of these decisions. At the opposite, the presence of employees at the board can help top managers develop antitakeover strategies, at the expense of external shareholders. Or, the presence of directors with different objectives and horizons can burden the decision process and result in suboptimal choices. Which effects prevail, and which firms are more likely to be exposed to these effects is then an empirical issue. Measuring empirically whether and how employees’ participation at the board affects firms’ decisions is a difficult task, to the extent that the nomination of employees as directors is an endogenous decision. The objective of this research is double:

First, it is to identify theoretically the channels through which employees’ participation at the board can affect firm value and strategy choices.

Second, it is to exploit a recent evolution of the French legislation regarding mandatory employees’ board representation in order to assess whether the presence of employees at the board changes firms’ decision and market value. To do so, we will rely on the adoption of the 14 june 2013 Law (resp. the 17 August 2015 Law) that impose mandatory seats for firms employing more than 5000 (resp. 1000) employees in France. To identify a causal effect, we plan to implement a diff-in-diff strategy, by matching firms affected by the new law with similar firms whose number of employees is just below the threshold defined by the law.

Project 2: Employee involvement in corporate decisions (coordinated by Patricia Crifo, Ecole Polytechnique and Antoine Rebérioux, University Paris 7)

In the spirit of recent debates in France to redefine the role and missions of companies, the literature on worker involvement in corporate strategy and decision overcomes the restrictive approach of an employment relationship based only under the framework of subordination. Beyond this generic definition, the notion of employee involvement or participation covers a large number of practices and devices that are very different. In particular, worker involvement may be implemented at the operational and/or at the strategic level. The objective of this research project is to propose a novel analysis of worker involvement by developing four main analyses. First, we propose to describe the various types of employee participation in corporate decisions (participation and work organization, participation and bargaining, financial participation and board-level participation). Second, we will examine employee participation instrategic decision via the company’s governance structure. In particular, we will analyze the legal, economic and sociological determinants of such type of worker involvement and the diversity of national models of involvement. Third, we will examine the codetermination model, which is the most advanced type of worker involvement. We will investigate its functioning (designation and role of employee-directors, distinction between one-tier and two-tier board structure) and its expected impact on firm performance. In the fourth and last part of the project, we will examine the complementarity between the various forms of involvement to answer the following questions: what are the relationships between employee-directors and employee-shareholders? how do companies articulate boards with employee-directors and worker involvement at the operational and bargaining level?

Project 3: Carbon pricing under deep uncertainty (coordinated by Christian Gollier, TSE)

Green investments generates social costs and social benefits that need to be compared in order to determine whether they are socially responsible. The problem is that most environmental benefits, such as reducing climate damages in the case of renewable energy, are not only distant in the future (35% of the CO2 emitted today will still be in the atmosphere by 2300), but they are also very uncertain in their intensity. How should we take account of this uncertainty when weighting these uncertain future environmental benefits with the current tangible cost of these investments? FDIR already financed my research on these questions in the past, and this agenda generated a set of publications that mostly focus on contexts where risk are Gaussian. This normality assumption allowed me to recommend using a normative version of the standard models from finance theory, adapted to the specificities of climate risks. In particular, I worked on the estimation of the CAPM "climate beta" to help experts pricing carbon with the right risk-adjusted "climate discount rate". The problem of this approach based on normal distributions is that the risk profile of climate change is summarized by one single number, the climate beta. It is intuitive that this number, which is related to the correlation between long-term climate damages and long-term economic growth, expresses only one aspect of the full story. In reality, I believe that the risk of climate change cannot be summarized by that simple correlation, and that one should also focus at one happens in the extreme events, such as those that materialize when temperature increases by more than 5 degrees Celsius. We have learned from the recent financial crisis that correlations can shift quite radically in catastrophes, and the anticipation of what happens in these events is a key element of optimal risk management. I would like to explore the question of whether these ingredients would modify the way we estimate the social cost of carbon that should be used in our evaluation of the social responsibility of green investments. Valuing green investment is of course a crucial issue for policy makers. It is alsoof utmost importance for long term investment managers, who need tools to assess the value of these projects in order to define and implement an appropriate strategic asset allocation.

Project 4: Impact assessment and SRI: Why and how investors use impact indicators? (coordinated by Patricia Crifo, Ecole Polytechnique)

In this project we will use survey data to provide insights into why and how investors use impact assessment methodologies for their socially responsible products. Based on a sample of 120 questionnaires gathered in 2018 in France, we identify the main motivationsfor impact assessment, and the various assessment styles it takes in practice.A first preliminary and descriptive analysis of the data shows that simplicity and relevance of the impact assessment measure is the most frequent motivation, followed by comparability (capacity to be standardized). Among the various impact assessmentstyles, pure ESG indicators and engagement measures are the most widespread tools. An important impediment to the use of impact assessmentis the lack of comparable standardsand data availability. We propose a more in-depth study of these data, using empirical (econometric) methods to identify the drivers and obstacles to impact assessment, its relevance to investment performance, in relationship with the actual or required indicators to be developed.

References

Crifo, P., and A. Rebérioux, 2019, La participation des salariés, Presses de Science Po
Cavaco S., P. Crifo, and A. Rebérioux, 2020, Employee involvement in corporate decisions and executive remuneration, Work in progress
Gollier, C., 2020, The welfare cost of ignoring the beta, mimeo
Gollier, C., 2020, The cost-efficiency carbon pricing puzzle, mimeo
Arjaliès, DL., C. Bouchet, P. Crifo, and N. Mottis, 2020, La mesure d’impact et l’Investissement Socialement Responsable (ISR) : Un tour d’horizon, in “L’entreprise socialement responsable. Perspective multiple : droit, administration et éthique” Ivan Tchotourian and Luc Brès éditeurs, Yvon Blais Editions Canada, forthcoming
Arjaliès, DL., P. Chollet, P. Crifo, and N. Mottis, 2020, Myths and Realities of Impact Assessment in Socially Responsible Investing: The French Case and its Implications for the Accounting Community, Working paper
Crifo P., Y. Kervinio, and E. Quinet, 2020, L’intégration des impacts environnementaux dans l’évaluation des investissements privés, Transitions, 76-83, forthcoming