Introduction

The latest Scientific Portfolio special issue of the EDHEC Research for Institutional Money Management supplement to P&I, which aims to provide institutional investors with an academic research perspective on the most relevant issues in the industry today. We first look at the benefits of risk-based diversification for equity investors. Diversification benefits can be achieved while maintaining the level of active risk, an important feature for investors seeking to both fully utilize their active risk budget and manage extreme losses, and risk-based diversification is achievable without reducing expected long-term returns.

We then examine climate transition risks in portfolio management by introducing a model that integrates firm-specific ‘green’ revenues, aligned with the European taxonomy. The analysis highlights three main results: revenue impacts are as influential as carbon pricing in shaping transition risks; effects vary within sectors, with some firms benefiting under ambitious transition scenarios; and socio-economic uncertainty strongly influences loss estimates. We examine the informational overlap between environmental, social, and governance (ESG) scores and ESG exclusionary screening strategies within equity portfolios. While ESG scores are widely used for integrating sustainability considerations in portfolio management, they may not fully align with exclusion criteria targeting companies engaged in controversial activities or behavior. By comparing the results of both approaches on a set of 417 indexes, the analysis reveals that reliance on ESG scores alone omits a substantial proportion of companies that fail to meet “do no harm” criteria. Exclusion/negative screening is the most popular methodology used to integrate ESG criteria into investment strategies. We examine the impact of exclusion policies on the financial risks of 493 indexes from Developed Europe and the US.

To address varying ESG criteria, we built three screens: one based on consensual criteria among asset owners, another incorporating additional climate criteria, and a third eliminating companies negatively impacting any United Nations sustainable development goal. The first two screens show limited impact on index risks, especially when using optimized reallocation. Finally, understanding the drivers influencing greenhouse gas emissions in financial portfolios is crucial for constructing and monitoring climate investment strategies. We compare existing frameworks for identifying the drivers of portfolio decarbonization, exploring key drivers and methods to isolate their effects. Building on this review, a flexible three-step model is formalized to integrate these drivers, and five specific models are developed to address climate-related questions. We hope that the articles in the supplement will prove useful, informative, and insightful. We wish you an enjoyable read and extend our warmest thanks to P&I for their collaboration on the supplement.

Contents

1. Mitigating Tail Risks without Sacrifice: Empirical Evidence of Risk-Based Diversification’s Benefits for Equity Investor
   • Matteo Bagnara, Benoit Vaucher
2. Beyond Carbon Price: A Scenario-Based Quantification of Portfolio Financial Loss from Climate Transition Risks
   • Vincent Bouchet, Thomas Lorans, Julien Priol
3. Do ESG Scores and ESG Screening Tell the Same Story? Assessing their Informational Overlap
   • Vincent Bouchet, Jenna Jones, Mathieu Joubre, Aurore Porteu de La Morandière, Shahyar Safaee
4. Do ESG Exclusions have an Effect on Portfolio Risk and Diversification?
   • Vincent Bouchet, Aurore Porteu de La Morandière, Benoit Vaucher
5. Attribution Analysis of Equity Portfolio Emissions: Examining and Integrating Existing Frameworks
   • Vincent Bouchet