Bridging Theory and Practice in Sustainable Finance
Last week, Peter Tankov, professor of quantitative finance at CREST-ENSAE Paris, delivered a six-hour class at the International Monetary Fund (IMF) Institute for Capacity Development. The training, aimed at economists working in various departments of the IMF, explored the financial and environmental impacts of green investing, a topic that is increasingly central to global economic policies.
Tankov’s session addressed both the theoretical foundations and practical applications of sustainable investment strategies, emphasizing their dual role in shaping financial markets and environmental outcomes.
Understanding Green Investing: Financial and Environmental Implications
The class was structured around two core dimensions:
- Financial Impact of Green Investing
Tankov analyzed how the increasing participation of green investors influences asset pricing and portfolio returns. The discussion covered key topics such as:
- The differential returns between green and brown assets
- ESG rating uncertainty and its influence on investment decisions
- The potential for green bubbles, where speculative enthusiasm drives asset prices beyond fundamentals
- The role of transition risks, particularly as regulatory frameworks evolve
- Environmental Impact of Green Investing
Beyond financial metrics, the session explored the real-world environmental effects of sustainable investments. Topics included:
- The mechanisms of impact investing—how investors can generate measurable environmental benefits alongside financial returns
- The effectiveness of shareholder engagement in influencing corporate sustainability practices
- How price signaling affects both the cost of capital for firms and their environmental performance
The reasons and consequences of the recent ESG backlash, which originated in the US but may spill over to Europe, were also discussed.
As a key economic policy advisor to governments and central banks worldwide, the IMF is well aware of the importance of accounting for climate risks—both those arising from the physical impacts of climate change and those resulting from the profound economic transformations it triggers, including the shift towards greener investment processes. Academic collaborations such as this one enable the IMF to further develop its in-house expertise on these critical issues.
These are challenging times for the practice of green investing, but from a research perspective, the past five years have been pivotal. We now have a much deeper understanding of its mechanics and impact—not just empirically but also through theoretical models. As governments relax reporting obligations and financial institutions engage in green-hushing, the role of academia and NGOs in driving progress has never been more crucial.