HEC Paris and HKUST Pioneer Sustainable Finance Research Across Continents

In December 2024, HEC Paris and Hong Kong University of Science and Technology (HKUST) successfully concluded their joint workshop on Impact and Sustainable Finance. The workshop brought together top researchers from Europe and Asia to share their latest studies and ideas in the burgeoning field of sustainable finance. It took place simultaneously in Paris and Hong Kong, showcasing cutting-edge research through a dozen presentations bridging finance with sustainability. One of the highlights of the two-day gathering was the inauguration of the HEC Center for Impact Finance Research, HCIFR.

"By connecting researchers across continents without the need for extensive travel, we're not just talking about sustainability—we're practicing it.” HEC Professor Stefano Lovo, did not hide his satisfaction at the results of this collaborative approach between the two major institutions He was the organizer of the workshop on the  HEC side. The academic director of the new born HCIFR continued: “This workshop serves as a model for how academic conferences can adapt to address global challenges while reducing their environmental impact.” Organized with fellow academic Emilio Bisetti (HKUST), and Alminas Zaldokas (NSU), the event discussed the real-world implications of the researchers’ findings. Along with the launch of the HCIFR, the two-day gathering solidified HEC’s role in sustainable finance research. In the course of the December 17-18 workshop saw 10 researchers from the two continents share academic research that covered topics ranging from climate polarization to corporate taxation's impact on carbon emissions, to the role of ESG rating and metrics as well as their unexpected effects on corporate behavior.
 

Investors and political polarization

Highlights included the research by Anders Anderson of Stockholm School of Economics who presented a paper entitled “Climate Polarization and Green Investment.” Anderson’s study reveals intriguing insights into how political polarization affects investment decisions in green technologies. Talking from Hong Kong, he noted how climate is becoming increasingly politicized: “One example is this tweet from Donald Trump,” he told the audience both on the HEC campus and online, as he showed a slide of the future US President stating: “In the East (of the US) it could be the COLDEST New Year’s Even on the record. Perhaps we could use a little bit of that good old Global Warming that Warming that our Country, but not other countries, was going to pay TRILLIONS OF DOLLARS to protect against (sic).” Anderson continued: "(Here, Trump) uses weather to make the opposite case for global warming… Our findings suggest that climate polarization significantly influences the allocation of capital towards green initiatives. This has profound implications for policymakers and investors alike." In hindsight, the research felt like a chilling premonition of what was to come, as Anderson’s study of political polarization in the context of wildfire shocks occurred 21 days before the onset of 30 wildfires in Los Angeles. 

The impact of political views on financial decision was also pointed out on Day 1 by economist Vesa Pursiainen of the University of St. Gallen. In his work Crowdfunding and Environmental Commitments,  Pursiainen  discussed the role of environmental commitments in crowdfunding campaigns. Counter-intuitively, his study shows that technology projects with environmental pledges were often less successful, particularly in regions with low climate concern or politically conservative leanings. “Backers often perceive sustainability commitments as potential trade-offs with product quality,” lamented Pursiainen.
 

ESG Incentives, Executive Compensation and in Ratings

Another thought-provoking presentation linked to the same topic addressed the question "Who Should Pay for ESG Ratings?" For this research, Lovo joined forces with HEC Professor of Finance Jacques Olivier to explore the complex dynamics of ESG ratings and their impact on financial markets. In his presentation Olivier remarked: "While firms typically pay for their credit ratings, it remains unclear whether firms or investors should bear the cost of ESG ratings. We demonstrate that only firms that are sufficiently green and have a large base of responsible investors are willing to pay for their ESG rating. In all other cases, ESG ratings agencies  should directly target responsible investors as their primary clients." The results of the professors’ study provided good and bad news: “The good news is that having a rating agency publish emission results is going to make the firm more willing to invest to reduce emissions. The downside is that not all investors necessarily benefit from the existence of ESG ratings”

At the core of a standout presentation by Matthias Efing was the question of whether managers have incentive to act on ESG information. The Associate Professor in Finance presented a study entitled “All Hat and No Cattle? ESG Incentives in Executive Compensation.” This research reveals startling insights into the limited impact of ESG metrics when they are integrated into executive compensation plans. Using a 2013-2020 dataset of 674 executives from 73 large European firms, Efing’s research highlights that while ESG goals are present in 60% of executive pay plans, they account for less than 5% of total performance-based pay. “Traditional financial metrics, meanwhile, dominate compensation plans, driving 87% of short-term pay variations,” he noted. This disparity raises concerns about the potential for “greenwashing” and questions the genuine commitment of firms to sustainability goals.

Efing’s study also identifies industry-specific trends. Energy-intensive sectors, such as manufacturing and utilities, incorporate more binding ESG metrics to align incentives with sustainability outcomes. Conversely, financial services tend to use discretionary ESG targets, reflecting symbolic rather than substantive engagement. Discussant Darwin Choi from HKUST noted: “The paper’s exploration of discretionary versus binding ESG targets is crucial for understanding how firms can improve the effectiveness of their compensation strategies.”

Whilst ESG incentives for managers may be lacking, Professor Yifei Zhang of Beijing University showed  that environmental scandals do drive firms to launch green products. Speaking on the second day of the workshop, Zhang insisted that such "incident-driven" products were often higher quality and resulted in real environmental improvements, unlike greenwashing initiatives unconnected to external pressure. “Environmental incidents can act as a catalyst for meaningful change,” Zhang concluded, highlighting the potential of crises to spur innovation.

Unexpected Effects of Regulation  - Another Recurring Theme in the Workshop.

Emilia Garcia-Appendini opened the workshop with research she initiated alongside her colleagues from the University of Zurich and Nova University Lisbon. They examined the effects of California’s cap-and-trade policy which reveals how suppliers who are exposed to the policy often lose customers to regions with less stringent regulations. This raises concerns about "carbon leakage" and the need for more harmonized climate policies.

Unintentional results of industrial policy are at the heart of the research by young Hao Liang on the consequences of mandatory ESG disclosures. Based at the Singapore Management University, the professor’s research suggests that firms that are required to disclose poverty alleviation efforts often divert resources away from long-term environmental sustainability, leading to increased pollution. His findings underscore the complexity of crafting effective ESG policies.

For his part, Thorsten Martin from Frankfurt School shared with the audience his work on corporate taxation and carbon emissions. The study reveals how tax policies in the US inadvertently incentivize carbon-heavy industries by enabling these firms to leverage higher levels of debt. "We've found compelling evidence that strategic adjustments to corporate tax structures can significantly influence a company's carbon footprint,” Martin explained. “This opens up new avenues for policymakers to consider in the fight against climate change."

Bridging Academia and Industry

A highlight of the workshop was the Day 1 round table discussion titled  "The Impact of Financial Intermediation on Sustainability". It was organized and chaired by HEC Finance professor Jessica Jeffers. The panel brought together academic experts and industry leaders, including Geraldine Gouges from Rothschild & Co, HEC Finance Professor Augustin Landier, Julie Malzac from Accuracy, and Eric de Tessières from BNP Paribas. According to Landier, regulations are changing and so companies need to integrate greater resilience in their business models: “With future regulations, future cost of carbon, etc, companies need to think about future opportunities linked to the transition. And sustainability is just one of the many dimensions that matter when evaluating projects. So it means, we need to create the information system, but also the skills to evaluate and to compute the net value of projects.”

Accuracy Director Julie Malzac helps the international firm’s clients with their high-stake situation. “We've seen the shift you described, Augustin,” she said. “What the C-level executive used to think about sustainability and compliance, is light years away from what they think nowadays. Now, they want to include sustainability as part of the strategy. You just have to see the arrival of chief impact officers in large firms. Or the fact that they combine it with responsibilities of a CFO. The roles are intertwined, and they ask to have visibility on the balance between profitability and sustainability.”

For Jeffers, such exchanges between academia and industry are crucial: “These debates ensure that our research remains relevant and applicable to real-world challenges while also inspiring new avenues of inquiry based on practical insights from the field," she said after the roundtable. 

Launch of the HEC Center for Impact Finance Research

The one-hour panel was part of another pivotal moment of the workshop, the inauguration of the HEC Center for Impact Finance Research (HCIFR). Its mission is to set up a knowledge hub devoted to how finance can impact firms’ and investors’ behaviors. In this way, say the founders, it can “help solve the economic, technological, climactic and social challenges of tomorrow”. This latest HEC institution is supported by Accuracy, BNP Paribas and Rothschild & Co. For HEC Dean of Faculty and Research Andrea Masini their role is vital: "You help us researchers focus on problems that are relevant for the business world.” Masini pursued: The HCIFR represents our commitment to being at the forefront of research in this field. Through rigorous, scientifically grounded research, we aim to shape the future of finance in a way that positively impacts society and the environment."

The center's research will focus on three key questions:

1. The relationship between firms' non-financial performance and their financial outcomes
2. The role of financial intermediaries and innovation in facilitating a just and sustainable economy
3. Methodologies for measuring non-financial performance
    

The Future of Sustainable Finance Research

As the workshop concluded, participants expressed optimism about the future of sustainable finance research and its potential to drive positive change. The success of the dual-location format also sparked discussions about how future academic conferences might adopt similar approaches to reduce their environmental impact. "This workshop has not only advanced our understanding of critical issues in sustainable finance but has also demonstrated a new model for global academic collaboration,” said Stefano Lovo, who has been involved in research at HEC for almost 25 years. “We're excited to build on this success and continue pushing the boundaries of what's possible in both research and sustainable practices."