Data for Good Seminars invite leading academics from around the world to share how they are using data to address societal challenges.

Hosted by the DSI Financial and Business Analytics Center

Guest Speaker

Chris Kenyon, Global Lead for Quant Innovation, MUFG; Global Lead for XVA Quant Modelling, MUFG; Honorary Associate Professor in Mathematics, UCL

Financial and Business Analytics Center Co-Chairs:

  • Paul Glasserman, Jack R. Anderson Professor of Business, Columbia Business School
  • David Yao, Piyasombatkul Family Professor of Industrial Engineering and Operations Research, Columbia Engineering

Details & Recording

Tuesday, March 29, 2022 (10:00 AM – 11:00 AM ET) – Virtual

Abstract & Biography

Transparency Principle for Carbon Emissions Drives Sustainable Finance

Abstract: Sustainability, focusing on climate change, is a key issue for financial market participants. Alignment of financial market incentives and carbon emissions disincentives is key to limiting global warming. Regulators and standards bodies have made a start by requiring some carbon-related disclosures and proposing others. In our paper we go further and propose a Carbon Equivalence Principle: all financial products shall contain a description of the equivalent carbon flows from greenhouse gases that the products enable, as well as their existing description in terms of cash flows. This description of the carbon flows enabled by the project shall be compatible with existing bank systems that track cashflows so that carbon flows have equal standing to cash flows. We demonstrate that this transparency alone can align incentives by applying it to project finance examples for power generation and by following through the financial analysis. The financial requirements to offset costs of carbon flows enabled in the future radically change project costs, and risk that assets become stranded, thus further increasing costs. This observation holds whichever partner in the project bears the enabled-carbon costs. Mitigating these risks requires project re-structuring to include negative emissions technologies. We also consider that sequestered carbon needs to remain sequestered permanently, e.g., for at least one hundred years. We introduce mixed financial-physical solutions to minimise this permanence cost, and price to them. This complements previous insurance-based proposals with lesser scope. For financial viability we introduce project designs that are financially net-zero, and as a consequence are carbon negative. Thus we see that adoption of the Carbon Equivalence Principle for financial products aligns incentives, requires product redesign, and is simply good financial management driving sustainability.

Paper available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4035833