Editors’ Introduction to the Special Issue on Novel Risks and Sources of Volatility: Identification and Measurement Challenges for Portfolio Management

Fabozzi, Frank J.; Karagozoglu, Ahmet K.

According to the author, recent academic literature suggests that there are parallels among ESG risk, climate change risk, cybersecurity risk, and geopolitical risk in terms of measurement challenges, including but not limited to emerging data and measurement methods;similarities in terms of their insufficient, noncomparable, less-specific, and non–decision-useful disclosures;and the potential interaction between these risks. Many corporations will have to adjust their operations and/or their products and services to meet their countries’ nationally determined contributions and future climate policies, which vary significantly across countries, to reduce greenhouse gas emissions in line with the 2015 Paris Agreement’s goal of keeping the increase in global average temperatures to well below 2°C. In their article, “Foundations of Climate Investing: How Equity Markets Have Priced Climate-Transition Risks,” Guido Giese, Zoltán Nagy, and Bruno Rauis examine the extent to which climate risk has been priced into equity markets by developing fundamental economic transmission channels to explain the potential impact of climate change on equity prices. Climate risk has become another important dimension, especially because minimum-variance strategies are massively implemented by ESG institutional investors. [...]the question of carbon metrics is important for portfolio construction. Financial markets are governed by institutions that are part of the connective tissue of nation-states, which in turn are the primary actors in international affairs. [...]the interactions of states with one another and important non-state actors can have significant impacts on market performance.