What’s the Market Price of Climate Change?

State Street’s research arm has formed a partnership with Harvard Business School professor George Serafeim to help investors determine the material risks of environmental, social, and governance factors. 

State Street Associates — the Boston asset manager and custodian’s research group — wants to develop a framework to practically incorporate into portfolios information on, for example, climate changes impact on stock prices. 

Serafeim, a high-profile researcher at Harvard, teaches one of HBS’s most popular courses, called Reimagining Capitalism: Business and Big Problems.

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“George’s work on materiality is impactful,” said Dave Turkington, who runs the portfolio and risk research team for State Street Associates, in an interview. “Investors struggle to understand the relationship between some of these ESG factors and investment valuations and performance. It’s a complicated relationship because some impacts might occur gradually and consistently, while others are far into the future.”

Turkington explained that Professor Serafeim’s research will also help investors understand which ESG issues are relevant for which companies. “There are a lot of important connections to make that can be informed by all sorts of data,” added Turkington. 

In an interview, Serafeim talked about creating an ESG framework and the benefits of combining his research with market and investment data from State Street. 

“My vision is that we can potentially create a lot of market infrastructure, barometers, and thermometers when it comes to ESG issues. We can inform investors about how the market is moving in regards to climate change, relative to employment and work issues, and how those issues are being priced. Investors will be able to incorporate those results into their portfolios,” said Serafeim. 

Serafeim added that he’s particularly interested in understanding — in a rigorous, data-driven way — different events, for example a country pulling out of the Paris agreement or the California wildfires. “We can model how people’s expectations are changing, how capital might be moving, and pricing and return effects,” he said. 

State Street Associates has a number of partnerships with academics, including Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at HBS. It uses insights from data to develop risk, investor behavior, sentiment, and economic indicators. 

Serafeim has recently researched such subjects as the purpose of a corporation and its effect on financial performance.