Global Climate Services: A Typology of Global Decisions Influenced by Climate Risk

Climate services are ideally co-developed by scientists and stakeholders working together to identify decisions and user needs. Yet, while climate services have been developed at regional to local scales, relatively little attention has been paid to the global scale. Global climate services involve decisions that rely on climate information from many locations in different world regions, and are increasingly salient. Increasing interconnections in the global financial system and supply chains expose private companies and financial institutions to climate risk in multiple locations in different world regions. Further, multilateral decisions on greenhouse gas emission reduction targets, disaster risk finance or international migration should make use of global scale climate risk assessments. In order to advance global climate service development, we present a typology of decisions relying on global (i.e., non-local) climate risk information. We illustrate each decision type through examples of current practice from the coastal domain drawn from the literature and stakeholder interviews. We identify 8 types of decisions making use of global climate information. At a top-level, we distinguish between “multilateral climate policy decisions,” and “portfolio decisions involving multiple locations.” Multilateral climate policy decisions regard either “mitigation targets” or “multilateral adaptation” decisions. Portfolio decisions regard either “choice of location” or “choice of financial asset” decisions. Choice of location decisions can be further distinguished as to whether they involve “direct climate risks,” “supply chain risks” or “financial network risks.” Our survey of examples shows that global climate service development is more advanced for portfolio decisions taken by companies with experience in climate risk assessment, i.e., (re-)insurers, whereas many multilateral climate policy decisions are at an earlier stage of decision-making. Our typology thus provides an entry-point for global climate service development by pointing to promising research directions for supporting global (non-local) decisions that account for climate risks.

Optimal Consumption and Portfolio Choice: The Impact of Health and Health Risk

This paper investigates the effect of health and health risk on households’ optimal consumption and portfolio allocations over the life cycle. The simulation results show that consumption, savings in bonds, and savings in stocks all increase in health. Compared with poor health households, the healthy households consume 49% higher, invest 27% and 39% more in bonds and in stocks, respectively. The risky portfolio share, which is the ratio of stocks to the total financial assets is positively related with health for most of the lifetime. Regarding the age profile, it demonstrates the same tendency for both health levels: at the very young age, the risky portfolio share is relatively high. Starting from the middle age, this share falls significantly and keeps steady until the end of life. These results emphasize the importance of health and its associated risk in consumption and portfolio decisions. With all other things equal, households’ consumption and investment behaviors are heterogenous across health. It also provides significant policy applications: by promoting health and reducing health risk, it would largely improve households’ well-being: higher consumption, and more savings in financial assets.

On the Introduction of Diffusion Uncertainty in Telecommunications’ Market Forecasting

Long-run forecasts of telecommunication services’ diffusion play an important role in policy, regulation, planning and portfolio decisions. Forecasting diffusion of telecommunication technologies is usually based on S-shaped models, mainly due to their accurate long-term predictions. Yet, the use of these models does not allow the introduction of risk in the forecast. In this paper, a methodology for the introduction of uncertainty in the underlying calculations is presented. It is based on the calibration of an Ito stochastic process and the generation of possible forecast paths via Monte Carlo Simulation. Results consist of a probabilistic distribution of future demand, which constitutes a risk assessment of the diffusion process under study. The proposed methodology can find applications in all high-technology markets, where a diffusion model is usually applied for obtaining future forecasts.

Life-cycle asset allocation and the peso problem: does ambiguity aversion matter?

PurposeThe study aims to show that ambiguity aversion exerts a non-negligible effect on the investors' decisions, especially due to the possibility of sharp declines in stock prices.Design/methodology/approachThe vast majority of previous studies on life-cycle consumption and asset allocation assume that the equity premium is constant. This study evaluates the impact of rare disasters that shift the stock market to a low return state on investors' consumption and portfolio decisions. The author assumes that investors are averse to ambiguity relative to the current state of the economy and must incur a per period cost to participate in the stock market and solve their optimal consumption and asset allocation problem using dynamic programming.FindingsThe results show that most young investors choose not to invest in stocks because they have low accumulated wealth and the potential return from their stock market investments would not cover the participation costs. Furthermore, ambiguity-averse investors hold considerably fewer stocks throughout their lifetime than ambiguity-neutral ones. The fraction of wealth invested in stocks over the typical consumer's life is hump-shaped: it is low for a young individual, peaks at his early 30s and then decreases until his retirement age.Originality/valueTo the best of the author’s knowledge, this is the first study that assesses the impact of negative stock price jumps on the optimal portfolio of an ambiguity-averse investor.

Improvement of Offshore Wind Turbine Portfolio Decisions Through Cost Forecast Equations

In this article we examine the research question ‘How cost forecast equations for offshore wind turbine main components can improve the portfolio decisions from Product Portfolio Management (PPM)?” by an extensive literature review of product portfolio decisions within PPM in the wind industry. In addition, two key experts from a leading offshore wind turbine OEM have been interviewed to answer this question and the method of qualitative content analysis as outlined by Mayring has been used to analyze the interviews and interpret the findings. It was analyzed how portfolio decisions for future offshore wind turbines are made and how future turbine costs are estimated. Therefore, this paper provides the scientific foundation by presenting the status quo of how PPM makes portfolio decisions for offshore wind turbines and with it how the future cost of offshore wind turbines are estimated. Aiming to use the presented results in future research in order to create accurate cost forecast models for the turbine main components and with it the creation of an overall turbine CAPEX scaling model.

Corporate Social Responsibility and Sustainable Finance

Corporate social responsibility (CSR) refers to the incorporation of environmental, social, and governance (ESG) considerations into corporate management, financial decision-making, and investors’ portfolio decisions. Socially responsible firms are expected to internalize the externalities they create (e.g., pollution) and be accountable to shareholders and other stakeholders (employees, customers, suppliers, local communities, etc.). Rating agencies have developed firm-level measures of ESG performance that are widely used in the literature. However, these ratings show inconsistencies that result from the rating agencies’ preferences, weights of the constituting factors, and rating methodology. CSR also deals with sustainable, responsible, and impact investing. The return implications of investing in the stocks of socially responsible firms include the search for an EGS factor and the performance of SRI funds. SRI funds apply negative screening (exclusion of “sin” industries), positive screening, and activism through engagement or proxy voting. In this context, one wonders whether responsible investors are willing to trade off financial returns with a “moral” dividend (the return given up in exchange for an increase in utility driven by the knowledge that an investment is ethical). Related to the analysis of externalities and the ethical dimension of corporate decisions is the literature on green financing (the financing of environmentally friendly investment projects by means of green bonds) and on how to foster economic decarbonization as climate change affects financial markets and investor behavior.

Emotions and Exposure to Risk: the Influence of Positive and Negative Emotions on Portfolio Decisions

This experimental study addresses the question of whether positive and negative emotions have an influence on diversification behaviour, and it reveals that only a small part of subjects take rational decisions and always choose the optimal portfolio. In addition, the study shows that the mood of subjects has an influence on their portfolio decisions and thus also on their exposure to risk. The average risk of the portfolio - measured against the standard deviation of the returns - is lower in the treatment entitled ‘neutral’ than in the treatments entitled ‘positive’ and ‘negative’. JEL classification numbers: C91, D81, G11, G41. Keywords: Emotions, Risk exposure, Laboratory experiment, Portfolio choice, Investment decisions, Investor rationality.