Risks in finance are many and varied. How can a forward-looking researcher choose which areas need the most attention?

We recently interviewed Patrick Bolton, professor of business at Columbia University and asked what led to his interest in hedging climate risk. “I am interested in long-term investing, especially how large long-term institutional investors should think about the risk-return trade-offs they face,” he said. “Long-term investors have to think harder about risks that do not yet appear material to short-term investors. One category of such risks is what is now commonly referred to as environmental, social and governance factors, or in short ESG factors. What is common about these risks is that they grow slowly, but eventually can have a large impact.”

hot-earth-climate-change-clipart_192-192Bolton co-authored research recently published in the Financial Analysts Journal.  He said, “Climate (or carbon) risk is among the [ESG] risks, so it is natural to ask how long-term investors should deal with climate risk. What is their risk management policy with respect to climate change?” ª

The extended interview with Bolton and others on managing climate risk will appear in the June 2017 issue of The Analyst  (not yet available).

Click here to view the research paper it’s based on: “Hedging Climate Risk” – M. Andersson, P.  Bolton,  F. Samama, 72(3) Financial Analysts Journal (2016).