SSRNThe Emerging Field of Climate Finance with Peter TufanoRecently, SSRN announced the new Climate Finance eJournal, sponsored by the MSCI Sustainability Institute. This area includes content on the application of financial economics to climate change mitigation, adaptation, and resiliency. Subscribe to the Climate Finance eJournal for free here. Harvard Professor Peter Tufano, one of the eJournals editors, spoke with SSRN about climate finance as an emerging field and how his research fits into this growing body of work.Peter Tufano is a Baker Foundation Professor at Harvard Business School (HBS) and Senior Advisor to the Harvard Salata Institute for Climate and Sustainability. From 2011 to 2021, he served as the Peter Moores Dean at Sad Business School at the University of Oxford, where he championed a systems change element to business education. From 1989 to 2011, he was a Professor at HBS, where he oversaw the schools tenure and promotion processes, campus planning, and university relations and was the founding co-chair of the Harvard i-lab. His current work focuses on climate finance, climate alliances, and the financial impact of climate on households. His longer body of research and course development also spans financial innovation, financial engineering, and household finance. He and his co-Editor, Laura Starks, created the collaborative doctoral reading group, The Financial Economics of Climate and Sustainability.Q: Climate finance is an emerging field that has been growing more prominent in recent years. For those unfamiliar with the subject, could you explain what climate finance is?A: Climate finance is a subset of what you might call whole system finance, which is directing large flows of funding to address some of the biggest problems that need to be solved in the world. These problems are very large, very global, have very long time horizons, and sit on the boundary between private and public. Finally, they are consequentialand in the case of climateexistential.One way to solve these problems is to simply say thats the province of government. But often we need the expertise and capital of the private sector. Redirecting not only huge flows of money but also transforming systems, like energy systems, will require the combination of public and private finances and a host of techniques and tools and leadershipacross sectors.The other thing that makes climate finance interesting is its time frame. Most of the time in finance, we dont evaluate projects that have multi-generational outcomes. With any traditional discount rate, something that takes place 60 or 70 years in the future would have a value today of about zero. The normal approaches to valuation pretend as if the long-horizon future doesnt matter. Clearly it does, so that requires us to think a little bit differently.Succinctly, climate finance studies the tools and techniques that will direct large resources and risk-bearing to solve climate and planetary problems.Q: What kind of research is done within this field? What are some of the main goals of research and study within climate finance?A: The climate finance research community is still evolving, with different clusters of researchers pursuing different topics, depending on their prior work. Lets talk about the academic researchers first. If you approach this new field from a traditional academic finance perspective, then youd likely try to figure out how climate will change the way that we think about asset prices, financial intermediaries, household finance, corporate finance, and public finance.If you come from the policy end of finance, you might begin with bigger picture questions. For example, suppose that we were able to make investments to keep us on a 1.5- or 1.8-degree C. trajectory, demanding a meaningful percentage of global GDP. Where would that money come from? What might get crowded out? How would the math work?So depending on where you come from, you will be drawn to different questions. Therefore, we expect a range of approaches within the new SSRN eJournal, as there are already in this emerging field.Q: You serve on the advisory council for the MSCI Sustainability Institute and as a senior advisor to the Harvard Salata Institute for Climate and Sustainability. What insights do these roles give you into the future of where those research subtopics are headed?A: Let me start with the work at Salata. Most universities rely on a set of cylinders of excellence, as one of my colleagues called itmore commonly called silos. This is because in those distinct domain expertise areas, scholars can know their material exceptionally well. Climate, sadly, doesnt respect any academic boundaries. The first insight from the work at Salata is that our disciplinary boundaries are going to have to be more permeable so that we can be aware of and fully consider the science of climate change, the economics of climate change, and the organizational reality of affecting climate change. Addressing climate change rigorously will require the best of all of our disciplines.MSCI is a remarkable organization, and I cant do justice to describe all that it does, but surely, it is preeminent in collecting data that can be used to drive decisions. In this climate space, the data that were going to need will be highly multi-dimensional. As an example, much of finance and financial analysis is not place-based. But with climate issues, place matters. Were going to have to think about the implications of physical locations for the risks to which we are exposed. Just as MSCI has evolved over time to incorporate more and more decision-relevant data, work in climate will demand that use a wider set of data to do cutting edge and relevant research.Q: In a paper you co-authored called The Evolving Academic Field of Climate Finance, you say that the sheer scale of the greenhouse gas induced climate crisis will force us to rethink and refine our financial theories and practices. What would you say are some of the biggest challenges in terms of rethinking those theories and practices, especially considering that so much of this work is still evolving, uncharted territory?A: Let me offer three ideas we need to rethink. First, in any MBA class we value everything on the basis of private benefits to investors. We dont even try to value the social benefits or harms of projects. The first thing we have to do is to broaden how we evaluate projects, firms and initiatives to make more intelligent decisions. Second, again considering valuation, we use discount rates to bring monies back and forth in time. But these discount rates are inappropriate in considering very long horizon outcomes. At a discount rate of 4%, the value of a dollar at the turn of the next century is $0.05. This implies that the value of a human life is worth one-twentieth of a life todaya very important ethical concept. Finally, while we have been indoctrinated to believe that markets solve all problems, the core principles of economics remind us that this will only be true if there are no externalities, which is clearly not the case when the private cost of emissions remains essentially zero.I think students and academics have to be alerted to a broader set of questions. Where this starts, in my mind, is in education. We need to ultimately transform our educational systems and what we teach. But the only way were going to do that is to have professors who understand this space, which is why a number of us got together to found Financial Economics of Climate and Sustainability (FECS), a doctoral course that we offered across 130 schools last year and this year is welcoming research staffs at government agencies. FECS trains the next generation of doctoral students and researchers, who can be the next generation of professors and policy makers, who can then go and intelligently think through these issues and not only produce great research, but [also] communicate it in a way that makes it meaningful.Q: In the paper I mentioned earlier, you talk about the interdisciplinary nature of climate finance and how the vast impact of climate change really blurs the lines between areas of study that may have been distinctly separate before. How do different fields and perspectives help foster research that contributes to these big goals and big questions about sustainability and climate change?A: This evolution will happen in stages. I think the first stage will be the acknowledgement of the importance of this climate topic within disciplines and locating climate issues within existing fields. Before we get to interdisciplinary or multidisciplinary research, lets first understand how it affects each of our disciplines. I think that if we start by staying in our lanes and understanding the implications of climate in say, asset pricing or household finance, we will begin to be open to other disciplines.To foster the kind of true multi-disciplinarity that addresses whole system problems like climate will require confronting inherent tensions in academia. There are, in academia, various norms and practices, like how we evaluate candidates for tenure and which journals publish which papers. For mostly good reasons, both of these tend to use narrow definitions, largely to demonstrate the depth that we demand of excellent work. As a result, tenure decisions and journals are to a large degree defined by our core disciplines, not by the problems we address. There are some problem-based journals, and [the Climate Finance eJournal] is an example.A second, perhaps even more important consideration is, whats the channel to impact? How is it that this research is going to drive action? We need to think and act differently in order to have greater impact, which might involve expanding our definitions of excellent research, substantially improving research communications, or regularly having a new type of sabbatical where scholars can rotate into government and business to increase the impact and relevance of their work.Q: Youve spoken before about the fact that there are a lot of levers, a lot of different ways, to kickstart climate finance and progress. If these mechanisms for change exist, whats holding us back as researchers, businesses, society from acting on solutions? Wheres the turning point to go from theoretical ideas to taking the kind of action that youre talking about?A: Ive used the term kickstart in a number of different contexts, but the physical image of a lever is helpful. Systems change scholars often organize actions in terms of which have the most and the least leverage. What is the long run impact if we can change specific outcomes, [such as] passing a law? What if we routinely measure impact? What if we encourage different levels of collaboration? And at the far end, with the most leverage, how can we change the way that people think about problems?I think that there are promising examples where we are affecting system changes. We start with changing measurable things, and weve seen this in changes in disclosure policies. The huge pushback in the U.S. against climate disclosure almost surely reflects some groups fears that this disclosure would show the harms that they are causing. Blended finance and climate finance is about the merging of public and private fundingnew forms of collaboration. We need to change and create new feedback loops. We are doing that through materializing demand through advanced market commitments where buyers signal future demand by orders in advance. We are seeing change happening through tax policies both carrots (like the U.S. IRA) or sticks (like the European Carbon Border Mechanism). We are seeing change happening through collaboration, and in particular, alliances. We are seeing this change in the discussion moving from shareholder to stakeholder capitalism.We are starting to see people move from this thinking of the climate issue as a nice thing that tree huggers do to something that is going to affect all of us and therefore we all have a responsibility to do something about. If you look at the levers for systems change, which are practical, structural, and cultural, I can see examples of all of them where we are making progress. But not enough progressand not fast enough, according to the most recent science.Q: So there is a bright future ahead in all those areas?A: I dont know if Id say bright future. I, and others this is not my original idea think theres a major difference between optimism and hope. Optimism is a statistical belief that the future will be better, and hope is more of a belief that with certain actions, theres a chance that the future could be better. I dont know that Im an optimistic person, but I am a hopeful person, and I think we have to be.Q: Are there any research focuses specifically you think will be especially promising in the coming years? What kind of things should we keep an eye out for?A: Theres so much new, interesting work going on right now. I was just chairing a session at a big banking conference with new work on how banks are incorporating climate into their lending decisions. My colleagues are doing more exciting work on how the insurance sector can play a bigger role in reducing emissions and in the financing transition. Theres serious and difficult work to hold various groups accountable, by studying those who make promises and then dont follow up on them; or say one thing and then lobby to do other things. We have to call that out. Im hard pressed to think about what there isnt to do.As were launching this SSRN eJournal, the initial base of papers that were going to have will probably be around 1000. In 10 years, I think that number could easily be 10 to 20 times that. Collectively, I hope that these papers will not only add to our understanding of how finance can change the world, but also help turn these ideas into action.Q: What are some of your current research interests?A: I am very interested in climate alliances. The dominant way of thinking in business is that competition is the natural order and societies will progress by firms competing with one another. Surely, thats true to some extent. But in the climate spacewhere there are huge externalitiesthis model breaks down. I think theres potentially an important role for collaboration: both collaboration between firms and collaboration between firms and governments. We need to understand how collaboration in the climate space can complement private competitive activity and government action. We need to study this both theoretically and empirically, and I am working actively on this question. Im also doing some work in the boundary between household finance and climate, linking my old and new research agendas. Finally, Im very excited about new work by young scholars linking insurance and climate and hope to contribute to this very new field.Q: Is there anything else youd like to add about climate finance or your work?A: When I returned to Harvard to teach after a decade of being a Dean at Oxford, I decided that I wanted to teach a doctoral course in climate finance, in part as a service to the school, but also as a way to get current on the latest literature. As a result of doing that, I reached out to people in the profession about what they were teaching in their doctoral classes. I rapidly learned that no major school had a doctoral course on climate finance.So ten of us got together and said, Why dont we collaboratively put together the syllabus? And why dont we teach it across our schools? In 2025, were going to run version 3.0 of Financial Economics of Climate and Sustainability. We will reach doctoral students and researchers at over 100 schools, and this year, well also be welcoming the research staffs at major financial regulators. We summarize the newest content in this space, and each local school customizes the course to fit their own circumstances. Its an example of how collaboration can be catalytic in the climate space, at least in our small way.If you look at the names of the teaching group, they will be familiar because theyre the Advisory Board for this journal and my co-editor, Laura Starks. Whats fascinating is that they all had hugely successful research careers before they pivoted to study climate. This is instructive because it shows that we can transform our research and teaching, starting one person at a time. Finally, we are all doing this as volunteers, for the benefit of a thousand future finance professors. But if we go beyond that, why not make all of this research available even more widely? When I joined the MSCI Advisory Board, I mentioned this idea to them. Id already edited two SSRN eJournals in the past, so it wasnt hard to link MSCI, SSRN, and this amazing group of scholars that I am privileged to work with to create this new Climate Finance eJournal.To see more work by Peter Tufano, visit his SSRN Author page here.Is there an eJournal you want to sponsor? Contact sales@ssrn.com for more information.