Navigating Risk in a Changing World — A Conversation with Robert Engle Part 3

We sat down with him to explore three pressing dimensions of risk that are currently shaping global investment decisions: geopolitical risk, market concentration, and climate risk. Each of these themes is structurally transforming the financial landscape, challenging traditional models and investment styles, as well as requiring new tools and insights.

Moderating the conversation is our Head of Quantitative Research, Dr. Gianluca De Nard, who has collaborated and published with Engle on topics such as climate risk modeling, volatility forecasting and portfolio optimization. Together, they offer a deep and pragmatic look into how risk is evolving—and how investors can prepare.

Teil 3: Klimarisiko und Finanzmärkte

As the final part of our interview series with Nobel Laureate Robert Engle, we turn to perhaps the most complex and long-term source of financial risk: climate change. It's a challenge marked by scientific uncertainty, political divergence, and deep questions about how to measure, price, and manage risk over decades rather than days.

The ESG Divide: U.S. vs. Europe

One of the most visible trends in recent years is the growing transatlantic divergence on ESG and climate-focused investing. Engle says: “We’re seeing a sea change in the U.S. The Trump administration is not just anti-regulation—it’s anti-science, including anti-climate.”

In contrast, Europe continues to push forward with ESG regulation, sustainable finance initiatives, and climate risk disclosures. This divergence creates confusion and fragmentation in global capital markets—and challenges for multinational investors.

Is ESG Misunderstood and Misused?

Engle makes a bold point: ESG scores are often poor proxies for actual climate risk exposure: “The ESG data doesn’t seem to predict much. The E score—especially emissions—has some value, but once you account for sector, it loses significance.” 

He argues that investors should focus less on ESG branding and more on economic exposure to transition risk—that is, how a company’s value will be impacted by the shift to a low-carbon economy.

Green vs. Brown: Rethinking Risk Premiums

Engle’s and De Nard’s latest joint research focuses on “transition risk” portfolios—where stocks are classified not by their ESG scores, but by their market-based sensitivity to climate transition shocks: “We define green stocks as those with negative exposure to transition risk—stocks that benefit from the green transition. Brown stocks are the opposite.”

This approach helps identify which firms the market expects to gain or lose as climate policies evolve. It also allows investors to build hedge portfolios—long green, short brown—that reduce climate exposure without relying on opaque third-party ESG data.

Is There a Green Alpha?

So should investors expect ESG integration to enhance returns—or is it just about managing downside? “Think of it as a hedge,” Engle says. “In a world of rising climate risk, green portfolios may underperform in calm markets—but they’ll protect you when transition shocks arrive.”

In that sense, the performance of sustainable strategies depends not only on fundamentals, but on how quickly markets update their expectations about climate risks.

New Tools, New Horizons

Traditional volatility models fall short when it comes to pricing long-term, structural risks. Engle’s call is clear, new tools are needed: “ARCH and GARCH models tell you about short-term volatility, not about long-term structural shifts. For climate risk, we need methods that capture exposure to the transition itself.”

He also highlights a promising trend, the use of large language models and AI to detect greenwashing and analyze climate-related disclosures: “There’s work now using LLMs to scan company statements and identify mismatches between rhetoric and reality. That’s the future—auditing not just carbon, but credibility.”

Global Collaboration and the Road Ahead

Given the political climate in the U.S., Engle is concerned about the erasure of climate language from federal research institutions and websites. As a response, he’s helping foster a global research network on climate finance: “We want to build an international platform for sharing data, code, and research—so that climate risk modeling can advance even if politics get in the way.”

One recent success: researchers in China have replicated and extended Engle’s and De Nard’s methodologies, using ChatGPT to identify climate news and build portfolios tailored to local conditions.

The Takeaway: Risk, Resilience, and Realism

For investors, Engle’s message is clear: climate risk is financial risk—even if it's not always priced in yet: “Whether or not you expect green to outperform, integrating climate into portfolios helps hedge against the future. That’s what risk management is about.”

As with geopolitical and market risks, the challenge isn’t avoiding uncertainty—it’s building portfolios that adapt to it.

Conclusion: Building Resilience in a New Risk Regime

Across all three dimensions—geopolitical, market, and climate—one message from Robert Engle stands out: risk is evolving, and so must our investment strategies and tools to manage it.

Whether it’s CoVol shocks triggered by political events, fragility hidden inside passive index structures, or transition risk from decarbonization, traditional models often lag behind the complexity of today’s markets. But new methods—statistical, structural, and even AI-powered—offer paths forward.

As Robert Engle and Gianluca De Nard both emphasize, investors must move from reactive to proactive. Risk-optimized strategies, deeper diversification, and real-time diagnostics can help build portfolios that not only endure stress—but adapt to it.

In an era marked by rapid change and uncertainty, the future of investing belongs to those who can see beyond the noise—and manage risk as a dynamic, multidimensional force.