Professor Robert Kosowski tells us how financial economics can be used in the fight against climate change and to bring about the fair distribution of resources
After public trust in the financial services sector was destroyed by the 2008 Global Financial Crisis, Robert Kosowski, Head of the Department of Finance and Professor of Finance at Imperial College Business School, was among those who advised the UK Parliament’s House of Lords on a measure designed to protect consumers and prevent another, similar, catastrophe.
The measure, which came into effect in 2013, was known as the Alternative Investment Fund Manager Directive (AIFMD) and was considered the European equivalent to the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States. Professor Kosowski’s interest in the directive, he says, came from his commitment to evidence-based government regulation.
“It’s very satisfying whenever regulation follows the evidence or evidence-based processes because it isn’t always the case,” he says.
During his inaugural lecture at the Business School, Professor Kosowski discussed the role of luck and skill in alternative investment management, stressing the level of sophistication necessary to spot unpredictable events that can have severe consequences (“black swans”), such as the 2008 financial crisis. Arguing that it is possible to anticipate these events with hypothetical scenario analysis and stress tests, he went on to say this requires scenario design and careful attention to implementation.
He believes the next “black swan” will be climate change related and says advising on the AIFMD has helped him in his work on environmental, social and governance (ESG) criteria and climate-based regulation, exposing him to the way regulation can evolve, as well as the impact it can have on the market and on business.
Using financial economics for good
As Head of the Department of Finance, a role he took over in 2021, he oversees several of the Business School’s research centres, including the Centre for Climate Finance & Investment. And a key focal point for the Centre, he says, is verification: ensuring the different kinds of ESG ratings – bond, stock or company ratings – are verified and “reflect the reality of whether a company is green or not”.
One of his own areas of interest is the incorporation of ESG preferences into so-called low volatility, low risk portfolios, looking at all the processes that need to be in place to achieve more sustainable growth.
“This is a recent research stream that I care dearly about and can make the world a better place,” he says.
But despite the challenge of incorporating green policies into financial systems and government regulation, Professor Kosowski is optimistic about the future. “We need to be realistic about what we can achieve but I don’t think making business and the economy more efficient is incompatible with the sustainability agenda. However, it’s important to remember that there’s still a long road ahead.”
It's fascinating to work on groundbreaking science and knowledge, and then try to package that and communicate it to students
His other research interests, such as machine learning, hedge funds and economic forecasting are linked by his desire to demonstrate how resources can be “optimally and fairly” distributed across the economy.
“For efficient allocation of capital, you need to understand where the biggest opportunities are, but also the associated risks, because measuring them incorrectly can lead to misallocation, which is bad for efficiency, bad for economic growth and bad for welfare,” he says.
The value in research impact
In addition to his roles at the Business School, Professor Kosowski is a research fellow at the Centre for Economic Policy Research and an associate member of the Oxford-Man Institute of Quantitative Finance at Oxford University.
The focus on research in these roles, he notes, makes them “highly synergistic”, and as a member of the Oxford-Man Institute he has access to researchers, not just from another university, but also from other disciplines. This, he says, had led to him being able to expand his knowledge, particularly in the areas of machine learning, AI and data science.
When it comes to research, Professor Kosowski believes impact is crucial. It is, he notes, of increasing importance and one of the benefits of his early-career private sector roles at Goldman Sachs, the Boston Consulting Group and Deutsche Bank is that he has been exposed to questions that are relevant to those outside of academia and have the potential to lead to positive change in the world.
“Grant-giving bodies and governments are increasingly concerned with impact, so research must create change as opposed to, for example, simply have a large number of citations.”
I don’t think making business and the economy more efficient is incompatible with the sustainability agenda
Of course, impact can also come about through teaching the next generation of business leaders and Professor Kosowski is determined that Business School students should continue to learn about “very important topics”, including those related to sustainable finance, as well as data science and blockchain application.
This is another area where he says his work in the private sector has paid off, helping to influence his teaching in a positive way and make it “relevant and practical”.
“It's fascinating to work on groundbreaking science and knowledge, and then try to package that and communicate it to students or executive education clients.
“It’s crucial that the Business School stays at the cutting edge of both research and teaching.”