7x new research on deadly climate change, green political power, brown bank securities, ESG rating diversion, ESG factor performance and equity drawdowns
Brown bank securities: 7x new research on deadly climate change, green political power, brown bank securities, ESG rating diversion, ESG factor performance and equity drawdowns (# shows SSRN full paper downloads as of May 29th, 2025)
Deadly climate change: Anthropogenic climate change contributes to wildfire particulate matter and related mortality in the United States by Beverly E. Law, John T. Abatzoglou, Christopher R. Schwalm, David Byrne, Neal Fann, and Nicholas J. Nassikas as of May 2nd, 2025: “Climate change has increased forest fire extent in temperate and boreal North America. … Climate change contributed to approximately 15,000 wildfire particulate matter deaths over 15 years … and a cumulative economic burden of $160 billion. … We suggest that absent abrupt changes in climate trajectories, land management, and population, the indirect impacts of climate change on human-health through wildfire smoke will escalate“ (abstract).
Green political power: Does Institutional Climate Adaptation Pressure Affect Corporate Mitigation Efforts? by Raffaele Conti, Aleksandra Kacperczyk, and Marcin Kacperczyk as of May 23rd, 2025 (#39): “Using the staggered adoption of Climate Change Adaptation Plans (CCAPs) across U.S. states, we … find that that firms headquartered in CCAP-adopting states significantly reduce emissions, especially those from company-controlled sources, and become more innovative, even though CCAPs are neither mandatory nor aimed at firm-level mitigation. These innovation effects extend beyond traditional environmental domains, suggesting that adaptation policies trigger broader organizational shifts toward higher efficiency and productivity rather than environmental responses alone. Correspondingly, firms reduce expenditures on new capital and employment while maintaining profitability margins. Finally, these effects are more pronounced among firms covered by analysts …“ (abstract).
Brown bank securities (1): Carbon Transition Risk and Corporate Loan Securitization by Isabella Mueller, Huyen Nguyen, and Trang Nguyen as of March 5th, 2025 (#261): “Our main result illustrates that when carbon transition risk is high, banks are significantly more likely to securitize a loan if the borrower is a high carbon emitter. In contrast, when transition risk is lower, banks adapt quickly and cut back on the securitization of brown loans. We also show that securitization allows banks to offer lower interest rates for loans given to high carbon emitters but there is no evidence that securitization enables banks to fund more green loans nor did we find brown loan securitization leads to changes in borrowers’ environmental performance. … we highlight that banks without preferences for green lending, US banks, large banks, banks with lower levels of deposits, and banks with lower capital ratios are more likely to manage carbon transition risk by securitization“ (p. 41). My comment: A serious transition needs to make sure that financial service companies are aligned with this goal
Brown bank securities (2): Do Bank Green Bonds Deliver? Evidence from Global Lending and Borrower Emissions by Jianlei Han, Tingjun Liu, and Qing (Clara) Zhou as of May 22nd, 2025 (#19): “Using data from 767 banks across 2007–2022, we find that green bond issuance is associated with increased lending to firms with high carbon emissions and low realized environmental performance, despite these borrowers having high external environmental ratings. … Although borrowers’ average environmental scores improve post-issuance, the dispersion of scores across banks’ portfolios widens, suggesting that banks strategically allocate funds to enhance reported—but not actual—environmental performance. Real environmental outcomes worsen, with higher CO ₂ emissions and more environmental incidents. These effects are more pronounced in countries with stronger regulatory oversight and among banks with higher institutional ownership …” (abstract). My comment: Green bonds must be screened carefully and measurement has to focus on real outcomes
ESG rating divergence: ESG Rating Competition and Rating Quality by Cai Chen, Svenja Dube and Shiran Froymovich as of May 23rd, 2025 (#57): “We exploit the entry of Sustainalytics as a new ESG rating agency in 2010. … First, we find that higher competition decreases incumbents’ ESG rating disagreements of the same scope. The negative relation between competition and ESG rating disagreement persists for same-scope rating metrics not covered by Sustainalytics, suggesting that neither learning nor herding drive the results. … Second, we find that incumbents’ ratings of ESG concerns are more strongly associated with future negative ESG news for firms additionally covered by Sustainalytics. This finding is consistent with competition improving ratings’ ability to predict future negative ESG incidents. Third, we find that incumbents evaluate more difficult-to measure outcome metrics for firms covered by Sustainalytics, consistent with competition inducing more effort”. My detailed comment see Neues Research: Positiver ESG-Ratingwettbewerb | CAPinside
ESG factor performance: Empirical Analysis: How ESG Investing has Impacted Asset Pricing in the Equity Market by Tareq Hossain as of May 22nd, 2025 (#20): “This study conducts an extensive empirical investigation into the influence of Environmental, Social, and Governance (ESG) factors on asset pricing for firms listed in the European STOXX 600 index over the period from 2003 to 2023. … The findings reveal a counterintuitive pattern: firms with higher ESG scores tend to underperform in terms of portfolio returns. However, companies with moderate levels of ESG integration demonstrate superior returns relative to both high and low ESG counterparts … Further analysis … reveals that firms with stronger Environmental and Social scores exhibit lower levels of systematic risk … we extend the traditional Fama-French five-factor asset pricing model by incorporating an ESG factor as a potential sixth explanatory variable. Our empirical results indicate that the inclusion of this ESG factor significantly improves the model’s explanatory power, with the social component emerging as the most influential driver of excess returns among all ESG dimensions” (abstract). My comment: I do not believe in factor investments but (ESG) factor analysis is important.
Drawdown issues: Drawdowns and Recoveries – Base Rates for Bottoms and Bounces by Michael J. Mauboussin and Dan Callahan from Morgan Stanley Investment Management as of May 21st, 2025: “The median drawdown for the 6,500 stocks in our sample from 1985-2024 was 85 percent and took 2.5 years from peak to trough. More than one-half of all stocks never recover to their prior highs. Relative to smaller drawdowns, larger drawdowns, on average, take longer to occur, recover to the previous peak less often, and yet can provide attractive returns off the lows. Recoveries from drawdowns of all sizes have significant skewness, which means some stocks do extremely well relative to the pack. As a result, average returns from rebounds are higher than median returns. … Mutual fund results follow a similar pattern. While the absolute levels of drawdowns were less than those of individual stocks, the average drawdown for the top 20 funds for the 25 years through 2024 was 60 percent. These funds subsequently produced substantial excess returns “ (p. 19). My comment: I use “max. drawdown” as the most important economic risk measure for my stock seletion. Without good forecasts it seems to be prudent not to invest in stocks which have had large dradowns.
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Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-/Mid-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R) investieren und/oder ihn empfehlen.
Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung mit durchschnittlich einzigartig hohen 99% SDG-vereinbaren Umsätzen der Portfoliounternehmen und sehr hohen E-, S- und G-Best-in-Universe-Scores sowie einem besonders umfangreichen Aktionärsengagement (siehe auch My fund).
Zum Vergleich: Ein traditioneller globaler Small-Cap-ETF hat eine SDG-Umsatzvereinbarkeit von etwa 5 %, ein diversifizierter Gesundheits-ETF 13 %, Artikel 9 Fonds circa 20%, liquide Impactfonds und ein ETF für erneuerbare Energien ungefähr 40 % (vgl. Hohe SDG Umsätze? Nur wenige Investmentfonds!).
Insgesamt hat der von mir beratene Fonds seit der Auflage im August 2021 eine ähnliche Performance wie traditionelle globale Small- und Mid-Cap-Fonds (vgl. z.B. Fonds-Portfolio: Mein Fonds | CAPinside).
Ein Fondsinvestment war also bisher ein „Free Lunch“ in Bezug auf Nachhaltigkeit: Ein besonders konsequent nachhaltiges Portfolio mit marktüblichen Renditen und (eher niedrigeren) Risiken. Vergangene Performance ist allerdings kein guter Indikator für künftige Performance.
