Archiv des Autors: Soehnholz

Über Soehnholz

Geschäftsführer der Soehnholz ESG GmbH. Alles Weitere siehe Xing oder Linked-In.

New gender research illustration by Mohamed Hassan from Pixabay

New gender research: Researchpost 176

New gender research illustration by Mohamed Hassan from Pixabay

New gender research: 16x new research on child labor, child bonus, climate models, green bonds, social returns, supply chain ESG, greenwashing, ESG bonifications, gender index, gender inheritance gap, inflation, investment risks and investment AI (# shows SSRN full paper downloads as of May 16th, 2024)

Social and ecological research in: New gender research

US child labor: (Hidden) In Plain Sight: Migrant Child Labor and the New Economy of Exploitation by Shefali Milczarek-Desai as of April 18th, 2024 (#164): “Migrant child labor pervades supply chains for America’s most beloved household goods including Cheerios, Cheetos, Lucky Charms, J. Crew, and Fruit of the Loom. Migrant children, some as young as twelve and thirteen, de-bone chicken sold at Whole Foods, bake rolls found at Walmart and Target, and process milk used in Ben & Jerry’s ice-cream. Most work grueling shifts, including overnight and over twelve-hour days, and some, working in extremely hazardous jobs such as roofing and meat processing, have died or suffered serious, permanent injuries. … many … are unaccompanied minors and have no choice but to work. … this paper charts a multifaceted course that might realistically address the predicament of migrant child workers who are precariously perched at the intersection of migration and labor“ (abstract).

New gender research: Is There Really a Child Penalty in the Long Run? New Evidence from IVF Treatments by Petter Lundborg, Erik Plug, and Astrid Würtz Rasmussen as of May 2nd, 2024 (#32): “The child penalty has been singled out as one of the primary drivers behind the gender gap in earnings. In this paper, we challenge this notion by estimating the child penalty in the very long run. For this purpose, we rely on … fertility variation among childless couples in Denmark to identify child penalties for up to 25 years after the birth of the first child. … we find that the first child impacts the earnings of women, not men. While the child penalties are sizable shortly after birth, the same penalty fades out, disappears completely after 10 years, and turns into a child premium after 15 years. … we even find that the birth of the first child leads to a small rise in the lifetime earnings of women” (p. 15/16).

New gender research: What Works in Supporting Women-Led Businesses? by Diego Ubfal as of April 30th, 2024 (#125): “This paper reviews evidence on interventions that can address the constraints faced by growth-oriented, women-led micro, small, and medium-sized enterprises (WMSMEs). … First, evidence of modest average treatment effects and treatment effect heterogeneity across various interventions suggests the need for better targeting and segmentation. Second, women-led firms face multiple constraints, and addressing them requires a package of multiple interventions“ (p. 20).

Climate model risks: The Emperor’s New Climate Scenarios – Limitations and assumptions of commonly used climate-change scenarios in financial services by Sandy Trust, Sanjay Joshi, Tim Lenton, and Jack Oliver as of July 4th, 2023: “Many climate-scenario models in financial services are significantly underestimating climate risk. … Real-world impacts of climate change, such as the impact of tipping points (both positive and negative, transition and physical-risk related), sea-level rise and involuntary mass migration, are largely excluded from the damage functions of public reference climate-change economic models. Some models implausibly show the hot-house world to be economically positive, whereas others estimate a 65% GDP loss or a 50–60% downside to existing financial assets if climate change is not mitigated, stating these are likely to be conservative estimates. … Carbon budgets may be smaller than anticipated and risks may develop more quickly. … We may have underestimated how quickly the Earth will warm for a given level of emissions, meaning we need to update our expectations as to how quickly risks will emerge. A faster warming planet will drive more severe, acute physical risks, bring forward chronic physical risks, and increase the likelihood of triggering multiple climate tipping points, which collectively act to further accelerate the rate of climate change and the physical risks faced. … Firms naturally begin with regulatory scenarios, but this may lead to herd mentality and ‘hiding behind’ Network for Greening the Financial System (NGFS) thinking, rather than developing an appropriate understanding of climate change. Key model limitations, judgements and choice of assumptions are not widely understood, as evidenced by current disclosures from financial institutions” (p. 6).

ESG investment research

Managed greenium: Determinants of the Greenium by Christoph Sperling, Roland Maximilian Happach, Holger Perlwitz, and Dominik Möst as of May 9th, 2024 (#23): “Environmental, social and governance (ESG) bonds can benefit from yield discounts compared to their conventional twins, a phenomenon known as the ‚greenium‘. … we examine five observable characteristics of corporate ESG bonds and their conventional twins for statistical differences in primary market yields and derive two overarching determinants from this” (abstract). “… two overarching determinants affecting the occurrence and magnitude of a greenium become apparent: transparent information disclosure and sustainable corporate management. Companies can actively enhance their greenium in the primary market and reduce debt financing costs by communicating clearly about the intended use of proceeds and aligning with ambitious sustainability goals” (p. 28).

Social return effects: Social Premiums by Hoa Briscoe-Tran, Reem Elabd, Iwan Meier, and Valeri Sokolovski as of April 30th, 2024 (#123): “Our analysis illuminates the impact of the S dimension of ESG on future stock returns. We find that the aggregate S score does not affect stock returns. However, the two main components of the S score exert significant, yet opposite, effects on returns. Specifically, higher human capital scores are associated with higher returns, aligning with previous research and suggesting that markets may not fully price in firms’ human capital. Conversely, higher product safety scores are associated with lower average returns, consistent with the risk-based explanation that firms with safer products exhibit safer cash flows, reduced risk, and therefore, lower expected returns” (p. 26). My comment: If social investments have similar returns as other investments, everything speaks for social investments.

ESG purchasing benefits: A Procurement Advantage in Disruptive Times: New Perspectives on ESG Strategy and Firm Performance by Wenting Li and Yimin Wang as of May 5th, 2024 (#29): “Drawing on the COVID-19 pandemic as a natural experiment, we define a firm’s resilience as its relatively superior financial performance during the pandemic. … The results reveal that increased ESG practices strengthen a firm’s resilience during disruptions: a 1% increase in ESG practice scores leads to a 0.215% increase in firms’ return on assets. We analyze the mechanisms driving this resilience effect and show that improved ESG practices are associated with reduced purchasing costs and higher profitability amid disruptions. … we provide robust evidence that ESG enhances operational congruency with suppliers, which becomes critical in securing a procurement advantage during severe external constraints. Contrary to popular belief, there is little evidence that the ESG improves price premiums during the disruption“ (abstract). My comment: My detailed recommendations for supplier evaluations and supplier engagement see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)

NGOs and Greenwashing: Scrutinizing Corporate Sustainability Claims. Evidence from NGOs’ Greenwashing Allegations and Firms’ Responses by Janja Brendel, Cai Chen, and Thomas Keusch as of April 9th, 2024 (#107): “We find that advocacy NGOs (Sö: Non-Governmental Organizations) increasingly campaign against greenwashing, targeting predominantly large, publicly visible firms in the consumer-facing and oil and gas industries. These campaigns mostly accuse firms of making misleading or false statements in communication outlets such as product labels, advertisements, and public relations campaigns about companies’ impacts on climate change and consumer health. Shareholders and the media react to NGO campaigns, especially when they allege greenwashing of material environmental or social performance dimensions. Finally, firms facing environment-related greenwashing allegations disclose less environmental information in the future, while companies criticized for climate-related greenwashing reduce future greenhouse gas emissions“ (abstract). My comment see Neues Greenwashing-Research | CAPinside

New gender research: Who Cares about Investing Responsibly? Attitudes and Financial Decisions by Alberto Montagnoli and Karl Taylor as of April 30th, 2024 (#25): “Using the UK Financial Lives Survey data … our analysis reveals that, firstly, individual characteristics have little explanatory power in terms of explaining responsible investments, except for: education; gender; age; and financial literacy. Secondly, those individuals who are interested in future responsible investments are approximately 7 percentage points more likely to hold shares/ equity, and have around 77% more money invested in financial assets (i.e. just under twice the amount)“ (abstract).

New gender research: Index Inclusion and Corporate Social Performance: Evidence from the MSCI Empowering Women Index by Vikas Mehrotra, Lukas Roth, Yusuke Tsujimoto, and Yupana Wiwattanakantang as of May 14th, 2024 (#48): “… we focus on the years surrounding the introduction of the MSCI Empowering Women Index (WIN), in which membership is based on a firm’s gender diversity performance in the workforce. … firms ranked close to the index inclusion threshold enhance their proportion of women in the workforce following the WIN inception compared to control firms that are distant from the inclusion threshold. Notably, these improvements are not accompanied by a reduction in male employees, … we observe that the enhancement of women’s representation in the workforce predominantly occurs in management positions, rather than at the rank-and-file positions, which remain largely unchanged. Additionally, there is evidence of a cultural shift within these firms, as indicated by a reduction in overtime and a higher incidence of male employees taking parental leaves in the post-WIN period. Moreover, WIN firms experience an increase in institutional ownership without any discernible decline in firm performance or shareholder value …” (p. 26).

Impact investment research

ESG bonus leeway: ESG & Executive Remuneration in Europe by Marco Dell’Erba and Guido Ferrarini as of May 6th, 2024 (#160): “… a qualitative and empirical analysis of the ways in which the major 300 largest corporations by market capitalization in Europe (from the FTSEurofirst 300 Index) implement ESG factors in their remuneration policies. … Few metrics are clearly measurable, and there is a general lack of appropriate metrics and targets” (p. 36/37). My comment see Wrong ESG bonus math? Content-Post #188 – Responsible Investment Research Blog (prof-soehnholz.com)

Bank net zero failure: Business as Usual: Bank Net Zero Commitments, Lending, and Engagement by Parinitha (Pari) Sastry, Emil Verner, and David Marques-Ibanez as of April 23rd, 2024 (#876): “This paper is the first attempt to quantify whether banks with a net zero pledge have made meaningful changes to their lending behavior. … we find that net zero lenders have not divested from emissions-intensive firms, in mining or in the sectors for which they have set targets. This holds both for borrowing firms in the eurozone, as well as across the globe. We also find limited evidence that banks reallocate financing towards low-carbon renewables projects within the power generation sector, casting doubt on within-sector portfolio reallocation. Further, we do not find evidence for engagement. Firms connected to a net zero bank are no more likely to set decarbonization targets, nor do they reduce their carbon emissions“ (p. 35).

Other investment research: in New gender research

New gender research: Wealth creators or inheritors? Unpacking the gender wealth gap from bottom to top and young to old by Charlotte Bartels, Eva Sierminska, and Carsten Schroeder as of Apri 28th, 2024 (#157): Using unique individual level data that oversamples wealthy individuals in Germany in 2019, we find that women and men accumulate wealth differently. Transfer amounts and their timing are an important driver of these differences: men tend to inherit larger sums than women during their working life, which allows them to create more wealth. Women often outlive their male partners and receive larger inheritances in old age. Yet, these transfers come too late in order for them to be used for further accumulation and to start a business. Against this backdrop, the average gender wealth gap underestimates the inequality of opportunity that men and women have during the active, wealth-creating phase of the life course” (p. 7).

Inflation ignorants: Don’t Ignore Inflation Ignorance: An Experimental Analysis of the Degree of Money Illusion in Individual Decision Making by Nicole Branger´, Henning Cordes, and Thomas Langer as of Dec. 30th, 2024 (#18): “Money illusion refers to the tendency to evaluate economic transactions in nominal rather than real terms. One manifestation of this phenomenon is the tendency to neglect future inflation in intertemporal investment decisions. Empirical evidence for this “inflation ignorance” is hard to establish due to the host of factors that simultaneously change with the inflation rate. … We find money illusion to be substantial – even in experimental settings where the bias cannot be driven by a lack of diligence, arithmetic problems, or misunderstandings of inflation. Our findings contribute to understanding various anomalies on the individual and market level, such as insufficient savings efforts or equity mispricing“ (abstract).

Active risk: Sharpe’s Arithmetic and the Risk Matters Hypothesis by James White, Vladimir Ragulin, and Victor Haghani from Elm Wealth as of Dec. 20th, 2023 (#140): “… the authors present … the „Risk Matters Hypothesis“ (RMH), which asserts that the average risk-adjusted excess return across all active portfolios will be greater than the risk-adjusted excess return of the market portfolio, before accounting for fees and trading costs” (abstract).

AI for the big guys only? A Walk Through Generative AI & LLMs: Prospects and Challenges by Carlos Salas Najera as of Dec. 20th, 2023 (#68): “Generative AI has firmly established its presence, and is poised to revolutionise various sectors such as finance. Large Language Models (LLMs) are proving pivotal in this transformation according to their recent impressive performances. However, their widespread integration into industries might only lead to gradual progress. The investment sector faces challenges of inadequate expertise and notably, the substantial costs associated with inhouse model training. Consequently, investment enterprises will confront the choice of leveraging foundational models, customisable variants, or insights from NLP vendors who remain well-versed in the latest advancements of LLMs” (p. 9). My comment: See How can sustainable investors benefit from artificial intelligence? – GITEX Impact

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Werbehinweis

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Small-Cap-Anlagefonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement bei derzeit 26 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T und My fund – Responsible Investment Research Blog (prof-soehnholz.com)

Article 9 funds illustrated with foto from Pixabay by mabel amber

Article 9 funds: Researchpost #175

Foto from Pixabay by Mabel Amber

Article 9 funds: 7x new research on happiness, greenwashing, green fund flows, climate data, climate pay, private equity and structured products („#“ shows number of SSRN full paper downloads as of May 9th, 2024)

Social and ecological research

Be happy! How Can People Become Happier? A Systematic Review of Preregistered Experiments by Dunigan Folk and Elizabeth Dunn as of Aug. 11th, 2023: “Can happiness be reliably increased? Thousands of studies speak to this question. However, many of them were conducted during a period in which researchers commonly “p-hacked,” creating uncertainty about how many discoveries might be false positives. To prevent p-hacking, happiness researchers increasingly preregister their studies, committing to analysis plans before analyzing data. We conducted a systematic literature search to identify preregistered experiments testing strategies for increasing happiness. We found surprisingly little support for many widely recommended strategies (e.g., performing random acts of kindness). However, our review suggests that other strategies—such as being more sociable—may reliably promote happiness. We also found strong evidence that governments and organizations can improve happiness by providing underprivileged individuals with financial support” (abstract). My comment: It would be great to have pre-registration for factor and other “outperformance” or alpha-research in financial services (I first discovered this research in a blog post by Joachim Klement).

ESG and impact investment research (Article 9 funds)

Green Article 9 funds: Greenwashing and the EU’s Sustainable Finance Disclosure Regulation by Daniel Fricke Kathi Schlepper as of May 7th, 2024 (#12): “We propose a simple approach to identify potential greenwashers in the context of mutual funds. Focusing on a sample of actively-managed bond funds in Europe, we find that the greenwashing-risk has decreased around the introduction of the EU’s Sustainable Finance Disclosure Regulation (SFDR). For Article 9 funds, the greenwashing-potential has dropped by a factor of two between March 2022 and September 2023. This is both due to (i) re-classifications towards Article 8 products and (ii) sustainability rating improvements. For Article 8 funds, the improvement is less pronounced and the greenwashing-potential remains elevated“ (abstract).

Article 9 funds: Shades of Green: The Effect of SFDR Downgrades on Fund Flows and Sustainability Risk by Hirofumi Nishi, S. Drew Peabody, Eli Sherrill, and Kate Upton as of May 2nd, 2024 (#24): “… our research provides compelling evidence of the significant impact that the European Union’s Sustainable Finance Disclosures Regulation (SFDR) has had on the European ESG fund market, particularly in the context of funds downgraded from Article 9 to Article 8. We documented a discernible decline in net flows into funds following a downgrade …. Moreover, our analysis reveals a tendency for downgraded funds to actively “de-green,” by adjusting their portfolios towards investments with lower ESG scores post-downgrade” (p. 13). My comment: Maybe I can finally expect some inflows in my article 9 fund (which has been performing nicely in the last months), see My fund – Responsible Investment Research Blog (prof-soehnholz.com) and FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Better climate data: Climate disclosure in financial statements by Maximilian A. Müller, Gaizka Ormazabal, Thorsten Sellhorn, and  Victor Wagner as of March 18th, 2024 (#362): “… we show that large EU-listed firms have substantially increased climate-related disclosures in their financial statements since 2018. …Climate disclosures in financial statements differ from those made elsewhere. The most striking difference is that climate disclosures outside the financial statements are significantly less related to a firm’s climate exposure. Hence, climate disclosures inside financial statements complement the disclosures made elsewhere by filtering out financially immaterial information. Many firms address climate-related matters outside the financial statements – but only those with financially material exposure do so inside their (mandatory and audited) financial statements“ (p. 28/29). My comment: Maybe additional ESG auditing fees deliver value for money.

Climate pay: 2024 Pay for Climate Performance Report by Tina Mavkari, Abigail Paris, Olivia Aldinger, Melissa Walton and Danielle Fugere from As you Sow as of  April 15th, 2024: “This second edition of the Pay for Climate Performance report analyzes how effectively 100 of the largest U.S. companies by market capitalization, across 11 sectors of the economy, are currently linking GHG emissions reduction incentives to CEO remuneration. … For CEOs to be motivated to achieve company-wide, science-aligned climate goals, rewards for climate-related achievements must be measurable, clear, and significant. Too often, where climate-related linkages exist, they are predominantly qualitative, leaving significant and unwarranted discretion to compensation committees; or are non-transparent or overly complex quantitative climate metrics, which are difficult to understand and monitor; or include insignificant metrics not captured in the long-term incentive plan (LTIP), which is the substantial part of CEO pay“ (p. 5). … “Of the 66 companies that do include a climate metric in their CEO compensation, only 20 companies had a measurable climate incentive, which is key to driving outcomes“ (p. 7). My comment: Many shareholder voting and engagement efforts focus on green CEO pay. In my opinion, it is important to avoid simple pay increases (see Pay Gap, ESG-Boni und Engagement: Radikale Änderungen erforderlich – Responsible Investment Research Blog (prof-soehnholz.com)) and this research shows that the pay details matter very much

Other investment research

Private equity nyths: Does the Case for Private Equity Still Hold? by Nori Gerardo Lietz and Philipp Chvanov as of April 25th, 2024 (#498): “All the actions PE firms claim add value to portfolio companies should result in superior returns relative to PMEs (Sö: Public Market Equivalents). The data indicate the average or median PE funds do not actually outperform their PMEs since the GFC (Sö: Global Financial Crisis). … First, General Partner (“GP”) fund performance persistence has eroded materially. Past performance is not necessarily indicative of future performance. While the top quartile GPs outperform relative to PMEs over time, they are not necessarily the same GPs over time. … if there is little persistence among the top quartile firms, then the selection of any GP is potentially a “random walk”. If that is the case, then investors should expect to achieve at best only average or median PE results. … there has been a somewhat shocking concentration of capital flows among a small number of firms. … PE performance may actually underperform PMEs on a risk adjusted basis given the amount of leverage they employ generating equivalent results on a nominal basis“ (p. 4/5). My comment: See my private investment criticism here: Impact divestment: Illiquidity hurts – Responsible Investment Research Blog (prof-soehnholz.com)

Bad structures: Do Structured Products improve Portfolio Performance? A Backtesting Exercise by Florian Perusset and Michael Rockinger as of April 29th, 2024 (#164): “This paper shows that the inclusion of structured products in a typical stocks and bonds portfolio, as might be held by an institutional investor, is detrimental for investors, even when considering simple structured products, which are simpler than the majority of the products on the market, even when products are priced at their fair value. This finding implies that when considering more complex structured products sold at a premium, the cost is expected to be higher since more complex products tend to be more overpriced…. “ (p. 22).

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Werbehinweis (Article 9 funds)

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Small-Cap-Anlagefonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement bei derzeit 29 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T und My fund – Responsible Investment Research Blog (prof-soehnholz.com)

Impact Divestment: Exit Illustration from Pixabay by Clker-Free-Vector-Images

Impact divestment: Illiquidity hurts

Illustration: Exit Illustration from Pixabay by Clker-Free-Vector-Images

Impact divestment means the ability to divest from an investment, if it is not considered impactful anymore.

Impact investment focus on private investments?

The Global Impact Investing Network (GIIN) writes that “impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments … target a range of returns from below market to market rate”. They “can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity” (www.thegiin.org).

For a reason, exchange listed bonds and equities are not explicitly mentioned by the GIIN. According to other impact definitions, one main requirement for investor impact is the provision of additional capital. Buying exchange-listed securities means paying money to other investors. With such transactions, the issuers of the securities do not receive additional capital. On the other hand, private credit and equity is typically additional capital. Therefore, often only private market investments were considered to be adequate for impact investments.

And there is another, although rarely used argument for private investments: Project-specific private investments provide a much more targeted impact potential than investments in listed stocks of whole companies or bundles of listed bonds e.g. through mutual funds.

Is it possible to have positive impact with listed securities? In: „Impact Divestment“

By definition, impact investments do not have to promise outperformance or even market rate returns. Frequently, they come with higher fees than traditional investments. It is no surprise, therefore, that today also many listed security investments are sold as impact investments. Marketing specialists have several arguments for this approach. Many of these arguments do not convince me, though.

One argumentation, although rarely used, does: Investors only have limited capital. Their main and core investments typically consist of easy to buy and to sell listed securities. Investors can focus on “impact securities”. Examples of positive impact securities are stocks and bonds of renewable energy and many healthcare companies. Examples of negative impact securities are coal mining companies and producers of unhealthy beverages and food. And when the “impact securities” lose their positive impact potential, they can be sold easily.

If investors openly communicate this approach, they may have an “investor impact” on the prices of the securities, the issuers of the securities, other investors and stakeholders.

Illiquid investments: The inability to divest as major impact risk? in: „Impact Divestment“

Providing additional capital for companies with positive impact may have more impact than the same investment in a listed company. Although the capital may be additional for the receiver, an investor may not the only potential provider of the additional capital, though. That is especially true when there is too much capital chasing too few attractive private investment opportunities, which often seems to be the case.

There is one major argument against private impact investments which I have not heard about: The inability to divest. With exchange traded investments, I can easily sell my holding if I am not satisfied with the impact of that investment anymore. I can not do that with illiquid investments. The key question is, how often investors want do divest for impact reasons. Unfortunately, I have no scientific evidence regarding this question.

Personally, I do not want to miss the possibility to divest from potential impact investments. Here is why: With my mutual fund, I try to create a portfolio of the 30 most sustainable companies (see: My fund – Responsible Investment Research Blog (prof-soehnholz.com)). Two and a half years after its start, I already divested from 56 companies. 7% of these were sold because I did not consider the companies to be sufficiently aligned with the Sustainable Development Goals anymore. 23% were divested because the companies use activities such as medical animal testing which I do not consider acceptable anymore. And 56% were thrown out because they fell below my minimum Environmental, Social or Governance (ESG) requirements (see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com). With illiquid investments, I would still have to stick with the initial 30 stocks.

Is shareholder engagement easier with public companies? In: Impact Divestment

In addition, through my extensive shareholder engagement activities, I try to improve the sustainability of my investments. Although I have only relatively little capital invested in every one of the 30 global stocks, the response rate of the companies is over 90% (see Engagement Report here: FutureVest Equity Sustainable Development Goals). If these companies will implement some of my proposals is not clear yet. The overall reaction is rather positive, though.

I am sure that I would not have a similar impact potential if I had invested the same amount of money in a diversified portfolio of private companies or projects. The main reason: The minimum investment for professional private credit or private equity is very high and I would have to indirectly invest through third-party funds. And successful indirect investor engagement through private funds by small investors is nothing I have ever heard about.

Illiquid investments: Neither return nor risk or diversification benefits?

There are more reasons why I am skeptical about illiquid investments. According to financial theory, investors should receive higher returns for an illiquid compared to a similar liquid investment. Scientific evidence shows, that even sophisticated institutional investors do not easily earn such an illiquidity premium (see e.g. research by Richard Ennis, e.g. Hogwarts Finance).

Institutional investors also like illiquid investments because they show little volatility. The volatility is often very low, because valuations of illiquid investments are infrequent and often based on previous valuations. If illiquid investments were valued with public market equivalents, they would be very volatile.

The third major argument is, that investors can diversify their portfolios with illiquid investments. That is correct. But the correct question should be about the additional diversification potential of illiquid securities. If illiquid securities are valued like liquid investments, the additional or marginal diversification potential is often very slim.

In sum: Illiquid investments have major impact (sustainability) risks, little diversification benefits and no significant return premium.

My recommendation for impact seeking investors therefore is: Focus on liquid investments which are highly aligned with the Sustainable Development Goals of the United Nations, have no unsustainable activities and excellent ESG-ratings. Then try to improve these investments with investor engagement. Finally divest, if you find alternatives which are significantly more sustainable.

ESG deficits: Desert illustration by Nushrolloh Huda from Pixabay

ESG deficits: Researchpost 174

ESG deficits: Illustration by Nushrulloh Huda from Pixabay

ESG deficits: 8x new research on plastic pollution, electric cars, climate prognostics, purpose, ESG deficits, climate costs, financial education, fund management (#shows SSRN full paper downloads as of May 2nd, 2024)

Ecological and social research

Plastic pollution: Global producer responsibility for plastic pollution by Win Cowger and many more as of April 24, 2024: “We used data from a 5-year (2018–2022) worldwide (84 countries) program to identify brands found on plastic items in the environment through 1576 audit events. We found that 50% of items were unbranded, calling for mandated producer reporting. The top five brands globally were The Coca-Cola Company (11%), PepsiCo (5%), Nestlé (3%), Danone (3%), and Altria (2%), accounting for 24% of the total branded count, and 56 companies accounted for more than 50%. … Phasing out single-use and short-lived plastic products by the largest polluters would greatly reduce global plastic pollution“ (abstract).

Solar car power: Solar Photovoltaics and Battery Electric Vehicles by Johannes Rode as of March 8th, 2024 (#105): “With a large enough PV (Sö: photovoltaic) system, it is financially attractive to charge a BEV (Sö: battery electric vehicle) with self-produced electricity from PV on sunny days. We indeed find that PV adoption spurs the co-adoption of BEV. … According to our baseline specification, PV adoption was responsible for a third of the BEV share in Germany in 2022. This finding only holds true for household PV systems and does not for industrial PV systems. … we can only confirm a causal effect from PV diffusion on the BEV share for PV systems that are large enough to generate enough electricity for normal household consumption and for charging a BEV. … we do not find evidence for reverse effects from adopting a BEV on PV adoption“ (p. 13/14).

Climate prognostic criticism: Klimawandel: Zur Unterscheidung von Fakten, Analysen und Prognosen in Umweltpolitik und Rechtsprechung von Werner Gleißner vom Februar 2024: „Im Ergebnis ist festzuhalten, dass bei wissenschaftlichen und natürlich auch politischen Diskussionen über den Klimawandel und die erforderlichen Klimaschutzmaßnahmen zwischen Aussagen unterschiedlicher Evidenz deutlicher unterschieden werden sollte. Dies sollte auch in der Medienberichterstattung, bei Gesetzesinitiativen und der Rechtsprechung beherzigt werden. Wie im Beitrag erläutert, sollte zwischen Fakten, Analysen und Prognosen aufgrund ihrer unterschiedlichen Evidenz klar abgegrenzt werden. Es sollte insbesondere auch klar ausgedrückt werden, dass es für Prognosen über die Auswirkungen des Klimawandels für in 100 Jahren lebende Menschen kein wissenschaftlich gesichertes Fundament gibt“ (S. 436).

Purpose explained: The Role of Corporate Purpose in Corporate Governance: A Framework for Boards of Directors and Senior Managers by Jordi Canals as of March 9th, 2024 (#54): “… I review the notion of purpose in contemporary management theory and corporate governance …. Corporate purpose has the potential to be an engine for organizational change, improve corporate governance and help reconnect companies with relevant stakeholders and society. Recent empirical studies show a positive relationship between corporate purpose and financial performance. … This paper … is based on some longitudinal real cases of firms that have been using corporate purpose in their governance and management. This paper presents a framework for boards of directors and senior managers for adopting corporate purpose effectively “ (abstract).

ESG investment research (in: ESG deficits)

ESG deficits? Environmental, Social, and Governance (ESG) Transparency and Investment Efficiency by Yifei Lu as of April 25th, 2024 (#39): “Exploiting the staggered coverage of Refinitiv Asset4 ESG ratings as an exogenous shock that increases ESG transparency, I uncover a reduction in investment-q sensitivity, indicating lower investment efficiency after coverage initiation. … I show that greater ESG transparency crowds out fundamental information from the stock price, making it less useful to guide investment decisions. … I find that pressure on ESG performance increases and that firms increase ESG investments but reduce regular investments. … firms with poorer initial ESG performance experience larger reductions in investment efficiency. Overall, I document that more ESG transparency hurts real efficiency by restraining managerial learning and driving firms’ objectives away from maximizing shareholder value“ (abstract). My comment: Firms should consider external effects very seriously and I . more or less successfully – use only responsible investment criteria for ETF and stock selection, see e.g. Regeländerungen: Nachhaltig aktiv oder passiv? – Responsible Investment Research Blog (prof-soehnholz.com)

Low climate-pressure? Climate-triggered institutional price pressure: Does it affect firms’ cost of equity? by George Skiadopoulos and Cheng Xue as of April 26th, 2024 (#30): “We find that institutional portfolio rebalancing triggered by firms’ climate change exposures, affects S&P 500 firms‘ cost of equity during 2005-2021 via the incurred climate change price pressure (CCPP). We estimate stock-level CCPP from physical and transition exposures in a demand-based asset pricing setting. … The average CCPP is sizable up to -8%. A one-standard-deviation decrease of CCPP increases firms‘ cost of equity by up to 6% of its average value, the effect being greater (smaller) from CCPP originating from opportunity and physical (regulatory) exposures. Banks and insurance companies contribute primarily to CCPP by on average underweighting stocks with high climate change exposures. Despite facing a higher cost of equity from more negative CCPP, firms do not reduce future climate change exposures and carbon emissions, except over periods of heightened media attention to climate change“ (abstract).

Other investment research (in: ESG deficits)

Financial knowhow? Financial Literacy and Financial Education: An Overview by Tim Kaiser and Annamaria Lusardi as of April 25th, 2024 (69): “This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education“ (abstract). My comment: I try to contribute to financial literacy and education with this free to use blog

Fund signals? When do Investors Care About Fund Performance? by Samia Badidi, Martijn Boons, and Rafael Zambrana as of April 11th, 2024 (#28): “We find that weekly flows strongly respond to daily performance, especially on days with unusually low market returns (bad days).. … we find that flows significantly respond to both poor and good performance on bad days. … we find that outperformance on bad days is persistent and contributes significantly to unconditional fund outperformance. In fact, we find that managers with the skill to outperform on the 5% of worst market return days in the previous year generate about as much unconditional future outperformance (relative to other active US equity mutual funds) as managers with the skill to outperform on the remaining 95% of days. Because we find little overlap between these two sets of managers, we conclude that outperformance on bad days requires specific bad day skill that is distinct from the one-dimensional notion of general skill often entertained in the literature. Indeed, we find no evidence to suggest that that there are many generally skilled fund managers that outperform on bad and other days alike. Finally, we find no evidence that fund managers learn from poor past performance on bad days“ (p. 36/37).

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Custom voting illustration by ArtRose from Pixabay

Custom voting: Researchpost 173

Picture by ArtRose from Pixabay

Custom Voting: 8x new research on child labour, carbon accounting, ESG ratings, ESG flows, voting and green project finance (# shows SSRN full paper downloads as of April 25th, 2024)

Social and ecological research

Child labour: Issue paper on child labour and climate change by the International Labour Orgnizsation as of November 30th, 2023: “The paper examines more than 100 articles from the peer-reviewed literature and reports from international organizations, think tanks and non-governmental organizations. The available evidence, though still limited, makes abundantly clear that climate change – and public and private responses to it – is already having profound impacts on child labour … Safeguards, for example, are needed so that public policies promoting the clean energy transition do not create labour market disruptions that leave low-skill workers and their families in a position of greater vulnerability and more reliant on their children’s labour” (p. vi).

ESG investment research (in: Custom Voting)

Creative carbon accounting: Incorporating Carbon Emissions into Decision-Making – The Case of Transactional Connectivity by Bastian Distler, Jürgen Ernstberger, Mario Keiling, Felix Müller, and Mike Szabo as of April 16th, 2024 (#65): “To incorporate non-financial information into decision-making, non-financial information must be available on the same level of granularity as financial information. A specific use case is transactional carbon accounting, which adds carbon emission information to transactions recorded in a firm’s general ledger. Consequently, general ledger accounts and, thus, the balance sheet and income statement show monetary values and carbon emissions. This strong connectivity between financial and carbon information (1) enables integrated thinking by considering carbon and financial information equally in decision-making, (2) provides more decision-useful information for investors, and (3) increases the reliability of carbon information as auditors can apply the same procedures as for financial information” (abstract). My comment: Interesting that this proposal is supported by practicioners from SAP

ESG divergence: Do ESG Scores Converge Over Time? Empirical Evidence From Listed US Companies by Christian Lohmann, Steffen Möllenhoff and Sebastian Lehner as of April 14th, 2024 (#12): “The present study shows low correlations between ESG scores of listed US companies from Refinitiv, MSCI, ESG Book, and Moody’s ESG persist during the observation period. There is no observable convergence of ESG scores over time as the correlations are stable or tend to decrease in the analyzed period 2007–2022 … No objective ranking can be derived with regard to the validity and the informative value of the ESG scores from different ESG rating agencies. Likewise, no statement can be made as to which ESG score represents the most valid measure“ (p. 8/9).  My comment: It is very important to select the most adequate ESG rating provider

Differentiated ESG performance: Cutting to the chase on ESG by Guillaume Burnichon, Frederic Lepetit, Théo Le Guenedal, Takaya Sekine, Raphaël Semet and Lauren Stagnol from munid as of April 22nd, 2024 (#190): “Examining the first layer – the surface – of financial performance, ESG, and to a lesser extent, the E, S and G pillars have not been the most important differentiators in terms of financial performance over the studied time window … In particular, we identified a dependence of the Emissions & Energy pillar to commodity price movements. Then, focusing specifically on North America, the remarkable performance of Biodiversity & Pollution and ESG Strategy sub-pillars is a strong indicator that ESG investing has not been halted in North America despite the strong politicization” (p.13).

Normal ESG investors: Are ESG investors more resilient? An examination of ESG fund flows Georgina Yarwood from Vanguard Asset Management as of April 16th, 2024 (#13): “… we assess whether investors in ESG index funds are more resilient against adverse market conditions than those in non-ESG index funds. Based on a sample of mutual funds and ETFs available for sale in Europe, the US and the UK representing 144,154 fund-week observations, observed over a time period ranging from 2009 to 2022 …” (abstract). … “We find weak evidence in support of our hypothesis that ESG fund investors demonstrate greater resilience, or “stickiness”, during times of market drawdown. Our hypothesis appears to hold only when the sample is comprised of retail mutual funds available for sale in Europe. What’s more, we also do not find conclusive evidence that the resilience of ESG investors is dependent on the extent of market drawdown experienced” (p. 14).

Responsible ESG risks? Responsible Asset Managers by Ke Shen, Xuemin (Sterling) Yan, Shuran Zhang, and Haibei Zhao as of April 16th, 2024 (#19): “There is no evidence that PRI signatories act more responsibly than their non-PRI counterparts. PRI signatories also exhibit more, not fewer, ESG risk incidents after signing PRI. We find mixed evidence that funds managed by responsible asset managers tend to invest more responsibly. We show that responsible asset managers are less likely to adopt a blanket approach to vote on contentious ESG proposals; however, they are not more likely to vote for ESG proposals. Finally, we show that funds managed by responsible asset managers tend to underperform those managed by irresponsible asset managers“ (p. 32).

Impact investment research (in: Custom Voting)

Custom Voting: Custom Proxy Voting Advice by Edwin Hu, Nadya Malenko, and Jonathon Zytnick as of April 15th, 2024 (#45): “This paper presents the first empirical analysis of custom proxy voting advice (Sö: With proxy voting shareholders delegate their votes to a third party). We find that customization is widespread and that custom recommendations differ significantly from benchmark recommendations. .. we show that customization serves two purposes. First, it aids shareholders in expressing their preferences, such as those related to ES issues, through voting. Second, it streamlines shareholders’ deliberative process by decreasing the need to pay attention to each individual proposal, enabling shareholders to concentrate their research efforts on the more crucial and contentious matters. … In the first stage, investors work with the proxy advisor to set their custom voting policies, and in the second stage, they decide whether to follow custom recommendations or to conduct additional research. … due to the widespread use of custom recommendations, proxy advisors provide far more than one recommendation on a given proposal“ (p. 30/31). My comment: My approach to impact investing see Impactaktien-Portfolio mit 80% SDG-Vereinbarkeit? – Responsible Investment Research Blog (prof-soehnholz.com) and Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Project greenwashing? Do Voluntary Pledges Make Loans Greener? by Tobias Berg, Robin Döttling, Xander Hut, and Wolf Wagner as of April 16th, 2024 (#45): “We analyze whether voluntary green pledges result in greener loan origination in the project finance (PF) market. The PF market is of key importance for financing large-scale, climate-relevant projects globally. We can directly classify the environmental impact of expenditures financed through PF loans because projects are single-purpose developments. We exploit a tightening of the Equator Principles (EP) that introduced comprehensive climate risk management requirements to newly originated PF loans. … we find no evidence for a shift from brown to green lending by EP members relative to non-EP members after the tightening”.

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ESG variety: Picture by Frauke Riether from Pixabay

ESG variety: Researchpost 172

Picture: „The Hands of Children“ by Frauke Riether from Pixabay

ESG variety: 12x new research on migration, climate politics, ESG (regulation, risk, disclosure, weigthings, ratings), Norwegian ESG, climate data, stewardship, impact measurement, and altruists (#shows the number of SSRN full paper downloads as of April 18th, 2024).

Social and ecological research

Migration to Germany: Walls, Not Bridges: Germany’s Post-WWII Journey with Refugee Integration by Noah Babel and Jackson Deutch as of Dec. 19th, 2023 (#15): “Given projections that by 2060, a third of its populace will be over 65, the economic argument for integrating a refugee workforce to counter labor shortages is compelling. However, current administrative measures like language proficiency assessments and residency restrictions inadvertently cast refugees as outsiders, hindering true integration. … Prolonged waits for asylum decisions, often extending for years, coupled with employment limitations, don’t just hamper economic advancement, they socially isolate refugees“ (p. 8).

Brown politics: The Behavioral Economics and Politics of Global Warming – Unsettling Behaviors Elements in Quantitative Finance by Hersh Shefrin as of Dec. 12th, 2023 (#50): “.. there is evidence that carbon continues to be priced in the range of 6 percent to 10 percent of its social cost …. Psychological biases, especially present bias, lie at the root of my analysis of the big behavioral question. In particular, these biases explain the reluctance to use taxes to price GHGs in line with their respective social costs. This reluctance is an unsettling behavior, and results in abatement being more costly than necessary, plausibly by a factor of five to seven. The cost of reluctance is a behavioral cost, and it is large“ (p. 108).

Good ESG regulation: Cross-border Impact of ESG Disclosure Mandate: Evidence from Foreign Government Procurement Contracts by Yongtae Kim, Chengzhu Sun, Yi Xiang, and Cheng (Colin) Zeng as of April 12th, 2024 (#30): “We find robust evidence that firms from countries mandating ESG disclosure are more likely to secure foreign governments’ procurement contracts with higher values than counterparts in non-regulated countries” (p. 33).

ESG investment research (in: ESG variety)

Financial ESG risk: Market Risk Premium and ESG Risk by Joey Daewoung, Yong Kyu Gam, Yong Hyuck Kim, Dmitriy Muravyev, and Hojong Shin as of April 12th, 2024 (#29): “Using a panel dataset consisting of US firms for 2010-2021, we find that the stock market beta is positively related to average returns on the days when investors learn about negative ESG incidents that affect the market as a whole. Specifically, we report that the CAPM-implied market risk premium is, on average, 31.52 bps on ESG days, which is, on average, 32.92 bps higher than the market risk premium on non-ESG days (-1.40 bps). The magnitude of the market risk premium is both statistically and economically significant, and robust across different model specifications. Our findings contribute to the existing literature by showing that the ESG risk is systematic and priced” (p. 16).

ESG weighting issues: Comparing ESG Score Weighting Approaches and Stock Performance Differentiation by Matthias Muck and Thomas Schmidl as of April 12th, 2024 (#22): “… we compare the performance differences of stocks sorted according to ESG scores that utilize the same categories but have different weightings. … Interestingly, an uninformed, equally weighted score leads to larger performance differences compared to Refinitiv’s data-driven weighted score. … As a robustness check, we consider the Paris Agreement as an exogenous event. … the post-Agreement increase in performance differentiation is likely due to investors’ recognition that sustainability information is indeed relevant for stock pricing” (p. 7). My comment: I use separate (Best-in-Universe) E, S and G Scores for stock selection. Unfortunately, I have seen very few studies suing such separate scores so far.

ESG disclosure differences: The impact of real earning management and environmental, social, and governance transparency on financing costs by Adel Necib, Malek El Weriemmi and Anis Jarboui as of April 10th, 2024 (#21): “We use a fixed effects panel data analysis to examine 97 firm-year observations of UK firms from 2014 to 2023. According to the research, investors place a lower value on ESG disclosure and increase the price of shares, whilst lenders view it favourably and reduce the cost of debt“ (abstract).

Mind the ESG-downgrade: ESG rating score revisions and stock returns by Rients Galema and Dirk Gerritsen as of March 26th, 2024 (#470): “Because the main users of ESG ratings typically adopt a low rebalancing frequency, we study the effect of ESG rating revisions on stock returns in a period of up to six months. We consider all ESG rating revisions issued by one of the largest ESG rating providers and we present evidence that both ESG and E rating downgrades are followed by six-month negative buy-and-hold abnormal returns in the magnitude of 2.5% to 3% (annualized). For larger downgrades, this effect becomes even more pronounced: Around 4.5% per year. We find that the effect of the E rating is most robust because we can confirm its significance in a calendar-time portfolio analysis. We conclude from additional analyses (i.e., mid-cycle versus annual revisions; pre-event trends) that these BHARs would not have materialized in the absence of rating revisions, despite the fact that rating revisions rely to a large extent on public information. … changes in a quarterly updated sustainable investment index based on ESG ratings explain part of the effect of E rating changes on abnormal returns. Second, institutional investors adjust their portfolios in response to decreases in E ratings. … we show that return volatility slightly increases following both ESG downgrades and E downgrades, a finding which is congruent with a reduced commitment from long-term institutional investors“ (p. 26/27). My comment: I use E, S and G Ratings downgrades (Best-in-Universe) to divest from stocks, see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com) or “Engagementreport” here FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Norwegian ESG? The ESG commitment of the Norwegian sovereign wealth fund: Is the socially responsible behaviour of companies considered in its investment strategy? by Iván Arribas, Fernando García García, and Javier Oliver Muncharaz as of April 11th, 2024 (#12): “… only seven of the leading sovereign wealth funds include ESG metrics in their investment process. The group includes the Norwegian GPFG, which is the biggest sovereign wealth fund worldwide in terms of assets under management. … findings suggest that favourable ESG performance of firms does have a positive impact on the probability of inclusion in the investment portfolio of Norway’s sovereign wealth fund. Notably, environmental performance is significant. Moreover, the GPFG’s criteria in relation to greenhouse gas emissions for companies in the electricity sector result in a lower probability of these firms becoming part of the fund’s investment portfolio compared with other industry sectors” (p. 20). My comment: The Norwegian SWF still invest in many companies and therefore has to compromise. Smaller investor can focus much better on demanding sustainability criteria, see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

Climate data issues: Climate Data in the Investment Process: Challenges, Resources, and Considerations by Andres Vinelli, Deborah Kidd, CFA, and Tyler Gellasch from the CFA Institute as of April 2024: “Before the maturation of accounting standards, financial data were imperfect for many years and are still imperfect for companies in emerging markets, where accounting and financial reporting practices are evolving. As with financial data, climate-related data availability and quality have improved over recent years and will continue to improve. In the meantime, investors should apply the same data interpretation, checks, and management techniques that they apply when working with other sets of estimated or incomplete data—such as validating data by cross-checking with original source data, understanding data provider methodologies (where disclosed), diversifying sources of data where possible, and using qualitative information and judgment as needed to fill in the gaps. … To help improve the current state of climate-related data, investors can participate in standards-setting processes, encourage issuers to voluntarily adopt standards, and advocate for high-quality, globally consistent disclosure regulations” (p. 13).

Impact investment research (in: ESG Variety)

Stewardship dilution?  ESG, Sustainability Disclosure, and Institutional Investor Stewardship by Giovanni Strampelli as of April 10th, 2024 (#20): “Several sets of sustainability standards have been adopted internationally. The European Commission recently adopted the CSRD, which places more stringent obligations and expanded the scope of companies, including unlisted ones, required to publish sustainability reports. … While such sustainability-related disclosure requirements may create a “name-and-shame” obligation for companies to take initiatives to improve their ESG performance, it is doubtful that such obligations can promote ESG-related stewardship activities by institutional investors. … the regulatory framework is still fragmented and there are differences between the various sustainability disclosure sets, concerning in particular the notion of materiality, which make it difficult to compare sustainability reports prepared under different standards. For these reasons, institutional investors rely on ESG ratings and indices for the purposes of their investment and stewardship strategies. … the choice of nonactivist institutional investors to focus part of their engagement initiatives on sustainability disclosure, requiring, for example, a higher degree of transparency or the adoption of a certain set of reporting, appears to be dictated by a desire to avoid more incisive initiatives (perceived as more aggressive) aimed directly at encouraging change in the environmental strategies or policies of the companies concerned” (p. 22/23). My comment: My broad and deep stewardship process see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) or in “Nachhaltigkeitsinvestmentpolitik” here FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Impact measurement: The Evolution of Impact Accounting and Utilization of Logic-Model in Corporate Strategy by Reona Sekino, Toshiyuki Imamura, and Yumiko Miwa as of Dec. 4th, 2023 (#77): “After discussing the existing methods for impact management, the article focuses on practical issues and investor engagement in impact management by companies. This article also makes recommendations on practical methods based on the current situation and issues. Specifically, this article proposes a method that integrates an Impact-Weighted Accounts framework that can quantify impact in a generalized format and a Logic Model that can visualize the ripple effects of corporate activities and clarify business strategies and value creation stories, thereby making it possible for stakeholders to evaluate impact. In addition, this article makes sample analysis to discuss the usefulness and challenges of the methodology“ (abstract). My comment: This article also includes interesting impact examples, see also Impactaktien-Portfolio mit 80% SDG-Vereinbarkeit? – Responsible Investment Research Blog (prof-soehnholz.com)

Other investment research (in: ESG Variety)

Risk-taking altruists: How Altruism Drives Risk-Taking by Dan Rubin, Diogo Hildebrand, Sankar Sen, and Mateo Lesizza as of Dec. 1st, 2023 (#51): “Individuals motivated by altruism often put themselves in harm’s way in helping others. … The first explanation, predicated on risk activation, suggests that altruism decreases risk perception by impeding the activation of self-risk information, leading to reduced risk perception and increased risk-taking. Alternatively, the second explanation implies that altruism may increase risk-discounting, whereby the importance of risk is downplayed when deciding whether to help others. Results of three studies … provide strong evidence for the risk-activation account and establish substantive boundaries for this effect“ (abstract).

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Impactaktien: FutureVest Fondsportfolio April 2024

Impactaktien-Portfolio mit 80% SDG-Vereinbarkeit?

Impactaktien: Dauerhaft haben aktive Fonds meist schlechtere Performances als adäquate passive Benchmarks. Outperformanceversprechen sind deshalb wenig glaubhaft. Aber den meisten Untersuchungen zufolge, kann man mit nachhaltigen Aktien eine marktübliche Performance erreichen. Ich versuche deshalb, aus besonders nachhaltigen Aktien ein attraktives Portfolio mit marktüblicher Performance zu machen.

Dafür nutze ich klare Regeln, die vor allem aus Ausschlüssen, hohen Anforderungen an Best-in-Universe Umwelt-, Sozial- und Unternehmensführungs- (E, S und G) Ratings und hohen Vereinbarkeiten mit den nachhaltigen Entwicklungszielen der Vereinten Nationen (SDG) bestehen (vgl. Regeländerungen: Nachhaltig aktiv oder passiv? (prof-soehnholz.com). Die SDG-Vereinbarkeit soll sicherstellen, dass die selektierten Unternehmen eine positive Wirkung auf Umwelt oder Soziales (Impact) haben.

Impactaktien: Klare Regeln und marktübliche Performance

Seit dem Start meiner Firma Ende 2015 nutze und veröffentliche ich klare Regeln für meine Portfolios. Das hier diskutierte globale ESG SDG Portfolio habe ich Ende 2017 eingeführt. Fast alle Regeln beziehen sich auf die Aktienselektion. Für die Portfoliobildung gibt es nur zwei relevante Regeln. Erstens: Direkte Wettbewerber mit dem Hauptsitz im selben Land sind ausgeschlossen, nur für die USA darf aufgrund der Größe des Marktes zwei Wettbewerber zugelassen. Und zweitens: Alle Aktien werden annähernd gleich gewichtet. Andere Portfolioentwickler, z.B. von Indexfonds, und Portfoliomanager nutzen meistens auch Vorgaben vor allem in Bezug auf Mindest- und Maximalgrenzen für Länder- und Branchenallokationen.

Seit dem Start performt mein Portfolio – vereinfacht zusammengefasst – ähnlich wie traditionelle Small- und Midcap-Aktien.

Unternehmens-Impact: 30 Spezialisten im Portfolio

Von den 30 Unternehmen, deren Aktien aktuell in meinem ESG SDG Fondsportfolio sind, haben 11 ihren Hauptsitz in den USA. Das ist weniger als in der Vergangenheit und erheblich weniger als der US-Anteil von Vergleichsindizes. 17 sind Unternehmen aus dem Gesundheitssektor bzw. können dem SDG 3 zugeordnet werden. Das ist viel mehr als bei anderen Small-/Mid-Cap-Portfolios und auch als in den meisten anderen Impactportfolios. Der Gesundheitssektor wird jedoch durch Unternehmen mit sehr unterschiedlichen Schwerpunkten abgedeckt (siehe Grafik). Die Schwerpunkte der einzelnen Unternehmen sind: Gesundheitspersonal, Schutzhandschuhe, Labortechnik, Hörgeräte, Strahlentherapie, Krebsvorsorge, Radiologiesoftware, Grüner Star, Dental, Örthopädie, Gesundheitssoftware (B2B), Medizinische Bildgeneration, Krankenhäuser, Krankenhausservices, Apotheken, biologische Arzneiservices, und Organtransplantationsprodukte.

Acht Unternehmen sind auf Umwelt- und Energiethemen (SDG 6 und 7) fokussiert: Energiemanagement, Windenergieanlagen, Solartechnik, Solarstrom, Wasserversorgungstechnik, Wassermessgeräte, Profi-Waagen.

Weitere fünf Unternehmen können dem Segment öffentlicher Transport bzw. nachhaltige Städte und Infrastruktur (SDG 9 und 11) zugeordnet werden: Schienenfahrzeugteile, Schienenfahrzeuge, Bushersteller, Öffentlicher Transport, Telekommunikation Afrika.

Ungefähr zwei Drittel der Unternehmen haben Marktkapitalisierungen unter 5 Milliarden Euro und sind damit ziemlich niedrig kapitalisiert (Small Caps). Die restlichen Unternehmen sind mittelgroß (Mid Caps). Das ist wenig verwunderlich, denn spezialisierte Unternehmen sind einfacher höchstmöglich SDG-kompatibel und bieten weniger „Ausschluss-Aktivitäten“ an. Größere Unternehmen sind dagegen oft diversifizierter und damit auch in nicht SDG- bzw. Ausschluss-Aktivitäten involviert.

Ich habe nur wenige dieser Unternehmen in anderen Impactfonds gefunden. Das liegt einerseits wohl daran, dass es wenige vergleichbare Fonds gibt, denn viele Impactfonds sind nur auf ökologische Themen oder regional fokussiert. Andererseits sind die Aktienselektionskriterien anderer Impactfonds nennenswert anders als meine (vgl. Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds? – Responsible Investment Research Blog (prof-soehnholz.com)).

Impactaktien: Wieso sind gerade diese Unternehmen im Portfolio?

Als ich das Portfolio 2017 gestartet habe, hatte ich noch keine guten Daten, um Vereinbarkeiten mit den SDG zu prüfen. Deshalb habe ich Unternehmen vor allem aufgrund ihrer Zugehörigkeit zu Marktsegmenten mit einem vermuteten positiven ökologischen oder sozialen Impact ausgesucht, namentlich Gesundheit, erneuerbare und elektrische Energien, Schienen-, Wasser- und Telekommunikationsinfrastruktur, Recycling, Umwelttechnik, Wohn- und Sozialimmobilien, Arbeitsvermittlung sowie Aus- und Fortbildung.

Seit Ende 2023 bietet mein Nachhaltigkeitsdatenanbieter Clarity.ai für die sehr vielen von ihm abgedeckten Unternehmen eine SDG-Umsatzanalyse an. Seitdem nehme ich nur noch Unternehmen neu ins Portfolio auf, deren Umsätze zu mindestens 50% als SDG-vereinbar gelten.

Allerdings habe ich zunächst Unternehmen im Portfolio gelassen, bei denen meine aktivitätsbasierten Einschätzungen von der Umsatzanalyse des Ratinganbieters abwichen. Das betraf vor allem Unternehmen mit Fokus auf Wohn- und Sozialimmobilien sowie Zeitarbeit bzw. Arbeitsvermittlung. Nach einigen intensiven Diskussionen mit dem Ratinganbieter kann ich dessen Argumentationen besser nachvollziehen und habe deshalb inzwischen alle Aktien verkauft, die nach dessen Berechnung nicht mindestens 45% SDG-kompatiblen Umsatz haben. Insgesamt haben meine 30 Portfoliounternehmen aktuell etwa 80% SDG-kompatible und 0% SDG-schädliche Umsätze.

Aktuell prüfe ich, wann ich die individuelle Mindestgrenze weiter hochsetzen kann. Dabei sind 50% bzw. sogar 75% relativ einfach erreichbar und für Ende des Jahres 2024 strebe ich sogar 90% Mindest-SDG-Vereinbarkeit an.

Mein Unternehmens- und Investor-Impact: Ausblick

Ich erwarte, dass es auch künftig bei der Konzentration meines Portfolios auf Gesundheit, Energie/Umwelt und Transport/Infrastruktur bleiben wird. Die Länderallokation wird weiter schwanken, aber die USA gegenüber traditionellen Benchmarks eher unterrepräsentiert sein. Außerdem erwarte ich auch künftig einen klaren Small-Cap-Fokus. Ich bin zuversichtlich, dass Risikokennzahlen wie zwischenzeitliche Verluste und Volatilität trotzdem marktüblich ausfallen werden, denn Gesundheit gilt als defensiver Sektor.

Insgesamt bin ich sehr von den Aktivitäten der Unternehmen angetan, die in meinem Portfolio sind. Diese Unternehmen können das Leben von Menschen wirklich positiv beeinflussen (Unternehmens-Impact). Ich bin froh, dass ich fast mein ganzes Vermögen in Unternehmen aus so attraktiven Marktsegmenten investieren kann.

Allerdings können – trotz meiner hohen Selektionsanforderungen – auch diese Unternehmen noch nachhaltiger werden. Das versuche ich durch meine umfassenden Engagementaktivitäten bei aktuell 27 von 30 Unternehmen voranzubringen (vgl. „Nachhaltigkeitsinvestmentpolitik“ und „Engagementreport“ auf www.futurevest.fund).

Diese Aktivitäten sind vor allem auf Umwelt-, Sozial- und Governanceverbesserungen der Unternehmen und ihrer Stakeholder ausgerichtet. Es kann aber kaum erwartet werden, dass die Produkte oder Services meiner Portfoliounternehmen durch meine Aktivitäten (noch) besser werden.

Ob die Unternehmen bzw. ich als Investor künftig (noch) mehr Impact haben werden, ist zudem nur schwer sinnvoll messbar. Viel mehr als 90% SDG-Vereinbarkeit sind kaum zu erreichen. Mehr Unternehmens-Impact kann nur dann erzielt werden, wenn die Unternehmen wachsen. Mehr Investor-Impact ist theoretisch einfacher. Dafür müssen mehr Portfoliounternehmen mehr von meinen Vorschlägen implementieren. Daran werde ich weiter intensiv arbeiten.

Impactaktien: Disclaimer

Diese Unterlage ist von der Soehnholz ESG GmbH erstellt worden. Die Erstellerin übernimmt keine Gewähr für die Richtigkeit, Vollständigkeit und/oder Aktualität der zur Verfügung gestellten Inhalte. Die Informationen unterliegen deutschem Recht und richten sich ausschließlich an Investoren, die ihren Wohnsitz in Deutschland haben. Sie sind nicht als Verkaufsangebot oder Aufforderung zur Abgabe eines Kauf- oder Zeichnungsangebots für Anteile des in dieser Unterlage dargestellten Fonds zu verstehen und ersetzen nicht eine anleger- und anlagegerechte Beratung. Anlageentscheidungen sollten nur auf der Grundlage der aktuellen gesetzlichen Verkaufsunterlagen (Wesentliche Anlegerinformationen, Verkaufsprospekt und – sofern verfügbar – Jahres- und Halbjahresbericht) getroffen werden, die auch die allein maßgeblichen Anlagebedingungen enthalten. Die Verkaufsunterlagen werden bei der Kapitalverwaltungsgesellschaft (Monega Kapitalanlagegesellschaft mbH), der Verwahrstelle (Kreissparkasse Köln) und den Vertriebspartnern zur kostenlosen Ausgabe bereitgehalten. Die Verkaufsunterlagen sind zudem im Internet unter www.monega.de erhältlich.

Die in dieser Unterlage zur Verfügung gestellten Inhalte dienen lediglich der allgemeinen Information und stellen keine Beratung oder sonstige Empfehlung dar. Die Kapitalanlage ist stets mit Risiken verbunden und kann zum Verlust des eingesetzten Kapitals führen. Vor einer etwaigen Anlageentscheidung sollten Sie eingehend prüfen, ob die Anlage für Ihre individuelle Situation und Ihre persönlichen Ziele geeignet ist. Diese Unterlage enthält ggf. Informationen, die aus öffentlichen Quellen stammen, die die Erstellerin für verlässlich hält. Die dargestellten Inhalte, insbesondere die Darstellung von Strategien sowie deren Chancen und Risiken, können sich im Zeitverlauf ändern. Einschätzungen und Bewertungen reflektieren die Meinung der Erstellerin zum Zeitpunkt der Erstellung und können sich jederzeit ändern. Es ist nicht beabsichtigt, diese Unterlage laufend oder überhaupt zu aktualisieren. Sie stellt nur eine unverbindliche Momentaufnahme dar. Die Unterlage ist ausschließlich zur Information und zum persönlichen Gebrauch bestimmt. Jegliche nicht autorisierte Vervielfältigung und Weiterverbreitung ist untersagt.

Climate Shaming: Illustration from Nina Garman from Pixabay

Climate shaming: Researchpost 171

Ilustration from Pixabay by Nina Garman

Climate shaming: 11x new research on green technology, sustainable fund labels, sustainable advice, carbon premium, brown profits, green bonds, green growth, green shareholder engagement, climate shaming, optimizations and investment timing (# shows number of SSRN full paper downloads as of April 11th, 2024)

Ecological and social research

Green technology benefits: Economic Impact of Natural Disasters Under the New Normal of Climate Change: The Role of Green Technologies by Nikos Fatouros as of March 18th, 2024 (#9):” In our model of the world economy, raising temperatures are expected to negatively affect consumption as well as increase debt. The most frequently proposed possible solution to climate change, is the de-carbonization of production, by using more “green” technologies. Under “green” technology adaptation, countries would be projected to achieve higher levels of consumption and welfare. This positive effect of more environmentally friendly means of production, tends to be stronger for more developed countries. However, under the assumption of greater technological progress of the “green” sector, our results show that even developing countries would be projected to follow the same path of higher and more sustainable levels of consumption and welfare” (p. 10).

ESG investment research (in: Climate Shaming)

Attractive labels: In labels we trust? The influence of sustainability labels in mutual fund flows by Sofia Brito-Ramos, Maria Céu Cortze Nipe, Svetoslav Covachev, and Florinda Silva as of April 2nd, 2024 (#29): “In Europe, investors can resort to different types of sustainable labels such as GNPO-sponsored labels and ESG ratings from commercial data vendors that assess funds’ sustainability risks. In addition, funds can communicate their sustainability features by including ESG-related designations in the name or self-classifying themselves as article 8 or 9 of the SFDR. … Drawing on a dataset of equity funds sold in Europe … Our initial results document investors‘ preferences for sustainability labels, with GNPO labels (Sö: Government and non-profit organizations) standing out as salient signals. … we find that GNPO labels have an effect on fund flows … Furthermore, this impact is stronger for funds holding other sustainability signals, such as Morningstar top globes, the LCD (Sö: Low Carbon Designation) and an ESG name, suggesting a complementary effect of labels … our results show that the effect of funds being awarded a GNPO label is stronger for the institutional invest segment. The findings show that GNPO labels and SFDR classification are influential for investors’ decisions (p. 23/24). My comment: Maybe I should consider paying for labels for my Article 9 fund. A more detailed comment can be found here Nachhaltigkeitssiegel beim Verkauf von Investmentfonds | CAPinside

(Un-)Sustainable advice? Investing Responsibly: What Drives Preferences for Sustainability and Do Investors Receive Appropriate Investments? by Chris Brooks and Louis Williams as of April 8th, 2024 (#21): „ While investors with stronger desires for sustainability do hold more highly ESG-rated funds on average, the relationship is weaker than might have been expected. Perhaps surprisingly, a majority of clients for whom responsible investing is very important hold some unrated funds, while those for whom it is unimportant nonetheless hold the highly ESG-rated funds in their portfolios. We therefore conclude that more focus on sustainability preferences is required to ensure that retail investors get the portfolios they want” (abstract). My comment: Advisor should develop detailed sustainability policies at least for larger investors, see e.g. DVFA_PRISC_Policy_for_Responsible_Investment_Scoring.pdf (English version available upon demand)

No carbon premium: Carbon Returns Across the Globe by Shaojun Zhang as of April 5th, 2024 (#272): ” Emissions are a weighted sum of firm sales scaled by emission factors and grow almost linearly with firm sales. However, emission data are released at significant lags relative to accounting variables, including sales. After accounting for the data release lag, more carbon-intensive firms underperform relative to less carbon-intensive ones in the U.S. in recent years. International evidence on carbon or green premium is largely absent. The carbon premium documented in previous studies stems from forward-looking bias instead of a true risk premium in ex-ante expected returns” (p. 23).

Profitable brown greening? Paying or Being Paid to be Green? by Rupali Vashisht, Hector Calvo-Pardo, and Jose Olmo as of March 31st, 2024 (#70): “… firms in the S&P 500 index are divided into brown (heavily polluting) and green (less polluting) sectors. In clear contrast with the literature, (i) brown firms pay to be green (i.e.better financial performance translates into higher environmental scores) but green firms appear not to. In addition, (ii) neither brown nor green firms with higher environmental scores perform better financially” (abstract). My comment: If brown and green firms perform the same, why not invest only in green firms?

Resilient green bonds: “My Name Is Bond. Green Bond.” Informational Efficiency of Climate Finance Markets by Marc Gronwald and Sania Wadud as of April 4th, 2024 (#15): “… the degree of informational inefficiency of the green bond market is generally found to be very similar to that of benchmark bond markets such as treasury bond markets. … the degree of inefficiency of the green bond market during the Covid outbreak in 2020 and the inflation shock in 2022/2023 is lower than that of the treasury bond market“ (abstract).

Green growth: Investing in the green economy 2023 – Entering the next phase of growth by Lily Dai, Lee Clements, Edmund Bourne, and Jaakko Kooroshy from FTSE Russell as of Sep. 19th, 2023: “After a downturn in 2022 … Green revenues for listed companies are on track to exceed US$5 trillion by 2025 — doubling in size since the conclusion of the Paris Agreement in 2015 — with market capitalisation of the green economy approaching 10% of the equity market. However, to shift the global economy onto a 1.5°C trajectory, green growth would have to further substantially accelerate with green market capitalisation approximating 20% of global equity markets by 2030” (p. 3).

Impact investment research (in: Climate Shaming)

Short-term impact: The Value Impact of Climate and Non-climate Environmental Shareholder Proposals by Henk Berkman, Jonathan Jona, Joshua Lodge, and Joshua Shemesh as of April 3rd, 2024 (#19): “In this paper, we investigate the value impact of environmental shareholder proposals (ESPs) for a large sample of Russell 3000 firms from 2006 to 2021 … We find that both withdrawn and non-withdrawn climate ESPs have positive CARs (Sö: Cumulative abnormal returns), indicating that management screens value-enhancing climate proposals and rejects value-destroying climate proposals. For non-climate ESPs we find insignificant CARs, suggesting that management does not have an ability to screen non-climate proposals. However, we find that close-call non-climate ESPs that are passed have negative abnormal returns, implying that for non-climate ESPs the original decision by managers not to agree with the activists is supported by the share market” (p. 26).

Climate shaming: Fighting Climate Change Through Shaming by Sharon Yadin as of April 4th, 2024 (#13): “This Book contends that regulators can and should shame companies into climate-responsible behavior by publicizing information on corporate contribution to climate change. Drawing on theories of regulatory shaming and environmental disclosure, the book introduces a “regulatory climate shaming” framework, which utilizes corporate reputational sensitivities and the willingness of stakeholders to hold firms accountable for their actions in the climate crisis context. The book explores the developing landscape of climate shaming practices employed by governmental regulators in various jurisdictions via rankings, ratings, labeling, company reporting, lists, online databases, and other forms of information-sharing regarding corporate climate performance and compliance” (abstract). My comment: Responsilbe Naming and Climate Shaming are adequate investor impact tools in my opinion (my “climate shaming” activities see Engagement report” here FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T)

Other investment research

(Pseudo-)Optimization? Markowitz Portfolio Construction at Seventy by Stephen Boyd, Kasper Johansson, Ronald Kahn, Philipp Schiele, and Thomas Schmelzer as of Feb. 13th, 2024 (#50): “More than seventy years ago Harry Markowitz formulated portfolio construction as an optimization problem that trades off expected return and risk, defined as the standard deviation of the portfolio returns. Since then the method has been extended to include many practical constraints and objective terms, such as transaction cost or leverage limits. Despite several criticisms of Markowitz’s method, for example its sensitivity to poor forecasts of the return statistics, it has become the dominant quantitative method for portfolio construction in practice. In this article we describe an extension of Markowitz’s method that addresses many practical effects and gracefully handles the uncertainty inherent in return statistics forecasting” (abstract). My comment:  Extensions of Markowitz methods create complexity but still contain many assumptions/forecasts and are far from solving all potential problems. I prefer very simple optimization and forecast-free approaches, see Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com)

Bad timing? Another Look at Timing the Equity Premiums by Wei Dai and Audrey Dong from Dimensional Fund Advisors as of Nov. 2nd, 2023 (#1642): “We examine strategies that time the market, size, value, and profitability premiums in the US, developed ex US, and emerging markets …. Out of the 720 timing strategies we simulated, the vast majority underperformed relative to staying invested in the long side of the premiums. While 30 strategies delivered promising outperformance at first glance, further analysis shows that their outperformance is very sensitive to specific time periods and parameters for strategy construction”(abstract).

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small cap mutual fund (SFDR Art. 9). The fund focuses on the Sustainable Development Goals and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 27 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or My fund (prof-soehnholz.com).

Greeniums: Picture from Sergio Cerrato from Pixabay

Greeniums and more: Researchpost #170

Picture from Sergio Cerrato from Pixabay

Greeniums: 15x new research on transition risk, emissions assurance, biodiversity risks, materiality, climate commitments, investment consultants, green innovation, biodiversity premium, sustainable fund flows, brown home bias, greenwashing, retail governance, and private debt performance

Ecological research

Transition or not? How you measure transition risk matters: Comparing and evaluating climate transition risk metrics by Philip Fliegel as of March 28th, 2024: “We employ a new dataset containing for the first-time reported EU taxonomy alignment of both capex and revenues as a proxy for companies transition risk. … We find a strong divergence in transition risk metrics for similar companies. … We find that only taxonomy and TRBC (Sö: Refinitiv Business Classification) based portfolios are able to measure green firms’ climate transition risk. … notably, emission based green portfolios are highly invested in service, technology and finance, not typical green sectors enabling the transition …” (abstract).

CO2-Negative assurance? On the Importance of Assurance in Carbon Accounting by Florian Berg, Jaime Oliver Huidobro, and Roberto Rigobon as of March 25th, 2024: “Firms that obtain assurance for their carbon emissions report on average a 9.5% higher carbon intensity than their peers without assurance. When controlling for assurance, we do not find evidence that SBTi target-setters reduce their future emissions. Instead, firms that audit reduce their future carbon intensity by 3.3%. This has implications for portfolio managers and ESG raters as taking disclosed carbon emissions at face value would lead to penalizing firms that are more serious about their carbon reductions …“ (p. 12).

Biodiversity risk details: Study for a methodological framework and assessment of potential financial risks associated with biodiversity loss and ecosystem degradation, Final Report by Maha Cziesielski, Cosima Dekker-Hufler, Timea Pal, Graeme Nicholls, Foivos Petsinaris, Lisa Korteweg (Trinomics) Michael Obersteiner, Nikolay Khabarov for the European Commission as of February 2024: “Biodiversity and nature loss pose multifaceted risk, … Reviewing best-practices and existing frameworks, the study covers the key definitions and steps in determining risk drivers, types, transmission channels, and exposure assessments. An assessment of the EU’s sectoral exposure furthermore reveals that agriculture, real estate and construction, and healthcare sectors as most susceptible” (p. 5).

Scarce materiality? European corporate sustainability reporting – The Financial Materiality Compass as an auxiliary tool by Christina Bannier and Henry Flach as of Feb. 8th, 2024: “European companies in scope of the new Corporate Sustainability Reporting Directive (CSRD) will have to report on all sustainability topics that are either financially-material or impact-material (or both) to them. Determining materiality in an extensive individual analysis, however, proves to be an expensive undertaking that will encumber resource-constrained and smaller companies in particular. To offer an easily applicable auxiliary tool, we create a comprehensive sector-specific Financial Materiality Compass (FMC) along the lines of the European Sustainability Reporting Standards (ESRS). … We find that for companies in the consumer staples and energy sector nine out of 10 ESRS categories are financially material, but only one, respectively two, of these categories show a strong materiality. For companies in the health care, information technologies and real estate sector, in contrast, we report the lowest number of financially material ESRS categories in total“ (abstract).

Net-zero bullshit? Business as usual: bank climate commitments, lending, and engagement by Parinitha (Pari) Sastry, Emil Verner, David Marques-Ibanez from the European Central Bank as of March 26th, 2024 (2x): “A prominent initiative is the Net Zero Banking Alliance, which constitutes an agreement to set voluntary net zero targets and decrease financed emissions in targeted sectors over the medium-term (2030) and long-term (2050). This paper is the first attempt to quantify whether banks have met their stated goals using administrative data that allows for a comprehensive examination of net zero lending commitments. We find that climate-aligned lenders reduce lending to targeted sectors, both in absolute terms and relative to other sectors. However, once we compare climate-aligned lenders to other lenders, we find that climate-aligned lenders have not differentially divested from emissions-intensive firms, in mining or in the sectors for which they have set targets. … Further, we do not find evidence for engagement. Firms connected to climate-aligned banks are no more likely to themselves set decarbonization targets“ (p. 36/37).

ESG investment research (in: Greeniums)

Dangerous pension consultants? Loading the DICE against pension funds – Flawed economic thinking on climate has put your pension at risk by Steve Keen for Carbon Tracker as of July 27th, 2023: “Investment consultants to pension funds have relied upon peer-reviewed economic research to provide advice to pension funds on the damages to pensions that will be caused by global warming. Following the advice of investment consultants, pension funds have informed their members that global warming of 2 – 4.3oC will have only a minimal impact upon their portfolios. … Economists have claimed, in refereed economics papers, that 6oC of global warming will reduce future global GDP by less than 10%, compared to what GDP would have been in the complete absence of climate change. In contrast, scientists have claimed, in refereed science papers, that 5oC of global warming implies damages that are “beyond catastrophic, including existential threats,” while even 1oC of warming—which we have already passed—could trigger dangerous climate tipping points“ (p. 6).

Variable greeniums: The Monetary Channel of the Green Premium by Xinwei Li as of March 26th, 2024: „I document .. novel empirical facts about the green premium, which refers to the average return of the Green-Minus-Brown (GMB) portfolio. First, I show that the green premium varies substantially over time, where greenness can be measured ether by Trucost carbon emission intensities or by MSCI environmental scores. The green premium ranges from -53 bps to 76 bps on a monthly basis …. Second, I find that the … green premium is positive and significant during periods of expansionary monetary policy and turns zero or even negative during periods of contractionary monetary policy …“ (p. 26).

True greeniums? In Search of the True Greenium by Marc Eskildsen, Markus Ibert, Theis Ingerslev Jensen, and Lasse Heje Pedersen as of March 1st, 2024: “We find widespread robustness problems with the ESG literature that estimates the greenium based on realized returns combined with a variety of greenness measures. … the true greenium … is negative across countries and asset classes. In equities, the estimated annual greenium is −25 bps per standard deviation increase in the robust green score. This greenium corresponds to a −50 bps expected return spread between the top- and bottom third of firms by greenness. Looking at more extreme differences, the greenium corresponds to a near −100 bps expected return spread between the top- and bottom deciles. Further, the greenium becomes more negative over time and is more negative in greener countries“ (p. 45/46).

Greeniums and innovation: Funding the Fittest? Pricing of Climate Transition Risk in the Corporate Bond Market by Martijn A. Boermans, Maurice J. G. Bun, and Yasmine van der Straten as of Jan. 17th, 2024: “We focus on the amount of green patents relative to the total amount of patents of a given company, and assess whether the interaction between emission intensity and the green patent ratio affects bond yield spreads. Our empirical results provide evidence that a firm’s carbon emission intensity positively affects the bond yield spread. At the same time we find that investors reward those emission-intensive companies engaging in green innovation. … we assess whether green patenting is associated with a decline in future emission intensity. We document substantial heterogeneity in the effect over time and across industries. … our results suggest that investors should exercise caution when accommodating emission intensive companies with a smaller bond yield spreads once they innovate in the green space. Finally, our results reveal that European investors, and particularly institutional investors, are more inclined to price exposures to climate transition risk …“ (p. 35).

Biodiversity premium? Biodiversity Risk Premium by Helena Naffaa and Gergely Janos Czupya as of March 27th, 2024: “By analysing almost 3,000 constituents of the MSCI All Country World Index over a decade, spanning from 2013 to 2023 … we observed decreases of 0.9%, 1.5%, and 3.6% in the maximum attainable Sharpe ratio in the universe for low, moderate, and high levels of biodiversity risk mitigation, respectively. … Moreover, there is an additional cost associated with the reduction in portfolio diversification due to the screening process, further diminishing the Sharpe ratio by 1.1%, 2.3%, and 3.5% for the respective risk mitigation levels. Our study also highlights the added benefit of biodiversity alignment on ESG scores, revealing unintended consequences resulting in improvements in the environmental, social and governance pillar metrics, in addition to the incurred reduction in the Sharpe ratio“ (p. 30/31).

Sustainable flows? Sustainability or Performance? Ratings and Fund Managers’ Incentives by Nickolay Gantchev, Mariassunta Giannetti, and Rachel Li as of March 9th, 2024: “Following the introduction of Morningstar’s sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks to attract flows. Such sustainability-driven trades, however, underperformed, impairing the funds’ overall performance. Consequently, a tradeoff between sustainability and performance emerged. In the new equilibrium, the globe ratings do not affect investor flows and funds no longer trade to improve their globe ratings” (abstract). My comment: If there is similar performance, I would select the more sustainable investment (for the most recent performance of my sustainable portfolios see Q1 Renditen der Soehnholz ESG Portfolios – Responsible Investment Research Blog (prof-soehnholz.com)

Pollution home bias: Carbon Home Bias by Patrick Bolton, Marc Eskildsen, and Marcin Kacperczyk as of Feb. 18th, 2024: “We undertake a global analysis of institutional investor portfolios and find widespread underweighting of companies with higher carbon emissions. This underweighting is largely driven by underinvestment in foreign companies with high carbon emissions … Similar domestic firms are overweighted but by a smaller magnitude. Further, the divestment of foreign polluters has increased since 2015“ (abstract).

Beyond Greenwashing: Crosswashing in Sustainable Investing: Unveiling Strategic Practices Impacting ESG Scores by Bertrand Kian Hassani and Yacoub Bahini as of March 26th, 2024: “… cross-washing involves companies strategically investing in sustainable activities to boost Environmental, Social, and Governance (ESG) scores while preserving non-sustainable core operations. The study emphasizes that this specific form of greenwashing is not currently considered in existing ESG assessments, potentially leading to an inflated perception of corporate ethical practices “ (abstract). … “The findings derived from the case study indicate a notable overestimation in current ESG notations. This overestimation, however, is contingent upon the specific industry sectors and the size of the companies involved” (p. 19). My comment: For a detailed comment see Nur ESG-Ratings für Nachhaltigkeitsbeurteilungen? | CAPinside

Retail governance: Corporate Governance Through Social Media by Christina M. Sautter as of March 20th, 2024: “Retail investors are vigorously and loudly taking positions regarding corporate governance issues on social media. … Retail investors have opened tens of millions of new brokerage accounts since 2020. … These wireless investors are taking advantage of social media platforms like YouTube, Reddit, TikTok, X (formerly Twitter), WhatsApp, Telegram, and Discourse, among other venues to transform corporate governance engagement. … Although structural barriers do impede engagement and reforms to the system are necessary … a case study of one particularly illustrious event involving AMC Entertainment Holdings, Inc. .. show(s) that retail investors are anything but silent” (abstract). My comment: Shareholder engagement is not that difficult, see “Engagementresport” at FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Other investment research (in: Greeniums)

Unattractive debt investments? Risk-Adjusting the Returns to Private Debt Funds by Isil Erel, Thomas Flanagan, Michael Weisbach as of March 26th, 2024: “Private debt funds are the fastest growing segment of the private capital market. … Using both equity and debt benchmarks to measure risk, a typical private debt fund produces an insignificant abnormal return to its investors. However, gross-of-fee abnormal returns are positive, and using only debt benchmarks also leads to positive abnormal returns as funds contain equity risks. The rates at which private debt funds lend appear to be high enough to offset the funds’ fees and risks, but not high enough to exceed both their fees and investors’ risk-adjusted rates of return” (abstract).

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small cap mutual fund (SFDR Art. 9). The fund focuses on the Sustainable Development Goals and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 28 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or My fund (prof-soehnholz.com).

Q1 Performance Illustration von Gerd Altmann von Pixabay

Q1 Renditen der Soehnholz ESG Portfolios

Q1 Renditen: Passive Multi-Asset Portfolios OK

Q1 Renditen: Das regelbasierte „most passive“ Multi-Asset Weltmarkt ETF-Portfolio hat mit +5,4% im Vergleich zu Multi-Asset ETFs (+5,1%) und aktiven Mischfonds (+4,8%) gut abgeschnitten. Das ebenfalls breit diversifizierte ESG ETF-Portfolio hat mit +4,2% dagegen unterdurchschnittlich rentiert.

Nachhaltige ETF-Portfolios: Anleihen gut, Aktien OK, SDG schwierig

Das ESG ETF-Portfolio ex Bonds lag mit +6,1% erheblich hinter traditionellen Aktien-ETFs (+10,6%) zurück. Die Rendite ist aber ähnlich wie die 7,2% traditioneller aktiv gemanagter globaler Aktienfonds.

Mit -0,3% rentierte das sicherheitsorientierte ESG ETF-Portfolio Bonds (EUR) ähnlich wie aktive Fonds (-0,7%). Das renditeorientierte ESG ETF-Portfolio Bonds hat mit +1,6% ebenfalls etwas besser abgeschnitten als vergleichbare aktiv gemanagte Fonds (+1.3%).

Das aus thematischen Aktien-ETFs bestehende SDG ETF-Portfolio lag mit -0,2% stark hinter traditionellen Aktienanlagen zurück. Besonders thematische Investments mit ökologischem Fokus liefen auch im ersten Quartal 2024 nicht gut.  

Q1 Renditen: Direkte ESG SDG Portfolios OK

Das auf Small- und Midcaps fokussierte Global Equities ESG SDG hat mit 1,4% im Vergleich zu Small- und Midcap-Aktienfonds schlecht abgeschnitten. Das ist vor allem auf den hohen Anteil an erneuerbaren Energien zurückzuführen. Das Global Equities ESG SDG Social Portfolio hat mit 3,7% dagegen vergleichbar wie Small- und Midcap-Portfolios abgeschnitten.

Mein FutureVest Equity Sustainable Development Goals R Fonds (Start 2021) hat nach einem guten Quartal 4/2023 im ersten Quartal 2024 eine Rendite von +2,6% erreicht. Das ist durch den Fokus auf Smallcaps und den relativ hohen Anteil an erneuerbaren Energien erklärbar (weitere Informationen wie z.B. auch den aktuellen detaillierten Engagementreport siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T und My fund – Responsible Investment Research Blog (prof-soehnholz.com).

Für die zu Jahresende 2023 voll investierten Trendfolgeportfolios gab es im ersten Quartal keine Signale, so dass sie wie die Portfolios ohne Trendfolge abgeschnitten haben.

Weiterführende Infos:

Regeländerungen: Nachhaltig aktiv oder passiv? – Responsible Investment Research Blog (prof-soehnholz.com)

2023: Passive Allokation und ESG gut, SDG nicht gut – Responsible Investment Research Blog (prof-soehnholz.com)

Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)

Anmerkungen: Die Performancedetails siehe www.soehnholzesg.com und zu allen Regeln und Portfolios siehe Das Soehnholz ESG und SDG Portfoliobuch. Benchmarkdaten: Eigene Berechnungen u.a. auf Basis von www.morningstar.de