Archiv des Autors: Soehnholz

Über Soehnholz

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

Alternatives (green) and SDG (blue) ETF Portfolios

Alternatives: Thematic replace alternative investments

Alternatives: Thematic investments can take up (part) of the allocation which alternative investments should have had in the past. The main reason is a stricter focus on responsible investments. Here I explain, why I support this development:

Extensive alternative and responsible investment experience

I started my financial services career trying to select the best private equity funds worldwide. Soon, I also covered hedge funds, real estate funds and infrastructure funds. In my current multi-asset portfolios, alternatives have a share between a quarter and a third of the portfolios.

In 2015, I developed three innovative ETF-Portfolios. One passively diversified multi-asset portfolio, one pure alternative investment portfolio and one ESG portfolio. The multi-asset ETF-portfolio and the ESG ETF-portfolio will be continued whereas I decided to stop the active offer of my alternatives ETF-Portfolio and will focus on my (multi-theme) SDG ETF-portfolio, instead. I follow a similar approach by replacing my direct listed alternatives ESG-portfolios with SDG-aligend investments.

My traditional multi-asset allocations will not change

My rather large allocation to alternatives is based on scientific studies of aggregated asset allocations of investors worldwide. I use ETFs not only for traditional equity and bond allocations but also for alternative investments. I have documented this most-passive asset allocation approach in detail in my Soehnholz ESG and SDG portfolio book. This approach is and will be applied to my traditional (non-ESG) Weltmarkt ETF-Portfolio and to my multi asset ESG ETF-Portfolio also in the years to come.

Stand-alone alternatives portfolios scrapped from my offering

There are two reasons for my decision to stop offering stand-alone alternatives portfolios: First, I want to focus on even stricter responsible investing and second, I could not find many investors for my “alternatives” portfolios.

The alternatives portfolios were offered to diversify traditional and ESG investment portfolios and I still think that this makes a lot of sense. Unfortunately, the returns of most alternatives market segments lagged the ones of traditional large-cap equities more or less since the start of my portfolios in 2016/2017. And low returns have not been good for sales.

It may well be that the timing of my decision is bad and that market segments such as listed (ESG) infrastructure and (ESG) real estate will perform especially well in the (near) future. But SDG-aligned investments did not perform well, either (see ESG gemischt, SDG schlecht: 9-Monatsperformance 2023 – Responsible Investment Research Blog (prof-soehnholz.com). I expect that they may recover soon. Performance, therefore, did not play a role in my decision.

The reason is, that I want to focus even more than in the past on responsible investments. Therefore, stopping the active offer of my „non-ESG“ alternatives ETF-portfolio should be obvious. But I will also stop to actively offer my direct listed real estate ESG and my listed infrastructure ESG portfolio.

I started similar portfolios at my previous employer in 2013 when there were no such products available in Germany. In 2016, with my own company, I began to offer such portfolios with much stricter ESG-criteria. I could find enough REITs and listed real estate stocks. For listed infrastructure, even though I extended my ideal definition from core infrastructure to also include social infrastructure and infrastructure related companies, I struggled to find 30 companies worldwide which fulfilled my responsibility requirements.

Thematic SDG-aligned portfolios can fill the “alternatives” allocation

But I will not give up on allocations to alternative investments. In the future, most of my actively offered portfolios will be SDG-aligned. I also use ESG-selection criteria in addition to SDG-alignment for all of these portfolios. And my SDG-aligned portfolios have significant exposures to “alternative” investment segments including green and social real estate and infrastructure.

My SDG ETF-Portfolio, for example, currently includes 10 Article 9 ETFs (see Drittes SDG ETF-Portfolio: Konform mit Art. 9 SFDR – Responsible Investment Research Blog (prof-soehnholz.com)). Several of these ETFs invest in  infrastructure (e.g. the Clean Water, Clean Energy and Smart City Infrastructure ETF). Two others are purely real estate focused. In addition, my SDG-ETFs are selected as portfolio-diversifiers and typically include a significant number of small cap investments which often have “private equity like” characteristics. Also, SDG-aligned ETF are only admitted for my portfolios if they have a low country- and company-overlap with traditional indices.

And my direct Global Equities ESG SDG portfolios and my mutual fund include about 20% “responsible” infrastructure and 7% social (healthcare and senior housing) real estate stocks in September 2023. In addition, almost half of the stocks in the portfolio are small cap investments (compare Active or impact investing? – (prof-soehnholz.com)).

Both ETF- and direct SDG-aligned portfolios thus can diversify most traditional (large-cap) portfolios. In addition, I will offer investors the ability to easily create bespoke SDG-aligned ESG-portfolios which may well focus on “alternatives”.  

Even the performance of my Alternatives ETF- (green in the chart above) and the SDG-ETF portfolio (blue) have been similar for quite some time.

Emissions trading: Illustration from Pixaby by AS_Appendorf

Emissions trading and more: Researchblog #146

Emissions trading: 16x new research on fossil subsidies, ECB eco policy, GHG disclosures, supplier ESG, workforce ESG, geospatial ESG data, ESG reputation and performance, investor driven greenwashing, sustainable blockchain, active management, GenAI for asset management and more

Emissions trading (ecological) research

Fossil subsidies: IMF Fossil Fuel Subsidies Data: 2023 Update by Simon Black, Antung A. Liu, Ian Parry, and Nate Vernon from the International Monetary Fund as of Oct. 4th, 2023 (#11): “Fossil fuel subsidy estimates provide a summary statistic of prevailing underpricing of fossil fuels. … falling energy prices provide an opportune time to lock in pricing of carbon and local air pollution emissions without necessarily raising energy prices above recently experienced levels. For example, even with a carbon price of $75 per tonne, international natural gas prices in 2030 (shown in Figure 1) would be well below peak levels in 2022. Energy price reform needs to be accompanied by robust assistance for households, but this should be both targeted at low-income households (to limit fiscal costs) and unrelated to energy consumption (to avoid undermining energy conservation incentives). Assistance might therefore take the form of means-tested transfer payments or perhaps lump-sum rebates in energy bills“ (p. 23). My comment: Total subsidies for Germany for 2022 amout to US$ bln 129 (or 3% of GDP, see table p. 27), one of the largest amounts worldwide.

ECB policy model: Climate-conscious monetary policy by Anton Nakov and Carlos Thomas from the European Central Bank as of Sept. 29th, 2023 (#23): “We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transition to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds’ spreads” (abstract).

Pollution trade? Are Developed Countries Outsourcing Pollution? by Arik Levinson as of summer 2023: “… in general, the balance of the evidence to date does not find statistically or economically significant evidence of regulations causing outsourcing. For all the talk of outsourcing pollution in the media and politics, there is surprisingly little empirical evidence that high-income regions increasingly and disproportionally import products of the most polluting sectors“ (p. 107).

Emission trading (1): Emissions trading system: bridging the gap between environmental targets and fair competition by Massimo Beccarello and Giacomo Di Foggia as of Aug. 27th, 2023 (#22)“The effectiveness of the European Emissions Trading System in supporting a level playing field while reducing total emissions is tested. While data show a robust impact on the environment as a steady decrease in carbon emissions is observed, it is reported that its ability to internalize emission costs may improve to better address the import of extra European generated emissions that negatively impact the economy when not properly accounted for. Analyzing data in six European countries between 2016 and 2020, the results suggest competitive advantages for industries with higher extra-European imports of inputs that result in biased production costs that, in turn, alter competitive positioning” (abstract).

Emissions trading (2): Firm-Level Pollution and Membership of Emission Trading Schemes by Gbenga Adamolekun, Festus Fatai Adedoyin, and Antonios Siganos as of Sept. 18th, 2023 (#7): “Our evidence indicates that firms that are members of ETS emit on average more carbon than their counterparts that are not members of the scheme. Members of emission trading schemes are more effective in their carbon reduction efforts. Firms that are members of an ETS emit significantly more sulphur and volatile organic compounds (VOCs) than their peers that are not members of an ETS. We also find that members of ETS typically have more environmental scandals than their counterparts that are non-members. … We also report that firms that choose to exit the scheme continue emitting more than their counterparts. … new entrants initially do not emit more than their peers at the beginning, but they increase their emissions in the years following” (S. 24/25).

Different disclosures: Climate Disclosure: A Machine Learning-Based Analysis of Company-Level GHG Emissions and ESG Data Disclosure by Andrej Bajic as of August 24th, 2023 (#39): “One of the key findings of the study indicates that larger firms tend to exhibit a greater tendency to disclose both ESG (partial disclosure) and GHG data (full disclosure) … more profitable and carbon-intensive firms tend to disclose data more frequently. Furthermore, we find that companies from Western, Northern, and Southern demonstrate a stronger propensity towards disclosing GHG emissions data, whereas those from North America, particularly the US, have a higher tendency to provide general ESG data (partial disclosure), but not as much transparency regarding their GHG emissions“ (p. 25/26). My comment: I try to convince small- and midcap companies to disclose GHG scope 3 emissions, see  Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

No intrinsic ESG? Do Major Customers Affect Suppliers‘ ESG Activities? by Feng Dong, John A. Doukas, Rongyao Zhang, Stephanie Walton, and Yiyang Zhang as of Sept. 20th, 2023 (#18): “Our empirical findings show a significantly negative relation between customer concentration and suppliers‘ ESG engagement, indicating that firms with major customers have fewer incentives to engage in ESG activities to improve their social capital, thereby attracting other customers. Instead, they cater to (maintain) their current major customers by allocating capital resources to other activities aiming to increase their intangible asset base … firms tend to maintain higher levels of ESG engagement when their principal customers exhibit greater financial leverage and bankruptcy risk. … Additionally, we find that suppliers with concentrated customer bases and customers facing lower switching costs tend to have higher levels of ESG engagement, while suppliers with non-diversified revenue streams also exhibit higher levels of ESG activities” (p. 32/33). My comment: Regarding supplier ESG effects see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)

Social research

Green flexibility: More Flexibility, Less Sustainability: How Workforce Flexibility Has a Dual Effect on Corporate Environmental Sustainability by Tobias Stucki and David Risi as of Sept. 24th, 2023 (#6): “Research suggests a strong link between corporate environmental sustainability and workforce flexibility. On the one hand, forms of workforce flexibility, such as job rotation and temporary employment, are relevant for organizational learning and absorptive capacity. On the other, organizational learning and absorptive capacity influence the adoption of environmental management systems (EMS) and green process innovation. … we hypothesize that (a) workforce flexibility positively affects green process innovation because it stimulates absorptive capacity and that (b) workforce flexibility has a negative moderating effect on the relationship between EMS (Sö: environmental Management systems) adoption and green process innovation … Empirical tests based on two representative datasets support our premises” (abstract). My comment: For the above mentioned reasons I include temporary work providers in my SDG-aligned portfolios and in my fund (see e.g. Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)). I could not find many other investors with a similar approach, though.  

Responsible investment research (Emissions trading)

Geo-ESG-Caching? Locating the Future of ESG: The Promise of Geospatial Data in Advancing ESG Research by Ulrich Atz and Christopher C. Bruno as of Sept.20th, 2023 (#25): “We reiterate that most contemporary critiques of ESG are appropriate. But this does not contradict the enormous progress we have made over the last ten years in measuring ESG performance. The tension rather highlights that there is no shortcut for establishing the next generation of accounting for sustainability performance. Aggregate ESG scores can never serve more than a narrow purpose. Practitioners need to accept that they have to deal with a menu of ESG performance metrics depending on factors that affect their business, industry, or preferences of their investors. We see the frontier and most promising avenue for better ESG measurements in location-based data“ (p. 9).

ESG image costs: ESG Reputation Risk Matters: An Event Study Based on Social Media Data by Maxime L. D. Nicolas, Adrien Desroziers, Fabio Caccioli, and Tomaso Aste as of Sept. 22nd, 2023 (#73): “… this study is the first to examine how shareholders respond to ESG related reputational risk events and how social media shapes their perception on the matter. … On the event date of an ESG-risk event, we observe a statistically significant decrease of approximately 0.29% in abnormal returns. Furthermore, this effect is stronger for Social and Governance-related risks, specifically “Product Liability”, “Stakeholder Opposition”, and “Corporate Governance”. Environmental-risk events don’t have a significant impact on stock prices, unless they are about “Environmental Opportunities“ (p. 10/11).

ESG risks: ESG Performance and Stock Risk in U.S. Financial Firms by Kyungyeon (Rachel) Koha and Jooh Lee as of Sept. 25th, 2023 (#45): “This study empirically examines the relationship between ESG performance and firm risks in the U.S. financial services industry. Our findings of a negative relationship between ESG and firm risk (total, idiosyncratic, and systematic) underscore the importance of ESG as both an ethical imperative and a strategic tool to manage risk in financial firms. … Specifically, under-diversified CEOs, with larger stakes in their firms, stand to benefit even more from high ESG performance, reinforcing the negative association between ESG and firm risk. Similarly, the interaction between ESG and leverage provides insight into how ESG can counteract the inherent risks associated with high leverage” (p. 13/14).

Greenwashing differences: Measuring Greenwashing: the Greenwashing Severity Index by Valentina Lagasio as of Sept. 28th, 2023 (#83): “Using a diverse dataset of 702 globally-listed companies … Our findings reveal variations in greenwashing practices, with certain sectors exhibiting higher susceptibility to greenwashing, while smaller companies tend to engage in fewer deceptive practices. … Key implications highlight the importance of transparent ESG reporting, third-party verification, and regulatory frameworks in combating greenwashing” (abstract).

Investor driven greenwashing? Green or Greenwashing? How Manager and Investor Preferences Shape Firm Strategy by Nathan Barrymore as of Sept. 19th, 2023 (#72): “This paper examines how managers’ and investors’ preferences with regards to … pressure … for environmental and social (ESG) responsibility – causes firms to either make substantive changes that result in improved outcomes or to greenwash: adopt symbolic policies. I find that managers’ ESG preferences, as proxied using their language on earnings calls, are associated with both ESG policies and outcomes. However, investors’ ESG preferences are associated with policies, but not outcomes, suggestive of greenwashing. … Greenwashing also correlates with ESG ratings disagreement, providing practical insight for managers and investors“ (abstract). My comment: Unfortunately, having policies often seems to be enough for some self-proclaimed responsible investors. I focus much more on outcomes such as SDG-alignment, see e.g. No engagement-washing! Opinion-Post #207 – Responsible Investment Research Blog (prof-soehnholz.com)

Sustainable blockchain? Blockchain Initiatives Dynamics Regarding The Sustainable Development Goals by Louis Bertucci and Jacques-André Fines-Schlumberger as of September 29th, 2023 (#60): “Using an open database of blockchain impact projects, we provide a dynamic analysis of these projects in relation with SDGs. We explain why the Bitcoin blockchain itself can help the development of clean energy infrastructure. … We also show that overall public blockchains are more popular than private blockchain and most importantly that the share of public blockchains as underlying technology is increasing among impact projects, which we believe is the right choice for global and transparent impact projects. More recently a new paradigm is emerging in the decentralized ecosystem called Regenerative Finance (or ReFi). Regenerative Finance merges the principles of Decentralised Finance (DeFi), which has the potential to broaden financial inclusion, facilitate open access, encourage permissionless innovation, and create new opportunities for entrepreneurs and innovators … with regenerative practices. … regenerative finance seeks to build a financial system that generates positive environmental and social outcomes … to fund public goods, encourage climate-positive initiatives and shift current economic systems from extractive models to regenerative ones“ (p. 20/21).

Other investment research (Emissions trading)

More effort, fewer trades? (Not) Everybody’s Working for the Weekend: A Study of Mutual Fund Manager Effort by Boone Bowles and Richard B. Evans as of Sept. 20th, 2023 (#53): “Our measure compares observable mutual fund work activity between regular workdays and weekends. We find that effort (P ctW k) varies over time (there is generally more effort between November and February) and across mutual funds (larger, more expensive, better run funds put in more effort). Further, we find that within-family increases in effort come in response to poor recent performance, outflows and higher volatility. We … find that after mutual funds increase their effort their portfolios are more concentrated, have higher active share, and experience lower turnover. … more effort leads to better performance in the future in terms of benchmark adjusted alphas“ (p.23/24).

GenAI for investments? Generative AI: Overview, Economic Impact, and Applications in Asset Management by Martin Luk frm Man AHL as of September 19th, 2023 (#1974): “This paper provides a comprehensive overview of the evolution and latest advancements in Generative AI models, alongside their economic impact and applications in asset management. … The first section outlines the key innovations and methodologies that underpin large language models like ChatGPT, while also covering image-based, multimodal, and tool-using Generative AI models. … the second section reviews the impact of Generative AI on jobs, productivity, and various industries, ending with a focus on use-cases within investment management. This section also addresses the dangers and risks associated with the use of Generative AI, including the issue of hallucinations” (abstract). My comment see AI: Wie können nachhaltige AnlegerInnen profitieren? – Responsible Investment Research Blog (prof-soehnholz.com)

Advert for German investors:

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 30 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

ESG gemischt: Illustriert durch Bild Brain von Roadlight von Pixabay

ESG gemischt, SDG schlecht: 9-Monatsperformance 2023

ESG gemischt: Vereinfacht zusammengefasst haben meine nachhaltigen ESG-Portfolios in den ersten 9 Monaten 2023 ähnlich rentiert wie vergleichbare traditionelle aktiv gemanagte Fonds bzw. traditionelle ETFs. Allerdings liefen die SDG-fokussierte (Multi-Themen) und die Trendfolgeportfolios schlecht. Im Jahr 2022 hatten dagegen besonders meine Trendfolge und SDG-Portfolios gut rentiert (vgl. SDG und Trendfolge: Relativ gut in 2022 – Responsible Investment Research Blog (prof-soehnholz.com)).

Traditionelles passive Allokations-ETF-Portfolios gut

Das nicht-nachhaltige Alternatives ETF-Portfolio hat in 2023 bis September 2023 0,2% gewonnen. Dafür hat das regelbasierte „most passive“ Multi-Asset Weltmarkt ETF-Portfolio mit +3,7% trotz seines hohen Anteils an Alternatives relativ gut abgeschnitten, denn die Performance ist sogar etwas besser als die aktiver Mischfonds (+3,2%).

ESG gemischt: Nachhaltige ETF-Portfolios

Vergleichbares gilt für das ebenfalls breit diversifizierte ESG ETF-Portfolio mit +3,5%. Das ESG ETF-Portfolio ex Bonds lag mit +5,4% aufgrund des hohen Alternatives- und geringeren Tech-Anteils  erheblich hinter den +10,6% traditioneller Aktien-ETFs. Das ist aber ganz ähnlich wie die +5,3% aktiv gemanagter globaler Aktienfonds. Das ESG ETF-Portfolio ex Bonds Income verzeichnete ein etwas geringeres Plus von +4,3%. Das ist etwas schlechter als die +4,8% traditioneller Dividendenfonds.

Mit -1,1% schnitt das ESG ETF-Portfolio Bonds (EUR) im Vergleich zu -2,2% für vergleichbare traditionelle Anleihe-ETFs relativ gut ab. Anders als in 2022 hat meine Trendfolge mit -4,9% für das ESG ETF-Portfolio ex Bonds Trend nicht gut funktioniert.

Das aus thematischen Aktien-ETFs bestehende SDG ETF-Portfolio lag mit -5,4% stark hinter traditionellen Aktienanlagen zurück und das SDG ETF-Trendfolgeportfolio zeigt mit -13.8% eine sehr schlechte Performance.

Direkte pure ESG und SDG-Aktienportfolios

Das aus 30 Aktien bestehende Global Equities ESG Portfolio hat +7,1% gemacht und liegt damit etwa besser als traditionelle aktive Fonds (+5,3%) aber hinter traditionellen Aktien-ETFs, was vor allem an den im Portfolio nicht vorhandenen Mega-Techs lag. Das nur aus 5 Titeln bestehende Global Equities ESG Portfolio war mit +6,6% etwas schlechter, liegt aber seit dem Start in 2017 immer noch vor dem 30-Aktien Portfolio.

Das Infrastructure ESG Portfolio hat -8,7% gemacht und liegt damit erheblich hinter den -5,3% traditioneller Infrastrukturfonds und den -3,8% eines traditionellen Infrastruktur-ETFs. Das Real Estate ESG Portfolio hat dagegen nur -1,5% verloren, während traditionelle globale Immobilienaktien-ETFs -3,6% und aktiv gemanagte Fonds -3,9% verloren haben. Das Deutsche Aktien ESG Portfolio hat bis September +2,5% zugelegt. Das wiederum liegt erheblich hinter aktiv gemanagten traditionellen Fonds mit +6,9% und nennenswert hinter vergleichbaren ETFs mit +4,9%.

Das auf soziale Midcaps fokussierte Global Equities ESG SDG hat mit -8,6% im Vergleich zu allgemeinen Aktienfonds sehr schlecht abgeschnitten. Das Global Equities ESG SDG Trend Portfolio hat mit -14,2% – wie die anderen Trendfolgeportfolios –besonders schlecht abgeschnitten. Das noch stärker auf Gesundheitswerte fokussierte Global Equities ESG SDG Social Portfolio hat dagegen mit +3,8% im Vergleich zum Beispiel zu Gesundheitsfonds (-3,2%) ziemlich gut abgeschnitten.

Investmentfondsperformance

Mein FutureVest Equity Sustainable Development Goals R Fonds, der am 16. August 2021 gestartet ist, zeigt nach einem sehr guten Jahr 2022 mit -8,1% eine starke Underperformance gegenüber traditionellen Aktienmärkten. Das liegt vor allem an der Branchenzusammensetzung des Portfolios (weitere Informationen wie z.B. auch den aktuellen detaillierten Engagementreport siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T). Mehrere der Portfoliobestandteile sind nach klassischen Kennzahlen teilweise stark unterbewertet.

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

Impactinvsting ideas illustrated by picture of tree by umut avci from Puxabay

Impactinvesting ideas – Researchblog #145

Impactinvesting ideas: 12x new research on terrorism, migrants, emissions, innovations, ESG-ratings, sustainable debt, impactinvesting, directors, ETFs, gamification and concentration by Timo Busch, Harald Hau, Ulrich Hege, Thorsten Hens and many more (#: SSRN downloads on Sept. 28th, 2023)

Social research

Terror success: Terrorism and Voting: The Rise of Right-Wing Populism in Germany by Navid Sabet, Marius Liebald, Guido Friebel as of Sept. 25th, 2023 (#15): “… we find that successful (Sö terror) attacks lead to significant increases in the vote share for the right-wing, populist Alternative für Deutschland (AfD) party. Our results are predominantly observable in state elections, though attacks that receive high media coverage increase the AfD vote share in Federal elections. These patterns hold even though most attacks are motivated by right-wing causes and target migrants. Using a longitudinal panel of individuals, we find successful terror leads individuals to prefer the AfD more and worry more about migration” (abstract).

Integration deficits: The Integration of Migrants in the German Labor Market: Evidence over 50 Years by Paul Berbée and Jan Stuhler as of Sept. 25th, 2023 (#47): “First, employment profiles tend to be concave, with low initial employment but rapidly increasing employment in the first years after arrival (convergence). However, income gaps widen with more time in Germany (divergence). … Second, for most groups the employment gaps do not close, despite the initial catch-up. … Third, the income and employment gaps close partially in the second generation, but the employment gaps shrink by only 25% and remain large for some groups. Finally, the perhaps most striking observation is the sudden collapse of employment among earlier arrivals from Turkey in the early 1990s. … The employment shares of the refugees arriving around 2015 are similar to earlier refugee cohorts, despite the unusual favorable labor market conditions and the increased focus on integration policies. Their predicted long-term gaps in employment (about 20-25 pp.) are more than twice as large as the corresponding gap for Ukrainian refugees (about 10 pp.). … Summing up, immigration has become indispensable for the German economy, and the experience from more than 50 years shows that many migrant groups achieve substantial employment rates and incomes. However, barriers to integration persist, and while integration policies have improved along some dimensions, as yet we see no systematic improvements in integration outcomes over time (“p. 36/37).

Ecological research

Loose commitments: Behind Schedule: The Corporate Effort to Fulfill Climate Obligations by Joseph E. Aldy, Patrick Bolton, Zachery M. Halem, and Marcin Kacperczyk as of Sept. 20th, 2023 (#66):  “We analyze corporate commitments to reduce carbon emissions. We show that companies in their decisions to commit are more driven by external shareholder pressure and reputational concerns rather than economic motives due to cost of capital effects. We further show that many companies focus on short-term pledges many of which get revised over time. Despite the growth in commitment movement, we find that most companies have fallen behind on their commitments for reasons that could be both systematic and idiosyncratic in nature“ (abstract).

Innovative suppliers: Climate Innovation and Carbon Emissions: Evidence from Supply Chain Networks by Ulrich Hege, Kai Li, and Yifei Zhang as of Sept. 14th, 2023 (#83): “… we ask (i) whether climate innovation invented by a supplier firm allows its customer firms to reduce CO2 emissions, and (ii) whether climate innovation facilitates the acquisition of new business customers and what types of customers. We find that climate innovations help customer firms to reduce carbon emissions …. Emissions savings are accentuated for high-emission firms and firm with stronger environmental concerns. … We show that customer firms generally have a strong preference for suppliers’ climate innovations. Moreover, we show that climate innovation allows suppliers to expand their customer base. We find that the capacity to attract new customers is more pronounced for customers with a strong preference for reducing their carbon footprint: these include firms with a strong preference for environmental protection, measured by their high environmental scores in their ESG ratings, but also firms with elevated GHG emissions that presumably anticipate regulatory or investor pressure to curtail their GHG emissions“ (p. 31/32). My comment regarding supplier relations see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)

ESG investment research: Impactinvesting ideas

E-Rating divergence: Environmental data and scores: Lost in translation by Enrico Bernardini, Marco Fanari, Enrico Foscolo, and Francesco Ruggiero from the Bank of Italy as of Sept. 19th, 2023 (#26): “… we find that environmental data have meaningful, although limited, explanatory power for the E-scores. … the scores of some providers are more related to raw data …. We identify some variables as significant and common across several providers, such as forward-looking measures like the presence of reduction targets for emissions and resource use as well as environmental and renewable energy policies. … We find the latent component to be heterogeneous across providers and this evidence may be due to different materiality in the providers’ assessments. Indeed, some providers focus their analysis on how the corporate financial conditions are affected by environmental issues, while others consider how corporate conduct can affect environmental conditions and others consider both perspectives (”double materiality”)” (p. 20).

More “sustainable” debt: Do Sustainable Companies Receive More Debt? The Role of Sustainability Profiles and Sustainability-related Debt Instruments by Julia Meyer and Beat Affolter as of Aug. 20th, 2023 (#89): “We have made use of three different sources of data to classify companies into one of three groups: (i) companies avoiding ESG risks (using the ESG rating), (ii) companies contributing to the SDGs (SDG score), and (iii) companies committed to transformation (SBTi targets or commitments). First, our results show that sustainability-related debt is largely issued by sustainable companies in all three dimensions. — Secondly, … we find a significant increase in levels of debt for more sustainable companies in all three dimensions. However, this increase seems not to be linked to the issuance of sustainability related debt instruments …. Our results, therefore, indicate that lenders have started to incorporate sustainability and transformation assessments over time and that good sustainability performance (again in all three dimensions) has led to additional debt financing compared to companies with a low sustainability performance” (p. 20).

Impactinvesting ideas: Research

Reactions to pollution: Sustainable Investing in Imperfect Markets by Thorsten Hens and Ester Trutwin as of Sept. 21st, 2023 (#42): “Given that the price for polluting the environment is too low, we show that impact investing can lead to a second-best solution. If at the margin the technology is ”clean”, investment should be increased while a capital reduction is appropriate if at the margin the firm’s technology is ”dirty”. However, sustainable investing requires households to anticipate the firm’s pollution activity. Therefor we show how the same solution can be implemented with ESG investing in which the burden of knowledge lies on the rating agency. Finally, we indicate that the first-best solution can be achieved by sustainable consumption” (abstract) My comment on impactinvesting ideas see Active or impact investing? – (prof-soehnholz.com)

Few Institutional directors: Do Institutional Directors Matter? by Heng Geng, Harald Hau, Roni Michaely, and Binh Nguyen as of Feb. 21st, 2023 (#168): “We find that board representation by institutional investors is relatively rare in U.S. public firms compared to the high institutional ownership in U.S. public firms. Only 7.61% of Compustat firm-years from 1999-2016 feature at least one institutional director representing an institutional shareholder owning more than 1% of outstanding shares. Second, Additional analyses indicate that banks, sophisticated investors (e.g., hedge funds, private equity), and activist shareholders are likely to obtain board seats. By contrast, large retail funds generally do not seek board representation. Common institutional directors representing the so-called “Big Three” asset management companies, which are concerned most for the potential antitrust implications, are only found in only 37 intra-industry firm pairs. Our third set of results reveals that rival firms sharing institutional investors rarely feature joint board representation by the same institutional investor. More importantly, in the rare cases of joint board representation, we do not find evidence that such overlapping board representation is related to higher profit margins than what is already predicted by common institutional ownership in a firm pair” (p. 23/24). My comment: Selecting adequate board directors is one of many potential of impactinvesting ideas

Practical Impactinvesting ideas: Principles for Impact Investments: Practical guidance for measuring and assessing the life cycle, magnitude, and tradeoffs of impact investments by Timo Busch, Eric Pruessner and Hendrik Brosche as of Sept. 26th, 2023 (#62): “For the impact life cycle, we propose a clear set of principles that create a standard for how impact-aligned and impact-generating investments should measure and assess impact. Regarding the topic of impact magnitude, the principles provide guidance for how large a company impact must be for impact investments to be considered significant. Ideally by using thresholds to determine the magnitude of a company impact, impact investments are directly connected to sustainable development objectives“ (p. 19).

Other investment research

ETF effects: Rise of Passive Investing – Effects on Price Level, Market Volatility, and Price Informativeness by Paweł Bednarek as of Sept. 12th, 2023 (#117): “I find that the growth of passive investing did not increase the overall price level, thus contradicting the common ETF bubble hypothesis, which postulated that rapid growth in passive strategies may lead to the detachment of prices of these securities from fundamentals. … We estimate that about 10% of current market volatility can be attributed to the rise of passive investing. It also resulted in diminished price informativeness due to weakened information acquisition. Further reduction in passive management fees will strengthen these effects“ (abstract).

The bank wins: The Gamification of Banking by Colleen Baker and Christopher K. Odinet as of Sept. 26th, 2023 (#42): “After providing an overview of gamification in general, we examined its rise in the context of stock trading … We next turned to early appearances of gamification in banking … we think that its pace is about to accelerate. Our perspective is supported by a number of examples involving banks and fintechs partnering or combining to offer banking services through a game-like interface. As in Truist’s case, bank-fintech partnerships are on the cusp of the gamification of banking that we predict will develop in three stages, culminating with meg one-stop-shop financial intermediary platforms anchored by cloud computing service providers“ (p. 39/40).

Better >10 stocks: Underperformance of Concentrated Stock Positions by Antti Petajisto as of Aug. 28th, 2023 (#473): “… we find that the median stock has underperformed the cap-weighted market portfolio by 7.9% over rolling ten-year investment periods (or 0.82% per year) since 1926. The relative underperformance over rolling ten-year periods increases to 17.8% (or 1.94% per year) when considering only stocks whose performance ranked in the top 20% over the prior five years. … the observed underperformance of the median stock applies across all industry groups and among both the smallest and largest stocks“ (p. 18/19). My comment: In this research concentrated means 10% or higher allocation to every stock. Here you find more research and my opinion: 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 29 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

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Customer ESG engagement picture shows sales increase by Elle Ritter from Pixabay

Customer ESG engagement – Opinion Post #212

Customer ESG engagement is my term for shareholder engagement with the goal to address corporate customers regarding ESG-topics. First, I want to help my respective portfolio companies to improve their ESG-profiles. In addition, I want to help to increase corporate revenues and thus to improve the returns for the clients in my investment portfolios.

Here I provide an overview of current scientific research regarding customer ESG engagement topics. I also explain my respective recommendations for the companies I am invested in.

The other two stakeholder groups which I address with my “leveraged shareholder engagement” are suppliers (see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)) and employees (compare HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)).

Unfortunately, I did not find much research on the link between ESG quality of companies (which is typically measured with ESG ratings) and corporate revenues.

Customer ESG engagement goal 1: Avoid or reduce negative aspects

My first hypothesis: If ESG quality (ratings) declines and customers are informed about the reasons for this change, they may react in buying less from the negatively affected companies. Here are two recent studies which support this hypothesis:

Negative ESG aspects (1): How Does ESG Shape Consumption? by Joel F. Houston, Chen Lin, Hongyu Shan, and Mo Shen as of June 11, 2023: “Our study explores the effects of more than 1600 negative events captured from the RepRisk database, on 150 million point-of-sale consumption observations … Our baseline findings show that the average negative event generates a 5 – 10 % decrease in sales for the affected product in the six months following the event“ (p. 23/24).

Negative aspects (2): Assessing the Impact of ESG Violations on Brand-Level Sales by Yao Chen, Rakesh Mallipeddi, M. Serkan Akturk, and Arvind Mahajan as of June 22nd, 2023 (no full paper free download): “This study examines the effects of negative Environmental, Social, and Governance (ESG) news on the sales of retail brands. … our results reveal that news coverage of firms‘ violations related to ESG significantly affects brand sales” (abstract).

The effects in the business-to-business market may be even larger. On the other hand, substituting a professional supplier with another one is typically time-consuming and costly.

Customer ESG engagement goal 2: Support positive aspects

My second hypothesis: If ESG quality (ratings) improves and customers are informed about the reasons for this change, they may react in buying more (volume effect) from the positively affected companies or pay them more (price effect).

Here are two recent studies which support this hypothesis:

Positive aspects (1): Do Consumers Care About ESG? Evidence from Barcode-Level Sales Data by Jean-Marie Meier, Henri Servaes, Jiaying Wei, and Steven Chong Xiao as of July 11th, 2023: “… we find that higher E&S ratings positively affect subsequent local product sales. … revenue also declines after the release of negative E&S news. … we find a significant increase in the sensitivity of local retail sales to firm E&S performance after … (Sö: natural and environmental) disaster events for counties located closer to the events“ (p. 23).

Positive aspects (2): The Return on Sustainability Investment (ROSI): Monetizing Financial Benefits of Sustainability Actions in Companies by Ulrich Atz, Tracy Van Holt, Elyse Douglas and Tensie Whelan as of Jan. 23rd, 2022: “The beef supply chain yielded a potential net present value (NPV) between 0.01 percent to 12 percent of annual revenue, depending on the supply chain segment. For one automotive company, the five-year NPV (Sö: Net present value) based on realized benefits was 12 percent of annual revenue“ (abstract).

Investors can influence corporations

If corporate ESG quality can influence revenues and if investors can influence corporate ESG quality, this can be a win-win situation.

I have written in the past about the potential impact of investors on corporations and my shareholder engagement approach (see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)). Here is an exemplary research study explicitly mentioning the potential for customer ESG engagement:

Good for stakeholders: Engagement on Environmental, Social, and Governance Performance by Tamas Barko, Martijn Cremers, and Luc Renneboog as of Nov. 18th, 2022: “Our results thus suggest that the activism regarding corporate social responsibility generally improves ESG practices and corporate sales and is profitable to the activist. Taken together, we provide direct evidence that ethical investing and strong financial performance, both from the activist’s and the targeted firm’s perspective, can go hand-in-hand together” (abstract).

I try to invest in the already most sustainable companies (see for example Active or impact investing? – (prof-soehnholz.com)). Therefore, my customer ESG engagement focuses on informing customers, that ESG is important for the respective companies. In addition, I want to encourage customers to suggest ESG improvements for the companies I am invested in.

My customer ESG engagement recommendations

I expect easier and faster adoption of my shareholder proposals for simple and low cost recommendations. Many companies already use regular customer surveys. Adding additional questions to such surveys should be rather easy for them.

I propose regular and formal questions to customers such as “How satisfied are you with the environmental, social and corporate governance activities of “your company”?” and “Which environmental, social and corporate governance improvements do you suggest to “your company”?” plus the publication of the main results of the answers in the next sustainability report“

With these questions, I also want to help to educate customers on ESG topics, since the surveys should be accompagnied by some basic ESG information. Also, if customers find ESG important, as I expect, then company internal ESG-sceptics may become less negative on ESG. Thirdly, regularly measuring customer ESG satisfaction can help to monitor customers ESG perception changes. With the publication of the main survey results e.g. in regular sutainability reports, other stakeholders can monitor these perception changes and intervene, if they want.

Since I only started my shareholder engagement by the end of last year, I cannot report much adoption of my proposals yet. But the good news is that I am currently in more or less active discussions with 29 of my 30 portfolio companies. I am confident, that at least a few companies will introduce such survey questions and thus position themselves even more as ESG-leaders.

Research such as “A Test of Stakeholder Governance” by Stavros Gadinis and Amelia Miazad as of Aug. 25th, 2021 is one of the reasons for optimism on my part. They summarise: „Our findings suggest that companies turned to stakeholders during the pandemic with increasing frequency and asked for input on issues that are central to their business … Today, stakeholder governance seeks to proactively cover the company’s social profile as comprehensively as possible, collecting information in a regular and standardized manner“ (abstract).

And, with publications such as this blog post, maybe I can encourage others to support such broad stakeholder engagement activities as well.

Update information: In their 2023 Sustanability Report (p.48/49) Nordex, one of my investments, documents that it surveys customers since 2022 on ESG issues. The response rate of 30% and the overall satisfaction rate of 4,6 out of 6 can still be improved, though.

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 29 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

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Supplier ESG illustrated with delivery man by 28819275 from Pixabay

Supplier ESG – Researchpost #144

Supplier ESG: 17x new research on SDG, green behavior, subsidies, SMEs, ESG ratings, real estate, risk management, sin stocks, trading, suppliers, acting in concert, AI and VC by Alexander Bassen, Andreas G.F. Hoepner, and many more (#: SSRN downloads on Sept. 21st, 2023)

Too late? Earth beyond six of nine planetary boundaries by Katherine Richardson and many more as of Sept. 13th, 2023: “This planetary boundaries framework update finds that six of the nine boundaries are transgressed, suggesting that Earth is now well outside of the safe operating space for humanity. Ocean acidification is close to being breached, while aerosol loading regionally exceeds the boundary. Stratospheric ozone levels have slightly recovered. The transgression level has increased for all boundaries earlier identified as overstepped. As primary production drives Earth system biosphere functions, human appropriation of net primary production is proposed as a control variable for functional biosphere integrity. This boundary is also transgressed. Earth system modeling of different levels of the transgression of the climate and land system change boundaries illustrates that these anthropogenic impacts on Earth system must be considered in a systemic context“ (abstract).

Ecological research (corporate perspective)

Social measures: How useful are convenient measures of pro-environmental behavior? Evidence from a field study on green self-reports and observed green behavior by Ann-Kathrin Blankenberg, Martin Binder, and Israel Waichmann as of Aug. 20th, 2023 (#12): “We conduct a field study with n = 599 participants recruited in the town hall of a German medium-sized town to compare self-reports of pro-environmental behavior of our participants with observed behavior (green product choice and donation to real charities). Our results indicate that self-reports are only weakly correlated to incentivized behavior in our sample of an adult population (r = .09∗ ), partly because pro-environmental behavior measures can conflate prosocial and pro-environmental preferences. … Our results … cast some doubt on the validity of commonly used convenient measures of pro-environmental behavior“ (abstract).

Expensive subsidies: Converting the Converted: Subsidies and Solar Adoption by Linde Kattenberg, Erdal Aydin, Dirk Brounen, and Nils Kok as of July 25th, 2023 (#18): „… there is limited empirical evidence on the effectiveness of subsidies that are used to promote the adoption of such (Sö: renewable energy) technologies. This paper exploits a natural experimental setting, in which a solar PV subsidy is assigned randomly within a group of households applying for the subsidy. Combining data gathered from 100,000 aerial images with detailed information on 15,000 households … The results show that, within the group of households that applied for the subsidy, the provision of subsidy leads to a 14.4 percent increase in the probability of adopting solar PV, a 9.6 percent larger installation, and a 1-year faster adoption. However, examining the subsequent electricity consumption of the applicants, we report that the subsidy provision leads to a decrease in household electricity consumption of just 8.1 percent, as compared to the rejected applicant group, implying a cost of carbon of more than €2,202 per ton of CO2”.

Regulatory SME effects: The EU Sustainability Taxonomy: Will it Affect Small and Medium-sized Enterprises? by Ibrahim E. Sancak as of Sept. 6th, 2023 (#52): “The EU Sustainability Taxonomy (EUST) is a new challenge for companies, particularly SMEs and financial market participants; however, it potentially conveys its economic value; hence, reliable taxonomy reporting and strong sustainability indicators can yield enormously. … We conclude that the EU’s sustainable finance reforms have potential domino effects. Backed by the European Green Deal, sustainable finance reforms, and in particular, the EUST, will not be limited to large companies or EU companies; they will affect all economic actors having business and finance connections in the EU“ (p. 14).

ESG rating credits: Determinants of corporate credit ratings: Does ESG matter? by Lachlan Michalski and Rand Kwong Yew Low as of Aug. 19th, 2023 (#25): “We show that environmental and social responsibility variables are important determinants for the credit ratings, specifically measures of environmental innovation, resource use, emissions, corporate social responsibility, and workforce determinants. The influence of ESG variables become more pronounced following the financial crisis of 2007-2009, and are important across both investment-grade and speculative-grade classes” (abstract).

Climate risk management: Climate and Environmental risks and opportunities in the banking industry: the role of risk management by Doriana Cucinelli, Laura Nieri, and Stefano Piserà as of Aug. 18th, 2023 (#22): “We base our analysis on a sample of 112 European listed banks observed from 2005 to 2021. Our results … provide evidence that banks with a stronger and more sophisticated risk management are more likely to implement a better climate change risk strategy. … Our findings underline that bank providing their employees and managers with specific training programs on environmental topics, or availing of the presence of a CSR committee, or adopting environmental-linked remuneration scheme, stand out for a greater engagement towards C&E risks and opportunities and a sounder C&E strategy” (p. 16).

Generic ESG Research (investor perspective)

ESG dissected: It’s All in the Detail: Individual ESG Factors and Firm Value by Ramya Rajajagadeesan Aroul, Riette Carstens and Julia Freybote as of Aug. 25th, 2023 (#29): “We disaggregate ESG into its individual factors (E, S and G) and investigate their impact on firm value using publicly listed equity real estate investment trusts (REITs) as a laboratory over the period of 2009 to 2021. … We find that the environmental factor (E) and governance factor (G) positively predict firm value while the social factor (S) negatively predicts it. … Further analysis into antecedents of firm value suggests that our results are driven by 1) E reducing cost of debt and increasing financial flexibility, operating efficiency, and performance, 2) S leading to a higher cost of debt as well as lower financial flexibility and operating performance, and 3) G increasing operating efficiency. … We also find evidence for time-variations in the relationships of E, S and G with firm value and its determinants” (abstract). My comment: This is not really new as one can see in my publication from 2014: 140227 ESG_Paper_V3 1 (naaim.org)

Greenbrown valuations: The US equity valuation premium, globalization, and climate change risks by Craig Doidge, G. Andrew Karolyi, and René M. Stulz as of Sept. 15th, 2023 (#439): “It is well-known that before the GFC (Sö: Global Financial Crisis of 2008), on average, US firms were valued more highly than non-US firms. We call this valuation difference the US premium. We show that, for firms from DMs (Sö: Developed Markets), the US premium is larger after the crisis than before. By contrast, the US premium for firms from EMs (Sö: Emerging Markets) falls. In percentage terms, the US premium for DMs increases by 27% while the US premium for EMs falls by 24%. … the differing evolution of the US premium for DM firms and for EM firms is concentrated among old economy firms – older firms in industries that have a high ratio of tangible assets to total assets. … We find that the valuations of firms in brown industries in non-US DMs fell significantly relative to comparable firm valuations in the US and this decline among brown industries in EMs did not take place. Though this mechanism does not explain the increase in the US premium for firms in DMs fully, it explains much of that increase. It follows from this that differences across countries in the importance given to sustainability and ESG considerations can decrease the extent to which financial markets across the world are integrated“ (p. 28).

Sin ESG: Does ESG impact stock returns for controversial companies? by Sonal and William Stearns as of Sept. 2nd, 2023 (#35): “We find that the market perception of ESG investments of controversial firms have changed over time. For the 2010-2015 period, ESG investments made by sinful firms are rewarded positively by increasing stock prices. However, for the sample period post 2015, increases in ESG no longer result in positive stock returns. We further find the maximum change for the oil and gas industry“ (p. 11/12). My comment see ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)

Portfolio ESG effects: Quantifying the Impacts of Climate Shocks in Commercial Real Estate Market by Rogier Holtermans, Dongxiao Niu, and Siqi Zheng as of Sept. 7th, 2023 (#251): “We focus on Hurricanes Harvey and Sandy to quantify the price impacts of climate shocks on commercial buildings in the U.S. We find clear evidence of a decline in transaction prices in hurricane-damaged areas after the hurricane made landfall, compared to unaffected areas. We also observe that …. Assets in locations outside the FEMA floodplain (with less prior perception about climate risk) have experienced larger price discounts after the hurricanes. … Moreover, the price discount is larger when the particular buyer has more climate awareness and has a more geographically diverse portfolio, so it is easier for her to factor in this risk in the portfolio construction” (abstract).

ESG investors or traders? Do ESG Preferences Survive in the Trading Room? An Experimental Study by Alexander Bassen, Rajna Gibson Brandon, Andreas G.F. Hoepner, Johannes Klausmann, and Ioannis Oikonomou as of Sept. 19th, 2023 (#12): “This study experimentally tests in a competitive trading room whether Socially Responsible Investors (SRIs) and students are consistent with their stated ESG preferences. … The results suggest that all participants who view ESG issues as important (ESG perception) trade more aggressively irrespective of whether the news are related to ESG matters or not. … More importantly, SRIs trade on average much less aggressively than students irrespective of their ESG perceptions and behaviors” (abstract). … “Investors mostly consider macroeconomic and id[1]iosyncratic financial news in their investment decisions. Updates on the ESG performance of a firm are perceived as less likely to move prices by the participants. In addition to that, we observe a stronger reaction to positive news compared to negative news” (p. 26). My comment: I prefer most-passive rules based to active investments, compare Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com) or Active or impact investing? – (prof-soehnholz.com)

Supplier ESG research (also see Supplier engagement – Opinion post #211)

Supplier ESG shocks: ESG Shocks in Global Supply Chains by Emilio Bisetti, Guoman She, and Alminas Zaldokas as of Sept. 6th, 2023 (#38): “We show that U.S. firms cut imports by 29.9% and are 4.3% more likely to terminate a trade relationship when their international suppliers experience environmental and social (E&S) incidents. These trade cuts are larger for publicly listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation …. Larger trade cuts around the scandal result in higher supplier E&S scores in subsequent years, and in the eventual resumption of trade” (abstract).

Sustainable supplier reduction: A Supply Chain Sourcing Model at the Interface of Operations and Sustainability by Gang Li and Yu A. Xia as of Aug. 25th, 2023 (#204): “This research investigates … how to integrate sustainability with sourcing planning decisions and how to address the challenges associated with the integration, such as the balance between operational factors and sustainability factors and the quantitative evaluation of sustainability performance. … Our model suggests that while increasing the number of suppliers may cause additional sustainability risk in supply chain management, decreasing the supply base will decrease the production capacity and increase the risk of delivery delay. Therefore, a firm should carefully set up its global sourcing network with only a limited number of selected suppliers. This finding is particularly true when the focus of sourcing planning gradually moves away from decisions based solely on cost to those seeking excellence in both supply chain sustainability and cost performance“ (p. 32).

Empowering stakeholders: Stakeholder Governance as Governance by Stakeholders by Brett McDonnell as of August 31st, 2023 (#64): “… American stakeholder engagement is limited to soliciting (and on occasion responding to) the opinions of employees, customers, suppliers, and others. True stakeholder governance would involve these groups in actively making corporate decisions. I have suggested various ways we could do this. The focus should be on employees, who could be empowered via board representation, works councils, and unions. Other stakeholders could be less fully empowered through councils, advisory at first but potentially given power to nominate or even elect directors” (p. 19).

Impact investment research (supplier ESG)

Anti-climate concert: Rethinking Acting in Concert: Activist ESG Stewardship is Shareholder Democracy by Dan W. Puchniak and Umakanth Varottil as of Sept. 13th, 2023 (#187): “… the legal barriers posed by acting in concert rules in virtually all jurisdictions prevent institutional investors from engaging in collective shareholder activism with the aim or threat of replacing the board (i.e., “activist stewardship”). Perversely, the current acting in concert rules effectively prevent institutional investors from replacing boards that resist (or even deny) climate change solutions – even if (or, ironically, precisely because) they collectively have enough shareholder voting rights to democratically replace the boards of recalcitrant brown companies. This heretofore hidden problem in corporate and securities law effectively prevents trillions of dollars of shareholder voting rights that institutional investors legally control from being democratically exercised to change companies who refuse to properly acknowledge the threat of climate change” … (abstract).

Other investment research

AI investment risks: Artificial Intelligence (AI) and Future Retail Investment by Imtiaz Sifat as of Sept. 12th, 2023 (#20): “I have analyzed AI’s integration in retail investment. … The benefits spring from access to sophisticated strategies once exclusive to institutional investors. The downside is that the opaque models which facilitate such strategies may aggravate risks and information asymmetry for retail investors. To stop this gap from widening, proper governance is essential. Similarly, the ability to ingest copious alternative data and instantaneous portfolio optimization incurs a tradeoff—too much dependence on historical data invokes modelling biases and data quality cum privacy concerns. It is also likely that AI-dominated markets of the future will be more volatile, and new forms of speculation would emerge as trading platforms incentivize speculation and gamification. The combined forces of these concurrent challenges put a heavy stress on orthodox finance theories …“ (p. 16/17). Maybe interesting: AI: Wie können nachhaltige AnlegerInnen profitieren? – Responsible Investment Research Blog (prof-soehnholz.com)

Venture careers: Failing Just Fine: Assessing Careers of Venture Capital-backed Entrepreneurs via a Non-Wage Measure by Natee Amornsiripanitch, Paul A. Gompers, George Hu, Will Levinson, and Vladimir Mukharlyamov as of Aug. 30th, 2023 (#131): “Would-be founders experience accelerated career trajectories prior to founding, significantly outperforming graduates from same-tier colleges with similar first jobs. After exiting their start-ups, they obtain jobs about three years more senior than their peers who hold (i) same-tier college degrees, (ii) similar first jobs, and (iii) similar jobs immediately prior to founding their company. Even failed founders find jobs with higher seniority than those attained by their non-founder peers“ (abstract).

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 30 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T; also see Active or impact investing? – (prof-soehnholz.com)

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Supplier Engagement table by CAF as example

Supplier engagement – Opinion post #211

Supplier engagement is my term for shareholder engagement with the goal to address suppliers either directly or indirectly. I provide an overview of current scientific research regarding supplier engagement. I also explain my respective recommendations to the companies I am invested in. Supplier engagement can be very powerful.

The other two stakeholder groups which I address with my “leveraged shareholder engagement” are customers and employees (compare HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)).

Supplier emissions can be very high

Supplier relations have become much talked about in recent years. Climate change is one of the reasons. Greenhouse gas (GHG) emissions are one of the prime shareholder concerns if they are interested in environmental topics. To compare more or less vertically integrated companies with their competitors, evaluating GHG emissions of suppliers is important. Often, GHG emissions of suppliers (part of so-called scope 3) are much higher than the (scope 1 and 2) emissions of the analyzed company itself.

Relevant research (1): Managing climate change risks in global supply chains: a review and research agenda by Abhijeet Ghadge, Hendrik Wurtmann and Stefan Seuring as of June 13th, 2022: “The research … captures a comprehensive picture of climate change and associated phenomenon in terms of sources, consequences, control drivers, and mitigation mechanisms. … The study contributes to practice by providing visibility into the industry sectors most likely to be impacted; their complex association with other supply chain networks. The drivers, barriers, and strategies for climate change mitigation are particularly helpful to practitioners for better managing human-induced risks …” (p. 59).

Supply chain becomes more important for ESG-analyses

COVID and geopolitical changes such as the Russian attack on the Ukraine also showed that the management of supply chains is crucial for many companies. Even before, many supplier related incidents such as the Foxconn/Apple discussions had significant effects on company ESG perceptions and potentially also on ESG-ratings. Also, supply chains are becoming more in many countries.

Relevant research (2): ESG Shocks in Global Supply Chains by Emilio Bisetti, Guoman She, and Alminas Zaldokas as of Sept. 6th, 2023: “We show that U.S. firms cut imports by 29.9% and are 4.3% more likely to terminate a trade relationship when their international suppliers experience environmental and social (E&S) incidents. These trade cuts are larger for publicly listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation …. Larger trade cuts around the scandal result in higher supplier E&S scores in subsequent years, and in the eventual resumption of trade” (abstract).

On the positive side, many suppliers have great knowhow and can help their clients to become better in ESG-terms.

Relevant research (3): Stakeholder Engagement by Brett McDonnell as of Nov. 1st, 2022t:  “Suppliers, like employees, also provide inputs to the production process of companies. Retaining the loyalty of suppliers may be important for companies, depending in part on how firm-specific inputs are. Where inputs are fungible, they can be bought on the market for the prevailing market price, but where they are firm-specific, the buying firm will have more trouble replacing a supplier that decides to withdraw. Suppliers have information about the quality of what they supply, and about conditions which may affect future availability and prices” (p. 8).

Supplier engagement: How investors can indirectly engage

Investors in publicly listed companies do probably not want to directly with the often many important suppliers of their portfolios companies. But they can indirectly leverage the knowhow and energy of suppliers. Here is what Brett McDonnell suggests:

Relevant research (4): Stakeholder Governance as Governance by Stakeholders by Brett McDonnell as of August 31st, 2023: “… American stakeholder engagement is limited to soliciting (and on occasion responding to) the opinions of employees, customers, suppliers, and others. True stakeholder governance would involve these groups in actively making corporate decisions. I have suggested various ways we could do this. The focus should be on employees, who could be empowered via board representation, works councils, and unions. Other stakeholders could be less fully empowered through councils, advisory at first but potentially given power to nominate or even elect directors” (p. 19).

In my opinion, too, advisory councils of suppliers could be helpful to improve listed companies. I prefer other forms of ESG engagement with suppliers, though. First, companies could regularly survey most of their direct and even some important indirect suppliers in a regular way regarding ESG topics. With regular surveys companies can find out how happy their suppliers are with the companies ESG activities and ESG-improvement ideas by suppliers can be collected.

Example (1): Surveys from Stakeholders Make Good Business Sense by Terrie Nolinske from the National Business Research Institute (no date) mentions The Body Shop and Michelin who use supplier surveys.

Example (2): AA1000 Stakeholder Engagement Standard from Accountability as of 2015 “provides a … practical framework to implement stakeholder engagement and … Describes how to integrate stakeholder engagement with an organization’s governance, strategy, and operations”.

I specifically suggest to regularly ask suppliers the following questions: 1) “How satisfied are you with the environmental, social and corporate governance activities of company XYZ?” and 2) “Which environmental, social and corporate governance improvements do you suggest to company XYZ?”.

Systematic supplier engagement using ESG evaluations

In my view, even more important to improve the full supply chain ESG-profile is that companies regularly, broadly and independently evaluate the ESG-quality of their suppliers. Independent ESG-ratings can be very useful for that purpose, since they systematically cover many environmental, social and governance aspects.

I try to invest in the 30 most sustainable publicly listed companies globally (see Active or impact investing? – (prof-soehnholz.com)), but even most of these companies do not have such a supplier ESG evaluation process. Here are the two best examples of my portfolios companies:

Supplier ESG evaluation (1): Watts Water Sustainability Report 2022 p. 63: “In 2022, we met our goal of reviewing suppliers representing approximately 30% of our global annual spend using the Dun & Bradstreet (D&B) ESG Rating Service. The service is a web-based ratings platform that assesses the ESG operations of suppliers across 70 key topics, including through peer benchmarking and using leading sustainability frameworks …. Through our expanded use of this tool, we gained increased insight into our suppliers’ sustainability practices, including that suppliers making up one-sixth of the global spend we assessed already have advanced ESG systems in place”.

Supplier ESG evaluation (2): CAFs 2022 Sustainability Report: “… the evaluation effort focuses on 349 target suppliers out of a total of approximately 6,000 suppliers. The evaluations are carried out by Ecovadis …. Ecovadis adapts the evaluation questionnaire to each supplier based on the locations in which it operates, its sector and its size to evaluate 21 aspects of sustainability alligned with the most demanding international norms, regulations and standards …. Suppliers‘ responses are evaluated by specialised analysts … This analysis results in a general rating with a maximum score of 100 points …. If the result of an evaluation does not meet the requirements established by CAF (a general score of 45 out of 100 in sustainability management), the supplier is required to implement an action plan to improve the weaknesses identified. If the supplier does not raise its assessment to acceptable levels or does not show a commitment to improve, it is audited by experts in the field” (p. 83).

“By the end of 2022, the activities … have assessed … 78% of the prioritised suppliers (118 business groups) …. The assessed suppliers have an average overall rating of 58.6 out of 100 … which is 13 percentage points higher than the average of all suppliers assessed by Ecovadis worldwide (45/100). In addition, 71% of CAF suppliers reassessed in the last year improved their general rating … As a result of these assessments it has also been identified that 2% of the Group’s total purchases are made from suppliers with average or lower sustainability management and an improvement plan has been agreed with all of them”(p. 84).

The picture of my blogpost summarises the results of the 2022 supplier assessment campaign of one of my portfolio companies: Construcciones y Auxiliar de Ferrocarriles (CAF Sustainability Report 2022, p. 85):

But even Watts Water and CAF currently only cover a relatively small share of their suppliers with these evaluations.

Better fewer suppliers?

Such a sustainability-oriented supplier evaluation approach could result in fewer and therefore more important suppliers.

Relevant research (5): A Supply Chain Sourcing Model at the Interface of Operations and Sustainability by Gang Li and Yu A. Xia as of Aug. 25th, 2023: “This research investigates … how to integrate sustainability with sourcing planning decisions and how to address the challenges associated with the integration, such as the balance between operational factors and sustainability factors and the quantitative evaluation of sustainability performance. … Our model suggests that while increasing the number of suppliers may cause additional sustainability risk in supply chain management, decreasing the supply base will decrease the production capacity and increase the risk of delivery delay. Therefore, a firm should carefully set up its global sourcing network with only a limited number of selected suppliers. This finding is particularly true when the focus of sourcing planning gradually moves away from decisions based solely on cost to those seeking excellence in both supply chain sustainability and cost performance“ (p. 32).

Supplier engagement: Powerful supplier ESG disclosures

I think that is very important to make the supplier engagement activities transparent. Only transparent activities can be controlled by stakeholders. It is very useful for stakeholders, too, to know the identities of the major suppliers.

Relevant research (6):  Green Image in Supply Chains: Selective Disclosure of Corporate Suppliers by Yilin Shi, Jing Wu, and Yu Zhang as of Sept. 9th, 2022 (#2015): “We uncover robust empirical evidence showing that listed firms selectively disclose environmentally friendly suppliers while selectively not disclosing suppliers with poor environmental performance, i.e., they conduct supply chain greenwashing. This is a prevalent behavior in the sample of more than 40 major countries or regions around the world that we study. … we find that customer firms that face more competitive pressure, care more about brand image and reputation, and have larger shares of institutional holdings are more likely to conduct such selective disclosure. … we find that information transparency reduces such behavior. Finally, we study the outcomes of selectively disclosing green suppliers and find that customers benefit from the practice in terms of sales, profitability, and market valuation“ (p. 22/24). 

A supplier engagement proposal and first engagement experiences

Based on my engagement policy (Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)), I try to make it as simple as possible for my portfolio companies to implement my suggestions. Comprehensive and regular supplier ESG surveys would be a rather simple and low-cost approach and I certainly encourage them.

Given the importance of the supply chain for ESG-topics and the risks of greenwashing, I especially recommend a more demanding supplier ESG-rating approach to all my portfolio companies. Specifically, I tell them: “Favoring suppliers with better overall/comprehensive ESG scores is probably the way to go. Reporting aggregated information such as percentage of suppliers with XYZ ESG-scores can be one first step regarding transparency”. I also inform them about current relevant research and the two examples mentioned above.

No supplier engagement results yet

I started my respective engagement activities only at the end of 2022. Some companies answered that they like my suggestions and plan to analyze them, but I cannot report implementations so far (compare 230831_FutureVest_Engagementreport-2830ab605a502648339b4f8f58fa2ee2dce539ef.pdf).

I am only a small investors and cooperative engagement can me more powerful. Unfortunately, my attempts for cooperative engagement with other investors have not been fruitful yet. One reason is that I could only find very few sustainable investment funds with a dedicated small-and midcap focus such as mine. With the few such funds I have typically very little company overlap. The asset managers and the shareholder organizations which I have asked so far want to cooperate with larger asset managers and not with such a small entity as mine.

Nevertheless, I will continue to ask my portfolio companies for such stakeholder engagements and the publication of their results. I am confident, that at least a few companies will adopt such surveys and evaluations and thus position themselves even more as ESG-leaders. Research such as “A Test of Stakeholder Governance” by Stavros Gadinis and Amelia Miazad as of Aug. 25th, 2021 is one of the reasons for optimism on my part. And, maybe, with publications such as this blog post, I can encourage other companies, investors etc. to support such broad stakeholder engagement activities as well.

Additional research:

Bringing ESG Accountability to Global Supply Chains as of Oct. 30th, 2023 by Ingrid Cornander, Michael Jonas, and Daniel Weise from The Boston Consulting Group

Social research illustration with picture by Sabine Kroschel from Pixabay

Social research: Researchpost #143

Social research: 9x new research on immigration, human resources, activists, transition investing, carbon prices and taxes, ESG performance and female entrepreneurs by Moritz Drupp, Gilbert Metcalf, James Stock and many others

New social research

Good immigration: Immigration and Nationalism in the Long Run by Valentin Lang and Stephan A. Schneider as of June 8th, 2023 (#248): “Drawing on a natural experiment from Germany, we show that the massive inflow of forced migrants after World War II reduces voting for nationalist parties more than 70 years later. Voters in municipalities that experienced this historical immigration shock are significantly less likely to respond to current immigration waves by voting for nationalist parties. … Individual-level evidence from a customized survey with a randomized experiment aligns with these results and shows that immigration-friendly attitudes in the regions that experienced the expellee inflow result from norm transmission within families and local communities. The long-term electoral effect is driven by both descendants of expellees and descendants of natives. Experimentally evoking memories of the historical experience also leads to more pro-immigration responses. … In many countries, the nationalist backlash against immigration is regionally concentrated; interestingly often in regions with relatively few immigrants. Our results offer an explanation for this particular phenomenon and suggest that the lack of experience with immigration in such regions is an important mechanism behind hostile political reactions. Second, the results highlight that the short- and long-run political effects of immigration can go in opposite directions“ (p. 39/40).

ESG keeps people: Effect of Corporate Environment Social and Governance Reputation on Employee Turnover by Ming Leung, Chuchu Liang, Ben Lourie and Chenqi Zhu as of August 20th, 2023 (#72): “We investigate how a firm’s environmental, social, and governance (ESG) reputation, as measured by the ESG sentiment of news articles, affects employee turnover. … Regression analyses on a firm-month panel of 1,822 publicly listed US firms from 2008 to 2018 reveal that a better public ESG reputation is associated with lower employee turnover and … this effect is stronger among female employees. … ESG reputation affects both men and women in states that have more Democratic voters …” (abstract). My comment: Here are some more employee related sources and ideas HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)

Good narcissists? Understanding Involvement in Environmental Activism: Relationships to Pathological Narcissism, Virtue Signaling, Dominance, and Sensation Seeking by Ann Krispenz and Alex Bertrams as of Sept. 8th, 2023 (#14): “Results support the validity of the DEVP (Sö: dark-ego-vehicle principle) by showing that higher pathological narcissistic grandiosity was related to greater involvement in environmental activism, even above and beyond relevant covariates (i.e., pathological narcissistic vulnerability, age, and gender). Also, we found positive relationships between involvement in environmental activism and typical correlates of pathological narcissistic grandiosity (i.e., virtue signaling, dominance, and sensation seeking)“ (abstract).

New ecological research

Urgent transition: The Road to Paris: Stress Testing the Transition Towards a Net-Zero Economy by Tina Emambakhsh, Maximilian Fuchs, Simon Kordel, Charalampos Kouratzoglou, Chiara Lelli, Riccardo Pizzeghello, Carmelo Salleo, and Martina Spaggiari from the European Central Bank as of Sept. 7th, 2023 (#42): “… By comparing different transition scenarios, the results of the exercise show that acting immediately and decisively would provide significant benefits for the euro area economy and financial system, not only by maintaining the optimal net-zero emissions path (and therefore limiting the physical impact of climate change), but also by limiting financial risk. An accelerated transition to a carbon-neutral economy would be helpful to contain risks for financial institutions and would not generate financial stability concerns for the euro area, provided that firms and households could finance their green investments in an orderly manner. However, the heterogeneous results across economic sectors and banks suggest that more careful monitoring of certain entities and subsets of credit exposures will be required during the transition process“ (abstract). My comment regarding transition investments see ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)

Good competition: Competitive Pressure and Emission Reduction: Unravelling the Link by Simone Cenci, Hossein Asgharian, Lu Liu, Marek Rei, and Maurizio Zollo as of Selt.9th, 2023 (#16): „We analysed data of 2 300 publicly traded firms from 47 countries and across all (GICS) sectors from 2011 to 2020. The main results of our analysis show that competitive pressures induce firms to increase their sustainability initiatives and to diversify their sustainability effort across different actions and SDGs. Sustainability behaviour diversification is in turn associated with lower future emissions. … We also find a significant heterogeneity in the magnitude of the effect across sectors and geographies“ (p.18/19).

Scientist disagreement? Heterogeneity in Expert Recommendations for Designing Carbon Pricing Policies across the Globe by Frikk Nesje, Robert C. Schmidt, and Moritz A. Drupp as of Sept.8th,2023 (#13): “… we present recommendations from a global survey of more than 400 experts to inform key design issues for carbon pricing policies. We find that almost twice as many experts favor a carbon tax over a cap-and-trade scheme for unilateral carbon pricing, and three-quarters strongly recommend using border carbon adjustment to address competitiveness concerns. Recommendations on the usage of revenues from carbon pricing exhibit a substantial degree of heterogeneity. While transfers to particularly affected households and equal lump sum transfers are among the options most favored, these account for only around 40 percent of recommendations …“ (abstract).

Good taxes? The Macroeconomic Impact of Europe’s Carbon Taxes by Gilbert E. Metcalf and James H. Stock as of July 10th, 2023 (#34): Placing a price on carbon pollution is widely viewed as the most cost‐effective approach to reducing emissions. … Using variation in the use of carbon taxes in European countries that are all part of the EU Emission Trading System (ETS), we find no evidence to support claims that the tax would adversely impact employment or GDP growth.  We find modest evidence for emissions reductions arising from the tax”.  (p. 24).

New ESG investment and other social research

Differentiated ESG performance: ESG and Global Investor Returns Study by Kroll as of September 2023: “Global portfolios of companies with higher ESG ratings earned a better annual compound return, when compared to portfolios of worse-rated companies over the 2013−2021 period. … with the notable exceptions of Brazil and Germany, 10 out of the 12 countries/markets analyzed individually saw companies rated as ESG Leaders outperform … Industries within the World portfolio also saw ESG Leaders generally outperform Laggards, except for Consumer Staples and Health Care. When industries were analyzed within regions or individual countries/markets, the relationship between returns and ESG ratings was less pronounced. … U.S. Laggards in the Energy, Health Care and Communications Services sectors significantly outperformed their better-rated counterparts“ (p. 40). My comment: Regarding industries I currently have a similar experience see ESG gut: 1. Halbjahr gut für ESG- und schlecht für SDG-Portfolios – (prof-soehnholz.com)

Female tools: Female Entrepreneurs, Digital Tools, and Work-Life Balance: Evidence from Small Businesses around the World by Elizabeth Lyons and Laurina Zhang as of Aug. 14th, 2023 (#14): “… we find that men and women do not differ in their extent of digital tool use for managing business activities that involve external stakeholders, but women are significantly less likely to use digital tools to manage internal business activities. This gender gap persists even in relatively gender equal countries and in industries where the benefits of using internal digital tools are high” (p. 12/13).

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 29 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T; also see Active or impact investing? – (prof-soehnholz.com)

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Illustration for HR-ESG is graphic Teamwork by Geralt from Pixabay

HR-ESG shareholder engagement: Opinion-Post #210

HR-ESG is attractive: Environmental, Social and Governance (ESG) aspects are becoming more important for companies who need additional capital, for those who want to increase sales, and also for hiring and keeping good employees (HR for “human resources”)[1].

In addition, employees can help companies to become more sustainable[2]. The Boston Consulting Group, for example, published recently that new ideas generated by employees helped to “overcome roadblocks in reducing Scope 3 emissions”[3].

Little scientific HR-ESG and employee engagement research

Unfortunately, I find very little comprehensive scientific research on HR-ESG[4]. A study by Hoa Briscoe-Tran from the University of Alberta[5] is one of the rare exceptions. Briscoe-Tran writes: “I analyze 10.4 million anonymous employee reviews and find that employees have useful information about firms’ environmental, social, and governance (ESG) practices. Employees discuss ESG topics in 43% of reviews, thereby providing substantial information about firms’ ESG practices. The employees’ inside view predicts various indicators of a firm’s future ESG-related outcomes, beyond the existing ESG ratings, particularly on the S and G dimensions. Using the inside view, I show that a firm’s stated ESG policies often differ from its employees’ view of its practices. … ESG rating agencies could consider incorporating employee reviews into their rating methodology more broadly” (p. 33).

A more recent study shows: „We find that, on average, job-seekers place a value on ESG signals equivalent to about 10% of the average wage. … Quantitatively, skilled workers value firm ESG activities substantially more than unskilled workers. … results indicate that ESG increases worker utility relative to the baseline economy without ESG. The reallocation of labor in the economy with ESG improves assortative matching and yields an increase in total output. Moreover, skilled workers benefit the most from the introduction of ESG, ultimately increasing wage differentials between skilled and unskilled workers“ (p. 32).

Companies should use the broad employee interest for ESG in a systematic way. And Shareholders should address this change potential when they engage with their portfolio companies.

Even though I have studied scientific publications regarding shareholder engagement quite thoroughly[6], I have found very little engagement with a broad HR-ESG perspective going significantly beyond rather limited diversity, equality, and inclusion (DEI) issues.

Broad HR-ESG activation is easy

With my mutual fund I try to invest in 30 of the most sustainable companies worldwide. Most of these companies actively address the typical HR-ESG-topics such as DEI, workplace safety etc.. I read their sustainability reports and also directly asked them, but I could not find one single company which tries to broadly engage its employees regarding ESG topics[7].

In my shareholder engagement strategy[8] I propose a very simple and efficient approach to activate employees for ESG-issues. Specifically, I write to all my portfolio companies: 

I think that regular and broad questions such as “How satisfied are you with the environmental, social and corporate governance activities of your company?” and “Which environmental, social and corporate governance improvements do you suggest to your company?” plus the (anonymous) publication of the main results of the answers in the sustainability report would be very helpful in seriously engaging employees and getting valuable structured feedback”.

Leveraged shareholder or stakeholder engagement

Most of these companies use regular broad as well as specific pulse employee surveys and typically have high participation rates. Implementation of my questions therefore should be simple and cost-efficient.

In addition, I suggest asking the same questions to customers and they also could be asked to suppliers. Interestingly, “surveys are already very common among employees, but many companies do not yet use them for customers (or at least, they don’t report on it if they do) and surveys of suppliers may be worth adopting as well“[9]. Therefore, the implementation of my suggested regular ESG surveys of customers and suppliers might be somewhat more time-consuming and expensive than employee surveys. But I think that it may well be worth the effort.

If companies regularly ask these questions to employees, customers and suppliers, shareholders can leverage their engagement activities to several stakeholder groups.

I started my respective engagement activities only at the end of 2022. Some companies answered that they like my suggestions and plan to analyze them, but I cannot report implementations so far.

I am only a small investors and cooperative engagement can me more powerful. Unfortunately, my trials for cooperative engagement with other investors have not been fruitful yet. One reason is that I could only find very few sustainable investment funds with a dedicated small-and midcap focus such as mine. With the few such funds I have typically very little overlap. The asset managers and shareholder organizations which I have asked so far want to cooperate with larger asset managers and not with such as small entity as mine.

But I will continue to ask for such surveys and the publication of their results. I am confident, that at least a few companies will adopt such surveys and position themselves even more as ESG-leaders[10]. And, maybe, with publications such as this one, I can encourage other companies, investors etc. to support such broad and easy to implement HR-ESG activities as well.

New research found after the first publication of this post (Sept. 13th, 2023)

Good jobs: Hidden Figures: The State of Human Capital Disclosures for Sustainable Jobs by Ulrich Atz and Tensie Whelan as of Oct. 11th, 2023: “Sustainable jobs … can lead to better financial performance, and represent a material impact for most corporations. … Using data from six leading ESG rating providers, we demonstrate substantial reporting gaps. For example, we find that only 20% of social metrics are decision-useful and quantitative measures are missing for most firms (70-90% per metric across raters). Even turnover, a financially material metric, is only available for half of firms at best and lacks details. Two case studies, on Amazon and the quick-service restaurant industry, further illustrate the financial costs of ignoring employment quality. We also provide several practical recommendations for managers and other stakeholders“ (abstract).

ESG attracts employees: Polarizing Corporations: Does Talent Flow to “Good’’ Firms? by Emanuele Colonnelli, Timothy McQuade, Gabriel Ramos, Thomas Rauter, and Olivia Xiong as of Nov. 30th, 2023: “Using Brazil as our setting, we make two primary contributions. First, in partnership with Brazil’s premier job platform, we design a nondeceptive incentivized field experiment to estimate job-seekers’ preferences to work for socially responsible firms. We find that, on average, job-seekers place a value on ESG signals equivalent to about 10% of the average wage. … Quantitatively, skilled workers value firm ESG activities substantially more than unskilled workers. … results indicate that ESG increases worker utility relative to the baseline economy without ESG. The reallocation of labor in the economy with ESG improves assortative matching and yields an increase in total output. Moreover, skilled workers benefit the most from the introduction of ESG, ultimately increasing wage differentials between skilled and unskilled workers“ (p. 32).


[1] see Effect of Corporate Environment Social and Governance Reputation on Employee Turnover by Ming Leung, Chuchu Liang, Ben Lourie and Chenqi Zhu as of August 20th, 2023

[2] see Engaging your people as the advocates and enablers of ESG change by Jessica Norton and Hannah Summers from Willis Towers Watson as of July 13, 2020

[3] see People Make the Difference in Green Transformations by Alice Bolton, Marjolein Cuellar, Kristy Ellmer, Elina Ibounig, Camila Noldin, Nick South and Astrid Vikström from The Boston Consulting Group as of August 23rd, 2023

[4] For a broad overview see e.g. Stakeholder Engagement by Brett McDonnell – SSRN as of Oct. 31st, 2022

[5] Do Employees Have Useful Information About Firms’ ESG Practices? by Hoa Briscoe-Tran – SSRN as of Aug. 2nd, 2023

[6] see for example Stakeholder engagement and ESG (Special Edition Researchposting 115) by Dirk Soehnholz as of Feb. 3, 23

[7] compare Active or impact investing? By Dirk Soehnholz as of July 21st, 2023 and 230831_FutureVest_Engagementreport-2830ab605a502648339b4f8f58fa2ee2dce539ef.pdf

[8] see Shareholder engagement: 21 science based theses and an action plan  by Dirk Soehnholz as of Feb. 8th, 2023

[9] see Stakeholder Engagement by Brett McDonnell – SSRN as of Oct. 31st, 2022, p. 48

[10] this study is one of the reasons for optimism on my part: A Test of Stakeholder Governance by Stavros Gadinis and Amelia Miazad as of Aug. 25th, 2021

Soccer picture from Blue Hat Graphics from Pixabay as Impact Strategies illustration

Impact strategies: Researchpost #142

Impact strategies: 12x new research on AI, education, diversity, insiders, compensation, impact investing, collaborative engagement, voting and analysts by Olaf Weber and many more (#: SSRN downloads as of Sept. 7th, 2023)

Social and ecological research (Impact strategies)

Good and bad AI: How We Learned to Stop Worrying and Love AI: Analyzing the Rapid Evolution of Generative Pre-Trained Transformer (GPT) and its Impacts on Law, Business, and Society by Scott J. Shackelford, Lawrence J. Trautman, and W. Gregory Voss as of Sept. 6th, 2023 (#108): “There is ample reason to believe that novel AI-driven capabilities hold considerable potential to drive practical solutions to address many of the world’s major challenges such as cancer, climate change, food production, healthcare, and poverty. … Even so, there are equally significant warning signs of serious consequences, including the threat of eliminating humanity. These warnings should not be ignored“ (p. 94). My comment: For responsible investing see How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Educational tools: The Emergence of An Educational Tool Industry: Opportunities and Challenges For Innovation in Education by Dominique Foray and Julio Raffo as of May 4th, 2023 (#16): “… an educational tool industry has emerged; that is to say a population of small firms is inventing and commercialising instruction (mainly ICT-based) technologies. … However the main commercial target of these companies is not the huge K12 public school system. This market does not satisfy most conditions for attracting and sustaining a strong entrepreneurial activity in the tool business. … But other “smaller” markets seem to be sufficiently attractive for entrepreneurs and this connection explains to a certain extent why we have observed the patent explosion and some increase in the number of firms specialised in the tool business“ (p. 19/20).

ESG investment research (Impact strategies)

Unflexible Diversity? Are Firms Sacrificing Flexibility for Diversity and Inclusion? by Hoa Briscoe-Tran as of Aug.14th, 2023 (#181): “I analyze data from thousands of companies dating back to 2008 and find that diverse and inclusive firms (D&I firms) tend to have lower operating flexibility. Exploration of mechanisms suggest that D&I firms have lower operating flexibility due to their slower operating efficiency in their response to unexpected economic shocks“ (p. 25).

Bad competition? Competitive Pressure and ESG by Vesa Pursiainen, Hanwen Sun, and Yue Xiang as of Sept. 1st, 2023 (#95): “… Our results suggest that a firm’s exposure to competition is negatively associated with its ESG performance. … The effect of product market competition on ESG performance is higher for firms that are more financially constrained and in more capital-intensive industries. Taken together, our findings suggest that companies face a trade-off in investing in ESG versus other investment needs …” (p. 18).

Bad insiders: Executive Ownership and Sustainability Performance by Marco Ghitti, Gianfranco Gianfrate, and Edoardo Reccagni as of Oct. 19th, 2022 (#167): “Our results indicate that executive shareholding is negatively associated with corporate E&S (Sö: Environmental and social) performance, indicating that the pursuit of non-financial returns is penalized when executives are more financially vested in the company. … We analogously observe that inside trading intensity is inversely associated with the sustainability footprint, thus confirming that when executives’ primary focus is on financial gains, E&S activities diminish. … we use an exogenous shock in capital gains taxation that specifically affected executive ownership in US public companies. The quasi-natural experiment confirms that it is the degree of executive ownership that affects the E&S footprint“ (p. 12).

CSR compensation: Empirical Examination of the Direct and Moderating Role of Corporate Social Responsibility in Top Executive Compensation by Mahfuja Malik and Eunsup Daniel Shim as of Aug. 9th, 2023 (#18): “Using a sample of 4,193 firm-year observations and 1,318 public U.S. firms, we find that CSR (Sö: Corporate social responsibility) performance positively moderates the relationship between firms’ total and long-term compensation, along with its direct association with CEO compensation. However, firms’ separate CSR report disclosures are not associated with CEO compensation. … we find that CSR has no moderating role in the relationship between CEO compensation and accounting-based performance. Interestingly, we find that CSR performance plays a moderating role in weakening the positive relationship between executive compensation and firm size“ (p. 18/19). My comment: see Wrong ESG bonus math? Content-Post #188 – Responsible Investment Research Blog (prof-soehnholz.com)

Costly greenwashing: Does Greenwashing Pay Off? Evidence from the Corporate Bond Market by Nazim Hussain, Shuo Wang, Qiang Wu, and Cheng (Colin) Zeng as of Sept. 7th, 2023 (#127): “Using 3,810 public bonds issued by U.S. firms, we find a positive relationship between greenwashing and the cost of bonds. We identify the causal relation by using the Federal Trade Commission’s 2012 regulatory intervention to curb misleading environmental claims as an exogenous shock to greenwashing. We also find a more pronounced relation between greenwashing and the cost of bonds for firms whose credit rating is adjacent to the investment/speculative borderline, firms within environmentally sensitive industries, and firms with opaque information environments. Moreover, we show that greenwashing leads to higher environmental litigation costs and a higher chance of rating disagreements among credit rating agencies … “ (abstract).

Impact strategies research

Green claims: Market review of environmental impact claims of retail investment funds in Europe by Nicola Stefan Koch, David Cooke, Samia Baadj, and Maximilien Boyne from the 2 Degree Investing Initiative as of August 2023: “27% of all in scope funds were associated with environmental impact claims. No fund with an environmental impact claim could sufficiently substantiate its claim according to the updated UCPD Guidance indicating a substantial potential legal risk. … Of the environmental impact claims deemed to be false or generic, there were 3x more appearing in Art 9 fund marketing materials compared to Art 8 fund marketing materials. … Most environmental impact claims deemed false equated “company impact” with “investor impact”, most environmental impact claims deemed unclear were not substantiated by sufficient information and most environmental impact claims deemed generic were fund names including the term “impact” with insufficient additional information” (p. 3). My comment: see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Impact strategies? New bottle or new label? Distinguishing impact investing from responsible and ethical investing by Truzaar Dordi, Phoebe Stephens, Sean Geobey, and Olaf Weber as of July 27th, 2023: “… how does the subfield of impact investing differentiate itself from more established ethical and responsible investing … Adopting a combination of bibliometric and content analyses, we identify four distinct features of impact investing – positive impact targeting, novelty of governance structures, long time horizons, and the importance of philanthropy” (abstract). … “This differs from responsible investing, which mainly relies on modern portfolio theory and capital pricing models for research …” (p. 22). My comment: see No engagement-washing! Opinion-Post #207 – Responsible Investment Research Blog (prof-soehnholz.com)

Engagement impact strategies: Tailor-to-Target: Configuring Collaborative Shareholder Engagements on Climate Change by Rieneke Slager, Kevin Chuah, Jean-Pascal Gond, Santi Furnari, and Mikael Homanen as of June 15th, 2023: “We study collaborative shareholder engagements on climate change issues. These engagements involve coalitions of investors pursuing behind-the-scenes dialogue to encourage target firms to adopt environmental sustainability practices. … we investigate how four coalition composition levers (coalition size, shareholding stake, experience, local access) combine to enable or hinder engagement success. We find that successful coalitions use four configurations of coalition composition levers that are tailored to target firms’ financial capacity and environmental predispositions, that is, target firms’ receptivity. Unsuccessful configurations instead emphasize single levers at the expense of others. Drawing on qualitative interviews, we identify three mechanisms (synchronizing, contextualizing, overfocusing) that plausibly underly the identified configurations and provide investor coalitions with knowledge about target firms and their local contexts, thus enhancing communication and understanding between investor coalitions and target firms” (abstract).

Other investment research

Bad delegation? Voting Choice by Andrey Malenkoy and Nadya Malenko as of Aug. 27th, 2023 (#346): “Under voting choice, investors of the fund can choose whether to delegate their votes to the fund or to exercise their voting rights themselves. … If the reason for offering voting choice is that investors have heterogeneous preferences, but investors are uninformed about the value of the proposal, then the equilibrium under voting choice is generally inefficient: it features either too little or too much delegation. … In contrast, if the reason for offering voting choice is that investors have information about the proposal that the fund manager does not have, but all investors preferences are aligned, then voting choice is efficient: the equilibrium level of delegation is the one that maximizes investor welfare. … However, if information acquisition is costly, voting choice can also lead to coordination failure: if too few votes are delegated to the fund, the fund has weak incentives to acquire information, which discourages delegation even further and may result in insufficiently informed voting outcomes“ (p. 28/29).

Analyst advantage: Behavioral Machine Learning? Computer Predictions of Corporate Earnings also Overreact by Murray Z. Frank, Jing Gao, and Keer Yang as of May 24th, 2023 (#184): “We study the predictions of corporate earnings from several algorithms, notably linear regressions and a popular algorithm called Gradient Boosted Regression Trees (GBRT). On average, GBRT outperformed both linear regressions and human stock analysts, but it still overreacted to news and did not satisfy rational expectation as normally defined. … Human stock analysts who have been trained in machine learning methods overreact less than traditionally trained analysts. Additionally, stock analyst predictions reflect information not otherwise available to machine algorithms” (abstract).

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 29 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T; also see Active or impact investing? – (prof-soehnholz.com)

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