ESG investment research: Beyond ESG
Greenium? Where Is the Carbon Premium? Global Performance of Green and Brown Stocks by Michael D. Bauer, Daniel Huber, Glenn D. Rudebusch, and Ole Wilms as of Feb. 2nd, 2023 (#26): “This paper documents a persistent outperformance of green over brown stocks since 2012. … The historical pattern of higher returns for green over brown stocks is evident not only for the United States but also for almost all other G7 countries, with Italy being the exception. However, the reversal of this pattern in 2022, with much stronger returns for brown over green stocks, also introduces a major area of investigation. Our finding of higher realized returns for green stocks is at least a partial challenge to the hypothesis of a carbon premium, which implies that expected returns are higher for brown stocks“ (p. 22).
Climate losses: Climate Change and Global Stock Market Returns by Whelsy Boungou and Alhonita Yatié as of Dec. 23rd, 2022 (#39): “Using data on the performance of stock market indices from 97 countries over the period from 31 August 2020 to 18 April 2022 … Our analysis highlights the significant negative impact of climate change on stock market returns worldwide. … the impact of climate change on the performance of stock market indices was stronger for countries with low CO2 emissions than for countries with high emissions” (p. 9/10).
ESG underperformed 2022: The Performance of ESG Indexes: Year in Review by Saurabh Katiyar and Yuliya Plyakha Ferenc from MSCI as of Jan. 31st, 2023: “… the five flagship MSCI ACWI ESG Indexes underperformed the MSCI ACWI Index in 2022 … underperformance was primarily driven by the outperformance of the energy sector as well as a rally in value stocks, although there was a positive contribution from higher-rated ESG companies. My comment: For the performance of my responsible investment portfolios see SDG und Trendfolge: Relativ gut in 2022 – Responsible Investment Research Blog (prof-soehnholz.com)
Beyond ESG ratings: Environmental disclosures and ESG fund ownership by Scott A. Robinson, Jonathan L. Rogers, A. Nicole Skinner, and Laura A. Wellman as of Feb. 1st, 2023 (#24): “We find robust evidence that ESG funds are investing in portfolio firms that supply more environmental disclosure (incremental to ESG scores), and this is concentrated in energy and emissions disclosures … our evidence is consistent with ESG fund managers collecting and analyzing information related to a broad range of environmental topics” (p. 28).
Carbon measurement problems: Corporate Greenhouse Gas Emissions’ Data and the Urgent Need for a Science-Led Just Transition: Introduction to a Thematic Symposium by Timo Busch, Charles H. Cho, Andreas G. F. Hoepner, Giovanna Michelon, and Joeri Rogelj as of Jan.30th, 2023: “Our overall objective was to derive academically sound suggestions that will grant investors, policymakers and regulators a more informed appraisal of emission data and related carbon risks, regardless of whether these are self-reported by corporations or curated by third parties. The Thematic Symposium comprises of four submissions which offer unique contributions in this regard”.
Green 16? EU Ecolabel: Calibrating green criteria for retail funds by The European Securites and Markets Authority (ESMA) as of Dec. 21st, 2022: “The EU Ecolabel is an EU-wide label awarded to green products and services. A version of the label for retail financial products has been considered … In this article we test three key Ecolabel criteria on a sample of 3 000 sustainability-oriented UCITS equity funds … Using fund portfolio holdings and proxy data, we find that only 16 funds (0.5 % of our sample) meet the proposed minimum portfolio greenness threshold of 50 % and exclusion requirements. … The article further illustrates the impact of different threshold calibrations on the number of eligible funds …” (p. 3).
Green tech correlation: Climate risk and the dynamic correlation between clean energy and technology stock markets by Elie Bouri, Tom L. Dudda, Lavinia Rognone, and Thomas Walther as of Dec. 22nd, 2022 (#73): “The transition from fossil fuels toward cleaner energy necessitates technological innovation … We find physical and transition climate risk to be positively associated with the long-term correlation between clean energy and technology stocks, whereas the effect of transition risk is more persistent. In contrast, the short-term correlation tends to decrease following shocks to physical climate risk, as clean energy stocks react stronger to physical risk shocks than technology stocks“ (abstract).
Transition problems: Which investors support the transition towards a low-carbon economy? Exit and Voice in Mutual Funds by Jonas Zink as of Dec. 13th, 2022 (#38) “First, the poor performance of the largest asset managers in both Exit and Voice suggests that efforts undertaken by regulators and other stakeholders to mainstream sustainability in asset management may have little effect. … Second, my findings question the validity of investor initiatives and reveal widespread lack of action which could jeopardize their credibility. …. Third, due to the observed U-shaped relationship between Exit and Voice, ESG rating agencies should consider including the voting behavior into their scoring methodology. So far, most environmental fund ratings are solely based on the asset allocation of funds, leaving out a major part of supporting the transition. Finally, the outperformance of low-carbon funds is not attributable to superior skills of low-carbon fund managers“ (p. 15). My comment regarding Exit and Voice see Impact Investing mit Voting und Engagement? (Opinionpost #194) – Responsible Investment Research Blog (prof-soehnholz.com)
Not-for-profit booster: Is ESG a Managerial Style? by Tianyu Cai, Leo Liu, Jason Zein, and Hao Zhang as of Jan. 31st, 2023 (#116): “We document that firms led by CEOs with not-for-profit experience are more likely to obtain higher CSR ratings and engage in more real ESG activities (as reported in the news). They are also associated with improved employee satisfaction ratings, more efforts on green innovation and less toxic emissions“ (p. 31).
Beyond ESG: Impact investment research
Climate or fiduciary duty? Can investors save the planet? – NZAMI and Fiduciary Duty by Tom Gosling and Iain MacNeil as of Dec. 1st, 2022 (#980): “We assess common “net zero aligned” investment strategies such as portfolio decarbonisation, tilting, active ownership, ESG integration, and impact investing by reference to considerations of fiduciary duty and real-world efficacy at combatting climate change. We find that the more likely a strategy is to deliver real-world change in carbon emissions in line with the 1.5oC goal, the more likely it is to give rise to fiduciary concerns. … As a result, the strategies most likely to be adopted are also the least likely to contribute meaningfully to addressing climate change”.
Impact channels: Sustainable Finance and Transmission Mechanisms to the Real Economy by Ben Caldecott, Alex Clark, Elizabeth Harnett, Krister Koskelo, Christian Wilson, and Felicia Liu as of April 19th, 2022: ”… we outline the mechanisms through which impact is transmitted from the financial system to the real economy. We argue that, in order to have a positive environmental impact, financial institutions must make a clear and measurable difference in one or more of the following ways: (i) reducing (increasing) the cost of capital for (un)sustainable activities; (ii) increasing (reducing) access to capital for (un)sustainable activities; and (iii) encouraging or enabling sustainable practices by counterparties, such as companies, sovereigns, and individuals. … We call for financial institutions, and particularly large universal owners, to integrate the development of “impact budgets” into strategic asset allocation” (abstract). “Holding green financial assets is not sufficient for investors to have an impact on the real economy. … Our findings suggest that fixed income, notably sustainability-linked bonds and loans, could present the greatest opportunity for impact, and hedge fund strategies the least” (p. 42).
Activist benefits: Shareholder Coordination, Investment Horizon and Hedge Fund Activism by Aslı Togan Eğrican as of Sept. 21st, 2021 (#98): “… focusing on three main questions: probability of being targeted by activists; the campaign types and demands employed by activists; and target firm performance (i.e., success of activists). … Firms are more likely to be targeted if they have long-term horizon institutional investors as well as the intervention benefits from activism with respect to bringing shareholders together is more likely and the coordination ability post intervention increases in targets significantly. … (they) receive hedge fund activist demands for shareholder maximization, corporate governance as well as board control/representation …. Firms with institutional investors that have long term horizon, however, see significant improvements in firm performance following hedge fund activism“ (p. 22). My comment: For additional engagement research see Stakeholder engagement and ESG (Special Edition Researchposting 115) – Responsible Investment Research Blog (prof-soehnholz.com)
Traditional investment research
Greedy insiders: The Other Insiders: Personal Trading by Brokers, Analysts, and Fund Managers by Henk Berkman, Paul Koch, and P. Joakim Westerholm as of Jan. 25th, 2023 (#42): “This study examines the personal trading activity of employees at Finnish financial institutions who are identified as having regular access to material private information (i.e., “access employees”). We show that these financial professionals generate significant short-term abnormal returns relative to retail investors when they trade for their own personal accounts” (p. 45/46).
Specialist fund disadvantage? Quality and Product Differentiation: Theory and Evidence from the Mutual Fund Industry by Maxime Bonelli, Anastasia Buyalskaya, and Tianhao Yao as of July 27th, 2022 (#248): “Mutual funds with lower perceived quality, as suggested by lower Morningstar rating and smaller management company size, are more likely to adopt a niche product design to cater for a smaller set of investors. … Unique funds enjoy a higher market power, allowing them to charge higher fees. Using the revealing of the Morningstar’s rating as a shock, we find that funds which receive a low initial rating respond strategically by becoming more unique. This change attenuates the flow-performance sensitivity, and increases the probability of survival for a low-rated fund” (p. 38)
Simple outperformance: How Inefficient is the 1/N Strategy for a Factor Investor? By Kevin Khang, Antonio Picca, Shaojun Zhang, and Minzhi Zhu from Vanguard as of Jan. 9th, 2023 (#86). “… we adopt the simple 1/N strategy as our benchmark and compare its performance to those of the classical mean-variance and minimum-variance strategies. The optimization strategies allow for various reasonable implementation choices and generate over 450 allocations to compare with. …. compared to minimum-variance strategies, the 1/N strategy delivers comparable or higher active returns and similar information ratios. Second, compared to the mean-variance strategies, the 1/N strategy tends to outperform in both active returns and information ratios. … Overall, no strategy consistently dominates the simple 1/N strategy in various performance metrics, such as active returns, information ratios“ (p. 18/19). My comment: This result is not new. I use 1/N for all my direct equity and thematic fund portfolios since a long time, see for example here Faktor-ETFs: Gut für Anbieter aber schlecht für Anleger? Ein Plädoyer für gleichgewichtete Benchmarks – Responsible Investment Research Blog (prof-soehnholz.com)
Alternative investment research: Beyond ESG
Green disappointment: Green SPACs by Nebojsa Dimic, John W. Goodell, Vanja, and Milos Vulanovic as of Jan. 31st, 2023 (#25): “This paper documents structural characteristics of green special purpose acquisition companies (SPACs) for the period 2020–2022. Our sample includes SPACs that went public in the U.S. capital markets. … We document that the ability of Green SPACs to raise capital depends on the geographical focus, listing exchange, and the degree of specialization of legal counsels. Similarly, geographical focus and the degree of specialization of SPAC legal counsel impact the speed of the IPO process for Green SPACs. … We show that Green SPACs exhibit positive merger announcement returns, while returns around the merger are mainly negative and significantly negative in the long term“ (p. 19).
Pension fund PE biases: Private Equity for Pension Plans? Evaluating Private Equity Performance from an Investor’s Perspective by Arthur Korteweg, Stavros Panageas, and Anand Systla as of Jan.17th, 2023 (#63): “We find that for the 1995 to 2018 sample period, … the average (US pension) plan could have benefited from a higher allocation to buyout funds. While there is no evidence of market timing skill, pension plans did realize higher risk-adjusted returns in the funds they chose to invest in, compared to an average PE fund of the same vintage. However, this appears to be due to differences in access rather than skill in picking outperforming funds. … Underfunded plans take more risk, which yields higher total returns, but lower risk-adjusted returns. Similarly, pension plan boards that have a higher fraction of state officials and appointed members of the public tend to invest in riskier funds, but earn lower alpha. Home-state PE investments also earn lower alpha, but do not differ in risk compensation, so that total returns are lower“ (p. 46/47).
(Female) Founder advantage: Self-Efficacy and Entrepreneurial Performance of Start-Ups by Marco Caliendo, Alexander S. Kritikos, Daniel Rodriguez, and Claudia Stier as of Jan. 17th, 2023 (#23): “Self-efficacy reflects the self-belief that one can persistently perform difficult and novel tasks while coping with adversity. … based on a representative sample of 1,405 German business founders … We find statistically significant and economically important positive effects of high scores of self-efficacy on start-up survival and entrepreneurial income …. Furthermore, we observe that generalized self-efficacy is similarly distributed between female and male business founders, with effects being partly stronger for female entrepreneurs” (abstract).