Archiv der Kategorie: Asset Allocation

Wrong ESG compensation? Researchpost 196

Wrong ESG compensation illustration from Pixabay by Ray Alexander

10x new research on new toxics, climate target ambitions, financial analysts and climate topics, new ESG regulation effect on investments, ESG compensation governance deficits, ESG compensation outcome deficits, costly custom indices, unattractive private capital investments, gender-typical investment problems, and AI for retirement planning

ESG research

New toxics: Novel Entities – A financial time bomb by Planet Tracker as of Oct. 1^st, 2024: “There are hundreds of thousands of novel entities – toxic substances created by humans and released into the environment that may be disruptive to the planet – travelling through the global economy. … most novel entities have not undergone safety assessments or information on those are protected or not shared. … Evaluating novel entities after they have been created and released is not acceptable. … Novel entities are often viewed by investors and lenders as technological progress adding to revenue and earnings potential. Novel entities are a source of significant litigation risk. Novel entities produced decades ago can still cause significant financial downside to companies today and in the future” (p. 5).

Intrinsic climate success: Raising the bar: What determines the ambition level of corporate climate targets? by Clara Privato, Matthew P. Johnson, and Timo Busch as of Sept. 9^th, 2024: “Since the launch of the Science Based Targets initiative (SBTi), we have witnessed a steady increase in the number of companies committing to climate targets for large-scale reduction of greenhouse gas (GHG) emissions. … a two-stage qualitative study is conducted with a sample of 22 companies from five countries. … Within companies with highly ambitious climate targets, the findings indicate that certain factors are highly present, including leadership engagement, continual management support, employee involvement, participation in climate initiatives, and stakeholder collaboration. Conversely, none of these key factors are highly present in companies with less ambitious climate targets. Rather, these companies strongly identify the initiating factors of market-related pressures and non-market stakeholder influence as being the driving forces behind their target setting“ (abstract).

Climate analysts? Climate Value and Values Discovery by Zacharias Sautner, Laurence van Lent, Grigory Vilkov, and Ruishen Zhang as of July 24^th, 2024 (#953): “Analyzing more than 310,000 earnings calls spanning two decades … the interest of analysts in “green topics ” is situational, reflecting market demands rather than persistent individual traits. Trading volume around earnings announcements is positively associated with the degree of climate discussions on earnings calls. … we find correlations between an analyst’s profile in earnings calls and career trajectories, with climate-centric analysts, particularly those focusing on value, experiencing better job opportunities. Climate analysts use voice, not exit, to ask (brown) firms to change“ (p. 25/26).

Regulation-driven divestments: Triggering a Divestment Wave? How ESMA’s Guidelines on ESG Fund Names Affect Fund Portfolios and Stocks by Stefan Jacob, Pauline Vitzthum, and Marco Wilkens as of Sept. 12^th, 2024 (#58): “This paper examines the impact of the European Securities and Markets Authority’s (ESMA) Guidelines on funds’ names using ESG-related terms. These guidelines define clear exclusion criteria for sustainability-named funds. We examine the extent to which funds will be required to exclude non-compliant stocks, resulting in substantial divestments, particularly from firms with fossil fuel involvements. The enforcement of these guidelines is expected to significantly decarbonize the portfolios of sustainability-named funds, while at the same time triggering unprecedented selling pressure on certain stocks“ (abstract).

Wrong ESG compensation (1): ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans by Adam B. Badawi and Robert Bartlett as of Sept. 10^th, 2024 (#366): “The practice of linking executive compensation to ESG performance has recently become more prevalent in US public companies. In this paper, we document the extent of this practice within S&P 500 firms during the 2023 proxy season … We find that 315 of these firms (63.0%) include an ESG component in their executives’ compensation and that the vast majority of these incentives are part of the annual incentive plan (AIA) … While executives miss all of their financial targets 22% of the time in our sample, we show that this outcome is exceptionally rare for ESG-based compensation. Only 6 of 247 (2%) firms that disclose an ESG performance incentive report missing all of the ESG targets. We ask whether the ESG overperformance that we observe is associated with exceptional ESG outcomes or, instead, is related to governance deficiencies. Our findings that meeting ESG-based targets is not associated with improvements in ESG scores and that the presence of ESG-linked compensation is associated with more opposition in say-on-pay votes provides support for the weak governance theory over the exceptional performance theory“ (abstract). My comment With my shareholder engagement I ask companies to publish the pay ratio between their CEO and the average employee. Thus, all stakeholders can monitor if ESG compensation increases this already typically critically high metric (which I fear), also see Wrong ESG bonus math? Content-Post #188 and Kontraproduktive ESG-Ziele für Führungskräfte? | CAPinside

Wrong ESG compensation (2)? Paychecks with a Purpose: Evaluating the Effectiveness of CEO Equity and Cash Compensation for the Triple Bottom Line by Dennis Bams, Frederique Bouwman, and Bart Frijns as of Oct. 2^nd, 2024 (#4): “We find that CEOs are more inclined to opt for a CSR strategy emphasizing Environmental Outcomes when they receive a larger proportion of their compensation in cash. … additional tests show that intentions have no predictive power for outcomes. … While the proportion of option compensation is beneficial for a CSR strategy that focuses on outcomes, the proportion of stock compensation motivates a focus on intentions. … In conclusion, our study shows that the prevailing approach of compensation packages focusing on equity compensation does not promote the triple bottom line principle.

Other investment research (in: Wrong ESG compensation)

Index illusion: Index Disruption: The Promise and Pitfalls of Self-Indexed ETFs by Bige Kahraman, Sida Li, and Anthony Limburg as of Sept. 27^th, 2024 (#42): “The market for index providers is a concentrated market where the five largest providers serve approximately 95 percent of the market. … An increasing number of ETF issuers are creating proprietary indices in-house to avoid paying fees to third party index providers. In this paper, we … find that self-index funds offer higher, not lower, fees to their customers. To explain this, we suggest two hypotheses, one based on product differentiation and the other one based on conflicts of interest. Our results support the latter“ (p. 22). My comment: There are many (sustainability policy) reasons for custom portfolios but these portfolios should not be more expensive (see e.g. my direct SDG indexing options)

Private capital alpha illusion: The Private Capital Alpha by Gregory Brown, Andrei S. Goncalves, and Wendy Hu as of Sept. 25^th, 2024 (#368): “We combine a large sample of 5,028 U.S. buyout, venture capital, and real estate funds from 1987 to 2022 to estimate the alphas of private capital asset classes under realistic simulations that account for the illiquidity and underdiversification in private markets as well as the portfolio allocation of typical limited partners. We find that buyout as an asset class has provided a positive and statistically significant alpha during our sample period. In contrast, over our sample period, the venture capital alpha was positive but statistically unreliable and the real estate alpha was, if anything, negative“ (p. 31). My comment: Most investors use gatekeepers of funds of funds to invest in private capital and after those costs even buyout alpha may be negligible”.

Lower-risk women: How Gender Differences and Behavioral Traits matter in Financial Decision-Making? Insights from Experimental and Survey Data by Giuseppe Attanasi, Simona Cicognani, Paola Paiardini, and Maria Luigia Signore as of Feb. 3^rd, 2024 (#112): “… Our research suggests that gender alone does not exclusively determine diverse behavioral and investment choices. Instead, it is the context in which these choices are elicited that plays a crucial role. …(but) female investors consistently demonstrated a lower likelihood of engaging in investment activities across the financial domains of risk and ambiguity. … a tendency to invest less in risky financial assets limits the potential for accumulating greater wealth over time “ (p. 30).

Financial AI? Can ChatGPT Plan Your Retirement?: Generative AI and Financial Advice by Andrew W. Lo and Jillian Ross as of Sept. 4^th, 2024 (#896): “… We focus on three challenges facing most LLM applications: domain-specific expertise and the ability to tailor that expertise to a user’s unique situation, trustworthiness and adherence to the user’s moral and ethical standards, and conformity to regulatory guidelines and oversight. … we focus on the narrow context of financial advice … Our goal is not to provide solutions to these challenges … but to propose a framework and road map for solving them as part of a larger research agenda for improving generative AI in any application” (abstract).

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ESG disclosure benefits: Researchpost 193

ESG disclosure benefits illustration from Pixabay by Gerd Altmann

14x new research on climate, water and ESG disclosure and litigation effects, World Bank greenwashing, pollution exports, green shows, ESG outperformance, emission credit risks, green bond and green fund benefits, low SDG alignments, financial LLMs, and degrowth theory problems by Heiko Bailer, Thorsten Hens, Stefan Ruenzi and many more (#shows number of SSRN full paper downloads as of Sept. 12^th, 2024)

Ecological and social research

Green disclosure meta-study (ESG disclosure benefits 1): The Economic Consequences of Climate Risk Disclosures by Meena Subedi and Emily Zoet as of June 7^th, 2024 (#56): “… this study provides stakeholders with a thorough analysis of the economic effects of climate risk disclosures, reveals emerging trends, and identifies future research opportunities in this area. … Prior studies find mixed results regarding the positive or negative effects of climate risk and suggest disclosure of climate action may mitigate the penalties associated with climate risk. … Additionally, we compare the theoretical frameworks used in prior studies. We identify the predominant theories and their distinct assumptions and focus, providing insight for future researchers to refer to in their climate disclosure studies” (p. 34).

Good water disclosure (ESG disclosure benefits 2): Self-regulation and self-presentation in sustainability reporting: Evidence from firms’ voluntary water disclosure by Siwen Liu and Hans van der Heijden as of June 6^th, 2024 (#68): “This study focuses on water disclosure, a key dimension of sustainability reporting, which, despite the importance of water, has received relatively little theoretical and empirical attention. … we document supportive evidence for the positive relations between voluntary water disclosure and several self-regulation mechanisms such as policies and actions on water efficiency and emission reductions. … We find that firms with high water efficiency are more likely to disclose water information in the global water survey to proactively showcase their good water performance to key stakeholders …“ (abstract).

Flight from ESG disclosures (ESG disclosure benefits 3): Behind the Corporate Veil: How Business Groups Arbitrage ESG Disclosure Mandates by Stefano Cascino and Maria Correia as of Sept. 9^th, 2024 (#32): “… we demonstrate that, while improving their own ESG performance at the headquarter-country level, business group parents actively shift irresponsible ESG activities down the corporate structure. Specifically, we document that subsidiaries of parents subject to disclosure mandates experience an increase in the occurrence and frequency of ESG incidents, particularly in countries where weaker institutions make stakeholder monitoring more challenging. Moreover, we find that, in response to the introduction of ESG disclosure mandates, parent companies streamline their group structures by tightening control over more integrated subsidiaries and divesting from those that are more peripheral“ (abstract).

ESG litigation opportunities: The Effect of Expected Shareholder Litigation on Corporate ESG Reporting: Evidence from a Quasi-Natural Experiment by Lijun (Gillian) Lei, Sydney Qing Shu, and Wayne Thomas as of June 19^th, 2024 (#112): “… the Morrison ruling by the U.S. Supreme Court … creates a plausibly exogenous shock (i.e., reduction) to expected shareholder litigation costs for U.S.-cross-listed foreign firms … Our primary result is that after Morrison, U.S.-cross-listed foreign firms increase their use of optimistic words in ESG reports. … We also find a decline in the relative likelihood of issuing an ESG report after Morrison … we also show that U.S.-cross-listed foreign firms are less likely to purchase external assurance or adopt GRI guidelines in preparation of their ESG reports in the post-Morrison period. … Overall, the results are consistent with a reduction in expected shareholder litigation costs decreasing the quality of ESG reporting“ (p. 35/36).

Greenwashing World Bank? How Has the World Bank’s Climate Finance Changed After the Paris Agreement? by Ayse Kaya and Asli Leblebicioglu as of Sept. 5^th, 2024 (#17): “Utilizing a novel dataset of more than 2700 projects spanning 2010-2021, this study investigates the shifts in the World Bank (WB)’s climate finance from pre- to post-Paris Agreement. … We show that although WB’s reported climate finance has quadrupled in this period, this increase primarily comes from “mixed projects” that combine mitigation or adaptation goals with other aims. For most projects, these other goals constitute projects’ larger share, and they also increasingly encompass general capacity strengthening as opposed to climate-adjacent aims. Conversely, projects solely dedicated to mitigation or adaptation have declined. … Overall, the spectacular quantitative increase in WB’s post-Paris climate finance may not be as qualitatively impressive“ (abstract). My comment: For my ESG ETF-Portfolios I will continue to use Multinational Development Bank Bonds instead of Government Bonds because I still think that the former have more positive potential impact than the latter

Pollution export: Exporting Carbon Emissions? Evidence from Space by Santanu Kundu and Stefan Ruenzi as of Sept. 5^th, 2024 (#32): “Our study based on the cement and steel industry shows that the price increase of carbon in the EU ETS (Sö: Emission Trading System) after 2017 is associated with emissions leakage to facilities in locations outside the EU. Not surprisingly, emissions are mainly leaked to pollution havens. … We find that mainly constrained firms, firms headquartered in countries with more developed financial markets as well as firms headquartered in civil law countries engage in carbon leakage. At the same time, our effects are stronger for private than for listed firms at the extensive margin. Firms affected by the EU-ETS not only leak more production to facilities outside the EU, they are also more likely to acquire more new facilities outside the EU“ (p. 31/32).

Green show beats impact: Impact, Inspiration, or Image: On the Trade-Offs in Pro-Environmental Behaviors by Raisa Sherif and Sven Arne Simon as of Sept. 4^th, 2024 (#96): “… We find that some individuals are willing to give up environmental impact for both social image concerns and role model aspirations, with the latter having a stronger effect. However, the crowding out is not perfect” (p. 25).

ESG and SDG investment research (in: ESG disclosure benefits)

ESG outperformance drivers: Charting New Frontiers: The S&P 500® ESG Index’s Outperformance of the S&P 500 by May Beyhan from S&P Dow Jones Indices as of Sept. 6^th, 2024: “Since its inception more than five years ago, the S&P 500 ESG Index had a tracking error of 1.33% and outperformed the S&P 500 by 1.62% on an annualized excess total return basis. … The performance of the S&P 500 ESG Index was … driven by an array of factors, such as seeking the best ESG-scoring constituents with medium ESG momentum scores, and selecting constituents with high Human Capital Development and Talent Attraction & Retention scores, while also avoiding the worst ESG-scoring constituents with high ESG momentum scores” (p. 12). My comment: My experience with ESG portfolios has been positive, too, although I exclude the “magnificient 7”, see Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)

Lower emissions and credit risks: Linking Climate Risk to Credit Risk: Evidence from Sectorial Analysis by Mohamad H. Shahrour, Mohamed Arouri, and Sandeep Rao as of April 24^th, 2024 (#86): “Using yearly data on the S&P 500, we first document that an increase in firms’ commitment towards reducing environmental emissions is associated with a lower credit risk (measured by credit ratings, and alternatively, distance-to-default). … While the majority of sectors experience a negative relationship, we find a positive relationship in the Industrials sector. Furthermore, we examine the direction of causality between carbon emissions and credit risk. Our results establish that the direction of causality is from carbon emissions to credit risk“ (p. 16).

Green bond advantages: Green Bonds in Banking: Do They Improve Loan Portfolio Quality and Funding Costs? by Egidio Palmieri, Maurizio Polato, and Josanco Floreani as of Sept. 9^th, 2024 (#8): “… banks issuing green bonds with high environmental performance exhibit an improvement in loan portfolio quality … Furthermore, the interaction with the governance pillar indicates that banks issuing green bonds experience a reduction in the cost of funding … showing that strong governance significantly contributes to lower funding costs” (p. 6).

Lower sustainability risks: Climate Risk Exposure: A Comparative Analysis of Sustainable and Conventional Funds by Camille Baily and Jean-Yves Gnabo as of Sept. 6^th, 2024 (#12): “We … investigate climate risk exposure in the U.S. mutual fund industry … using a large dataset of 3,140 mutual funds from 2013 to 2021. Using a conditional Value-at-Risk approach—CoVaR, we measure individual fund exposure to climate risks. We find that, on average, fund VaR is affected by climate risks when we control for other risk factors, suggesting that climate risks are spreading to U.S. mutual funds. Yet, we show that sustainable funds, as identified by the Morningstar metric, are significantly less exposed to climate risks than their conventional peers, even when we control for other fund characteristics“ (abstract). “Our results indicate that climate risk exposure is almost 50% lower for an average sustainable fund, compared to its conventional counterpart” (p. 31). My comment: In my most recent report for the fund which I advise I showed that “a traditional global small-cap ETF has a Weighted Average Carbon (Scope 1 + 2) Intensity of 313 instead of 32 for the fund” (see Monatsreport).

25% SDG-Alignment? PAB & CTB: Sustainability 2.0 by Heiko Bailer as of Sept. 6^th, 2024 (#27) “This paper investigates the MSCI World and Europe Paris-Aligned Benchmarks (PAB) and Climate Transition Benchmarks (CTB), focusing on refining these indices by incorporating additional sustainable constraints and tilting them towards better alignment with the United Nations Sustainable Development Goals (SDGs). … For instance, the sustainable revenue component of the indices was increased from a baseline of 13- 15% to 25%, while the temperature targets were reduced from approximately 2°C to 1.7°C. These enhancements were achieved with minimal negative impact on financial performance, and in some cases, such as the Europe CTB, even resulted in performance gains. … Further adjustments involved tilting the indices towards higher SDGs, which provided additional alignment with UN sustainability goals without negative performance trade-offs. The analysis revealed a substantial difference in SDG scores between the World and Europe indices, with Europe’s SDG alignment being more than double that of the World indices“ (p.11/12). My comment: In my most recent fund report I write: “The net SDG revenue alignment reported by the data provider for the fund is very high at 93%. … By way of comparison, a traditional global small-cap ETF has an SDG revenue alignment of 5 %” (see Monatsreport).

Other investment research (in: ESG disclosure benefits)

Financial LLM deficits: How good are LLMs in risk profiling? by Thorsten Hens and Trine Nordlie as of Aug. 25^th, 2024 (#113): “This study asked “How do ChatGPT and Bard categorize investor risk profiles compared to financial advisors?” For half of the clients the study revealed no statistically significant differences in the risk scores assigned by ChatGPT and Bard compared to those assigned by bankers. Moreover, on average, the differences had minor economic relevance. However … their reasoning … many times missed the specific characteristics of the clients“ (p. 9).

Degrowth deficits: Reviewing studies of degrowth: Are claims matched by data, methods and policy analysis? by Ivan Savin and Jeroen van den Bergh as of August 2024: “In the last decade many publications have appeared on degrowth as a strategy to confront environmental and social problems. … Based on a sample of 561 studies we conclude that: (1) content covers 11 main topics; (2) the large majority (almost 90%) of studies are opinions rather than analysis; (3) few studies use quantitative or qualitative data, and even fewer ones use formal modelling; (4) the first and second type tend to include small samples or focus on non-representative cases; (5) most studies offer ad hoc and subjective policy advice, lacking policy evaluation and integration with insights from the literature on environmental/climate policies; (6) of the few studies on public support, a majority concludes that degrowth strategies and policies are socially-politically infeasible; (7) various studies represent a “reverse causality” confusion, i.e. use the term degrowth not for a deliberate strategy but to denote economic decline (in GDP terms) resulting from exogenous factors or public policies; (8) few studies adopt a system-wide perspective – instead most focus on small, local cases without a clear implication for the economy as a whole“ (abstract).

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Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Smallcap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung (aktuell durchschnittlich 93% SDG-vereinbare Umsätze der Portfoliounternehmen: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen (siehe auch My fund).

Capital-weighted Asset Allocation: Researchpost 191

Capital-weighted Asset Allocation Illustration based on Soehnholz ESG und SDG Portfoliobuch page 79

9x new research on ESG disclosure profits, ESG credit risks, environmental versus social scores, developing country ESG, capital weighted asset allocation, asset allocation glidepaths, social media mania, robo advisor tuning, and venture biases (#shows the number of SSRN full paper downloads as of August 29^th, 2024)

ESG investment research

“Good bank” ESG risks: ESG Relevance in Credit Risk of Development Banks by Jan Porenta and Vasja Rant as of August 21^st, 2024 (#12): “… multilateral development banks exhibit elevated ESG risk relevance, primarily stemming from S risk and G risk. The mandate-oriented engagement of multilateral development banks in financing regions and countries marked by challenges such as deficient labor practices, human rights violations, inadequate supply chain oversight, and occasional insolvency issues may accentuate the relevance of social risk. Additionally, risks associated with the rule of law, institutional robustness, regulatory quality, and internal governance challenges could contribute to the heightened governance risk for multilateral development banks“ (p. 24). My comment: Instead of Government bond ETFs I use ETFs for multilateral development bank bonds since several years because they are much better SDG-aligned. Credit and other risks of these bonds have been satisfactory, so far.

Ecological or social? Return trade-offs between environmental and social pillars of ESG scores by Leyla Yusifzada, Igor Loncarski, Gergely Czupy and Helena Naffa as of Aug. 21^st, 2024 (#17): “We analyse the trade-offs between the environmental (E) and social (S) pillars of ESG scores and their implications for equity market performance using data from the MSCI All Country World Index (ACWI) over the period from 2013 to 2022. We find a persistent negative correlation between the E and S scores across most industries. For example, the correlation between E and S scores for the overall sample reached as low as -0.56 in 2018, indicating a significant inverse relationship where firms that excel in environmental performance often lag in social performance and vice versa“ (p. 9). My comment: Since 2016, I require high minimum standards for E, S and G scores at the same time to avoid too negative tradeoffs and I have been happy with the resulting ESG and financial performances

ESG disclosure profits: The Role of Catering Incentives in ESG Disclosure by King Fuei Lee from Schroder Investment Management as of June 12^th, 2024 (#16): “… The study examines 2,207 US-listed firms from 2005-2022, and finds a significant positive relationship between the ESG disclosure premium and firm ESG reporting. Managers respond to prevailing investor demand for ESG data by disclosing more when investors place a stock price premium on companies with high disclosure levels …” (abstract).

Developing ESG deficits: Are Developing Country Firms Facing a Downward Bias in ESG Scores? by Jairaj Gupta, R. Shruti, and Xia Li as of Aug. 26^th, 2024 (#31): “Using panel regression analysis on a comprehensive cross-country sample of 7,904 listed firms from 2002 to 2022 across 50 countries, we find that corporate ESG scores in developing economies are significantly lower – 57% lower for raw ESG scores and 23% lower for standardized ESG scores – than those in developed economies. Further analysis indicates that this disparity is linked to institutional bias and measurement issues within ESG scoring firms, stemming from information asymmetry. Our empirical evidence also suggests that ESG scoring firms can mitigate these information problems by incorporating analyst coverage and experience into their algorithms” (abstract). My comment: Companies in all (including developing) countries can and should provide high (ESG) transparency and then will receive appropriate ratings and ESG investments without such artificial rating adjustments

Other investment research (in: Capital-weighted Asset Allocation)

Capital-weighted Asset Allocation: The Risk and Reward of Investing by Ronald Doeswijk and Laurens Swinkels as of Aug. 28^th,2024 (#283): “This is the first study documenting the historical risks and rewards of the aggregate investor in global financial markets by studying monthly returns. Our sample period runs from January 1970 to December 2022. The breadth of asset classes in this study is unmatched as it basically covers all accessible financial investments of investors across the world. … Despite its diversification across all globally invested assets, the global market portfolio does not have the highest Sharpe ratio compared to the five asset categories over our 53-year sample period. Its Sharpe ratio is only slightly higher than that of equities broad, but lower than that of nongovernment bonds. However, … The stability of the Sharpe ratio over rolling decade samples is substantially greater than that of individual asset categories. In other words, confidence in a positive Sharpe ratio for the global market portfolio over a decade is highest. … If we adjust the average returns by drawdowns instead of volatility, the global market portfolio has the highest reward for risk, and the shortest maximum drawdown period. All of the results above have been measured in U.S. dollars. If we change the measurement currency to one of the nine other major currencies, we observe substantial heterogeneity in the risks and rewards of investing. … Overall, our new monthly data on the global market portfolio suggests that the aggregate investor has experienced considerable wealth losses compared to savers who earn a nominal risk-free interest rate. Such losses are usually recovered within five years, but recovery can take substantially longer“ (p. 20/21). My comment: I use such asset allocations since the start of my own company in 2015. I am still – to my knowledge – the only portfolio provider worldwide using it for all of its allocation portfolios. Overall, my experience is good, see the Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com) and recently Halbjahres-Renditen: Divergierende Nachhaltigkeitsperformances

Slippy asset allocation glidepaths: The Glidepath Confusion by Edward Hoyle from AHL Partners as of March 30^th, 2024 (#127): “The importance of glidepath choice can be overstated. If a pension saver held a balanced portfolio throughout working life, and then at retirement they find that their investment returns are in the left tail of outcomes, it is likely that they would be similarly placed had they chosen an alternative glidepath. Our examination of contrarian strategies confirmed their outperformance on average. As to their tail properties, we find that they are relatively favourable in historical simulations, but less favourable in bootstrapped simulations. This may clear up some apparent disagreement between previous studies. This also lends credence to the intuition that it is risky to be heavily invested in stocks over short horizons. However, this does not mean that stocks investments should be small as retirement approaches. Holding a balanced portfolio throughout working life and retirement seems entirely sensible if the plan is to generate retirement income by decumulation. In these situations no glidepath is needed“ (p. 18).

Social media mania? Social Media and Finance by J. Anthony Cookson, William Mullins, and Marina Niessner as of May 9^th, 2024 (#591): “Social media has become an integral part of the financial information environment, changing the way financial information is produced, consumed and distributed. This article surveys the financial social media literature, distinguishing between research using social media as a lens to shed light on more general financial behavior and research exploring the effects of social media on financial markets. We also review the social media data landscape“ (abstract).

Robo-advisor tuning: In Design and Humans we Trust“? – Drivers of Trust and Advice Discounting for Robo Advice by Claudia Breuer, Wolfgang Breuer, and Thomas Renerken as of April 16^th, 2024 (#38): “We compare the acceptance of advice in the context of robo-advised individual portfolio allocation decisions with respect to the impact of certain layout and questionnaire characteristics as well as the involvement of a human. Our data are based on incentivized experiments. The results show that a more emotional design of the advice software leads to a higher level of advice acceptance, whereas a detailed exploration questionnaire reduces the level of acceptance. The presence of a human influences trust levels significantly positive, but leads to a lower acceptance of advice in total“ (abstract).

Venture biases: Biases influencing venture capitalists’ decision-making: A systematic literature review by Moritz Sachs and Matthias Unbescheiden as of May 9^th,2023 (#44): “In recent years, researchers have demonstrated that venture capitalists are subject to various biases in their decision-making, but a systematic overview was absent. Our literature review revealed that 15 different biases can influence venture capitalist’s investments. For each of these biases, their effect on venture capitalists’ decisionmaking is explained. We contribute to the research on biased start-up investing by detailing the biases and their expected effects on venture capitalists. Our results will be useful for venture capitalists improving their decision-making” (abstract).

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Werbehinweis (in: Capital-weighted Asset Allocation)

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Smallcap-Investmentfonds (SFDR Art. 9, siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung (SDG: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen: Vgl. My fund.

Biodiversity finance and more: Researchpost #186

Biodiversity finance illustration from ecolife zone (https://www.ecolife.zone/)

18x new research on climate regulation, green millionaires, donations, fintechs, ESG ratings, climate analysts, ESG funds, social funds, smart beta, asset allocation, research risks, green hedge funds, biodiversity, impact funds, proxy voting, sustainable engagement, and timberland investing

Social and ecological research

Non-negative climate regulation? Firms’ Response to Climate Regulations: Empirical Investigations Based on the European Emissions Trading System by Fotios Kalantzis, Salma Khalid, Alexandra Solovyeva, and Marcin Wolski from the International Monetary Fund as of July 15^th, 2024 (#13): “Using a novel cross-country dataset … We find that more stringent policies do not have a strong negative impact on the profitability of ETS-regulated or non-ETS firms. While firms report an increase in their input costs during periods of high carbon prices, their reported turnover is also higher. Among ETS-regulated firms which must purchase emission certificates under the EU ETS, tightening of climate policies in periods of high carbon prices results in increased investment, particularly in intangible assets” (abstract).

Greening millionaires? Wealth transfer intentions, family decision-making style and sustainable investing: the case of millionaires by Ylva Baeckström and Jeanette Carlsson Hauff as of June 21^st, 2024 (#13): “… little is known about how the wealthy make sustainable investment decisions. Using unique survey data from 402 millionaires … Our results show that funds are more likely to be channeled towards sustainable causes in families that are society-oriented and adopt democratic decision-making styles compared to families whose decision-making style is autocratic and intend for future generations to inherit their wealth” (abstract).

Selfish donations? Donations in the Dark by Ionela Andreicovici, Nava Cohen, Alessandro Ghio, and Luc Paugam as of March 13^th, 2024 (#103): “We examine the impact of the 2013 shift from mandatory to voluntary disclosure of corporate philanthropy in the United Kingdom (UK). … we find that, relative to a sample of United States firms, UK firms (i) reduce corporate philanthropy disclosure and (ii) increase corporate philanthropic donations in the voluntary period. … Overall, our results point towards the idea that the shift to voluntary disclosure (i) reduces managerial incentives to transparently report corporate philanthropic activities and (ii) exacerbates managers’ incentives to engage in self-serving corporate donations“ (abstract).

Limited fintech-inclusion: Promise (Un)kept? Fintech and Financial Inclusion by Serhan Cevik from the International Monetary Fund as of July 15^th, 2024 (#12): „The ownership of accounts in formal financial institutions increased from 51 percent of the world’s adult population in 2011 to 76 percent in 2021, but there is still significant variation across countries. … While digital lending has a significant negative effect on financial inclusion, digital capital raising is statistically insignificant. … the overall impact of fintech is also statistically insignificant for the full sample, but becomes positive and statistically highly significant in developing countries” (abstract).

ESG investment research (in: Biodiversity finance)

Positive High-ESG effects: The Effects of ESG Ratings on Firms’ Financial Decisions by Sahand Davani as of July 12^th, 2024 (#27): “I show that firms with higher ESG ratings (high-ESG firms) have higher ownership by ESG institutional investors, have lower perceived cost of capital, and issue more net equity than net debt compared to similar firms with lower ESG ratings (low-ESG firms). Consistently, I find that high-ESG firms try to maintain their high ESG ratings at the current levels, while the ESG ratings of similar low-ESG firms decline” (abstract).

Analysts climate ignorance: Analysts’ Perspectives on Climate Change: An Examination of Analyst Reports by Jesse Chan as of July 12^th, 2024 (#30): “Despite focusing on firms operating in industries most exposed to climate change, I find a minority of analysts (<11%) discuss climate topics in their analyst reports … analysts are concentrating their discussion among electric utilities and other electronic equipment manufacturers, and typically discuss climate change related business opportunities and regulatory issues related to climate change. Climate related discussions, and particularly discussion of regulatory issues, are associated with more pessimistic long-term growth forecasts and revisions, implying analysts expect these issues to affect firms‘ financial performance in the long run” (abstract).

Easy ESG sell? ESG and Mutual Fund Competition? by Ariadna Dumitrescua and Javier Gil-Bazo as of July 12^th, 2024 (#37): “Investors have heterogenous preferences for ESG. Not all investors care for sustainability, and among those who do, they value different ESG objectives differently. The model predicts that in equilibrium the market is segmented: neutral investors (those with no preference for ESG) invest only in conventional funds and ESG investors invest only in ESG funds. While competition is fierce in the conventional segment of the market and only the best funds survive, it is relaxed by investors’ ESG preferences in the ESG segment of the market. If the intensity of ESG investors’ preferences is sufficiently high, ESG funds of lower quality will be able to survive“ (p. 18/19).

ESG steering? Smarter Beta Investing: Forget Exclusions, add Steering towards lower Emissions by Heiko Bailer and Jonathan Miller as of July 17^th, 2024 (#28): “Steering strategically tilts portfolios towards sustainable factors such as lower emissions … This research investigates the effectiveness of steering compared to exclusion-based strategies. … The analysis, spanning September 2019 to May 2024, reveals that steering maintains or improves risk-adjusted returns compared to exclusions. Additionally, steering portfolios exhibit lower risk and avoid unintended biases toward smaller companies, often observed with exclusions“ (abstract). My comment: The resulting steering strategies appear to have rather limited SDG-revenue alignments. My experience shows attractive risk/return characteristics for strategies using many strict exclusions and demanding ESG- and SDG-Revenue requirements. It would be interesting to compare the results with steering approaches (which may be driven by significant Tech allocations).

Risk reducing ESG: Can Environmental and Social Stocks Weather Market Turbulence? A risk premia analysis by Giovanni Cardillo, Cristian Foroni and Murad Harasheh as of July 23^rd, 2024 (#28): “Analyzing all listed firms in the EU and UK and exploiting COVID-19 as an exogenous shock, our findings challenge prior literature by demonstrating that firm sustainability does not necessarily reduce the cost of equity in adverse states of the economy. … Nevertheless, our results indicate that riskier yet more sustainable firms experience a relatively smaller increase in their cost of equity, suggesting a moderating rather than a first-order effect of sustainability. Second, investors positively value firms that reduce CO2 emissions and offer green and more ethical products, as evidenced by lower risk premia assigned to such firms. Lastly, we provide robust evidence that more sustainable firms exhibit less uncertain and higher cash flows during the pandemic than their less sustainable counterparts“ (abstract).

Green optimization limits: Portfolio Alignment and Net Zero Investing by Thierry Roncalli from Amundi as of July 12^th, 2024 (#28): “First, the solution is parameter and data sensitive. In particular, we need to be careful in choosing the carbon scope metric … Scope 3 and consumption-based emissions need to be taken into account to align a portfolio with a net-zero scenario. The problem is that we see a lack of data reliability on these indirect emissions today. Similarly, the solution is highly dependent on the green intensity target and the level of self-decarbonization we want to achieve. … The second key finding is that portfolio decarbonization and net-zero construction lead to different solutions. … These results are amplified when we add the transition dimension to the optimization program. … it is quite impossible to achieve net zero alignment without allowing the algorithm to exclude companies (or countries) from the benchmark. … As a result, some key players in the transition, such as energy and utility companies, unfortunately disappear. … The final lesson is that it is easier to implement net zero in bonds than in equities. … there is another important point that is missing from our analysis. This is the issue of engagement. … The reason is that engagement is difficult to model quantitatively” (p. 20-22). My comment: Given the many discretionary decisions for “optimizations”, I usually call them “pseudo-optimizations”.

No green outperformance? Do sustainable companies have better financial performance? Revisiting a seminal study by Andrew King as of July 24^th, 2024 (#2180): “Do high-sustainability companies have better financial performance than their low-sustainability counterparts? An extremely influential publication, “The Impact of Corporate Sustainability on Organizational Processes and Performance”, claims that they do. Its 2014 publication preceded a boom in sustainable investing …Yet I report here that I cannot replicate the original study’s methods or results, and I show that a close reading of the original report reveals its evidence is too weak to justify its claims concerning financial performance” (abstract). My comment: It is very important to clearly write, understand and also to replicate scientific studies. But as long as the performance of sustainable investments is similar as the performance of traditional investments, I clearly prefer sustainable investments.

Green hedge funds: Are the Hedges of Funds Green? by Huan Kuang, Bing Liang, Tianyi Qu, and Mila Getmansky Sherman as of April 15^th, 2024 (#59): “… we … find that funds with higher green beta not only outperform other funds but also exhibit lower risk. This outperformance is driven by fund managers’ superior investment skill in both green stock picking and green factor timing. Furthermore, we document that investors reward green funds with higher inflows after the 2015 Paris Agreement, but only within high-performance funds. Finally, we show that political beliefs, climate news sentiment, and participation in the United Nations Principles for Responsible Investment (PRI) all influence hedge funds’ exposure to sustainable investing and investor flows” (abstract).

Biodiversity finance and bond risks: Biodiversity Risk in the Corporate Bond Market by Sevgi Soylemezgil and Cihan Uzmanoglu as of July 14^th, 2024 (#165): “We investigate how risks associated with biodiversity loss influence borrowing costs in the US corporate bond market. … we find that higher biodiversity risk exposure is associated with higher yield spreads among long-term bonds, indicating biodiversity as a long-run risk. This effect is stronger among riskier firms and firms that mention biodiversity, particularly biodiversity regulation, in their financial statements. … we find that the impact of biodiversity risk on yield spreads is more pronounced when biodiversity-related awareness and regulatory risks rise” (abstract).

Impact investment research

RI market segmentation: Styles of responsible investing: Attributes and performance of different RI fund varieties by Stuart Jarvis from PGIM as of July 2^nd, 2024 (#18): “Paris-aligned funds … achieve a low level of portfolio emissions, not just through a combination of significant divestment from sectors but also by selecting companies with low emissions levels. The resulting companies have decarbonised significantly in recent years … Impact funds … have demonstrated willingness to invest in sectors with currently-high emissions … Performance for these funds has been the most challenged in recent years …” (p. 12). My comments see Orientierung im Dschungel der nachhaltigen Fonds | CAPinside

Biodiversity finance overview: Biodiversity Finance: A review and bibliometric analysis by Helena Naffaa and Xinglin Li as of June 26^th, 2024 (#31): “Using bibliometric analysis tools, key features of the literature are revealed, influential works are recognized, and major research focuses are identified. This systematic mapping of the field makes contribution to the existing research by providing historical evolution of the literature, identifying the influential works, and current research interests and future research direction“ (abstract).

Empowering small investors? Open Proxy by Caleb N. Griffin as of July 12^th, 2024 (#27): “This Article has explored how the world’s largest asset managers have voluntarily implemented programs for “voting choice,” agreeing to pass through a measure of voting authority to selected investors. Unfortunately, the current instantiation of voting choice offers only a narrow set of artificially constrained options, which, in effect, merely transfer a fraction of the Big Three’s voting power to another oligopoly. In order to amplify the choices available to investors, this Article proposes that large asset managers shift from the current closed proxy system to an open proxy system wherein any bona fide proxy advisor could compete for the right to represent investors’ interests. Such a policy change would infuse intermediated voting programs with essential competitive pressure and allow for truly meaningful voting choice” (p. 41).

Depreciation-aligned sustainability: Timing Sustainable Engagement in Real Asset Investments by Bram van der Kroft, Juan Palacios, Roberto Rigobon, and Siqi Zheng as of July 3^rd, 2024 (#151): “This paper provides evidence that sustainable engagement improves firms’ sustainable investments only when its timing aligns with the (“real” not “book”) depreciation of their physical assets. … Further, our results appear unexplained by a selection in REITs and are generalized to the US heavy manufacturing industry, heavily relying on real assets. Therefore, this paper argues that sustainable engagement poses an effective tool to improve firms’ sustainable investments when accurately aligned with the depreciation cycles of their physical assets” (p. 35/36).

Other investment research (in: Biodiversity finance)

Attractive timberland: Investing in US Timberland Companies by Jack Clark Francis and Ge Zhang as of June 27^th, 2024 (#11): “Over a 20-year sample period it turns out that the US timberland corporations, on average, perform about as well as the highly diversified US stock market index. It is surprising that the timberland companies do not outperform the stock market indexes because, in order to encourage tree planting, the US Congress has almost completely exempted timberland companies from paying federal income taxes. Furthermore, it is scientifically impossible to assess the value of the large amounts of photosynthesis that the timberland companies produce” (abstract). My comment: In my opinion, similar returns clearly speak for the more responsible investments.

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Werbehinweis (in: biodiversity finance)

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Smallcap-Investmentfonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen: Vgl. My fund.

Zur jetzt wieder guten Performance siehe zum Beispiel Fonds-Portfolio: Mein Fonds | CAPinside

Halbjahres-Renditen: Divergierende Nachhaltigkeitsperformances

Halbjahres-Renditen Illustration von Gerd Altmann von Pixabay

Halbjahres-Renditen der Soehnholz ESG Portfolios: Vereinfacht zusammengefasst haben die Trendfolge-, ESG-ETF- und SDG-ETF-Aktienportfolios relativ schlecht rentiert. Dafür performten passive Asset Allokationen, ESG-Anleihenportfolios und vor allem direkte SDG Portfolios und der FutureVest Equity SDG Fonds sehr gut.

Halbjahres-Renditen: Passive schlägt aktive Allokation

Halbjahres-Renditen: Das regelbasierte „most passive“ Multi-Asset Weltmarkt ETF-Portfolio hat +7,2% (+5,4% in Q1) gemacht. Das ist ähnlich wie Multi-Asset ETFs (+7,0%) und besser als aktive Mischfonds mit +6,0% (+4,8% in Q1). Das ebenfalls breit diversifizierte ESG ETF-Portfolio hat mit +6,5% (+4,2% in Q1) ebenfalls überdurchschnittlich rentiert.

Nachhaltige ETF-Portfolios: Anleihen gut, Aktien nicht so gut, SDG schwierig

Das ESG ETF-Portfolio ex Bonds lag mit +9,3% (+6,1% in Q1) erheblich hinter traditionellen Aktien-ETFs mit +14,7% (+10,6% in Q1) und aktiv gemanagten globalen Aktienfonds mit +13,7% zurück.

Mit -0,9% (-0,3% in Q1) rentierte das sicherheitsorientierte ESG ETF-Portfolio Bonds (EUR) wie aktive Fonds mit -0,9% (-0,7% in Q1). Das renditeorientierte ESG ETF-Portfolio Bonds hat mit +1,6% (+1,6% in Q1) dagegen nennenswert besser abgeschnitten als vergleichbare aktiv gemanagte Fonds (-1.2%).

Das aus thematischen Aktien-ETFs zusammengestellte SDG ETF-Portfolio lag mit -1,4% (-0,2% in Q1) stark hinter diversifizierten Weltaktienportfolios aber noch vor einem relativ neuen Multithemen SDG ETF, der -4,8% im ersten Halbjahr verlor. Besonders thematische Investments mit ökologischem Fokus liefen auch im zweiten Quartal 2024 nicht gut.

Halbjahres-Renditen: Sehr gute direkte ESG SDG Portfolios und Fonds

Das auf Small- und Midcaps fokussierte Global Equities ESG SDG hat im ersten Halbjahr mit +8,4% (1,4% in Q1) im Vergleich zu Small- (+1,4%) und Midcap-ETFs (+0,6%) und aktiven Aktienfonds (+5,8%) sehr gut abgeschnitten. Das Global Equities ESG SDG Social Portfolio hat mit +6,3% (+3,7% in Q1) ebenfalls sehr gut abgeschnitten.

Mein auf globales Smallcaps fokussierter FutureVest Equity Sustainable Development Goals R Fonds (Start 2021) hat im ersten Halbjahr 2024 eine ebenfalls sehr gute Rendite von +6,8% (+2,6% in Q1) erreicht (weitere Informationen wie z.B. auch den aktuellen detaillierten Engagementreport siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T und My fund – Responsible Investment Research Blog (prof-soehnholz.com).

Für Trendfolgeportfolios haben die zur Risikosenkung gedachten Signale vor allem Rendite gekostet, weil die Portfolios nach dem Marktausstieg aufgrund negativer Signale nicht von dem schnellen und starken Marktaufschwung profitieren konnten.

Mehr Details sind hier zu finden: Soehnholz ESG, siehe auch Excel-Download: Historische Zeitreihen der Portfolios.

Brown banks? Researchpost 180

Brown banks picture from clker free vector images from Pixabay

Brown banks: 9x new research on CO2-costs, climate policy effects, Mittelstand climate, stock prices, ESG, CSR, gender diversity, green projects, and listed real estate (# shows the number of SSRN full research paper downloads as of June 13^th, 2024)

Social and ecological research

Correct CO2 costs? Synthesis of evidence yields high social cost of carbon due to structural model variation and uncertainties by Frances C. Moore, Moritz A. Drupp, James Rising, Simon Dietz, Ivan Rudik, Gernot Wagner as of June 10^th, 2024 (#9): “Estimating the cost to society from a ton of CO2 – termed the social cost of carbon (SCC) – requires connecting a model of the climate system with a representation of the economic and social effects of changes in climate, and the aggregation of diverse, uncertain impacts across both time and space. … we perform a comprehensive synthesis of the evidence on the SCC, combining 1823 estimates of the SCC from 147 studies with a survey of authors of these studies. The distribution of published 2020 SCC values is wide and substantially right-skewed, showing evidence of a heavy right tail (truncated mean of $132). … we train a random forest model on variation in the literature and use it to generate a synthetic SCC distribution that more closely matches expert assessments of appropriate model structure and discounting. This synthetic distribution has a mean of $284 per ton CO2, respectively, for a 2020 pulse year (5%–95% range: $32–$874), higher than all official government estimates … “ (abstract).

Strict policy effects: Climate and Environmental Policy Risk and Debt by Karol Kempa and Ulf Moslener as of April 25^th, 2024 (#95): “… we find that policy determines how firms’ externalities, such as CO2 emissions and different types of environmental pollution, translate into credit risks and corporate bond pricing. The size as well as direction of the effect of externalities on credit risk and bond spreads depends on the stringency of policy. Ambitious policy increases the credit risk and costs of debt for dirty firms and decreases both for clean firms. Lenient regulation can have the opposite effect. … Finally, we find that a higher likelihood of stringent climate policies in the future increases the impact of CO2 emissions on credit risk“ (abstract).

Mittelstandsklima: Die unternehmerische Akzeptanz von Klimaschutzregulierung von Markus Rieger-Fels, Susanne Schlepphorst, Christian Dienes, Rodi Akalan, Annette Icks und Hans-Jürgen Wolter vom 3. Juni 2024: „Nur eine starke Volkswirtschaft kann die für den Klimaschutz erforderlichen Ressourcen aufbringen. Die Unternehmen sind dabei in der Mehrzahl bereit, diesen Weg mitzugehen. Speziell die mittelständischen Unternehmerinnen und Unternehmer weisen tendenziell eine hohe intrinsische Motivation auf, zum Schutz der Umwelt und des Klimas beizutragen. Das ist wichtig, da den Unternehmen stets ein strategischer Spielraum in der Umsetzung bleibt. Das Spektrum reicht dabei von einer Standortverlagerung über eine Produktionseinstellung und dem bewussten Ignorieren von Vorgaben bis hin zur freiwilligen Übererfüllung von Regulierungen …“ (p. 26/27). My comment: The reaction of global “Mittelstand” companies regarding my shareholder engagement activities (see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)) is more open than I thought

ESG investment research (in: Brown banks)

Brown banks? Banking on climate chaos – Fossil fuel finance report 2024 by Urgewald as of May 13^th, 2024: “The 60 biggest banks globally committed $705 B USD to companies conducting business in fossil fuels in 2023, bringing the total since the Paris agreement to $6.9 T. These banks committed $347 billion in 2023 and $3.3 trillion total since 2016 to expansion companies – those companies that the Global Oil & Gas Exit List and the Global Coal Exit List report having expansion plans. … Total financing committed for companies with methane gas (LNG) import and export capacity under development, increased from $116.0 billion in 2022 to $121.0 billion in 2023. … 15.4 % of the financing by dollar value issued in 2023 matures after 2030; 3.7 % matures after 2050. Financing for fossil fuel extraction or infrastructure that matures after 2030 faces a risk of becoming stranded … several banks, including Bank of America and PNC, rolled back their previous exclusions in 2023 (see p. 32). Banks continue to prioritize net zero targets, though early research suggests that these targets, like other bank policies, leave loopholes for ongoing fossil fuel finance (see p. 35)” (p. 4). My comment: Check out you bank based on the detailed data: Banking on Climate Chaos 2024 – Banking on Climate Chaos

Climate correlations: The Cold Hard Cash Effect: Temperature’s Role in Shaping Stock Market Outcomes by Yosef Bonaparte as of April 15^th, 2024 (#8): “The analysis conducted across 67 countries …highlight that warmer climates are linked to lower stock market returns, with a notable economic significance exceeding 9.12%, and reduced volatility, demonstrating an economic significance of at least 36.9%. Conversely, the Sharpe ratio, serving as a gauge of risk-adjusted returns, displays a positive co-movement with temperature change, indicating an economic significance surpassing 1.63%. Furthermore, cold countries earn greater stock market returns but are more negatively affected by temperature changes” (p. 16).

ESG or CSR? Combining CSR and ESG for Sustainable Business Transformation: When Corporate Purpose Gets a Reality Check by David Risi, Eva Schlindwein and Christopher Wickert as of June 7^th, 2024 (#135): “ESG is a compliance-driven and metrics-oriented idea for stimulating sustainable business transformation. It focuses on reducing negative impacts and improving performance in specific areas. Moreover, it provides a reality check on how a firm is doing in light of increasing societal expectations for greater sustainability. By contrast, CSR is often viewed as a more values-based and internally driven approach to sustainability. It provides a strategy for developing a sense of meaning and purpose for responsible business conduct that reflects a firm’s values and identity… In their mutual integration, CSR and ESG create synergy since they can compensate for their respective weaknesses” (p. 12/13).

Good diversity: Board Gender Diversity and Investment Efficiency: Global Evidence from 83 Country-Level Interventions by Dave (Young Il) Baik, Clara Xiaoling Chen, and David Godsell as of May 4^th, 2024 (#177): “We document increases in firms’ investment efficiency after the adoption of BGD interventions relative to firms in countries that do not concurrently adopt BGD interventions. Our results are economically significant, suggesting that treatment firms reduce inefficient investment by 0.6 percent of total assets or 6.5 percent of total investment and are 4 percentage points more likely to have above-median investment efficiency after interventions relative to firms in countries not concurrently adopting interventions“ (p. 33). My comment: I recently divested from a company because the social rating declined which was mainly due to low gender worker and board diversity

Impact investment research

Small climate steps: Inside the Blackbox of Firm Environmental Efforts: Evidence from Emissions Reduction Initiatives by Catrina Achilles, Peter Limbach, Michael Wolff and Aaron Yoon as of June 7^th, 2024 (#35): “This study uses granular data at the firm’s project level, provided by the Carbon Disclosure Project, to present primary evidence on what large U.S. firms actually do to reduce greenhouse gas emissions. … the majority of emissions reduction projects require small investments – the median investment per project is $127,000, with the median of firms’ total annual investment in such projects amounting to only 0.2% of net income. Second, 63% of all projects have payback periods of at most three years, while just about 10% of all projects pay off after more than ten years. These short-term projects mostly target energy efficiency in buildings or production, and typically do not involve new transformative technology and low-carbon energy. … our results suggest that short-term emissions reduction projects generate more CO2e and monetary savings per year, yield greater NPVs, and predict higher environment-related ESG ratings in the near future. However, total CO2e savings over the projects’ lifetime are at least 25% lower for short-term payback projects. Firms that exhibit the most CO2e savings have a mix of short- and longer-term projects, while firms exclusively implementing only short-term or longer-term projects save significantly less CO2e. We also study how characteristics of firms’ emissions reduction projects, such as their payback period and efficiency in saving CO2e, evolve over time and show which firms implement more short-term projects …. the evidence presented in this paper suggests that the majority of large U.S. firms do not act … long-term oriented” (p. 31/32).

Other investment research (in: Brown banks)

Real estate hedge: U.S. and European Listed Real Estate as an Inflation Hedge by Jan Muckenhaupt, Martin Hoesli and Bing Zhu as of May 28^th, 2024 (#27): “This paper investigates the inflation-hedging capability of an important asset class, i.e., listed real estate (LRE), using data from 1990 to the end of 2023 … Listed real estate provides an effective hedge against inflation in the long run, both in crisis and non-crisis periods. In the short term, listed real estate only hedges against inflation in stable periods. LRE effectively serves as a hedge against inflation shocks, particularly protecting against unexpected inflation from the first month and against energy inflation during stable periods. While stocks surpass LRE in long-term inflation protection and LRE has short-term benefits, gold distinguishes itself from LRE by offering reliable long-run protection, but only in economic downturns” (abstract). My comment: My “most-passive” multi-asset ETF portfolios have a target allocation of 10-12% Listed Real Estate, 5 to 6 % Listed Infrastructure and 5% US Treasury Inflation-Protected Securities

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Werbehinweis

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Small-Cap-Anlagefonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen: My fund – Responsible Investment Research Blog (prof-soehnholz.com). Zur jetzt wieder guten Performance siehe zum Beispiel Fonds-Portfolio: Mein Fonds | CAPinside

Private company ESG: Researchpost #178

Private company ESG: 10x new research on climate risk and nudging, private company ESG, ESG rating changes, AI and greenwashing, transformation, political engagement and impact asset allocation (# shows number of SSRN full paper downloads as of May 30th, 2024)

Social and ecological research

More climate risks? The globalization of climate change: amplification of climate-related physical risks through input-output linkages by Stephan Fahr, Richard Senner, and Andrea Vismara as of May 21^st, 2024 (#164): “While global supply chains … risks across countries has received surprisingly little attention. … The findings suggest that direct GDP loss estimates can severely underestimate the ultimate impact of physical risk because trade can lead to losses that are up to 30 times higher … than what looking at the direct impacts would suggest. However, trade can also mitigate losses if substitutability across country-sectors is possible“ (abstract).

Easy climate nudging: Misperceived Social Norms and Willingness to Act Against Climate Change by Peter Andre Teodora Boneva Felix Chopra Armin Falk as of May 21^st, 2024 (#237): “Americans vastly underestimate the prevalence of climate norms in the US …. We show that a relatively simple, scalable, and cost-effective intervention – namely informing respondents about the actual prevalence of climate norms in the US – reduces these misperceptions and encourages climate-friendly behavior. Importantly, we find that this intervention is depolarizing and particularly effective for climate change skeptics, the group of people who are commonly difficult to reach. Our results suggest that informing people about the behavior of relevant peers constitutes a particularly effective tool to target, reach, and convince skeptics“ (p. 29/30).

Private company ESG? Do ESG disclosure mandates affect the competitive position of public and private firms? by Peter Fiechter, Jörg-Markus Hitz, and Nico Lehmann as of May 23^rd, 2024 (#46): “… we find that the staggered adoption of ESG disclosure mandates in different economies around the globe has an economically meaningful impact on competition in these domestic markets, as private suppliers gain contracts at the expense of public suppliers. … (i) ESG regulated corporate customers shift contracts from public to private suppliers, consistent with a preference for ESG opaque over ESG transparent supply chains, and (ii) adverse price competition effects for treated suppliers due to incremental direct and indirect costs associated with the ESG disclosure mandate. We also show that treatment effects are concentrated in contractual relations with suppliers of low importance to their corporate customers” (p. 27).

ESG investment research (in: Private company ESG)

ESG mechanics (1): Sovereign Environmental, Social, and Governance (ESG) Investing: Chasing Elusive Sustainability by Ekaterina Gratcheva and Bryan Gurhy from the International Monetary Fund as of May 23^rd, 2024 (#35): “Most sovereign ESG scores used by the industry focus on evaluating sustainability risks that could impact financial returns – and not those that impact positive sustainability outcomes. … This mismatch has prompted regulatory bodies in various jurisdictions, including the FCA (2023), to consider stricter regulations governing the use of terms such as „responsible“ and „sustainable“ in investment fund nomenclature. … ESG factors … have limited effectiveness in reducing national emissions or advancing the achievement of SDGs” (p. 24). My comment see Neues Greenwashing-Research | CAPinside

ESG mechanics (2): Do Investors Respond to Mechanical Changes in ESG Ratings by Seungju Choi, Fabrizio Ferri, and Daniele Macciocchi as of May 24^th, 2024 (#98): “… we study whether investors change their portfolio holdings in response to mechanical changes in ESG ratings––i.e., changes independent of concurrent changes in a firm’s actual ESG activities. To do so, we exploit a change in Refinitiv’s ESG ratings mechanically driven by the expansion of its coverage in 2015. We first document that the coverage expansion automatically and substantially improved the relative position – and thus the ESG rating – of the firms already covered by Refinitiv. Next, we show that these firms did not exhibit any improvement in their ESG performance (as measured using actual ESG outcomes, ESG ratings by other providers, as well as our estimated Refinitiv’s ESG rating absent the coverage expansion). … the probability of being selected by an ESG fund is higher for treatment firms relative to control firms, whereas we do not find that ESG funds increase their holdings of treated stocks already in their portfolio. These findings suggest that ESG funds use ESG ratings mostly in the selection process rather than the portfolio weighting process. … our analyses show that passive ESG funds (those with an index-based investing strategy) and active ESG funds that are more “passive” in their selection strategy (due to resource constraints) are more likely to add to their portfolio firms that experience an increase in ESG ratings independent of concurrent changes in the firm’s ESG activities” (p. 20/21). My comment: I f my ESG rating provider updates its methodology and company ESG ratings change only because of this change, I still react regarding my investment/divestment portfolio decisions. The reason: I assume (and can usually confirm) that the updated rating methdodology I better than the old methodology. “Rule-change” examples see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com)

AI vs Greenwashing: Combining AI and Domain Expertise to Assess Corporate Climate Transition Disclosures by Chiara Colesanti Senni, Tobias Schimanski, Julia Bingler, Jingwei Ni, and Markus Leippold as of May 14^th, 2024 (#417): “… the lack of one clear reference framework paves the way for inconsistencies in transition plans and the risk of greenwashing. We propose a set of 64 common ground indicators from 28 different transition plan disclosure frameworks to comprehensively assess transition plans … Applying the tool to 143 reports from the carbon-intensive CA100+ companies, we find that companies tend to disclose more indicators related to target setting (talk) but fewer indicators related to the concrete implementation of strategies (walk)“ (abstract). My comment: I am not sure if there is an added value compared to the approaches of good ESG rating providers.

Impact investment research (in: Private company ESG)

More transformation? Consistency or Transformation? Finance in Climate Agreements by Sebastian Rink, Maurice Dumrose and Youri Matheis as of May 21^st, 2024 (#21): “Our paper critically examines the role of responsible institutional investors… we show that responsible investors tend to avoid high-emitting companies in their portfolios. Companies with higher ownership by responsible investors do not decarbonize faster. In contrast, companies’ ESG ratings improve significantly with higher responsible investor ownership. This highlights a focus by responsible investors on these widely used ESG metrics instead of real economy decarbonization“ (abstract).

Private company ESG: Entrepreneurial Finance and Sustainability: Do Institutional Investors Impact the ESG Performance of SMEs? by Wolfgang Drobetz, Sadok El Ghoul, Omrane Guedhami, Jan P. Hackmann, and Paul P. Momtaz as of May 22^nd, 2024 (#83): “We show that … investor backing by venture capital and private equity funds leads to an increase in SMEs’ (Sö: Small and medium size enterprises) externally validated ESG scores compared to matched non-investor-backed SMEs. Consistent with ESG-as-insurance theory, we find that the ESG performance of SMEs with a higher probability of failure, especially low-revenue SMEs and SMEs with high revenue volatility, is more likely to benefit from institutional investor backing. The positive effect is non-linear: SMEs with high ex-ante ESG performance are more likely to further improve ESG policies following investor backing, while SMEs with low ex-ante ESG performance are unlikely to improve“ (abstract). My comment: With my shareholder engagement focus on supplier ESG ratings improvement I want to leverage my engagement efforts, see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)

Political engagement: Collaborative investor engagement with policymakers: Changing the rules of the game? by Camila Yamahaki and Catherine Marchewitz as of April 12^th, 2024 (#41): “… this article analyzes what drives institutional investors to engage with government entities and what challenges they find in the process. … We identify a trend that investors conduct policy engagement to fulfill their fiduciary duty, improve investment risk management, and create an enabling environment for sustainable investments. As for engagement challenges, investors report the longer-term horizon, a perceived limited influence toward governments, the need for capacity building for investors and governments, as well as the difficulty in accessing government representatives“ (abstract).

Impact asset allocation: How sustainable fnance creates impact: transmission mechanisms to the real economy by Ben Caldecott, Alex Clark, Elizabeth Harnett, and Felicia Liu as of May 23^rd, 2024: “Our findings suggest that fixed income, notably sustainability-linked bonds and loans, could present the greatest opportunity for impact if they are appropriately designed, passively-managed public equities the least, and hedge funds strategies the most variable. … we suggest how this analysis might be applied to strategic asset allocation by investors with multi-asset portfolios, suggesting that the addition of an “impact budget” as a way of operationalising these decisions” (p.27). My comment see Sustainable investment = radically different? – Responsible Investment Research Blog (prof-soehnholz.com) or Nachhaltige Geldanlage = Radikal anders? – Responsible Investment Research Blog (prof-soehnholz.com)

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Werbehinweis (in: Private company ESG):

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Small-Cap-Anlagefonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds mit aktuell sehr positiver Performance konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement (Investor impact) bei derzeit 28 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T und My fund – Responsible Investment Research Blog (prof-soehnholz.com)

Financial health: Researchpost #177

Financial health: Illustration from Riad Tchakou from Pixabay

9x new research on financial health, startups, circular economy, family firms, green revenues, green bonds, green CAPM, and index funds (# shows SSRN full paper downloads as of May 23^rd, 2024)

Social and ecological research: Financial health and more

Financial health 1: Connecting Mental and Financial Wellbeing – Insights for Employers by Surya Kolluri, Emily Watson and High Lantern Group as of May15th,2024 (#29): “Financial health is deeply intertwined with mental health. Financial stresses, such as debt, significantly contribute to mental health challenges. This stress affects personal wellbeing and has profound implications on workplace productivity and employee engagement, affecting personal relationships, work performance, and overall wellbeing. Additionally, poor mental health also hinders effective decision-making by impairing the cognitive capacity crucial for evaluating financial options and risks which can lead to impulsive spending, poor financial planning, and increased vulnerability to stressinduced short-term financial decisions. By providing integrated education and support, employers play a crucial role in positively addressing the mutually reinforcing financial and mental health relationship” (p. 2).

Financial health 2: New insights into improving financial well-being by Jennifer Coats and Vickie Bajtelsmit as of May 1^st, 2024 (#25): “Individual discount rates, risk preferences, and financial self-confidence consistently contribute to different indicators of FWB (Sö: Financial well-being). In particular, we find significant evidence that both the discount rate and self-confidence in financial decision-making have strong impacts on the dimensions of FWB. Financial literacy has an important moderating role in relation to these two drivers and to income. Personality traits, such as conscientiousness and neuroticism are influential in alternative ways across models” (abstract). … “The most important contribution of this study is the finding that individual discount rates play such an important role in determining composite financial well-being … Financial literacy appears to be necessary but not sufficient to enhance FWB. In particular, if individuals lack the confidence and/or patience to make sound financial decisions, the influence of financial literacy on FWB is limited” (p. 30).

Startup-migration: The Startup Performance Disadvantage(s) in Europe: Evidence from Startups Migrating to the U.S. by Stefan Weik as off Sept. 27^th, 2023 (#202): “This paper explores the main drawbacks of the European startup ecosystem using a new dataset on European startups moving to the U.S. … Empirical evidence shows that startups moving to the U.S. receive much more capital, produce slightly more innovation, and are grow much bigger before exit than startups staying in Europe. More surprisingly, I find that U.S. migrants do not increase their revenues for many years after migration, instead incur higher financial losses throughout, and do not significantly improve their likelihood of achieving an IPO or successful exit. Additional evidence shows that large parts of the innovation, net income loss, and growth difference can be explained by U.S. migrants’ funding advantage. … European startups are only marginally, if at all, hindered by technology, product, and exit markets, but that the main disadvantage is the VC financing market“ (p. 24/25).

Full circle? The Circular Economy by Don Fullerton as of May 16^th, 2024 (#47): “Research about the circular economy is dominated by engineers, architects, and social scientists in fields other than economics. The concepts they study can be useful in economic models of policies – to reduce virgin materials extraction, to encourage green design, and to make better use of products in ways that reduce waste. This essay attempts to discuss circular economy in economists’ language about market failures, distributional equity, and policies that can raise economic welfare by making the appropriate tradeoffs between fixing those market failures and achieving other social goals” (p. 15).

ESG investment research (in: “Financial health”)

Green families: Family-Controlled Firms and Environmental Sustainability: All Bite and No Bark by Alexander Dyck, Karl V. Lins, Lukas Roth, Mitch Towner, and Hannes F. Wagner as of May15th, 2024 (#11): “We find that family-controlled firms have carbon emissions that are indistinguishable from those of widely held firms. … Further, we find that family-controlled firms have significantly lower carbon emissions than widely held firms in countries where a government has not taken significant climate actions and there is thus a substantial risk of policy tightening in the future. … Our paper also finds that, relative to widely held firms, family-controlled firms are significantly less likely to disclose and perform well against the myriad qualitative metrics that comprise a large component of ESG rating agency scores …” (p. 26/27). My comment: With more supply chain transparence ESG-ratings of public and privately held suppliers will become much more important, see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)

Green institutional benefits: In the Pursuit of Greenness: Drivers and Consequences of Green Corporate Revenues by Ugur Lel as of May 19^th, 2024 (#142): “Firms are increasingly turning to green products and services in recent years …Drawing on an extensive dataset spanning from 2008 to 2023 across 49 countries, … I find that foreign institutional ownership, especially from countries with rigorous environmental regulations and norms, significantly boosts green revenue intensity. … These effects are mostly present in carbon-intensive firms …. I also observe a significant increase in green revenues following the implementation of EU Green Deal, accompanied by improvements in CO2 emissions and other environmental policies. There is also an immediate effect of green revenues on profit margins but only for firms in clean industries” (p. 26/27).

Green reputation pays: The reputation effect of green bond issuance and its impact on the cost of capital by Aleksandar Petreski, Dorothea Schäfer, and Andreas Stephan as of Nov. 19^th, 2023 (#61): “This study provides a deeper understanding of the mechanism behind the established negative relationship between green bond issuances and financing costs. The paper hypothesized that this negative relationship can be explained by reputation effects that arise from repeated green bond issuances. … The econometric results … using Swedish real estate firms confirm that it is not the occasional issuance of green bonds but the repeated green bond issuance that reduces the firm’s cost of capital. This effect is also found for the cost of equity. … Additional econometric results confirm the effect of green-bond issuance on reputation using ESG scores as a reputation proxy variable. We find that all aspects of the ESG composite score—environmental, social, and governance pillars—are positively affected by a long track record of green bond issuance, whereas only the governance pillar of ESG is positively affected by a long track record of non-green issuance“ (p. 18).

ESG investment model: Modelling Sustainable Investing in the CAPM by Thorsten Hens and Ester Trutwin as of April 22^nd, 2024 (#202): “We relate to existing studies and use a parsimonious Capital Asset Pricing Model (CAPM) in which we model different aspects of sustainable investing. The basic reasoning of the CAPM, that investors need to be compensated for the bad aspects of assets applies so that investors demand higher returns for investments that are harmful from an environmental, social, and governance (ESG) perspective. Moreover, if investors have heterogeneous views on the ESG–characteristics of a company, the market requires higher returns for that company, provided richer investors care more about ESG than poorer investors, which is known as the Environmental Kuznets Curve (EKC). Besides the effect on asset prices, we find that sustainable investing has an impact on a firm’s production decision through two channels – the growth and the reform channel. Sustainable investment reduces the size of dirty firms through the growth channel and makes firms cleaner through the reform channel. We illustrate the magnitude of these effects with numerical examples calibrated to real–world data, providing a clear indication of the high economic relevance of the effects” (abstract).

Traditional investment research

Smart investors: Is Money in Index Funds Smart? by Jeffrey A. Busse, Kiseo Chung, and Badrinath Kottimukkalur as of Jan. 17^th, 2024 (#157): “Passive funds with inflows generate positive risk-adjusted returns during the subsequent year and outperform funds with outflows, consistent with the notion that index fund money is “smart.” Similar outperformance during the next year is not present in active funds seeing higher inflows. Passive funds that outperform see high inflows even though their performance does not persist after accounting for size, value, and momentum. These findings suggest that the “smart money” effect in passive funds reflects genuine investor ability …“ (abstract).

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Werbehinweis (in. „Financial health“)

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Small-Cap-Anlagefonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds mit aktuell sehr positiver Performance konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement (Investor impact) bei derzeit 27 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T und My fund – Responsible Investment Research Blog (prof-soehnholz.com)

Free Lunch: Diversifikation nein, Nachhaltigkeit ja?

Free Lunch: Es gibt viele Geldanlagemythen. Zu den hartnäckigsten gehört die Annahme, dass Streuung über unterschiedliche Geldanlagen bzw. Diversifikation viel bringt und nichts kostet. Das wird oft als „Free Lunch“ bezeichnet.

Aber gute Geldanlagen müssen nicht nur Rendite-, Volatilitäts- und Korrelationserwartungen sondern realistische Renditen und Verlustrisiken aber auch Liquidität und Nachhaltigkeit berücksichtigen.

Woher kommt die Free Lunch Annahme?

Angeblich hat der Nobelpreisträger Harry Markowitz erstmals den Satz vom „Free Lunch“ genutzt. Seine Theorie besagt vereinfacht, dass eine Ergänzung eines Portfolios um eine weitere nicht-voll korrelierte (gleichlaufende) Geldanlage die Relation von Rendite zu Risiko (als Sharpe Ratio gemessen) verbessert. Viele Geldanlagespezialisten berufen sich auch heute noch auf diese „Moderne Portfoliotheorie“ von 1952.

Seit einigen Jahren können auch deutsche Privatanleger kostengünstige und stark diversifizierte Exchange Traded Fonds (ETF) kaufen. Viele Anbieter von Geldanlagen werben damit, dass ETFs oder ihre (etwas) anderen bzw. alternative Geldanlagen zur Diversifikation von Portfolios beiträgt. Beide Arten von Anbietern sprechen oft von Free Lunches.

Diversifikation über Anlageklassen: Illiquiditätskosten

Auch viele professionelle Anleger begründen Investitionen ihrer Portfolios in Anlagesegmente wie Immobilien, Private Equity, Private Debt oder Hedge Fonds damit, dass sie zusätzliche Diversifikation anstreben, um ihre Portfoliorisiken breiter zu streuen und damit zu senken.

Ob solche Investments nach allen ihren Kosten die Renditen von Portfolios verbessern, ist strittig (vgl. aktuell z.B. Ennis oder Isil Erel/Thomas Flanagan/Michael Weisbach). Unstrittig ist, dass solche Diversifikationen in wenig korrelierte Geldanlagen die Wertschwankungen (Volatilität) von Portfolios grundsätzlich reduzieren. Das stimmt aber nicht immer und gilt nicht unbedingt auch für Verluste, wie zum Beispiel die Finanzkrise von 2008 zeigte.

Außerdem sind die oben genannten alternativen Investments meistens wenig liquide. Das bedeutet, dass man sie nicht schnell verkaufen kann, wenn man das möchte. Illiquidität ist ein Risiko, welches bei der Portfoliooptimierung von Markowitz und auch vielen Weiterentwicklungen nicht adäquat berücksichtigt wird (Gleiches gilt für Nachhaltigkeit). Dabei ist es offensichtlich, dass eine Diversifikation mit nicht-liquiden Investments Anlegerrisiken erhöht. Damit ist Diversifikation kein „Free Lunch“ mehr.

Illiquiditätsrisiken von Impact Investments

Impact Investments gelten als die nachhaltigsten Investments. Dabei geht es in der anspruchsvollsten Variante darum, dass Geldanleger auf ihre Investments einwirken sollen, um sie (noch) nachhaltiger zu machen. Lange Jahre wurden nur illiquide Investments als Impactinvestments anerkannt. Das liegt daran, dass bei illiquiden bzw. Private Capital Investments den Empfängern neues Kapital zukommt. Das ist bei liquiden bzw. börsennotierten Investments, bei denen anderen Anlegern Wertpapiere abgekauft werden, nicht der Fall. Allerdings ist es oft schwer, diesen Impact bzw. das Impactpotenzial verlässlich zu messen und konkreten Investoren zuzurechnen.

Illiquide impact Investments können mit großen Risiken behaftet sein. Wie alle illiquiden Investments haben sie den Nachteil, dass man sie nicht schnell verkaufen kann, wenn man Fehlentwicklungen erkennt und künftige Risiken reduzieren will. Das kann häufiger vorkommen, als man erwartet (vgl. Impact divestment: Illiquidity hurts (prof-soehnholz.com)). Wenn zudem bekannt wird, dass Anleger auf längere Zeit an nicht (mehr) nachhaltige Investments gebunden sind, kann das zu Reputationsverlusten führen.

Kein Free Lunch: Erhebliche Nachhaltigkeits-Diversifikationskosten innerhalb von Anlagesegmenten

Seitdem es kostengünstige ETFs (Exchange Traded Fonds) gibt, bin ich ein Fan solcher Produkte. Beim Start meines eigenen Unternehmens in 2015 wollte ich eigentlich nur Portfolios aus ETFs anbieten. Diesen Plan habe ich aber schnell geändert. Der Grund war mein Wunsch, möglichst nachhaltige Portfolios anzubieten.

Mein Ende 2015 gestartetes ESG ETF-Portfolios war zwar wohl das erste derartige Portfolio, das öffentlich angeboten wurde. Mit dem Fokus auf relativ strenge Socally Responsible Investment (SRI) ETFs ist es auch ein besonders konsequent nachhaltiges Portfolio. Allerdings war nach der Durchschau auf die in den ETFs enthaltenen Wertpapiere schnell klar, dass auch solche ETFs viele Aktien und Anleihen enthalten, die ich nicht für ausreichend nachhaltig halte. Das liegt vor allem daran, dass die ETFs Wertpapiere aus möglichst allen Branchen enthalten sollen, damit die Abweichungen (Tracking Error) zu vergleichbaren nicht-nachhaltigen Indizes nicht zu groß werden. So findet man in vielen angeblich nachhaltigen ETFs Wertpapiere von fossilen Energieproduzenten und/oder anderen Emittenten mit nicht-nachhaltigen Produkten oder Services.

Positive Diversifikationsbegrenzung und Nachhaltigkeits- Free Lunch

Ich habe mich deshalb 2016 entschlossen, auch direkte Aktienportfolios anzubieten. Diese sollten möglichst nachhaltig sein. Ich habe deshalb mehrere tausend Aktien nach meiner eigenen Nachhaltigkeitsdefinition in eine Reihenfolge gebracht. Eine Kernfrage war dabei, wie viele Aktien nötig sind, um ein relativ risikoarmes Portfolio zu bekommen, das marktübliche Renditen erreichen kann. Wissenschaftliche Studien nennen dazu meistens Zahlen von 5 bis 50 Aktien. Ich habe mich für 30 Aktien entschieden, weil der Grenznutzen zusätzlicher Diversifikation in Bezug auf Rendite bzw. Risiko sehr gering ist.

Es gibt drei wichtige Gründe für die Beschränkung der Diversifikation. Anders als bei ETFs können mehr Aktien in einem direkten Aktienportfolio zu nennenswert höheren (Handels-)Kosten führen können, vor allem wenn es zu häufigen Umschichtungen kommt. Zweitens ist mir Shareholder Engagement wichtig und der Aufwand für ein gutes solches Engagement steigt mit der Zahl der Portfoliobestandteile. Der wichtigste Grund aber ist, dass bei einer Investition auf Basis von Nachhaltigkeitsrankings jede zusätzliche Aktie zu einer Reduktion der durchschnittlichen Portfolionachhaltigkeit führt (vgl. 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com).

Nach meinem ganzheitlichen Nachhaltigkeitsbeurteilungsansatz (siehe Kapitel 7 hier: Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com)) erreiche ich mit diversifizierten ETF nur maximal die Hälfte der Nachhaltigkeit im Vergleich zu direkten Aktienportfolios. Auch aus Nachhaltigkeitssicht ist Diversifikation also kein Free-Lunch sondern kostet Nachhaltigkeit. Andererseits erreichen meine Portfolios aus nur 30 börsennotierten Aktien ähnliche Renditen bei vergleichbaren Risiken wie traditionelle stark diversifizierte Benchmarks. Anders ausgedrückt: Man kann marktübliche Renditen und Risiken mit hoher Liquidität und Nachhaltigkeit erreichen, wenn man auf unnötige Diversifikation verzichtet.

Neue Kennzahlen: Grenznutzen, Grenzkosten und Alternativportfolios

Die Diversifikationskosten von mehr Illiquidität bzw. mehr Nachhaltigkeit kann man auch konkret berechnen. In Bezug auf Nachhaltigkeit ist das relativ einfach, sofern man eine zufriedenstellende Nachhaltigkeitsmessgröße hat. Wenn durchschnittliches ESG-Rating diese Messgröße ist, kann man feststellen, wie viel eine zusätzliche Diversifikation um eine Aktie oder Anleihe in Bezug auf diese Messgröße kostet. Das sind dann die Nachhaltigkeits-Grenzkosten einer zusätzlichen Diversifikation. Diese sollte man mit dem zusätzlichen Nutzen einer Diversifikation vergleichen, die man mit zusätzlicher Renditeerwartung und/oder zusätzlicher Risikosenkung messen kann, also den Grenznutzen der Diversifikation. Solange der Grenznutzen die Grenzkosten übersteigt, kann Diversifikation ein Free Lunch sein, wenn man von Transaktions- und anderen Zusatzkosten abstrahiert.

Ähnlich kann man bei der Betrachtung der Diversifikation mit illiquiden Investments vorgehen. Dabei ist die Schwierigkeit, dass es keine einfach verfügbare Liquiditätsmesszahlen gibt. Man könnte aber schätzen, wie viele Tage die Umwandlung von Investments in sofort verfügbare Geldanlagen dauert. Bei Aktien sind das zum Beispiel wenige Stunden oder Tage. Bei Privatmarktinvestments kann es dagegen mehrere Jahre dauern, bis 100% der Anlage in Liquidität umgewandelt sind.

Wenn man die Nachhaltigkeitsdimension berücksichtigt, kann das kritisch sein. Bei meinem aus den meiner Ansicht nach jeweils 30 nachhaltigsten Aktien bestehenden Investmentfonds (vgl. My fund (prof-soehnholz.com)) habe ich seit dem Start vor weniger als drei Jahren schon 60 Aktien verkauft (49 bis 11/2023 vgl. Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds (prof-soehnholz.com)). Der Hauptgrund: Die Aktien haben meine im Laufe der Zeit weiter gestiegenen Nachhaltigkeitsanforderungen nicht mehr erfüllt. Wenn ich mein Aktienportfolio in den letzten Jahren nicht regelmäßig angepasst hätte, wären die Nachhaltigkeitskennzahlen wie ESG-Ratings oder SDG-Vereinbarkeit erheblich schlechter als sie es heute sind.

Für Illiquide Investments könnte man eine ähnliche Analyse machen: Wie Nachhaltig könnte man investieren, wenn man die illiquide angelegte Summe aktuell neu investieren würde. Mutmaßliche Rendite- oder Risikovorteile einer Diversifikation mit illiquiden Investments müssten dann um Nachhaltigkeitsnachteile korrigiert werden.

Fazit: Nachhaltigkeits- statt Diversifikations- Free Lunch

Mein Fazit: Diversifikation ist aus Nachhaltigkeitsgründen und vor allem bei Nutzung illiquider Investments keinesfalls ein Free Lunch. Im Gegenteil: Die Grenzkosten von Diversifikation können sehr hoch sein. Ich halte eher nachhaltige Investments für einen Free Lunch. Ich habe für mich jedenfalls entschieden, nur noch liquide und konsequent, d.h. konzentriert nachhaltig zu investieren.

Impact divestment: Illiquidity hurts

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

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

Impact investment focus on private investments?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Illiquid investments: Neither return nor risk or diversification benefits?

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

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

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

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

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