Archiv der Kategorie: Bonds

ESG transition illustration is a wood bridge into green nature by Mjudem McGuire from Pixabay

ESG Transition Bullshit?

No impact on secondary markets?

ESG transition approaches suggest making companies more sustainable. Many providers of so-called responsible investments promote ESG transition investments. Typically, the argumentation is: You have to put money into brown companies so that they can finance the transition to become a greener company. That sounds plausible but may be misleading.

In the case of listed investments, securities are bought from other investors. No capital flows to the companies themselves. This is different with capital increases, new bond issues or private equity and credit investments. Not every such investor investment is truly additional because of an often high investor demand (“capital overhang”). In any case, issuers receive additional capital which they could use to finance a green transition. Unfortunately, even in the case of some so-called green, social or sustainability bonds, it cannot be guaranteed that the proceeds are used to finance greener or more social transitions (compare The Economics of Sustainability Linked Bonds by Tony Berrada, Leonie Engelhardt, Rajna Gibson, and Philipp Krueger as of September 14th, 2022).

ESG Transition? Big Oil throws cash at shareholders, not renewables

According to Nathaniel Bullard from BNN Bloomberg (“Big Oil’s pullback from clean energy matters less than you might think” as of June 25th, 2023) “The world’s five biggest publicly listed oil and gas companies posted just under $200 billion in total profits last year. Faced with three strategic possibilities for how to use their cash piles — extract oil and gas apace, move their businesses into renewable power and energy transition assets or return money to shareholders — the supermajors have largely sprung for the third option in recent weeks”. They invested in transition in the past, but their overall energy-transition investment share is low with about 3% according to Bullard. “And there is no shortage of capital at the moment — according to the International Energy Agency, more has been invested in clean energy than fossil fuels every year since 2016”.

It seems to make little sense to promote investments in Big Oil stocks or bonds as transition investments. Blackrock, one of the largest asset managers with very large holdings in Big Oil companies, probably disagrees with me. Exxon, Chevron and ConocoPhilipps are among the holding of its U.S. Carbon Transition Readiness ETF. According to Blackrock, the ETF provides a “broad exposure to large- and mid-capitalization U.S. companies tilting towards those that BlackRock believes are better positioned to benefit from the transition to a low-carbon economy” and “harness BlackRock’s thinking in sustainable investing through a strategy utilizing research-driven insights” (BlackRock U.S. Carbon Transition Readiness ETF | LCTU (ishares.com)).

I would rather invest in companies specialized in renewable energies. And even with listed investments, investments could have some positive impact.

Shareholder engagement with the bad or the good companies?

In theory, share- and bondholder engagement can have a positive impact on companies. For Big Oil, that did not work well so far: “Resolutions that would have forced the companies to align with Paris Agreement climate targets failed. BP and Shell have also pulled back on their strategies to cut fossil fuel production” (Bullard).

Shareholder engagement seems to be more fruitful when targeted at already somewhat responsible companies (compare Shareholder Engagement on ESG Performance by Barko et al. (2022)). That is also my experience (see Active or impact investing? – (prof-soehnholz.com)).

ESG Transition: But we still need oil and gas!

Certainly, we still need oil and gas for our economy for a long time. But Big Oil will certainly sell us oil and gas as long as we adequately pay for it. I do not expect that they decide to sell oil and gas only to stock- and bondholders.

Maybe, responsible investors should not invest at all in brown companies or companies with social deficits which distribute dividends instead of investing the available capital in a greener or more social future (see Transitionierer: Dividendenverbot für ESG Sünder? – Responsible Investment Research Blog (prof-soehnholz.com)).

Underdiversification and return risks?

Many investment advisors (and promotors of diversified products) argue, that investors should not deviate much from diversified indices. This would mean to also invest in brown and not very social companies. These advisors and promotors rarely mention the – mostly very low – marginal utility of additional diversification. Also, most likely, you will not hear the argument that if you start with very responsible investments and then diversify, the average responsibility score of the portfolio will shrink. There are very few convincing arguments why investors should invest in all the same countries, industries and companies as broad indices. Focusing investments on few of the most responsible investments can generate attractive returns and risk adjusted performances (see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)).

Some argue that theory proves that brown investment should have high returns in the future. According to them, brown companies have to pay higher interest rates to creditors and higher returns to stockholders than responsible companies. Thus, shareholders of brown companies should have higher returns than shareholders of green companies.

Lower brown risks

There are other arguments, though. Brown companies certainly have more ecological risk than green companies. Therefore, the risk adjusted returns of brown companies may not be so attractive. And if brown companies have to invest instead of distributing dividends, higher returns for stockholders mean that in the future, someone has to pay a relatively high price for the (formerly?) brown stock. Instead, investors can invest in already green companies. Those companies have lower capital investment requirements for transitions. But they can still improve their greenness and/or distribute dividends. That seems to be the more attractive investment case. And given the low current share of truly green and social investments, I expect responsible investments to continue to grow for many years to come.

Since 2017 I try to invest in a limited number of most responsible companies. Since even these companies can still improve significantly in terms of responsibility, I also try to engage with all of them (see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)). So far, that approach works well.

Picture by gerd Altmann from Pixabay show Partnership Illustration as Picture for Complex Engagement

Complex engagement, ESG placebo and more: Researchpost #132

Complex engagement: 10x new research on hot Nordics, green growth, GHG data, debt-for-nature, quant and placebo ESG, shareholder engagement, bond factors, insider trading and international fintech by Sebastian Grund, Julian Heeb, Julian Kölbel, Florian Berg, Andrew Lo, Roberto Rigobon and many more (# shows the number of SSRN downloads on June 22nd, 2023)

Ecological and social research

Hot Nordic mountains? Does Climate Sensitivity Differ Across Regions? A Varying–Coefficient Approach by Heather Anderson, Jiti Gao, Farshid Vahid, Wei Wei, and Yang Yang as of May 14th, 2023 (#21): “… using data from 1209 weather stations show that mid/high-latitude regions in the northern hemisphere are more sensitive to changes in GHGs (Sö: greenhouse gases) than the equatorial area or the southern hemisphere, and that inland areas are more sensitive than coastal areas. Our latitude-varying model estimates suggest that global temperature would rise by 3.7◦C following a doubling CO2, with areas above 50◦N rising by more than 5 ◦C and areas near 30◦S rising by 2.5◦C. … In an out-of-sample forecasting exercise, we demonstrate that our latitude-varying model outperforms the parsimonious constant coefficient model in forecasting future temperatures“ (p. 25).

Policy failure? Restructuring Reforms for Green Growth by Serhan Cevik and João Tovar Jalles from the IMF as of June 20th, 2023 (#17): “… in a panel of 25 countries during the period 1970– 2020 … First, while electricity and gas sector reforms so far failed in bringing about a reduction in CO2 and GHG emissions per capita, there is some evidence for greater effectiveness in lowering GHG emissions per unit of GDP. Second, although electricity and gas sector reforms are not associated with higher supply of renewable energy as a share of total energy supply, they appear to stimulate a sustained increase in the number of environmental inventions and patents per capita over the medium term …  market-oriented electricity and gas sector reforms leading to better environmental outcomes and green growth in countries with stronger environmental regulations”.

GHG data issues: GHG Challenges for the Accurate Measurement and Accounting of Corporate Greenhouse Gas Emissions by Anton Kelnhofer and Benedikt Brauner as of May 9th, 2023 (#23): “ … companies often struggle to ensure the validity and accuracy of GHG emission calculations published and frequently remain reluctant to intensify their efforts due to perceived ambiguity and clarity on their true carbon footprint. This potentially results in substantial deviations between GHG emission data actually incurred and publicly reported. We attempt to identify the drivers at the root of these deviations. To this end, we conduct a multiple-case study among 14 large, public companies operating in emission-intensive sectors. The study reveals that GHG accuracies mostly result from challenges regarding the application of available standards and initiatives, the collection and calculation of GHG emission data along scopes 1, 2 and 3, the transparency, motivation and target definition of published reports as well as objectives and quality of external verification by auditors” (abstract).

Responsible investment research (complex engagement)

Debt-for-Nature? Debt-for-Nature Swaps: The Belize 2021 Deal and the Future of Green Sovereign Finance by Stephanie Fontana-Raina and Sebastian Grund as of May 16th, 2023 (#226): “The Belize debt-for-nature swap was a milestone … Despite representing innovations that facilitated Belize’s significant investments in local environmental protection while providing much needed, if possibly insufficient, fiscal relief, this new model of debt-for-nature swap is limited in terms of scalability and replicability. … For countries with unsustainable debt, a debt-for-nature swap cannot be expected to restore sustainability on its own, unless it involves a sufficiently large share of a country’s debt and substantial debt relief. The model in recent debt-for-nature swaps supports that the transaction may not be financially feasible without grant funding or credit enhancement from a highly creditworthy party, and the larger the stock of external debt that needs to be restructured, the more difficult it may be to attract sufficient credit support from the official sector. Larger debt restructurings involve tens of billions of dollars. … For now, debt-for-nature swaps represent a significant evolution in green sovereign finance and can serve as a “sweetener” in more traditional debt restructurings” (p. 22/23).

No ESG placebo: Is Sustainable Finance a Dangerous Placebo? by Florian Heeb, Julian F. Kölbel, Stefano Ramelli, Anna Vasileva as of June 19th, 2023 (#198): “Some observers argue that sustainable finance is a dangerous placebo that crowds out individual support for policy-driven solutions to societal challenges … with a pre-registered experiment exploiting a real-world climate policy referendum in Switzerland. We find that the opportunity to invest in a climate-conscious fund does not crowd out individual political engagement and costly efforts to advance formal climate policy. If anything, we observe moderate, not statistically significant, evidence for a crowding-in effect of sustainable investing on political engagement … on average, voters do not consider sustainable finance a substitute for political action“ (p. 18/19).

Quant ESG: Quantifying the Returns of ESG Investing: An Empirical Analysis with Six ESG Metrics by Florian Berg, Andrew W. Lo, Roberto Rigobon, Manish Singh, and Ruixun Zhang as of June 16th, 2023 (#1210): “… we quantify the excess returns of arbitrary ESG portfolios … for firms in the U.S., Europe and Japan from 2014 to 2020. … We also propose a number of methods to aggregate ESG scores across vendors to produce the best signal within the data, simultaneously addressing measurement errors and yielding a single measure of ESG that can potentially be used for portfolio management. Empirically, we find significant ESG excess returns in the U.S. and Japan. We also find positive and higher than market risk-adjusted returns” (p. 30). My comment: Including 2021 and 2022 experiences, investors should not expect excess ESG returns but they may still have lower risks with ESG investments. Instead of “pseudo-optimizing” portfolios and aggregating ESG scores from different providers which reduces transparency and explainability, more efforts should go into comparing rating approaches and finding the best (fitting) ones.

Complex engagement: Shareholder Engagement Inside and Outside the Shareholder Meeting by Tim Bowley, Jennifer G. Hill, and Steve Kourabas as of June 1st, 2023 (#199): “First, contemporary shareholder-company engagement is a multi-dimensional and evolving phenomenon. Shareholders use, to varying degrees, a wide range of engagement techniques. These include the shareholder meeting, behind-the-scenes interactions, public campaigns, and online technologies such as discussion boards and messaging apps. The latter technologies are particularly favoured by younger retail investors and have been used with remarkable effect to marshal the governance influence of such investors in recent high-profile cases. Second, shareholders often mix and match different engagement techniques in a synergistic manner to leverage their governance influence. Third, shareholders increasingly undertake their engagement activities collectively, highlighting the growing capacity of public company shareholders to overcome traditional collective action challenges. Finally, despite the engagement alternatives available to shareholders, the shareholder meeting remains an important engagement mechanism. … the processes which shape corporate decisions are becoming more diffuse and potentially less transparent. Ensuring accountability is a more complex issue in these circumstances …” (abstract). My comment: My most recent engagement experience see Active or impact investing? – (prof-soehnholz.com)

Traditional investment research (complex engagement)

No bond outperformance? Priced risk in corporate bonds by Alexander Dickerson, Philippe Mueller, and Cesare Robotti as of June 15th, 2023 (#1191): “… we explore the limitations of evaluating factor models on corporate bonds …. Overall we find that it is difficult for newly proposed specifications to outperform the simple bond CAPM, economically and statistically. … given the nontrivial transaction costs in the over-the-counter trading of corporate bonds, it would be valuable to formally compare the performance of alternative pricing models for bonds based on economically meaningful metrics that take into account transaction costs …” (p. 22/23).

Insider ETFs: Using ETFs to conceal insider trading by Elza Eglīte, Dans Štaermans, Vinay Patel, and Tālis J. Putniņš as of Feb. 1st, 2023 (#2097): “We show that exchange traded funds (ETFs) are used in a new form of insider trading known as “shadow trading.” Our evidence suggests that some traders in possession of material non-public information about upcoming M&A announcements trade in ETFs that contain the target stock, rather than trading the underlying company shares, thereby concealing their insider trading” (abstract).

International fintech: Global Fintech Trends and their Impact on International Business: A Review by Douglas Cumming, Sofia Johan and Robert S. Reardon as of June 19th, 2023 (#82): “Firstly, fintech facilitates entrepreneurial internationalization, as evidenced by the role of crowdfunding in numerous start-ups‘ internationalization processes. Crowdfunding, along with P2P lending, has lowered barriers across countries by opening global markets and providing alternative funding sources. Fintech can also be harnessed to enhance financial inclusion in developing nations, promoting access to capital and financial services for underserved populations. Secondly, fintech can be incorporated into multinational corporations‘ research to uncover opportunities for growth and market expansion worldwide. The digital nature of online banking and the agility of fintech platforms can potentially transform corporate culture and streamline business processes, offering new ways to optimize operations and drive innovation. Thirdly, effective global regulation and regulatory technology are essential to fully realize fintech’s benefits. … concerns include potential risks associated with consumer protection, data privacy, and illicit activities. Developing and implementing appropriate regulatory frameworks can help mitigate these risks …“ (p. 30).

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Advert for German investors: 

“Sponsor” my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement (currently 26 of 30 companies engaged). The fund typically scores very well in sustainability rankings, e.g. see this free tool, and the risk-adjusted performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T. Also see Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

Greenwashing Banks Illustration: Green Clothespin pciture by Robert Allmann from Pixabay

Greenwashing banks? Researchpost #129

Greenwashing banks? 12x new research on immigration, suppliers, greenwashing, banks, ESG ratings, AI voting, green bonds, climate inflation, (climate) VCs and crowdinvesting by Christian Klein et al. (# shows the number of SSRN-downloads on May 31st, 2023):

Social and ecogical research

Positive immigration: Firm-Level Prices, Quality, and Markups: The Role of Immigrant Workers by Giulia Sabbadin as of March 17th, 2023 (#16):“… I study … French manufacturing traders. I find that the share of immigrant workers in a local labor market is positively associated with firm-level export prices and quality and that this quality advantage translates to higher markups. I present evidence for the mechanism accounting for these relationships and find that the presence of immigrant workers is positively associated with firms importing higher-price (higher-quality) intermediate inputs, which are key to producing higher-price (higher-quality) exports. The hypothesized economic mechanism is that immigrant workers help firms overcome informational barriers to sourcing higher-price (higher-quality) inputs from abroad. I provide evidence consistent with immigrant workers having specialized knowledge of the upstream market” (abstract).

Climate inaction? Climate Policies in Supply Chains by Swarnodeep Homroy and Asad Rauf as of May 15th, 2023 (#33): “… we show that suppliers are more likely to adopt climate action and climate governance practices following the adoption of emission targets by their customers. The effects are economically meaningful and increase with the relative bargaining power of the customer firm over its suppliers …. However, we find no evidence that adopting climate policies following customer pressure, on average, changes supplier firms’ climate outcomes (emissions and energy expenses) and leading indicators of emission abatement (capital investments and R&D expenses)“ (p. 24). My comment: ESG-evaluation and engaging suppliers is one of my top shareholder engagement priorities, compare Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Sustainable investment research: Greenwashing banks?

Greenwashing Corporates: Show & Tell: An Analysis of Corporate Climate Messaging and its Financial Impacts by Joseph E. Aldy, Patrick Bolton, Zachery M. Halem, Marcin T. Kacperczyk, and Peter R. Orszag as of Aril 22nd, 2023 (#288): “… investors are increasingly scrutinizing a patchwork of voluntary climate-related communications–namely public disclosures, emission reduction commitments, and soft information from earnings calls and other public announcements. We observe, for large-cap U.S. firms, a rise in the usage of all forms of climate communication from 2010-2020. We also find evidence that a majority of firms are not decarbonizing on a sufficient trajectory to meet committed emission reduction targets. In regard to financial effects, we show that increased transparency from disclosure can offset a significant portion of the price-to-earnings discount associated with carbon emissions, especially for firms in the energy and industrial sectors. … “ (abstract). My comment: Disclosure of Scope 3 emissions is another of my most important engagement topics.

Greenwashing banks? “Glossy Green” Banks: The Disconnect Between Environmental Disclosures and Lending Activities by Mariassunta Giannetti, Martina Jasova, Maria Loumioti, and Caterina Mendicino as of May 24th, 2023 (#250): “… we show that banks with extensive environmental disclosures lend more to brown borrowers and do not provide more credit to firms in green industries. These results are not driven by banks’ financing of brown borrowers’ transition to greener technologies. Instead, banks lend to the weakest borrowers in brown industries, especially if they have low capital adequacy. Our results suggest that banks overemphasize their climate goals and credentials while continuing their relationships with polluting borrowers“ (abstract). My comment: I do not consider banks in my most sustainable investment portfolios such as my mutual fund

Bank ESG factors: Bank and ESG score by Belinda Laura Del Gaudio, Serena Gallo, Daniele Previtali, and Vincenzo Verdoliva as of  April 26th, 2023 (#79): “This paper analyses factors affecting international banks‘ Environmental, Social and Governance (ESG ) performance from 2008-2018. Using data for all listed banks in the U.S., E.U. and U.K., we show that the characteristics of banks‘ boards influence their ESG performance. In particular, banks with a higher female presence, a larger board size, high networking and more qualified directors are more likely to show better ESG performance. Furthermore, we find that banks with a propensity to pursue a fintech innovation strategy are more likely to have a better ESG performance …. also banks‘ financial factors influence their sustainability profile” (abstract).

Better big? Size bias in refinitiv ESG data by Juris Dobrick, Christian Klein, and Bernhard Zwergel as of May 19th, 2023: “Even though Refinitiv claims to have minimized the well-known size bias present in ASSET4 ESG data, we find that it is still there and has even become … A one unit increase in company size corresponds to an increase in the ESG (E) score of around 5.8 (6.7) compared with previous 3.5 (4) in Drempetic et al.(2020). For G and S it is 3.7 and 6.3, respectively” …. My comment: There are still enough well ESG-rted small and midsize companies available for investment, see e.g. Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

ESG factor: ESG as risk factor by Juris Dobrick, Christian Klein, and Bernhard Zwergel as of May 26th, 2023 (#14): “… we address the question of whether factors constructed using ESG (Environmental, Social, Governance) scores could potentially meet the necessary requirements for risk factors in multi-factor models. … We pay particular attention to the problem of divergent scores across different rating providers and investigate whether the regression results of 4- and 5-factor models converge. … We find that there are ESG factors across all investigated rating providers that capture common-variation in stock returns over time, indicating that ESG should be considered in common asset pricing models” (abstract).

AI Voting? Outsourcing Voting to AI: Can ChatGPT Personalize Index Funds’ Voting Decisions? by Chen Wang as of April 25th, 2023 (#184): “Asset Management giants like Vanguard have already been utilizing AI to “create customized financial plans that help clients meet their short-term and long-term financial goals.” … By fine-tuning ChatGPT, its ability of generalization can be enhanced by training with curated datasets. Thus, investment funds can employ customized ChatGPT to make self-informed and personalized proxy voting more in line with their shareholders’ interests and preferences. … The cost of hiring experts to fine-tune the model, as well as the cost of acquiring high-quality data, could be a significant obstacle for small funds. … there were also limitations such as token limitations and long-range dependencies. … AI models trained on biased data could lead to biased voting decisions …” (p. 41/42).

Green demand: The Demand for Green Bonds by Hari Gopal Risal, Chandra Thapa, Andrew P. Marshall, Biwesh Neupane, and Arthur Krebbers as of April 22nd, 2023 (#314): “… we find that the demand for corporate GB is about 32 to 42% points higher than comparable conventional non-GB issued by similar firms. Further, the demand for debut GB is stronger than seasoned GB offerings and higher for those issued by financial firms compared to non-financial firms. Finally, our results also show that the demand is higher for GB issued by firms with higher environmental commitments and issued in countries with better environmental performance“ (abstract).

Traditional and alternative investment research: Greenwashing banks?

Heated inflation: The impact of global warming on inflation: averages, seasonality and extremes by Maximilian Kotz, Friderike Kuik, Eliza Lis, and Christiane Nickel as of April 24th, 2023 (#31): “… in the absence of historically un-precedented adaptation, future warming will cause global increases in annual food and headline inflation of 0.92-3.23 and 0.32-1.18 percentage-points per year respectively, under 2035 projected climate … Moreover, we estimate that the 2022 summer heat extreme increased food inflation in Europe by 0.67 (0.43-0.93) percentage-points and that future warming projected for 2035 would amplify the impacts of such extremes by 50%“ (abstract).

Outcrowded VC? Crowdfunding vs. Venture Capital: Complements or Substitutes? A Theoretical Assessment by Guillaume Andrieu and Alexander Peter Groh as of April 25th, 2023 (#39): “Entrepreneurs need to weigh campaign cost as well as lower profit requirements of the crowd against the support of VCs. In addition, VCs make efficient abandonment decision and thus improve resource allocation which benefits the relationship. A passive crowd cannot detect lemons and thus creates model frictions. The model also predicts that the emergence of CF has created a shock for the VC industry. It has increased competition, and thus reduced VCs’ deal flow, and their profits. The model suggests that CF forces VCs to strengthen their own expertise and to specialize. CF may have reduced the number of VC actors, or makes them shift towards later financing stages“ (p. 24).

Tech-Defizite: Wagniskapital für Net Zero: Potenziale und Herausforderungen von Steffen Viete und Milena Schwarz von der KfW vom 17. Mai 2023: “Im Jahr 2022 wurden in Deutschland über 1,5 Mrd. EUR in 118 Finanzierungsrunden in Climate-Tech-Start-ups investiert. Dabei haben Investoren ihr Engagement bei Climate-Tech-Start-ups über die Jahre sogar deutlich stärker ausgebaut als im Rest des gesamten VC-Marktes. … Zwischen den Jahren 2019 und 2022 machten sie über 13 % des gesamten Investitionsvolumens im Markt aus. … in den USA …. wurde … zwischen 2019 und 2022 das 4,7-fache des Volumens in Deutschland investiert. … Aufgrund des hohen Kapitalbedarfs sind für die Weiterentwicklung des Finanzierungsumfeldes für Climate-Tech-Start-ups vor allem Fonds von Bedeutung, die auch größere Runden finanzieren können. … Die Forschung legt nahe, dass insbesondere im Industriesektor noch großes Potenzial zur Emissionsminderung durch technische Innovation besteht“ (S. 1).

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Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. The fund focuses on social SDGs and small and midcaps, uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement (currently 24 of 30 companies engaged). The fund typically scores very well in sustainability rankings, e.g. see this free tool, and the risk-adjusted performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Climate reporting: Picture Facts by Gerd Altmann from Pixabay

Climate reporting: Researchpost #128

Climate reporting: 13x new research regarding inequality, climate reporting, biodiversity, green bonds, external costs, private equity real estate, gold, equal weighting, correlations, tail risks, robo advisors and AI (# indicates the number of SSRN downloads on May 22nd, 2023)

Ecological and social research

Inequality: Climate Inequality Report 2023 by Lucas Chancel, Philipp Bothe, and Tancrède Voituriez from the World Inequality Lab as of Jan. 30th, 2023: “The accelerating climate crisis is largely fuelled by the polluting activities of a fraction of the world population. The global top 10% are responsible for almost half of global carbon emissions and the global top 1% of emitters are responsible for more emissions than the entire bottom half of the world’s population. … within-country carbon inequality now makes up the bulk of global emissions inequality, i.e. about two thirds of the total, an almost complete reversal as compared to 1990. The carbon budgets needed to eradicate poverty below the US$ 5.50/day poverty line are equal to roughly one third of the current emissions attributable to the top 10% of global emitters. … Many countries in the Global South are significantly poorer today than they would have been in the absence of climate change. This trend is set to continue and result in income losses of more than 80% for many tropical and subtropical countries by the end of the century. Within countries, the poor suffer stronger losses from climate impacts than more affluent population groups. The income losses from climate hazards of the bottom 40% are estimated to be 70% larger than the average in low- and middle-income countries” (p. 9).

Responsible investment research: Climate reporting

Climate reporting (1): The MSCI Net-Zero Tracker by MSCI Research as of May 2023: “35% of listed companies have disclosed at least some of their Scope 3 emissions … 44% of listed companies have set a decarbonization target … 17% of listed companies have published a climate target that, if achieved, would align carbon emissions across the company’s total value chain with the ambitious 1.5°C goal of the Paris Agreement … Listed companies are on a path to warm the planet by 2.7° above preindustrial levels this century … Just over half (51%) of listed companies align with warming equal to or below 2°C, placing them at the high end of the Paris Agreement’s uppermost temperature threshold … Unlisted companies in four of the five most emissions-intensive industry groups were less carbon-intensive than their listed counterparts on aggregate …Real-assets funds held the most emissions-intensive industries per dollar of financing, followed by mezzanine- and distressed-debt funds … The carbon intensity of all three fund types was more than triple the carbon intensity of buyout funds” (p. 4/5). My comment: I try to engage with all my fund portfolio companies to report broad Scope 3 data, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Climate reporting (2): The Climate Transition Is Increasingly about Opportunity by Chris Cote and Guido Giese of MSCI Research as of May 15th, 2023: “We have found that in the most emissions-intensive sectors, for example, companies that had a higher share of revenue from alternative energy, energy efficiency and green buildings had significantly faster earnings growth than their sector peers over a period of roughly seven-and-a-half years that ended on March 31, 2023” (p. 3). … only 155 companies (1.7% of the listed universe), with a total market cap of USD 1.6 trillion, earned more than half of their revenues from such (SÖ: alternative energy or energy efficiency) activities, our analysis finds. … We found in our data that many of the more than 3,800 listed companies (42% of that universe) that have published a decarbonization target, for example, do not explain how they plan to meet their climate-related goals” (p. 6).

Biodiversity risks: Nature positive: How the world’s largest companies depend on nature and biodiversity by Esther Whieldon, Shirley Yap, Lokesh Raikwar, and Gautier Desme of S&P Global as of May 10th, 2023: “85% of the world’s largest companies that make up the S&P Global 1200 have a significant dependence onn nature across their direct operations … 46% of companies in this universe … have at least one asset located in a Key Biodiversity Area …”.

Control advantage: Corporate Green Bonds: The role of external reviews for investment greenness and disclosure quality by Tami Dinh, Florian Eugster, and Anna Husmann as of May 19th, 2023 (#69): „Our results indicate that although companies with worse environmental performance are more likely to obtain at-issuance external reviews for their green bonds, their certified investments are more likely to be greener than companies that did not obtain a review at issuance. … Additionally, we develop a disclosure index for green bond reports and exhibit how post-issuance report assurance is associated with increased transparency” (abstract).

External costs: Auf dem netto-positiven Weg? Wie Unternehmen Wert schaffen – Messung und Integration von Nachhaltigkeit in die strategische Planung von Martin G. Viehöver at al von Positive Impacts vom 2. September 2022: „Im Allgemeinen erzeugen alle Industriesektoren im Durchschnitt einen positiven Gesellschaftlichen Wert, aber auch Gesellschaftliche Verluste aufgrund der entstehenden gesellschaftlichen Kosten (externe Effekte). Es wurde jedoch bestätigt, dass Unternehmen gesellschaftliche Erträge erzielen können, indem die von ihnen gezahlten Steuern höher als die gesellschaftlichen Kosten waren, wie es bei 20 Unternehmen in der Stichprobe der Fall war“ (S. 61).

General investment research

Bad PERE: Persistently Poor Performance in Private Equity Real Estate by Da Li and Timothy J. Riddiough as of May 14th, 2023 (#629): “We compare Buyout (BO), Venture Capital (VC), and Private Equity Real Estate (RE) funds. RE funds underperform BO and VC, as well as the public market alternative. In RE, worse-performing fund managers survive at a high rate. They are also susceptible to diseconomies of fund scale, with no skill-based persistence to offset the negative scale effects. Analysis of noisy fund manager selection indicates that RE investors are not disadvantaged relative to BO and VC. LP investors in RE funds seem to be optimizing something other than, or in addition to, investment return when selecting fund managers” (abstract).

Good gold? The Safe Asset Shortage Conundrum and Why Gold is a Safe Asset by Dirk G. Baur as of April 19th, 2023 (#29): “This paper demonstrates that gold is a safe asset based on existing definitions, central bank holdings, history, and risk characteristics such as default risk and currency risk. Changes in the safe asset pool during the 2008 financial crisis and its aftermath led to a safe asset triage that potentially led to the inclusion of gold in the safe asset pool. This is evident in the weakly symmetric opposite movements of gold and US government bond prices since 2008 and also in an increasing correlation especially since 2008. A simple safe asset test that analyzes whether a supposedly “safe asset” can be sold without a loss over different investment horizons or holding periods shows that gold is indeed relatively safe when compared with US government bonds. Finally, we also argue that the “safe asset shortage” is not a “natural” shortage but caused by central bank “QE” asset purchasing programs rendering this shortage rather narrow“ (p. 8).

Easy outperformance: Beating the S&P 500 at Its Own Game – The triumph of the equally weighted index by John Rekenthaler from Morningstar as of May 15th, 2023: “… only 19 equally weighted U.S. equity funds of any flavor currently exist, and none except for Invesco’s funds possess significant assets … Since summer 1998 … a costless version of the equally weighted S&P 500 portfolio has thrashed the conventional index … Half the equally weighted portfolio is invested in firms with market caps exceeding $30 billion. But the comparable figure for the customary S&P 500 is $150 billion”. My comment: I use equal weight for all my direct equity model portfolios and my fund since many yearsm see e.g. Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

Correlation criticism: Co-Occurrence: A New Perspective on Portfolio Diversification by William Kinlaw, Mark Kritzman, and David Turkington as of May17th, 2023 (#25): “Investors typically measure an asset’s potential to diversify a portfolio by its correlations with the portfolio’s other assets, but correlation is useful only if it provides a good estimate of how an asset’s returns co-occur cumulatively with the other asset returns over the investor’s prospective horizon. And because correlation is an average of sub-period co-occurrences, it only serves as a good estimate of prospective co-occurrence if the assets’ returns are multi-variate normal, which requires them to be independent and identically distributed. The authors provide evidence that correlations differ depending on the return interval used to estimate them, which indicates they are not serially independent. Moreover, the authors show that asset co-movement differs between regimes of high and low interest rates and between turbulent and quiescent markets, and that they are asymmetric around return thresholds, which indicates that returns are not identically distributed. These departures from multi-variate normality cast serious doubt on the usefulness of full-sample correlations to measure an asset’s potential to diversify a portfolio. The authors propose an alternative technique for diversifying a portfolio that explicitly considers the empirical prevalence of co-occurrences and thus the non-normality of returns“ (abstract).

Tail risks: Equity Tail Protection Strategies Before, During, and After COVID by Roni Israelov and David Nze Ndong as of May 10th, 2023 (#124): “We investigate three common, yet different approaches to hedging equity drawdowns and a few themes emerge. First, hedging is expensive. … Second, the variable equity exposure embedded in option strategies is a source of risk and path dependence. … Third (and related to the previous point), a hedger’s decision on whether to delta-hedge their option exposure to isolate the option convexity or to maintain an unhedged position materially impacts performance in non-forecastable ways. …. Finally, there is enormous dispersion in the performance of tail risk hedging strategies. Well-reasoned arguments can be made in favor or against any number of decisions on how to implement a tail risk hedge. We only considered a few strategies (long options hedged or unhedged, long put protection, and long VIX futures) and the dispersion in outcomes is notable … those who implement hedging solutions should plan for the possibility – as remote as it might be – that their hedges make things worse in times of stress“ (p. 11/12).

Invest-Tech research (Climate reporting)

Robo-risks: Demystifying Consumer-Facing Fintech: Accountability for Automated Advice Tools by Jeannie Paterson, Tim Miller, and Henrietta Lyons as of May 10th, 2023 (#12): “Currently, the most prominent forms of fintech available to consumers are automated advice tools for investing and budgeting. These tools offer advantages of low cost, convenient and consistent advice on matters consumers often find difficult. … the oft-stated aspiration … should not distract attention from their potential to provide only a marginally useful service, while extracting consumer data and perpetuating the exclusion of some consumer cohorts from adequate access to credit and banking. … Fintech tools that hold out to consumers a promise of expertise and assistance should genuinely be fit for purpose. Consumers are unlikely to be able to monitor this quality themselves …“ (p. 15/16).

AI Advantage? Can ChatGPT Forecast Stock Price Movements? Return Predictability and Large Language Models by Alejandro Lopez-Lira and Yuehua Tang as of May 12th, 2023 (#32759): “We use ChatGPT to indicate whether a given headline is good, bad, or irrelevant news for firms’ stock prices. We then compute a numerical score and document a positive correlation between these “ChatGPT scores” and subsequent daily stock market returns. Further, ChatGPT outperforms traditional sentiment analysis methods. … Our results suggest that incorporating advanced language models into the investment decision-making process can yield more accurate predictions and enhance the performance of quantitative trading strategies. Predictability is concentrated on smaller stocks and more prominent on firms with bad news, consistent with limits-to-arbitrage arguments rather than market inefficiencies“ (abstract).

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Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. The fund focuses on social SDGs and midcaps, uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement (current engagement with 24 of 30 companies). The fund typically scores very well in sustainability rankings, e.g. see this free tool, and the risk-adjusted performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Banning dividends: Picture with dollar notes by Oleg Gamulinksii from Pixabay

Banning dividends? Researchpost #127

Banning dividends: 10x new research on gender wealth, activists, dividends, greenium, correlations, diversification, ChatGPT and investment committees by Charlotte Bartels, Eva Sierminska, Carsten Schroeder, Marcos López de Prado, Bernd Scherer et al. (# indicates the number of SSRN downloads on May 17th, 2023)

Social and ecological research

Gender wealth: Wealth creators or inheritors? Unpacking the gender wealth gap from bottom to top and young to old by Charlotte Bartels, Eva Sierminska and Carsten Schroeder as of April 28th, 2023 (#19): “Our analysis of gender-specific age-wealth profiles revealed that the average gender wealth gap is small up to age 40, then widens, and shrinks after retirement. … men tend to inherit larger sums than women during working life. Women often outlive their male partners and therefore receive large inheritances in old age. But these transfers come too late to be used productively, for instance, to start a business. Against this backdrop, the average gender wealth gap underestimates the inequality of opportunity that men and women have during the active, wealth-creating phase of the life course” (p. 11/12).

Sustainable investment research: Banning dividends?

ESG preferred: ESG Spillovers by Shangchen Li, Hongxun Ruan, Sheridan Titman, and Haotian Xiang as of May 10th (#537): “We study ESG and non-ESG mutual funds managed by overlapping teams. We find that non-ESG mutual funds include more high ESG stocks after the creation of an ESG sibling, and the high ESG stocks they select exhibit superior performance. The low ESG stocks selected by ESG funds also exhibit superior performance and despite being more constrained, the ESG funds outperform their non-ESG siblings. The latter result is consistent with fund families making choices that favor ESG funds. Specifically, ESG funds tend to trade illiquid stocks prior to their non-ESG siblings and get preferential IPO allocations” (abstract).

Good action, bad result? Activist Pressure and Firm Compliance with ESG Disclosure Policy: Experimental Evidence from the U.K. Modern Slavery Act by Matthew Lee and Jasjit Singh as of May 10th, 2023 (#55): “Many corporate ESG disclosure regulations rely on private activist pressure to enforce compliance, but relatively little is known about its effectiveness. We present results from a field experiment testing the effect of various types of pressure from a leading human rights NGO on subsequent corporate compliance with the U.K. Modern Slavery Act of 2015, a law requiring disclosure of actions taken to address human rights issues. Sending firms a letter describing their legal ESG disclosure obligations had an unexpected effect of reducing rather than increasing compliance. This effect was partly mitigated for firms whose letter additionally included a list of already compliant firms, the mitigating effect being greatest when this list of peers was drawn from the same geographic location as the targeted firm” (abstract). My comment: Together with my engagement proposals, I send best-practice examples e.g. regarding supplier ESG evaluation to the companies I am invested in see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Banning dividends? Power Struggle: How Shareholder Primacy in the Electrical Utility Sector Is Holding Back an Affordable and Just Energy Transition by Nicholas Lusiani as of April 17th, 2023 (#10): “Instead of reinvesting earnings into more efficient, zero-carbon energy systems for consumers and future generations, this brief details how US investor-owned utilities have instead distributed over $250 billion—or 86 percent of net earnings—to shareholders over the past decade, at tremendous cost to a just transition. … policy recommendations to head off creeping shareholder primacy in the electricity sector, including: Creating a ban or very low bright-line limits on share buybacks; Implementing an annual shareholder payout cap, prioritizing reinvestment in efficiency and resiliency; Instituting a new set of binding fiduciary duties, toward alignment with the public interest; and establishing clear guardrails to protect against utility lobbying efforts currently undermining a just transition” (abstract). My comment: Divesting from such companies would most likely not stop their energy production because they still will be able to sell their energy (self-financing), although some investors seem to suggest such effects

Greenium problems: Who benefits from the bond greenium? by Daniel Kim and Sebastien Pouget as of May 3rd, 2023 (#56): “Using a sample of 354 US firms active in the bond market from 2005 to 2022, we establish our main result: there is a greenium that appears larger on the secondary than on the primary market. … Our evidence suggests that two economic forces underlie our main result. The part of the greenium pocketed in by financial intermediaries appears related i) to uncertainty regarding investors’ future climate concerns and ii) to a lack of competition among underwriting dealers. … green investors should try and participate more directly in primary bond markets if they want to increase their impact on firms’ financial incentives to become green” (p. 31).

Traditional investment research: Banning dividends

Misleading correlations: The Hierarchy of Empirical Evidence in Finance by Marcos López de Prado as of May 14th, 2023 (#190): “… the majority of journal articles in the investment literature make associational claims, and propose investment strategies designed to profit from those associations. For instance, authors may find that observation X often precedes the occurrence of event Y, determine that the correlation between X and Y is statistically significant, and propose a trading rule that presumably monetizes such correlation. A caveat of this reasoning is that the probabilistic statement “X often precedes Y” provides no evidence that Y is a function of X, thus the relationship between X and Y may be coincidental or unreliable … misspecification errors make it likely that the correlation between X and Y will change over time, and even reverse sign, exposing the investor to systematic losses. … The hierarchy of empirical evidence proposed in this article can help readers assess the strength and scientific rigor of the claims made by financial researchers (p. 18). My comment: For good reasons my rules-based investment strategies do not rely spurious correlations

Bad diversification? Which is Worse: Heavy Tails or Volatility Clusters? by Joshua Traut and Wolfgang Schadner as of April 28th, 2023 (#152): “Asset returns are known to be neither normally distributed nor of perfect random order. In contrast, they appear to exhibit a heavy-tailed distribution and are ordered in a complex, non-random way that causes large (small) fluctuations to be followed by large (small) fluctuations, a phenomenon that is known as volatility clustering“ (p. 2). … “We find that financial markets across various asset classes are clearly more destabilized from volatility clusters than from heavy-tailed distributions per se. We also observe that the effect gets more pronounced with an increasing degree of portfolio diversification” (p. 33). My comment: Good add-on argument to 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

Large beats small: Is Information Production for the U.S. Stock Market Becoming More Concentrated? Yang Cao, Miao Liu, and Xi Zhang as of April 18th, 2023 (#40): “The US stock market has experienced dramatic shifts in structure in the past two decades. While small firms have disappeared, large ones have increasingly gained market share. … we find consistent and robust evidence that as large firms take a more significant market share, they attract market attention away from smaller ones, even when small firms’ business fundamentals remain unchanged. … If the market produces more and better information for large firms relative to small firms, capital would be allocated away from small firms to large ones, further deepening market concentration” (p. 25).

To ChatGPT or not? Unleashing the Power of ChatGPT in Finance Research: Opportunities and Challenges by Zifeng Feng, Gangqing Hu, and Bingxin Li as of pril 25th, 2023 (#183): “This article explores the multifaceted potential of ChatGPT as a transformative tool for finance researchers, highlighting the benefits, challenges, and novel insights it can offer to facilitate the research. We demonstrate applications in coding support, theoretical derivation, research idea assistance, and professional editing. A comparison of ChatGPT-3.5, ChatGPT-4, and Microsoft Bing reveals unique features and applicability. By discussing pitfalls and ethical concerns, we encourage responsible AI adoption and a comprehensive understanding of advanced NLP’s impact on finance research and practice“ (abstract).

Inefficient Expert Groups? Optimal Design of Investment Committees by Bernd Scherer as of May 1st, 2023 (#93): “… traditional investment committees are riddled with challenges. This results in biases (group shift bias), incentive problems (free rider), and aggregation problems (how to ensure that all member views enter the IC portfolio equally). I argue that these challenges will likely become considerably smaller once an investment committee moves towards creating an algorithmic consensus by averaging anonymous member portfolios instead of relying on qualitative group discussions. While investment committees based on these principles always performed well in my previous CIO positions, communication is one weakness in this design choice. Finding a coherent ex-post narrative that builds on a consistent top-down view is problematic because consistency across positions is neither enforced nor desired” (p. 13/14). My comment: Better use rules-based investment strategies (such as mine, see Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com) where committees may discuss the rules, although I do not believe much in superior “committee expertise”

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Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. The fund focuses on social SDGs and midcaps, uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement (currently 22 of 30 companies engaged). The fund typically scores very well in sustainability rankings, e.g. see this free tool, and the risk-adjusted performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Finfluencers: influencer picture by Gerd Altmann from Pixabay

Finfluencers: Researchpost #126

Finfluencers: 14x new research on CO2 storage, climate learnings, sustainable bonds, diversity, impact investing, active investing, and finfluencers by Laurens Swinkels, Alex Edmans, Caroline Flammer, Simon Glossner, Jeffrey Ptak, Michael Kitces, Norman Schürhoff, Christian Klein et al. (# indicates the number of SSRN downloads on May 9th, 2023)

Ecological and social research

CO2 Storage? CO2 storage or utilization? A real options analysis under market and technological uncertainty by Hanne Lamberts-Van Assche, Maria Lavrutich, Tine Compernolle, Gwenny Thomassen, Jacco Thijssen, and Peter M. Kort as of April 24th, 2023 (#8): “First, the presence of technological and market uncertainties … increase the barriers to invest in CCS or CCU. Second, when the firm anticipates the arrival of a more attractive CCU solution in the future, it will not postpone the investment in CCS. …. Third, higher uncertainty in the CO2 price, i.e. higher σ, increases the investment thresholds, while a higher trend in the CO2 price, i.e. higher α, decreases the investment thresholds for CCS and CCU. … First, policymakers should aim to ensure stability and predictability in the CO2 price, to lower the volatility σ of the CO2 price. Reducing the market uncertainty will lower the CO2 price investment thresholds for CCS, CCU and CCUS. Second, they should also commit to an increasing growth rate in the CO2 price in the EU ETS. When firms expect higher growth rates for the CO2 price in the future, they are more favourable to invest in CCS, CCU and CCUS sooner. Finally, policymakers should realize that CCU and CCS can be complementary solutions” (p. 32/33).

Climate-information matters: Complexity and Learning Effects in Voluntary Climate Action: Evidence from a Field Experiment by Johannes Jarke-Neuert, Grischa Perino, Daniela Flörchinger, and Manuel Frondel as of April 16th, 2023 (#26): “Exploiting the fact that timing matters, we have empirically investigated how individuals respond to (a) having the choice about the timing of their voluntary abatement efforts in the form of retiring an emission allowance and to (b) being confronted with either no, simple but counter-intuitive, or complex but intuitive information about the effectiveness-ranking of options. To this end, we have conceived a field experiment with more than four thousand participants that was embedded in a survey conducted in Germany in 2021 … Adding information did not systematically affect contributions overall, but substantially increased their effectiveness. … The uptake of information provided was most pronounced by individuals who most strongly believed in the opposite ranking“ (p. 15/16).

German pension wealth: Accounting for pension wealth, the missing rich and under-coverage: A comprehensive wealth distribution for Germany by Charlotte Bartels, Timm Bönke, Rick Glaubitz, Markus M. Grabka, and Carsten Schröder as of April 25th, 2023 (#13): “We found that including pension wealth increases the wealth-income ratio of German households from 570% to 850%. … pension wealth plays an equalizing role: The wealth share of the bottom 50% increases from 2% to 9% when including pension wealth, whereas that of the top 1% declines from 30% to 20%. However … Pension wealth is not transferable and, hence, differs significantly from marketable assets such as financial investments or housing“ (p. 12).

Responsible investment research: Finfluencers

Green and other bonds: Social, Sustainability, and Sustainability-Linked Bonds by Gino Beteta Vejarano and Laurens Swinkels from Robeco as of April 24th, 2023 (#107): “… several variations of sustainable bonds appearing in the market, where either use of proceeds are earmarked for sustainable activities, or coupon payments depend on sustainability targets. Despite the fast growth, the sustainable bond market is currently less than 4% of the overall bond market, with the green bond market accounting for half of it. Social and sustainability bonds tend to be issued by government or government-related institutions and, therefore generally have higher credit quality than sustainability-linked bonds, which are much more popular in the corporate sector. … The yields on sustainable bonds tend to be only marginally lower than those on conventional bonds with a similar risk profile …. Since correlations between returns on sustainable and conventional bonds are high, the risk and return profile of the portfolio is unlikely to change much when certain conventional bonds are replaced with ESG bonds with similar characteristics …” (p. 28).

Growing greenium? How Large is the Sovereign Greenium? by Sakai Ando, Chenxu Fu, Francisco Roch, and Ursula Wiriadinata as of April 19th, 2023 (#22): “This paper is the first empirical study to estimate the sovereign greenium using both the twin bonds issued by Denmark and Germany, and panel regression analysis. While the estimated greenium in this paper is not large, it has been increasing over time alongside the level of sovereign green bond issuances. … It remains an open question whether the purpose of the project associated with the green bond is a key determinant of the greenium, and whether green bonds have resulted in the climate outcomes they intended to achieve” (p.9/10).

Good diversity: Diversity, Equity, and Inclusion by Alex Edmans, Caroline Flammer, and Simon Glossner as of May 2nd, 2023 (#723): “… demographic diversity measures may miss many important aspects of DEI. … Companies with high DEI enjoyed recent strong financial performance and are less levered, suggesting that a strong financial position gives companies latitude to focus on long-term issues such as DEI that may take time to build. Small growth firms also exhibit higher DEI scores, consistent with either greater incentives or ability to improve DEI in such firms. … we find that the percentage of women in senior management is significantly positively associated with DEI perceptions, and this result holds regardless of the gender or ethnicity of the respondents. … DEI is also unrelated to general workplace policies and outcomes, suggesting that DEI needs to be improved by targeted rather than generic initiatives. … we find no evidence of a link between DEI and firm-level stock returns” (p. 25/26).

Impact measure: The Impact Potential Assessment Framework (IPAF) for financial products by Mickaël Mangot and Nicola Stefan Koch of the 2o investing initiative as of March 2023: “The Impact Potential Assessment Framework (IPAF) assesses financial products based only on their actions to generate real-life impact … It is exclusively based on public information provided by the product manufacturers … It is applicable to various types of financial products … serves as a tool against impact-washing by displaying practical limitations of self-labelled “impact products … First, it assesses the (maximum) impact potential of financial products based on impact mechanisms they supposedly apply (in relation to communicated elements in marketing documents). Those impact mechanisms are the ones widely documented by academic research: Grow new/undersupplied markets, Provide flexible capital, Engage actively, Send (market and nonmarket) signals. Second, it evaluates the implementation of that impact potential based on the intensity with which financial products action the various impact mechanisms in connection to success factors documented by academic research”. My comment: I try to provide as much impact as possible with my public equity mutual fund, see https://futurevest.fund/

Green demand: Nachfrage nach grünen Finanzprodukten, Teilbericht der Wissensplattform Nachhaltige Finanzwirtschaft im Auftrag des Umweltbundesamtes von Christian Klein, Maurice Dumrose, Julia Eckert vom April 2023: “… In this project report, the development of the sustainable investment market, especially in the retail sector, is presented and the characteristics of sustainable investments are introduced. Retail investor motives for investing in such products and the requirements retail investors have for sustainable investment products are highlighted. Barriers for retail investors and investment advisors are identified in the area of sustainable investments. Finally, based on these findings, recommendations for political action are proposed, which can lead to a reduction of these barriers and thus increase the acceptance of sustainable investments” (abstract). .. “Die Literatur zeigt eindeutig, dass insbesondere die Fehlannahme der Anlageberatenden, Retail-Investierende hätten kein Interesse an Nachhaltigen Geldanlagen und fragen deshalb nicht aktiv im Beratungsgespräch nach diesen, eine Barriere darstellt. Die Untersuchung von Klein et al. zeigt in diesem Zusammenhang deutlich, dass diese Barriere durch eine verpflichtende Abfrage der Nachhaltigkeitspräferenz der Retail-Investierenden überwunden werden kann. Ferner zeigt der aktuelle Forschungsstand, dass insbesondere ein zu geringes Wissen im Bereich Nachhaltige Geldanlage die zentrale Barriere für Anlageberatende darstellt. Hohe Transaktions- sowie Informationskosten, ein fehlendes kundengerechtes nachhaltiges Produktangebot, Zweifel an dem Beitrag, den Nachhaltige Geldanlagen zu einer nachhaltigen Entwicklung leisten, hohe wahrgenommene Komplexität, Wahrnehmung von Green Washing, Angst vor Haftungsrisiken, potentielle Reputationsrisiken und keine einheitliche bzw. gesetzliche Definition des Begriffs Nachhaltige Geldanlage konnten als weitere Barrieren identifiziert werden“ (S. 42/43).

2 ESG types? Sustainable investments: One for the money, two for the show by Hans Degryse, Alberta Di Giuli, Naciye Sekerci, and Francesco Stradi as of April 26th, 2023 (#66): “Analyzing a representative sample of Dutch households, we document the existence of two types of households: those that invest in sustainable products for social reasons (social sustainable investors) and those that do it for financial reasons (financial sustainable investors). The two groups are of equal importance but are characterized by different features. The social sustainable investors have higher social preferences, level of education and trust, and are more likely left-wing and less risk-loving. Reliable labelling, reducing greenwashing concerns, and emphasizing typical left-wing thematic linked to sustainable investments is positively related to sustainable investments by social sustainable investors, whereas hyping the benefit in terms of returns of sustainable investments through social media and word of mouth is positively associated with the investment decisions of financial sustainable investors” (abstract).

Traditional and fintech investment research: Finflucencers

Difficult 1/n?: Is Naïve Asset Allocation Always Preferable? by Thomas Conlon, John Cotter, Iason Kynigakis, and Enrique Salvador as of April 28th, 2023 (#90): “For allocation within asset classes, we find only limited evidence of outperformance in terms of risk-adjusted returns for optimized portfolios relative to the naïve benchmark … we find statistical and economic evidence that a bond portfolio that minimizes risk is the only case that provides outperformance of the 1/n rule. This evidence points to challenges in outperforming the equally weighted portfolio, especially when allocating among equities and REITs. When allocating across asset classes, we find that minimum-variance portfolios that include bonds exhibit higher Sharpe ratios than the equally weighted portfolio. These findings also carry over to downside risk, where optimal strategies have a lower VaR, both economically and statistically, than that associated with the equally weighted approach. Allocations across different asset classes also have lower rebalancing requirements, which means they are less affected by the transaction costs” (p. 26). My comment: My equity portfolios are all equal weighted. The most passive world market portfolio should be uses as reference instead of naïve asset allocation which does not work well because auf unclear asset class definitions, see Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com). Regarding optimization limits see Kann institutionelles Investment Consulting digitalisiert werden? Beispiele. – Responsible Investment Research Blog (prof-soehnholz.com)

Active disaster: How Can Active Stock Managers Improve Their Funds’ Performance? By Taking a Vacation—a Long One by Jeffrey Ptak from Morningstar as of May 2nd, 2023: “While active large-cap managers made thousands of trades worth trillions of dollars over the 10-year period ended March 31, 2023 … The funds’ actual returns were almost identical to what they’d have been had those managers made no trades at all and were worse after adjusting for risk. And that was before fees were deducted”. My comment: With my portfolios/fund I try to trade as little as possible

Wealthtech changes: The Kitces AdvisorTech Map Highlights The Evolving Landscape As It Turns 5 Years Old by Michael Kitces and ben Henry-Moreland as of May 1st, 2023: “… there now 409 different software solutions …  with the total number of solutions more than doubling … Some highlights of these AdvisorTech evolution trends over the past 5 years include: The near-disappearance of the ‚B2B robo‘ tools as advisors demanded better onboarding capabilities but showed an unwillingness to pay for them on top of their broker-dealer or custodial providers … portfolio management tools have increasingly bought or built performance reporting and performance reporters acquired most of the available trading and rebalancing tools in a massive consolidation into what is now the „All-In-One“ category … The growth of the Behavioral Assessments category … The proliferation of specialized financial planning software …The explosion in advisor marketing technology …”

Bad influences: Finfluencers by Ali Kakhbod, Seyed Kazempour, Dmitry Livdan, and Norman Schürhoff as of May 4th, 2023 (#178): “… instead of following more skilled influencers, social media users follow unskilled and antiskilled finfluencers, which we define as finfluencers whose tweets generate negative alpha. Antiskilled finfluencers ride return and social sentiment momentum, which coincide with the behavioral biases of retail investors who trade on antiskilled finfluencers’ flawed advice. These results are consistent with homophily in behavioral traits between social media users and finfluencers shaping finfluencer’s follower networks and limiting competition among finfluencers, resulting in the survival of un- and antiskilled finfluencers despite the fact that they do not provide valuable investment advice. Investing contrarian to the tweets by antiskilled finfluencers yields abnormal out-of-sample returns, which we term the “wisdom of the antiskilled crowd.”“ (p. 40).

Literacy returns: Financial literacy and well-being: The returns to financial literacy by Sjuul Derkx, Bart Frijns, and Frank Hubers as of April 25th, 2023 (#21): “Using a panel data set of Dutch households over 2011-2020, we find that initial (2011) … financial literacy positively affects wealth accumulation for up to four years into the future, showing that there is mean-reversion in financial literacy when one no longer invests in it. Considering different age brackets, we document that financial literacy among the young results in higher income generation, while financial literacy among the old leads to greater wealth accumulation” (abstract).

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Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. The fund focuses on social SDGs and midcaps, uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement. The fund typically scores very well in sustainability rankings, e.g. see this free new tool, and the performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

ESG AI: Picture from Gordon Johnson from Pixabay to illustrate green or ESG AI

ESG AI: Researchpost #125

ESG AI: >10x new research on climate AI models (for banks), CO2 removal, bridge technology risks, human capital, ESG risk management and ESG bullshit, government greenium, double materiality and listed impact investing and industry versus regional diversification by Markus Leippold, Marco Wilkens, Johannes Leister, Ottmar Edenhofen, Timo Busch, Andreas Hoepner and many more (# indicates the number of SSRN downloads on April 30th, 2023)

Social and ecological research: ESG AI

Climate LLM: Enhancing Large Language Models with Climate Resources (ESG AI) by Mathias Kraus, Julia Anna Bingler, Markus Leippold, Tobias Schimanski, Chiara Colesanti Senni, Dominik Stammbach, Saeid Ashraf Vaghefi, Nicolas Webersinke as of April 17th, 2023 (#114): “Our prototype LLM agent retrieves information from general Google searches and emission data from ClimateWatch to provide reliable and accurate information. Through two exemplary experiments, we showcase how such an LLM agent can operate to enhance the accuracy and reliability of climate-related text generation. This work contributes to the exploration of LLM applications in domains where up-to-date and accurate information is critical …” (p. 6).

Complex climate scenarios: Klima-Szenarioanalysen in Banken (ESG AI) von Marco Wilkens und Johannes Leister vom April 2023: “… supervisory-motivated climate scenario analyses build on „traditional scenario analyses“ for assessing market and economic risks, but they are much more complex. This is in particular due to the need to model the interrelationship between climate data and macroeconomic data and the significantly much longer period under consideration. In addition, there is very little empirical data available for mapping climate risks, which is needed for econometric modeling of relevant relationships. Moreover, these long time periods require considerations of how banks and bank customers act over time. However, taking into account resulting dynamic bank balance sheets lead to hardly comparable results between banks. … this allows primarily a relative estimation of climate-related risks between banks than a realistic and comprehensive estimation of climate-related credit risks for individual banks. … In summary, we see climate scenario analyses as one of several important tools for transforming both the financial industry and the real economy toward the green economy“ (abstract).

Tricky CO2 removal: On the Governance of Carbon Dioxide Removal – A Public Economics Perspective by Ottmar Edenhofer, Max Franks, Matthias Kalkuhl, and Artur Runge-Metzger as of April 19th, 2023 (#25): “This paper highlights the importance of carbon dioxide removal (CDR) technologies for climate policy. We … discuss removal costs and storage duration of different technologies. … seemingly cheap removal technologies in the land sector can indeed be very expensive when increasing opportunity costs and and impermanence are appropriately accounted for. The use of non-permanent removal – though to a certain extent economically optimal – creates high liability to firms and regulators that warrants a careful and deliberative risk management“ (abstract).

Human-Climate relations: Climate Changes Affect Human Capital by Germán Caruso, Inés de Marcos, and Ilan Noy as of April 19th, 2023 (#13): “… we provide a framework for analyzing the multiple interlinkages between climate change and human capital … The framework presents two channels through which human capital is affected: direct effects on health, nutrition, and wellbeing, and indirect effects through changes in economic systems, markets, and through damage to infrastructure. … For mitigation and adaptation, we find that while these are overall clearly beneficial, they are also associated with significant human capital costs for specific sectors and groups in society. … Since there is also evidence that high human capital improves adaptation and mitigation, this suggests that adaptation and mitigation that accounts and compensates for these ‘sectoral’ losses can create a virtuous cycle that leads to positive outcomes for both climatic action and human capital“ (abstract). My comment: My fund focuses on human/social and climate topics, see Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

Responsible investment research

Risky bridges: Bridge technologies from a sustainable finance perspective by Timo Busch, Tanja Ohlson, Ana Sarantidi, and Özüm Yenen as of March 2023: “The interviewees identified risks related to a particular bridge technology, in our case LNG infrastructure, risks that stemmed from the classification of the investment into bridge technologies, and risks to the own organizations mainly in the reputational context. These risks often led to a low appetite for investing in bridge technologies. However, the asset managers also recommended that these risks could be minimized by providing a more transparent and reliable path forward for the “end of bridge” phase of the technology. In the LNG case this relates to the future utilization of hydrogen. Moreover, a classification scheme and related label for transition finance products could help increase the attractiveness of bridge technology investments, and better communication and science-based long-term decision making would help minimize risks in the context of the bridge technology” (p. 50).

Less (ESG) bullshit: Bloated Disclosures: Can ChatGPT Help Investors Process Information? (ESG AI) by Alex G. Kim, Maximilian Muhn, and Valeri V. Nikolaev as of April 27th, 2023 (#443): “By summarizing a large sample of corporate disclosures with GPT-3.5- Turbo, we show that the length of the summaries is shortened by as much as 80%, on average. Importantly, the obtained summaries appear to provide more relevant insights as compared to the underlying raw documents. Specifically, we show that summarized sentiment better explains cumulative abnormal returns around disclosure dates than raw sentiment. Building on this insight, we construct a novel and easy-to-implement measure of the degree of “bloat” in textual disclosures. … We show that bloated disclosures are associated with slower price discovery and higher information asymmetry, thus implying negative capital market consequences. Finally, we show that GPT is useful to investors interested in targeted summaries related to important topics, such as a summary of ESG-related activities” (p. 24/25).

Good E/S/G risk management: How ESG risk management can impact security risk by Miranda Carr, Yuliya Plyakha Ferenc, Blessy Varghese, Zoltán Nagy, and Guido Giese from MSCI ESG Research as of April 13th, 2023: “Our findings indicate that companies with higher E and S risk management and governance scores, and consequently higher ESG Ratings, than their peer groups had lower stock-specific risk than their peers during the 2017-2022 time period. … A key element behind this lower risk profile is … how the company itself managed these risks … our findings demonstrated that E and S risk management adds valuable informational content in portfolio management. … For social key issues, management metrics include elements such as the promotion of training and development of the workforce for companies in knowledge-intensive industries, transparency and visibility over the supply chain for companies in the retail industry, robust health and safety policies for companies in the consumer-durables sector and positive community relations for companies in the mining industry“ (p. 14). My comment: My engagement policy focuses on several of these topics see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Government greenium? How Large is the Sovereign Greenium? by Sakai Ando, Chenxu Fu, Francisco Roch and Ursula Wiriadinata as of April 19th, 2023 (#18): “This paper is the first empirical study to estimate the sovereign greenium using both the twin bonds issued by Denmark and Germany, and panel regression analysis. While the estimated greenium in this paper is not large, it has been increasing over time alongside the level of sovereign green bond issuances. Whether the administrative costs associated with green bond issuance exceed the benefit is a country-specific question … It remains an open question whether the purpose of the project associated with the green bond is a key determinant of the greenium, and whether green bonds have resulted in the climate outcomes they intended to achieve” (p. 11/12).

Double materiality: Beyond Climate: ‚EU Taxonomy‘ Criteria, Materiality, and CDS Term Structure by Andreas G. F. Hoepner, Johannes Klausmann, Markus Leippold, and Jordy Rillaerts as of April 18th, 2023: “… the risks associated with water and biodiversity impacting a firm are perceived to be long-term issues, as evidenced by significantly negative effects on CDS slopes. The negative effects are weaker but still significant for pollution prevention, also suggesting a long-term vision. The financing benefits due to a firm’s commitment to pollution prevention, however, have stronger long-term implications rather than short-term advantages. In contrast, a firm’s impact on biodiversity has no such timing differential, revealing a more imminent awareness. … Overall, our findings identify the long-term focus on infrastructure firms’ financing conditions with regard to the environmental topics covered in the latest EU taxonomy beyond climate change. Moreover, they highlight the importance of considering both materiality sides, i.e., the impact of the environment on firms and the impact of firms on the environment“ (p. 23).

Listed impact? Guidance for Pursuing Impact in Listed Equities by the Global Impact Investing Network as of March 30th, 2023: “Developed with input from over 100 investors, Guidance for Pursuing Impact in Listed Equities uses the GIIN’s “Core Characteristics of Impact Investing” to provide baseline practices and expectations for asset managers seeking to achieve positive impacts in listed equities. The guidance is structured around four main aspects of listed equities impact investing: setting fund/portfolio strategy, portfolio design and selection, engagement and performance data usage. Additionally, it introduces two key concepts, investor contribution and theory of change, that investors should consider when designing and managing listed equities impact funds”.

Traditional investment research

Good industry diversification: Market Segmentation and International Diversification Across Country and Industry Portfolios by Mehmet Umutlu, Seher Gören Yargı and Adam Zaremba as of April 14th, 2023 (#22): “We conjecture that partially segmented stock indexes that are characterized by low correlation with the world market are mainly priced by local factors and should produce abnormal returns relative to a global asset-pricing model. This implies a negative relation between correlation and future index returns in the presence of segmented indexes. Empirical evidence confirms such a relationship for the sample of industry indexes, suggesting a heterogeneous segmentation. Nonetheless, we do not observe a similar pattern for country indexes. Thus, cross-industry diversification is superior to cross-country diversification. The international diversification potential of industries does not vanish during volatile periods” (abstract).

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Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. The fund focuses on social SDGs and midcaps, uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement. The fund typically scores very well in sustainability rankings, e.g. see this free new tool, and the performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

ESG Beliefs: Picture from ecolife.zone

ESG beliefs: Researchpost #124

Picture from ecolife.zone (Home – Eco Life Zone)

ESG beliefs: 10x new research on biodiversity, subsidies, governance, greenium, ESG beliefs, divestments, taxonomy reporting, fund commissions, SVB, private asset platforms etc. by Theresa Kuchler, Johannes Stroebel, Christian Klein and many more (# indicates the number of SSRN downloads on April 19th, 2023)

Ecologial and social research

Quantified biodiversity risks: Biodiversity Risk by Stefano Giglio, Theresa Kuchler, Johannes Stroebel, and Xuran Zeng as of April 4th, 2023 (#8): “The goal of this paper is to introduce measures of aggregate biodiversity risk as well as measures of firms’ and industries’ exposures to these risks; to connect and validate the two; to study the pricing of this risk in financial markets; and to publicly release our biodiversity exposure measures at www.biodiversityrisk.org to facilitate more research on this important topic“ (p. 28).

Dubious subsidies: Green Technology Adoption, Complexity, and the Role of Public Policy: A Simple Theoretical Model by Sanjit Dhami as of April 13th (#9): “We present a simple model of technology choice by heterogeneous firms … We illustrate the extreme unpredictability of the final outcome, and consider the role of public policy in the form of taxes and subsidies in influencing the long-run expected outcome. Our model … highlights the challenges and limitations of public policy in such scenarios“ (p. 24).

Good governance competition: Boosting Foreign Investment: The Role of Certification of Corporate Governance by Pietro Bonetti and Gaizka Ormazabal as of Jan. 31st, 2023 (#42): “… we exploit a recent cross-country initiative by a coalition of key institutions in Southeast Asia; the periodic publication of a “Top List” containing the top 50 firms for each participating Southeast Asian country based on an independent assessment of corporate governance practices. Our tests reveal that the inclusion in the list is associated with increases in foreign institutional ownership and equity issuance. We also find evidence suggestive that firms change their governance practices to be included in the list“ (p. 33).

Responsible investment research: ESG beliefs

Policy success: An empirical analysis of climate and environmental policy risk, the cost of debt and financial institutions‘ risk preferences by Xiaoyan Zhou, Ben Caldecott, and Gireesh Shrimali as of April 13th, 2023 (#9): “… we analyse the loan spreads variance using a large sample of syndicated loan data across 40 countries from 2000- 2019. … we observe that a higher level of CE (Sö: climate and environmental policy stringency) (such as carbon trading schemes) can lower the capital cost for loans issued to renewables, leading to an increase in renewable energy investments. We also find that the more stringent CE policies in a country, the lower likelihood of capital flow into oil & gas or coal. In the electricity sector, while no evidence supports that CE policies (solar & wind support policies) decrease the cost of debt for renewable electric utilities compared to fossil fuel and mixed electric utilities, they are still successful in attracting more capital to renewable firms” (abstract).

Performance trumps beliefs: Four Facts About ESG Beliefs and Investor Portfolios by Stefano Giglio, Matteo Maggiori, Johannes Stroebel, Zhenhao Tan, Stephen Utkus, and  Xiao Xu as of  April 13th, 2023 (#26): “We analyze survey data on ESG beliefs and preferences in a large panel of retail investors linked to administrative data on their investment portfolios. … First, investors generally expected ESG investments to underperform the market. Between mid-2021 and late-2022, the average expected 10-year annualized return of ESG investments relative to the overall stock market was −1.4%. Second, there is substantial heterogeneity across investors in their ESG return expectations and their motives for ESG investing: 45% of survey respondents do not see any reason to invest in ESG, 25% are primarily motivated by ethical considerations, 22% are driven by climate hedging motives, and 7% are motivated by return expectations. Third, there is a link between individuals’ reported ESG investment motives and their actual investment behaviors, with the highest ESG portfolio holdings among individuals who report ethics-driven investment motives. Fourth, financial considerations matter independently of other investment motives: we find meaningful ESG holdings only for investors who expect these investments to outperform the market, even among those investors who reported that their most important ESG investment motives were ethical or hedging reasons” (abstract).

Inefficient markets? Private Sanctions by Oliver D. Hart, David Thesmar, and Luigi Zingales as of Jan. 19th, 2023 (#338): “Neoclassical economics is based on the assumption that firms maximize profits. We provide survey evidence that a majority of Americans do not want the firms they invest in, shop from, and work for, to behave in this way. Limited deviations from value maximization are desired when firms can have a unique impact, as in the case of the sanctions against Russia for the purpose of ending the war. We show that a very simple model … can explain 24% of the cross-sectional variations in the willingness to boycott“ (p. 28). My comment see Impact Investing mit Voting und Engagement? (Opinionpost #194) – Responsible Investment Research Blog (prof-soehnholz.com)

Good taxonomy reporting: Portfolio benefits of taxonomy orientated and renewable European electric utilities by Thomas Cauthorn, Christian Klein, Leonard Remme, and Bernhard Zwergel as of Jan. 12th, 2023 (#65): “We find a positive low-carbon premium (confirming H1) for portfolios of taxonomy orientated and renewable energy EEU. … We can confirm H2, i.e., the level of renewables in the energy mix positively affects the returns of the taxonomy orientated and renewable energy portfolios while negatively affecting the non-orientated, non-reporting and conventional energy portfolios. The taxonomy orientated and renewable energy portfolios outperformed their counterparts confirming H3. … Next, we find that a taxonomy orientated portfolio outperforms a non-reporting portfolio” (p. 18/19). My comment see Taxonomy reporting: Can companies boost their share-prices? – (prof-soehnholz.com)

Traditional and alternative investment research (ESG beliefs)

Bad commissions: The Effect of Commission Bans on Household Wealth: Evidence from OECD Countries by Steffen Sebastian, Lukas Noth, and Albert Grafe as of April 5th, 2023: “Although misaligned incentives of financial advisors created by commission-based systems have been shown to have a negative impact on the quality of financial advice, many countries decided not to introduce commission bans. In the European Union, only five including the UK countries followed the recommendation of the Commission to ban commission-based financial advice. … Countries with commission-bans in place have seen an outperformance of their wealth between 1.7 percent and 2 percent annually. … We find that a household in a commission-ban country achieves wealth levels double the amount of a household in a non-commission-ban country over the period of 40 years with the most conservative estimate (typical timespan for retirement provision). … countries that have implemented commission bans realized ~900 billion USD access wealth formation compared to countries without commission bans” (p. 19).

Crash herding: Public attention, sentiment and the default of Silicon Valley Bank? by Stephan Bales and Hans-Peter Burghof as of April 7th, 2023 (#123): “We assess the interplay between public attention and trading of the Silicon Valley Bank stock around its default on March 10, 2023. Based on tweets and Google searches, we demonstrate that public attention considerably fueled the crash dynamics … the attention dynamics fueled and accelerated the downward spiral, but are not fully responsible for the outcome” (p. 11/12).

Private Equity Fintechs: The Amplify private-asset platforms study by Selin Bucak from Citywire Amplify as of April 13th, 2023: “There has been a proliferation of private-asset platforms in recent years. Specialist investment firms want to reach into the wealth management space, while many mainstream asset managers have pushed hard into private markets. So what does the landscape look like now? Citywire Amplify will examine how many platforms there are, what they offer and how they differ. We have collated the key data on the major players: how much they have raised, who their backers and partners are and, crucially, what they charge” (p. 2). My comment see Über 70 interessante Fintechs für institutionelle Anleger – Responsible Investment Research Blog (prof-soehnholz.com)

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Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. The fund focuses on social SDGs and midcaps, uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement. The fund typically scores very well in sustainability rankings, e.g. see this free new tool, and the performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

ESG or impact: Results or Excuses Picture from Gerd Altmann from Pixabay

ESG or impact? Researchpost #123

ESG or impact: 15x new research on (social) housing, AI lawyers, DWS, climate models, divestments, sustainability loans and greenium, green fees, ESG ratings, ESG labels, Article 9 funds, fiduciary duty and suppliers by Marco Wilkens, Maximilian Görgen, Martin Rohleder, Daniel Engler, Gunnar Gutsche, Paul Smeets, Mauricio Vargas, Marie Kuhn and many more

Ecological and social research

Housing risks: European Housing Markets at a Turning Point – Risks, Household and Bank Vulnerabilities, and Policy Options by Laura Valderrama, Patrik Gorse, Marina Marinkov, and Petia Topalova as of April 5th, 2023 (#6): „European housing markets are at a turning point as the cost-of-living crisis has eroded real incomes and the surge in interest rates has made borrowers more vulnerable to financial distress. … Under the baseline IMF macroeconomic forecast, the share of households that could struggle to meet basic expenses could rise by 10 pps reaching a third of all households by end 2023. Under an adverse scenario, 45 percent of households could be financially stretched, representing over 40 percent of mortgage debt and 45 percent of consumer debt. The impact on the banking sector seems contained under the baseline forecast, though there are pockets of vulnerability. … Fiscal measures, such as subsidies to the bottom income tercile, could save 7 percent of households from financial distress at an estimated cost of 0.8 percent of GDP” (abstract).

Social housing: The Global Housing Affordability Crisis: Policy Options and Strategies by Albert Saiz as of March 29th, 2023 (#320): “… I described the basic parameters and foundations behind global affordable housing policies and strategies. I also provided several case studies that inform the discussion. At least thirty different economic strategies can be combined to conform a large field of potential interventions” (p. 39). My comment see Wohnteilen: Viel Wohnraum-Impact mit wenig Aufwand – (prof-soehnholz.com)

AI lawyer: GPT-4 Passes the Bar Exam by Daniel Martin Katz, Michael James Bommarito, Shang Gao, and Pablo David Arredondo as of March 20th, 2023 (#3225): “The exam, which includes both multiple-choice and open-ended tasks testing theoretical knowledge and practical lawyering, has long been viewed as an insurmountable summit for even domain-specific models. This assumption no longer holds; large language models can meet the standard applied to human lawyers in nearly all jurisdictions in the United States by tackling complex tasks requiring deep legal knowledge, reading comprehension, and writing ability“ (p. 10).

Kein Vorbild: DWS: Hohe Boni durch Greenwashing von Mauricio Vargas und Marie Kuhn von Greenpeace vom 15. März 2022: „ … DWS-CEO unter Berücksichtigung der Unternehmensgröße mit Abstand Deutschlands bestbezahlter Manager eines börsennotierten Unternehmens … Im Vergütungsbericht 2021 ist die problematische Zielgröße des „ESG-spezifisch verwalteten“ Vermögens aus den Leistungszielen für den CEO verschwunden. Allerdings wurde auch der überarbeitete Katalog der Nachhaltigkeitsziele auf weitgehend wirkungslose Pseudo-Nachhaltigkeitsindikatoren reduziert“ (p. 4). My comment: My engagement focuses on CEO pay ratio see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. The fund focuses on social SDGs and midcaps, uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement. The fund typically scores very well in sustainability rankings, e.g. see this free new tool, and the performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

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Climate investment research picture of storm and sun by Marlene Bitzer from Pixabay

Climate investment research: Researchpost #121

Climate investment research: 11x new research on digital productivity, crimes, ESG fees, green home bias, disclosure, infrastructure, brown news, ECB impact, shareholder engagement, and public-private deals

Social and ecological research

Digital productivity limits: Digitalisation and productivity: gamechanger or sideshow? by Robert Anderton, Vasco Botelho, Paul Reimers as of March 9th, 2023 (#26): „We use a large balance sheet panel dataset comprising more than 19 million European firm-level observations … the firm that exhibits on average a higher share of investment in digital technologies will exhibit a faster rate of TFP (Soe: total factor productivity) growth … Digitalisation does not seem to have relatively stronger impacts on the productivity of frontier firms compared to laggards, nor does it help to turn laggards into frontier firms. … Digital technologies … seem more like a sideshow for most firms, who attempt to be increasingly digital but are not able to adequately reap its productivity gains” (abstract).

Pollution leads to crimes: Symptom or Culprit? Social Media, Air Pollution, and Violence by Xinming Du as of March 9th, 2023 (#6): „… Together with higher air pollution, I find more aggressive behaviors both online and offline, as well as worse health outcomes near refineries. A one standard deviation increase in surrounding VOCs (Sö: volatile organic compounds) leads to 0.16 more hate crimes against Black people and 0.23 more hospital visits per thousand people each day. … On days with pollution spikes, surrounding areas see 30% more offensive and racist tweets and 12% more crimes; those geographically distant but socially networked regions also see offensive and racist tweets increase by 3% and more crimes by 4.5% …” (abstract).

Responsible and climate investment research

Higher ESG fees: Capitalists or fiduciary conscious agents? ESG mutual fund fees and investor sophistication by Wei Wei and Anna (Ania) Zalewska as of March 16th, 2023 (#19): “We use a sample of 2,055 U.S. equity mutual funds … and find that fund families do exploit retail ESG investor’s low performance sensitivity when setting fees of ESG funds. In contrast, we find no evidence of such practices in the sample of institutional funds. Moreover, we find that the exploitative fee setting practices observed in the retail sample are driven by marketing fees and not by operating fees“ (abstract).

Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. The fund focuses on social SDGs and midcaps, uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement. The fund typically scores very well in sustainability rankings, e.g. see this free new tool, and the performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T, see also Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

… continue on page 2 (# indicates the number of SSRN downloads on March 16th, 2023):

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