Archiv der Kategorie: Engagement

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 31^st, 2023):

Social and ecogical research

Positive immigration: Firm-Level Prices, Quality, and Markups: The Role of Immigrant Workers by Giulia Sabbadin as of March 17^th, 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 15^th, 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 22^nd, 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 24^th, 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 26^th, 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 19^th, 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 26^th, 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 25^th, 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 22^nd, 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 24^th, 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 25^th, 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

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 28^th, 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 10^th (#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 10^th, 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 17^th, 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 3^rd, 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 14^th, 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 28^th, 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 18^th, 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 25^th, 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 1^st, 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

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 17^th, 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 19^th, 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 19^th, 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 27^th, 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 13^th, 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 19^th, 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 18^th, 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 30^th, 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 14^th, 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 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 5^th, 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 29^th, 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 20^th, 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: 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 9^th, 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 9^th, 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 16^th, 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)

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Critical ESG and more: Researchposting 118

Critical ESG: 11x new research on tax avoidance, ESG deficits, corporate governance, green monetary policy, climate transition investing, shareholder engagement, inequality, factor investments, listed real estate, and ChatGPT by Alex Edmans, David Larcker, Martin Hoesli et al.

Unsocial multinationals: Global profit shifting, 1975–2019 by Ludvig Wier and Gabriel Zucman as of Nov. 29^th, 2022 (#11): “This paper constructs time series of global profit shifting covering the 2015–19 period, during which major international efforts were implemented to curb profit shifting. We find that (i) multinational profits grew faster than global profits, (ii) the share of multinational profits booked in tax havens remained constant at around 37 per cent, and (iii) the fraction of global corporate tax revenue lost due to profit shifting rose from 9 to 10 per cent. We extend our time series back to 1975 and document a remarkable increase of multinational profits and global profit shifting from 1975 to 2019”. My comment: To strenghten communities (stakeholders), the reduction of profit shifting should be an attractive topic for shareholder ESG engagement

ESG investment research: Critical ESG

10 critical ESG theses: Applying Economics – Not Gut Feel – To ESG by Alex Edmans as of Feb. 21^st, 2023 (#2754): “I identify how conventional thinking on ten key ESG issues is overturned when applying the insights of mainstream economics” (abstract): “1. Shareholder Value is Short-Termist (No, shareholder value is a long-term concept). 2. Shareholder Primacy Leads to an Exclusive Focus on Shareholder Value (No, shareholders have objectives other than shareholder value). 3. Sustainability Risks Increase the Cost of Capital (No, sustainability risks lower expected cash flows). 4. Sustainable Stocks Earn Higher Returns (No, sustainability may be priced in; tastes for sustainable stocks lead to lower returns). 5. Climate Risk is Investment Risk (No, climate risk is an unpriced externality). 6. A Company’s ESG Metrics Capture Its Impact on Society (No, partial equilibrium differs from general equilibrium). 7. More ESG Is Always Better (No, ESG exhibits diminishing returns and trade-offs exist). 8. More Investor Engagement Is Always Better (No, investors may be uninformed or undermine managerial initiative). 9. You Improve ESG Performance By Paying For ESG Performance (No, paying for some ESG dimensions will cause firms to underweight others). 10. Market Failures Justify Regulatory Intervention (No, regulatory intervention is only justified when market failure exceeds regulatory failure)“ (p. 4). My comment: I don’t detect any contradictions regarding my approach to invest as sustainable as possible considering exclusions, ESG and SDG factors and engagement, see e.g. Artikel 9 Fonds: Sind 50% Turnover ok? – Responsible Investment Research Blog (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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Shareholder engagement: 21 science based theses and an action plan

Preliminary remarks and shareholder engagement definition

Note: This shareholder engagement concept builds in part on analyses that I developed together with colleagues from the German Association for Financial Analysis and Asset Management (DVFA) as part of the Impact Expert Committee. It has been originally published on Feb. 8th and the chapter „engagement content“ has been expanded on Feb. 22nd, 2023).

My shareholder engagement definition: One or more investors (i.e. explicitly excluding non-investors such as media) seek to directly influence companies (i.e. excluding engagement with states and other organizations and excluding lobbying or other audiences). Voting at shareholder meetings (voting) may or may not be part of engagement. Engagement is typically not as comprehensive or long-term as trusteeship[1].

My engagement focus is sustainability, i.e. environmental, social and governance (ESG) issues. In the following, I list my engagement theses. I then describe my engagement policy and activities derived from them.

Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. I focus on social SDGs and midcaps and use separate E, S and G best-in-universe minimum ratings. 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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Beyond ESG: Researchposting 116

Beyond ESG: 21x new research on bioenergy, CSR, carbon policy, greenium, ESG ratings, ecolabel, greentech, transition, fiduciaries, impact, activism, insiders, 1/n, SPACs, private equity and female founders by Timo Busch, Andreas Hoepner and many more

Social and ecological research

High bio-emissions: Emissions of Wood Pelletization and Solid Bioenergy Use in the United States by Huy Tran, Edie Juno, and Saravanan Arunachalam as of Dec. 27th, 2022 (#6): “… we find that this sector’s emissions could be potentially underestimated by a factor of two. Emissions from biomass-based facilities are on an average up to 2.8 times higher than their non-biomass counterpart per unit energy. Up to 2.3 million people live within 2km of a biomass facility, and who could be subject to adverse health impacts from their emissions. Overall, bioenergy sector contributes to about 3 – 17% of total emissions from all energy, i.e., electric and non-electric generating facilities in the U.S. In comparison to residential wood combustion, bioenergy sector emissions are lower in VOC, CO, NH3, and directly emitted PM2.5, but higher in NOX and SO2. We also review some drivers of bioenergy expansion, various feedstocks and technologies deployed with an emphasis on wood-based bioenergy and discuss their implications for future air quality and health impacts” (abstract).

Research overview: The Past and Future of Corporate Sustainability Research by Vanessa Burbano, Magali A. Delmas, and Manuel Jesus Cobo as of Oct. 13^th, 2022 (#122): “… we present a comprehensive review of the field of corporate sustainability using a science mapping co-word bibliometric analysis. Through analysis of the co-occurrence of 25,701 keywords in 11,962 sustainability-related articles from 1994-2021, we identify and graphically illustrate the thematic and theoretical evolution of the field, in addition to emerging and waning research trends in the field. We characterize the most impactful articles of sustainability research in terms of disciplinary focus, topic of focus, dependent variable of focus, unit of analysis, and research method employed” (abstract).

Climate policy works: Carbon Policy Surprises and Stock Returns: Signals from Financial Markets by Martina Hengge, Ugo Panizza, and Richard Varghese as of Feb. 1^st, 2023 (#18): “…. the creation of the EU Emissions Trading System (ETS) in 2005. This “cap and trade” scheme places a limit on the right to emit greenhouse gases and allows companies to trade emission allowances. … we show that regulatory surprises that result in an increase in carbon prices have a negative and statistically significant impact on stock returns, which increases with a firm’s carbon intensity. This negative relationship becomes even stronger when we drop firms in sectors which participate in the EU ETS, suggesting that investors price in transition risk stemming from the shift towards a low-carbon economy“ (p. 22).

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

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Stakeholder engagement and ESG (Special Edition Researchposting 115)

Stakeholder engagement: 18x (new) research on stakeholder engagement, human capital, employee activists, employee ESG surveys, ESG wage gap, CEO pay gap, customer alpha, CEO limits and more research which is important for my shareholder engagement activities (see e.g. my earlier blog posts Engagement test, Impact Investing mit Voting und Engagement? and Wrong ESG bonus math?).

Stakeholder engagement overview

Stakeholder engagement studies: Exploring the antecedents and consequences of firm-stakeholder engagement process: A systematic review of literature by Avinash Pratap Singh and Zillur Rahman as of Oct. 31st, 2022 (#16): “… we pursued the vast body of literature on firm-stakeholder engagement and comprehensively examined over 170 research articles to accumulate precursors and outcomes of SE processes. … We used thematic analysis to provide evidence of the growing interest of academics and managers in firm-stakeholder engagement. The findings of this study suggest that shared benefits with a long-term perspective are valuable to both corporation and its stakeholders”.

Stakeholder engagement options: Stakeholder Engagement by Brett H. McDonnell as of Oct. 31st, 2022 (#88): “We have seen that the present reality of stakeholder engagement is fairly extensive, and sensible as far as it goes. As one would expect, employees are the most engaged group, followed by customers, and then by nonprofits, suppliers, and government regulators. The most used forms of engagement include meetings and surveys. Employee resource groups are near-universally used. Partnerships, social media, and councils are used less frequently, but still somewhat regularly. … And yet, the current reality falls well short of the future possibilities of stakeholder engagement. Current engagement mostly involves companies listening to what stakeholders have to say. It does not empower stakeholders to be more actively involved in corporate decision making” (p. 53/54). My comment: Very helpful paper for practitioners including reference to the AccountAbility Stakeholder Engagement Standard

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ESG confusion and more (Researchposting 114)

ESG confusion: 19x new research on energy, mining, home offices, UN PRI, D&O, ESG ratings, greenwashing, shareholder and bondholder engagements, CEO pay, asset allocation, trading fee, private equity, cryptos

Political (social and ecological) research

Energy tax chaos: Carbon conundrum – How to Save Climate Change Policy from Government Failure by Philip Booth and Carlo Stagnaro from the Institute of Economic Affairs as of Jan. 19^th, 2023 (#5): “In principle, environmental taxes and subsidies should reflect externalities. However, in practice, policy is chaotic with tax treatment reflecting the nature of the fuel, who consumes the fuel and for what purpose the fuel is used. … On average, oil products are taxed at €405 per tonne of oil equivalent in the UK and €334 in the EU27, as compared with €135 and €101 for natural gas and €112 and €84 for coal. This is despite the fact that coal, not oil, poses the largest environmental challenges as far as climate change is concerned. … Subsidies were higher for solar photovoltaics (€1,468 per tonne of oil equivalent in the UK and €2,019 in the EU27), followed by wind power (€961 and €743, respectively). Hydro power and bio-energies received, on average, much lower subsidies. … Subsidies to fossil fuels were generally intended to support consumption rather than production. On average, oil, natural gas and coal received €130, €61 and €86 per tonne of oil equivalent in subsidies in the UK and €320, €47 and €27 respectively in the EU27. … The net effect of taxes and subsidies leads to substantially greater net taxes on oil than on natural gas while coal is taxed the least. The level of net taxes on energy sources does not, in any way, relate to the externalities from the energy source” (Viii-X)

Social mining: Mining for Peace by Roland Hodler, Paul Schaudt, and Alberto Vesperoni as of Jan. 25^th, 2023 (#9):“The energy transition increases the demand for minerals from ethnically diverse, conflict-prone developing countries. We study whether and where mining is possible in such countries without raising the risk of civil conflict. … A crucial insight is that new mining projects do not necessarily translate into more conflict but may pacify the country under the right conditions and the right policies“ (abstract). My comment: Ca. 1% of my investable ESG universe consists of mining stocks

Good home offices: Time Savings When Working from Home by Cevat Giray Aksoy, Jose Maria Barrero, Nicholas Bloom, Steven J. Davis, Mathias Dolls, and Pablo Zarate as of Jan. 17^th, 2023 (#53): “We quantify the commute time savings associated with work from home, drawing on data for 27 countries. The average daily time savings when working from home is 72 minutes in our sample. … Workers allocate 40 percent of their time savings to their jobs and about 11 percent to caregiving activities. People living with children allocate more of their time savings to caregiving“ (abstract).

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

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