Smart ESG investors:14x new research on CSDDD, ESG charts, missing disclosures, good ESG disagreements, cheap ESG funds, smart ESG investors, ambiguity factor, brown bankruptcies, green premium, ESG literature review, ESG compensation, gender bias, index effects, and multilateral development banks (# shows number of SSRN full paper downloads as of Dec. 19th, 2024)
Social and ecological research
Good CSDDD regulation? The Entrepreneurial Impact of the European Directive on Corporate Sustainability Due Diligence by Juan Dempere, Eseroghene Udjo and Paulo Mattos as of Dec. 13th, 2024 (#4): “The European Commission’s Directive on Corporate Sustainability Due Diligence, adopted in 2022 and approved in 2024, mandates that companies identify, prevent, and mitigate hostile human rights and environmental impacts across their operations and supply chains, integrating sustainability into corporate governance. … Findings suggest that while the directive imposes compliance challenges and costs, particularly for startups and small and medium-sized enterprises, it offers significant long-term benefits, such as improved risk management, enhanced reputation, and market differentiation. The directive promotes accountability and ethical practices, harmonizing due diligence across the EU and fostering a culture of sustainability. It concludes that companies addressing these impacts can gain a competitive edge and attract sustainability-focused investors, necessitating support mechanisms for startups and small and medium-sized enterprises to mitigate burdens and encourage compliance” (abstract). My comment: Through my shareholder engagement I encourage companies to use third party ESG evaluations of suppliers (see Supplier engagement – Opinion post #211)
ESG investment research (in: Smart ESG investors)
2000 sustainability charts: Course 2024-2025 in Sustainable Finance & Climate Change y Thierry Roncalli from Amundi Asset Management as of Dec. 13th, 2024 (#1374): “These lectures notes have been written for the course in Sustainable Finance given at the University of Paris-Saclay. The slides cover the following topics: 1. Introduction, 2. ESG Scoring,3. Impact of ESG Investing on Asset Prices and Portfolio Returns, 4. Sustainable Financial Products,5. Impact Investing, 6. Biodiversity, 7. Engagement & Voting Policy, 8. Extra-financial Accounting, 9. Awareness of Climate Change Impacts, 10. The Ecosystem of Climate Change, 11. Economic Models \& Climate Change, 12. Climate Risk Measures, 13. Transition Risk Modeling, 14. Climate Portfolio Construction. 15. Physical Risk Modeling and 16. Climate Stress Testing & Risk Management” (abstract). My comment: Lots of interesting and current information in here (although only little information on listed impact/SDG investments)
More ESG information needed: Learning Fundamentals from Text by Alex G. Kim, Valeri V. Nikolaev, Maximilian Muhn and Yijing Zhang as of Dec. 10th, 2024 (#364): “… We … analyze a comprehensive set of topics discussed in companies’ annual reports. … sustainability and governance are consistently among the least important topics judging by the market reactions. Building on our approach, we show that regulatory interventions can successfully enhance the relevance of textual communication. We also show that firms strategically position information within MD&A (Sö: Management discussion and analysis) to influence investor focus” (abstract).
Good ESG disagreement? Unveiling the consequences of ESG rating disagreement: An empirical analysis of the impact on the cost of equity capital by Chiara Mio, Marco Fasan, Antonio Costantini, Francesco Scarpa, and Aoife Claire Fitzpatrick as of Dec. 13th, 2024 (#26): “Using a sample of 23,201 firm-month observations from January 2019 to March 2021, we find that ESG disagreement positively moderates the negative relationship between the average ESG score and cost of equity. … the association between ESG rating disagreement and cost of equity is more pronounced in the presence of high analyst information uncertainty”. My comment: Select the ESG rating provider with the best concept (not necessarily the market leader)
Cheap ESG funds: The Puzzle of ESG Fund Fees by Aaron J. Black and Julian F. Kölbel as of Dec. 13th, 2024 (#34): “… (Sö: US) ESG funds have expense ratios that are, on average, 9.5 to 12.7 basis points lower than comparable non-ESG funds. This fee reduction for ESG funds first emerged in 2015 and has persisted through 2024. … Our findings highlight the strategic use of fee waivers as a key factor in driving down net expense ratios for ESG funds. These waivers, which are more frequent and larger in magnitude for ESG funds than for non-ESG funds, offset higher gross fees. … First, we examine whether investors expect lower returns for ESG funds. We find evidence for this explanation, which compliments the literature on a negative premium for green stocks by providing fund-level evidence. Second, … We present descriptive evidence that ESG funds exhibit higher holdings overlap with their peers than non-ESG funds, indicating a more competitive environment. Finally, we test whether fund providers use lower fees on ESG funds as a strategy to cross-sell higher-fee funds within the same fund family. Our findings suggests that ESG fund fees covary negatively with the fees of other funds offered by the same provider, which is consistent with the cross-selling explanation …” (p. 34/35). My comment: My ESG SDG fund has very little overlap with other sustainable funds and it’s a stand-alone fund (see e.g. Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds?)
Smart ESG investors: Analyzing Sustainable Investor Returns by Jean-Paul van Brakel, Joop Huij and Georgi Kyosev as of Dec. 13th, 2024 (#31): “We find that, in aggregate, non-sustainable funds earned 65 basis points higher yearly returns than sustainable funds. However, after accounting for the timing and magnitude of flows, we find that sustainable investors earned 88 basis points higher yearly returns than their non-sustainable peers. We show that this outperformance is driven by an asymmetric response to historical fund performance: sustainable investors invest more after periods of strong returns but do not divest more when returns are disappointing. … The higher returns earned by sustainable investors … result from a combination of their timing skills and their ability to select funds with specific advantageous characteristics” (abstract).
Ambiguity factor? Pricing Climate Ambiguity by Francesco Rocciolo, Monica Billio, Massimo Guidolin, and Yehuda Izhakian as of Dec. 13th, 2024 (#20): “The theoretical literature on climate finance advocates the existence of a tight relation between climate change and uncertainty of the probabilistic models (ambiguity) concerning future climate-related events affecting consumption opportunities. This paper provides empirical evidence for the relevance of this phenomenon to asset pricing. … This paper suggests the existence of a so-far undisclosed climate-ambiguity cross-sectional pricing anomaly. An idiosyncratic cross-sectional climate ambiguity factor explains up to 92% of the abnormal returns linked with the anomaly”.
Brown bankruptcies: Greening the Red: Climate Transition Risk and Corporate Bankruptcy by Matilde Faralli and Costanza Tomaselli as of Nov. 21st, 2024 (#102): “Using a novel dataset of business bankruptcies from 2000 to 2023 … we find that brown companies are more prone to financial distress and bankruptcy filings …. Analysis of emissions data reveals that facilities of reorganized firms exhibit lower emissions post-bankruptcy … This improvement is potentially driven by debt relief, which provides financial flexibility for green investments” (abstract). My comment: My focus on highly-ESG rated companies so far has not resulted in any bankruptcy
SDG and impact investment research
Green premium illusion? Reevaluating the Carbon Premium: Evidence of Green Outperformance by Christoph Hambel and Floor van der Sanden as of Dec 8th, 2024: “The carbon premium refers to the excess returns of brown firms over their green counterparts. Our findings provide robust evidence supporting a negative carbon premium in the US based on a sample with more than 3,500 publicly listed firms from 2007 to 2023, indicating that green firms tend to outperform brown firms. The key findings carry over to the global sample with more than 10,000 firms across 90 countries. … those findings are primarily driven by vendor-estimated emissions, and the carbon premium becomes non-significant if we restrict the sample to firms that report their emissions” (abstract). My comment: I prefer to invest in green firms even without a green premium (=free green lunch)
Sustainable investment literature review: Sustainable Investing by Lubos Pastor, Robert F. Stambaugh, and Lucian A. Taylor as of Dec. 9th, 2024 (#204): “We review the literature on sustainable investing, focusing on financial effects. First, we examine the effects of investor tastes on portfolio tilts and asset prices in a simple equilibrium setting. We establish novel connections, including a direct relation between the green portfolio tilt and the greenium. We also relate our framework to prior modeling of divestment. Finally, we review evidence related to the main concepts from our theoretical analysis, including the greenium, green tilts, climate risk, and investor tastes” (abstract).
ESG compensation issues: Regulatory and Investor Demands to Use ESG Performance Metrics in Executive Compensation: Right Instrument, Wrong Method by Marco Dell’Erbaa and Suren Gomtsian as of Dec 13th, 2024 (#22): “The analysis highlights the limitations of ESG objectives unrelated to shareholder value and demonstrates the limited circumstances where some company specific ESG objectives can drive rapid changes in targeted performance by drawing attention to these objectives. These findings question the evolving practice of a uniform integration of ESG metrics in compensation plan design of all companies and urge regulators, institutional investors, and corporate boards to adopt a more tailored, focused, and selective strategy in integrating ESG metrics into executive pay” (abstract). My comment: With my shareholder engagement I recommend disclosing the difference between top management and average worker pay (CEO pay ratio) which should not increase with the introduction of ESG compensation.
Other investment research (in: Smart ESG investors)
Risk averse women: What matters most? Exploring the driving forces of gender differences in singles’ investment behavior by Jan-Christian Fey as of Dec. 13th, 2024 (#9): “… I propose a novel approach for exploring the origins of gender differences in investor behavior… To illustrate my methodology, I use data from the second wave of the Deutsche Bundesbank Panel on Household Finances (PHF). Within this dataset, I limit my analysis to single households. … I find that women are less likely to hold risky financial assets than men. To a significant part, this gender gap in the extensive margin results from females’ lower willingness to take financial risks and lower household net disposable income. In an additional analysis, I attribute women’s higher level of financial risk aversion to factors other than general risk attitude. Moreover, there is substantial heterogeneity in the gender differences observed for the extensive margin and financial risk attitude. For example, the gender gap in financial risk attitude is considerably smaller for younger age groups. With respect to the conditional risky share, I find that both sexes hold a comparable proportion of their financial wealth in risky financial assets. However, within the risky financial assets portfolio, women invest in more conservative securities than men. According to my analyses, this gender gap is mainly due to inherently different investment styles rather … According to my estimates, women’s extensive margin would be 1.34 percentage points higher if they had men’s average net disposable income. That is, due to their lower income, women participate less often in risky financial assets …” (p. 34/35).
Multilateral stability: The Resilience of MDB Bonds to Credit Rating Downgrades by Thea Kolasa, Steven Ongena, and Christopher Humphrey as of Nov. 27th, 2024 (#33): “We show that credit rating downgrades do not consistently impact multilateral development banks (MDBs) in the same way as they do firms and sovereigns. Unlike other entities, MDBs do not experience significant market reaction in bond yield spreads following credit rating downgrades. Additionally, downgrades of shareholder countries’ credit ratings do not systematically affect bond yield spreads for MDBs. The study suggests that the unique attributes of MDBs, such as preferred creditor treatment and callable capital, may account for these differences. Furthermore, MDBs’ bond issuance behavior is not significantly altered by credit rating downgrades” (abstract). My comment: For my responsible investment portfolios I use MNDB bonds instead of government bonds since many years
Hope for Small Caps: From Realized to Expected: The Passive Investing Impact by Pouya Behmaram as of Dec. 13th, 2024 (#40): “The core of this study is the Indexing Inclusion ratio (IXI), a new measure of passive ownership. … the data suggests that as the surge in passive strategies slows down and the market moves towards equilibrium, the expected returns for high-indexed stocks may diminish. Another key finding is the concept of the indexing premium, which underscores the difference in expected returns between high and low-indexed stocks. A consistent negative indexing premium throughout the study period suggests that the strong performance of high-indexed stocks may have caught many off-guard. This study also clarifies the ambiguous performance patterns of value and small-cap stocks. The rise of passive investment and the dominance of growth and large-cap stocks in passive portfolios can provide insights into their recent underperformance” (p. 36). My comment: My fund focuses on small and mid-caps and will hopefully benefit from such a future equilibrium
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Werbung (in: Smart ESG investors)
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