Archiv der Kategorie: Engagement

ESG and impact: Researchpost #154

ESG and impact: 12x new research on AI, poverty, crime, green demand, ESG risks, brown lending, green agency issues, voting, engagement, impact investing, CEO compensation, small caps etc. (# shows the number of SSRN downloads as of Nov. 30^th, 2023)

Social and ecological research

AI job-booster: New technologies and jobs in Europe by Stefania Albanesi, António Dias da Silva, Juan F. Jimeno, Ana Lamo and Alena Wabitsch as of Aug. 24^th, 2023 (#111): “… we … find that AI-enabled automation in Europe is associated with employment increases. This positive relationship is mostly driven by occupations with relatively higher proportion of skilled workers … the magnitude of the estimates largely varies across countries, possibly reflecting different economics structures, such as the pace of technology diffusion and education, but also to the level of product market regulation (competition) and employment protection laws. … wages do not appear to be affected in a statistically significant manner from software exposure“ (p. 28).

Climate-induced poverty: Does Global Warming Worsen Poverty and Inequality? An Updated Review by Hai-Anh H. Dang, Stephane Hallegatte, and Trong-Anh Trinh from the World Bank as of Mov. 4^th, 2023 (#38): “Our findings suggest that while studies generally find negative impacts of climate change on poverty, especially for poorer countries, there is less agreement on its impacts on inequality. … Our results suggest that temperature change has larger impacts over the short-term than over the long-term and more impacts on chronic poverty than transient poverty” (p. 32).

Refugee crimes: Do Refugees Impact Crime? Causal Evidence From Large-Scale Refugee Immigration to Germany by Martin Lange and Katrin Sommerfeld as of Nov. 14^th, 2023 (#21): “Our results indicate that crime rates were not affected during the year of refugee arrival, but there was an increase in crime rates one year later. This lagged effect is small per refugee but large in absolute terms and is strongest for property and violent crimes. The crime effects are robust across specifications and in line with increased suspect rates for offenders from refugees’ origin countries. Yet, we find some indication of over-reporting“ (abstract).

ESG investment research (ESG and impact)

Green demand: Responsible Consumption, Demand Elasticity, and the Green Premium by Xuhui Chen, Lorenzo Garlappi, and Ali Lazrak as of Nov. 27^th, 2023 (#122): “… decreasing product price are signals of high price competition and hence high demand elasticity. We sort firms into portfolios based on their demand elasticity and their ESG score. We refer the spread return on this portfolio as the Green Minus Brown (GMB) spread, or green premium” (p. 3). … “… when consumers have a “green” bias, green firms producing high demand elasticity goods are riskier than brown firms producing high demand elasticity products. The riskiness of these firms flips for firms that produce low demand elasticity goods. …. we find that the green-minus-brown (GMB) spread is increasing in the price elasticity of demand. Specifically, the annual spread is 2.6% and insignificant in the bottom elasticity tercile and 11.7% and significant in the top tercile. … we show that the cumulative positive return spread of green vs. brown stocks over the last decade is mainly attributed to high-demand-elasticity stocks, with low demand elasticity stocks earning an insignificant or negative spread“ (p. 32).

Risky calls: ESG risk by Najah Attig and Abdlmutaleb Boshanna as of Oct. 5^th, 2022 (#62): “… using Natural Language Processing, we measure firm-level ESGR (Sö: ESG risk) faced by US firms, as reflected in the discussion of ESG issues associated with words capturing risk and uncertainty in the transcripts of firms’ earning calls. We first validate ESGR as measure of risk by documenting its positive association with the volatility of stock returns and CSR concerns. We then show that ESGR is associated with a deterioration in corporate value … We show also that ESGR bears negatively on conference call short-term returns during the COVID-19 pandemic“ (p. 31). My comment: I try to only invest in the best E/S/G rated companies, see e.g. Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)

Retail ESG: Better Environmental Performance Attracts the Retail Investor Crowd during Crisis by Anil Gautam and Grace Lepone as of Nov. 24^th, 2023 (#12): “… we use the Robinhood data set to examine the firm size-adjusted changes in investor numbers. We find that investors moved away from holding securities with low (Sö: ESG) scores following the COVID-19 pandemic shock. The observation holds for the bottom quartile of securities sorted by ESG, E, emissions, corporate social responsibility (CSR), human rights, management, shareholder and community scores. … No significant reaction to S and G scores is observed for either quartile“ (p. 16).

Green bank disclosure: Do banks practice what they preach? Brown lending and environmental disclosure in the euro area by Leonardo Gambacorta, Salvatore Polizzi, Alessio Reghezza, and Enzo Scannella from the ECB as of Nov. 14^th, 2023 (#21): “… we found that banks that provide higher levels of environmental disclosure lend more to low polluting firms and less to highly polluting firms. … we found that banks that use a more negative tone (i.e. those that are more aware and genuinely concerned about environmental risks and climate change) lend less to brown firms, while banks that use a more positive tone (i.e. those that are less aware and concerned about environmental risks) tend to finance more brown firms. Therefore, we show that the tone of disclosures plays a crucial role in assessing whether a bank is engaging in window dressing or its willingness to inform stakeholders and investors on environmental matters results in actual behaviour to tackle environmental risks by reducing brown lending“ (p. 21).

Good transparency? The Eco-Agency Problem and Sustainable Investment by Moran Ofir and Tal Elmakiess as of Nov. 28^th, 2023 (#10): “… we first define the eco-agency problem—the special conflict of interest between the corporate officers who focus on short-term profitability and the other stakeholders who seek long-term profitability and sustainability—and then discuss existing coping measures, such as green bonds, CoCo bonds, and ESG compensation metrics. To assess the extent of the eco-agency problem, we have conducted an experimental study of both professional and nonprofessional investors. According to our findings, both groups exhibit strong and significant preferences for sustainable investments. Revealing the preferences of investors towards sustainability can inspire corporate officers to embrace their role as sustainability advocates, encouraging them to align their decisions with investor preferences, and can thus drive positive change both within their organizations and across industries. … By embracing transparency as a strategic advantage, corporations can transcend traditional reporting boundaries, heralding a new era in which investors implement their ecological preferences in the capital market pricing mechanism” (abstract). My comment: My shareholder engagement strategy seems to focus on the right topics, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Impact investing research (ESG and impact)

Voting and engagement approaches: UK Asset Owner Stewardship Review 2023: Understanding the Degree & Distribution of Asset Manager Voting Alignment by Andreas Hoepner as of Nov. 17^th, 2023 (#33): “… Empirically, we observe misalignment between UK asset owners and asset managers to varying degrees. Specifically, misalignment is more pronounced (i) in recent years, (ii) for shareholder resolutions than for management resolutions, (iii) for issuers in the Americas compared with European issuers, (iv) and, on average, for non-participating than for participating asset managers (Sö regarding the survey). … (a) Only very selected asset managers publicly reason like asset owners. (b) Some asset managers somehow see voting and ESG engagement as mutually exclusive and appear to fear the loss of access to management if they voted against management. (c) Among asset managers, there appears to be a substantial divergence as to their interpretation of shareholders’ and even society’s interests. Some asset managers are aligned with asset owners, while others have fundamentally different views that may be consistent with short term commercial interest but do not reflect scientific evidence. Third, we reviewed the ESG Engagement success across all relevant issuers, which revealed three different engagement process types. Type 1 is “textbook style” persistent, long duration, large scale engagement with considerable progress. Type 2 appears to be “quick fix style” engagements which are characterised by less consistency, shorter duration, and more mixed progress. Type 3 engagements are “jumping the bandwagon style” as they appear to target only firms that already have been improved by others” (abstract). My comment: My approach and other potential shareholder engagement strategies see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) and DVFA-Fachausschuss Impact veröffentlicht Leitfaden Impact Investing – DVFA e. V. – Der Berufsverband der Investment Professionals

Risky impact? What Do Impact Investors Do Differently? by Shawn Cole, Leslie Jeng, Josh Lerner, Natalia Rigol, and Benjamin N. Roth as of Nov. 16^th, 2023 (#340): “In recent years, impact investors – private investors who seek to generate simultaneously financial and social returns – have attracted intense interest and controversy. … we document that they are more likely to invest in disadvantaged areas and nascent industries and exhibit more risk tolerance and patience. We then examine the degree to which impact investors expand the financing frontier, versus investing in companies that could have attracted traditional private financing. … we find limited support for the assertion that impact investors expand the financing frontier, either in the deal-selection stage or the post-investment stage“ (abstract).

Other investment research

Lower-paid CEOs? CEO Compensation: Evidence From the Field by Alex Edmans, Tom Gosling, and Dirk Jenter as of Oct. 13^th, 2023 (#3130): “We survey directors and investors on the objectives, constraints, and determinants of CEO pay. We find .. that pay matters not to finance consumption but to address CEOs’ fairness concerns. 67% of directors would sacrifice shareholder value to avoid controversy, leading to lower levels and one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Intrinsic motivation and reputation are seen as stronger motivators than incentive pay“ (abstract). My comment: Within my shareholder engagement activities, I ask to disclose the CEO-medium employee pay ratio so that other interested parties can engage with the companies to reduce this typically vey large difference

Better big or small? The Size Premium in a Granular Economy by Logan P. Emery and Joren Koëter as of Nov. 21^st., 2023 (#81): “… Our analysis provides robust evidence that the expected size premium increases during periods of higher stock market concentration. … we find that smaller firms receive less attention, are less likely to complete a seasoned equity offering, and have higher fundamental volatility during periods of higher stock market concentration. Moreover, our results occur predominantly among firms in industries with a greater dependence on external equity financing, or for firms with relatively low book-to-market ratios (i.e., growth firms). … we find that the expected size premium weakens following idiosyncratic shocks to the largest firms in the stock market” (p. 32).

ESG and Impact + Engagement 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 with currently 25 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Purpose – Researchpost #149

Purpose: 14x new interesting research on free data, AI, biodiversity, gender gaps, purpose and ESG washing, geodata, shareholder engagement, financial education, ETFs, private equity and asset allocation (# shows SSRN downloads as of Oct. 26^th, 2023)

Social and ecological research (Purpose)

Much (free) data: A Compendium of Data Sources for Data Science, Machine Learning, and Artificial Intelligence by Paul Bilokon, Oleksandr Bilokon, and Saeed Amen from Thalesians as of Sept. 12^th, 2023 (#942): “… compendium – of data sources across multiple areas of applications, including finance and economics, legal (laws and regulations), life sciences (medicine and drug discovery), news sentiment and social media, retail and ecommerce, satellite imagery, and shipping and logistics, and sports”. My comment: My skeptical view on big data see Big Data und Machine Learning verschlechtern die Anlageperformance und Small Data ist attraktiv from 2018 and more recently How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Unclear AI-Labor relation: Labor Market Exposure to AI: Cross-country Differences and Distributional Implications by Carlo Pizzinelli, Augustus Panton, Marina M. Tavares, Mauro Cazzaniga, Longji Li from the IMF as of Oct. 6^th,2023 (#5): “…. a detailed cross-country analysis encompassing both Advanced Economies (AEs) and Emerging Markets (EMs) … high-skill occupations that are more prevalent in AEs, despite being more exposed, can also greatly benefit from AI. Overall, AEs have more employment than EMs in exposed occupations at both ends of the complementarity spectrum. This finding suggests that AEs may expect a more polarized impact of AI on the labor market and are thus poised to face greater risk of labor substitution but also greater benefits for productivity” (p. 31/32).

Pay for biodiversity? Revealing preferences for urban biodiversity as an environmental good by Leonie Ratzke as of Oct. 25th, 2022 (#26): “… relatively little research on urban dwellers’ preferences and willingness to pay (WTP) for urban biodiversity exists. … using a revealed preference approach based on a real estate dataset comprising around 140,000 unique entries of rental and sales transactions of apartments. I find that WTP for biodiversity is exclusively positive and economically relevant” (abstract).

Insurance gender issues: Gender-inclusive Financial and Demographic Literacy: Lessons from the Empirical Evidence by Giovanna Apicella, Enrico G. De Giorgi, Emilia Di Lorenzo, and Marilena Sibillo as of Jan. 24^th, 2023 (#104): “Consistent empirical evidence shows that women have historically experienced lower mortality rates than men. In this paper, we study a measure of the gender gap in mortality rates, we call “Gender Gap Ratio” … The evidence we provide about a Gender Gap Ratio that ranges between 1.5 and 2.5, depending on age and country, translate into a significant reduction of up to 25% in the benefits from a temporary life annuity contract for women with respect to men, against the same amount invested in the annuity. The empirical evidence discussed in this paper documents the crucial importance of working towards a more widespread demographic literacy, e.g., a range of tools and strategies to raise longevity consciousness among individuals and policy makers, in the framework of gender equality policies“ (abstract).

Corporate purpose: Sustainability Through Corporate Purpose: A New Framework for the Board of Directors by Mathieu Blanc and Jean-Luc Chenaux as of July 27^th, 2023 (#106): “The definition and implementation of a corporate purpose is the most appropriate process for the board of directors and management to achieve a sustainable as well as profitable business activity, which necessarily encompasses economic, social and environmental components. The corporate purpose statement offers guidance to the managing bodies of a company to determine the necessary and difficult trade-offs between the different stakeholders and set priorities in the long-term interest of the company. In our opinion, this concept is most likely the best tool to reconcile society with business activities and remind shareholders, business leaders, customers and employees that what unites them for the development of society is much stronger that what divides them“ (p. 32). My comment: My corporate purpose is very simple: Offer liquid investment portfolios that are as sustainable as possible.

Purpose-washing? Putting Social Purpose into Your Business by Philip Mirvis of the Babson Institute for Social innovation as of Oct. 15^th, 2023 (#9): “… there’s a massive “purpose gap”—large majorities of companies have purportedly proclaimed their purpose but it has not been built into their business and is either unknown to or doubted by their employees and customers. Who get this right? The research reports on how Ben & Jerry’s, Nike, Novo Nordisk, PepsiCo, and Unilever developed and implemented a “social purpose”—a pledge to address serious social problems their business operations, products, partnerships, and social issue campaigns” (abstract).

Responsible investment research (Purpose)

Costly ESG washing: When Non-Materiality is Material: Impact of ESG Emphasis on Firm Value by Sonam Singh, Ashwin V. Malshe, Yakov Bart, and Serguei Netessine as of Oct. 18^th, 2023 (#63): “ESG factors are nonmaterial (material) when excluding them from corporate disclosure would not (would) significantly alter the overall information available to a reasonable investor. Using a deep learning model to earnings call transcripts of 6,730 firms from 2005 to 2021 to measure ESG emphasis the authors estimate panel data models for testing this framework. The analysis reveals a 1% increase in nonmaterial ESG emphasis decreases firm value by .30%. This negative impact on firm value is 2.12 times higher than the positive impact of material ESG emphasis. Furthermore, the negative impact of nonmaterial ESG emphasis on firm value grows over time and is more pronounced in regulated industries“ (abstract).

Geodata for ESG: Breaking the ESG rating divergence: an open geospatial framework for environmental scores by Cristian Rossi, Justin G D Byrne, and Christophe Christiaen as of Oct. 19^th, 2023 (#20): “… geospatial datasets offer ESG analysts and rating agencies the ability to verify claims of company reported data, to fill in gaps where none is otherwise reported or available, or to provide new types of data that companies would not be able to provide themselves. Free to use geospatial datasets that have broad geographic coverage exist, and some are updated over time. … This paper has proposed a novel framework … to mitigate the reported divergence in ESG scores by using consistent and trusted geospatial data for environmental impact analysis at the physical asset level“ (p. 19).

Green owner success: Divestment and Engagement: The Effect of Green Investors on Corporate Carbon Emissions by Matthew E. Kahn, John Matsusaka, and Chong Shu as of Oct. 13^th, 2023 (#72): “We focus on public pension funds, classifying them as green or non-green based on which political party controlled the fund. … Our main finding is that companies reduced their greenhouse gas emissions when stock ownership by green funds increased and did not alter their emissions when ownership by non-green funds changed. We find evidence that ownership and constructive engagement was more effective than confrontational tactics such as voting or shareholder proposals. We do not find that companies with green investors were more likely to sell off their polluting facilities (greenwashing). Overall, our findings suggest that (a) corporate managers respond to the environmental preferences of their investors; (b) divestment in polluting companies may be counterproductive, leading to greater emissions; and (c) private markets may be able to address environmental challenges without explicit government regulation“ (abstract). My comment: My shareholder and stakeholder engagement approach is documented here Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Political Private Equity: ESG Disclosures in Private Equity Fund Prospectuses and Fundraising Outcomes by John L. Campbell, Owen Davidson, Paul Mason, and Steven Utke as of Sept. 9^th, 2023 (#105): “We use a large language model to identify Environment, Social, and Governance (ESG) disclosures in private equity (PE) brochures (Form ADV Part 2) … First, we find environmental, but not social or governance, disclosures are negatively associated with the likelihood a PE adviser raises a new fund. Second, using disclosure tone, we separately identify disclosures of ESG risk from disclosures of ESG related investment activity. We find environmental risk disclosure is negatively associated with new fund formation. In contrast, the effect of environmental investment disclosure is positive or negative depending on the political leaning of investors home state” (abstract).

Other investment research

Literate delegation: Household portfolios and financial literacy: The flight to delegation by Sarah Brown, Alexandros Kontonikas, Alberto Montagnoli, Harry Pickard, and Karl Taylor as of Oct. 17^th, 2023 (#6): “ … we analyse the asset allocation of European households, focusing on developments during the period that followed the recent twin financial crises. … We provide novel evidence which suggests that the “search for yield” during the post-crisis period of low interest rates took place not by raising the direct holdings of stocks and bonds, but rather indirectly through higher mutual funds’ holdings, in line with a “flight to delegation”. Importantly, this behaviour is strongly linked to the level of financial literacy, with the most literate households displaying significantly higher use of mutual funds“ (abstract).

Fin-Ed returns: Selection into Financial Education and Effects on Portfolio Choice by Irina Gemmo, Pierre-Carl Michaud, and Olivia S. Mitchell as of Sept. 25^th, 2023 (#34): “The more financially literate and those expecting higher gains pay more to purchase education, while those who consider themselves very financially literate pay less. Using portfolio allocation tasks, we show that the financial education increases portfolio efficiency and welfare by almost 20 and 3 percentage points, respectively. In our setting, selection does not greatly influence estimated program effects, comparing those participating and those who do not“ (abstract). My comment: I try to contribute to B2B financial literacy with (free) www.prof-soehnholz.com

Passive problems: Passive Investing and Market Quality by Philipp Höfler, Christian Schlag, and Maik Schmeling as of Oct. 5^th, 2023 (#127): “We show that an increase in passive exchange-traded fund (ETF) ownership leads to stronger and more persistent return reversals. … we further show that more passive ownership causes higher bid-ask spreads, more exposure to aggregate liquidity shocks, more idiosyncratic volatility and higher tail risk. We … show that higher passive ETF ownership reduces the importance of firm-specific information for returns but increases the importance of transitory noise and a firm’s exposure to market-wide sentiment shocks” (abstract).

New allocation model: The CAPM, APT, and PAPM by Thomas M. Idzorek, Paul D. Kaplan, and Roger G. Ibbotson as of Sept. 9^th, 2023 (#114): “Important insights and conclusions include: In the CAPM, there is only one “taste” and that is a single dimension of risk aversion. The CAPM assumes homogeneous expectations, so there is no “disagreement”. Both the APT and the PAPM have a linear structure, but in the APT an unknown factor structure is supplied by the economy, whereas in the PAPM the structure arises out of the investor demand for security characteristics, which need not be risk based. … The PAPM with “disagreement” leads to mispricing, inefficient markets, and the potential for active management. The CAPM, as well as a number of new ESG equilibrium asset pricing models, are special cases of the PAPM, which allows for any number of tastes for any number of characteristics and disagreement“ (p. 25). My comment: I prefer a much simpler and optimization-free passive asset allocation see 230720 Das Soehnholz ESG und SDG Portfoliobuch

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Liquid impact 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 with currently 28 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Liquid impact – Researchpost #148

Liquid impact: 10x new and interesting research on greentech, sustainable jobs, ESG exclusions and ratings, green performance, greenwashing and advisor growth by Ulrich Atz, Thomas Dangl, Michael Halling and many more (# show SSRN downloads on Oct. 19^th)

Ecological and social research

Greentech: The global environmental effects of FinTech market growth by Charilaos Mertzanis as of Sept. 25^th, 2023 (#13): “We contribute to the existing literature by examining the impact of aggregate values of FinTech finance on environmental performance across a sample of fifty-eight countries during the period of 2013-2019. Our findings show a small but statistically significant positive effect of FinTech finance on environmental performance within our sample. … government effectiveness emerges as a crucial factor in driving environmental performance, promoting it both directly and indirectly through fostering higher growth effects in the FinTech market“ (p. 20).

Good jobs: Hidden Figures: The State of Human Capital Disclosures for Sustainable Jobs by Ulrich Atz and Tensie Whelan as of Oct. 11^th, 2023 (#34): “Sustainable jobs … can lead to better financial performance, and represent a material impact for most corporations. … Using data from six leading ESG rating providers, we demonstrate substantial reporting gaps. For example, we find that only 20% of social metrics are decision-useful and quantitative measures are missing for most firms (70-90% per metric across raters). Even turnover, a financially material metric, is only available for half of firms at best and lacks details. Two case studies, on Amazon and the quick-service restaurant industry, further illustrate the financial costs of ignoring employment quality. We also provide several practical recommendations for managers and other stakeholders“ (abstract).

Responsible investment research: Liquid impact

Rating differences: ESG Reporting Divergence by Qiang Cheng, Yun Lou, and Mengjie Yang as of Sept. 9^th,2023 (#128): “ … the ESG reporting divergence measure is lower for firm-pairs using the same ESG reporting framework, with similar size, and with similar ESG performance than for other firm-pairs. We also find that the level of divergence in firms’ reporting of environmental or social activities is significantly higher than that of governance reporting … we find that a higher level of ESG reporting divergence is associated with more ESG rating disagreement among ESG rating providers and weaker association between ESG ratings and ESG fund allocation. … We also find that the informativeness of ESG ratings about firms’ future ESG performance declines with ESG reporting divergence“ (p. 34/35).

ESG exclusions: Green Dilution: How ESG Scores Conflict with Climate Investing by Noel Amenc, Felix Goltz, and Antoine Naly from EDHEC as of June 2023: “By comparing the greenness of portfolios built to have both higher ESG scores and lower carbon intensity to that of portfolios solely built to reduce carbon intensity, we are able to compute the incremental impact of the inclusion of ESG scores on carbon intensity reduction, which we call green dilution. We show green dilution is pervasive, regardless of which ESG scores are targeted as objectives, substantial, with an average of 92% across our portfolios, and robust across several alternative specifications. A 92% green dilution means that 92% of the carbon intensity reduction investors could have reached by solely weighting stocks to minimise carbon intensity is lost when adding ESG scores as a partial weight determinant. … A more sensible alternative is to separate the two objectives, by first screening out stocks with low ESG scores, and then weighting the remaining stocks by the investor’s key objective, carbon intensity in our case. Since both dimensions are unrelated, screening out stocks by ESG scores does not affect the carbon intensity distribution of the stock universe. ESG exclusions thus result in a neutral impact on portfolio carbon intensity, with a green dilution close to zero” (p. 6). My comment: I exclude low (best-in-universe and separate E, S and G) rated stocks since many years, see e.g. 140227 ESG_Paper_V3 1 (naaim.org) and Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

Low emissions, high returns: Carbon emissions, stock returns and portfolio performance by Papa Orgen as of Oct. 11^th, 2023 (#28): “This study offers an explanation for the absence of a carbon risk premium on the basis of firm carbon intensity. The results suggest investors became more responsive to firm-level climate risks proxied by carbon intensity in the aftermath of the Paris Climate Conference. The relationship between carbon intensity and stock performance is underpriced before the Paris Conference, but strong and economically significant afterwards. The estimated carbon premium can neither be diversified away by risk factors or size, nor can it be attributed to highly carbon-intensive sectors such as Energy, Utilities and Industrials. Moreover, portfolios with a low carbon intensity focus broadly outperform the benchmark and/or high carbon intensity portfolios regardless of firm size, beta and alpha“ (abstract).

Green performance: The impact of green investors on stock prices by Gong Cheng, Eric Jondeau, Benoit Mojon and Dimitri Vayanos from the Bank of International Settlements as of Sept. 29^th, 2023: “We study the impact of green investors on stock prices in a dynamic equilibrium asset-pricing model … Contrary to the literature, we find a large fall in the stock prices of the high-emitting firms that are excluded and in turn an increase in stock prices of greener firms when the exclusion strategy is announced and during the transition process” (abstract).

Green advantage? Firm-specific Climate Risk Estimated from Public News by Thomas Dangl, Michael Halling, and Stefan Salbrechter as of Oct. 5^th, 2023 (#48): “… we propose a fully data-driven methodology to estimate firm-specific climate risk from public news. … A portfolio that is long “green” stocks (low regulatory risk) and short “brown” stocks (high regulatory risk) reveals a regime shift occurring around 2012. The regulatory risk premium is positive from 2002 to 2012 (1.54% p.a.), but switches sign in the subsequent period from 2012 to 2020 and becomes significantly negative with a point estimate of -2.56%. … In addition, we find a significant positive risk premium of 1.5% p.a. for physical climate risk over the period 2002 to 2020“ (p. 51).

Costly lies: Greenwashing: Do Investors, Markets and Boards Really Care? By Erdinc Akyildirim, Shaen Corbet, Steven Ongena, and Les Oxley as of Oct. 12^th, 2023 (#97): “What are the financial repercussions of corporate greenwashing? … We find a broad devaluation, with an average abnormal stock return of -0.63% …. We further find a shift in investor sentiment in parallel with the growth of social media, underscoring the potential for future swift and extensive reputational damage. … Industries inherently associated with environmental concerns, particularly energy and manufacturing, experienced more pronounced market reactions …. Furthermore, nations with robust environmental values and consciousness witnessed intensified market penalties for greenwashing …” (abstract).

Liquid impact and other investment research

Liquid impact strategies: DVFA-Leitfaden Impact Investing vom DVFA-Fachausschuss Impact vom 18. Oktober 2023: „… Additionalität nicht als notwendige Bedingung für Impact Investments gesehen werden. Stattdessen sollte besser der Beitrag einer Investition zur Lösung von ökologischen und sozialen Problemen transparent dargestellt werden. Hierfür spielen die Intentionalität sowie die Nachweisbarkeit bei der Erzielung der (netto-) positiven Wirkung eine wichtige Rolle … Erstmals werden unterschiedliche Impact- bzw. Engagementstrategien definiert (risiko- bzw. prozessorientiertes, reportingorientiertes, stakeholder- und outputorientiertes Engagement), deren Ergebnisse unterschiedlich gemessen werden können … “. Mein Kommentar: Die aktive Mitarbeit im Fachausschuß war sehr interessant und ich habe versucht, Impulse zu liefern für Engagement, vor allem Strategien, Priorisierungen und Messung, vgl. auch Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Advisor growth: Investment Advisors to Individual Investors by Harry Mamaysky and Yuqi Zhang as of Sept. 29^th, 2023 (#43): “Investment advisors are individuals who work at firms called registered investment advisors (RIAs). We focus specifically on vanilla RIAs, whose main business is advising individuals on how they should invest. Using a novel data set of annually mandated SEC filings, we document how services, fees, advertising, misconduct, and M&A activity have evolved in the vanilla RIA sector. We show how these factors impact RIA growth, as well as how their impact on RIA growth is related to future industry evolution. We introduce a novel measure of vanilla RIA performance and show it is related to future asset flows” (abstract).

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Liquid impact 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 with currently 29 of 30 engaged companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

ESG inflation – Researchpost #147

ESG inflation: 18x interesting new research on real estate, pharma, monetary policy, fires, innovation, banks, corporate culture, ESG and climate funds, carbon premium, greenium, purpose, shareholder engagement, ETFs, structured products, art and crypto investing (# shows the number of full paper downloads at SSRN as of Oct. 13^th, 2023)

Social research: ESG inflation

Positive big real estate: The Impact of Institutional Investors on Homeownership and Neighborhood Access by Joshua Coven as of Sept. 19^th, 2023 (#89): “(Sö: Institutional buy to rent) … investors made it harder for households to purchase homes, but easier for the financially constrained to live in neighborhoods that previously had few rental options. B2R investors, by raising prices, benefited homeowners who held housing in B2R regions because they experienced capital gains. … I find that for every home B2R bought, they decreased the housing available for owner occupancy by 0.3 homes. It was not a 1:1 decrease because the demand shock triggered a supply response, and B2R investors crowded out other landlords. … I find that B2R increased the supply of rentals and lowered rents. … I also show with individual location data that B2R increased access to the neighborhoods for the financially constrained by providing rentals in areas with few rentals” (p.28/29). My comment: I consider residential listed real estate companies (REITs) to be typically aligned with SDG-goals. This research supports my hypothesis.

Pharma ESG: Aligning Environmental, Social, and Governance to Clinical Development: Moving 2 Towards More Sustainable Clinical Trials by Sandeep N. Athalye, Shylashree Baraskar, Shivani Mittra, and Elena Wolff-Holz as of Oct. 5^th, 2023 (#13): “Innovation in clinical trials that delivers affordable access to life-saving therapeutics for patients worldwide is fast becoming the core of the ESG strategy. The way clinical trials are conducted has a significant impact on the environment and planetary health. Drug development is among the highest producers of greenhouse gas (GHG) emissions, with about 4.4-4.6% of the worldwide GHG emissions coming from the Pharma sector. … This article discusses/reviews how clinical researchers can align with the ESG goals for efficient conduct of clinical trials of biologics as well as their biosimilars“ (abstract).

Ecological research: ESG inflation

Carbon money policy: Does Monetary Policy Shape the Path to Carbon Neutrality? by Robin Döttling and Adrian Lam as of Oct. 4^th, 2023 (#76): “… this paper documents that — in the US — stock prices of firms with relatively higher carbon emissions are more sensitive to monetary policy shocks. Consistent with the valuation results, we find that high-emission firms reduce their emissions relative to low-emission firms, but slow down emission-reduction efforts when monetary policy is tight“ (p. 28).

Northern problem: Explosive Temperatures by Marc Gronwald as of Oct. 9^th, 2023 (#18):“The paper finds, first, that global temperatures are explosive. Second, the paper also finds clear evidence of temporary explosiveness in Northern hemispheric data while in the Southern hemisphere respective evidence is much weaker. … The empirical pattern described here is attributable to so-called Arctic amplification, a phenomenon widely discussed in the climate science literature …” (p. 14/15).

Fire locations: Forest Fires: Why the Large Year-to-Year Variation in Forests Burned? By Jay Apt, Dennis Epple, and Fallaw Sowell as of Oct. 9^th, 2023 (#10): “California has 4% of the land area of the United States, but over the 36-year period of our sample (1987-2022) California averaged 13% of the total US forest area burned. … We find that 75 percent of the variability in forest area burned can be accounted for by variation in six variables: the mean of maximum annual temperatures, prior year precipitation, new housing construction, net electricity imports, and variation in AMO and ENSO (Sö: Atlantic Multi-decadal Oscillation (AMO) and El Niño–Southern Oscillation (ENSO)“ (p. 17).

Climate cooperation: Induced Innovation and International Environmental Agreements: Evidence from the Ozone Regime by Eugenie Dugoua as of Oct. 6^th, 2023 (#11): “This paper revisits one of the rare success stories in global environmental cooperation: the Montreal Protocol and the phase-out of ozone-depleting substances. I show that the protocol increased science and innovation on alternatives to ozone-depleting substances, and argue that agreements can indeed be useful to solving global public goods problems. This contrasts with game-theoretical predictions that agreements occur only when costs to the players are low, and with the often-heard narrative that substitutes were readily available“ (abstract)

Unclear GHG bank data: Assessing the data challenges of climate-related disclosures in European banks. A text mining study by Angel Ivan Moreno and Teresa Caminero of Banco de Espana as of Oct. 5^th, 2023 (#25): “The Climate Data Steering Committee (CDSC) is working on an initiative to create a global central digital repository of climate disclosures, which aims to address the current data challenges. … Using a text-mining approach, coupled with the application of commercial Large Language Models (LLM) for context verification, we calculate a Greenhouse Gas Disclosure Index (GHGDI), by analysing 23 highly granular disclosures in the ESG reports between 2019 and 2021 of most of the significant banks under the ECB’s direct supervision. This index is then compared with the CDP score. The results indicate a moderate correlation between institutions not reporting to CDP upon request and a low GHGDI. Institutions with a high CDP score do not necessarily correlate with a high GHGDI“ (abstract).

Cleaner culture: Environmental Externalities of Corporate Culture: Evidence from Firm Pollution by Wenquan Li, Suman Neupane, and Kelvin Jui Keng Tan as of Oct. 9^th, 2023 (#48): “We find that firms with a strong culture tend to have lower toxic emission levels and pollution intensity compared to those with a weak culture. … Further evidence shows that cultural values related to teamwork, innovation, respect, and integrity mainly drive the negative relationship between corporate culture and firm pollution. … Moreover, we find that enhanced diversity and increased investment in R&D activities serve as two potential channels through which a strong corporate culture affects firms’ pollution reduction efforts. Moreover, our results suggest that the decrease in firm pollution does not come at the expense of production. … when facing a less regulatory burden, firms with a strong culture proactively address environmental concerns, whereas firms with a weak culture increase toxic releases” (p. 36/37).

Responsible investment research: ESG Inflation

ESG inflation? ESG names and claims in the EU fund industry by European Securities and Markets Authority (ESMA) as of October 2^nd, 2023: “Focussing on EU investment funds … Using a novel dataset with historical information on 36,000 funds managing EUR 16 trillion of assets, we find that funds increasingly use ESG-related language in their names, and that investors consistently prefer funds with ESG words in their name“ (p. 3). My comment: My fund has no ESG in it’s name although it applies very strict Best-in-Universe ESG criteria and many 100% exclusions, see e.g. Active or impact investing? – (prof-soehnholz.com)

Climate fund deficits: Investing in Times of Climate Change 2023 by Hortense Bioy, Boya Wang, Alyssa Stankiewicz and Biddappa A R from Morningstar as of September 2023: “We identified more than 1,400 open-end and exchange-traded funds with a climate-related mandate as of June 2023, compared with fewer than 200 in 2018. Assets in these funds have surged 30% in the past 18 months to USD 534 billion, boosted by inflows and product development. Fueled by higher investor interest and regulation, Europe remains the largest and most diverse climate fund market, accounting for 84% of global assets. … Against a backdrop of high oil and gas prices, falling valuations in renewable energy stocks, and despite the Inflation Reduction Act, assets in U.S. climate funds have grown by only 4% in the past 18 months to USD 31.7 billion. … Funds offering exposure to climate solutions also exhibit high carbon intensity. These funds tend to invest in transitioning companies that operate in high-emitting sectors, such as utilities, energy, and industrials, and that are developing solutions to help reduce their own emissions and those of others. None of the most common companies in climate funds are aligned to 1.5° Celsius. The most popular stocks in broad market climate portfolios are more misaligned than those in portfolios that target climate solutions, with average Implied Temperature Rises of 3.3°C versus 2.4°C. This can be explained by the high and difficult-to-manage carbon emissions coming from the supply chain and/or customers (Scope 3 upstream and downstream) of top companies in broad market portfolios“ (p. 1). My comment: My SDG-aligned fund avoids fossil fuels but is only partly focused on climate solutions, clean energy and cleantech. Current data shows a 1.9°C Temperature Alignment for Scope 1+2 and 2.9°C including Scope 3, see www.futurevest.fund

Emissions pay: Does the Carbon Premium Reflect Risk or Mispricing? by Yigit Atilgan, K. Ozgur Demirtas, and Alex Edmans as of Sept. 25^th, 2023 (#12782): “… the level of and change in all three scopes of carbon emissions is significantly associated with both higher earnings surprises and higher earnings announcement returns, but carbon intensities are not. The four earnings announcements each year account for 30- 50% of the carbon premium in both levels and changes. … emitting firms are able to enjoy superior earnings surprises, earnings announcement returns, and realized returns because they do not fully bear the consequences (nor are they expected to fully bear the consequences) of their polluting activity“ (p. 11).

Green hedge: Greenium Fluctuations and Climate Awareness in the Corporate Bond Market Massimo Dragottoa , Alfonso Dufoura , and Simone Varotto as of Sept. 19^th, 2023 (#55): “… green bonds generally trade at a premium in comparison to their non-green counterparts. Further, we have identified dynamic fluctuations in the greenium over time, which correspond to major climate change-related events and policy decisions. … Bonds that have been externally reviewed exhibit an (up to five time) larger greenium than non-certified bonds. …. certified green bonds can also garner a ‘green premium’ during these (Sö: natural disaster) events, with the scale of this premium directly being influenced by the extent of disaster damages. … increased demand for environmentally responsible investments translates into lower spreads for green and conventional bonds issued by companies that are actively working to address climate change issues, such as the green issuers in our sample. The effect is even stronger for certified green bonds“ (p. 17/18).

ESG compensation? What Purpose Do Corporations Purport? Evidence from Letters to Shareholders by Raghuram Rajan, Pietro Ramella, and Luigi Zingales as of March 18^th, 2023 (#877): “In spite of the proliferation of corporate goals, we find that executive compensation remains overwhelmingly focused on shareholder value, as measured by stock prices and financial performance. While we do observe an increase in the use of environmental and social metrics in compensation, especially by firms that announce such goals, the magnitude of this relationship is still small. We also find corporate statements of ESG goals are associated with policies and programs that favor those goals, but there is little evidence that it improves the firm’s measurable ESG outcomes“ (p. 37).

No engagement monopoly? Big Three (Dis)Engagements by Dhruv Aggarwal, Lubomir Litov, and Shivaram Rajgopal as of Oct. 5^th, 2023 (#117): “This paper uses newly available data to empirically analyze how the three largest asset managers (BlackRock, Vanguard, and State Street) engage with portfolio companies” (abstract). … “The revelation that a portfolio firm is targeted for engagement leads it to exhibit negative abnormal returns. However, the magnitude of value destruction is tiny, ranging from 10 to 50 basis points, and transient, concentrated in the days immediately around the public revelation of the engagement effort. … engagement is significantly correlated with the extent of the asset managers’ ownership stake in the firm and the CEO’s total compensation. Both these variables are easily available heuristics that can be used by the Big Three’s understaffed stewardship teams to select engagement targets. … BlackRock and Vanguard become less likely to vote against management the year after they select a portfolio company for engagement. … Companies do not reduce CEO compensation, increase female board representation, or become less likely to have dual class structures after being targeted for engagement by the largest asset managers“ (p. 26/27). My comment: If Blackrock has only 15 engagement professionals, then my fund has relatively more shareholder engagement resources. My approach see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Other investment research

Active index funds? Discretionary Investing by ‘Passive’ S&P 500 Funds by Peter Molk and Adriana Robertson as of Aug.28^th, 2023 (#169): “… we examine funds that track the most prominent index, the S&P 500. S&P 500 index funds do not typically commit, in a legally enforceable sense, to holding even a representative sample of the underlying index, nor do they commit to replicating the returns of that index. Managers therefore have the legal flexibility to depart substantially from the underlying index’s holdings. We also show that these departures are commonplace: S&P 500 index funds routinely depart from the underlying index by meaningful amounts, in both percentage and dollar terms. While these departures are largest among smaller funds, they are also present among mega-funds: even among the largest S&P 500 funds, holdings differ from the index by a total of between 1.7% and 7.5% in the fourth quarter of 2022” (abstract).

Structured product markets: Essays on Structured Products 2022 by Jacob H Schmidt and Esha Pilinja as of Sept. 26^th, 2023 (#78): “Over the past 30 years structured products (SP) have become popular with all investors – institutional, family offices, high-net-worth individuals and retail investors. But what are structured products? Put simply, SP are investment products linked to equities, fixed income (bonds or interest rates), commodities or any other market or underlying asset, with or without derivatives overlay, with or without leverage, with or without capital guarantee. Crypto-linked products are the latest variant. …. we present ten essays on structured products in wealth management … The focus is on the role, risk-return profile and applications of structured products in wealth management, in different countries and for different investors“ (abstract). My comment: Several essays seem to be too optimistic but I find the ones from Karl David Bok on risks and from Fereydoun Valizadeh on Switzerland and Anna Sandberg on Germany interesting.

Art investment research: A Bilbliometric Analysis of Art in Financial Markets by Diana Barro, Antonella Basso, Stefania Funari, Guglielmo Alessandro Visentin as of Oct. 6^th, 2023 (#25): “Over 250 scholars contributed to writing 181 articles on art in financial markets, published in almost 100 journals. … a relatively small fraction of authors is responsible for a large percentage of the contributions. We have identified the most relevant papers, journals, and authors in the field …“ (p. 23).

Crypto infections: New Evidence on Spillovers Between Crypto Assets and Financial Markets by Roshan Iyer and Adina Popescu from the International Monetary Fund as of October 5^th, 2023 (#52): „The paper finds that crypto asset markets exhibit a high level of integration, potentially surpassing other asset classes, with significant spillovers in terms of both returns and volatilities. Over time, this connectedness has shown an upward trend, especially following 2017, reaching its peak during the early phase of the COVID-19 pandemic. … Although Ethereum stands out in terms of the number of spillovers to other coins in the more recent period, various other coins also play significant roles in transmitting spillovers … we find that crypto assets exhibit a significant level of connectedness with global equities, while the spillovers with bond indices and the USD are relatively modest. Volatility spillovers between crypto assets and the VIX and commodity prices are also pronounced, with gold in particular receiving substantial spillovers from crypto assets” (p. 31/32).

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Impactinvesting ideas – Researchblog #145

Impactinvesting ideas: 12x new research on terrorism, migrants, emissions, innovations, ESG-ratings, sustainable debt, impactinvesting, directors, ETFs, gamification and concentration by Timo Busch, Harald Hau, Ulrich Hege, Thorsten Hens and many more (#: SSRN downloads on Sept. 28^th, 2023)

Social research

Terror success: Terrorism and Voting: The Rise of Right-Wing Populism in Germany by Navid Sabet, Marius Liebald, Guido Friebel as of Sept. 25^th, 2023 (#15): “… we find that successful (Sö terror) attacks lead to significant increases in the vote share for the right-wing, populist Alternative für Deutschland (AfD) party. Our results are predominantly observable in state elections, though attacks that receive high media coverage increase the AfD vote share in Federal elections. These patterns hold even though most attacks are motivated by right-wing causes and target migrants. Using a longitudinal panel of individuals, we find successful terror leads individuals to prefer the AfD more and worry more about migration” (abstract).

Integration deficits: The Integration of Migrants in the German Labor Market: Evidence over 50 Years by Paul Berbée and Jan Stuhler as of Sept. 25^th, 2023 (#47): “First, employment profiles tend to be concave, with low initial employment but rapidly increasing employment in the first years after arrival (convergence). However, income gaps widen with more time in Germany (divergence). … Second, for most groups the employment gaps do not close, despite the initial catch-up. … Third, the income and employment gaps close partially in the second generation, but the employment gaps shrink by only 25% and remain large for some groups. Finally, the perhaps most striking observation is the sudden collapse of employment among earlier arrivals from Turkey in the early 1990s. … The employment shares of the refugees arriving around 2015 are similar to earlier refugee cohorts, despite the unusual favorable labor market conditions and the increased focus on integration policies. Their predicted long-term gaps in employment (about 20-25 pp.) are more than twice as large as the corresponding gap for Ukrainian refugees (about 10 pp.). … Summing up, immigration has become indispensable for the German economy, and the experience from more than 50 years shows that many migrant groups achieve substantial employment rates and incomes. However, barriers to integration persist, and while integration policies have improved along some dimensions, as yet we see no systematic improvements in integration outcomes over time (“p. 36/37).

Ecological research

Loose commitments: Behind Schedule: The Corporate Effort to Fulfill Climate Obligations by Joseph E. Aldy, Patrick Bolton, Zachery M. Halem, and Marcin Kacperczyk as of Sept. 20^th, 2023 (#66): “We analyze corporate commitments to reduce carbon emissions. We show that companies in their decisions to commit are more driven by external shareholder pressure and reputational concerns rather than economic motives due to cost of capital effects. We further show that many companies focus on short-term pledges many of which get revised over time. Despite the growth in commitment movement, we find that most companies have fallen behind on their commitments for reasons that could be both systematic and idiosyncratic in nature“ (abstract).

Innovative suppliers: Climate Innovation and Carbon Emissions: Evidence from Supply Chain Networks by Ulrich Hege, Kai Li, and Yifei Zhang as of Sept. 14^th, 2023 (#83): “… we ask (i) whether climate innovation invented by a supplier firm allows its customer firms to reduce CO2 emissions, and (ii) whether climate innovation facilitates the acquisition of new business customers and what types of customers. We find that climate innovations help customer firms to reduce carbon emissions …. Emissions savings are accentuated for high-emission firms and firm with stronger environmental concerns. … We show that customer firms generally have a strong preference for suppliers’ climate innovations. Moreover, we show that climate innovation allows suppliers to expand their customer base. We find that the capacity to attract new customers is more pronounced for customers with a strong preference for reducing their carbon footprint: these include firms with a strong preference for environmental protection, measured by their high environmental scores in their ESG ratings, but also firms with elevated GHG emissions that presumably anticipate regulatory or investor pressure to curtail their GHG emissions“ (p. 31/32). My comment regarding supplier relations see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)

ESG investment research: Impactinvesting ideas

E-Rating divergence: Environmental data and scores: Lost in translation by Enrico Bernardini, Marco Fanari, Enrico Foscolo, and Francesco Ruggiero from the Bank of Italy as of Sept. 19^th, 2023 (#26): “… we find that environmental data have meaningful, although limited, explanatory power for the E-scores. … the scores of some providers are more related to raw data …. We identify some variables as significant and common across several providers, such as forward-looking measures like the presence of reduction targets for emissions and resource use as well as environmental and renewable energy policies. … We find the latent component to be heterogeneous across providers and this evidence may be due to different materiality in the providers’ assessments. Indeed, some providers focus their analysis on how the corporate financial conditions are affected by environmental issues, while others consider how corporate conduct can affect environmental conditions and others consider both perspectives (”double materiality”)” (p. 20).

More “sustainable” debt: Do Sustainable Companies Receive More Debt? The Role of Sustainability Profiles and Sustainability-related Debt Instruments by Julia Meyer and Beat Affolter as of Aug. 20^th, 2023 (#89): “We have made use of three different sources of data to classify companies into one of three groups: (i) companies avoiding ESG risks (using the ESG rating), (ii) companies contributing to the SDGs (SDG score), and (iii) companies committed to transformation (SBTi targets or commitments). First, our results show that sustainability-related debt is largely issued by sustainable companies in all three dimensions. — Secondly, … we find a significant increase in levels of debt for more sustainable companies in all three dimensions. However, this increase seems not to be linked to the issuance of sustainability related debt instruments …. Our results, therefore, indicate that lenders have started to incorporate sustainability and transformation assessments over time and that good sustainability performance (again in all three dimensions) has led to additional debt financing compared to companies with a low sustainability performance” (p. 20).

Impactinvesting ideas: Research

Reactions to pollution: Sustainable Investing in Imperfect Markets by Thorsten Hens and Ester Trutwin as of Sept. 21^st, 2023 (#42): “Given that the price for polluting the environment is too low, we show that impact investing can lead to a second-best solution. If at the margin the technology is ”clean”, investment should be increased while a capital reduction is appropriate if at the margin the firm’s technology is ”dirty”. However, sustainable investing requires households to anticipate the firm’s pollution activity. Therefor we show how the same solution can be implemented with ESG investing in which the burden of knowledge lies on the rating agency. Finally, we indicate that the first-best solution can be achieved by sustainable consumption” (abstract) My comment on impactinvesting ideas see Active or impact investing? – (prof-soehnholz.com)

Few Institutional directors: Do Institutional Directors Matter? by Heng Geng, Harald Hau, Roni Michaely, and Binh Nguyen as of Feb. 21^st, 2023 (#168): “We find that board representation by institutional investors is relatively rare in U.S. public firms compared to the high institutional ownership in U.S. public firms. Only 7.61% of Compustat firm-years from 1999-2016 feature at least one institutional director representing an institutional shareholder owning more than 1% of outstanding shares. Second, Additional analyses indicate that banks, sophisticated investors (e.g., hedge funds, private equity), and activist shareholders are likely to obtain board seats. By contrast, large retail funds generally do not seek board representation. Common institutional directors representing the so-called “Big Three” asset management companies, which are concerned most for the potential antitrust implications, are only found in only 37 intra-industry firm pairs. Our third set of results reveals that rival firms sharing institutional investors rarely feature joint board representation by the same institutional investor. More importantly, in the rare cases of joint board representation, we do not find evidence that such overlapping board representation is related to higher profit margins than what is already predicted by common institutional ownership in a firm pair” (p. 23/24). My comment: Selecting adequate board directors is one of many potential of impactinvesting ideas

Practical Impactinvesting ideas: Principles for Impact Investments: Practical guidance for measuring and assessing the life cycle, magnitude, and tradeoffs of impact investments by Timo Busch, Eric Pruessner and Hendrik Brosche as of Sept. 26^th, 2023 (#62): “For the impact life cycle, we propose a clear set of principles that create a standard for how impact-aligned and impact-generating investments should measure and assess impact. Regarding the topic of impact magnitude, the principles provide guidance for how large a company impact must be for impact investments to be considered significant. Ideally by using thresholds to determine the magnitude of a company impact, impact investments are directly connected to sustainable development objectives“ (p. 19).

Other investment research

ETF effects: Rise of Passive Investing – Effects on Price Level, Market Volatility, and Price Informativeness by Paweł Bednarek as of Sept. 12^th, 2023 (#117): “I find that the growth of passive investing did not increase the overall price level, thus contradicting the common ETF bubble hypothesis, which postulated that rapid growth in passive strategies may lead to the detachment of prices of these securities from fundamentals. … We estimate that about 10% of current market volatility can be attributed to the rise of passive investing. It also resulted in diminished price informativeness due to weakened information acquisition. Further reduction in passive management fees will strengthen these effects“ (abstract).

The bank wins: The Gamification of Banking by Colleen Baker and Christopher K. Odinet as of Sept. 26^th, 2023 (#42): “After providing an overview of gamification in general, we examined its rise in the context of stock trading … We next turned to early appearances of gamification in banking … we think that its pace is about to accelerate. Our perspective is supported by a number of examples involving banks and fintechs partnering or combining to offer banking services through a game-like interface. As in Truist’s case, bank-fintech partnerships are on the cusp of the gamification of banking that we predict will develop in three stages, culminating with meg one-stop-shop financial intermediary platforms anchored by cloud computing service providers“ (p. 39/40).

Better >10 stocks: Underperformance of Concentrated Stock Positions by Antti Petajisto as of Aug. 28^th, 2023 (#473): “… we find that the median stock has underperformed the cap-weighted market portfolio by 7.9% over rolling ten-year investment periods (or 0.82% per year) since 1926. The relative underperformance over rolling ten-year periods increases to 17.8% (or 1.94% per year) when considering only stocks whose performance ranked in the top 20% over the prior five years. … the observed underperformance of the median stock applies across all industry groups and among both the smallest and largest stocks“ (p. 18/19). My comment: In this research concentrated means 10% or higher allocation to every stock. Here you find more research and my opinion: 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

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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 with currently 29 of 30 engaged companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

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Customer ESG engagement – Opinion Post #212

Customer ESG engagement is my term for shareholder engagement with the goal to address corporate customers regarding ESG-topics. First, I want to help my respective portfolio companies to improve their ESG-profiles. In addition, I want to help to increase corporate revenues and thus to improve the returns for the clients in my investment portfolios.

Here I provide an overview of current scientific research regarding customer ESG engagement topics. I also explain my respective recommendations for the companies I am invested in.

The other two stakeholder groups which I address with my “leveraged shareholder engagement” are suppliers (see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)) and employees (compare HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)).

Unfortunately, I did not find much research on the link between ESG quality of companies (which is typically measured with ESG ratings) and corporate revenues.

Customer ESG engagement goal 1: Avoid or reduce negative aspects

My first hypothesis: If ESG quality (ratings) declines and customers are informed about the reasons for this change, they may react in buying less from the negatively affected companies. Here are two recent studies which support this hypothesis:

Negative ESG aspects (1): How Does ESG Shape Consumption? by Joel F. Houston, Chen Lin, Hongyu Shan, and Mo Shen as of June 11, 2023: “Our study explores the effects of more than 1600 negative events captured from the RepRisk database, on 150 million point-of-sale consumption observations … Our baseline findings show that the average negative event generates a 5 – 10 % decrease in sales for the affected product in the six months following the event“ (p. 23/24).

Negative aspects (2): Assessing the Impact of ESG Violations on Brand-Level Sales by Yao Chen, Rakesh Mallipeddi, M. Serkan Akturk, and Arvind Mahajan as of June 22^nd, 2023 (no full paper free download): “This study examines the effects of negative Environmental, Social, and Governance (ESG) news on the sales of retail brands. … our results reveal that news coverage of firms‘ violations related to ESG significantly affects brand sales” (abstract).

The effects in the business-to-business market may be even larger. On the other hand, substituting a professional supplier with another one is typically time-consuming and costly.

Customer ESG engagement goal 2: Support positive aspects

My second hypothesis: If ESG quality (ratings) improves and customers are informed about the reasons for this change, they may react in buying more (volume effect) from the positively affected companies or pay them more (price effect).

Here are two recent studies which support this hypothesis:

Positive aspects (1): Do Consumers Care About ESG? Evidence from Barcode-Level Sales Data by Jean-Marie Meier, Henri Servaes, Jiaying Wei, and Steven Chong Xiao as of July 11^th, 2023: “… we find that higher E&S ratings positively affect subsequent local product sales. … revenue also declines after the release of negative E&S news. … we find a significant increase in the sensitivity of local retail sales to firm E&S performance after … (Sö: natural and environmental) disaster events for counties located closer to the events“ (p. 23).

Positive aspects (2): The Return on Sustainability Investment (ROSI): Monetizing Financial Benefits of Sustainability Actions in Companies by Ulrich Atz, Tracy Van Holt, Elyse Douglas and Tensie Whelan as of Jan. 23^rd, 2022: “The beef supply chain yielded a potential net present value (NPV) between 0.01 percent to 12 percent of annual revenue, depending on the supply chain segment. For one automotive company, the five-year NPV (Sö: Net present value) based on realized benefits was 12 percent of annual revenue“ (abstract).

Investors can influence corporations

If corporate ESG quality can influence revenues and if investors can influence corporate ESG quality, this can be a win-win situation.

I have written in the past about the potential impact of investors on corporations and my shareholder engagement approach (see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)). Here is an exemplary research study explicitly mentioning the potential for customer ESG engagement:

Good for stakeholders: Engagement on Environmental, Social, and Governance Performance by Tamas Barko, Martijn Cremers, and Luc Renneboog as of Nov. 18^th, 2022: “Our results thus suggest that the activism regarding corporate social responsibility generally improves ESG practices and corporate sales and is profitable to the activist. Taken together, we provide direct evidence that ethical investing and strong financial performance, both from the activist’s and the targeted firm’s perspective, can go hand-in-hand together” (abstract).

I try to invest in the already most sustainable companies (see for example Active or impact investing? – (prof-soehnholz.com)). Therefore, my customer ESG engagement focuses on informing customers, that ESG is important for the respective companies. In addition, I want to encourage customers to suggest ESG improvements for the companies I am invested in.

My customer ESG engagement recommendations

I expect easier and faster adoption of my shareholder proposals for simple and low cost recommendations. Many companies already use regular customer surveys. Adding additional questions to such surveys should be rather easy for them.

I propose regular and formal questions to customers such as “How satisfied are you with the environmental, social and corporate governance activities of “your company”?” and “Which environmental, social and corporate governance improvements do you suggest to “your company”?” plus the publication of the main results of the answers in the next sustainability report“

With these questions, I also want to help to educate customers on ESG topics, since the surveys should be accompagnied by some basic ESG information. Also, if customers find ESG important, as I expect, then company internal ESG-sceptics may become less negative on ESG. Thirdly, regularly measuring customer ESG satisfaction can help to monitor customers ESG perception changes. With the publication of the main survey results e.g. in regular sutainability reports, other stakeholders can monitor these perception changes and intervene, if they want.

Since I only started my shareholder engagement by the end of last year, I cannot report much adoption of my proposals yet. But the good news is that I am currently in more or less active discussions with 29 of my 30 portfolio companies. I am confident, that at least a few companies will introduce such survey questions and thus position themselves even more as ESG-leaders.

Research such as “A Test of Stakeholder Governance” by Stavros Gadinis and Amelia Miazad as of Aug. 25^th, 2021 is one of the reasons for optimism on my part. They summarise: „Our findings suggest that companies turned to stakeholders during the pandemic with increasing frequency and asked for input on issues that are central to their business … Today, stakeholder governance seeks to proactively cover the company’s social profile as comprehensively as possible, collecting information in a regular and standardized manner“ (abstract).

And, with publications such as this blog post, maybe I can encourage others to support such broad stakeholder engagement activities as well.

Update information: In their 2023 Sustanability Report (p.48/49) Nordex, one of my investments, documents that it surveys customers since 2022 on ESG issues. The response rate of 30% and the overall satisfaction rate of 4,6 out of 6 can still be improved, though.

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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 with currently 29 of 30 engaged companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

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Supplier ESG – Researchpost #144

Supplier ESG: 17x new research on SDG, green behavior, subsidies, SMEs, ESG ratings, real estate, risk management, sin stocks, trading, suppliers, acting in concert, AI and VC by Alexander Bassen, Andreas G.F. Hoepner, and many more (#: SSRN downloads on Sept. 21^st, 2023)

Too late? Earth beyond six of nine planetary boundaries by Katherine Richardson and many more as of Sept. 13^th, 2023: “This planetary boundaries framework update finds that six of the nine boundaries are transgressed, suggesting that Earth is now well outside of the safe operating space for humanity. Ocean acidification is close to being breached, while aerosol loading regionally exceeds the boundary. Stratospheric ozone levels have slightly recovered. The transgression level has increased for all boundaries earlier identified as overstepped. As primary production drives Earth system biosphere functions, human appropriation of net primary production is proposed as a control variable for functional biosphere integrity. This boundary is also transgressed. Earth system modeling of different levels of the transgression of the climate and land system change boundaries illustrates that these anthropogenic impacts on Earth system must be considered in a systemic context“ (abstract).

Ecological research (corporate perspective)

Social measures: How useful are convenient measures of pro-environmental behavior? Evidence from a field study on green self-reports and observed green behavior by Ann-Kathrin Blankenberg, Martin Binder, and Israel Waichmann as of Aug. 20^th, 2023 (#12): “We conduct a field study with n = 599 participants recruited in the town hall of a German medium-sized town to compare self-reports of pro-environmental behavior of our participants with observed behavior (green product choice and donation to real charities). Our results indicate that self-reports are only weakly correlated to incentivized behavior in our sample of an adult population (r = .09∗ ), partly because pro-environmental behavior measures can conflate prosocial and pro-environmental preferences. … Our results … cast some doubt on the validity of commonly used convenient measures of pro-environmental behavior“ (abstract).

Expensive subsidies: Converting the Converted: Subsidies and Solar Adoption by Linde Kattenberg, Erdal Aydin, Dirk Brounen, and Nils Kok as of July 25^th, 2023 (#18): „… there is limited empirical evidence on the effectiveness of subsidies that are used to promote the adoption of such (Sö: renewable energy) technologies. This paper exploits a natural experimental setting, in which a solar PV subsidy is assigned randomly within a group of households applying for the subsidy. Combining data gathered from 100,000 aerial images with detailed information on 15,000 households … The results show that, within the group of households that applied for the subsidy, the provision of subsidy leads to a 14.4 percent increase in the probability of adopting solar PV, a 9.6 percent larger installation, and a 1-year faster adoption. However, examining the subsequent electricity consumption of the applicants, we report that the subsidy provision leads to a decrease in household electricity consumption of just 8.1 percent, as compared to the rejected applicant group, implying a cost of carbon of more than €2,202 per ton of CO2”.

Regulatory SME effects: The EU Sustainability Taxonomy: Will it Affect Small and Medium-sized Enterprises? by Ibrahim E. Sancak as of Sept. 6^th, 2023 (#52): “The EU Sustainability Taxonomy (EUST) is a new challenge for companies, particularly SMEs and financial market participants; however, it potentially conveys its economic value; hence, reliable taxonomy reporting and strong sustainability indicators can yield enormously. … We conclude that the EU’s sustainable finance reforms have potential domino effects. Backed by the European Green Deal, sustainable finance reforms, and in particular, the EUST, will not be limited to large companies or EU companies; they will affect all economic actors having business and finance connections in the EU“ (p. 14).

ESG rating credits: Determinants of corporate credit ratings: Does ESG matter? by Lachlan Michalski and Rand Kwong Yew Low as of Aug. 19^th, 2023 (#25): “We show that environmental and social responsibility variables are important determinants for the credit ratings, specifically measures of environmental innovation, resource use, emissions, corporate social responsibility, and workforce determinants. The influence of ESG variables become more pronounced following the financial crisis of 2007-2009, and are important across both investment-grade and speculative-grade classes” (abstract).

Climate risk management: Climate and Environmental risks and opportunities in the banking industry: the role of risk management by Doriana Cucinelli, Laura Nieri, and Stefano Piserà as of Aug. 18^th, 2023 (#22): “We base our analysis on a sample of 112 European listed banks observed from 2005 to 2021. Our results … provide evidence that banks with a stronger and more sophisticated risk management are more likely to implement a better climate change risk strategy. … Our findings underline that bank providing their employees and managers with specific training programs on environmental topics, or availing of the presence of a CSR committee, or adopting environmental-linked remuneration scheme, stand out for a greater engagement towards C&E risks and opportunities and a sounder C&E strategy” (p. 16).

Generic ESG Research (investor perspective)

ESG dissected: It’s All in the Detail: Individual ESG Factors and Firm Value by Ramya Rajajagadeesan Aroul, Riette Carstens and Julia Freybote as of Aug. 25^th, 2023 (#29): “We disaggregate ESG into its individual factors (E, S and G) and investigate their impact on firm value using publicly listed equity real estate investment trusts (REITs) as a laboratory over the period of 2009 to 2021. … We find that the environmental factor (E) and governance factor (G) positively predict firm value while the social factor (S) negatively predicts it. … Further analysis into antecedents of firm value suggests that our results are driven by 1) E reducing cost of debt and increasing financial flexibility, operating efficiency, and performance, 2) S leading to a higher cost of debt as well as lower financial flexibility and operating performance, and 3) G increasing operating efficiency. … We also find evidence for time-variations in the relationships of E, S and G with firm value and its determinants” (abstract). My comment: This is not really new as one can see in my publication from 2014: 140227 ESG_Paper_V3 1 (naaim.org)

Greenbrown valuations: The US equity valuation premium, globalization, and climate change risks by Craig Doidge, G. Andrew Karolyi, and René M. Stulz as of Sept. 15^th, 2023 (#439): “It is well-known that before the GFC (Sö: Global Financial Crisis of 2008), on average, US firms were valued more highly than non-US firms. We call this valuation difference the US premium. We show that, for firms from DMs (Sö: Developed Markets), the US premium is larger after the crisis than before. By contrast, the US premium for firms from EMs (Sö: Emerging Markets) falls. In percentage terms, the US premium for DMs increases by 27% while the US premium for EMs falls by 24%. … the differing evolution of the US premium for DM firms and for EM firms is concentrated among old economy firms – older firms in industries that have a high ratio of tangible assets to total assets. … We find that the valuations of firms in brown industries in non-US DMs fell significantly relative to comparable firm valuations in the US and this decline among brown industries in EMs did not take place. Though this mechanism does not explain the increase in the US premium for firms in DMs fully, it explains much of that increase. It follows from this that differences across countries in the importance given to sustainability and ESG considerations can decrease the extent to which financial markets across the world are integrated“ (p. 28).

Sin ESG: Does ESG impact stock returns for controversial companies? by Sonal and William Stearns as of Sept. 2^nd, 2023 (#35): “We find that the market perception of ESG investments of controversial firms have changed over time. For the 2010-2015 period, ESG investments made by sinful firms are rewarded positively by increasing stock prices. However, for the sample period post 2015, increases in ESG no longer result in positive stock returns. We further find the maximum change for the oil and gas industry“ (p. 11/12). My comment see ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)

Portfolio ESG effects: Quantifying the Impacts of Climate Shocks in Commercial Real Estate Market by Rogier Holtermans, Dongxiao Niu, and Siqi Zheng as of Sept. 7^th, 2023 (#251): “We focus on Hurricanes Harvey and Sandy to quantify the price impacts of climate shocks on commercial buildings in the U.S. We find clear evidence of a decline in transaction prices in hurricane-damaged areas after the hurricane made landfall, compared to unaffected areas. We also observe that …. Assets in locations outside the FEMA floodplain (with less prior perception about climate risk) have experienced larger price discounts after the hurricanes. … Moreover, the price discount is larger when the particular buyer has more climate awareness and has a more geographically diverse portfolio, so it is easier for her to factor in this risk in the portfolio construction” (abstract).

ESG investors or traders? Do ESG Preferences Survive in the Trading Room? An Experimental Study by Alexander Bassen, Rajna Gibson Brandon, Andreas G.F. Hoepner, Johannes Klausmann, and Ioannis Oikonomou as of Sept. 19^th, 2023 (#12): “This study experimentally tests in a competitive trading room whether Socially Responsible Investors (SRIs) and students are consistent with their stated ESG preferences. … The results suggest that all participants who view ESG issues as important (ESG perception) trade more aggressively irrespective of whether the news are related to ESG matters or not. … More importantly, SRIs trade on average much less aggressively than students irrespective of their ESG perceptions and behaviors” (abstract). … “Investors mostly consider macroeconomic and id[1]iosyncratic financial news in their investment decisions. Updates on the ESG performance of a firm are perceived as less likely to move prices by the participants. In addition to that, we observe a stronger reaction to positive news compared to negative news” (p. 26). My comment: I prefer most-passive rules based to active investments, compare Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com) or Active or impact investing? – (prof-soehnholz.com)

Supplier ESG research (also see Supplier engagement – Opinion post #211)

Supplier ESG shocks: ESG Shocks in Global Supply Chains by Emilio Bisetti, Guoman She, and Alminas Zaldokas as of Sept. 6^th, 2023 (#38): “We show that U.S. firms cut imports by 29.9% and are 4.3% more likely to terminate a trade relationship when their international suppliers experience environmental and social (E&S) incidents. These trade cuts are larger for publicly listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation …. Larger trade cuts around the scandal result in higher supplier E&S scores in subsequent years, and in the eventual resumption of trade” (abstract).

Sustainable supplier reduction: A Supply Chain Sourcing Model at the Interface of Operations and Sustainability by Gang Li and Yu A. Xia as of Aug. 25th, 2023 (#204): “This research investigates … how to integrate sustainability with sourcing planning decisions and how to address the challenges associated with the integration, such as the balance between operational factors and sustainability factors and the quantitative evaluation of sustainability performance. … Our model suggests that while increasing the number of suppliers may cause additional sustainability risk in supply chain management, decreasing the supply base will decrease the production capacity and increase the risk of delivery delay. Therefore, a firm should carefully set up its global sourcing network with only a limited number of selected suppliers. This finding is particularly true when the focus of sourcing planning gradually moves away from decisions based solely on cost to those seeking excellence in both supply chain sustainability and cost performance“ (p. 32).

Empowering stakeholders: Stakeholder Governance as Governance by Stakeholders by Brett McDonnell as of August 31^st, 2023 (#64): “… American stakeholder engagement is limited to soliciting (and on occasion responding to) the opinions of employees, customers, suppliers, and others. True stakeholder governance would involve these groups in actively making corporate decisions. I have suggested various ways we could do this. The focus should be on employees, who could be empowered via board representation, works councils, and unions. Other stakeholders could be less fully empowered through councils, advisory at first but potentially given power to nominate or even elect directors” (p. 19).

Impact investment research (supplier ESG)

Anti-climate concert: Rethinking Acting in Concert: Activist ESG Stewardship is Shareholder Democracy by Dan W. Puchniak and Umakanth Varottil as of Sept. 13^th, 2023 (#187): “… the legal barriers posed by acting in concert rules in virtually all jurisdictions prevent institutional investors from engaging in collective shareholder activism with the aim or threat of replacing the board (i.e., “activist stewardship”). Perversely, the current acting in concert rules effectively prevent institutional investors from replacing boards that resist (or even deny) climate change solutions – even if (or, ironically, precisely because) they collectively have enough shareholder voting rights to democratically replace the boards of recalcitrant brown companies. This heretofore hidden problem in corporate and securities law effectively prevents trillions of dollars of shareholder voting rights that institutional investors legally control from being democratically exercised to change companies who refuse to properly acknowledge the threat of climate change” … (abstract).

Other investment research

AI investment risks: Artificial Intelligence (AI) and Future Retail Investment by Imtiaz Sifat as of Sept. 12^th, 2023 (#20): “I have analyzed AI’s integration in retail investment. … The benefits spring from access to sophisticated strategies once exclusive to institutional investors. The downside is that the opaque models which facilitate such strategies may aggravate risks and information asymmetry for retail investors. To stop this gap from widening, proper governance is essential. Similarly, the ability to ingest copious alternative data and instantaneous portfolio optimization incurs a tradeoff—too much dependence on historical data invokes modelling biases and data quality cum privacy concerns. It is also likely that AI-dominated markets of the future will be more volatile, and new forms of speculation would emerge as trading platforms incentivize speculation and gamification. The combined forces of these concurrent challenges put a heavy stress on orthodox finance theories …“ (p. 16/17). Maybe interesting: AI: Wie können nachhaltige AnlegerInnen profitieren? – Responsible Investment Research Blog (prof-soehnholz.com)

Venture careers: Failing Just Fine: Assessing Careers of Venture Capital-backed Entrepreneurs via a Non-Wage Measure by Natee Amornsiripanitch, Paul A. Gompers, George Hu, Will Levinson, and Vladimir Mukharlyamov as of Aug. 30^th, 2023 (#131): “Would-be founders experience accelerated career trajectories prior to founding, significantly outperforming graduates from same-tier colleges with similar first jobs. After exiting their start-ups, they obtain jobs about three years more senior than their peers who hold (i) same-tier college degrees, (ii) similar first jobs, and (iii) similar jobs immediately prior to founding their company. Even failed founders find jobs with higher seniority than those attained by their non-founder peers“ (abstract).

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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 with currently 30 of 30 engaged companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T; also see Active or impact investing? – (prof-soehnholz.com)

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Supplier engagement – Opinion post #211

Supplier engagement is my term for shareholder engagement with the goal to address suppliers either directly or indirectly. I provide an overview of current scientific research regarding supplier engagement. I also explain my respective recommendations to the companies I am invested in. Supplier engagement can be very powerful.

The other two stakeholder groups which I address with my “leveraged shareholder engagement” are customers and employees (compare HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)).

Supplier emissions can be very high

Supplier relations have become much talked about in recent years. Climate change is one of the reasons. Greenhouse gas (GHG) emissions are one of the prime shareholder concerns if they are interested in environmental topics. To compare more or less vertically integrated companies with their competitors, evaluating GHG emissions of suppliers is important. Often, GHG emissions of suppliers (part of so-called scope 3) are much higher than the (scope 1 and 2) emissions of the analyzed company itself.

Relevant research (1): Managing climate change risks in global supply chains: a review and research agenda by Abhijeet Ghadge, Hendrik Wurtmann and Stefan Seuring as of June 13^th, 2022: “The research … captures a comprehensive picture of climate change and associated phenomenon in terms of sources, consequences, control drivers, and mitigation mechanisms. … The study contributes to practice by providing visibility into the industry sectors most likely to be impacted; their complex association with other supply chain networks. The drivers, barriers, and strategies for climate change mitigation are particularly helpful to practitioners for better managing human-induced risks …” (p. 59).

Supply chain becomes more important for ESG-analyses

COVID and geopolitical changes such as the Russian attack on the Ukraine also showed that the management of supply chains is crucial for many companies. Even before, many supplier related incidents such as the Foxconn/Apple discussions had significant effects on company ESG perceptions and potentially also on ESG-ratings. Also, supply chains are becoming more in many countries.

Relevant research (2): ESG Shocks in Global Supply Chains by Emilio Bisetti, Guoman She, and Alminas Zaldokas as of Sept. 6^th, 2023: “We show that U.S. firms cut imports by 29.9% and are 4.3% more likely to terminate a trade relationship when their international suppliers experience environmental and social (E&S) incidents. These trade cuts are larger for publicly listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation …. Larger trade cuts around the scandal result in higher supplier E&S scores in subsequent years, and in the eventual resumption of trade” (abstract).

On the positive side, many suppliers have great knowhow and can help their clients to become better in ESG-terms.

Relevant research (3): Stakeholder Engagement by Brett McDonnell as of Nov. 1^st, 2022^t: “Suppliers, like employees, also provide inputs to the production process of companies. Retaining the loyalty of suppliers may be important for companies, depending in part on how firm-specific inputs are. Where inputs are fungible, they can be bought on the market for the prevailing market price, but where they are firm-specific, the buying firm will have more trouble replacing a supplier that decides to withdraw. Suppliers have information about the quality of what they supply, and about conditions which may affect future availability and prices” (p. 8).

Supplier engagement: How investors can indirectly engage

Investors in publicly listed companies do probably not want to directly with the often many important suppliers of their portfolios companies. But they can indirectly leverage the knowhow and energy of suppliers. Here is what Brett McDonnell suggests:

Relevant research (4): Stakeholder Governance as Governance by Stakeholders by Brett McDonnell as of August 31^st, 2023: “… American stakeholder engagement is limited to soliciting (and on occasion responding to) the opinions of employees, customers, suppliers, and others. True stakeholder governance would involve these groups in actively making corporate decisions. I have suggested various ways we could do this. The focus should be on employees, who could be empowered via board representation, works councils, and unions. Other stakeholders could be less fully empowered through councils, advisory at first but potentially given power to nominate or even elect directors” (p. 19).

In my opinion, too, advisory councils of suppliers could be helpful to improve listed companies. I prefer other forms of ESG engagement with suppliers, though. First, companies could regularly survey most of their direct and even some important indirect suppliers in a regular way regarding ESG topics. With regular surveys companies can find out how happy their suppliers are with the companies ESG activities and ESG-improvement ideas by suppliers can be collected.

Example (1): Surveys from Stakeholders Make Good Business Sense by Terrie Nolinske from the National Business Research Institute (no date) mentions The Body Shop and Michelin who use supplier surveys.

Example (2): AA1000 Stakeholder Engagement Standard from Accountability as of 2015 “provides a … practical framework to implement stakeholder engagement and … Describes how to integrate stakeholder engagement with an organization’s governance, strategy, and operations”.

I specifically suggest to regularly ask suppliers the following questions: 1) “How satisfied are you with the environmental, social and corporate governance activities of company XYZ?” and 2) “Which environmental, social and corporate governance improvements do you suggest to company XYZ?”.

Systematic supplier engagement using ESG evaluations

In my view, even more important to improve the full supply chain ESG-profile is that companies regularly, broadly and independently evaluate the ESG-quality of their suppliers. Independent ESG-ratings can be very useful for that purpose, since they systematically cover many environmental, social and governance aspects.

I try to invest in the 30 most sustainable publicly listed companies globally (see Active or impact investing? – (prof-soehnholz.com)), but even most of these companies do not have such a supplier ESG evaluation process. Here are the two best examples of my portfolios companies:

Supplier ESG evaluation (1): Watts Water Sustainability Report 2022 p. 63: “In 2022, we met our goal of reviewing suppliers representing approximately 30% of our global annual spend using the Dun & Bradstreet (D&B) ESG Rating Service. The service is a web-based ratings platform that assesses the ESG operations of suppliers across 70 key topics, including through peer benchmarking and using leading sustainability frameworks …. Through our expanded use of this tool, we gained increased insight into our suppliers’ sustainability practices, including that suppliers making up one-sixth of the global spend we assessed already have advanced ESG systems in place”.

Supplier ESG evaluation (2): CAFs 2022 Sustainability Report: “… the evaluation effort focuses on 349 target suppliers out of a total of approximately 6,000 suppliers. The evaluations are carried out by Ecovadis …. Ecovadis adapts the evaluation questionnaire to each supplier based on the locations in which it operates, its sector and its size to evaluate 21 aspects of sustainability alligned with the most demanding international norms, regulations and standards …. Suppliers‘ responses are evaluated by specialised analysts … This analysis results in a general rating with a maximum score of 100 points …. If the result of an evaluation does not meet the requirements established by CAF (a general score of 45 out of 100 in sustainability management), the supplier is required to implement an action plan to improve the weaknesses identified. If the supplier does not raise its assessment to acceptable levels or does not show a commitment to improve, it is audited by experts in the field” (p. 83).

“By the end of 2022, the activities … have assessed … 78% of the prioritised suppliers (118 business groups) …. The assessed suppliers have an average overall rating of 58.6 out of 100 … which is 13 percentage points higher than the average of all suppliers assessed by Ecovadis worldwide (45/100). In addition, 71% of CAF suppliers reassessed in the last year improved their general rating … As a result of these assessments it has also been identified that 2% of the Group’s total purchases are made from suppliers with average or lower sustainability management and an improvement plan has been agreed with all of them”(p. 84).

The picture of my blogpost summarises the results of the 2022 supplier assessment campaign of one of my portfolio companies: Construcciones y Auxiliar de Ferrocarriles (CAF Sustainability Report 2022, p. 85):

But even Watts Water and CAF currently only cover a relatively small share of their suppliers with these evaluations.

Better fewer suppliers?

Such a sustainability-oriented supplier evaluation approach could result in fewer and therefore more important suppliers.

Relevant research (5): A Supply Chain Sourcing Model at the Interface of Operations and Sustainability by Gang Li and Yu A. Xia as of Aug. 25th, 2023: “This research investigates … how to integrate sustainability with sourcing planning decisions and how to address the challenges associated with the integration, such as the balance between operational factors and sustainability factors and the quantitative evaluation of sustainability performance. … Our model suggests that while increasing the number of suppliers may cause additional sustainability risk in supply chain management, decreasing the supply base will decrease the production capacity and increase the risk of delivery delay. Therefore, a firm should carefully set up its global sourcing network with only a limited number of selected suppliers. This finding is particularly true when the focus of sourcing planning gradually moves away from decisions based solely on cost to those seeking excellence in both supply chain sustainability and cost performance“ (p. 32).

Supplier engagement: Powerful supplier ESG disclosures

I think that is very important to make the supplier engagement activities transparent. Only transparent activities can be controlled by stakeholders. It is very useful for stakeholders, too, to know the identities of the major suppliers.

Relevant research (6): Green Image in Supply Chains: Selective Disclosure of Corporate Suppliers by Yilin Shi, Jing Wu, and Yu Zhang as of Sept. 9^th, 2022 (#2015): “We uncover robust empirical evidence showing that listed firms selectively disclose environmentally friendly suppliers while selectively not disclosing suppliers with poor environmental performance, i.e., they conduct supply chain greenwashing. This is a prevalent behavior in the sample of more than 40 major countries or regions around the world that we study. … we find that customer firms that face more competitive pressure, care more about brand image and reputation, and have larger shares of institutional holdings are more likely to conduct such selective disclosure. … we find that information transparency reduces such behavior. Finally, we study the outcomes of selectively disclosing green suppliers and find that customers benefit from the practice in terms of sales, profitability, and market valuation“ (p. 22/24).

A supplier engagement proposal and first engagement experiences

Based on my engagement policy (Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)), I try to make it as simple as possible for my portfolio companies to implement my suggestions. Comprehensive and regular supplier ESG surveys would be a rather simple and low-cost approach and I certainly encourage them.

Given the importance of the supply chain for ESG-topics and the risks of greenwashing, I especially recommend a more demanding supplier ESG-rating approach to all my portfolio companies. Specifically, I tell them: “Favoring suppliers with better overall/comprehensive ESG scores is probably the way to go. Reporting aggregated information such as percentage of suppliers with XYZ ESG-scores can be one first step regarding transparency”. I also inform them about current relevant research and the two examples mentioned above.

No supplier engagement results yet

I started my respective engagement activities only at the end of 2022. Some companies answered that they like my suggestions and plan to analyze them, but I cannot report implementations so far (compare 230831_FutureVest_Engagementreport-2830ab605a502648339b4f8f58fa2ee2dce539ef.pdf).

I am only a small investors and cooperative engagement can me more powerful. Unfortunately, my attempts for cooperative engagement with other investors have not been fruitful yet. One reason is that I could only find very few sustainable investment funds with a dedicated small-and midcap focus such as mine. With the few such funds I have typically very little company overlap. The asset managers and the shareholder organizations which I have asked so far want to cooperate with larger asset managers and not with such a small entity as mine.

Nevertheless, I will continue to ask my portfolio companies for such stakeholder engagements and the publication of their results. I am confident, that at least a few companies will adopt such surveys and evaluations and thus position themselves even more as ESG-leaders. Research such as “A Test of Stakeholder Governance” by Stavros Gadinis and Amelia Miazad as of Aug. 25^th, 2021 is one of the reasons for optimism on my part. And, maybe, with publications such as this blog post, I can encourage other companies, investors etc. to support such broad stakeholder engagement activities as well.

Additional research:

Bringing ESG Accountability to Global Supply Chains as of Oct. 30th, 2023 by Ingrid Cornander, Michael Jonas, and Daniel Weise from The Boston Consulting Group

Social research: Researchpost #143

Social research: 9x new research on immigration, human resources, activists, transition investing, carbon prices and taxes, ESG performance and female entrepreneurs by Moritz Drupp, Gilbert Metcalf, James Stock and many others

New social research

Good immigration: Immigration and Nationalism in the Long Run by Valentin Lang and Stephan A. Schneider as of June 8^th, 2023 (#248): “Drawing on a natural experiment from Germany, we show that the massive inflow of forced migrants after World War II reduces voting for nationalist parties more than 70 years later. Voters in municipalities that experienced this historical immigration shock are significantly less likely to respond to current immigration waves by voting for nationalist parties. … Individual-level evidence from a customized survey with a randomized experiment aligns with these results and shows that immigration-friendly attitudes in the regions that experienced the expellee inflow result from norm transmission within families and local communities. The long-term electoral effect is driven by both descendants of expellees and descendants of natives. Experimentally evoking memories of the historical experience also leads to more pro-immigration responses. … In many countries, the nationalist backlash against immigration is regionally concentrated; interestingly often in regions with relatively few immigrants. Our results offer an explanation for this particular phenomenon and suggest that the lack of experience with immigration in such regions is an important mechanism behind hostile political reactions. Second, the results highlight that the short- and long-run political effects of immigration can go in opposite directions“ (p. 39/40).

ESG keeps people: Effect of Corporate Environment Social and Governance Reputation on Employee Turnover by Ming Leung, Chuchu Liang, Ben Lourie and Chenqi Zhu as of August 20th, 2023 (#72): “We investigate how a firm’s environmental, social, and governance (ESG) reputation, as measured by the ESG sentiment of news articles, affects employee turnover. … Regression analyses on a firm-month panel of 1,822 publicly listed US firms from 2008 to 2018 reveal that a better public ESG reputation is associated with lower employee turnover and … this effect is stronger among female employees. … ESG reputation affects both men and women in states that have more Democratic voters …” (abstract). My comment: Here are some more employee related sources and ideas HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)

Good narcissists? Understanding Involvement in Environmental Activism: Relationships to Pathological Narcissism, Virtue Signaling, Dominance, and Sensation Seeking by Ann Krispenz and Alex Bertrams as of Sept. 8^th, 2023 (#14): “Results support the validity of the DEVP (Sö: dark-ego-vehicle principle) by showing that higher pathological narcissistic grandiosity was related to greater involvement in environmental activism, even above and beyond relevant covariates (i.e., pathological narcissistic vulnerability, age, and gender). Also, we found positive relationships between involvement in environmental activism and typical correlates of pathological narcissistic grandiosity (i.e., virtue signaling, dominance, and sensation seeking)“ (abstract).

New ecological research

Urgent transition: The Road to Paris: Stress Testing the Transition Towards a Net-Zero Economy by Tina Emambakhsh, Maximilian Fuchs, Simon Kordel, Charalampos Kouratzoglou, Chiara Lelli, Riccardo Pizzeghello, Carmelo Salleo, and Martina Spaggiari from the European Central Bank as of Sept. 7^th, 2023 (#42): “… By comparing different transition scenarios, the results of the exercise show that acting immediately and decisively would provide significant benefits for the euro area economy and financial system, not only by maintaining the optimal net-zero emissions path (and therefore limiting the physical impact of climate change), but also by limiting financial risk. An accelerated transition to a carbon-neutral economy would be helpful to contain risks for financial institutions and would not generate financial stability concerns for the euro area, provided that firms and households could finance their green investments in an orderly manner. However, the heterogeneous results across economic sectors and banks suggest that more careful monitoring of certain entities and subsets of credit exposures will be required during the transition process“ (abstract). My comment regarding transition investments see ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)

Good competition: Competitive Pressure and Emission Reduction: Unravelling the Link by Simone Cenci, Hossein Asgharian, Lu Liu, Marek Rei, and Maurizio Zollo as of Selt.9^th, 2023 (#16): „We analysed data of 2 300 publicly traded firms from 47 countries and across all (GICS) sectors from 2011 to 2020. The main results of our analysis show that competitive pressures induce firms to increase their sustainability initiatives and to diversify their sustainability effort across different actions and SDGs. Sustainability behaviour diversification is in turn associated with lower future emissions. … We also find a significant heterogeneity in the magnitude of the effect across sectors and geographies“ (p.18/19).

Scientist disagreement? Heterogeneity in Expert Recommendations for Designing Carbon Pricing Policies across the Globe by Frikk Nesje, Robert C. Schmidt, and Moritz A. Drupp as of Sept.8^th,2023 (#13): “… we present recommendations from a global survey of more than 400 experts to inform key design issues for carbon pricing policies. We find that almost twice as many experts favor a carbon tax over a cap-and-trade scheme for unilateral carbon pricing, and three-quarters strongly recommend using border carbon adjustment to address competitiveness concerns. Recommendations on the usage of revenues from carbon pricing exhibit a substantial degree of heterogeneity. While transfers to particularly affected households and equal lump sum transfers are among the options most favored, these account for only around 40 percent of recommendations …“ (abstract).

Good taxes? The Macroeconomic Impact of Europe’s Carbon Taxes by Gilbert E. Metcalf and James H. Stock as of July 10^th, 2023 (#34): Placing a price on carbon pollution is widely viewed as the most cost‐effective approach to reducing emissions. … Using variation in the use of carbon taxes in European countries that are all part of the EU Emission Trading System (ETS), we find no evidence to support claims that the tax would adversely impact employment or GDP growth. We find modest evidence for emissions reductions arising from the tax”. (p. 24).

New ESG investment and other social research

Differentiated ESG performance: ESG and Global Investor Returns Study by Kroll as of September 2023: “Global portfolios of companies with higher ESG ratings earned a better annual compound return, when compared to portfolios of worse-rated companies over the 2013−2021 period. … with the notable exceptions of Brazil and Germany, 10 out of the 12 countries/markets analyzed individually saw companies rated as ESG Leaders outperform … Industries within the World portfolio also saw ESG Leaders generally outperform Laggards, except for Consumer Staples and Health Care. When industries were analyzed within regions or individual countries/markets, the relationship between returns and ESG ratings was less pronounced. … U.S. Laggards in the Energy, Health Care and Communications Services sectors significantly outperformed their better-rated counterparts“ (p. 40). My comment: Regarding industries I currently have a similar experience see ESG gut: 1. Halbjahr gut für ESG- und schlecht für SDG-Portfolios – (prof-soehnholz.com)

Female tools: Female Entrepreneurs, Digital Tools, and Work-Life Balance: Evidence from Small Businesses around the World by Elizabeth Lyons and Laurina Zhang as of Aug. 14^th, 2023 (#14): “… we find that men and women do not differ in their extent of digital tool use for managing business activities that involve external stakeholders, but women are significantly less likely to use digital tools to manage internal business activities. This gender gap persists even in relatively gender equal countries and in industries where the benefits of using internal digital tools are high” (p. 12/13).

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HR-ESG shareholder engagement: Opinion-Post #210

HR-ESG is attractive: Environmental, Social and Governance (ESG) aspects are becoming more important for companies who need additional capital, for those who want to increase sales, and also for hiring and keeping good employees (HR for “human resources”)[1].

In addition, employees can help companies to become more sustainable[2]. The Boston Consulting Group, for example, published recently that new ideas generated by employees helped to “overcome roadblocks in reducing Scope 3 emissions”[3].

Little scientific HR-ESG and employee engagement research

Unfortunately, I find very little comprehensive scientific research on HR-ESG[4]. A study by Hoa Briscoe-Tran from the University of Alberta[5] is one of the rare exceptions. Briscoe-Tran writes: “I analyze 10.4 million anonymous employee reviews and find that employees have useful information about firms’ environmental, social, and governance (ESG) practices. Employees discuss ESG topics in 43% of reviews, thereby providing substantial information about firms’ ESG practices. The employees’ inside view predicts various indicators of a firm’s future ESG-related outcomes, beyond the existing ESG ratings, particularly on the S and G dimensions. Using the inside view, I show that a firm’s stated ESG policies often differ from its employees’ view of its practices. … ESG rating agencies could consider incorporating employee reviews into their rating methodology more broadly” (p. 33).

A more recent study shows: „We find that, on average, job-seekers place a value on ESG signals equivalent to about 10% of the average wage. … Quantitatively, skilled workers value firm ESG activities substantially more than unskilled workers. … results indicate that ESG increases worker utility relative to the baseline economy without ESG. The reallocation of labor in the economy with ESG improves assortative matching and yields an increase in total output. Moreover, skilled workers benefit the most from the introduction of ESG, ultimately increasing wage differentials between skilled and unskilled workers“ (p. 32).

Companies should use the broad employee interest for ESG in a systematic way. And Shareholders should address this change potential when they engage with their portfolio companies.

Even though I have studied scientific publications regarding shareholder engagement quite thoroughly[6], I have found very little engagement with a broad HR-ESG perspective going significantly beyond rather limited diversity, equality, and inclusion (DEI) issues.

Broad HR-ESG activation is easy

With my mutual fund I try to invest in 30 of the most sustainable companies worldwide. Most of these companies actively address the typical HR-ESG-topics such as DEI, workplace safety etc.. I read their sustainability reports and also directly asked them, but I could not find one single company which tries to broadly engage its employees regarding ESG topics[7].

In my shareholder engagement strategy[8] I propose a very simple and efficient approach to activate employees for ESG-issues. Specifically, I write to all my portfolio companies:

“I think that regular and broad questions such as “How satisfied are you with the environmental, social and corporate governance activities of your company?” and “Which environmental, social and corporate governance improvements do you suggest to your company?” plus the (anonymous) publication of the main results of the answers in the sustainability report would be very helpful in seriously engaging employees and getting valuable structured feedback”.

Leveraged shareholder or stakeholder engagement

Most of these companies use regular broad as well as specific pulse employee surveys and typically have high participation rates. Implementation of my questions therefore should be simple and cost-efficient.

In addition, I suggest asking the same questions to customers and they also could be asked to suppliers. Interestingly, “surveys are already very common among employees, but many companies do not yet use them for customers (or at least, they don’t report on it if they do) and surveys of suppliers may be worth adopting as well“[9]. Therefore, the implementation of my suggested regular ESG surveys of customers and suppliers might be somewhat more time-consuming and expensive than employee surveys. But I think that it may well be worth the effort.

If companies regularly ask these questions to employees, customers and suppliers, shareholders can leverage their engagement activities to several stakeholder groups.

I started my respective engagement activities only at the end of 2022. Some companies answered that they like my suggestions and plan to analyze them, but I cannot report implementations so far.

I am only a small investors and cooperative engagement can me more powerful. Unfortunately, my trials for cooperative engagement with other investors have not been fruitful yet. One reason is that I could only find very few sustainable investment funds with a dedicated small-and midcap focus such as mine. With the few such funds I have typically very little overlap. The asset managers and shareholder organizations which I have asked so far want to cooperate with larger asset managers and not with such as small entity as mine.

But I will continue to ask for such surveys and the publication of their results. I am confident, that at least a few companies will adopt such surveys and position themselves even more as ESG-leaders[10]. And, maybe, with publications such as this one, I can encourage other companies, investors etc. to support such broad and easy to implement HR-ESG activities as well.

New research and best practices found after the first publication of this post (Sept. 13th, 2023)

Good jobs: Hidden Figures: The State of Human Capital Disclosures for Sustainable Jobs by Ulrich Atz and Tensie Whelan as of Oct. 11^th, 2023: “Sustainable jobs … can lead to better financial performance, and represent a material impact for most corporations. … Using data from six leading ESG rating providers, we demonstrate substantial reporting gaps. For example, we find that only 20% of social metrics are decision-useful and quantitative measures are missing for most firms (70-90% per metric across raters). Even turnover, a financially material metric, is only available for half of firms at best and lacks details. Two case studies, on Amazon and the quick-service restaurant industry, further illustrate the financial costs of ignoring employment quality. We also provide several practical recommendations for managers and other stakeholders“ (abstract).

ESG attracts employees: Polarizing Corporations: Does Talent Flow to “Good’’ Firms? by Emanuele Colonnelli, Timothy McQuade, Gabriel Ramos, Thomas Rauter, and Olivia Xiong as of Nov. 30^th, 2023: “Using Brazil as our setting, we make two primary contributions. First, in partnership with Brazil’s premier job platform, we design a nondeceptive incentivized field experiment to estimate job-seekers’ preferences to work for socially responsible firms. We find that, on average, job-seekers place a value on ESG signals equivalent to about 10% of the average wage. … Quantitatively, skilled workers value firm ESG activities substantially more than unskilled workers. … results indicate that ESG increases worker utility relative to the baseline economy without ESG. The reallocation of labor in the economy with ESG improves assortative matching and yields an increase in total output. Moreover, skilled workers benefit the most from the introduction of ESG, ultimately increasing wage differentials between skilled and unskilled workers“ (p. 32).

Best practices:

„… employees are consulted at regular intervals regarding their suggestions on sustainability in company-wide surveys and the results are presented.“ (Nexus AG Sustainability Report 2023, p. 5).

„To effectively engage our employees and raise their awareness of these crucial matters, we distribute a monthly ESG newsletter to all our employees worldwide. This communication tool is dedicated to disseminating information about our sustainability activities, highlighting our progress and the impact we are making. In 2023, we enriched the newsletter with the “What We Do Matters” campaign aimed at sharing our patients’ stories with our employees“ (Medacta Group Sustainability Report 2023, p. 16)

[1] see Effect of Corporate Environment Social and Governance Reputation on Employee Turnover by Ming Leung, Chuchu Liang, Ben Lourie and Chenqi Zhu as of August 20th, 2023

[2] see Engaging your people as the advocates and enablers of ESG change by Jessica Norton and Hannah Summers from Willis Towers Watson as of July 13, 2020

[3] see People Make the Difference in Green Transformations by Alice Bolton, Marjolein Cuellar, Kristy Ellmer, Elina Ibounig, Camila Noldin, Nick South and Astrid Vikström from The Boston Consulting Group as of August 23^rd, 2023

[4] For a broad overview see e.g. Stakeholder Engagement by Brett McDonnell – SSRN as of Oct. 31^st, 2022

[5] Do Employees Have Useful Information About Firms’ ESG Practices? by Hoa Briscoe-Tran – SSRN as of Aug. 2nd, 2023

[6] see for example Stakeholder engagement and ESG (Special Edition Researchposting 115) by Dirk Soehnholz as of Feb. 3, 23

[7] compare Active or impact investing? By Dirk Soehnholz as of July 21^st, 2023 and 230831_FutureVest_Engagementreport-2830ab605a502648339b4f8f58fa2ee2dce539ef.pdf

[8] see Shareholder engagement: 21 science based theses and an action plan by Dirk Soehnholz as of Feb. 8^th, 2023

[9] see Stakeholder Engagement by Brett McDonnell – SSRN as of Oct. 31^st, 2022, p. 48

[10] this study is one of the reasons for optimism on my part: A Test of Stakeholder Governance by Stavros Gadinis and Amelia Miazad as of Aug. 25^th, 2021