Archiv der Kategorie: Faktorinvesting

Sustainability deficits: Researchpost 188

Sustainability deficits picture from Pixabay by Alexas Fotos

11x new research on green jobs, carbon prices, GHG reporting, accountants, ESG disclosures, institutional ESG, Governance returns, kid investments, ETF liquidity, loss aversion and customized investments (# shows SSRN full paper downloads as of August 8^th, 2024)

Social and ecological research

Good green job effects: The Green Future: Labor Market Implications for Men and Women by Naomi-Rose Alexander, Longji Li, Jorge Mondragon, Sahar Priano, and Marina M. Tavares from the International Monetary Fund as of July 25^th, 2024 (#15): “In AEs (Sö: Advanced economies), green jobs are predominantly found among high-skilled workers and cognitive occupations, whereas in EMs, many green jobs are manual positions within the construction sector …. green jobs are disproportionately held by men in both AEs and Ems … Additionally, we observe a green wage premium and narrower gender pay gaps in green jobs … many green jobs are well-positioned to harness the benefits of AI advancements … green jobs with a greater capacity to leverage AI exhibit a reduced gender pay gap” (p. 40/41).

Sustainability deficits (1): Negative carbon price effects: Firms’ heterogeneous (and unintended) investment response to carbon price increases by Anna Matzner and Lea Steininger as of July 29^th, 2024 (#13): “Using balance sheet data of 1.2 million European firms and identified carbon policy shocks, we find that higher carbon prices reduce investment, on average. However, less carbon-intensive firms and sectors reduce their investment relatively more compared to otherwise similar firms after a carbon price tightening shock. Following carbon price tightening, firms in demand-sensitive industries see a relative decrease not only in investment but also in sales, employment and cashflow. Moreover, we find no evidence that higher carbon prices incentivise carbon-intensive firms to produce less emission-intensively. Overall, our results are consistent with theories of the growth-hampering features of carbon price increases and suggest that carbon pricing policy operates as a demand shock“ (abstract).

Sustianbility deficits (2): Corporate carbon deficits: The MSCI Sustainability Institute Net-Zero Tracker from the MSCI Sustainability Institute as of July 2024: “A series of indicators that investors use to guide transition finance … suggest that the world’s listed companies remain largely misaligned with global climate goals … Just over one-fifth (22%) of listed companies have set a decarbonization target that aims to reduce their financially relevant GHG emissions to net-zero by 2050 in line with a science-based pathway, as of May 31, 2024, an increase of eight percentage points from a year earlier … 38% of companies disclosed at least some of their upstream Scope 3 emissions, up eight percentage points from a year earlier, while 28% disclosed at least some of their downstream Scope 3 emissions, up seven percentage points over the same period” (p. 4). My comment: I ask every company within my fund to fully disclose GHG Scope 3 data so that all stakeholders can engage regarding these data.

Sustainability deficits (3): Accountant ESG deficits: ESG Assurance and Comparability of Greenhouse Gas Emission Disclosures by Jenna Burke, Jiali Luo, Zvi Singer, and Jing Zhang as of Aug. 7^th, 2024 (#7): “… a recent rule from the SEC mandates expanded ESG disclosure, including external assurance of reported greenhouse gas (GHG) emissions. …. we … find that companies with ESG assurance report more comparable GHG emissions. Comparability is further enhanced when companies use the same assurance provider and when the provider is more experienced. We also find some evidence that comparability is higher when assurance is provided by consulting and engineering firms than by accounting firms“ (abstract).

ESG investment research (in: Sustainability deficits)

Sustainability deficits (4): No ESG disclosure benefits? Does mandating corporate social and environmental disclosure improve social and environmental performance?: Broad-based evidence regarding the effectiveness of Directive 2014/95/EU by Charl de Villiers, John Dumay, Federica Farneti, Jing Jia, and Zhongtian Li as of July 11^th, 2024 (#33): “The Directive …requires companies that are (i) listed on EU exchanges or have significant operations within the EU; (ii) employing more than 500 people; or (iii) deemed to be public-interest entities; to report their performance on non-financial matters, including environmental issues, social and employee matters, human rights, anti-corruption, and bribery” (p. 1). … “Analysing a cross-country sample from 2009-2020, we find that social and environmental performance has not meaningfully improved since the Directive was enacted, and instead of EU companies increasing their performance more than US companies, there was either no difference (for social performance) or US companies improved more than EU companies (for environmental performance). Thus, the results suggest that the Directive did not have the intended impact on the social and environmental performance of EU companies “ (p. 19). My comment: Is more regulatory pressure required or more stakeholder engagement or both?

Sustainability deficits (5): Institutional ESG deficits: Comparisons of Asset Manager, Asset Owner, and Wealth and Retail Portfolios by Peter Jacobs, Ursula Marchioni, Stefan Poechhacker, Nicolas Werbach, and Andrew Ang from BlackRock as of April 16^th,2024 (#183): “We examine 800 portfolios from European asset managers, asset owners, and wealth/retail managers … The average European institutional portfolio exhibits a total risk hovering between 10 to 11%, with little difference across the average asset manager, asset owner, and wealth/retail portfolios. Equity risk … accounting for almost 90% of the total portfolio risk. Decomposing equity risk further, country-specific tilts are the primary driver of equity risk, contributing approximately half of the overall equity risk. Style factors and sectors represent 35% and 17% of the equity risk, respectively. … the largest style factor exposure is small size. … the average European institution has lower carbon intensities, but perhaps surprisingly lower ESG scores, than the MSCI ACWI benchmark“ (p. 22). My comment: I do not expect significant positive share- and bondholder pressure from these investors. This opens room for more customized investor-driven solutions (see the last research publication of this blog post).

Governance returns: From Crisis to Opportunity: The Impact of ESG Scores and Board Structure on Firms’ Profitability by Luis Seco, Azin Sharifi and Shiva Zamani as of Aug. 6^th, 2024 (#13): “This study … of firms listed in the S&P 500 index from 2016 to 2022 reveals that firms with a higher BSI index (Sö: Board structure index) demonstrate enhanced financial profitability …. Among the ESG components, only the Governance score significantly impacts financial profitability, … whereas Environmental and Social scores do not show a significant direct effect on net profit margins … the positive impact of robust board structures and governance practices is more pronounced in the post-COVID period “ (p. 16/17). My comment: Our study from 2014 revealed similar results, see Fetsun, A. and Söhnholz, D. (2014): A quantitative approach to responsible investment: Using ESG multifactor models to improve equity portfolios, Veritas Investment Arbeitspapier, presented at PRI Academic Network Conference in Montreal, September 23^rd (140227 ESG_Paper_V3 1 (naaim.org))

Other investment research (in: Sustainability deficits)

Kids beat adults: Invest Like for Your Kids: Performance and Implications of Children’s Investment Accounts on Portfolios in Adulthood by Denis Davydov and Jarkko Peltomäki as of April 16^th, 2024 (#78): “… we explore the performance of custodial investment accounts for children and their subsequent impact on portfolio performance in adulthood. We find that children’s investment accounts demonstrate superior performance, boasting an average Sharpe ratio over 35% higher and an annual return three times greater compared to adults’ accounts. Notably, the observed trading activity and account behavior in children’s accounts suggest a preference for passive investment strategies. In addition, the combination of lower volatility and higher returns in children’s accounts may indicate a more effective diversification strategy adopted by parents. … the risk-taking and overall account activity of teenage boys become significantly higher than those of girls, resulting in deteriorated investment performance. … individuals who had investment accounts during childhood consistently demonstrate superior performance compared to their peers who started investing in adulthood” (p. 26/27).

ETF liquidity risk: Passing on the hot potato: the use of ETFs by open-ended funds to manage redemption requests by Lennart Dekker, Luis Molestina Vivar, and Christian Weistroffer as of Aug. 1^st, 2024 (#12): “Investment funds are the largest group of ETF investors in the euro area. Our results … show that investment funds were the most run-prone investor type during the COVID-19 crisis. We then show that ETF selling by open-ended funds during March 2020 was stronger for funds facing larger outflows. … This finding is consistent with funds using ETFs for managing liquidity and raising cash if needed“ (p. 16).

Loss aversion? A meta-analysis of disposition effect experiments by Stephen L. Cheung as of pril 3^rd, 2024 (#53): “This paper reports a meta-analysis of the disposition effect – the reluctance to liquidate losing investments – in three standard experimental environments in which this behaviour is normatively a mistake. … the literature finds that investors are around 10% more willing to sell winning compared to losing assets, despite optimal choice dictating the opposite“ (abstract).

Hyper-managed customized investments? Beyond Active and Passive Investing: The Customization of Finance from the CFA Institute Research Foundation by Marc R. Reinganum and Kenneth A. Blay as of Aug. 6^th, 2024: “…The overwhelming ascendancy of index funds associated within the US Equity Large-Cap Blend category is the exception rather than the rule. … The economics of customizable portfolios, enabled by technology facilitating hyper-managed separate accounts, will yield better outcomes for investors in terms of after-tax returns and alignment with investor attitudes and preferences. … In the future, active and passive investing will coexist but will increasingly take place within hyper-managed separate accounts, where the passive component will be implemented in an unbundled way rather than in a fund to maximize net economic benefits and other objectives. … The next frontier for asset managers and their service providers will be the era of low-cost customization“ (p. 76/77). My comment: See Index- und Nachhaltigkeits-Investing 2.0? | CAPinside

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Werbehinweis

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Green salt: Researchpost 187

Green salt picture by H. Hach from Pixabay

10x new research on green salt, digital aid, ESG risks, ESG ratings, direct ESG indexing, environmental engagement, green regulation, stock return dispersion and equal weigthing

Social and ecological research

Green salt? Expanding the Use of Molten Salt for Renewable Energy Storage and the Role of Green Technology Policies by Lavinia Heisenberg and Richhild Moessner as of July 31^st, 2024 (#6): “This paper discussed expanding the use of molten salt for renewable energy storage and generation, in an environmentally friendly way and making use of existing infrastructure. These include using molten salt to store solar energy in concentrated solar plants, replacing coal by molten salt to power thermal plants and thereby convert existing coal thermal plants to renewables, and linking these two uses. They also include molten salt thermal batteries for grid-scale energy storage, and using molten salt in green hydrogen production” (p. 9).

Digital humanitarian aid: Can Digital Aid Deliver during Humanitarian Crises? by Michael Callen, Miguel Fajardo-Steinhäuser, Michael G. Findley, and Tarek Ghani as of July 31^st, 2024 (#3): “We experimentally evaluated digital payments to extremely poor, female-headed households in Afghanistan …. The payments led to substantial improvements in food security and mental well-being. Despite beneficiaries’ limited tech literacy, 99.75% used the payments, and stringent checks revealed no evidence of diversion. … Delivery costs are under 7 cents per dollar, which is 10 cents per dollar less than the World Food Programme’s global figure for cash-based transfers” (abstract).

ESG investment research (in: Green salt)

Low ESG risks pay: MSCI ESG Ratings and Cost of Capital by Jakub Malich and Anett Husi from MSCI Research as of July 22^nd, 2024: “The objective of our study was to determine whether companies with higher resilience to financially material sustainability-related risks (as measured by MSCI ESG Ratings) did benefit from a lower cost of capital. Key takeaways: We found a significant historical correlation between a company’s MSCI ESG Rating and its financing costs. This relationship held in both equity and debt markets … Companies assessed to be the most resilient to financially material sustainability-related risks consistently financed themselves more cheaply than those considered more vulnerable“ (p. 4). My comment: I invest in stocks with low ESG risks and my returns have been good so far, see e.g. Fonds-Portfolio: Mein Fonds | CAPinside

Better social than green? The Influence of ESG Ratings on the Performance of Listed Companies in Germany during by Crisis by Katharina Neuenroth and Alexander Zureck as of July 29^th, 2024 (#8): “Data of a sample of 20 companies listed in the Deutscher Aktienindex (DAX) was utilised for the analysis and a time period of two years (2020 – 2021) was considered. The required information was gathered from the Refinitiv Thomson Reuters database. The research found no significant influence of environmental and governance ratings on EBITDA. However, a significant positive influence of the social rating was observable.“ (abstract). My comment: My SDG-portfolios have more social than green exposure and most have performed rather well over time see www.soehnholzesg.com

Direct ESG Indexing: Smart Beta, Direct Indexing, and Index-Based Investment Strategies by from Jordan Doyle and Genevieve Hayman from the CFA Research Institute as of July 30^th, 2024: “…. we review the origins of index investing and develop an indexing framework that captures incremental levels of active management for new index-based products within the evolving index investing landscape. This conceptual framework helps investors, firms, and policymakers better understand and define index-based products. Additionally, we offer policy recommendations to clarify terminologies with respect to smart beta products and direct indexing, and we encourage increased disclosure on the part of index providers regarding indexing methodologies” (p. 3). …. “Several recent studies have highlighted the increased calls for personalized strategies and product offerings within investment management. In a Charles Schwab Asset Management (2023) survey, 88% of ETF investors expressed interest in further personalizing their investment portfolio, with 78% wishing to better align investments with their personal values” (p. 7). My comment: I offer direct ESG and SDG index solutions since quite some time now but demand has been very low, see Direct ESG Indexing: Die beste ESG Investmentmöglichkeit auch für Privatkunden?

Good ESG banks? Stock returns and ESG scores of banks by Silvia Bressan and Alex Weissensteiner as of July 29^th, 2024 (#12): “We analyze the relationship between United States bank stock returns and ESG scores from January 2013 to December 2022. Our findings indicate that during bear markets, high ESG banks perform slightly better than low ESG banks. However, during market rebounds, the outperformance of high ESG banks becomes significantly more pronounced. … during the more stable period from March 2021 to December 2022 … high ESG banks exhibiting lower equity performance“ (p. 30/31).

Impact investment research (in: Green salt)

Green bank returns: Does Banks’ Environmental Engagement Impact Funding Costs? by Md Jaber Al Islam, Fernando Moreira, and Mustapha Douch as of July 24^th, 2024 (#12): “This study investigates 853 banks across 59 countries from 2004 to 2021, identifying a significant relationship between banks’ environmental engagement and lower funding costs. This association is more pronounced among banks with better management, lower deposit levels, and operating in countries with higher GDP. Depositors and investors support ecofriendly banks due to their favourable conditions in risk, capital adequacy, profitability, and reputation. Besides, the Paris Agreement has been instrumental in heightening awareness among depositors and investors regarding climate change.” (abstract).

Effective green regulation: The impact of ECB Banking Supervision on climate risk and sustainable finance by Lena Schreiner and Andreas Beyer as of July 23rrd, 2024 (#37): “This paper provides a first empirical analysis of the impact of the European Central Bank’s (ECB’s) climate-risk-related supervisory efforts … We …. find a significant impact on both improvements in climate risk exposure and management and on an increase in banks’ green finance activities“ (abstract).

Oher investment research

Stock return dispersion: Which U.S. Stocks Generated the Highest Long-Term Returns? by Hendrik Bessembinder as of July 16^th, 2024 (#5538): “This report describes compound return outcomes for the 29,078 publicly-listed common stocks contained in the CRSP database from December 1925 to December 2023. The majority (51.6%) of these stocks had negative cumulative returns. However, the investment performance of some stocks was remarkable. Seventeen stocks delivered cumulative returns greater than five million percent (or $50,000 per dollar initially invested) … The highest annualized compound return for any stock with at least 20 years of return data was 33.38%, earned by Nvidia shareholders” (abstract).

Equal weigthing: Worth the Weight by Tim Edwards, Anu R. Ganti, and Hamish Preston from S&P Dow Jones Indices as of July 23^rd, 2024: “The S&P 500 Equal Weight Index has recently displayed underperformance in comparison to the S&P 500, driven primarily by historical extremes of performance in the market’s largest names. Moreover, concentration in the broader U.S. equity market has increased to its highest in many years, while single-stock momentum trends are showing unusual signs of extension. Historically, such periods have tended to eventually revert toward their historical means, with such reversion accompanied by stronger relative performance by equal weight indices” (p. 17). My comment: I use equal weighting for equity portfolios since many years and are happy with the results, see e.g. here Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com)

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Werbehinweis (in: Green salt)

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

Biodiversity finance and more: Researchpost #186

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

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

Social and ecological research

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

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

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

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

ESG investment research (in: Biodiversity finance)

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

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

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

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

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

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

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

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

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

Impact investment research

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

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

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

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

Other investment research (in: Biodiversity finance)

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

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Werbehinweis (in: biodiversity finance)

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

ESG rumors: Researchpost #169

ESG rumors: 8x new research on carbon offsets, green innovation, sustainable fund outperformance, ESG rumors and their effects on equities and bonds, ESG factors, safe bonds and private equity (# shows SSRN full paper downloads as of March 27^th, 2024)

Ecological and social research

Problematic Offsets: Carbon Offsets: Decarbonization or Transition-Washing? by Sehoon Kim, Tao Li, and Yanbin Wu as of March 23^rd, 2024 (#104): “Carbon offsets allow firms to claim reductions in carbon emissions by purchasing and retiring carbon credits sold by projects or entities that achieve those reductions. … While large firms with net-zero commitments are more likely to use offsets, we find evidence that offsets are often used strategically by firms that are already positioned close to achieving these targets or in industries where it is easier to boost their ESG rankings relative to their peers. When faced by an exogenous shock to their incentives to boost rankings, firms with low emissions in industries with narrow cross-peer emission gaps become more likely to use offsets whereas heavy-emission firms in large-gap industries do not. Moreover, firms that strategically increase the use of offsets do so by retiring credits from low-quality offset projects, which command lower prices and therefore provide a cost-effective way of transition-washing. Overall, our evidence does not support the purported idea that carbon offsets can be effective at facilitating net-zero transitions by heavy-emission firms. … we do not find evidence that these firms would use such “good” offsets in large-enough quantities to meaningfully reduce their net emissions“ (p. 29/30). My comment: I do not consider/use offsets for my investments.

ESG investment research (ESG rumors)

Green innovation variations: Doing Good by Being Smart: Green Innovation and Firms’ Financial and Environmental Performance by Qiang Cheng, An-Ping Lin, and Mengjie Yang as of March 22^nd, 2024 (#25): “We find that firms with more valuable pollution prevention patents have better future financial and environmental performance, whereas the value of firms’ pollution control patents is not associated with their future financial or environmental performance. We further document that pollution prevention innovation improves financial performance through its positive effects on sales growth and cost efficiency …“ (p. 29/30).

2023 ESG outperformance: Sustainable Reality – Sustainable Funds Show Continued Outperformance and Positive Flows in 2023 Despite a Slower Second Half by Morgan Stanley Institute for Sustainable Investing as of Feb. 29^th, 2024: “Sustainable funds outperformed their traditional peers in 2023 with a median return of 12.6% compared to traditional funds’ 8.6%, according to Morningstar data. … Sustainable fund assets under management (AUM) globally grew to $3.4 trillion, up 15% from 2022 and reaching 7.2% of total AUM. Inflows to sustainable funds remained positive overall at $136 billion, 4.7% of the prior year-end AUM. … Equity funds with a global, Europe or APAC investment focus skew primarily to Industrials and Health Care, while funds investing in the Americas are more overweight Technology. Greater exposure to Technology stocks helped sustainable equity funds investing in the Americas in 2023, but this was not the only factor influencing sustainable funds’ outperformance” (p. 1). … “If a hypothetical fund achieved the median return for each of the past five years, a sustainable fund would be up +35% compared with a traditional fund’s +25%” (p. 6). … “Europe-domiciled Sustainable Funds Outperformed Traditional Funds, With Article 8 and Article 9 Funds in a Similar Range” (p. 18). My comment: I have a similar experience, see 2023: Passive Allokation und ESG gut, SDG nicht gut – Responsible Investment Research Blog (prof-soehnholz.com)

ESG rumors (1): Attention-Grabbing ESG: Do Investors Extract Value-relevant ESG Information from Social Media? by Yoshitaka Tanaka and Shunsuke Managi as of March 23^rd, 2024 (#9): “Initially, we find that unconditional excess stock returns exhibit a positive correlation with positive and attention-grabbing ESG events and a negative correlation with negative ESG events. Our findings also indicate that events with low financial materiality, despite their high social prominence, do not have a lasting effect on stock returns. … we find that the greater is the information asymmetry regarding ESG information, the greater is the stock return response. On the other hand, when we control for firm attributes, we find no correlation between materiality and stock returns. The regression results suggest that the response of stock returns to ESG events may be attributed to market inefficiencies arising from information asymmetries rather than fundamental factors“ (p. 20). My comment: I ,like that my ESG ratings provider incorporates ESG controversies in its frequently updated ESG ratings

ESG rumors (2): From News to Numbers: Quantifying the Impact of ESG Controversies on Corporate Bond Spreads by Doina C. Chichernea, J. Christopher Hughen, and Alex Petkevich as of March 23^rd, 2024 (#7): “… we document that bondholders demand a higher credit spread for bonds issued by firms with higher ESG controversies. The adverse effect of ESG controversies on bond pricing is long-lived and is primarily observed in bond issues with higher credit risk and more pronounced information asymmetry. We also document that current ESG controversies significantly predict an increase in the firm’s future asymmetric information and default risk …” (abstract).

No ESG factor? Are ESG Factors Truly Unique? by Svetoslav Covachev, Jocelyn Martel, and Sofia Brito-Ramos as of March 21^st, 2024 (#71): “This paper studies the relationships between carbon and ESG risk factors and commonly accepted equity risk factors. … the carbon and ESG risk factors can be replicated as linear combinations of risk factors that are based on stock characteristics that are not directly related to environmental and ESG policies. We note that the main inputs for building the carbon and ESG factors are ESG ratings, which have a documented link with firm size. Bigger firms tend to have greater resources for gathering and disclosing ESG information. We also examine the risk exposures of popular ESG indexes, which provide a convenient means to invest in ESG-focused companies. Our findings indicate that the indexes examined are all exposed to the market and size factors, but they are also well-explained by the long leg of the ESG factor” (p. 15). My comment: Sustainable investments should not be expected to have higher returns but rather lower (ESG and thus overall) risks than comparable other investments.

Other investment research (ESG rumors)

Flights to bonds: Global or Regional Safe Assets: Evidence from Bond Substitution Patterns by Tsvetelina Nenova as of March 25^th, 2024 (#5): “This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors’ demand for bonds. … Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy“ (abstract).

Private equity dissected: The economics of private equity: A critical review by Alexander Ljungqvist as of Feb. 15^th, 2024: “… I have aimed to critically synthesize the main insights of more than 90 academic studies of private equity … to draw the following conclusions. Private equity funds have, on average, historically outperformed public-market indices after fees, but maybe not when adjusted for risk, leverage, and illiquidity. … Private equity funds generate returns for their investors through a combination of the value they add to their portfolio companies and their ability to target companies whose performance is about to take off anyway. Whether private equity creates social value for the economy at large is an open question. … Private equity is a demanding asset class in which more sophisticated investors can expect to earn better returns than less sophisticated investors. There is scope for ample misalignment of interests between fund managers and investors. Private equity is an innovative asset class, creating new practices and solutions at a fast pace. Recent examples include subscription lines, GP-led secondaries, and NAV financing“ (p. 42/43).

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Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds?

Small-Caps: Ich möchte möglichst nachhaltig und transparent, d.h. regelbasiert investieren. Die nachhaltigsten regelbasierten ETFs- bzw. Publikumsfonds erreichen aber nur ungefähr die Hälfte der Nachhaltigkeit meiner nachhaltigsten Aktienportfolios (Details dazu vgl. Nachhaltigkeitsinvestmentpolitik auf www.futurevest.fund). Interessenten sind neben der absoluten auch an der relativen Performance dieser Portfolios interessiert. Dafür ist eine faire Benchmark nötig. Es ist schwer, eine solche zu finden.

Keine diversifizierte SDG-Benchmark?

Meine Regeln beinhalten vor allem Länder- und Aktivitätsausschlüsse, ESG-Anforderungen und solche an Vereinbarkeit mit den Nachhaltigen Entwicklungszielen der Vereinten Nationen (SDG). Außerdem versuche ich, ein breites und tiefes Shareholder Engagement umzusetzen.

Die Aktien für meinen Fonds werden Bottom-Up selektiert. Es gibt also keine Allokationsvorgaben z.B. für Länder oder Branchen oder Unternehmensgrößen. Bisher hatten die USA einen Anteil von etwa 40 bis 60 Prozent, danach folgt Australien mit ca. 10% sowie diverse europäische Länder.

Bei den Branchen lag das Gewicht je nach Definition bei 30 bis 60 Prozent Gesundheit und bis zu 40% Industrie.

Ein ESG- plus SDG-Index bzw. eine derartige Fonds-Vergleichsgruppe (Peergroup) wären als Benchmark geeignet. Fonds mit Fokus auf Cleantech oder erneuerbarer Energieproduktion (SDG 7) performen ganz anders als Fonds mit Gesundheitsfokus (SDG 3). Deshalb ist eine SDG-diversifizierte Benchmark nötig. Ich kenne aber keine solche Benchmark bzw. Peergroup, deren Daten öffentlich zugänglich sind und die somit allen Interessenten für Vergleiche zur Verfügung stehen.

Allenfalls der Global Challenges Index der Börse Hannover (GCX) könnte als Benchmark dienen. Allerdings beinhaltet er vor allem ökologisch ausgerichtete Aktien und kaum welche mit Sozialfokus. Außerdem ist er Europalastig und beinhaltet überwiegend höher kapitalisierte Unternehmen als mein Fonds. Ein Vergleich der Positionen von GCX und meinem Fonds ergibt nur sehr wenige Gemeinsamkeiten. Deshalb ist die Korrelation zu meinem Fonds mit ca. 0,6 (seit Fondsauflage im August 2021) auch relativ gering.

Small-Caps Benchmark adäquat?

Eine hohe SDG-Vereinbarkeit ist für branchenfokussierte Unternehmen einfacher erreichbar als für diversifizierte. In den letzten Jahren haben zudem immer mehr Small- und Mid-Cap-Unternehmen aussagekräftige ESG-Daten veröffentlicht. Deshalb gibt es zunehmend mehr SDG-kompatible Unternehmen mit guten ESG-Ratings. Aus diesen Gründen sind überwiegend kleine und wenige Großunternehmen in meinem Portfolio vertreten.

Die durchschnittliche Kapitalisierung der Unternehmen im Portfolio ist von anfangs ca. 15 Milliarden auf inzwischen unter 5 Milliarden gesunken. Je nach Zeitpunkt bzw. Definition war der Fonds also zu Beginn eher ein Mid-Cap- und ist jetzt eher ein Small-Cap-Fonds. Ich erwarte aus den oben genannten Gründen, dass der Fonds auch künftig Small-Cap-fokussiert bleibt.

Korrelationen seit Fondsauflage zeigen knapp 0,6 mit globalen Mid-Caps und etwas über 0,6 mit globalen Small-Caps. Einen kombinierten Small/Mid-Cap-Index bzw. ETF, der für Vergleiche genutzt werden kann, habe ich nicht gefunden. Datenanbieter wie Morningstar oder CAPInside stellen aber Fondspeergroups aus Small- und Mid-Cap-Fonds zusammen. Diese scheinen mir für Performancevergleiche meines Fonds für die Vergangenheit am ehesten geeignet. Bei der CAPInside Peergroup liegt die Korrelation seit Fondsauflage bei 0,7. Dabei ist allerdings zu beachten, dass solche Vergleichsgruppen aufgrund der relativ hohen Kosten aktiver Fonds typischerweise geringere Renditen erreichen als direkte Wertpapierindizes bzw. kostengünstige ETFs.

Der Vorteil einer Small- bzw. Small/Mid-Cap-Benchmark ist, dass mein Fonds mit sehr viel mehr anderen Fonds verglichen werden kann als mit der GCX-Benchmark. Außerdem sind viel mehr Anleger gewohnt, mit traditionellen (Small/Midcap) als mit nachhaltigen (GCX) Benchmarks zu arbeiten. Für künftige Vergleiche wäre eine reine Smallcap-Peergroup adäquater. Eine solche frei zugängliche Vergleichsgruppe gibt es jedoch weder bei Morningstar noch bei CAPInside.

Keine eigene Impact-Peergoup

Ich habe auch versucht, eine eigene Peergroup mit vergleichbaren Fonds zu erstellen. Ich habe aber keine Fonds gefunden, die konsequente ESG- und breite SDG-Kriterien nutzen und global vor allem in Small-Caps investieren. Es gibt zwar SDG- bzw. Impactfonds, aber die sind oft auf nachhaltige Energien fokussiert und/oder nur auf eine Region. Wenn es sich um globale Fonds handelt, enthalten sie typischerweise sehr viele (Technologie-) Mega-Caps, die meiner Meinung nach weder nach ESG- noch nach SDG-Kriterien nachhaltig genug sind (vgl. Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)).

Am ehesten können deshalb die Fonds genutzt werden, die dem Global Challenges Index folgen. Wie erwartet, haben diese erheblich geringere USA- und Sozialallokationen und aktuell eine etwa doppelt so hohe durchschnittliche Marktkapitalisierung wie mein Fonds.

Problematische Faktoranalysen

Ich könnte auch auf Faktoranalysen verweisen, um die Fondsperformance zu erklären. Für meinen Fonds ist aber aufgrund seiner Konzeption, außer in Bezug auf SDG, ESG und Small- und Mid-Caps, keine klare und dauerhafte Faktorabhängigkeit zu erwarten. Und die mir bekannten öffentlichen und damit einfach von Interessenten nachprüfbaren Faktoranalysen nutzen keine SDG- bzw. ESG-Faktoren.

Bei Morningstar wird für meinen Fonds z.B. eine unpassende „Aktien global All-Cap“ Benchmark genutzt und eine Flex-Cap- (inkl. Mega- und Large-Caps) anstatt einer Small/Mid-Cap-Peergruppe, die es ebenfalls gibt. Bei der Morningstar-Portfolioanalyse ist der Small-/Mid-Cap-Fokus dagegen deutlich erkennbar.

Der Fonds hat nach Morningstar-Klassifikation keinen klaren Value- oder Growth-Fokus und nur geringe Momentum-Komponenten. Für Interessenten problematisch ist, dass die Ergebnisse solcher Faktoranalysen stark von den jeweiligen Faktordefinitionen abhängen können (vgl. z.B. Kessler, Stephan and Scherer, Bernd and Harries, Jan Philipp, Value by Design? (November 14, 2019). The Journal of Portfolio Management Quantitative Special Issue, 46 (2) 25-43, 2020, DOI: https://doi.org/10.3905/jpm.2019.1.122, Available at SSRN: https://ssrn.com/abstract=3593557).

Fazit: Die für meinen Fonds am besten geeignete Benchmark über die bisherige Laufzeit ist eine Vergleichsgruppe aus globalen Small- und Mid-Cap-Fonds. Im Vergleich zu einer solchen Fondsgruppe von CAPInside hat mein Fonds eine ähnliche Performance seit Auflage und vor allem seit Mitte 2023 und seit Auflage eine Korrelation von ca. 0,7. Das ist nachvollziehbar, denn seit der letzten jährlichen regelbasierten Portfolioumstellung zu Mitte/Ende 2023 besteht der Fonds aus noch mehr Small- und Mid-Caps als vorher. Für künftige Analysen ist dagegen eine reine Small-Cap-Benchmark adäquater.

Besonders nachhaltige marktübliche Performance

Natürlich wäre es aus meiner Sicht gut, eine Outperformance gegenüber solchen Benchmark zu erreichen. Weil für meinen Fonds neben den oben genannten Branchen auch – relativ schlecht performende – nachhaltige Energien, Infrastruktur und Immobilien eine wichtige Rolle spielen, war das in den letzten Jahren aber schwierig. Die Rendite meines Fonds ist deshalb aus meiner Sicht OK. Mit ungefähr 13% Volatilität sind die Schwankungen zudem relativ gering (Interessenten können die Performance z.B. hier prüfen: Fonds-Portfolio: Mein Fonds | CAPInside).

Nachdem Small-Caps lange Zeit relativ schlecht rentiert haben, erwarten einige Marktbeobachter, dass sich die Renditen bald verbessern könnten. Weil ich prognosefrei arbeite, kann ich das nur hoffen. Zumindest gelten Small-Caps als Aktien, die grundsätzlich schnell und stark steigen können. Im Dezember 2023 hat mein Fonds mit den +9% gezeigt, dass das durchaus vorkommen kann.

Mein erklärtes Ziel, mittelfristig eine marktübliche Performance mit besonders nachhaltigen Investments zu erzielen, habe ich bisher erreicht. Anders ausgedrückt: Wenn man weltweit in Small-Caps investieren möchte, kann man das mit meinem Fonds besonders nachhaltig machen und sollte dabei keine Performancenachteile haben.

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Werbung (Small Caps):

Der von mir beratene Fonds (SFDR Art. 9) ist auf soziale SDGs fokussiert. Ich nutze separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement bei aktuell 26 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T oder Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds

Disclaimer

Diese Unterlage ist von der Soehnholz ESG GmbH erstellt worden. Die Erstellerin übernimmt keine Gewähr für die Richtigkeit, Vollständigkeit und/oder Aktualität der zur Verfügung gestellten Inhalte. Die Informationen unterliegen deutschem Recht und richten sich ausschließlich an Investoren, die ihren Wohnsitz in Deutschland haben. Sie sind nicht als Verkaufsangebot oder Aufforderung zur Abgabe eines Kauf- oder Zeichnungsangebots für Anteile des in dieser Unterlage dargestellten Fonds zu verstehen und ersetzen nicht eine anleger- und anlagegerechte Beratung. Anlageentscheidungen sollten nur auf der Grundlage der aktuellen gesetzlichen Verkaufsunterlagen (Wesentliche Anlegerinformationen, Verkaufsprospekt und – sofern verfügbar – Jahres- und Halbjahresbericht) getroffen werden, die auch die allein maßgeblichen Anlagebedingungen enthalten. Die Verkaufsunterlagen werden bei der Kapitalverwaltungsgesellschaft (Monega Kapitalanlagegesellschaft mbH), der Verwahrstelle (Kreissparkasse Köln) und den Vertriebspartnern zur kostenlosen Ausgabe bereitgehalten. Die Verkaufsunterlagen sind zudem im Internet unter www.monega.de erhältlich. Die in dieser Unterlage zur Verfügung gestellten Inhalte dienen lediglich der allgemeinen Information und stellen keine Beratung oder sonstige Empfehlung dar. Die Kapitalanlage ist stets mit Risiken verbunden und kann zum Verlust des eingesetzten Kapitals führen. Vor einer etwaigen Anlageentscheidung sollten Sie eingehend prüfen, ob die Anlage für Ihre individuelle Situation und Ihre persönlichen Ziele geeignet ist. Diese Unterlage enthält ggf. Informationen, die aus öffentlichen Quellen stammen, die die Erstellerin für verlässlich hält. Die dargestellten Inhalte, insbesondere die Darstellung von Strategien sowie deren Chancen und Risiken, können sich im Zeitverlauf ändern. Einschätzungen und Bewertungen reflektieren die Meinung der Erstellerin zum Zeitpunkt der Erstellung und können sich jederzeit ändern. Es ist nicht beabsichtigt, diese Unterlage laufend oder überhaupt zu aktualisieren. Sie stellt nur eine unverbindliche Momentaufnahme dar. Die Unterlage ist ausschließlich zur Information und zum persönlichen Gebrauch bestimmt. Jegliche nicht autorisierte Vervielfältigung und Weiterverbreitung ist untersagt.

ESG bluff? Researchpost #164

ESG bluff: 10x new research on Swiss/sustainable retail, lab meat, Weimar politics, sustainable women, SDG financial research, green funds, real estate ESG, free trading governance effects and bond factors (#shows the number of SSRN full paper downloads as of February 22^nd, 2024)

Social and ecological research (in: ESG bluff?)

Sustainable retail (English version below): Ausgebummelt – Wege des Handels aus der Spass- und Sinnkrise by Gianluca Scheidegger, Johannes Bauer, and Jan Bieser as of Dec. 7th, 2023 (#21): „Die Zeit wird neu verteilt: Was keine Freude oder Sinn stiftet, wird gestrichen … Nachhaltiger Konsum gewinnt an Bedeutung … Umfassend informiert: KI erleichtert die Produktsuche für Konsument:innen …Auf einer Linie: Persönliche Werte werden bei der Produkt- und Händlerwahl entscheidend: Purpose-driven Consumers sind die weltweit größte Kundengruppe. Tendenz steigend. Diese Kund:innen kaufen nur bei Firmen ein, die ihre Werte teilen. Die Konsument:innen erwarten in Zukunft mehr von den Unternehmen. Händler müssen Stellung zu gesellschaftlichen Problemen beziehen und aktiv zu ihrer Lösung beitragen. Die gute Nachricht ist: Die Menschen trauen dies den Unternehmen zu. Jedem Kanal seine Rolle: Transaktion primär online, Inspiration eher offline. Schnell und nachhaltig: … Händler, die beide Ansprüche unter einen Hut bekommen, verschaffen sich einen klaren Wettbewerbsvorteil“ (p. 84).

Sustainable retail (German version above): Going shopping is dead – How to Restore Meaning and Fun in Retail by Gianluca Scheidegger, Johannes Bauer and Jan Bieser as of Dec. 4^th, 2023 (#17): “Time is being reallocated: what’s not fun or meaningful will be crossed off the schedule … Sustainable consumption is gaining in importance Overconsumption has a massive impact on the environment. … Fully informed: AI facilitates consumers’ searches for products … In aligment: personal values becoming decisive in choosing products and retailers Purpose-driven consumers are the largest customer group worldwide. This trend is rising. These customers only buy from companies that share their values. Consumers will expect more from companies in the future. Retailers must take a stand on social problems and actively contribute to solving them. The good news is that people trust companies to do this. Each channel has its role: transactions primarily online, inspiration mostly offline … Fast and sustainable: delivery under greater scrutiny … The fastest form of delivery is often not the most sustainable. Retailers who can reconcile both requirements gain a clear competitive advantage“ (p. 84).

Lab meat: Good conscience from the lab? The State of Acceptance for Cultivated Meat by Christine Schäfer, Petra Tipaldi and Johannes C. Bauer as of Jan. 8^th, 2024 (#12; German version: Gutes Gewissen aus dem Labor? So steht es um die Akzeptanz von kultiviertem Fleisch by Christine Schäfer, Petra Tipaldi, Johannes Bauer :: SSRN, #26): “Lab-grown meat instead of beef fillet, cell-cultured patties instead of burgers – for many Swiss people this sounds far from appetising. A mere 20% would even try cultivated meat, whilst 15% remain undecided. … The Swiss population is also sceptical about other kinds of novel foods, such as insects or coffee made from mushrooms. There are, however, customer groups who may be more inclined to tuck into a steaming plate of crispy lab-grown schnitzel: They are young, male, educated, mainly live in the city, already have experience with a particular diet, such as vegetarian or low carb, and know a lot about sustainable food. … Lab-grown meat is one such example of a novel food. It is cultivated from stem cells in a bioreactor and has many advantages, namely that factory farming and the use of antibiotics are all but eliminated, less space and water is needed for production, no rainforests need to be cut down to cultivate animal feed and the combination of nutrients in the meat can be adapted to specific target groups. But there are risks …. the production facilities needed eat up enormous amounts of energy … Lab-grown meat is still hard to find on the market. Customers can only taste chicken derived from cellular agriculture in a few restaurants in Singapore and the USA at the moment. As yet, it has not been approved anywhere in Europe“ (p. 2). My comment: I am skeptical about the ecological footprint and market potential of lab meat compared to plant-based meat alternatives.

Sustainable women: Sustainable leadership among financial managers in Spain: a gender issue by Elena Bulmer, Iván Zamarrón, and Benito Yáñez-Araque as of Dec. 29^th, 2023 (#13): “A total of 131 senior financial managers (106 men and 25 women), from various sectors in Spanish companies (a multi-sector study), responded to two scales: the Honeybee Sustainable Leadership Scale (focusing on stakeholder orientation and a vision of social and shared leadership) and the Locust Leadership Scale (primarily centered on achieving short-term profits at any cost). … The main finding was that female financial managers scored significantly higher on the Honeybee Leadership Scale compared to their male counterparts, signifying that female presence is key to sustainable leadership” (abstract).

Deglobalization effect? The consequences of a trade collapse: Economics and politics in Weimar Germany by Björn Brey and Giovanni Facchini as of Jan. 17^th, 2024 (#18): “What are the political consequences of de-globalization? We address this question in the context of Weimar Germany, which experienced a 67% decline in exports between 1928-1932. During this period, the Nazi party vote share increased from 3% to 37%. … we show that this surge was not driven by the direct effects of the export decline in manufacturing areas. At the same time, trade shock-induced declines in food prices spread economic hardship to rural hinterlands. We document that this indirect effect and the pro-agriculture policies put forward by the Nazis are instead key to explain their electoral success” (abstract).

Responsible investment research (in. ESG bluff?)

SDG research: Finance Research and the UN Sustainable Development Goals – an analysis and forward look by Yang Sua, Brian M. Lucey, and Ashish Kumar Jha as of Feb. 13^th, 2024 (#183): “This study conducts a comprehensive analysis of the interplay between the United Nations Sustainable Development Goals (UN SDGs) and scholarly output in financial journals from 2010 to 2022. … The findings demonstrate a focus within finance research on Economic Growth (Goal 8) and Peace and Justice (Goal 16), while also identifying areas that warrant further scholarly attention” (abstract). My comment: For mutual funds it seems to be easiest to focus on SDGs 3 (Health), 7 (Energy) and 9 (Industry/Infrastructure). That is my experience with a bottom-up stock selection approach, see www.futurevest.fund “Nachhaltigkeitsreport”.

ESG bluff? Sustainable in Name Only? Does Bluffing or Impact Explain Success in a Moral Market? by Kevin Chuah and Witold Henisz as of Feb. 13^th, 2024 (#16): “… US-domiciled equity-focused investment funds that are labeled as focusing on environmental, social, and governance (ESG) issues. Although we find that product success in terms of investment inflows is more likely for funds with better ESG performance, the draw of larger fund operators and of superior financial returns remains substantial. We further segment our sample, finding that segments offering lower levels of ESG engagement achieve inflows that are unrelated to ESG performance, yet are a substantial part of the overall market. This suggests that bluffing by large product providers may undermine genuine attempts at social impact in moral markets“ (abstract). My comment: It certainly seems to help to grow fund assets to have huge marketing power and good returns, recently often based on high allocations to the glorious 7 which I do not consider to be very sustainable, see Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)

Green disadvantage? Carbon Risk Pricing or Climate Catering? The Impact of Morningstar’s Low Carbon Designation on Fund Performance by K. Stephen Haggard, Jeffrey S. Jones , H. Douglas Witte, and C. Edward Chang as of Jan. 18^th, 2024 (#21): “Our results show insignificant performance differences between Low Carbon Designated (LCD) funds and non-LCD funds for the most recent (three-year) period. For longer periods of five and ten years, we observe excess performance only for the Sharpe and Sortino ratios, but not for Total Return or the Treynor ratio. … our results are consistent with a catering hypothesis of climate investing. Initially, investors seeking low-carbon investments bid up the prices of low-carbon stocks. Firms respond by seeking Low Carbon Designations, whether through real efforts or greenwashing. Once enough low-carbon stocks are available to meet the demand of the lowcarbon clientele, the premium associated with low carbon disappears“ (p. 17). My comment: If low LCD funds have similar performance as high carbon funds, why invest in the latter?

Green disadvantage? Doing Good and Doing Well: The Relationships between ESG and Stock Returns of REITs by Neo Jing Rui Dominic and Sing Tien Foo as of Jan. 29^th, 2024 (#31): “Using a sample of 413 REITs from both the US and other developed countries covering the period from 2018 to 2022 …We find that REITs with an ESG rating have a lower price return of 0.8% relative to REITs not assessed for ESG. … The results show that the total returns of the ESG-rated REITs were even lower when the climate change risks increased, or more specifically, when investors became more salient about climate change news, they increased their preference for ESG-rated REITs, thus reducing the total return of REITs. … we find that higher compliance and operation costs for REITs with strong ESG agendas, which may come in the form of higher compensation for the Board and Senior Management, who take on more ESG responsibilities, may have a negative impact on the ESG-rated REIT stock performance“ (p. 19/20). My comment: The higher compensation for REIT Boards and Senior Management with the associated higher pay gap compared to median employee should be explored further. With my shareholder engagement strategy I try to alert regarding this issue, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Retail anti-governance? Retail Investors and Corporate Governance: Evidence from Zero-Commission Trading by Dhruv Aggarwal, Albert H. Choi, and Yoon-Ho Alex Lee as of Feb. 9^th, 2024 (#102): “We examine the effects of the sudden abolition of trading commissions by major online brokerages in 2019, which lowered stock market entry costs for retail investors, on corporate governance. … Firms with positive abnormal returns in response to commission-free trading subsequently saw a decrease in institutional ownership, a decrease in shareholder voting, and a deterioration in environmental, social, and corporate governance (ESG) metrics. Finally, these firms were more likely to adopt bylaw amendments to reduce the percentage of shares needed for a quorum at shareholder meetings” (abstract).

Other investment research (in: ESG bluff)

Few good bond factors: The Corporate Bond Factor Zoo by Alexander Dickerson, Christian Julliard, and Philippe Mueller as of Nov. 14^th, 2023 (#1299): “We find that the majority of tradable factors designed to price corporate bonds are unlikely sources of priced risk, and that only one factor, capturing the post-earnings an-nouncement drift in corporate bonds, which has not been utilized in prior asset pricing models, should be included in any stochastic discount factor (SDF) with very high probability. Furthermore, we find that nontradable factors capturing inflation volatility risk … and the term structure yield spread … as well as the return on a broad based bond market index, are likely components of the SDF” (p. 37/38).

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global smallcap 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)

Diversification myths: Researchpost #159

Diversification myths: 14x new research on ESG and consumption, ESG data, ESG washing, ESG returns, climate risks, voting, divestments, diversification myths, anomalies, trend following, real estate and private equity (# shows number of full paper downloads as of Jan. 18^th, 2024)

Social and ecological research

Low ESG-consumption effect: How Do Consumers Use Firm Disclosure? Evidence from a Randomized Field Experiment by Sinja Leonelli, Maximilian Muhn, Thomas Rauter, and Gurpal Sran as of Jan. 11^th, 2024 (#79): “In a sample of more than 24,000 U.S. households, we first establish several stylized facts: (i) the average consumer has a moderate preference to purchase from ESG-responsible firms; (ii) consumers typically have no preference for more or less profitable firms; (iii) consumers rarely consult ESG reports and virtually never use financial reports to inform their purchase decisions. … Consumers increase their purchase intent when exogenously presented with firm-disclosed positive signals about environmental, social, and—to a lesser extent—governance activities. Full ESG reports only have an impact on consumers who choose to view them, whereas financial reports and earnings information do not have an effect. After the experiment, consumers increase their actual product purchases, but these effects are small, short-lived, and only materialize for viewed ESG reports and positive social signals. … we provide explanations for why consumers (do not) change their shopping behavior after our information experiment“ (abstract).

ESG investment research (Diversification myths)

ESG data criticism: ESG Data Primer: Current Usage & Future Applications by Tifanny Hendratama, David C. Broadstock, and Johan Sulaeman as of Jan. 12^th, 2024 (#66): “ESG data is important, and will become even more so as time progresses. … There remains a prevalent use of combined ESG scores instead of E, S and G specific pillar scores; The use of combined ESG, and pillar specific scores may themselves detract focus away from crucial underlying raw data; Empirical research depends heavily on a small number of ESG data providers; That some data providers focus more on the E than the S – creating a need for data users to make sure the scoring ethos of each provider aligns with their expectations and requirements; There is a potentially material quantity of ESG data inconsistencies which could result in unintended investment allocation” (p. iv). My comment: I use segregated E, S and G ratings since many years and best-in-universe instead of best-in-class ratings

Costly washing: ESG washing: when cheap talk is not cheap! by Najah Attig and Abdlmutaleb Boshanna as of Dec. 26^th, 2023 (#63): “… we introduce an easily replicable ESG washing measure. We then document a robust negative impact of ESG washing on corporate financial performance … we show that the COVID-19 pandemic incentivized firms to engage in increased overselling of their ESG performance. Taken together, our new evidence suggests that ‚cheap talk is not cheap‘ and the misalignment between ‘ESG talk’ and ‘ESG walk’ not only fails to serve shareholders‘ best interests but may also undermine a firm’s social license to operate” (abstract).

Disclosure or performance? The relation between environmental performance and environmental disclosure: A critical review of the performance measures used by Thomas Thijssens as of Jan. 9^th, 2024 (#8): “More extensive disclosures may even be a signal for inferior rather than superior performance in terms of actual environmental impact. This suggestion is fueled by the observations that more polluting industries have on average more extensive ED (Sö: Environmental disclosure) and higher environmental commitment is associated with higher GHG emissions“ (p. 18). My comment: Most other studies known to me show – in general – positive effects of more disclosure

Performance-neutral ESG: Drawing Up the Bill: Is ESG Related to Stock Returns Around the World? by Rómulo Alves, Philipp Krüger, and Mathijs van Dijk as of Jan. 13^th, 2024 (#47): “… our analysis of a comprehensive global database (including 16,000+ stocks in 48 countries and seven different ESG rating providers over 2001-2020) uncovers very little evidence that ESG ratings are related to stock returns around the world. … thus it has been possible to “do good without doing poorly.” Our findings also suggest that the prices of strong ESG stocks have not consistently been driven up, and that, going forward, ESG investors could potentially still benefit from any demand effects resulting in the pricing of ESG preferences. On the flip side, our analysis implies that ESG investing has so far not been effective in reducing (increasing) the cost of equity capital of strong (poor) ESG firms, which could lead firms to internalize climate and social externalities (Fama 2021, Pástor et al. 2021)“ (p. 14). My comment: I could not agree more for the small and midcap companies on which I focus

Huge climate risks: How climate stress test may underestimate financial losses from physical climate risks by a factor of 2-3x by Jakob Thomä from 1 in 1000 and Theia Finance Labs as of Dec. 1^st, 2023: “A high baseline climate risk (i.e. using a climate stress-test model with meaningful baseline GDP losses over the next 30 years) stress-test scenario can create a 10% shock to global equity markets. A combination of climate tipping points, ecosystem decline, and social risks can increase that number as a cumulative risk to 27%, almost 3x the baseline losses. A low baseline scenario of a 4% shock in turn turns into a 14% shock when considering these other factors. These losses are dramatic as they are secular and not cyclical. It is worth flagging that this event would be unprecedented in modern financial market history“ (p. 4). My comment: Thanks to Bernd Spendig for informing me about this study.

Climate risk aversion: Institutionelle Investor:innen und physische Klimarisiken vom Lehrstuhl für Sustainable Finance, Universität Kassel as of September Dec. 17th, 2023: “Approximately 40 percent of the surveyed institutions do not take physical climate risks into account when valuing corporate bonds. In addition, a majority of respondents who already take physical climate risks into account are unsure whether these risks are adequately taken into account. In this regard, Part II reveals that 80% of the surveyed institutional investors believe that physical climate risks are not adequately reflected in the risk premiums of corporate bonds” (abstract).

Impact investing research

Voting deficits: Voting matters 2023 by Abhijay Sood at al from Share Action as of Jan. 11^th, 2024: “In 2023, only 3% of assessed resolutions passed, just eight out of 257 resolutions. This is down from 21% of assessed resolutions in 2021 … In 2023, the ‘big four’ (BlackRock, Vanguard, Fidelity Investments, and State Street Global Advisors) only supported – on average – one eighth of those put forward, a marked drop since 2021 … Eight asset managers with public net zero targets supported fewer than half of all climate resolutions … Three quarters of all shareholder proposals covered in our study asked only for greater corporate disclosure, including those which some asset managers have deemed overly “prescriptive”. The other quarter of resolutions ask for movement in line with globally agreed climate goals or international human rights standards. … Resolutions at financial services companies on fossil fuel financing received the lowest support by asset managers of any climate-related topic” (p. 8-10). My comment: I focus more on direct dialogue (engagement) than voting, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Divestment myths: Beyond Divestment by David Whyte as of Jan. 16^th, 2024 (#11): “The top 20 shareholders in both BP and Shell have increased their total number of shares by three quarters of a billion in BP, and half a billion in Shell since the Paris Agreement was signed in 2015. Indeed, although 47% of BP shareholders and 54% of Shell shareholders have reduced their stake, net share ownership overall has risen significantly in both companies. … more than a quarter of the 20 investors who made the most significant reductions in shareholdings in either BP or Shell increased their overall fossil fuel investment. … only 60 institutional investors have sold all of their shares in the two oil firms. This represents 3% of BP and 4% of Shell shareholders“ (abstract).

Other investment research (Diversification myths)

Diversification myths: Diversification Is Not A Free Lunch by Dirk G. Baur as of Jan. 3^rd, 2024 (#56): “We … demonstrate that diversification generally comes at a cost through lower returns and is thus not a free lunch. While the risk of diversified portfolios is clearly lower than that of less diversified or undiversified portfolios, the return is generally also lower. There is only one exception. If the investor is ignorant and picks stocks randomly, diversification is a free lunch. … if diversification is a free lunch, it would violate the fundamental positive risk – return relationship in finance. Specifically, if risk can be reduced without a cost, risk and return are not positively aligned” (p.15). My comment: Even for randomly picked stocks the marginal gains of diversification are very low (see p. 11) whereas the reductions in sustainability – which are not covered in this paper – can be high, see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

Normal anomalies: Anomalies Never Disappeared: The Case of Stubborn Retail Investors by Xi Dong and Cathy Yang as of Dec. 29^th, 2023 (#56): “Our examination of 260 anomalies challenges the prevailing notion that market efficiency erodes anomaly-based profits, these anomalies continue to thrive, especially over longer timeframes. We demonstrate that retail investors play a pivotal role in the persistence of these anomalies. Their stubborn trading patterns, especially against anomalies, not only contribute to initial mispricing but also lead to delayed price corrections“ (p. 37).

Trend following theory: Speculating on Higher Order Beliefs by Paul Schmidt-Engelbertz and Kaushik Vasudevan as of Aug.3^rd, 2023 (#187): “We study investors’ higher order beliefs, using survey data from the Robert Shiller Investor Confidence surveys. While previous work has documented instances of non-fundamental speculation – investors taking positions in a risky asset in a direction that conflicts with their fundamental views – we find that such speculation is the norm for the U.S. stock market. The majority of investors in the Shiller surveys, who represent an important class of investors, report that other investors have mistaken beliefs, but nevertheless report positive return expectations from speculating in the direction of these mistaken beliefs. In addition, investors report that they believe that stock markets overreact and exhibit momentum and reversal in response to news. … We find that higher order beliefs may substantially amplify stock market fluctuations. When investors exhibit the same fundamental belief biases that they attribute to other investors, patterns such as overreaction, momentum, and reversal can persist in equilibrium, even though everybody knows about them“ (p. 37/38). My comment: I use simple trend following strategies to reduce drawdown-risks for investors who do not like bond investments but not to try to enhance returns

US Real Estate: A First Look at the Historical Performance of the New NAV REITs by Spencer J. Couts and Andrei S. Goncalves as of Jan.12^th, 2024 (#31): “…we study the historical investment performance of NAV REITs relative to public bonds, public equities, and public REITs from 2016 to 2023. … First, the smoothness of NAV REIT returns due to lagged price reactions creates an important challenge to the measurement of the alphas of NAV REIT investments relative to public market indices. Moreover, return unsmoothing methods significantly mitigate (but do not fully solve) this issue. Second, traditional performance analysis indicates that NAV REIT investments generated substantial alpha (above 5% per year) relative to public indices over our sample period“ (p. 26).

PE calculation-uncertainties: Unpacking Private Equity Performance by Gregory Brown and William Volckmann as of Dec. 20^th., 2023 (#31): “… complicating the analysis are the increasingly common practices of funds using subscription lines of credit (fund-level debt) and recycling capital. Even the variation in the timing of capital deployment across funds has important implications for common performance measures used to evaluate funds such as internal rate of return (IRR) and multiple on invested capital (MOIC). …. values likely observed during fundraising periods for subsequent funds – are strongly affected by subscription lines and deployment pacing. Intermediate MOICs are only weakly affected by subscription lines, but strongly affected by capital deployment pacing. Both IRRs and MOICs are strongly affected by recycle deal accounting methodology“ (abstract). “When a fund utilizes subscription lines, net IRR is very sensitive over the life cycle of the fund and can massively exaggerate performance during the investment/fundraising period. Net MOIC can also be exaggerated early in the investment period …” (p. 17).

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

SDG rating confusion: Researchpost #152

SDG rating confusion: 13x new research on emissions, life expectancy, green bonds, physical risks and transition, environmental information, private equity ESG, SDG ratings, bond and equity factors, fraud, health-wealth relations, LLM financial analysts (# shows the number of full paper SSRN downloads as of Nov. 16^th, 2023)

Ecological and social research (SDG rating confusion)

Too hot: The State of Climate Action: Major Course Correction Needed from +1.5% to −7% Annual Emissions by the World Economic Forum and The Boston Consulting Group as of November 2023: “As 1.5°C is slipping out of reach, achieving it now calls for a 7% annual emissions reduction, more than the climate reduction impact from COVID-19 and against the current trend of a 1.5% annual increase. … Only 35% of emissions are covered by a national net-zero commitment by 2050, and only 7% by countries that complement bold targets with ambitious policies. Fewer than 20% of the world’s top 1,000 companies have set 1.5°C science-based targets, and, based on the Net Zero Tracker, fewer than 10% also have comprehensive public transition plans. Technologies that are economically attractive now or will be in the near future can only achieve just over half of the emissions reductions needed to reach 1.5°C. … More than half of climate funding needs are still unmet, with critical gaps in early technologies and infrastructure particularly acute, and the climate funding gap twice as large in developing economies as in developed ones” (p. 4).

Longer lifes: The Long-run Effect of Air Pollution on Survival by Tatyana Deryugina and Julian Reif as of Nov. 13^th, 2023 (#8): “We show that the short-run mortality effects of acute SO2 exposure can be decomposed into two distinct phenomena: mortality displacement, where exposure kills frail individuals with short counterfactual life expectancies, and accelerated aging, where mortality continues to increase after exposure has ceased. … we calculate that a permanent, ten percent decrease in air pollution exposure would improve life expectancy by 1.2–1.3 years … our estimates imply that value of reducing pollution exposure may be substantially larger than has previously been recognized“ (p. 37).

Responsible investing research (SDG rating confusion)

Green bond limits: Decoding Corporate Green Bonds: What Issuers Do With the Money and Their Real Impact by Yufeng Mao as of Nov. 8^th, 2023 (#157): “This paper reveals a distinct motivation for issuing green bonds compared to conventional bonds. Proceeds from green bonds remain as cash for longer periods, largely owing to the time required to identify eligible projects. Contrary to the notion of fungibility, my results indicate that they neither lead to more new investments than conventional bonds nor are used in apparent green-washing. … firms issuing green bonds show improved environmental performance, particularly in the reduction of GHG intensity. However, this improvement appears not to stem from incremental green investments facilitated by green bonds but rather from issuers that would have pursued green initiatives regardless” (p. 44).

Physical risk costs: The cost of maladapted capital: Stock returns, physical climate risk and adaptation by Chiara Colesanti Senni and Skand Goel as of July 23^rd, 2023 (#48): “Using S&P Global Sustainable data on Physical Risk and measures of adaptability to physical risk from S&P Global Corporate Sustainability Assessment, we find evidence that higher physical risk is associated with higher expected returns. However, this risk premium diminishes with increased adaptability, signifying that risk management through adaptation reduces a company’s cost of capital. Notably, this adaptability-driven risk discount is more pronounced for high levels of physical risk, reflecting market incentives for efficient adaptation” (abstract).

Carbon-free distance: Carbon-Transition Risk and Net-Zero Portfolios by Gino Cenedese, Shangqi Han, and Marcin Kacperczyk as of Oct. 5^th, 2023 (#493): “…. using a novel measure of distance-to-exit (DT E) … we show that companies that are more exposed to exit from net-zero portfolios have lower values and require higher returns from investors holding them. This result is economically large and is consistent with the view that DT E are useful measures of transition risk. Notably, we show that DT E capture distinct variation to that captured by previously used measures based on corporate carbon emissions. Distinct from these, they capture information that is forward-looking and is grounded in climate science“ (p. 29)

Attention, outsiders: Do Insiders Profit from Public Environmental Information? Evidence from Insider Trading by Sadok El Ghoul, Zhengwei Fu, Omrane Guedhami, and Yongwon Kim as of Oct. 19^th, 2023 (#26): “We provide evidence that insiders sell their stocks profitably based on publicly available information on environmental costs. Further analysis indicates that these results become more pronounced when the search frequency for environmental information in Google is low, in countries governed by left-leaning governments, and in countries where investor protection is weak. These results … suggest that investor inattention and investor protection are key drivers of insider trading performance“ (abstract).

PE ESG boost: ESG Footprints in Private Equity Portfolios: Unpacking Management Instruments and Financial Performance by Noah Bani-Harounia, Ulrich Hommel, and Falko Paetzold as of Nr. 8^th, 2023 (#13): “Based on data covering 206 buyout funds for the time period 2010-2022, … Improving fund-level ESG footprints by 50% explains a statistically and economically significant net IRR increase of up to 12.4% over a fund’s life cycle. The outcome is linked to specific ESG-management instruments of private equity investors, such as centralised ESG management and ESG value enhancement plans, while no significant effect is recorded for other measures, such as ESG reporting frequencies and ESG impact controlling” (abstract).

SDG rating confusion: “In partnership for the goals”? The (dis)agreement of SDG ratings by Tobias Bauckloh, Juris Dobrick, André Höck, Sebastian Utz, and Marcus Wagner as of May 31st, 2023 (#59): „This paper analyzes the (dis)agreement of Sustainable Development Goals (SDGs) ratings across different rating providers and implications for portfolio management. It documents a considerable level of disagreement that is particularly high for large companies and for companies from the Healthcare and the Basic Materials sector. In general, the sector in which the companies are mainly active explains a large part of the variation in disagreement measures of the SDG ratings. Moreover, we document different return characteristics and risk factor exposures of portfolios sorted according to SDG ratings of different rating providers” (abstract). My comment: I expect SDG-Risk-Ratings to have little additional value to ESG-Ratings. I prefer to use SDG-related revenues or Capex in addition to ESG-Ratings to avoid SDG rating confusion (see e.g. Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com)).

Other investment research

Equity factors: Factor Zoo (.zip) by Alexander Swade, Matthias X. Hanauer, Harald Lohre and David Blitz from Robeco as of Nov. 15^th, 2023 (#2546): “Using a comprehensive set of 153 U.S. equity factors, we find that a set of 10 to 20 factors spans the entire factor zoo, depending on the selected statistical significance level. This implies that most candidate factors are redundant but also that academic factor models, which typically contain just three to six factors, are too narrowly defined. When repeating the factor selection to factors as they become available over an expanding window, we find that newly published factors sometimes supersede older factor definitions, emphasizing the relevance of continuous factor innovation based on new insights or newly available data. However, the identified factor style clusters are quite persistent, emphasizing the relevance of diversification across factor styles” (p. 20/21). My comment: Without good (almost impossible) forecasts which factors will outperform, outperforming factor investing is difficult.

Bond factors: Corporate Bond Factors: Replication Failures and a New Framework by Jens Dick-Nielsen, Peter Feldhütter, Lasse Heje Pedersen, and Christian Stolborg as of Oct. 26^th, 2023 (#1257): “Many corporate bond factors cannot be reproduced even when attempting to use the methodology of the corresponding paper. More broadly, even factors that can be reproduced should be questioned, since the corporate bond literature is based on data full of errors. … we show that the majority of corporate bond factors from the literature fail to replicate, but a minority of factors remain significant. Further, analyzing corporate bond factors based on equity signals, we find a number of significant new factors“ (p. 27/28). My comment: Same as above: Without good (almost impossible) forecasts which factors will outperform, outperforming factor investing is difficult.

Big fraud? How pervasive is corporate fraud? by Alexander Dyck, Adair Morse, and Luigi Zingales as of Oct. 2^nd, 2023 (#120): “… we use the natural experiment provided by the sudden demise of a major auditing firm, Arthur Andersen, to infer the fraction of corporate fraud that goes undetected. This detection likelihood is essential to quantify the pervasiveness of corporate fraud in the United States and to assess the costs that this fraud imposes on investors. We find that two out of three corporate frauds go undetected, implying that, pre Sox, 41% of large public firms were misreporting their financial accounts in a material way and 10% of the firms were committing securities fraud, imposing an annual cost of $254 billion on investors“ (p. 31). My comment: It would be interesting to see the relationship between governance-ratings and fraud.

Health-Wealth-Gap: Health Heterogeneity, Portfolio Choice and Wealth Inequality by Juergen Jung and Chung Tran as of Oct. 18^th, 2023 (#28): “… the early exposure to health shocks has strong and long-lasting impacts on the portfolio choice of households and the observed wealth gap among households at retirement age. … as sicker individuals often forgo investing in risky assets that pay higher returns in the long-run. This health-wealth portfolio channel amplifies wealth concentration across groups and over the lifecycle. … In the absence of the health-wealth portfolio channel, the observed wealth gap at retirement is 40–50 percent smaller. In addition, we provide new insights into the social benefit of health insurance. The expansion of public or private health insurance in the US can reduce wealth inequality via mitigating exposure to health expenditure shocks and thereby allow households to make riskier investment choices with higher long-term returns” (p. 27/28).

LLM financial analysts: Large Language Models and Financial Market Sentiment by Shaun A. Bond, Hayden Klok, and Min Zhu as of Oct. 23^rd, 2023 (#257): “… we use ChatGPT and BARD to recall daily news summaries related to the S&P 500 Index, classify sentiments from these texts, and use these sentiments to forecast future index returns. … we demonstrate ChatGPT and BARD can recall and classify summary market-level financial text from the perspective of a financial analyst. … we show these sentiments proxy for aggregate investor sentiment and forecast future return reversals of the S&P 500 Index … we provide evidence that incorporating ChatGPT-derived sentiments leads to superior economic performance compared to portfolios that incorporate sentiments from BARD, simpler transformer models, and traditional dictionary approaches. LLMs have superior potential to process contextual information around specific topics or themes beyond that of simpler transformer models and context-indifferent word frequency methods. This greater context awareness leads to better identification of aggregate market sentiment, and superior short-term economic performance when taken into account. Further, results suggest LLMs can identify different aspects of sentiment from text, such as information on different frequencies, and the presence of persistent effects“ (p. 45). My comment see AI: Wie können nachhaltige AnlegerInnen profitieren? – Responsible Investment Research Blog (prof-soehnholz.com) or How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

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

Complex engagement, ESG placebo and more: Researchpost #132

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

Ecological and social research

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

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

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

Responsible investment research (complex engagement)

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

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

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

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

Traditional investment research (complex engagement)

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

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

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

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

Critical ESG and more: Researchposting 118

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

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

ESG investment research: Critical ESG

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

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

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