Archiv der Kategorie: Fonds-/Managerselektion

Bluewashing, bad good ESG and more: Researchpost 199

Bluewashing illustration by from Pasja1000 from Pixabay

16x new research on Chinese cars, carbon market criticism, 9-Euro ticket pollution effects, biodiversity reporting, government bond climate costs, high ESG score greenwashing, ESG performance claim risks, ESG AI and Climate AI tools, circular economy strategies, investor GHG impact, brown stock risks, anti-climate lobbying benefits, and profitable employee ESG satisfaction (#shows the number of SSRN full paper downloads as of Oct. 24^th, 2024)

Social and ecological research

Low Chinese auto threat: Europe’s Shift to EVs Amid Intensifying Global Competition by Philippe Wingender, Jiaxiong Yao, Robert Zymek, Benjamin Carton, Diego Cerdeiro, and Anke Weber from the Intenrational Monetary Fund as of Oct. 16^th, 2024 (#24): “European countries have set ambitious goals to reduce their carbon emissions. These goals include a transition to electric vehicles (EVs)—a sector that China increasingly dominates globally… we analyze a scenario in which the share of Chinese cars in EU purchases rises by 15 percent over 5 years … We find that for the EU as a whole, the GDP cost of this shift is small in the short term, in the range of 0.2-0.3 percent of GDP, and close to zero over the long term. Adverse short-run effects are more significant for smaller economies heavily reliant on the car sector, mainly in Central Europe. Protectionist policies, such as tariffs on Chinese EVs, would raise the GDP cost of the EV transition. A further increase in Chinese FDI inflows that results in a significant share of Chinese EVs being produced in Central European economies, on the other hand, would offset losses in these economies by supporting their shift from supplying the internal combustion engine (ICE) production chain to that of EVs”.

Carbon pricing: The Effectiveness of Carbon Pricing: A Global Evaluation by Suphi Sen, Serhan Sadikoglu, Changjing Ji, and Edwin van der Werf as of Oct. 23^rd, 2024 (#21): “We show that adopting a carbon price reduces per capita CO2 emissions from fossil fuel combustion by 8 to 12 percent on average. … we find gradual adjustments after implementation, resulting in a 19 to 23 percent decrease in per capita emissions after 10 years. … we also show that the estimated effects of carbon pricing policies stabilize after a decade following their enactment. … This result challenges the idea that carbon pricing may not be necessary in low-emitting countries, such as those in Africa. … Furthermore, we show that the effects of carbon pricing policies do not overlap with the potential effects of renewable energy policies to a large extent“ (p. 31/32).

Low GHG reduction? Do carbon markets undermine private climate initiatives? Pat Akey, Ian Appel, Aymeric Bellon, and Johannes Klausmann as of Sept. 25^th, 2024 (#185): “We examine firms’ behaviors in carbon secondary markets following the adoption of climate initiatives. … we confirm that such commitments are associated with lower future emissions, leading to a reduction in allowances surrendered. In response to needing fewer allowances, we observe an increase in net sales of allowances, driven primarily by a rise in sales rather than a reduction in purchases. However, we find no evidence that firms voluntarily retire allowances. … We find evidence that commitments are associated with an increase in ESG scores related to climate” (p. 23).

9-Euro pollution reduction: Public Transport Subsidization and Air Pollution: Evidence from the 9-Euro-Ticket in Germany by Eren Aydina and Kathleen Kürschner Rauck as of Nov. 20^th, 2023 (#141): “We study the short-term effects of the 9-Euro-Ticket, a major German public transport subsidization program, on particulate matter (PM). .. we find declines in PM10 and PM2.5 at core traffic stations, displaying differential effects of −0.44 µg/m3 and −0.41 µg/m3 relative to less frequented locations, which corresponds to approximately 2.8 % and 8.5 % of the current limit guidelines that the WHO suggests to mitigate adverse effects on human health. Pollution reductions materialize in regions with above-average public-transportation accessibility, are most pronounced during peak travel times on weekdays and in regions with above-average population density and larger car fleets, suggesting reductions in car usage sign responsible for our findings” (abstract).

ESG investment research (in: Bluewashing)

Biodiversity underreporting: Mind the Gap?! The Current State of Biodiversity Reporting by Gerrit von Zedlitz as of Oct. 2^nd, 2024 (#647): “… I therefore explore the biodiversity reporting of large European public firms between 2020 and 2022. … firms disclose twice as much content on climate as on biodiversity and focus more on the quantitative dimensions of reporting. But biodiversity reporting is evolving quickly. Firms reported 63% more in 2022 than they did two years ago. … current biodiversity reporting, also by early reporters, remains largely qualitative. Even in 2022, firms provided less than 20% of the recommended disclosures on targets and metrics“ (p. 31/32).

Sovereign bond climate costs: Does Climate Change Impact Sovereign Bond Yields? by Michael Barnett and Constantine Yannelis as of Oct. 1^st, 2024 (#49): “We started our analysis with the following question: Do sovereign bonds prices today incorporate future climate risk? Our theoretical analysis and empirical estimates show that in fact they do. … our empirical analysis shows that projections of future climate change damage have a statistically significant impact on sovereign bond yields. Moreover, we find that these implications are most significant for bonds with the longest maturity horizon. … countries projected to suffer more economic damage from the effects of climate change in the future see higher borrowing costs today. …” (p.38). My comment: With my responsible investment portfolios I invest in Development Bank Bonds instead of Government Bonds

Is good ESG bad? What you see is not what you get: ESG scores and greenwashing risk by Manuel C. Kathana, Sebastian Utz, Gregor Dorfleitner, Jens Eckberg, and Lea Chmel as of Oct. 12^th, 2024 (#39): “This paper shows that ESG scores capture a company’s greenwashing behavior. Greenwashing accusations are most prevalent among large companies with high ESG scores. We empirically employ a novel theoretical model that distinguishes between the communication of a company’s environmental efforts (apparent environmental performance) and its actual environmental impact (real environmental performance). The correlation of the apparent (real) environmental performance with ESG scores is significantly positive (negative). Therefore, ESG scores are unsuitable for measuring real performance. Thus, investors focusing on high ESG-rated companies may unknowingly increase their greenwashing risk exposure, and academics may use misleading information to assess greenwashing risk” (abstract). My comment: That big and high-ESG companies face higher greenwashing risks, seems to be obvious to me. ESG-ratings typically reflect ESG-risks. The authors measure real environmental performance “by Scope 1 intensity, Scope 2 intensity, Misleading communications, Supply-chain issues, Energy management, and Landscape impact” (p. 12).

ESG performance claim risks: Market vs Social norms: Evidence from ESG fund flows by Soohun Kim, S. Katie Moon, and Jiyeon Seo as of July 24^th, 2024 (#44): “Environmental, Social, and Governance (ESG) funds, designed to integrate non-financial considerations into investment strategies, can result in unintended consequences by additionally emphasizing their focus on financial performance. We employ innovative textual analysis methods on fund prospectuses to assess the degree of emphasis that funds place on ESG factors versus traditional financial returns. … ESG fund managers’ emphasis on traditional monetary metrics leads to an increase in fund flow’s sensitivity to monetary performance. Paradoxically, this heightened sensitivity to monetary performance may hinder the long-term objectives of ESG investments“ (abstract).

Bluewashing? Green or Blue? The Effect of Sustainability Committees on ESG Decoupling by Weite Qiu Qiu, Yang Jinghan, Maqsood Ahmad and Sunny Sun as of Oct. 15^th, 2024 (#10) “… we mainly investigate the effect of sustainability committees on the ESG decoupling. … Using a sample of 2,759 unique US listed firms over the 2002 to 2021 period, we find that the ESG decoupling is positively related to the sustainability committees. … decoupling measures find that sustainability committees improve firms’ environmental performance but increase the firms’ symbolic actions in social and governance aspects, indicating the potential bluewashing behavior“ (p. 27). My comment: Some sustainable fund evaluations use the existence and breadth of sustainability committees to judge the sustainability of mutual funds. There may be some bluewashinng of mutual funds, too.

ESG AI-Tool: Chatreport: Democratizing Sustainability Disclosure Analysis through LLM-based Tools by Jingwei Ni, Julia Bingler, Chiara Colesanti-Senni, Mathias Kraus, Glen Gostlow, Tobias Schimanski, Dominik Stammbach, Saeid Ashraf Vaghefi, Qian Wang, Nicolas Webersinke, Tobias Wekhof, Tingyu Yu, and Markus Leippold as of Nov.21^st, 2023 (#1732): “Empowering stakeholders with LLM-based automatic analysis tools can be a promising way to democratize sustainability report analysis. However, developing such tools is challenging due to (1) the hallucination of LLMs and (2) the inefficiency of bringing domain experts into the AI development loop. In this paper, we introduce CHATREPORT, a novel LLM-based system to automate the analysis of corporate sustainability reports, addressing existing challenges by (1) making the answers traceable to reduce the harm of hallucination and (2) actively involving domain experts in the development loop. We make our methodology, annotated datasets, and generated analyses of 1015 reports publicly available“ (abstract).

Climate-AI-Tool: ClimateBERT-NetZero: Detecting and Assessing Net Zero and Reduction Targets by Tobias Schimanski, Julia Bingler, Camilla Hyslop, Mathias Kraus, and Markus Leippold as of Nov. 20^th, 2023 (#453): “… this paper demonstrates the development and exemplary employment of ClimateBERT-NetZero, a model that automatically detects net zero and reduction targets in textual data. We show that the model can effectively classify texts and even outperforms larger, more energy-consuming architectures. We further demonstrate a more fine-grained analysis method by assessing the ambitions of the targets as well as demonstrating the large-scale analysis potentials by classifying earning call transcripts. By releasing the dataset and model, we deliver an important contribution to the intersection of climate change and NLP research” (p. 6/7).

SDG and impact investment research (in: Bluewashing)

Different circular loop effects: Mapping of circular economy strategies in the USA and their impact on financial performance by Josep Oriol Izquierdo-Montfort, Yves De Rongé, James Thewissen, Özgür Arslan-Ayaydin, and Sébastien Wilmet as of Oct. 12^th, 2024 (#26): “This study offers the first comprehensive analysis of circular economy (CE) strategies adopted by U.S. firms and their implications for financial performance. By examining over 2,000 ESG reports from 2007 to 2020 … We observe a growing emphasis on the explicit use of the term CE, alongside a notable focus on specific strategies such as recycling, reducing, and reusing. We find that disclosing CE strategies generally decreases firm value. Specifically, long-loop strategies, where the materials’ use is extended but products lose their original purpose, tend to enhance firm value. In contrast, medium-loop strategies, which involve repairing and upgrading products, negatively impact firm value. Short-loop strategies, aimed at increasing the direct utilization of products and improving resource efficiency, have no significant effect on firm value“ (abstract).

Investor impact: Institutional investors and the fight against climate change by Thea Kolasa and Zacharias Sautner as of May 6^th, 2024 (#346): “We show that climate change has a significant impact on institutional investors. Simutaneously, we demonstrate that institutional investors can have a significant positive impact on fighting climate change, particularly if they actively engage with portfolio firms to reduce carbon emissions. For risk management reasons, this is in their own interest, and it is also in the interests of society” (abstract). My comment: One of my engagement topics is GHG Scope 3 transparence so that all stakeholders can act on this information (see Shareholder engagement: 21 science based theses and an action plan)

Brown stock risks: International Climate News by Maria Jose Arteaga-Garavito, Ric Colacito, Mariano (Max) Massimiliano Croce, and Biao Yang as of Feb. 29^th, 2024 (#520): “We develop novel high-frequency indices that measure climate attention …. This is achieved by analyzing the text of over 23 million tweets published by leading national news papers on Twitter during the period from 2014 to 2022. Our findings reveal that a country experiencing more severe climate news shocks tends to see both an inflow of capital and an appreciation of its currency. In addition, brown stocks in highly exposed countries experience large and persistent negative returns after a global climate news shock” (abstract).

Lucrative anti-clima lobbying: Corporate Climate Lobbying by Markus Leippold, Zacharias Sautner, and Tingyu Yu as of March 22^nd, 2024 (#1179): “In this paper, we quantify corporate anti- and pro-climate lobbying expenses, identify the largest corporate lobbyists and their motives, establish how climate lobbying relates to business models, and document how climate lobbying is priced in financial markets. Firms spend, on average, $277k per year on anti-climate and $185k on pro-climate lobbying. Anti-climate lobbying is highly concentrated, with firms in Utilities and Petroleum & Natural Gas spending the largest total amounts. Pro-climate lobbying is more dispersed across sectors, but the Utility sector also ranks highest based on the aggregate amount of pro-climate lobbying. Recently, firms have tried to camouflage their lobbying activities by avoiding explicitly mentioning climate issues in lobbying reports. …More anti-climate spending is associated with more climate-related incidents. Firms with more anti-climate lobbying earn higher future returns, even after controlling for carbon emissions. The higher returns are not the effect of earnings surprises“ (p. 42). My comment: There seem to be too many buyers of anti-climate lobbying company shares who reward such behavior.

Profitable ESG-satisfaction: Putting the ‘S’ of ESG into Asset Pricing from a First-hand Perspective – Employee Satisfaction and Stock Returns: Evidence from Germany, Austria, and Switzerland by Nils Gimpl as of Aug. 12^th, 2024 (#99): “Utilizing a unique dataset comprising 183,944 employee reviews from the employer rating platform Kununu, the analysis reveals that firms with high levels of employee satisfaction exhibit significant outperformance in stock returns compared to those with low employee satisfaction levels. … dissecting the employer ratings, strong associations between stock return effects and employee perceptions of a firm’s environmental and social awareness, equality, treatment of older colleagues, work-life balance, and working atmosphere are identified …“ (abstract). My comment: With my shareholder engagement I propose to regularly evaluate and publish employee ESG-satisfaction. That seems to be right, see HR-ESG shareholder engagement: Opinion-Post #210

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Werbehinweis (in: Bluewashing)

Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung (aktuell durchschnittlich außerordentlich hohe 97% SDG-vereinbare Umsätze der Portfoliounternehmen) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement bei derzeit 29 von 30 Unternehmen (siehe auch My fund).

Zum Vergleich: Globale Gesundheits- bzw. Renewables- oder SDG-Fonds kommen nur auf wesentlich geringere SDG-Umsatzquoten und Engagement-Quoten.

Nature credits and more: Researchpost 198

Nature credits illustration from Pixabay by MW

14x new research on GHG-data driven innovation, EU taxonomy benefits, diverse green preferences, ESG fund manipulation, ESG rating problems, AI for ESG, Art. 8/9 fund and SDG performance, nature credits, ESG compensation, AI-based financial analysis, retirement surprises and neighbor investment effects („#“ shows SSRN full paper downloads as of Oct. 17th, 2024)

Social and ecological research

GHG-data startup push: Mandatory Carbon Disclosure and New Business Creation by Raphael Duguay, Chenchen Li, and Frank Zhang as of Oct. 14^th, 2024 (#36): “Prior work documents that mandatory GHG disclosure causes existing firms to reduce their GHG emissions by curbing economic activities and/or carbon intensity. We posit that such reductions create business opportunities for new firms. In addition, emissions reports contain information about production levels, allowing prospective entrants to estimate demand and identify profitable business opportunities. Consistent with our hypothesis, we find a significant increase in business births following the implementation of the Greenhouse Gas Reporting Program in affected industries, compared to control industries. This effect is more pronounced in industries in which existing firms actively reduce carbon emissions and face heightened pressure“ (abstract).

Responsible investment research (in: Nature credits)

Good EU taxonomy? Is the EU Taxonomy a Rational Sustainability Tool? by Ibrahim E. Sancak as of Oct. 16^th, 2024 (#89): “This paper examines the EU Sustainability Taxonomy (EUST) … As a regulation-based sustainability classification tool, it differs significantly from typical ESG indicators and perspectives by providing net positive-contribution indicators in terms of revenue, capex, and opex key performance indicators for businesses. … We find that the EUST is in the realm of the rational sustainability concept, indicating that the EUST is a rational sustainability tool, and it supports sustainability at heart by definition and design. The EUST is a real sustainability tool that can restore the losses of our planet and answer to challenges. It does not breach the free market realities. Companies decide their own sustainability policies; they can decide to what extent they should be Taxonomy-aligned, they can decide how much they have to invest in sustainability transformation, and they can freely decide which Taxonomy KPIs they have to focus on …“ (p. 21). My comment: I like the focus of the EUST on revenues, opex and capex but it can only provide politically accepted low minimum standards (see discussion about Gas, nuclear energy and defense industry) and it mostly leaves out social and shareholder engagement topics. It may be rational and not good enough, anyhow.

Different green preferences: The Sustainability Preferences of Individual and Institutional Investors by Gosia Ryduchowska and Moqi Groen-Xu as of Oct. 16^th, 2024 (#16): “We compare the sustainability preferences of institutional investors to other investors, using the universe of holdings in bonds traded in Norway in the years 2010-20. We identify sustainability investors as those who choose Green Bonds over similar non-green bonds by the same issuers. … individual investors hold riskier portfolios with higher volatility and more defaults, although financial investors do not. Our results suggest that individual Green Bond investors have non-pecuniary green preferences but are not representative of the majority of sustainable investment in the market“ (abstract). My comment: I initiated the DVFA PRISC toll which helps investors to easily determine their sustainable investment policies and use this tool to compare investment options (DVFA_PRISC_Policy_for_Responsible_Investment_Scoring.pdf). A new version will be published soon.

ESG fund pushing? ESG Favoritism in Mutual Fund Families by Anna Zsofia Csiky, Rainer Jankowitsch, Alexander Pasler, and Marti G. Subrahmanyam as of Oct. 15^th, 2024 (#34): “We empirically analyze whether mutual fund families favor their ESG funds potentially at the expense of their non-ESG siblings … We use a survivorship bias-free sample obtained from Morningstar Direct, covering domestic US equity open-end funds from 2005 to 2022. … Our approach is built on comparing the performance of ESG with regular funds within and outside the family. Similar to the prior literature, we interpret a higher return differential between ESG and regular funds within the family, compared to outside, as an indication of cross-fund subsidization. We find a significant net-ofstyle return spread of around 2% per year, indicating sizable ESG favoritism within fund families“ (p. 30).

ESG rating problems and improvements: It’s Hard to Hit a Target that Doesn’t Exist: A Novel Conceptual Framework for ESG Ratings by Jorge Cruz-Lopez, Jordan B. Neyland, and Dasha Smirnow as of Oct. 16^th, 2024 (#8): “… Our framework consists of analyzing three different stages in the production of ESG ratings: (1) Data Collection and Disclosure, (2) Measurement, and (3) Dissemination. At each stage, we clearly identify the parties involved, their incentives and limitations, and the noise or bias introduced to ESG ratings due to misaligned incentives, data constraints, or inadequate regulations… solutions include improving disclosure standards, incentivizing public data access to foster competition as well as transparency of rating methodologies, and relying on regular audits to verify the accuracy of corporate disclosures and ESG ratings“ (abstract).

Readability ESG impact: Evaluating the Impact of Report Readability on ESG Scores: A Generative AI Approach by Takuya Shimamura, Yoshitaka Tanaka, and Shunsuke Managi as of July 8^th, 2024 (#46): “This study explores the relationship between the readability of sustainability reports and ESG scores for U.S. companies using GPT-4, a generative AI tool. The findings reveal a positive correlation between context-dependent readability scores and the average of multiple ESG scores …. Conversely, existing readability scores reflecting word features show no correlation with ESG scores“ (abstract).

AI for ESG: AI in ESG for Financial Institutions: An Industrial Survey by Jun Xu as of Oct. 11^th, 2024 (#21): “This paper surveys the industrial landscape to delineate the necessity and impact of AI in bolstering ESG frameworks. … our findings suggest that while AI offers transformative potential for ESG in banking, it also poses significant challenges that necessitate careful consideration. … We conclude with recommendations with a reference architecture for future research and development, advocating for a balanced approach that leverages AI’s strengths while mitigating its risks within the ESG domain“ (abstract).

No Art. 8/9 outperformance: SFDR versus performance classification: a clustering approach by Veronica Distefano, Vincenzo Gentile, Paolo Antonio Cucurachi and Sandra De Iaco as of July 10th, 2024 (#25): EU “… investment companies have to disclose in the key information document the category of each mutual fund. This regulation came into force in March 2021 and the first reaction of the market has been a strong shift of Assets Under Management (AUM) towards art. 8 and art. 9 funds. … This study showed that the expectations of better performances only based on the SFDR (Sö: Sustainable Finance Disclosure Regulation) classification is biased. … the contingency table show a low correlation of the classifications based on ESG declaration and on performances. … using the SFDR classification to create expectations of better future performance could be misleading“ (p. 8). My comment: I rather heard complaints lower performance expectations for Art. 8/9 funds due to perceived investment limitations. If there are similar returns, why not invest more sustainably?

Impact Investment research

Green cost reduction and SDG performance: The effects of ESG performance and sustainability disclosure on GSS bonds’ yields and spreads: A global analysis by Oliviero Roggi, Luca Bellardini, and Sara Conticelli as of July 10^th, 2024 (#30): “Considering a sample of 3,960 green, sustainable, and sustainability-linked (GSS) bonds issued in global capital markets, this study investigates the effects of the issuer’s environmental, social, and governance (ESG) performance on both the issue-specific yield spread — defined as the difference in yield-to-maturity between a corporate debt instrument and a sovereign comparable — and its spread vis-à-vis a sovereign comparable. The findings indicate that there is a negative association between ESG performance and bond spreads, implying that a greater commitment to the sustainable transition today is a winning strategy, for a company, to reduce the cost of debt for future projects. … we find that the real enabler of curbing the unexplained portion of risk is a detailed disclosure on the use of proceeds. This is likely to minimise the likelihood of greenwashing” (abstract).

“… With regard to Core yield, the pursuit of Goal 2 (Zero hunger) and Goal 9 (Industry, innovation and infrastructure) is associated with a reduction in risk, whereas Goal 3 (Good health and well-being) and Goal 12 (Responsible consumption and production) are found to be risk-accruing. With regard to Core spread, Goal 5 (Gender equality), in addition to Goals 2 and 9, is negatively associated with a company’s cost of debt, net of the financial characteristics of the issue. The pursuit of Goal 12 and Goal 8 (Decent work and economic growth) has the opposite effect, but not Goal 3” (p. 6). My comment: This is one of the few studies with SDG-analysis. I hope that more will come.

Nature credits: Advancing Effective and Equitable Crediting: Natural Climate Solutions Crediting Handbook by John Ward, Christine Gerbode, Britta Johnston, and Suzi Kerr as of Oct. 10^th, 2024 (#8): “Natural Climate Solutions, or NCS, are activities to protect, restore, or enhance ecosystems in terms of their ability to remove or sequester carbon. They can deliver about one third of the greenhouse gas emissions reductions needed this decade to achieve key climate goals. Implemented well, they also provide benefits for people and nature. Crediting of NCS mitigation is a powerful way to unlock this potential–but it is also controversial. … By clarifying essential terms and concepts underpinning NCS carbon crediting, highlighting solutions to technical challenges, and providing informed framing to help newcomers understand prominent ongoing debates, the NCS Crediting Handbook seeks to provide the reader with a clear introduction to the world of NCS crediting, and an impartial, accessible guide to support their decision making“ (abstract).

ESG compensation challenges: Implicit versus Explicit Contracting in Executive Compensation for Environmental and Social Performance by Roni Michaely, Thomas Schmid, and Menghan Wang as of Oct. 16^th, 2024 (#31): “We examine whether linking executive pay to environmental and social targets (ES Pay) can help improve firms’ environmental and social performance. … firms that use explicit contracting for targets that can be precisely and objectively measured, such as emissions and incident rates, demonstrate better ES performance. By contrast, firms with implicit contracting show little improvement in these areas. However, for targets that are hard to measure, such as community engagement, or E/S reporting, implicit contracts are effective and can even outperform explicit contracting. … we observe a positive association between the adoption of ES Pay schemes and total CEO compensation … even when an increase in executive pay is observed, it is also associated with improved firms’ ES conduct. We find no increase in CEO pay among those firms using explicit schemes, or implicit schemes for easily measurable targets“ (p. 28/29). My comment: CEO pay is usually already very high with, quite often, >300x the average employee compensation. Introducing sustainability goals in executive compensation should not lead to a growing gap, in my opinion. One of my 5 shareholder engagement topics therefore is CEO to average employee pay ratio disclosure.

Other investment research (in: Nature Credits)

Financial Analyst AI-Risks: Large Language Models as Financial Analysts by Miquel Noguer i Alonso and Hanane Dupouy as of Oct. 7^th, 2024 (#1004): “The ability of … GPT-4o, Gemini Advanced, and Claude 3.5 Sonnet to perform financial analysis highlights their potential as powerful tools for interpreting complex financial data. … When it comes to extrapolation questions that are the core of valuation and stock picking, the level of analysis provided by these LLMs is similar to that of skilled humans” (p. 15). My comment: Given the underperfomance of actively managed funds compared to passive benchmarks, this AI-performance is not enough.

Retirement surprises: Patterns of Consumption and Savings around Retirement by Arna Olafsson and Michaela Pagel as of Oct. 7^th, 2024 (#23): “Using a large transaction-level data set from a financial aggregator on income, spending, account balances, and credit limits in Iceland, we document“ (p. 16) … First, many households have barely any savings and hold substantial amounts of consumer debt at the time of retirement. Second, consumption falls at retirement, possibly due to work-related expenses, bargain shopping, or because households face unexpected adverse shocks. Third, liquid savings increase at retirement. Fourth, wealth increases more over the course of retirement for the average household”.

Neighbor investment-effects: Wealth Accumulation: The Role of Others by Michael Haliassos as of Oct. 7^th, 2024 (#19): “First, interacting with a larger proportion of neighbors with college-level economics or business education tends to promote retirement saving. … Second, college-educated people exposed to greater local wealth inequality as well as more wealth mobility at the start of their economic lives, tend to take more asset risks later in life and thus accrue greater wealth, leaving the less-educated behind. … Third, the current pattern of access to financial advice, under which the young and less experienced are also less likely to receive financial advice, tends to discourage stock market participation and reduce equity in retirement portfolios, because the peers of the young tend to be more conservative in their recommendations to them than professionals would have been. Professional advisors are more conservative towards the older and wealthier people that they do meet, compared to their peers. Finally, background stressors such as crises and wars, but also personal problems, occupy people’s minds as they make saving decisions” (p. 23/24).

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Werbehinweis (in: Nature credits)

Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung (aktuell durchschnittlich außerordentlich hohe 97% SDG-vereinbare Umsätze der Portfoliounternehmen: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen (siehe auch My fund).

Zum Vergleich: Globale Gesundheits- bzw. Renewables- oder SDG-Fonds kommen nur auf wesentlich geringere SDG-Umsatzquoten, ESG-Ratings und Engagement-Quoten.

ESG transparency returns: Researchpost 195

ESG transparency returns: Illustration by Natishus from Pixabay

12x new research on green hydrogen acceptance, climate data, transition funds, sustainability reporting problems, materiality assessment issues, ESG disclosure premium, ESG discount, ESG investment limits, diversity benefits, non-additional green bonds, private equity low risk anomaly (#shows number of SSRN full paper downloads as of Sept. 26^th,2024)

Ecological and social research

Green hydrogen acceptance: Keep it local and safe: Which system of green hydrogen production in Germany is accepted by citizens? by Johannes Buchner, Klaus Menrad, and Thomas Decker as of Dec. 20^th, 2024 (#5): “… our study aims to identify significant factors influencing the German population‘s acceptance of green hydrogen production within various acceptance groups with differing preferences for future green hydrogen production systems. … Based on our results, it is recommended that required renewable energy for green hydrogen production be produced as close to the green hydrogen plants as possible. It must be ensured and communicated to the public that the (planned) green hydrogen plants meet high safety standards and pose a very low risk of fire or explosion. The neighbouring population should also benefit through annual heating cost savings and financial participation …“ (abstract).

Climate data analysis: ClimRetrieve: A Benchmarking Dataset for Information Retrieval from Corporate Climate Disclosures by Tobias Schimanski, Jingwei Ni, Roberto Spacey, Nicola Ranger, and Markus Leippold as of July 19^th, 2024 (#46): “…this work simulates the typical tasks of a sustainability analyst by examining 30 sustainability reports with 16 detailed climate-related questions. As a result, we obtain a dataset with over 8.5K unique question-source-answer pairs labeled by different levels of relevance. Furthermore, we develop a use case with the dataset to investigate the integration of expert knowledge into information retrieval with embeddings. Although we show that incorporating expert knowledge works, we also outline the critical limitations of embeddings in knowledge-intensive downstream domains like climate change communication“ (abstract).

ESG investment research (in: ESG transparency returns)

Transition funds: Olive Is the New Black: The Rise of Transition Funds by Rumi Mahmood, Xinxin Wang, and Shuang Guo from MSCI as of September 12^th, 2024: “Transition-labeled funds have seen rapid growth in recent years, with over USD 50 billion across more than 100 funds globally. Although the majority of transition funds (>70%) are domiciled in Europe, their primary investments are in the U.S., with a skew toward specialty chemicals, semiconductors and electrical components. In 2023, most transition funds delivered positive returns, with almost half outperforming their benchmark or parent index”.

Green information quality? Mandatory Sustainability Reporting and Project Selection by Hui Chen and Fulvia Oldrini as of June 21^st, 2024 (#52): “… we examine the implications of implementing a mandate for sustainability reporting in an environment where companies are already inclined to disclose such information voluntarily. We compare the effects of voluntary and mandatory disclosure regimes through a parsimonious model where a manager has to choose between a brown and green project. The two projects are mutually exclusive and generate different financial returns and environmental externalities. We show that a mandatory disclosure regime for sustainability information is more likely to encourage the manager to invest in the green project than a voluntary regime. … when we consider the costs associated with a mandate, mandatory disclosure improves investors’ welfare only when the quality of the sustainability information system is sufficiently high“ (p. 30/31).

Material or sustainable? A review of ex ante and ex post materiality measures, and consequences and determinants of material disclosures in sustainability reporting by Asif M Huq and Mahsa Mohammadrezaei as of June 26^th, 2024 (#26): “The purpose of the review is to synthesize the research on materiality measures of sustainability reporting and highlight how preparers, users, auditors, regulators, and other stakeholders assess or determine the materiality in sustainability reporting. The review further summarizes the findings on consequences and determinants of material disclosures in sustainability reporting. … We find that the ex post materiality measures are simplistic and unidirectional in nature and ex ante materiality measures lack external validity and are generally narrow in focus – for example, focused on single firms or industries. Another major limitation in the current literature is the absence of robust empirical investigation of double materiality in sustainability reporting and a vast majority of the measures are developed without stakeholder engagement. Lastly, we document that the findings on determinants of material disclosure are fragmented and inconclusive and along with the literature on consequences of material disclosure is rather un-explored“ (abstract). My comment: This is important for shareholder engagement. I often get feedback from the companies I want to invest in, that they conducted a materiality analysis and will only focus on what they determined to be material and therefore do not care much about (my) shareholder proposals if these do not focus on the “material” topics.

ESG transparency returns (1): The ESG Disclosure Premium by Yumeng Gao, Benjamin C. Herbert, and Lionel Melin as of Dec. 23^rd, 2024 (#30): “This paper investigates how firms’ valuations are impacted by the disclosure of ESG metrics. It concludes that companies are granted a lower cost of equity capital from initiating disclosure on any of the eight key environmental and social topics investigated. Markets appear to reward the availability of environmental metrics more than social ones. Interestingly, the positive disclosure premium has strengthened over time in developed Europe and the Asia-Pacific region. It has broadly turned from negative to positive in developed North America and emerging markets after the 2015 Paris Agreement. The paper also details, sector by sector, the specific premium that disclosure on the various topics would warrant …“ (p. 23).

ESG transparency returns (2): From Mandate to Market across the Globe: The Impact of Mandatory ESG Disclosure on the Cost of Equity Capital by Tung Lam Dang, Duc Trung Do, Thang Ho, and Cameron Truong as of June 26^th, 2024 (#233): “By utilizing staggered ESG disclosure regulations across 35 countries … we identify a causal relationship between ESG disclosure and the cost of equity. Our results indicate a substantial reduction in the cost of equity by an average of 50 basis points due to ESG disclosure mandates. … Firms with weaker pre-mandate information environments experience a larger drop in equity-financing cost in the post-adoption periods. Second, firms, particularly those with high ESG ratings, witness increased interest from institutional investors who prioritize ESG considerations” (p. 37).

ESG discount? Is it time to change the climate for ESG Investing? by Timothy A. Krause and Eric R. Robbins as of Sept. 19^th, 2024 (#35): “There is a preponderance of evidence that ESG investing provides negative incremental returns to shareholders, which may be a result of the imprecise early measures used to estimate corporate ESG performance. An in-depth analysis of the recent empirical research and the current empirical study of both contemporaneous and long-term stock returns clearly shows the relationships among third-party ESG scores and stock returns are largely negative. Our results are confirmed by much of the recent research, although we use a robust statistical methodology to provide additional evidence that this is the case over both the short- and long-term” (abstract). My comment: I do not think that this research is objective regarding (previous) ESG evidence (I included many other studies in my blog posts which show other results than this one)

ESG investment limits: Sustainable Investing: Evidence From the Field by Alex Edmans, Tom Gosling, and Dirk Jenter as of Sept. 23^rd, 2024 (#734): “We survey 509 equity portfolio managers from both traditional and sustainable funds … ES performance influences stock selection, engagement, and voting for over three quarters of investors, including nearly two thirds of traditional investors. Financial considerations are a primary reason, even among sustainable funds. Few are willing to sacrifice financial returns for ES performance, largely due to fiduciary duty concerns, and voting and engagement are mainly driven by financial considerations. A second reason is constraints. Fund mandates, firmwide policies, or client wishes caused 71% to make stock selection, voting, or engagement decisions that they would otherwise not have. Some of these actions had financial consequences, such as avoiding stocks that would improve returns or diversification; others had ES consequences, such as avoiding stocks whose ES performance they could have improved” (abstract). My comment: I am happy that I have very limited (only legal and regulatory and – rarely – client specific) constraints to invest and engage as sustainable as I can.

Impact and SDG investment research

Diversity benefits: Unveiling the Dual Impact of Diversity & Inclusion: Boosting Financial Outcomes Through Enhanced Environmental Performance by Eleonora Monaco, Luca Galati, Lorenzo Dal Maso, and Marco Maria Mattei as of Sept. 20^th, 2024 (#7): “The analysis conducted over a large sample of globally listed companies from 2017 to 2022 highlights that fostering a holistic approach to D&I is not only associated with enhanced financial performance but also with a firm’s ability to manage environmental issues. This subsequently contributes to superior financial metrics, underscoring a significant mediation effect where 40% of the financial benefits from D&I is associated with enhanced environmental performance …“ (p. 24).

Non-Additional? Green Bonds: New Label, Same Projects by Pauline Lam and Jeffrey Wurgler as of Sept. 9^th, 2024 (#8): “Green finance emphasizes “additionality,” meaning funded projects should offer distinct environmental benefits beyond standard practice. Analysis of U.S. corporate and municipal green bonds, however, indicates that the vast majority of green bond proceeds is used for refinancing ordinary debt, continuing ongoing projects, or initiating projects without green aspects that are novel for the issuer. Only 2% of corporate and municipal green bond proceeds initiate projects with clearly novel green features. Investors and market participants also do not distinguish among levels of additionality: Offering yields, announcement effects, green bond index inclusion, and green bond fund holdings are uncorrelated with additionality” (abstract). My comment: Additionality in the sense of this research is a very demanding requirement but Green Bonds should clearly be used to finance really green projects.

Other investment research (in: ESG transparency returns)

PE low risk anomaly: Benchmarking Private Equity Performance – When Fund-Level Cash Flows are Missing by Da Li and Timothy Riddiough as of Sept. 19^th, 2024 (#24): “After pooling together risk-adjusted performance results for funds with and without detailed cash flow data, we find that Buyout funds outperform the S&P500, while Venture Capital and Real Estate funds underperform for most of the sample period. We further classify Venture Capital and Real Estate funds by their strategy types and vintage years, and find that there is a negative relationship between benchmarked returns and fund strategy riskiness” (p. 26). My comment: Most investors use funds of funds or gatekeepers to invest in alternatives. After accounting for the respective costs, even buyout funds may not be attractive anymore.

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Werbehinweis (in: ESG transparency returns)

Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Smallcap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung (aktuell durchschnittlich 93% SDG-vereinbare Umsätze der Portfoliounternehmen: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen (siehe auch My fund).

ESG disclosure benefits: Researchpost 193

ESG disclosure benefits illustration from Pixabay by Gerd Altmann

14x new research on climate, water and ESG disclosure and litigation effects, World Bank greenwashing, pollution exports, green shows, ESG outperformance, emission credit risks, green bond and green fund benefits, low SDG alignments, financial LLMs, and degrowth theory problems by Heiko Bailer, Thorsten Hens, Stefan Ruenzi and many more (#shows number of SSRN full paper downloads as of Sept. 12^th, 2024)

Ecological and social research

Green disclosure meta-study (ESG disclosure benefits 1): The Economic Consequences of Climate Risk Disclosures by Meena Subedi and Emily Zoet as of June 7^th, 2024 (#56): “… this study provides stakeholders with a thorough analysis of the economic effects of climate risk disclosures, reveals emerging trends, and identifies future research opportunities in this area. … Prior studies find mixed results regarding the positive or negative effects of climate risk and suggest disclosure of climate action may mitigate the penalties associated with climate risk. … Additionally, we compare the theoretical frameworks used in prior studies. We identify the predominant theories and their distinct assumptions and focus, providing insight for future researchers to refer to in their climate disclosure studies” (p. 34).

Good water disclosure (ESG disclosure benefits 2): Self-regulation and self-presentation in sustainability reporting: Evidence from firms’ voluntary water disclosure by Siwen Liu and Hans van der Heijden as of June 6^th, 2024 (#68): “This study focuses on water disclosure, a key dimension of sustainability reporting, which, despite the importance of water, has received relatively little theoretical and empirical attention. … we document supportive evidence for the positive relations between voluntary water disclosure and several self-regulation mechanisms such as policies and actions on water efficiency and emission reductions. … We find that firms with high water efficiency are more likely to disclose water information in the global water survey to proactively showcase their good water performance to key stakeholders …“ (abstract).

Flight from ESG disclosures (ESG disclosure benefits 3): Behind the Corporate Veil: How Business Groups Arbitrage ESG Disclosure Mandates by Stefano Cascino and Maria Correia as of Sept. 9^th, 2024 (#32): “… we demonstrate that, while improving their own ESG performance at the headquarter-country level, business group parents actively shift irresponsible ESG activities down the corporate structure. Specifically, we document that subsidiaries of parents subject to disclosure mandates experience an increase in the occurrence and frequency of ESG incidents, particularly in countries where weaker institutions make stakeholder monitoring more challenging. Moreover, we find that, in response to the introduction of ESG disclosure mandates, parent companies streamline their group structures by tightening control over more integrated subsidiaries and divesting from those that are more peripheral“ (abstract).

ESG litigation opportunities: The Effect of Expected Shareholder Litigation on Corporate ESG Reporting: Evidence from a Quasi-Natural Experiment by Lijun (Gillian) Lei, Sydney Qing Shu, and Wayne Thomas as of June 19^th, 2024 (#112): “… the Morrison ruling by the U.S. Supreme Court … creates a plausibly exogenous shock (i.e., reduction) to expected shareholder litigation costs for U.S.-cross-listed foreign firms … Our primary result is that after Morrison, U.S.-cross-listed foreign firms increase their use of optimistic words in ESG reports. … We also find a decline in the relative likelihood of issuing an ESG report after Morrison … we also show that U.S.-cross-listed foreign firms are less likely to purchase external assurance or adopt GRI guidelines in preparation of their ESG reports in the post-Morrison period. … Overall, the results are consistent with a reduction in expected shareholder litigation costs decreasing the quality of ESG reporting“ (p. 35/36).

Greenwashing World Bank? How Has the World Bank’s Climate Finance Changed After the Paris Agreement? by Ayse Kaya and Asli Leblebicioglu as of Sept. 5^th, 2024 (#17): “Utilizing a novel dataset of more than 2700 projects spanning 2010-2021, this study investigates the shifts in the World Bank (WB)’s climate finance from pre- to post-Paris Agreement. … We show that although WB’s reported climate finance has quadrupled in this period, this increase primarily comes from “mixed projects” that combine mitigation or adaptation goals with other aims. For most projects, these other goals constitute projects’ larger share, and they also increasingly encompass general capacity strengthening as opposed to climate-adjacent aims. Conversely, projects solely dedicated to mitigation or adaptation have declined. … Overall, the spectacular quantitative increase in WB’s post-Paris climate finance may not be as qualitatively impressive“ (abstract). My comment: For my ESG ETF-Portfolios I will continue to use Multinational Development Bank Bonds instead of Government Bonds because I still think that the former have more positive potential impact than the latter

Pollution export: Exporting Carbon Emissions? Evidence from Space by Santanu Kundu and Stefan Ruenzi as of Sept. 5^th, 2024 (#32): “Our study based on the cement and steel industry shows that the price increase of carbon in the EU ETS (Sö: Emission Trading System) after 2017 is associated with emissions leakage to facilities in locations outside the EU. Not surprisingly, emissions are mainly leaked to pollution havens. … We find that mainly constrained firms, firms headquartered in countries with more developed financial markets as well as firms headquartered in civil law countries engage in carbon leakage. At the same time, our effects are stronger for private than for listed firms at the extensive margin. Firms affected by the EU-ETS not only leak more production to facilities outside the EU, they are also more likely to acquire more new facilities outside the EU“ (p. 31/32).

Green show beats impact: Impact, Inspiration, or Image: On the Trade-Offs in Pro-Environmental Behaviors by Raisa Sherif and Sven Arne Simon as of Sept. 4^th, 2024 (#96): “… We find that some individuals are willing to give up environmental impact for both social image concerns and role model aspirations, with the latter having a stronger effect. However, the crowding out is not perfect” (p. 25).

ESG and SDG investment research (in: ESG disclosure benefits)

ESG outperformance drivers: Charting New Frontiers: The S&P 500® ESG Index’s Outperformance of the S&P 500 by May Beyhan from S&P Dow Jones Indices as of Sept. 6^th, 2024: “Since its inception more than five years ago, the S&P 500 ESG Index had a tracking error of 1.33% and outperformed the S&P 500 by 1.62% on an annualized excess total return basis. … The performance of the S&P 500 ESG Index was … driven by an array of factors, such as seeking the best ESG-scoring constituents with medium ESG momentum scores, and selecting constituents with high Human Capital Development and Talent Attraction & Retention scores, while also avoiding the worst ESG-scoring constituents with high ESG momentum scores” (p. 12). My comment: My experience with ESG portfolios has been positive, too, although I exclude the “magnificient 7”, see Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)

Lower emissions and credit risks: Linking Climate Risk to Credit Risk: Evidence from Sectorial Analysis by Mohamad H. Shahrour, Mohamed Arouri, and Sandeep Rao as of April 24^th, 2024 (#86): “Using yearly data on the S&P 500, we first document that an increase in firms’ commitment towards reducing environmental emissions is associated with a lower credit risk (measured by credit ratings, and alternatively, distance-to-default). … While the majority of sectors experience a negative relationship, we find a positive relationship in the Industrials sector. Furthermore, we examine the direction of causality between carbon emissions and credit risk. Our results establish that the direction of causality is from carbon emissions to credit risk“ (p. 16).

Green bond advantages: Green Bonds in Banking: Do They Improve Loan Portfolio Quality and Funding Costs? by Egidio Palmieri, Maurizio Polato, and Josanco Floreani as of Sept. 9^th, 2024 (#8): “… banks issuing green bonds with high environmental performance exhibit an improvement in loan portfolio quality … Furthermore, the interaction with the governance pillar indicates that banks issuing green bonds experience a reduction in the cost of funding … showing that strong governance significantly contributes to lower funding costs” (p. 6).

Lower sustainability risks: Climate Risk Exposure: A Comparative Analysis of Sustainable and Conventional Funds by Camille Baily and Jean-Yves Gnabo as of Sept. 6^th, 2024 (#12): “We … investigate climate risk exposure in the U.S. mutual fund industry … using a large dataset of 3,140 mutual funds from 2013 to 2021. Using a conditional Value-at-Risk approach—CoVaR, we measure individual fund exposure to climate risks. We find that, on average, fund VaR is affected by climate risks when we control for other risk factors, suggesting that climate risks are spreading to U.S. mutual funds. Yet, we show that sustainable funds, as identified by the Morningstar metric, are significantly less exposed to climate risks than their conventional peers, even when we control for other fund characteristics“ (abstract). “Our results indicate that climate risk exposure is almost 50% lower for an average sustainable fund, compared to its conventional counterpart” (p. 31). My comment: In my most recent report for the fund which I advise I showed that “a traditional global small-cap ETF has a Weighted Average Carbon (Scope 1 + 2) Intensity of 313 instead of 32 for the fund” (see Monatsreport).

25% SDG-Alignment? PAB & CTB: Sustainability 2.0 by Heiko Bailer as of Sept. 6^th, 2024 (#27) “This paper investigates the MSCI World and Europe Paris-Aligned Benchmarks (PAB) and Climate Transition Benchmarks (CTB), focusing on refining these indices by incorporating additional sustainable constraints and tilting them towards better alignment with the United Nations Sustainable Development Goals (SDGs). … For instance, the sustainable revenue component of the indices was increased from a baseline of 13- 15% to 25%, while the temperature targets were reduced from approximately 2°C to 1.7°C. These enhancements were achieved with minimal negative impact on financial performance, and in some cases, such as the Europe CTB, even resulted in performance gains. … Further adjustments involved tilting the indices towards higher SDGs, which provided additional alignment with UN sustainability goals without negative performance trade-offs. The analysis revealed a substantial difference in SDG scores between the World and Europe indices, with Europe’s SDG alignment being more than double that of the World indices“ (p.11/12). My comment: In my most recent fund report I write: “The net SDG revenue alignment reported by the data provider for the fund is very high at 93%. … By way of comparison, a traditional global small-cap ETF has an SDG revenue alignment of 5 %” (see Monatsreport).

Other investment research (in: ESG disclosure benefits)

Financial LLM deficits: How good are LLMs in risk profiling? by Thorsten Hens and Trine Nordlie as of Aug. 25^th, 2024 (#113): “This study asked “How do ChatGPT and Bard categorize investor risk profiles compared to financial advisors?” For half of the clients the study revealed no statistically significant differences in the risk scores assigned by ChatGPT and Bard compared to those assigned by bankers. Moreover, on average, the differences had minor economic relevance. However … their reasoning … many times missed the specific characteristics of the clients“ (p. 9).

Degrowth deficits: Reviewing studies of degrowth: Are claims matched by data, methods and policy analysis? by Ivan Savin and Jeroen van den Bergh as of August 2024: “In the last decade many publications have appeared on degrowth as a strategy to confront environmental and social problems. … Based on a sample of 561 studies we conclude that: (1) content covers 11 main topics; (2) the large majority (almost 90%) of studies are opinions rather than analysis; (3) few studies use quantitative or qualitative data, and even fewer ones use formal modelling; (4) the first and second type tend to include small samples or focus on non-representative cases; (5) most studies offer ad hoc and subjective policy advice, lacking policy evaluation and integration with insights from the literature on environmental/climate policies; (6) of the few studies on public support, a majority concludes that degrowth strategies and policies are socially-politically infeasible; (7) various studies represent a “reverse causality” confusion, i.e. use the term degrowth not for a deliberate strategy but to denote economic decline (in GDP terms) resulting from exogenous factors or public policies; (8) few studies adopt a system-wide perspective – instead most focus on small, local cases without a clear implication for the economy as a whole“ (abstract).

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Werbehinweis

Impactfunds: Researchpost 183

Impactfunds illustration by Dmitriy from Pixabay

Impactfunds: 4x new research on right-wing policies, gender pay gap, AI and nature-reporting and channels of impactfunds (#shows SSRN full document downloads as of July 4^th, 2024)

Unhappy rightists: Support for a right-wing populist party and subjective well-being: Experimental and survey evidence from Germany by Maja Adena and Steffen Huck as of June 26^th, 2024: “… we establish a causal link revealing that individuals who are new or marginal supporters of the AfD exhibit deterioration in well-being … In addition, we establish a strong correlation between negative perceptions of personal and financial well-being and support for the German right-wing populist party AfD” (“Conclusion”).

Gender pay issues: One Cohort at a Time: A New Perspective on the Declining Gender Pay Gap by Jaime Arellano-Bover, Nicola Bianchi, Salvatore Lattanzio, and Matteo Paradisi as of May 2^nd, 2024 (#263): “…we show that the entirety of the decline in the gender pay gap can be attributed to newer cohorts who entered the labor market with smaller gender differentials and to older cohorts who exited the labor market with larger differentials. … The data confirm that it was a significant decline in opportunities for younger men, rather than substantial gains for younger women, that drove the convergence in labor-market outcomes that occurred in the 1970s through the mid-1990s. After this point, the remaining gender gap at labor-market entry reflected mostly gender differences in educational choices, rather than differences in initial job allocations. Therefore, further increases in the number of older workers has continued to create bottlenecks to the careers of all younger workers, but not differentially between men and women” (p. 26/27).

Disclosure-deficits: Using AI to Assess the Decision-Usefulness of Corporates’ Nature-related Disclosures by Chiara Colesanti Senni, Saeid Ashraf Vaghefi, Tushar Manekar, Tobias Schimanski, and Markus Leippold as of June 10^th, 2024 (#158): “Nature-related disclosures by companies are insufficient. As long as they remain voluntary, this situation is unlikely to improve, even under well-intentioned initiatives like the Task Force on Nature-related Financial Disclosures (TNFD). … our sentiment analysis reveals that corporate disclosures predominantly report positive C2N (Sö: company-to-nature) impact. … we find that current CSR disclosures, although aligned with the TNFD, are not sufficiently decision-useful for stakeholders and lack legal enforceability” (abstract). My comment: That is why I try to engage companies to improve disclosures, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com). For the German version see “Nachhaltigkeitsinvestmentpolitik” at www.futurevest.fund

Impactfunds: The Impact of Sustainable Investment Funds – Impact Channels, Status Quo of Literature, and Practical Applications by Marco Wilkens, Stefan Jacob, Martin Rohleder, and Jonas Zink as of June 28^th, 2024 (#1223): “… investment funds can, in principle, achieve impact through three impact channels which we systematize in an impact framework: engagement, portfolio allocation, and further effects. In a next step, the article provides an overview of the current status quo of research on impact investment. … Empirically, there are at least initial indications that an impact has already been achieved via engagement and portfolio allocation. However, there are also legitimate concerns that neither of the two impact channels will have the desired positive and material impact. There is therefore a growing need of information in this area, which could be met, for example, via impact grids for sustainable investment funds” (p. 23). My comment: Good research summary, ideas and concept. For my impactfund approach see My fund – Responsible Investment Research Blog (prof-soehnholz.com)

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Werbehinweis (in: Impactfunds)

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Smallcap-Investmentfonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen: My fund – Responsible Investment Research Blog (prof-soehnholz.com).

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

Impactfonds im Nachhaltigkeitsvergleich

Impactfonds: Foto von Mastertux von Pixabay

Es ist schwierig, passende nachhaltige Fonds zu finden

Nachhaltige Investments sind kein No-Brainer. Ein Problem dabei: Nachhaltige Investments können sehr unterschiedlich definiert werden. Ich verweise meist auf das von mir mit entwickelte Policies for Responsible Invesment Scoring Concept der DVFA (DVFA PRISC, vgl. Kapitel 7.3 in Das Soehnholz ESG und SDG Portfoliobuch). Damit können Anleger, Berater und Anbieter ihre individuelle Nachhaltigkeitspolitik festlegen. Das ist einfach. Schwierig wird es, wenn die dazu passenden Investmentfonds gefunden werden sollen. In diesem Beitrag zeige ich, wie man das machen kann und welche Fonds besonders gut zu meinen Nachhaltigkeitsanforderungen passen.

Wenig überraschend ist, dass der von mir beratene Fonds dabei am besten abschneidet. Neu für mich war aber, wie stark die Unterschiede zu anderen Smallcap-Fonds sind, die den Fondsnamen nach mit meinem Fonds vergleichbar sein sollten. Das gilt auch für die Performance.

Was ist ein liquider Impactfonds?

Laut Bundesinitiative Impact Investing ist wirkungsorientiertes Investieren ein Investmentansatz, der neben einer finanziellen Rendite auch eine messbare ökologische und/oder soziale Wirkung erzielen soll.

Ich beschränke mich in dieser Analyse auf liquide Investments. Das heißt, dass ich nur Fonds vergleiche, die in börsennotierte Wertpapiere investieren. Damit werden Fonds ausgeklammert, die Empfängern direkt zusätzliches Eigen- oder Fremdkapital bringen können. Das reduziert den potenziellen Impact von Fonds.

Allerdings ist mir die jederzeitige Änderungsmöglichkeit von Investments sehr wichtig. Das zeigt sich daran, dass ich bisher schon 60 Aktien aus meinem im August 2021 gestarteten und aus 30 Aktien bestehenden Fonds verkauft habe (vgl. Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds und das Engagementreporting auf FutureVest Equity Sustainable Development Goals). Verkaufsgründe waren überwiegend meine zunehmend höheren Nachhaltigkeitsansprüche und (relativ) verschlechterte Nachhaltigkeit der Aktien im Portfolio. Mit illiquiden Investments ist man meistens mehrere Jahre an diese gebunden. Das bedeutet, dass man ein relativ hohes Nachhaltigkeitsrisiko eingeht (vgl. Free Lunch: Diversifikation nein, Nachhaltigkeit ja?).

Man kann zwei Arten von Impactinvestments unterscheiden, nämliche solche mit Fokus auf den Impact der Anlagen selbst und andere, die den Impact von Anlegern Berücksichtigen (vgl. Impactleitfaden der DVFA DVFA-Fachausschuss Impact veröffentlicht Leitfaden Impact Investing und ähnlich Eurosif und Forum nachhaltige Geldanlagen, Marktbericht 2024 S. 13). Im ersten Fall sind das zum Beispiel Aktien und Anleihen von Herstellern erneuerbarer Energien. Im zweiten Fall ist das die positive Einflussnahme von Anlegern über Stimmrechtsausübungen und andere Formen von Engagement, um Investmentziele nachhaltiger zu machen.

109 diversifizierte Impactfonds?

In Deutschland werden aktuell ungefähr neuntausend Investmentfonds mit insgesamt 34.500 Anteilsklassen öffentlich angeboten (vgl. Fonds-Suche | DAS INVESTMENT Fonds Explorer). Ungefähr 4% davon bzw. 350 sind Fonds nach dem strengsten Nachhaltigkeitsartikel 9 der Offenlegungsverordnung.

Man könnte annehmen, dass nur Artikel 9 Fonds auch Impactfonds sein können. Das Forum nachhaltige Geldanlagen kommt aber zu anderen Ergebnissen. Danach fallen „fast 60 Prozent der Artikel-6-Mandate bzw. Spezialfonds … in die Kategorie „Impact-Aligned“ (FNG Marktbericht 2024, S. 20). Das erscheint mir sehr viel.

Für meine eigene Analyse habe ich mir die verfügbaren Fonds auf www.morningstar.de angesehen und nach Stichworten im Fondsnamen gesucht. Ich interessiere mich dabei vor allem für Fonds mit Impact und Sustainable Development Goals im Namen. Bei den sogenannten aktiven Fonds finde ich nur 582 von 62325, also 0,9% aller potenziellen Anteilsklassen mit „Impact“ im Namen. Hinzu kommen 0,4% mit „Sustainable Development Goals“ bzw. „SDG“ im Namen. Insgesamt finde ich sich so 84 unterschiedliche Impactfonds.

Ohne Transitions-, reine Engagement- und wenig diversifizierte Fonds

Dabei habe ich Fonds ausgeklammert, die Transitionen von schlechteren zu besseren Nachhaltigkeiten anstreben. Das wären zum Beispiel Paris-Aligned Benchmark (PAB) Fonds. Diese investieren in Aktien und Anleihen von Organisationen, die sich auf einem CO2-Reduktionspfad befinden. Darunter sind oft Unternehmen mit aktuell noch hohen Emissionen und wenig nachhaltigen Produktangeboten. Solche Fonds sind nach meiner Auffassung keine konsequenten SDG-vereinbaren Fonds, zu denen ich nur Fonds mit Wertpapieren zähle, die in Bezug auf ihre Produkte und Services bereits möglichst nachhaltig sind.

Man könnte auch noch die 134 Anteilklassen mit „Engagement“ im Namen nutzen. Darauf verzichte ich aber ebenfalls (wenn nicht SDG oder Impact zusätzlich im Namen enthalten sind), denn für mich sollten die Emittenten der Wertpapiere im Fonds vor allem mit den SDG vereinbare Produkte und Services anbieten. Wenn dann noch Shareholder Engagement dazu kommt, ist das gut. Aber nur Engagement ohne SDG-Vereinbarkeit reicht mir für meinen Impactansatz nicht aus.

Ich interessiere mich vor allem für potenzielle Wettbewerber für den von mir beraten branchen- und länderdiversifizierten Aktienfonds. Deshalb betrachte ich hier keine länderspezifischen oder branchen- bzw. themenspezifischen Fonds, auch nicht solche für erneuerbare Energien oder Mikrofinanz. Ich klammere auch Anleihefonds mit Fokus auf grüne, soziale und andere nachhaltige Anleihen aus, sofern sie nicht SDG oder Impact im Namen nutzen.

Dafür füge ich Fonds hinzu, die dem Global Challenges Index bzw. dem nx25 Index folgen. Der Grund dafür ist, dass mein Fonds manchmal mit diesen Fonds verglichen wird.

Bei den ETFs finde ich nur einen Impact-ETF mit Umweltfokus sowie nur zwei SDG-diversifizierte-ETFs, die ich beide in der Detailanalyse berücksichtige.

Insgesamt erhalte ich so 109 „Impactfonds“. 34 davon sind Anleihefonds, 7 sind Mischfonds und 3 sind Protected- bzw. Garantie- oder Hedgefonds. Damit bleiben 65 Aktienfonds übrig. 37 sind globale Aktienfonds, die grundsätzlich alle Unternehmensgrößen abdecken (Allcaps),12 sind überwiegend auf mittelgroße Unternehmen (Midcap) fokussierte globale Aktienfonds und 5 sind regional fokussierte Fonds. Bis auf zwei regionale Fonds enthalten diese nur relativ wenige Smallcaps, die in meinem Fonds vorherrschend sind. Damit bleiben 11 überregionale Smallcapfonds für den Detailvergleich übrig.

Detailvergleich von 11 globalen sogenannten Impactfonds mit Smallcapfokus

Idealerweise wird ein Nachhaltigkeitsvergleich der von mir selektieren Fonds mit kostenlos verfügbaren und damit extern einfach nachprüfbaren Daten durchgeführt. Die mir bekannten derartigen Datenbanken sind jedoch wenig transparent, nutzen nur Best-in-Class ESG Ratings und/oder enthalten nur einen Teil der mich interessierenden Fonds und Nachhaltgigkeitsdaten.

Deshalb habe ich die Fonds mit der kostenpflichtigen Datenbank von Clarity.ai analysiert. Diese hat den Vorteil, dass sie – mit Ausnahme eines neuen ETFs – für alle 11 Fonds detaillierte SDG- und ESG-Analysen ermöglicht. Dabei werden möglichst alle Aktien einzeln analysiert und dann auf Portfolioebene aggregiert.

Bei der Interpretation der Ergebnisse ist zu berücksichtigen, dass solche Nachhaltigkeitsanalysen je nach Datenanbieter und Stichtag (hier: Mitte Juni 2024) unterschiedliche Ergebnisse ergeben können. Zu beachten ist auch, dass die Ratings oft annähernd normalverteilt sind, d.h. die Streuung in der Mitte ziemlich hoch ist und Ausreißer selten sind. Das bedeutet, dass ein durchschnittliches ESG-Rating von 55 gegenüber 50 einen erheblichen Unterschied bedeuten kann.

Nur 1 diversifizierter konsequenter Smallcap-Impactfonds?

Ich analysiere sogenannte unerwünschte Aktivitäten, ESG-Ratings und SDG-Vereinbarkeiten. ESG-Ratings fassen dabei ESG-Risiken inklusive Kontroversen zusammen, ohne finanzielle Aspekte zu berücksichtigen. Dabei nutze ich ein Best-in-Universe Rating. Das bedeutet, dass Umwelt-, Sozial- und Unternehmensführungsrisiken aller über fünfundzwanzigtausend gerateten Unternehmen miteinander verglichen werden und nicht brancheninterne (Best-in-Class) Ratings genutzt werden. ESG-Risiken haben eine mögliche Bandbreite von 0 bis 100 und SDG-Vereinbarkeit wird über SDG-vereinbare Umsätze gemessen, von denen vorher unvereinbare Umsätze abgezogen werden (Netto-Umsatz-Ansatz).

Die hier analysierten 11 Fonds investieren insgesamt in über 200 Unternehmen mit einigen von 37 von mir unerwünschten und vermiedenen Aktivitäten. Das sind vor allem in Unternehmen, die Tierversuche durchführen. Dutzende weitere Unternehmen haben Abhängigkeiten von fossilen Brennstoffen oder Waffen.

Die SDG-(Netto-)Umsatzvereinbarkeit ist mir besonders wichtig. Am besten schneidet dabei der von mir beraten Fonds Futurevest Equities SDG R mit 88% ab. Drei weitere Fonds liegen um die 80%. Damit sind für mich nur diese 4 Smallcap-SDG Fonds konsequente Impactfonds. Zwei davon setzen vor allem auf erneuerbare Energien, einer auf Gesundheit und nur der von mir beratene Fonds auf beide und weitere Segmente.

Zwei weitere Fonds haben etwas über 50% SDG-Umsätze. Für mich überraschend ist, dass für 6 Fonds unter 50% netto SDG-Umsätze ausgewiesen wird. Ein Fonds mit „SDG-Engagement“ im Namen schneidet mit 7% am schlechtesten ab. Das Fondsmanagement will mit seinem Engagement dabei offensichtlich relativ wenig nachhaltige Investments nachhaltiger machen.

Impactfonds mit ESG-Risiken

In Bezug auf die ESG-Risiken ergeben sich ebenfalls erhebliche Unterschiede: Auch hier schneidet der von mir beratene Fonds mit einem durchschnittlichen ESG- Rating von 66 am besten ab. Bei Governance gibt es mit 71 einen noch besseren Fonds im Vergleich zu den 70 des Futurevest Fonds. Mit 62 bei Sozialrisiken und 68 von 100 Punkten bei Umweltrisiken scheidet der Futurevest-Fonds aber am besten ab.

Drei Fonds liegen bei den aggregierten ESG-Ratings aber auch bei Umwelt- und Sozialem unter 50 und haben damit überdurchschnittliche Risiken. Alle anderen Fonds liegen zwischen 53 und 60 bei den aggregierten Ratings. Beim Governancerating geht die Bandbreite nur von 52 bis 71, bei Umwelt von 40 bis 68 und bei Sozialem von 36 bis 63. Dabei liegen 9 Fonds bei den Sozialratings unter 50.

Auch bei den Emissionen gibt es starke Unterschiede. So reichen die umsatzgewichteten Scope 1 und Scope 2 Emissionen von 41 bis 1503 Tonnen mit fünf Fonds über 100 Tonnen. Mit 54 Tonnen hat der Futurevest-Fonds die drittniedrigsten Emissionen. Die Scope 3 Emissionen reichen von 88 bis 3.650 (Futurevest: 665) und scheinen damit kaum vergleichbar zu sein. Fonds, die bei ihren Investments auf Scope 3 Reporting drängen, wie ich das machen, werden bei solchen Vergleichen tendenziell benachteiligt.

Engagementdaten der Fonds werden in der Clarity.ai Datenbank nicht aufgeführt. Hierzu wäre eine relativ aufwändige separate Analyse nötig (Infos zu Futurevest siehe „Engagementreporting“ auf FutureVest Equity Sustainable Development Goals).

Strengster Fonds mit guter Performance

In Bezug auf Ausschlüsse, SDG-Umsätze und ESG-Ratings ist nach diesen Daten der von mir beratenen Fonds der mit Abstand am konsequentesten nachhaltige. Das ist auch nachvollziehbar, denn ich nutze fast nur Nachhaltigkeitskriterien für die Aktienselektion.

Aber natürlich ist auch Performance wichtig. In Bezug auf traditionelle Smallcapfonds erreicht der von mir beratene Fonds seit der Auflage marktübliche Renditen und Risiken. Für die Analyse der selektieren Smallcap-Nachhaltigkeitsfonds nutze ich, sofern vorhanden, die thesaurierenden nicht-währungsgesicherten Retailanteilsklassen. Bezüglich der Renditen von Anfang 2022 bis Mitte Juni 2024 (der Futurevest-Fonds ist erst im August 2021 gestartet) liegt mein Fonds aktuell an der zweitbesten Position, direkt nach dem aus meiner Sicht wenig nachhaltigen SDG Engagementfonds. Im aktuellen Jahr liegt er sogar an erster Stelle. Und die Volatilität von etwa 13% ist auch relativ niedrig. Die Bandbreite der Performance recht dabei von +11% bis -59%.

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Disclaimer

Dieser Beitrag 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 keine Finanzanalyse und nicht als Verkaufsangebot oder Aufforderung zur Abgabe eines Kauf- oder Zeichnungsangebots für Anteile der/s in dieser Unterlage dargestellten Aktie/Fonds zu verstehen und ersetzen nicht eine anleger- und anlagegerechte Beratung.

Die in diesem Artikel enthaltenen Informationen dienen ausschließlich zu Bildungs- und Informationszwecken. Sie sind weder als Aufforderung noch als Anreiz zum Kauf oder Verkauf eines Wertpapiers oder Finanzinstruments zu verstehen. Die in diesem Artikel enthaltenen Informationen sollten nicht als alleinige Quelle für Anlageentscheidungen verwendet werden.

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 des Fonds 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 deficits: Researchpost 174

ESG deficits: Illustration by Nushrulloh Huda from Pixabay

ESG deficits: 8x new research on plastic pollution, electric cars, climate prognostics, purpose, ESG deficits, climate costs, financial education, fund management (#shows SSRN full paper downloads as of May 2^nd, 2024)

Ecological and social research

Plastic pollution: Global producer responsibility for plastic pollution by Win Cowger and many more as of April 24, 2024: “We used data from a 5-year (2018–2022) worldwide (84 countries) program to identify brands found on plastic items in the environment through 1576 audit events. We found that 50% of items were unbranded, calling for mandated producer reporting. The top five brands globally were The Coca-Cola Company (11%), PepsiCo (5%), Nestlé (3%), Danone (3%), and Altria (2%), accounting for 24% of the total branded count, and 56 companies accounted for more than 50%. … Phasing out single-use and short-lived plastic products by the largest polluters would greatly reduce global plastic pollution“ (abstract).

Solar car power: Solar Photovoltaics and Battery Electric Vehicles by Johannes Rode as of March 8^th, 2024 (#105): “With a large enough PV (Sö: photovoltaic) system, it is financially attractive to charge a BEV (Sö: battery electric vehicle) with self-produced electricity from PV on sunny days. We indeed find that PV adoption spurs the co-adoption of BEV. … According to our baseline specification, PV adoption was responsible for a third of the BEV share in Germany in 2022. This finding only holds true for household PV systems and does not for industrial PV systems. … we can only confirm a causal effect from PV diffusion on the BEV share for PV systems that are large enough to generate enough electricity for normal household consumption and for charging a BEV. … we do not find evidence for reverse effects from adopting a BEV on PV adoption“ (p. 13/14).

Climate prognostic criticism: Klimawandel: Zur Unterscheidung von Fakten, Analysen und Prognosen in Umweltpolitik und Rechtsprechung von Werner Gleißner vom Februar 2024: „Im Ergebnis ist festzuhalten, dass bei wissenschaftlichen und natürlich auch politischen Diskussionen über den Klimawandel und die erforderlichen Klimaschutzmaßnahmen zwischen Aussagen unterschiedlicher Evidenz deutlicher unterschieden werden sollte. Dies sollte auch in der Medienberichterstattung, bei Gesetzesinitiativen und der Rechtsprechung beherzigt werden. Wie im Beitrag erläutert, sollte zwischen Fakten, Analysen und Prognosen aufgrund ihrer unterschiedlichen Evidenz klar abgegrenzt werden. Es sollte insbesondere auch klar ausgedrückt werden, dass es für Prognosen über die Auswirkungen des Klimawandels für in 100 Jahren lebende Menschen kein wissenschaftlich gesichertes Fundament gibt“ (S. 436).

Purpose explained: The Role of Corporate Purpose in Corporate Governance: A Framework for Boards of Directors and Senior Managers by Jordi Canals as of March 9^th, 2024 (#54): “… I review the notion of purpose in contemporary management theory and corporate governance …. Corporate purpose has the potential to be an engine for organizational change, improve corporate governance and help reconnect companies with relevant stakeholders and society. Recent empirical studies show a positive relationship between corporate purpose and financial performance. … This paper … is based on some longitudinal real cases of firms that have been using corporate purpose in their governance and management. This paper presents a framework for boards of directors and senior managers for adopting corporate purpose effectively “ (abstract).

ESG investment research (in: ESG deficits)

ESG deficits? Environmental, Social, and Governance (ESG) Transparency and Investment Efficiency by Yifei Lu as of April 25^th, 2024 (#39): “Exploiting the staggered coverage of Refinitiv Asset4 ESG ratings as an exogenous shock that increases ESG transparency, I uncover a reduction in investment-q sensitivity, indicating lower investment efficiency after coverage initiation. … I show that greater ESG transparency crowds out fundamental information from the stock price, making it less useful to guide investment decisions. … I find that pressure on ESG performance increases and that firms increase ESG investments but reduce regular investments. … firms with poorer initial ESG performance experience larger reductions in investment efficiency. Overall, I document that more ESG transparency hurts real efficiency by restraining managerial learning and driving firms’ objectives away from maximizing shareholder value“ (abstract). My comment: Firms should consider external effects very seriously and I . more or less successfully – use only responsible investment criteria for ETF and stock selection, see e.g. Regeländerungen: Nachhaltig aktiv oder passiv? – Responsible Investment Research Blog (prof-soehnholz.com)

Low climate-pressure? Climate-triggered institutional price pressure: Does it affect firms’ cost of equity? by George Skiadopoulos and Cheng Xue as of April 26^th, 2024 (#30): “We find that institutional portfolio rebalancing triggered by firms’ climate change exposures, affects S&P 500 firms‘ cost of equity during 2005-2021 via the incurred climate change price pressure (CCPP). We estimate stock-level CCPP from physical and transition exposures in a demand-based asset pricing setting. … The average CCPP is sizable up to -8%. A one-standard-deviation decrease of CCPP increases firms‘ cost of equity by up to 6% of its average value, the effect being greater (smaller) from CCPP originating from opportunity and physical (regulatory) exposures. Banks and insurance companies contribute primarily to CCPP by on average underweighting stocks with high climate change exposures. Despite facing a higher cost of equity from more negative CCPP, firms do not reduce future climate change exposures and carbon emissions, except over periods of heightened media attention to climate change“ (abstract).

Other investment research (in: ESG deficits)

Financial knowhow? Financial Literacy and Financial Education: An Overview by Tim Kaiser and Annamaria Lusardi as of April 25^th, 2024 (69): “This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education“ (abstract). My comment: I try to contribute to financial literacy and education with this free to use blog

Fund signals? When do Investors Care About Fund Performance? by Samia Badidi, Martijn Boons, and Rafael Zambrana as of April 11^th, 2024 (#28): “We find that weekly flows strongly respond to daily performance, especially on days with unusually low market returns (bad days).. … we find that flows significantly respond to both poor and good performance on bad days. … we find that outperformance on bad days is persistent and contributes significantly to unconditional fund outperformance. In fact, we find that managers with the skill to outperform on the 5% of worst market return days in the previous year generate about as much unconditional future outperformance (relative to other active US equity mutual funds) as managers with the skill to outperform on the remaining 95% of days. Because we find little overlap between these two sets of managers, we conclude that outperformance on bad days requires specific bad day skill that is distinct from the one-dimensional notion of general skill often entertained in the literature. Indeed, we find no evidence to suggest that that there are many generally skilled fund managers that outperform on bad and other days alike. Finally, we find no evidence that fund managers learn from poor past performance on bad days“ (p. 36/37).

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Advert for German investors

Sponsor my research by investing in and/or recommending my global small cap mutual fund (SFDR Art. 9). The fund focuses on the Sustainable Development Goals and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 29 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or My fund (prof-soehnholz.com).

Climate shaming: Researchpost 171

Ilustration from Pixabay by Nina Garman

Climate shaming: 11x new research on green technology, sustainable fund labels, sustainable advice, carbon premium, brown profits, green bonds, green growth, green shareholder engagement, climate shaming, optimizations and investment timing (# shows number of SSRN full paper downloads as of April 11^th, 2024)

Ecological and social research

Green technology benefits: Economic Impact of Natural Disasters Under the New Normal of Climate Change: The Role of Green Technologies by Nikos Fatouros as of March 18^th, 2024 (#9):” In our model of the world economy, raising temperatures are expected to negatively affect consumption as well as increase debt. The most frequently proposed possible solution to climate change, is the de-carbonization of production, by using more “green” technologies. Under “green” technology adaptation, countries would be projected to achieve higher levels of consumption and welfare. This positive effect of more environmentally friendly means of production, tends to be stronger for more developed countries. However, under the assumption of greater technological progress of the “green” sector, our results show that even developing countries would be projected to follow the same path of higher and more sustainable levels of consumption and welfare” (p. 10).

ESG investment research (in: Climate Shaming)

Attractive labels: In labels we trust? The influence of sustainability labels in mutual fund flows by Sofia Brito-Ramos, Maria Céu Cortze Nipe, Svetoslav Covachev, and Florinda Silva as of April 2^nd, 2024 (#29): “In Europe, investors can resort to different types of sustainable labels such as GNPO-sponsored labels and ESG ratings from commercial data vendors that assess funds’ sustainability risks. In addition, funds can communicate their sustainability features by including ESG-related designations in the name or self-classifying themselves as article 8 or 9 of the SFDR. … Drawing on a dataset of equity funds sold in Europe … Our initial results document investors‘ preferences for sustainability labels, with GNPO labels (Sö: Government and non-profit organizations) standing out as salient signals. … we find that GNPO labels have an effect on fund flows … Furthermore, this impact is stronger for funds holding other sustainability signals, such as Morningstar top globes, the LCD (Sö: Low Carbon Designation) and an ESG name, suggesting a complementary effect of labels … our results show that the effect of funds being awarded a GNPO label is stronger for the institutional invest segment. The findings show that GNPO labels and SFDR classification are influential for investors’ decisions (p. 23/24). My comment: Maybe I should consider paying for labels for my Article 9 fund. A more detailed comment can be found here Nachhaltigkeitssiegel beim Verkauf von Investmentfonds | CAPinside

(Un-)Sustainable advice? Investing Responsibly: What Drives Preferences for Sustainability and Do Investors Receive Appropriate Investments? by Chris Brooks and Louis Williams as of April 8^th, 2024 (#21): „ While investors with stronger desires for sustainability do hold more highly ESG-rated funds on average, the relationship is weaker than might have been expected. Perhaps surprisingly, a majority of clients for whom responsible investing is very important hold some unrated funds, while those for whom it is unimportant nonetheless hold the highly ESG-rated funds in their portfolios. We therefore conclude that more focus on sustainability preferences is required to ensure that retail investors get the portfolios they want” (abstract). My comment: Advisor should develop detailed sustainability policies at least for larger investors, see e.g. DVFA_PRISC_Policy_for_Responsible_Investment_Scoring.pdf (English version available upon demand)

No carbon premium: Carbon Returns Across the Globe by Shaojun Zhang as of April 5^th, 2024 (#272): ” Emissions are a weighted sum of firm sales scaled by emission factors and grow almost linearly with firm sales. However, emission data are released at significant lags relative to accounting variables, including sales. After accounting for the data release lag, more carbon-intensive firms underperform relative to less carbon-intensive ones in the U.S. in recent years. International evidence on carbon or green premium is largely absent. The carbon premium documented in previous studies stems from forward-looking bias instead of a true risk premium in ex-ante expected returns” (p. 23).

Profitable brown greening? Paying or Being Paid to be Green? by Rupali Vashisht, Hector Calvo-Pardo, and Jose Olmo as of March 31^st, 2024 (#70): “… firms in the S&P 500 index are divided into brown (heavily polluting) and green (less polluting) sectors. In clear contrast with the literature, (i) brown firms pay to be green (i.e.better financial performance translates into higher environmental scores) but green firms appear not to. In addition, (ii) neither brown nor green firms with higher environmental scores perform better financially” (abstract). My comment: If brown and green firms perform the same, why not invest only in green firms?

Resilient green bonds: “My Name Is Bond. Green Bond.” Informational Efficiency of Climate Finance Markets by Marc Gronwald and Sania Wadud as of April 4^th, 2024 (#15): “… the degree of informational inefficiency of the green bond market is generally found to be very similar to that of benchmark bond markets such as treasury bond markets. … the degree of inefficiency of the green bond market during the Covid outbreak in 2020 and the inflation shock in 2022/2023 is lower than that of the treasury bond market“ (abstract).

Green growth: Investing in the green economy 2023 – Entering the next phase of growth by Lily Dai, Lee Clements, Edmund Bourne, and Jaakko Kooroshy from FTSE Russell as of Sep. 19^th, 2023: “After a downturn in 2022 … Green revenues for listed companies are on track to exceed US$5 trillion by 2025 — doubling in size since the conclusion of the Paris Agreement in 2015 — with market capitalisation of the green economy approaching 10% of the equity market. However, to shift the global economy onto a 1.5°C trajectory, green growth would have to further substantially accelerate with green market capitalisation approximating 20% of global equity markets by 2030” (p. 3).

Impact investment research (in: Climate Shaming)

Short-term impact: The Value Impact of Climate and Non-climate Environmental Shareholder Proposals by Henk Berkman, Jonathan Jona, Joshua Lodge, and Joshua Shemesh as of April 3^rd, 2024 (#19): “In this paper, we investigate the value impact of environmental shareholder proposals (ESPs) for a large sample of Russell 3000 firms from 2006 to 2021 … We find that both withdrawn and non-withdrawn climate ESPs have positive CARs (Sö: Cumulative abnormal returns), indicating that management screens value-enhancing climate proposals and rejects value-destroying climate proposals. For non-climate ESPs we find insignificant CARs, suggesting that management does not have an ability to screen non-climate proposals. However, we find that close-call non-climate ESPs that are passed have negative abnormal returns, implying that for non-climate ESPs the original decision by managers not to agree with the activists is supported by the share market” (p. 26).

Climate shaming: Fighting Climate Change Through Shaming by Sharon Yadin as of April 4^th, 2024 (#13): “This Book contends that regulators can and should shame companies into climate-responsible behavior by publicizing information on corporate contribution to climate change. Drawing on theories of regulatory shaming and environmental disclosure, the book introduces a “regulatory climate shaming” framework, which utilizes corporate reputational sensitivities and the willingness of stakeholders to hold firms accountable for their actions in the climate crisis context. The book explores the developing landscape of climate shaming practices employed by governmental regulators in various jurisdictions via rankings, ratings, labeling, company reporting, lists, online databases, and other forms of information-sharing regarding corporate climate performance and compliance” (abstract). My comment: Responsilbe Naming and Climate Shaming are adequate investor impact tools in my opinion (my “climate shaming” activities see Engagement report” here FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T)

Other investment research

(Pseudo-)Optimization? Markowitz Portfolio Construction at Seventy by Stephen Boyd, Kasper Johansson, Ronald Kahn, Philipp Schiele, and Thomas Schmelzer as of Feb. 13^th, 2024 (#50): “More than seventy years ago Harry Markowitz formulated portfolio construction as an optimization problem that trades off expected return and risk, defined as the standard deviation of the portfolio returns. Since then the method has been extended to include many practical constraints and objective terms, such as transaction cost or leverage limits. Despite several criticisms of Markowitz’s method, for example its sensitivity to poor forecasts of the return statistics, it has become the dominant quantitative method for portfolio construction in practice. In this article we describe an extension of Markowitz’s method that addresses many practical effects and gracefully handles the uncertainty inherent in return statistics forecasting” (abstract). My comment: Extensions of Markowitz methods create complexity but still contain many assumptions/forecasts and are far from solving all potential problems. I prefer very simple optimization and forecast-free approaches, see Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com)

Bad timing? Another Look at Timing the Equity Premiums by Wei Dai and Audrey Dong from Dimensional Fund Advisors as of Nov. 2^nd, 2023 (#1642): “We examine strategies that time the market, size, value, and profitability premiums in the US, developed ex US, and emerging markets …. Out of the 720 timing strategies we simulated, the vast majority underperformed relative to staying invested in the long side of the premiums. While 30 strategies delivered promising outperformance at first glance, further analysis shows that their outperformance is very sensitive to specific time periods and parameters for strategy construction”(abstract).

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small cap mutual fund (SFDR Art. 9). The fund focuses on the Sustainable Development Goals and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 27 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or My fund (prof-soehnholz.com).

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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Biodiversity diversion: Researchpost #165

Biodiversity diversion: 14x new research on donations, brown indices, ESG ETFs, ESG investing fees, greenwashing, labeled bonds, climate engagement, framing, female finance, and risk measurement (“’#” shows full paper SSRN downloads as of Feb. 29^th, 2024).

Social and ecological research

Facebook donations: Does Online Fundraising Increase Charitable Giving? A Nationwide Field Experiment on Facebook by Maja Adena and Anselm Hager as of Feb. 27^th, 2024 (#4): “Using the Facebook advertising tool, we implemented a natural field experiment across Germany, randomly assigning almost 8,000 postal codes to Save the Children fundraising videos or to a pure control. … We found that (i) video fundraising increased donation revenue and frequency to Save the Children during the campaign and in the subsequent five weeks; (ii) the campaign was profitable for the fundraiser; and (iii) the effects were similar independent of video content and impression assignment strategy. However, we also found some crowding out of donations to other similar charities or projects.” (abstract).

Biodiversity diversion (1)? The 30 by 30 biodiversity commitment and financial disclosure: Metrics matter by Daniele Silvestro, Stefano Goria, Ben Groom, Thomas Sterner, and Alexandre Antonelli as of Nov. 23^rd, 2023 (#93): “The recent adoption of the Kunming-Montreal Global Biodiversity Framework commits nearly 200 nations to protect 30% of their land by 2030 – a substantial increase from the current global average of c. 17%. … the easiest approach to reach compliance would be to protect the cheapest areas. … Here we explore biological and financial consequences of area protection … We find substantial differences in performance, with the cheapest solution always being the worst for biodiversity. Corporate disclosure provides a powerful mechanism for supporting conservation but is often dependent on simplistic and underperforming metrics. We show that conservation solutions optimized through artificial intelligence are likely to outperform commonly used biodiversity metrics“ (abstract).

ESG investment research (in: „Biodiversity diversion“)

Biodiversity diversion (2): A Bibliometric and Systemic Literature Review of Biodiversity Finance by Mark C. Hutchinson and Brian Lucey as of Feb. 19^th, 2024 (#140): “This study presents a short bibliometric analysis of biodiversity finance …. Six focal areas emerge, with Conservation, Conservation Finance, and Ecosystem Finance prominent. Thematic emphasis revolves around biodiversity challenges and the inefficiency of financial mechanisms in addressing them. Our analysis reveals an exploitable gap in the lack of finance-led solutions” (abstract).

Brown stock indices: International trade in brown shares and economic development by Harald Benink, Harry Huizinga, Louis Raes, and Lishu Zhang as of Feb. 22^nd, 2024 (#9): “Using global stock ownership data, we find a robust negative relation between the tendency by investors to hold brown assets and economic development as measured by log GDP per capita. … First, at the country level, economic development is likely to lead to a greening of the national stock portfolio. Second, cross-sectionally, richer countries will tend to hold greener portfolios. … Finally, we find that investors in richer countries have a lower propensity to divest from browner firms that are included in the MSCI World index, which does not consider firms’ carbon intensities” (p. 31/32). My comment: Most (institutional) investors use benchmarks. Green benchmarks should be used more often to foster transition (regarding benchmark selection compare Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds? (prof-soehnholz.com).

ESG ETF dispersion: From ESG Confusion to Return Dispersion: Fund Selection Risk is a Material Issue for ESG Investors by Giovanni Bruno and Felix Goltz from Scientific Beta as of Feb. 22^nd, 2024: “… we construct a dataset of Sustainable ETFs – passive ETFs that have explicit ESG objectives. … Overall, our results indicate that ESG investors face a large fund selection risk. Over the full sample dispersion is 6.5% (4.9%) in terms of annualised CAPM Alpha (Industry Adjusted Returns), and it can reach 22.5% (25.3%) over single calendar years. We also show that past performance and tracking error do not contain useful information on future performance. … dispersion in performance allows ETF providers to always present investors some strategy that has recently outperformed“ (p. 31). My comment: It would be nice to have more details in the research article regarding conceptual differences e.g. between ESG Leader, Transition and SRI indics/ETFs, see e.g. Verantwortungsvolle Investments im Vergleich: SRI ETFs sind besser als ESG ETFs (prof-soehnholz.com) from 2018

Good ESG ETFs: Unraveling the Potential: A Comprehensive Analysis of ESG ETFs in Diversified Portfolios across European and U.S. Markets by Andrea Martínez-Salgueiro as of Feb. 15^th, 2024 (#10): “… results indicate substantial benefits of ESG ETFs in Europe and notable hedge, diversification, and safe-haven potential in the U.S. Simulated data further demonstrate ESG portfolios‘ outperformance, especially in Europe, highlighting the risk-return tradeoff” (abstract).

Responsible fees: Responsible Investment Funds Build Consistent Market Presence by Jordan Doyle as of Feb. 21^st, 2024: “… during the study period from 31 December 2012 to 31 December 2022. Total net assets for “responsible investments” as defined by Lipper increased by a factor of 2.7×, from $2,215.6 billion in 2012 to $5,974.6 billion in 2022. The market share of responsible investment funds remained relatively constant during the same period, increasing from 14.2% in 2012 to 15.4% in 2022. … Retail ownership dominates institutional ownership of responsible investment funds globally. In the United States, however, institutional assets surpassed retail assets in 2018, indicating a relative shift in demand preferences. … they both invest more assets into negative screening funds than any other type of responsible investment strategy …fund fees of responsible investing funds are largely in line with those of non-responsible investment fund fees in the United States. In Europe, however, responsible investment fund fees tend to be lower than non-responsible investment fund fees“ ( p. 3).

Unsustainable institutions? Sustainable Finance Disclosure Regulation: voluntary signaling or mandatory disclosure? by Lara Spaans, Jeroen Derwall, Joop Huij, and Kees Koedijk as of Feb. 19^th, 2024 (#38): “… we point out that (i) the SFDR similarly to voluntary disclosure enables funds to signal their sustainability commitments to the market, while (ii) like mandatory disclosure, requires these funds to be transparent about the sustainability outcomes of their underlying portfolio … we show that investors indeed respond to the Article signals, but that this effect is driven by retail investors. … we see that mutual funds that take on an Article 8(/9) label after the SFDR announcement improve their sustainability outcomes compared to Article 6 funds. Specifically, we note that retail funds behave in accordance with their signal, while for institutional funds we do not find that Article 8(/9) funds behave differently from Article 6 funds. We disregard the hypothesis that these institutional funds partake in ‘window-dressing’, instead we find evidence that mandatory disclosure induces European institutional funds to significantly improve their sustainability outcomes compared to untreated, US-domiciled institutional funds“ (p. 32). My comment: For my Article 9 (global smallcap fund) see www.futurevest.fund and My fund (prof-soehnholz.com).

Less greenwashing: Do US Active Mutual Funds Make Good of Their ESG Promises? Evidence from Portfolio Holdings by Massimo Guidolin and Monia Magnani as of Feb. 23^rd, 2024 (#22): “… our findings indicate a distinct shift towards greater sustainability within the mutual equity fund industry. Notably, this trend is not exclusive to self-labelled ESG funds; all types of funds have enhanced their ESG ratings and reduced their investments in sin stocks. The number of self-labelled ESG funds has continued to rise in recent years, and importantly, most of these ESG funds, on average, appear to genuinely adhere to their claims of prioritizing sustainable investing. Consequently, they demonstrate significantly higher actual ESG scores in their portfolio holdings. Moreover, we are witnessing a noticeable reduction in sin stocks within their portfolios“ (p. 34).

SDG- aligned and impact investment research

Sustainable returns: Labeled Bonds: Quarterly Market Overview Q4 2023 by Jakub Malich and Anett Husi from MSCI Research as of Feb. 21^st, 2024: Green, social, sustainability and sustainability-linked “Labeled-bond issuance reached a similar level in 2023 as in 2022, which was notably below the peak issuance of 2021. … The market continued to grow both in size and diversity, as hundreds of new and recurring corporate and government-related issuers brought labeled bonds to the market. … Most newly issued and outstanding labeled bonds were investment-grade and issued by ESG leaders … the performance of labeled bonds, despite their distinctions from conventional bonds, was primarily driven by key fixed-income risk and return drivers, such as interest-rate sensitivity, currency fluctuations and credit risk“ (p. 18). … “Corporate issuers led issuance in the fourth quarter, with USD 75 billion worth of labeled bonds (63% of the total), while supranational, sovereign and agency (SSA) entities issued USD 44 billion (37%). This continues a shift in the labeled-bond market, with corporate issuers taking a more central role” (p. 4).

Index impact: The Impact of Climate Engagement: A Field Experiment by Florian Heeb and Julian F. Kölbel as of Feb. 6^th, 2024 (#361): “A randomly chosen group of 300 out of 1227 international companies received a letter from an index provider, encouraging the company to commit to setting a science-based climate target to remain included in its climate transition benchmark indices. After one year, we observed a significant effect: 21.0% of treated companies have committed, vs. 15.7% in the control group. This suggests that engagement by financial institutions can affect corporate policies when a feasible request is combined with a credible threat of exit” (abstract). My comment: It would be interesting to know the assets of the funds threatening to divest (index funds are often large). Hopefully, this type of shareholder engagement also works for active (and small) asset managers. Further shareholder engagement research see e.g. Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

ESG nudging: Optimistic framing increases responsible investment of investment professionals by Dan Daugaard, Danielle Kent, Maroš Servátka, and Lyla Zhang as of Jan. 1zh, 2024 (#33): “… we report insights from an incentivized online experiment with investment professionals … The analyzed sample consists of individuals who stated their intention to increase their investment in ESG within the next 10 years … We demonstrate that framing divestment decisions in a more optimistic orientation, with an emphasis on the transitory nature of costs and the permanency of future benefits, significantly increases responsible investment by 3.6%. With total professionally managed assets valued at USD $98.4 trillion globally, a comparable effect size would represent a USD $3.6 trillion shift in asset allocations” (p. 12).

Other investment research (in: „Biodiversity diversion“)

Gender differences: The Gender Investment Gap: Reasons and Consequences by Alexandra Niessen-Ruenzi and Leah Zimmerer as of Jan. 27^th, 2024 (#31): „ Women, compared to men, report larger financial constraints, higher risk aversion, perceived stress in financial matters, and lower trust in financial institutions. As a result, women save and invest less consistently than men. Conditional on investing, women use fewer financial products, particularly in equity investments. We find a significant gender gap in stock market participation, with 17.6% of women and 32.3% of men investing. The motives and barriers influencing stock market participation also diverge, with men leaning towards short-term gains and the thrill of investing, while women commonly cite unfamiliarity with stocks and fear of potential losses as primary reasons for non-participation” (abstract).

New performance indicator: Maximum Cumulative Underperformance: A New Metric for Active Performance Management by Kevin Khang and Marvin Ertl from The Vanguard Group as of Jan. 18^th, 2024 (#29): “… we define maximum cumulative underperformance (MaxCU)—the maximum underperformance of an active fund relative to the benchmark … The greater the benchmark return environment and the longer the investment horizon, the greater MaxCU investors should expect … Ex-ante, our framework can be used to articulate the investor’s tolerance for underperformance relative to the benchmark and inform the final active allocation decision at the outset. Ex-post, our framework can be used to set the base rate for terminating a manager who has suffered a sizeable underperformance“ (p. 19/20). My comment: Useful concept, but benchmark selection is very important for this approach. For the latter problem see e.g. Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds? (prof-soehnholz.com)

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Advert for German investors:

Sponsor my research by investing in and/or recommending my global small cap mutual fund (SFDR Art. 9). The fund focuses on the Sustainable Development Goals and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 26 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or My fund (prof-soehnholz.com).