Archiv der Kategorie: Governance

SDG rating confusion: Researchpost #152

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

Ecological and social research (SDG rating confusion)

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

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

Responsible investing research (SDG rating confusion)

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

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

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

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

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

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

Other investment research

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

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

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

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

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

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Liquid impact advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 24 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Supplier engagement – Opinion post #211

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

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

Supplier emissions can be very high

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

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

Supply chain becomes more important for ESG-analyses

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

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

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

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

Supplier engagement: How investors can indirectly engage

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

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

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

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

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

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

Systematic supplier engagement using ESG evaluations

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

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

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

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

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

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

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

Better fewer suppliers?

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

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

Supplier engagement: Powerful supplier ESG disclosures

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

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

A supplier engagement proposal and first engagement experiences

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

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

No supplier engagement results yet

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

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

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

Additional research:

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

HR-ESG shareholder engagement: Opinion-Post #210

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

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

Little scientific HR-ESG and employee engagement research

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

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

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

Broad HR-ESG activation is easy

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

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

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

Leveraged shareholder or stakeholder engagement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Corporate governance and more: Researchpost #138

Corporate governance: 19x new research on German wealth, ESG real world impact, CDR, circular economy, ESG ratings, ESG AI, supplier ESG, climate data, green govvies and corporates, private equity ESG, VCs and UBS by Reiner Braun, Florian Ederer, Andreas Egert, Arnd Huchzermeier, Tim Kröncke and many more (# of SSRN downloads on August 10^th, 2023)

Social and ecological research

Rich Germans: Distributional National Accounts (DINA) for Germany, 1992-2016 by Stefan Bach, Charlotte Bartels, and Theresa Neef as of June 26^th, 2023 (#36): “… Our DINA series show that economic growth has been pro-rich from 1992 to 2007 and pro-poor from 2007 to 2016. But although incomes of the bottom 50% have resumed to grow since 2007, the income gap between the bottom 50% and the top 10% has widened between 1992 and 2016. The ratio of top 10% to bottom 50%’s average incomes has increased from eight to ten. … Germany’s highly concentrated economic elite – Germany’s top 0.1% and 0.01% income share is similar to the United States and far above France. Germany’s top business income recipients primarily hold firms as partnerships predominantly owned by two to four shareholders, while top business income earners in the United States and France hold shares in corporations“ (p. 30/31).

CDR case studies: How Responsible Digitalization Creates Profitable Pathways to Sustainability by Niklas Werle and Arnd Huchzermeier as of June 24^th, 2023 (#21): “… we show that companies that committed to CDR (Sö: Corporate Digital Responsibility) successfully implemented digitally enabled sustainability strategies. … we conclude that responsible digitalization enables improved sustainability and contributes to reaching not only the UN SDG goals but also carbon neutrality. This study contributes to the research on CDR by showcasing exemplary outcomes from pioneering companies and developing a framework explaining the effects of CDR practices“ (p. 23).

No ESG sales impact? Do consumers vote with their feet in response to negative ESG news? Evidence from consumer foot traffic to retail locations by Svenja Dube, Hye Seung (Grace) Lee, and Danye Wang as of July 20^th, 2023 (#118): “We conduct an event-study analysis in the 21-day window around the release of negative ESG news. … individuals in counties with higher ESG consciousness (proxied with income, education, political affiliation, and population density) decrease their visits to stores following negative ESG news. … However, the magnitude of the response is inconsequentially small even for these most affected consumers” (p. 36).

Circular definition: Circular Economy by Mark Anthony Camilleri, Benedict Sheehy, and Kym Fraser as of June 26^th, 2023 (#7):“This contribution features the submission of one of the most important sustainability keywords to Springer’s Encyclopedia of Sustainable Management. It provides a definition and an introduction to the circular economy (CE). It describes key policies and regulatory interventions that are meant to promote the CE agenda“ (abstract).

ESG investment research: Asset class independent (Corporate Governance and more)

ESG rating criticism: ESG Ratings—Guiding a Movement in Search for Itself by Andreas Engert as of July 31^st, 2023 (#114): “ESG ratings deliver the short-hand evaluation that investors need to incorporate environmental, social, and governance aspects in their decision-making. … an ESG rating can serve two distinct purposes: either to inform financial investors about long-term risks and returns from ESG-related factors or to guide prosocial investors in awarding a “greenium” subsidy for social performance. Because the information demands differ, ESG rating providers should commit to either one of these missions. The paper analyzes the specific problems of ratings serving prosocial investors. Implicitly or explicitly, such ratings reflect an ordering of political priorities that rating providers have to set. … Standardizing ESG ratings would further strengthen the effect of impact investing but seems unlikely to be attainable“ (abstract). My comment: ESG ratings typically (should) measure ESG-risks for the rated entities and SDG ratings typically (should) measure the SDG-alignment of products and services offered

Chat ESG: Overcoming Complexity in ESG Investing: The Role of Generative AI Integration in Identifying Contextual ESG Factors by Yash Jain, Shubham Gupta, Serhan Yalciner, Yashodhan Joglekar, Parth Khetan, and Tony Zhang as of July 18^th, 2023 (#171): “… The results of this study suggest that GPT 3.5 is capable of generating informative and accurate responses to prompts related to ESG. … we found that it has the ability to provide insights into various ESG-related topics, such as climate change, social responsibility, and corporate governance. Furthermore, the use of APIs in this study allowed for efficient and effective data collection and analysis“ (p. 32).

Supplier ESG: The Sustainability Reporting Ripple: Direct and Indirect Implications of the EU Corporate Sustainability Reporting Directive for SME Actors by Deirdre Ahern as of July 27^th, 2023 (#31): “The unique regulatory lens of the Corporate Sustainability Reporting Directive challenges affected companies, not just to mechanically report on, but to qualitatively consider how other partners in their value chain (including SMEs) impact on achievement of the company’s sustainability goals. … although the Corporate Sustainability Reporting Directive has not imposed any new reporting requirements on SMEs, except for those with securities listed on regulated markets in the EU, the indirect impact on the SME sector can be expected to be far broader. … The signal that the information required from value chain SMEs should be no more onerous that under the simplified reporting standards for listed SMEs is important to ensure regulatory coherence, feasibility, and to reduce the administrative burden on regulated actors and SMEs in the value chain” (p. 20/21). My comment: One of the focus areas of my shareholder engagement activities is to include suppliers in ESG-improvements across the whole value chain, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Governance research 1: Corporate Governance Characteristics and Involvement in ESG Activities: Current Trends and Research Directions by Anand Kumar, Tatiana Garanina, and Mikko Ranta as of July 26^th, 2023 (#38): “Our unique combined approach towards conducting a literature review allows us to come up with the key research topics in the area, their deep analysis and identification of the current and future research trends. A review of corporate governance and ESG literature suggests a shift towards a more strategic and practically oriented papers” (abstract).

Governance research 2: A Literature Review on Corporate Governance and ESG research: Emerging Trends and Future Directions by Bruno Buchetti and Francesca Romana Arduino as of August 5ht, 2023 (#112): “… our findings reveal that a variety of elements, such as the inclusion of female directors, the participation of institutional investors, the appointment of independent directors, the existence of specific CEO traits, a strategically formulated directors’ compensation scheme, and the establishment of a sustainability committee, all positively influence ESG outcomes. On the other hand, it seems that family ownership may adversely impact ESG performance. Our review has also highlighted several research areas where, we believe, future research should contribute“ (p. 30).

Climate data chaos: Are Implied Temperature Rise Metrics as Inconsistent as ESG Ratings?: Examining Firm-Level Disagreement among Data Providers by Lea Chmel, Manuel C. Kathan, and Sebastian Utzas of June 29^th, 2023 (#20): “This study documents substantial heterogeneity in valuating firms regarding their ITR (Sö: Implied Temperature Rise) values across different providers. Pairwise Pearson correlations range from −0.133 to 0.313 and indicate disagreement among providers. … We find that energy-intensive industry sectors and a headquarter located in North America seem to be the strongest drivers for the disagreement. … size and tangibility also appear to be determinants of higher divergence in the ITR values of firms. This is puzzling since larger firms are covered by more analysts, on average. … underlying assumptions are not observable to investors, making the exact methodology to determine an ITR value a black box …”.

ESG investment research: Bonds and Loans (Corporate Governance and more)

Brown Govvies: A framework to align sovereign bond portfolios with net zero trajectories by Inès Barahhou, Philippe Ferreira, and Yassine Maalej from Kepler Cheuvreux as of July 26^th, 2023 (#76): “The first conclusion that we drew from our analysis is that it is necessary to impose significant constraints on the optimisation programme. Otherwise, the resulting net zero portfolios may appear unrealistic for investors. … We also highlighted that the choice of the carbon metric is fundamental for net zero alignment. …. Production-based metrics tend to favour developed countries because their industries are more efficient, and they have relocated carbon-intensive activities overseas. In contrast, consumption-based carbon metrics favour emerging countries which tend to have more carbon-efficient consumption habits. … considering carbon emissions or carbon intensities paints very different pictures of the carbon dynamics. … we are not able to find solutions to our net zero problem until 2050. … that unless there is a significant improvement in countries’ behaviours, the main sovereign bond universe will be highly incompatible with an increase in global temperature below 1.5°C“ (p. 40/41). My comment: For my responsible multi-asset portfolios, since many years I use bonds of multilateral development banks instead of government bonds, see soehnholzesg.com/de/wp-content/uploads/Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf

Green cover: Corporate Green Bonds: Market Response and Corporate Response by Sanjai Bhagat and Aaron Yoon as of July 13^th, 2023 (#81): “… per the Green Stakeholder Hypothesis, announcement of green bond issuance should elicit a positive stock market response for the company … Per the Greenwashing Hypothesis, the stock market will respond non-positively to green bond issuance announcements. … Consistent with the Greenwashing Hypothesis, we do not find any significant market response to these green bond announcements. … We document no change in carbon emissions subsequent to the announcement of green bonds. … In the year of the green bond announcements, the abnormal operating performance of these announcing firms is significantly negative. This is consistent with the argument that managers of these firms are using the green bond announcements as a cover for their poor business performance“ (p. 24/25).

Sustenium: The Pricing of Sustainability Linked Bonds on the Primary and Secondary Bond Market by Jannis Poggensee as of July 13^th, 2023 (#33): “The central innovation SLBs provide is that their financial characteristics can vary depending on whether a predefined sustainable performance target has been achieved or not. Typically, the coupon steps-up 25bps for the remaining lifetime of the bond if the target will not be achieved. … investor pay higher prices (accept lower returns) for green assets reflected in the premium SLBs trade both on the primary and on the secondary market on average. Issuers benefit from lower cost of capital, although this effect is decaying“ (p. 32).

Green innovation premium: Can firms adopting a green innovation policy fetch better deals from debtholders? A study on G7 countries by Vu Quang Trinh, Hai Hong Trinh, Tam Huy Nguyen, and Giang Phung as of June 26^th,2023 (#38):.“… We find that high green innovation lowers the corporate cost of debt … Specifically, high-level green innovation engagement facilitates firms to reduce their carbon intensity (risk) and the likelihood of bankruptcy … The better borrowing deals underneath green innovation are also more likely to be acquired in financially constrained businesses. … prolonged green innovation engagement helps firms secure a lower cost of debt because it signifies both a richer experience and higher commitment, increasing trust from debt providers …”(abstract).

ESG investment research: Equities (Corporate Governance and more)

Costly ESG: The Cost of Being Green: How ESG Ratings Affect a Firm’s Cost of Equity by Alessio Galluzzi, Fergus O’Donnell, and Reuben Segara as of July 10^th, 2023 (#123): “We find that a one standard deviation increase in ESG ratings is linked to a significant 15 basis points increase in a firm’s COE on average. This relationship is predominantly observed among S&P 500 firms or large firms, while its impact is less pronounced for energy-intensive firms. These findings highlight the importance of considering industry-specific dynamics, firm-level characteristics, and the broader investment climate when assessing the impact of ESG ratings on a firm’s COE“ (abstract).

Brown Private Equity: ESG in the Top 100 US Private Equity Firms by Garen Markarian, Calvin Rakotobe, and Alexander Semionov as of July 17^th, 2023 (#96): “… we conduct an examination of the ESG practices of the top 100 private equity firms in the United States, a sector that represents over $1.5 trillion of committed capital and directly employs 12 million individuals. … We find that approximately 58% of these private equity firms disclose no information about their ESG practices. Moreover, of the firms that do disclose, two-thirds provide sparse and uninformative ESG information. … Internal Rate of Return (IRR) does not predict ESG scores overall but relates to higher social scores.“ (p. 31).

Other investment research

Unquant PE: Limited Partners versus Unlimited Machines; Artificial Intelligence and the Performance of Private Equity Funds by Reiner Braun, Borja Fernández Tamayo, Florencio López-de-Silanes, Ludovic Phalippou, and Natalia Sigrist as of July 3^rd, 2023 (#1556): “… traditional quantitative factors and document readability proxies, are poor predictors of future performance. In addition, we do not find our proxies of fundraising success at the beginning of a fund’s life are actually correlated with ultimate fund performance. … Results show that approaches exploiting the qualitative information disclosed to investors in PPMs (Sö: Private placement memorandum) have important predictive power for ultimate fund success …“ (p. 25/26).

Big tech control: The Great Startup Sellout and the Rise of Oligopoly by Florian Ederer and Bruno Pellegrino as of Aril 14^th, 2023 (#638): “… we documented a secular shift from IPOs (Sö: Initial public offerings) to acquisitions by VC-backed startups. … firms face an increasingly high (opportunity) cost of going public … dominant companies that are disproportionately active in the corporate control market for startups (such as GAFAM) appear to have become more insulated from the product market competition over the same period. These facts are consistent with the hypothesis that startup acquisitions have contributed to rising oligopoly power in high-tech sectors …” (p. 7). My comment: One more reason for not investing with big techs?

Swiss bailout: The UBS-Credit Suisse Merger: Helvetia’s Gift by Pascal Böni, Tim Kröncke, and Florin Vasvari as of July 13^th, 2023 (#204): “We show that the UBS-CS-merger … created a net value of 22.8 bn USD, distributed to UBS stockholders (5.1 bn USD), CS stockholders (-1.1 bn USD), and CS bondholders (18.8 bn USD). The combined wealth effect cannot be explained by the participating firms’ abnormal returns on securities. … we find that there have likely been large transfers of wealth from taxpayers to UBS/CS stakeholders. … First, we argue that UBS stockholders have profited from bidding restrictions imposed by the government. … Second, we believe that CS bondholders profited from substantial coinsurance effects. Third, the “too-big-to-fail” channel, combined with a material loss protection agreement which covered a specific portfolio of CS assets (corresponding to approximately 3% of the combined assets of the merged bank) may have contributed to the combined wealth effect. Finally, and importantly, we infer from our analysis that the government intervention likely came at the cost of a significant jump in Switzerland’s sovereign credit risk and thus an increase in its expected cost of debt, implying the risk of a substantial taxpayer wealth transfer in the magnitude of approximately six to seven billion USD” (p.23/24).

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Impact impact? Researchpost #137

Impact impact? 18x new research on pension taxes, food carbon labels, sector investing, brown divestments, biodiversity, ESG fund flows, governance washing, impact investing, stewardship, shareholder engagement, divestments, social bonds, article 9 funds and asset allocation (# of SSRN downloads on August 3^rd, 2023) by Marco Becht, Tobias Berg, Timo Busch, Thierry Roncalli, Laurens Swinkels and many more

Social and ecological research

Pension taxes: Does a Decrease in Pension Taxes Increase Retirement Savings? An Experimental Analysis by Kay Blaufus, Michael Milde, and Alexandra Spaeth as of June 12^th, 2023 (#34): “Many countries use tax incentives to promote retirement savings. … Using a series of experiments, we demonstrate that decreasing pension tax rates does not encourage retirement savings. … In contrast, an increase in the tax refund rate, i.e., the rate at which individuals can deduct their retirement savings, increases savings. … all subjects were fully informed about the tax rules and passed comprehension tests on these rules. Nevertheless, we observe significant misperceptions regarding taxes on pension income. … an instrument that increases current tax benefits is more effective than one that decreases future tax burdens even if both instruments are economically equivalent. … we show that substituting deferred taxation with economically equivalent immediate taxation increases the (effective) savings rate by 7.2 percentage points without changing tax revenue” (p. 28/29).

Food carbon labels: Should Carbon Footprint Labeling be Mandatory for all Food Products? RCT Shows no Benefit beyond Labeling the Top Third by Pierre Chandon, Jad Chaaban, and Shemal Doshi as of June 12^th, 2023 (#26): “Carbon footprint labels have been shown to lead consumers to choose food products with lower CO2 emissions … We asked 1,081 American consumers to shop in an experimental online grocery store and choose one frozen meal among the full assortment of a major American grocer … A 16.5% reduction in emissions was achieved by labeling the top third of products, with no statistically significant improvement gained by further increasing the proportion of labeled products” (abstract).

ESG and internal control: Corporate Environmental, Social, and Governance (ESG) Performance and the Internal Control Environment by Jacquelyn Sue Moffitt, Jeanne-Claire Alyse Patin, and Luke Watson as of June 15^th, 2023 (#59): “We find that ESG performance is negatively related to the likelihood of general internal control weaknesses, consistent with transparent reporting. We also find that ESG performance is negatively related to company-level internal control weaknesses, which are considered relatively severe. Further, we find that ESG performance is negatively associated with specific internal control weaknesses that indicate a lack of ethical tone at the top. … Overall, our results suggest that ESG performance is positively associated with the strength of the internal control environment“ (abstract).

ESG investing research: Impact impact?

Environmental sector investing: Environmental Preferences and Sector Valuations by Tristan Jourde and Arthur Stalla-Bourdillon as of July 7^th, 2023 (#75): “… we explore the dynamic nature of pro-environmental preferences among investors through the lens of sector valuations in global equity markets from 2018 to 2021. … we find that firms’ green and brown sector affiliations are significantly priced in the global equity market, positively for green sectors and negatively for brown sectors. Furthermore, companies operating in green sectors have become increasingly overvalued relative to the rest of the market between 2018 and 2021, and vice versa for those operating in brown sectors … In addition, the turnover rate of both green and brown companies has increased over the last years …“ (p. 19). My comment: An update of the study after the 2022 market development would be interesting.

Brown divestments: Climate risk and strategic asset reallocation by Tobias Berg, Lin Ma, and Daniel Streitz as of Feb. 28^th, 2023 (#128): “We document that large emitters, i.e., firms that are part of the Climate Action 100+ scheme, started to reduce their combined Scope 1 and 2 emissions by around 12% in the years after the 2015 Paris Agreement relative to other public firms with positive carbon emission levels. … There is no evidence for increased engagements in other emission reduction activities. … we find that buyers of large asset sales tend to be private, financial, and other firms that do not disclose emissions to the Carbon Disclosure Project. … We provide evidence that is consistent with increased regulatory risk being a main driver of the effects“ (p. 25/26). My comment: I am skeptical regarding Transition investments see ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)

Biodiversity premium: A closer look at the biodiversity premium by Guillaume Coqueret and Thomas Giroux as of Juy 21^st, 2023 (#163): “… while this (Sö: biodiversity) premium is not unconditionally strong, there are dimensions along which it may prove substantial. For instance, air pollution is priced significantly more than land use, even though the latter has a more decisive impact on the environment. Another important subtlety lies in the distinction between realized versus expected returns (from investors). Our results show more pronounced effects on expected returns. … Lastly, like all other premia, the biodiversity factor experiences fluctuating returns. The recent period is associated with largely negative premia, especially for expected returns. Our analysis shows that a few variables are able to explain some time-variations, notably attention to biodiversity and climate, oil prices, and consumer sentiment” (p. 17).

Good ESG capital: ESG Capitals and Corporate Value Creation by Banita Bissoondoyal-Bheenick, Scott Bennett, and Angel Zhong as of June 12^th, 2023 (#110): “Our paper has documented that investing in ESG capital … can lead to better short-term and long-term shareholder wealth … In the short term, the ESG capital triggers sharp financial return improvement for a firm to improve their ESG capital from a very low point (i.e., a firm that seldom considers ESG activities and culture) to an average ESG performance. Such positive effects are small but still positive if the firm continues to enhance its ESG capital from the middle range towards the top level in the market. We also find that investment in ESG capital can positively and interactively influence other capitals, such as financial, innovation and manufacturing capitals, to improve financial returns. Under a good ESG environment, more holding of the other capitals could lead to more significant financial returns than each capital could achieve individually“ (p. 23/24).

Provider-friendly ESG? Machine-Learning about ESG Preferences: Evidence from Fund Flows by George O. Aragon and Shuaiyu Chen as of July 29^th, 2023 (#36): “We first construct a broad dataset of ESG scores for active equity mutual funds based on funds’ stock holdings and stock-level scores from six prominent ESG data providers. We document substantial dispersion in scores across providers, but that many scores nevertheless have predictive power for flows. … Over our 2010–2020 sample period, we find that funds with higher ESG benefits subsequently realize higher flows, lower net returns against the benchmark, lower value-added from net returns, and hold stocks that underperform other stocks. We estimate that investors pay an annual premium of $11 million to invest in a fund with ESG benefits in the top decile. Overall, our findings shed new light on the relevance of ESG scores and the ESG preferences of investors“ (p. 23). My comment: The fund flows should be positive for my pure ESG fund and portfolios, see e.g. Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

Governance-washing: The G-pillar in ESG: how to separate the wheat from the chaff in comply-or-explain approach? by Daniela Venanzi as of June 26^th, 2023 (#24): “This study tries to verify if a gap exists between apparent and real compliance to CG (Sö; Corporate Governance) Code requirements in a sample of Italian listed financial companies (mostly banks), with reference to two areas (independence of board members and transparency) that mostly make decision-making unbiased by conflicts of interests and are therefore crucial for corporate sustainability. We find opacity/obfuscation in CG narrative and avoidance/concealment strategies also in banks considered “CG champions”, more rarely non-compliance clearly declared and appropriately explained” (abstract).

ESG predictions: Are ESG ratings informative to forecast idiosyncratic risk? by Christophe Boucher, Wassim Le Lann, Stéphane Matton, and Sessi Tokpavi as of July 11^th, 2023 (#71): “The contribution of this article is to propose a formal statistical procedure for assessing the informational content in ESG ratings. … We apply our procedure to evaluate two leading ESG rating systems (Sustainalytics and Asset4) in three investment universes (Europe, North America, and the Asia-Pacific region). The results show that the null hypothesis of a lack of informational content in ESG ratings is strongly rejected for Europe, while the results are mixed and predictive accuracy gains are lower for the other regions. Furthermore, we find that the predictive accuracy gains are higher for the environmental dimension of the ESG ratings. Importantly, we find that the predictive accuracy gains derived from ESG ratings increase with the level of consensus between rating agencies in all three universes, while they are low for firms over which there is a high level of disagreement“ (p. 31).

Risk-reducing disclosure: ESG Disclosure, CEO Power and Incentives and Corporate Risk-taking by Faek Menla Ali, Yuanyuan Wu, and Xiaoxiang Zhang as of July 25^th, 2023 (#19): “… we analyze the impact of ESG disclosure on firm risk-taking within US companies. … the reduction in corporate risk-taking due to ESG disclosure mitigates excessive risk-taking rather than leading to risk avoidance“ (p. 26).

Impact investing research: Impact impact?

Impact impact? Missing the Impact in Impact Investing Research – A Systematic Review and Critical Reflection of the Literature by Deike Schlütter, Lena Schätzlein, Rüdiger Hahn, and Carolin Waldner as of July 6^th, 2023: “Impact investing (II) aims to achieve intentional social impact in addition to financial return. … the growing academic literature on II is scattered across a variety of disciplines and topics, with inconsistencies in terminology and concepts and a paucity of theoretical explanations and frameworks. … Despite the fact that II aims to create a measurable societal impact, this impact of II, its raison d’être, is not scrutinized in the literature“ (abstract).

Stewardship overview: Investor Stewardship: The State of the Art and Future Prospects by Dionysia Katelouzou as of June 22^nd, 2023 (#46): “Within less than fifteen years fifty-five soft-law stewardship codes have been developed across 23 jurisdictions on six continents and investor stewardship became the standard term of reference for the role of institutional investors in addressing not only corporate governance but also environmental and social issues. … Nevertheless, there is still a continuing lack of clarity or consensus over what regulators and investors deem to be a good investor steward. … Institutional investors acting as stewards are expected to exercise power and influence over their assets, on behalf of others, and for others. … Finally, I look at the future of investor stewardship, focusing specifically on two ongoing trends, that of green stewardship and disintermediated stewardship“ (abstract).

ESG engagement: Does Paying Passive Managers to Engage Improve ESG Performance? by Marco Becht, Julian R. Franks, Hideaki Miyajima and Kazunori Suzuki as of July 26^th, 2023 (#283): “… the Japanese Government Pension Investment Fund (GPIF), the largest public pension fund in the world … gave its largest passive manager a remunerated mandate to improve the environmental (E), social (S) and governance (G) performance of portfolio companies. … engagement by the asset manager has resulted in improvements in some of the ESG scores for mid- and large cap companies; small-cap companies were rarely engaged. … we find evidence that GPIF’s portfolio tilt towards ESG indexes has created financial incentives to improve ESG scores” (abstract).

Career first? Exit or Voice? Divestment, Activism, and Corporate Social Responsibility by Victor Saint-Jean as of June 21^st, 2023 (#80): “Using a classification framework based on US mutual funds’ portfolio holdings and votes on S-related shareholder proposals, I show that voice funds generally do better than exit funds when it comes to curtailing firms’ anti-social behavior. The exit strategy relies on the threat of lower stock prices and is effective only at firms with high CEO wealth-performance-sensitivity. Voice funds threaten directors’ reelection, and are thus more effective in general, especially when elections are approaching. Taken together, my results point to the career concerns of the leadership as driving pro-social change when shareholders demand it” (abstract).

No social premium: Green vs. Social Bond Premium by Mohamed Ben and Thierry Roncalli from Amundi as of May 21^st, 2023 (#102): “Between 2019 and 2022, the greenium is about −3 bps on average, meaning that, all else being equal, investors are willing to forsake a small share of returns in exchange for environmental benefits. … For the social bond premium, we notice fragmented estimates of the premium in the secondary market. In the long run, the premium is close to zero and equal to −0.3 bps on average. … we notice that the social bond premium is not positively correlated with the greenium. … non-euro projects are subject to a higher premium“ (p. 26/27).

Article 9 segments: SFDR Article 9: Is it all about impact? by Lisa Scheitza and Timo Busch as of July 17^th, 2023 (#235): “We investigate more than 1,000 investment funds that are classified under Article 9 of the EU Sustainable Finance Disclosure Regulation (SFDR). … while 60% of funds follow an impact-oriented investment strategy, we identify 40% that are not impact-related but rather pursue an Environment, Social, and Governance (ESG) investment strategy. Generally, we do not find significant differences in ESG scores and returns between ESG-related and impact-related funds. Yet, impact-related funds have higher SDG impact scores and higher management fees than ESG-related funds. Downgraded Article 9 funds, i.e., funds that changed SFDR status by January 2023, however, tend to follow less ambitious investment approaches and realize lower returns than funds that maintained their SFDR statuses“ (abstract). “ …. we find no significant differences in risk-adjusted returns between ESG-related investments and impact-related investments among Article 9 funds” (p. 16). My comment: My impact approach see Active or impact investing? – (prof-soehnholz.com)

Other investment research

Asset allocation problem? Empirical evidence on the stock-bond correlation by Roderick Molenaar, Edouard Sénéchal, Laurens Swinkels, and Zhenping Wang as of July 26^th, 2023 (#377): “Our historical data starting in 1875 indicates that a positive stock-bond correlation has been more common than a negative one, even though the latter has been observed mostly in the past two decades. Our overarching finding is that for the post-1952 period with independent central banks, a positive stock-bond correlation is observed during periods with high inflation and high real returns on Treasury bills. … Historical regimes with positive stock-bond correlation are associated with higher volatility risk of a 60/40 portfolio and lower Sharpe ratios“ (p. 25/26). My comment: My most-passive allocation approach see Microsoft Word – 230720 Das Soehnholz ESG und SDG Portfoliobuch

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Impact impact? Advert for German investors:

“Sponsor” my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 28 of 30 companies engaged: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Active ESG share: Researchpost #136

Active ESG share: 26x new research on SDG, climate automation, family firms, greenium and green liquidity, anti-ESG, ESG-ratings, diversity, sustainability standards, disclosure, ESG pay, taxes, impact investing, and financial education by Martijn Cremers and many more (#: SSRN downloads as of July 27^th, 2023)

Ecological and social research: Active ESG share

SDG deficits: The Sustainable Development Goals Report Special edition by the United Nations as of July 10^th, 2023: “At the midpoint on our way to 2030, the Sustainable Development Goals are in deep trouble. An assessment of the around 140 targets for which trend data is available shows that about half of these targets are moderately or severely off track; and over 30 per cent have either seen no movement or regressed below the 2015 baseline. Under current trends, 575 million people will still be living in extreme poverty in 2030, and only about one third of countries will meet the target to halve national poverty levels. Shockingly, the world is back at hunger levels not seen since 2005, and food prices remain higher in more countries than in the period 2015–2019. The way things are going, it will take 286 years to close gender gaps in legal protection and remove discriminatory laws. And in education, the impacts of years of underinvestment and learning losses are such that, by 2030, some 84 million children will be out of school and 300 million children or young people attending school will leave unable to read and write. … Carbon dioxide levels continue to rise – to a level not seen in 2 million years. At the current rate of progress, renewable energy sources will continue to account for a mere fraction of our energy supplies in 2030, some 660 million people will remain without electricity, and close to 2 billion people will continue to rely on polluting fuels and technologies for cooking. So much of our lives and health depend on nature, yet it could take another 25 years to halt deforestation, while vast numbers of species worldwide are threatened with extinction” (p. 4).

Climate automation: Labor Exposure to Climate Change and Capital Deepening by Zhanbing Xiao as of June 21^st, 2023 (#31): “This paper looks into these risks and calls for more attention to the health issues of outdoor workers in the transition to a warmer era. … I find that high-exposure firms have higher capital-labor ratios, especially when their managers believe in climate change or when jobs are easy to automate. After experiencing shocks to physical (abnormally high temperatures) or regulatory (the adoption of the HIPS in California) risks, high-exposure firms switch to more capital-intensive production functions. …I also find that high-exposure firms respond to the shocks by innovating more, especially in technologies facilitating automation and reducing labor costs. … industry-wide evidence that labor exposure to climate change negatively affects job creation and workers’ earnings“ (p. 34/35).

Open or private data? Opening Up Big Data for Sustainability: What Role for Database Rights in the Fourth Industrial Revolution? by Guido Noto La Diega and Estelle Derclaye as of Nov. 8^th, 2022 (#159): “… the real guardians of big data – the private corporations that are the key decision-makers in the 4IR (Sö: 4th Industrial Revolution) – are not doing enough to facilitate the sharing and re-use of data in the public interest, including the pursuit of climate justice. … While there may be instances where Intellectual Property (IP) reasons may justify some limitations in the access to and re-use of big data held by corporations, it is our view that, in general, IP should not be used to hinder re-use of data to pursue the SDGs. … First, we will illustrate the triple meaning of ‘data sustainability.’ Second, we will critically assess whether the database right (or ‘sui generis right’) can play a role in opening up corporate big data. Third, will imagine how a sustainable framework for sustainable data governance may look like. This focus is justified by the fact that the Database Directive, often accused of creating an unjustified monopoly on data, is in the process of being reformed by the yet-to-be-published Data Act” (abstract).

Clean family firms: Family Ownership and Carbon Emissions by Marcin Borsuk, Nicolas Eugster, Paul-Olivier Klein, and Oskar Kowalewski as of April 13^th, 2023 (#159): “Family firms exhibit lower carbon emissions both direct and indirect when compared to non-family firms, suggesting a higher commitment to environmental protection by family owners. When using the 2015 Paris Agreement as a quasi-exogeneous shock, results show that family firms reacted more to the Agreement and recorded a further decline in their emissions. … Firms directly managed by the family experience a further reduction in their emissions. On the contrary, family firms with hired CEOs see an increase in emissions. We show that family firms record a higher level of R&D expenses, suggesting that they invest more in new technologies, which might contribute to reducing their environmental footprint. … Compared with non-family firms, family firms commit less to a reduction in their carbon emissions and display lower ESG scores“ (p. 26).

Green productivity: Environmental Management, Environmental Innovation, and Productivity Growth: A Global Firm-Level Investigation by Ruohan Wu as of June 18^th, 2023 (#5): “… overall, environmental management and innovation both increase firm productivity but substitute for each other’s positive effects. Environmental management significantly increases productivity of firms that do not innovate, while environmental innovation significantly increases productivity of those without environmental management” (p. 30).

Good governance: Governance, Equity Issuance and Cash: New International Evidence by Sadok El Ghoul, Omrane Guedhami, Hyunseok Kim, and Jungwon Suh as of May 9^th, 2023 (#18): “… we hypothesize that equity issuance is more frequent and growth-inducing under strong governance than under weak governance. We also hypothesize that cash added to or held by equity issuers creates greater value for shareholders under strong governance than under weak governance. Our empirical results support these hypotheses. Most remarkably, under weak governance, cash assets not only fail to create but destroy value for shareholders if they are in the possession of equity issuers instead of non-equity-issuers. Overall, strong institutions help small growth firms unlock their value through active equity issuance. On the flip side, weak institutions render an economy’s capital allocation inefficient by hindering value-creating equity issuance” (abstract).

ESG Ratings Reearch: Active ESG Share

MSCI et al. criticism? ESG rating agency incentives by Suhas A. Sridharan, Yifan Yan, and Teri Lombardi Yohn as of June 19^th, 2023 (#96): “First, we report that firms with higher (lower) stock returns receive higher (lower) ratings from a rater with high index incentives relative to ratings from a rater with low index incentives. … Second, the rater with high index incentives provides higher ESG ratings for smaller firms with less ESG disclosure. … Third, we show that ESG index inclusion decisions are associated with stock returns. Collectively, our findings suggest that ESG data providers’ index licensing incentives influence their ESG ratings“ (p. 22).

Anti-ESG ESG: Conflicting Objectives of ESG Funds: Evidence from Proxy Voting by Tao Li, S. Lakshmi Naaraayanan, and Kunal Sachdeva as of February 6^th, 2023 (#840): “ESG funds reveal their preference for superior returns by voting against E&S proposals when it is uncertain whether these proposals will pass. … active ESG funds and non-ESG focused institutions are more likely to cast votes against E&S proposals” (p. 26).

Non-ESG ESG? What Does ESG Investing Mean and Does It Matter Yet? by Abed El Karim Farroukh, Jarrad Harford, and David Shin as of June 26^th, 2023 (#77): “… even ESG-oriented funds often vote against shareholder proposals related to E&S issues. When considering portfolio holdings and turnover, firms added to portfolios have better ESG scores than those dropped for both ESG and non-ESG funds. Nevertheless, portfolio additions and deletions do not improve fund scores on a value-weighted basis, and those scores closely track the ESG score of a value weighed portfolio of all public firms. This suggests that while investment filters based on ESG criteria may exist, they rarely bind. … we find that material E&S proposals receive more support, but only a small proportion (4%) of these proposals actually pass. Lastly, unconditional support from funds associated with families that have signed the United Nations Principles for Responsible Investing (UN PRI) would lead to a significant change in the voting outcomes of numerous E&S proposals. Overall, our findings suggest that the effects of ESG investing are growing but remain relatively limited. E&S proposals rarely pass, and the ESG scores of funds declaring ESG preferences are not that different from the rest of funds“ (p. 26).

ESG divergence: ESG Ratings: Disagreement across Providers and Effects on Stock Returns by Giulio Anselmi and Giovanni Petrella as of Jan. 23^rd, 2023 (#237): “This paper examines the ESG rating assigned by two providers, Refinitiv and Bloomberg, to companies listed in Europe and the United States in the period 2010-2020. … Companies with higher ESG scores have the following characteristics: larger size, lower credit risk, and lower equity returns. The ESG dimension does not affect stock returns, once risk factors have been taken into account. The divergence of opinions across rating providers is stable in Europe and increasing in the US. As for the individual components (E, S and G), in both markets we observe a wide and constant divergence of opinions for governance as well as a growing divergence over time for the social component“ (abstract).

Active ESG share: The complex materiality of ESG ratings: Evidence from actively managed ESG funds by K.J. Martijn Cremers, Timothy B. Riley, and Rafael Zambrana as of July 21^st,2023 (#1440): “Our primary contribution is to introduce a novel metric of the importance of ESG information in portfolio construction, Active ESG Share, which measures how different the full distribution of the stock-level ESG ratings in a fund’s portfolio is from the distribution in the fund’s benchmark … We find no predictive relation between Active ESG Share and performance among non-ESG funds and a strong, positive predictive relation between Active ESG Share and performance among ESG funds” (p. 41). My comment: My portfolios are managed independently from benchmarks and typically show significant positive active ESG shares, see e.g. Active or impact investing? – (prof-soehnholz.com)

Responsible investment research: Active ESG share

Stupid ban? Do Political Anti-ESG Sanctions Have Any Economic Substance? The Case of Texas Law Mandating Divestment from ESG Asset Management Companies by Shivaram Rajgopal, Anup Srivastava, and Rong Zhao as of March 16^th,2023 (#303): “Politicians in Texas claim that the ban on ESG-heavy asset management firms would penalize companies that potentially harm the state’s interest by boycotting the energy sector. We find little economic substance behind such claims or the reasoning for their ban. Banned funds are largely indexers with portfolio tilts toward information technology and away from energy stocks. Importantly, banned funds carry significant stakes in energy stocks and hold 61% of the energy stocks held by the control sample of funds. The risk and return characteristics of banned funds are indistinguishable from those of control funds. A shift from banned funds to control funds is unlikely to result in a large shift of retirement investments toward the energy sector. The Texas ban, and similar follow-up actions by Republican governors and senior officials, appear to lack significant economic substance“ (p. 23).

Better proactive: Gender Inequality, Social Movement, and Company Actions: How Do Wall Street and Main Street React? by Angelyn Fairchild, Olga Hawn, Ruth Aguilera, Anatoli Colicevm and Yakov Bart as of May 25^th,2023 (#44): “We analyze reactions to company actions among two stakeholder groups, “Wall Street” (investors) and “Main Street” (the general public and consumers). … We identify 632 gender-related company actions and uncover that Wall Street and Main Street are surprisingly aligned in their negative reaction to companies’ symbolic-reactive actions, as evidenced by negative cumulative abnormal returns, more negative social media and reduced consumer perceptions of brand equity” (abstract)

Less risk? Socially Responsible Investment: The Role of Narrow Framing by Yiting Chen and Yeow Hwee Chua as of Dec. 8^th, 2022 (#54): “Through our experiment, subjects allocate endowments among one risk-free asset and two risky assets. … Relative to the control condition, this risky asset yields additional payments for subjects themselves in one treatment, and for charities in the remaining two treatments. Our results show that additional payments for oneself encourage risk taking behavior and trigger rebalancing across different risky assets. However, payments for charities solely induce rebalancing“ (abstract). My comment: This may explain the typically lower risk I have seen in my responsible portfolios and in some research regarding responsible investments.

Greenium model: Asset Pricing with Disagreement about Climate Risks by Thomas Lontzek, Walter Pohl, Karl Schmedders, Marco Thalhammer, and Ole Wilms as of July 19^th, 2023 (#113): “We present an asset-pricing model for the analysis of climate financial risks. … In our model, as long as the global temperature is below the temperature threshold of a tipping point, climate-induced disasters cannot occur. Once the global temperature crosses that threshold, disasters become increasingly likely. The economy is populated by two types of investor with divergent beliefs about climate change. Green investors believe that the disaster probability rises considerably faster than brown investors do. … The model simultaneously explains several empirical findings that have recently been documented in the literature. … according to our model past performance is not a good predictor of future performance. While realized returns of green stocks have gone up in response to negative climate news, expected returns have gone down simultaneously. In the absence of further exogenous shocks and climate-induced disasters, our model predicts higher future returns for brown stocks. However, if temperatures continue to rise and approach the tipping point threshold, the potential benefits of investments to slow down climate change increase significantly. In this scenario, our model predicts a significant increase in the market share of green investors and the carbon premium“ (p. 39/40).

More green liquidity: Unveiling the Liquidity Greenium: Exploring Patterns in the Liquidity of Green versus Conventional Bonds by Annalisa Molino, Lorenzo Prosperi, and Lea Zicchino as of July 16^th, 2023 (#14): “… we investigate the relationship between liquidity and green bond label using a sample of green bonds issued globally. … our findings suggest that green bonds are more liquid than comparable ordinary bonds. … The difference is large and statistically significant for bonds issued by governments or supranationals, while it is not significantly different from zero for corporates, unless the company operates in the energy sector. … companies that certify their commitment to use the proceeds for green projects or enjoy a strong environmental reputation can also benefit from higher liquidity in the secondary market. … the liquidity of ECB-eligible green bonds improves relative to similar conventional bonds, possibly because they become more attractive to banks with access to ECB funding. Finally, we find that the liquidity of conventional bonds issued by green bond issuers improves significantly in the one-year period following the green announcement“ (p. 18/19).

Impact investment and shareholder engagement: Active ESG share

Standard overload: Penalty Zones in International Sustainability Standards: Where Improved Sustainability Doesn’t Pay by Nicole Darnall, Konstantinos Iatridis, Effie Kesidou, and Annie Snelson-Powell as of June 19^th, 2023 (#17): “International sustainability standards (ISSs), such as the ISO standards, the United Nations Global Compact, and the Global Reporting Initiative framework, are externally certified process requirements or specifications that are designed to improve firms’ sustainability” (p. 1). “Adopting an International Sustainability Standard (ISS) helps firms improve their sustainability performance. It also acts as a credible market “signal” that legitimizes firms’ latent sustainability practices while improving their market value. … However, beyond a tipping point of 2 ISSs, firms’ market gains decline, even though their sustainability performance continues to improve until a tipping point of 3 ISSs“ (abstract).

Good ESG disclosure (1): Mandatory ESG Disclosure, Information Asymmetry, and Litigation Risk: Evidence from Initial Public Offerings by Thomas J. Boulton as of April 7^th, 2023 (#168): “If ESG disclosure improves the information environment or reduces litigation risk for IPO firms, IPOs should be underpriced less when ESG disclosure is mandatory. I test this prediction in a sample of 15,456 IPOs issued in 36 countries between 1998 and 2018. … I find underpricing is lower for IPOs issued in countries that mandate ESG disclosure. From an economic perspective, my baseline results indicate that first-day returns are 15.9 percentage points lower in the presence of an ESG disclosure mandate. The typical IPO firm raises approximately 105.93 million USD in their IPO. Thus, the implied impact of an ESG disclosure mandate is an additional 16.8 million in proceeds. … I find that their impact on underpricing is stronger in countries with lower-quality disclosure environments. … a significant benefit of ESG disclosure mandates is that they lower the cost of capital for the young, high-growth firms that issue IPOs” (p. 27-29).

Good ESG disclosure (2): Environmental, Social and Governance Disclosure and Value Generation: Is the Financial Industry Different? by Amir Gholami, John Sands, and Habib Ur Rahman as of July 18^th, 2023 (#24): “The results show that the overall association between corporate ESG performance disclosure and companies’ profitability is strong and positive across all industry sectors. … All corporate ESG performance disclosure elements (ENV, SOC and GOV) are positively associated with corporate profitability for companies that operate in the financial industry. Remarkably, for companies operating in non-financial sectors, except for corporate governance, there is no significant association between corporate environmental and social elements and a company’s profitability“ (p. 12).

Climate pay effects: Climate Regulatory Risks and Executive Compensation: Evidence from U.S. State-Level SCAP Finalization by Qiyang He, Justin Hung Nguyen, Buhui Qiu, and Bohui Zhang as of April 13^th, 2023 (#131): “Different state governments in the U.S. have begun to adopt climate action plans, policies, and regulations to prepare for and combat the significant threats of climate change. The finalization of these climate action plans, policies, and regulations in a state results in an adaptation plan— the SCAP. … we find that SCAP finalization leads residents in that state to pay more attention to climate-related topics. Also, it leads firms headquartered in that state to have higher perceived climate regulatory risks … Further analyses show a reduction of total CEO pay of about 5% for treated firms headquartered in the SCAP-adopting state relative to control firms headquartered in non-adopting states. The negative treatment effect also holds for non-CEO executive compensation. … the shareholders of treated firms reduce their CEO’s profit-chasing and risk-taking incentives, probably because these activities will likely incur more future environmental compliance costs. Instead, CEO pay is more likely to be linked to corporate environmental performance, that is, the treated firms adopt environmental contracting to redirect CEO incentives from financial gains to environmental responsibility” (p. 27/28).

Stakeholder issues: Corporate Tax Disclosure by Jeffrey L. Hoopes, Leslie Robinson, and Joel Slemrod as of July 17^th, 2023 (#47): “Policies that require, or recommend, disclosure of corporate tax information are becoming more common throughout the world, as are examples of tax-related information increasingly influencing public policy and perceptions. In addition, companies are increasing the voluntary provision of tax-related information. We describe those trends and place them within a taxonomy of public and private tax disclosure. We then review the academic literature on corporate tax disclosures and discuss what is known about their effects. One key takeaway is the paucity of evidence that many tax disclosures mandated with the aim of increasing tax revenue have produced additional revenue. We highlight many crucial unanswered questions …” (abstract). My comment: Nevertheless I suggest to focus on tax disclosure/payment regarding community/government stakeholder engagement see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) rather than on donations or other indicators.

Impact investment status quo: Impact Investing by Ayako Yasuda as of July 23^rd, 2023 (#62): “Impact investing is a class of investments that are designed to meet the non-pecuniary preferences of investors (or beneficiaries) and aim to generate a positive externality actively and causally through their ownership and/or governance of the companies they invest in. Impact investing emerged as a new branch of responsible, sustainable or ESG (environmental, social, and governance) investment universe in the last few decades. In this article, we provide a definition of impact investing, review the extant literature, and discuss suggestions for future research” (abstract).

Political engagement: Collaborative investor engagement with policymakers: Changing the rules of the game? by Camila Yamahaki and Catherine Marchewitz as of June 25^th, 2023 (#44): “A growing number of investors are engaging with policymakers on environmental, social and governance (ESG) issues, but little academic research exists on investor policy engagement. … We identify a trend that investors engage with sovereigns to fulfil their fiduciary duty, improve investment risk management, and create an enabling environment for sustainable investments. We encourage future research to further investigate these research propositions and to analyze potential conflicts of interest arising from policy engagement in emerging market jurisdictions” (abstract).

General investment research

Good diversity: Institutional Investors and Echo Chambers: Evidence from Social Media Connections and Political Ideologies by Nicholas Guest, Brady Twedt, and Melina Murren Vosse as of June 26^th, 2023 (#62): “… we measure the ideological diversity of institutional investors’ surroundings using the social media connections and political beliefs of the communities where they reside” (p. 24/25). “Finally, firms whose investors have more likeminded networks exhibit substantially lower future returns. Overall, our results suggest that connections to people with diverse beliefs and information sets can improve the financial decision making of more sophisticated investors, leading to more efficient markets (abstract).

Good education: The education premium in returns to wealth by Elisa Castagno, Raffaele Corvino, and Francesco Ruggiero as of July 6^th, 2023 (#17): “… we define as education premium the extra-returns to wealth earned by college-graduated individuals compared to their non-college graduated peers. We find that the education premium is sizeable … We find that an important fraction of the premium is due to the higher propensity for risk-taking and investing in the stock market of better educated individuals … we document a significantly higher propensity for well-diversified portfolios as well as a higher persistence in stock market participation over time of better educated individuals, and we show that both mechanisms positively and significantly contribute to the education premium” (p. 25).

Finance-Machines? Financial Machine Learning by Bryan T. Kelly and Dacheng Xiu as of July 26^th, 2023 (#12): “We emphasize the areas that have received the most research attention to date, including return prediction, factor models of risk and return, stochastic discount factors, and portfolio choice. Unfortunately, the scope of this survey has forced us to limit or omit coverage of some important financial machine learning topics. One such omitted topic that benefits from machine learning methods is risk modeling. … Closely related to risk modeling is the topic of derivatives pricing. … machine learning is making inroads in other fields such as corporate finance, entrepreneurship, household finance, and real estate“ (p. 132/133). My comment: I do not expect too much from financial maschine learning. Simple approaches to investing often work better than pseudo-optimised ones, see e.g. Pseudo-optimierte besser durch robuste Geldanlagen ersetzen – Responsible Investment Research Blog (prof-soehnholz.com)

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ESG sales impact: Researchpost #135

ESG sales impact: 11x new research on ESG sales effects, governance knowledge deficits and policies, corporate purpose measurement, CSR returns, impact frameworks, bad asset managers, financial advice AI and Bitcoin by Christina Bannier, Lars Hornuf, Judith Stroehle and many more (#: SSRN downloads on July 19th, 2023)

Social and ecological research: ESG sales impact

ESG sales impact (1): Do Consumers Care About ESG? Evidence from Barcode-Level Sales Data by Jean-Marie Meier, Henri Servaes, Jiaying Wei, and Steven Chong Xiao as of July 11^th, 2023 (#266): “… we find that higher E&S ratings positively affect subsequent local product sales. The positive effect of E&S ratings on local product sales is stronger in markets with more Democratic voters and with a higher average income. … revenue also declines after the release of negative E&S news. … we find a significant increase in the sensitivity of local retail sales to firm E&S performance after (Sö: natural and environmental) … disaster events for counties located closer to the events“ (p. 23).

ESG sales impact (2): How Does ESG Shape Consumption? by Joel F. Houston, Chen Lin, Hongyu Shan, and Mo Shen as of June 21^st, 2023 (#280): “Our study explores the effects of more than 1600 negative events captured from the RepRisk database, on 150 million point-of-sale consumption observations … Our baseline findings show that the average negative event generates a 5 – 10 % decrease in sales for the affected product in the six months following the event. … we find that there is considerable heterogeneity in consumer responses, and that the average response varies considerably depending on consumer demographics and the nature of the ESG-related reputation shock“ (p. 23/24).

Governance doubts: Seven Gaping Holes in Our Knowledge of Corporate Governance by David F. Larcker and Brian Tayan as of May 3^rd, 2023 (741): “… we highlight significant “holes” in our knowledge of corporate governance. … While the concepts we review are not exhaustive, each is critical to our understanding of the proper functioning of governance, including board oversight, the recruitment of CEO talent, the size and structure of CEO pay, and the advancement of shareholder and stakeholder welfare” (abstract).

Purpose first: Sustainable Corporate Governance. An Overview and an Assessment by Steen Thomsen as of June 8^th, 2023 (#144): “This paper outlines what could be some of the key elements of sustainable corporate governance 2.0 including company law (director liability), long-term ownership, ESG investment, company purpose, sustainability committees, sustainability competencies, ESG incentives, climate plans, climate risk management, sustainability reporting, and internal carbon pricing. … the current fixation on regulation and ESG is counterproductive and suggest that a better way forward is to start with company purpose and to adjust corporate governance accordingly. Using this approach, I outline a tentative roadmap for sustainable corporate governance 2.0“ (abstract). My comment: I suggest a Roadmap for corporate and stakeholder engagement here Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Responsible investment research: ESG sales impact

Purpose measurement: Through the looking glass: tying performance and materiality to corporate purpose by Judith C. Stroehle, Kazbi Soonawalla, and Marcel Metzner as of June 7^th, 2023 (#18): “The performance principles of corporate purpose suggest that measurement needs to reflect whether companies take into account the growing significance of workers, societies and natural assets both inside and outside a company’s legal boundaries … Purpose without measurement runs the risk of being merely a mirage …. we show that it is not impossible to establish measurement of purpose, in particular when performance in relation to purpose is linked to existing frameworks of measurement and notions of single and double materiality“ (p. 30/31).

Irresponsible returns? The risk‑return tradeoff: are sustainable investors compensated adequately? by Christina E. Bannier, Yannik Bofinger, and Björn Rock as of April 27^th, 2023: “… our results show that low CSR (Sö: Corporate Social Responsibility) is … associated with higher portfolio returns. Interestingly, these higher returns even overcompensate the investor for the amount of risk she has to bear. … from an investor’s perspective, the ‘optimal’ return-to-risk ratio is achieved for a portfolio that invests in the lowest CSR-rated firms” (p. 169/170). My comment see ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)

Impact frames: How impact investing firms use reference frameworks to manage their impact performance: An industry-level study by Syrus M. Islam and Ahsan Habib as of July 10^th, 2023 (#8): “… we show how impact investing firms use various reference frameworks (e.g., IFC Performance Standards, Impact Management Project framework, UN Sustainable Development Goals) to manage their impact performance throughout the investment lifecycle. … We also discuss … how reference frameworks used in performance management in the impact investing industry differ from those used in some other industries” (abstract). My comment: I use the SDG-Framework see Active or impact investing? – (prof-soehnholz.com)

Bad asset managers? Who’s managing your future? An assessment of asset managers’ climate action by Lara Cuvelier at al. from Reclaim Finance as of June 28^th, 2023: “At the parent (or group) level, the 30 asset managers included in this report invested at least $3.5 billion in 74 newly issued bond securities from companies actively engaged in fossil fuel expansion. … The 30 asset managers analyzed held US$597 bn in bonds and shares in the biggest fossil fuel developers as of January 2023. … the majority of these 30 major asset managers do not currently sanction polluting companies for failing to take the right steps for the climate …After five years of intensive dialogue by investors from the CA100+ initiative, only 20% of the companies from the coal mining and oil and gas sectors that have been engaged have even set an ambition to achieve net zero emissions by 2050. … only two of the companies are working to decarbonize their capital expenditures” (p. 7).

General investment research

AI & investments: Executives vs. Chatbots: Unmasking Insights through Human-AI Differences in Earnings Conference Q&A by John (Jianqiu) Bai, Nicole Boyson, Yi Cao, Miao Liu, and Chi Wan as of June 22th, 2023 (#125): “… we use earnings conference calls as a setting and introduce a novel measure of information content (Human Machine Differences, HAID) by exploiting the discrepancy between answers to questions at earnings conference calls provided by actual corporate CFOs and CEOs and those given by several context-preserving Large Language Models (LLM) including ChatGPT. … HAID has significant predictive power for the absolute cumulative abnormal return around earnings call, stock liquidity, earnings growth, analyst forecast accuracy, as well as management’s propensity to provide guidance. … Overall, we find that HAID provides a unique and previously unidentified source and methodology to help investors uncover new information content” (p. 26).

LLM Advice: Using GPT-4 for Financial Advice by Christian Fieberg, Lars Hornuf, David J. Streich as of July 6^th, 2023 (#250): “GPT-4 can provide financial advice which is on par with the advice provided by professional low-cost automated financial advisory services. While the portfolios suggested by GPT-4 displayed considerable home bias, its historical risk-return profiles are at least on par with … benchmark portfolios. … To investigate GPT-4’s ability to serve clients’ sustainability preferences (ESMA, 2018), we added sustainability preferences to some of our investor profiles. The portfolios suggested for those profiles included ESG-focused versions of the portfolio components such as the iShares ESG Aware MSCI USA ETF. … risk profiling … can currently not be handled by GPT-4. … GPT-4 cannot offer assistance in implementing the portfolio (opening an account, purchasing and rebalancing portfolio components)“ (p. 11/12).

Bitcoin infects: Is Bitcoin Exciting? A Study of Bitcoin’s Spillover Effects by Minhao Leong and Simon Kwok as of July 13^th, 2023 (#16): “… we detect the presence of positive jump spillovers from Bitcoin to risk assets (U.S. equities, developed market equities and emerging market equities) and negative jump spillovers from Bitcoin to defensive assets (gold and emerging market bonds) after COVID-19. … we also find evidence of jump and diffusion spillovers from Bitcoin to U.S. equity sectors, particularly to the financials, technology, consumer discretionary and communication services sectors. … We show that over time, the proportion of blockchain and cryptocurrency exposed U.S. companies (BCEs) has increased in recent years, from 19% during the pre-pandemic period to 28.8%. Specifically, the adoption of blockchain and cryptocurrency related technologies by mega-cap names such as Microsoft (Technology), Amazon (Consumer Discretionary), Alphabet (Communication Services) and Tesla (Consumer Discretionary) has increased the Bitcoin exposures of equity market and sector indices“ (p. 41/42).

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No engagement-washing! Opinion-Post #207

Engagement-washing as a term, according to my research, was first used by Kunal Desai in an interesting study in early 2022 (see Active-Engagement-thought-piece-final-2.pdf (gibam.com)). Engagement-washing means pretending that shareholder engagement can create a significant positive real-world impact when it probably can’t. That is different from impact-washing which typically is used to describe overambitious product marketing claims to make the world better.

Impact investing and engagement-washing

Impact investing is clearly on the rise. With impact investing, investors want to improve the world through their investments in equity capital or through credits. Impact investing with secondary-market listed equities or bonds is especially difficult. With those products, one security holder buys the security from another one. With such a transaction, issuers of the securities do not receive any additional funds. Therefore, providers of listed products which want to create impact typically use shareholder voting and shareholder engagement to change the issuers of the securities they are invested in.

Limitation of shareholder voting

Shareholder voting is typically only possible at annual shareholder meetings. Votes can only be used regarding the proposals on the agenda. In most cases, corporate management proposals are supported by the majority of votes. Investors can try to put own proposals on the agenda, but even the largest shareholders alone typically do not have enough votes to get them through.

Shareholder (or bondholder) engagement can be exercised at any time and regarding every topic. If investors can convince the top management of companies to adopt their proposals, they may have impact.

So far, so good. But the reality may not be that simple (data see Kunal Desais paper which refers to ESG Shareholder Engagement and Downside Risk by Andreas G. F. Hoepner, Ioannis Oikonomou, Zacharias Sautner, Laura T. Starks, Xiaoyan Zhou :: SSRN):

7 limitations of ecological and social shareholder engagement

Although engagement becomes more popular, the majority of investors most likely does not engage at all.
Even if investor engage, engagements typically are undertaken only for a minority of investments. That is not surprising, because most institutional investors own very many securities and only have limited resources for engagement.
The majority of engagements involves only one interaction with the targeted companies. Since changes at companies typically take some time, one interaction does not seem enough to change much.
Governance topics typically dominate engagements whereas impact-relevant environmental and social topics are the minority of topics addressed during engagements.
ESG-ratings cover dozens if not hundreds of topics. Engagement typically only focus on one or very few topics. Even very well managed companies have many and sometimes also huge improvement potential in several social and ecological issues. The typical share of actual shareholder engagement topics compared to potentially relevant social and ecological engagement topics therefore is very low.
It is very unclear how many engagements are successful since so far there is no good system to measure engagement success. If anything, shareholders measure engagement activity and not success. Often, marketing only repeats the same case study of a successful corporate engagement over and over. Shareholders for Change (see SfC-ENGAGEMENT-Report2022-1.pdf (shareholdersforchange.eu) page 6) proposes an evaluation scheme but it does not allow to quantity the aggregate success of shareholder engagements.
Mostly, companies do not state clearly what the consequences are, when their engagements are not successful. I assume that there are no divestments or even reductions in investments after most unsuccessful engagements. The reason is the low openness to divestments and benchmark deviations of institutional investors. Most try to stay very close to their selected benchmarks, even though divestments typically would reduce their portfolio diversification only marginally.

Conclusion: No engagement-washing but investing as good as you can

Conclusion: Social and ecological shareholder engagement is the most important tool to create impact with listed companies. But investors should not pretend to be able to significantly change the engaged target companies. Calling listed equity or bond funds “impact” funds does not sound right to me (impact-aligned is somewhat better, though). And reliance on investors to change listed companies is insufficient.

Engagement-washing seems to be a real risk which, if revealed, would hurt the “washer” but also potentially the whole segment of responsible investments. Investors nevertheless should invest as responsibly as possible. They should also try to engage as much as they can afford to. And that should include engagements with industry associations, NGOs, politicians etc. to advance responsible investing in general.

Good immigrants and bad bankers: Researchpost #131

Good immigrants: 16x new research on inequality, hate, decarbonization, electric cars, carbon reporting, ESG ratings, CEOs, bankers, impact investments and venture capital by Jens Dammann, Moritz Drupp and many more (# shows SSRN downloads on June 15th, 2023)

Social and ecological research: Good immigrants

Good immigrants: Inequality and Immigration by Christian Dustmann, Yannis Kastis, and Ian Preston as of June 9^th, 2023 (#17): “… we investigate the relationship between immigration and inequality in the UK over the past forty years. Over this period, the share of foreign-born individuals in the UK rose from 5.3% in 1975 to 13.4% in 2015 … Work and family reunification have been the most common reasons behind immigration of EU nationals, while inflows of non-EU nationals have been largely driven by study purposes. We document that immigrants have been systematically better educated than natives in the UK throughout the forty years of our observation period. Nevertheless, in line with DFP (2013), we find that immigrants downgrade upon their arrival in the UK by working in jobs that are in substantially lower earnings categories than where they would be allocated based on their education alone. We provide evidence that as immigrants spend more time in the UK and acquire complementary skills or transfer their existing skill sets to the particularities of the UK, they move to jobs higher up in the earnings distribution. … wage inequality among immigrants was systematically higher than wage inequality within the group of natives throughout the period 1994-2016 … However, the overall effects of immigration on inequality in the UK were very small. Finally, we report that wage inequality in the UK significantly decreased from 2000 onwards both within the native and within the immigrant group. … immigrants are large net fiscal contributors” (p. 46-48). My comment: In some of my other blogpost I have documented more research regarding good immigration effects e.g here Positive immigration and more little known research (Researchposting 110) – Responsible Investment Research Blog (prof-soehnholz.com)

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ESG beliefs: Researchpost #124

ESG beliefs: 10x new research on biodiversity, subsidies, governance, greenium, ESG beliefs, divestments, taxonomy reporting, fund commissions, SVB, private asset platforms etc. by Theresa Kuchler, Johannes Stroebel, Christian Klein and many more (# indicates the number of SSRN downloads on April 19th, 2023)

Ecologial and social research

Quantified biodiversity risks: Biodiversity Risk by Stefano Giglio, Theresa Kuchler, Johannes Stroebel, and Xuran Zeng as of April 4^th, 2023 (#8): “The goal of this paper is to introduce measures of aggregate biodiversity risk as well as measures of firms’ and industries’ exposures to these risks; to connect and validate the two; to study the pricing of this risk in financial markets; and to publicly release our biodiversity exposure measures at www.biodiversityrisk.org to facilitate more research on this important topic“ (p. 28).

Dubious subsidies: Green Technology Adoption, Complexity, and the Role of Public Policy: A Simple Theoretical Model by Sanjit Dhami as of April 13^th (#9): “We present a simple model of technology choice by heterogeneous firms … We illustrate the extreme unpredictability of the final outcome, and consider the role of public policy in the form of taxes and subsidies in influencing the long-run expected outcome. Our model … highlights the challenges and limitations of public policy in such scenarios“ (p. 24).

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Ecological and social research (SDG rating confusion)

Responsible investing research (SDG rating confusion)

Other investment research

Liquid impact advert for German investors

Supplier emissions can be very high

Supply chain becomes more important for ESG-analyses

Supplier engagement: How investors can indirectly engage

Systematic supplier engagement using ESG evaluations

Better fewer suppliers?

Supplier engagement: Powerful supplier ESG disclosures

A supplier engagement proposal and first engagement experiences

No supplier engagement results yet

Additional research:

Little scientific HR-ESG and employee engagement research

Broad HR-ESG activation is easy

Leveraged shareholder or stakeholder engagement

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

Social and ecological research

ESG investment research: Asset class independent (Corporate Governance and more)

ESG investment research: Bonds and Loans (Corporate Governance and more)

ESG investment research: Equities (Corporate Governance and more)

Other investment research

Advert for German investors:

Social and ecological research

ESG investing research: Impact impact?

Impact investing research: Impact impact?

Other investment research

Impact impact? Advert for German investors:

Ecological and social research: Active ESG share

ESG Ratings Reearch: Active ESG Share

Responsible investment research: Active ESG share

Impact investment and shareholder engagement: Active ESG share

General investment research

Advert for German investors:

Social and ecological research: ESG sales impact

Responsible investment research: ESG sales impact

General investment research

Advert for German investors:

Impact investing and engagement-washing

Limitation of shareholder voting

7 limitations of ecological and social shareholder engagement

Conclusion: No engagement-washing but investing as good as you can

Further reading regarding engagement-washing

Social and ecological research: Good immigrants

Ecologial and social research