Archiv der Kategorie: Impact

Finfluencers: Researchpost #126

Finfluencers: 14x new research on CO2 storage, climate learnings, sustainable bonds, diversity, impact investing, active investing, and finfluencers by Laurens Swinkels, Alex Edmans, Caroline Flammer, Simon Glossner, Jeffrey Ptak, Michael Kitces, Norman Schürhoff, Christian Klein et al. (# indicates the number of SSRN downloads on May 9th, 2023)

Ecological and social research

CO2 Storage? CO2 storage or utilization? A real options analysis under market and technological uncertainty by Hanne Lamberts-Van Assche, Maria Lavrutich, Tine Compernolle, Gwenny Thomassen, Jacco Thijssen, and Peter M. Kort as of April 24^th, 2023 (#8): “First, the presence of technological and market uncertainties … increase the barriers to invest in CCS or CCU. Second, when the firm anticipates the arrival of a more attractive CCU solution in the future, it will not postpone the investment in CCS. …. Third, higher uncertainty in the CO2 price, i.e. higher σ, increases the investment thresholds, while a higher trend in the CO2 price, i.e. higher α, decreases the investment thresholds for CCS and CCU. … First, policymakers should aim to ensure stability and predictability in the CO2 price, to lower the volatility σ of the CO2 price. Reducing the market uncertainty will lower the CO2 price investment thresholds for CCS, CCU and CCUS. Second, they should also commit to an increasing growth rate in the CO2 price in the EU ETS. When firms expect higher growth rates for the CO2 price in the future, they are more favourable to invest in CCS, CCU and CCUS sooner. Finally, policymakers should realize that CCU and CCS can be complementary solutions” (p. 32/33).

Climate-information matters: Complexity and Learning Effects in Voluntary Climate Action: Evidence from a Field Experiment by Johannes Jarke-Neuert, Grischa Perino, Daniela Flörchinger, and Manuel Frondel as of April 16^th, 2023 (#26): “Exploiting the fact that timing matters, we have empirically investigated how individuals respond to (a) having the choice about the timing of their voluntary abatement efforts in the form of retiring an emission allowance and to (b) being confronted with either no, simple but counter-intuitive, or complex but intuitive information about the effectiveness-ranking of options. To this end, we have conceived a field experiment with more than four thousand participants that was embedded in a survey conducted in Germany in 2021 … Adding information did not systematically affect contributions overall, but substantially increased their effectiveness. … The uptake of information provided was most pronounced by individuals who most strongly believed in the opposite ranking“ (p. 15/16).

German pension wealth: Accounting for pension wealth, the missing rich and under-coverage: A comprehensive wealth distribution for Germany by Charlotte Bartels, Timm Bönke, Rick Glaubitz, Markus M. Grabka, and Carsten Schröder as of April 25^th, 2023 (#13): “We found that including pension wealth increases the wealth-income ratio of German households from 570% to 850%. … pension wealth plays an equalizing role: The wealth share of the bottom 50% increases from 2% to 9% when including pension wealth, whereas that of the top 1% declines from 30% to 20%. However … Pension wealth is not transferable and, hence, differs significantly from marketable assets such as financial investments or housing“ (p. 12).

Responsible investment research: Finfluencers

Green and other bonds: Social, Sustainability, and Sustainability-Linked Bonds by Gino Beteta Vejarano and Laurens Swinkels from Robeco as of April 24^th, 2023 (#107): “… several variations of sustainable bonds appearing in the market, where either use of proceeds are earmarked for sustainable activities, or coupon payments depend on sustainability targets. Despite the fast growth, the sustainable bond market is currently less than 4% of the overall bond market, with the green bond market accounting for half of it. Social and sustainability bonds tend to be issued by government or government-related institutions and, therefore generally have higher credit quality than sustainability-linked bonds, which are much more popular in the corporate sector. … The yields on sustainable bonds tend to be only marginally lower than those on conventional bonds with a similar risk profile …. Since correlations between returns on sustainable and conventional bonds are high, the risk and return profile of the portfolio is unlikely to change much when certain conventional bonds are replaced with ESG bonds with similar characteristics …” (p. 28).

Growing greenium? How Large is the Sovereign Greenium? by Sakai Ando, Chenxu Fu, Francisco Roch, and Ursula Wiriadinata as of April 19^th, 2023 (#22): “This paper is the first empirical study to estimate the sovereign greenium using both the twin bonds issued by Denmark and Germany, and panel regression analysis. While the estimated greenium in this paper is not large, it has been increasing over time alongside the level of sovereign green bond issuances. … It remains an open question whether the purpose of the project associated with the green bond is a key determinant of the greenium, and whether green bonds have resulted in the climate outcomes they intended to achieve” (p.9/10).

Good diversity: Diversity, Equity, and Inclusion by Alex Edmans, Caroline Flammer, and Simon Glossner as of May 2^nd, 2023 (#723): “… demographic diversity measures may miss many important aspects of DEI. … Companies with high DEI enjoyed recent strong financial performance and are less levered, suggesting that a strong financial position gives companies latitude to focus on long-term issues such as DEI that may take time to build. Small growth firms also exhibit higher DEI scores, consistent with either greater incentives or ability to improve DEI in such firms. … we find that the percentage of women in senior management is significantly positively associated with DEI perceptions, and this result holds regardless of the gender or ethnicity of the respondents. … DEI is also unrelated to general workplace policies and outcomes, suggesting that DEI needs to be improved by targeted rather than generic initiatives. … we find no evidence of a link between DEI and firm-level stock returns” (p. 25/26).

Impact measure: The Impact Potential Assessment Framework (IPAF) for financial products by Mickaël Mangot and Nicola Stefan Koch of the 2o investing initiative as of March 2023: “The Impact Potential Assessment Framework (IPAF) assesses financial products based only on their actions to generate real-life impact … It is exclusively based on public information provided by the product manufacturers … It is applicable to various types of financial products … serves as a tool against impact-washing by displaying practical limitations of self-labelled “impact products … First, it assesses the (maximum) impact potential of financial products based on impact mechanisms they supposedly apply (in relation to communicated elements in marketing documents). Those impact mechanisms are the ones widely documented by academic research: Grow new/undersupplied markets, Provide flexible capital, Engage actively, Send (market and nonmarket) signals. Second, it evaluates the implementation of that impact potential based on the intensity with which financial products action the various impact mechanisms in connection to success factors documented by academic research”. My comment: I try to provide as much impact as possible with my public equity mutual fund, see https://futurevest.fund/

Green demand: Nachfrage nach grünen Finanzprodukten, Teilbericht der Wissensplattform Nachhaltige Finanzwirtschaft im Auftrag des Umweltbundesamtes von Christian Klein, Maurice Dumrose, Julia Eckert vom April 2023: “… In this project report, the development of the sustainable investment market, especially in the retail sector, is presented and the characteristics of sustainable investments are introduced. Retail investor motives for investing in such products and the requirements retail investors have for sustainable investment products are highlighted. Barriers for retail investors and investment advisors are identified in the area of sustainable investments. Finally, based on these findings, recommendations for political action are proposed, which can lead to a reduction of these barriers and thus increase the acceptance of sustainable investments” (abstract). .. “Die Literatur zeigt eindeutig, dass insbesondere die Fehlannahme der Anlageberatenden, Retail-Investierende hätten kein Interesse an Nachhaltigen Geldanlagen und fragen deshalb nicht aktiv im Beratungsgespräch nach diesen, eine Barriere darstellt. Die Untersuchung von Klein et al. zeigt in diesem Zusammenhang deutlich, dass diese Barriere durch eine verpflichtende Abfrage der Nachhaltigkeitspräferenz der Retail-Investierenden überwunden werden kann. Ferner zeigt der aktuelle Forschungsstand, dass insbesondere ein zu geringes Wissen im Bereich Nachhaltige Geldanlage die zentrale Barriere für Anlageberatende darstellt. Hohe Transaktions- sowie Informationskosten, ein fehlendes kundengerechtes nachhaltiges Produktangebot, Zweifel an dem Beitrag, den Nachhaltige Geldanlagen zu einer nachhaltigen Entwicklung leisten, hohe wahrgenommene Komplexität, Wahrnehmung von Green Washing, Angst vor Haftungsrisiken, potentielle Reputationsrisiken und keine einheitliche bzw. gesetzliche Definition des Begriffs Nachhaltige Geldanlage konnten als weitere Barrieren identifiziert werden“ (S. 42/43).

2 ESG types? Sustainable investments: One for the money, two for the show by Hans Degryse, Alberta Di Giuli, Naciye Sekerci, and Francesco Stradi as of April 26^th, 2023 (#66): “Analyzing a representative sample of Dutch households, we document the existence of two types of households: those that invest in sustainable products for social reasons (social sustainable investors) and those that do it for financial reasons (financial sustainable investors). The two groups are of equal importance but are characterized by different features. The social sustainable investors have higher social preferences, level of education and trust, and are more likely left-wing and less risk-loving. Reliable labelling, reducing greenwashing concerns, and emphasizing typical left-wing thematic linked to sustainable investments is positively related to sustainable investments by social sustainable investors, whereas hyping the benefit in terms of returns of sustainable investments through social media and word of mouth is positively associated with the investment decisions of financial sustainable investors” (abstract).

Traditional and fintech investment research: Finflucencers

Difficult 1/n?: Is Naïve Asset Allocation Always Preferable? by Thomas Conlon, John Cotter, Iason Kynigakis, and Enrique Salvador as of April 28th, 2023 (#90): “For allocation within asset classes, we find only limited evidence of outperformance in terms of risk-adjusted returns for optimized portfolios relative to the naïve benchmark … we find statistical and economic evidence that a bond portfolio that minimizes risk is the only case that provides outperformance of the 1/n rule. This evidence points to challenges in outperforming the equally weighted portfolio, especially when allocating among equities and REITs. When allocating across asset classes, we find that minimum-variance portfolios that include bonds exhibit higher Sharpe ratios than the equally weighted portfolio. These findings also carry over to downside risk, where optimal strategies have a lower VaR, both economically and statistically, than that associated with the equally weighted approach. Allocations across different asset classes also have lower rebalancing requirements, which means they are less affected by the transaction costs” (p. 26). My comment: My equity portfolios are all equal weighted. The most passive world market portfolio should be uses as reference instead of naïve asset allocation which does not work well because auf unclear asset class definitions, see Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com). Regarding optimization limits see Kann institutionelles Investment Consulting digitalisiert werden? Beispiele. – Responsible Investment Research Blog (prof-soehnholz.com)

Active disaster: How Can Active Stock Managers Improve Their Funds’ Performance? By Taking a Vacation—a Long One by Jeffrey Ptak from Morningstar as of May 2^nd, 2023: “While active large-cap managers made thousands of trades worth trillions of dollars over the 10-year period ended March 31, 2023 … The funds’ actual returns were almost identical to what they’d have been had those managers made no trades at all and were worse after adjusting for risk. And that was before fees were deducted”. My comment: With my portfolios/fund I try to trade as little as possible

Wealthtech changes: The Kitces AdvisorTech Map Highlights The Evolving Landscape As It Turns 5 Years Old by Michael Kitces and ben Henry-Moreland as of May 1^st, 2023: “… there now 409 different software solutions … with the total number of solutions more than doubling … Some highlights of these AdvisorTech evolution trends over the past 5 years include: The near-disappearance of the ‚B2B robo‘ tools as advisors demanded better onboarding capabilities but showed an unwillingness to pay for them on top of their broker-dealer or custodial providers … portfolio management tools have increasingly bought or built performance reporting and performance reporters acquired most of the available trading and rebalancing tools in a massive consolidation into what is now the „All-In-One“ category … The growth of the Behavioral Assessments category … The proliferation of specialized financial planning software …The explosion in advisor marketing technology …”

Bad influences: Finfluencers by Ali Kakhbod, Seyed Kazempour, Dmitry Livdan, and Norman Schürhoff as of May 4^th, 2023 (#178): “… instead of following more skilled influencers, social media users follow unskilled and antiskilled finfluencers, which we define as finfluencers whose tweets generate negative alpha. Antiskilled finfluencers ride return and social sentiment momentum, which coincide with the behavioral biases of retail investors who trade on antiskilled finfluencers’ flawed advice. These results are consistent with homophily in behavioral traits between social media users and finfluencers shaping finfluencer’s follower networks and limiting competition among finfluencers, resulting in the survival of un- and antiskilled finfluencers despite the fact that they do not provide valuable investment advice. Investing contrarian to the tweets by antiskilled finfluencers yields abnormal out-of-sample returns, which we term the “wisdom of the antiskilled crowd.”“ (p. 40).

Literacy returns: Financial literacy and well-being: The returns to financial literacy by Sjuul Derkx, Bart Frijns, and Frank Hubers as of April 25^th, 2023 (#21): “Using a panel data set of Dutch households over 2011-2020, we find that initial (2011) … financial literacy positively affects wealth accumulation for up to four years into the future, showing that there is mean-reversion in financial literacy when one no longer invests in it. Considering different age brackets, we document that financial literacy among the young results in higher income generation, while financial literacy among the old leads to greater wealth accumulation” (abstract).

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ESG AI: Researchpost #125

ESG AI: >10x new research on climate AI models (for banks), CO2 removal, bridge technology risks, human capital, ESG risk management and ESG bullshit, government greenium, double materiality and listed impact investing and industry versus regional diversification by Markus Leippold, Marco Wilkens, Johannes Leister, Ottmar Edenhofen, Timo Busch, Andreas Hoepner and many more (# indicates the number of SSRN downloads on April 30th, 2023)

Social and ecological research: ESG AI

Climate LLM: Enhancing Large Language Models with Climate Resources (ESG AI) by Mathias Kraus, Julia Anna Bingler, Markus Leippold, Tobias Schimanski, Chiara Colesanti Senni, Dominik Stammbach, Saeid Ashraf Vaghefi, Nicolas Webersinke as of April 17^th, 2023 (#114): “Our prototype LLM agent retrieves information from general Google searches and emission data from ClimateWatch to provide reliable and accurate information. Through two exemplary experiments, we showcase how such an LLM agent can operate to enhance the accuracy and reliability of climate-related text generation. This work contributes to the exploration of LLM applications in domains where up-to-date and accurate information is critical …” (p. 6).

Complex climate scenarios: Klima-Szenarioanalysen in Banken (ESG AI) von Marco Wilkens und Johannes Leister vom April 2023: “… supervisory-motivated climate scenario analyses build on „traditional scenario analyses“ for assessing market and economic risks, but they are much more complex. This is in particular due to the need to model the interrelationship between climate data and macroeconomic data and the significantly much longer period under consideration. In addition, there is very little empirical data available for mapping climate risks, which is needed for econometric modeling of relevant relationships. Moreover, these long time periods require considerations of how banks and bank customers act over time. However, taking into account resulting dynamic bank balance sheets lead to hardly comparable results between banks. … this allows primarily a relative estimation of climate-related risks between banks than a realistic and comprehensive estimation of climate-related credit risks for individual banks. … In summary, we see climate scenario analyses as one of several important tools for transforming both the financial industry and the real economy toward the green economy“ (abstract).

Tricky CO2 removal: On the Governance of Carbon Dioxide Removal – A Public Economics Perspective by Ottmar Edenhofer, Max Franks, Matthias Kalkuhl, and Artur Runge-Metzger as of April 19^th, 2023 (#25): “This paper highlights the importance of carbon dioxide removal (CDR) technologies for climate policy. We … discuss removal costs and storage duration of different technologies. … seemingly cheap removal technologies in the land sector can indeed be very expensive when increasing opportunity costs and and impermanence are appropriately accounted for. The use of non-permanent removal – though to a certain extent economically optimal – creates high liability to firms and regulators that warrants a careful and deliberative risk management“ (abstract).

Human-Climate relations: Climate Changes Affect Human Capital by Germán Caruso, Inés de Marcos, and Ilan Noy as of April 19^th, 2023 (#13): “… we provide a framework for analyzing the multiple interlinkages between climate change and human capital … The framework presents two channels through which human capital is affected: direct effects on health, nutrition, and wellbeing, and indirect effects through changes in economic systems, markets, and through damage to infrastructure. … For mitigation and adaptation, we find that while these are overall clearly beneficial, they are also associated with significant human capital costs for specific sectors and groups in society. … Since there is also evidence that high human capital improves adaptation and mitigation, this suggests that adaptation and mitigation that accounts and compensates for these ‘sectoral’ losses can create a virtuous cycle that leads to positive outcomes for both climatic action and human capital“ (abstract). My comment: My fund focuses on human/social and climate topics, see Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

Responsible investment research

Risky bridges: Bridge technologies from a sustainable finance perspective by Timo Busch, Tanja Ohlson, Ana Sarantidi, and Özüm Yenen as of March 2023: “The interviewees identified risks related to a particular bridge technology, in our case LNG infrastructure, risks that stemmed from the classification of the investment into bridge technologies, and risks to the own organizations mainly in the reputational context. These risks often led to a low appetite for investing in bridge technologies. However, the asset managers also recommended that these risks could be minimized by providing a more transparent and reliable path forward for the “end of bridge” phase of the technology. In the LNG case this relates to the future utilization of hydrogen. Moreover, a classification scheme and related label for transition finance products could help increase the attractiveness of bridge technology investments, and better communication and science-based long-term decision making would help minimize risks in the context of the bridge technology” (p. 50).

Less (ESG) bullshit: Bloated Disclosures: Can ChatGPT Help Investors Process Information? (ESG AI) by Alex G. Kim, Maximilian Muhn, and Valeri V. Nikolaev as of April 27^th, 2023 (#443): “By summarizing a large sample of corporate disclosures with GPT-3.5- Turbo, we show that the length of the summaries is shortened by as much as 80%, on average. Importantly, the obtained summaries appear to provide more relevant insights as compared to the underlying raw documents. Specifically, we show that summarized sentiment better explains cumulative abnormal returns around disclosure dates than raw sentiment. Building on this insight, we construct a novel and easy-to-implement measure of the degree of “bloat” in textual disclosures. … We show that bloated disclosures are associated with slower price discovery and higher information asymmetry, thus implying negative capital market consequences. Finally, we show that GPT is useful to investors interested in targeted summaries related to important topics, such as a summary of ESG-related activities” (p. 24/25).

Good E/S/G risk management: How ESG risk management can impact security risk by Miranda Carr, Yuliya Plyakha Ferenc, Blessy Varghese, Zoltán Nagy, and Guido Giese from MSCI ESG Research as of April 13^th, 2023: “Our findings indicate that companies with higher E and S risk management and governance scores, and consequently higher ESG Ratings, than their peer groups had lower stock-specific risk than their peers during the 2017-2022 time period. … A key element behind this lower risk profile is … how the company itself managed these risks … our findings demonstrated that E and S risk management adds valuable informational content in portfolio management. … For social key issues, management metrics include elements such as the promotion of training and development of the workforce for companies in knowledge-intensive industries, transparency and visibility over the supply chain for companies in the retail industry, robust health and safety policies for companies in the consumer-durables sector and positive community relations for companies in the mining industry“ (p. 14). My comment: My engagement policy focuses on several of these topics see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Government greenium? How Large is the Sovereign Greenium? by Sakai Ando, Chenxu Fu, Francisco Roch and Ursula Wiriadinata as of April 19^th, 2023 (#18): “This paper is the first empirical study to estimate the sovereign greenium using both the twin bonds issued by Denmark and Germany, and panel regression analysis. While the estimated greenium in this paper is not large, it has been increasing over time alongside the level of sovereign green bond issuances. Whether the administrative costs associated with green bond issuance exceed the benefit is a country-specific question … It remains an open question whether the purpose of the project associated with the green bond is a key determinant of the greenium, and whether green bonds have resulted in the climate outcomes they intended to achieve” (p. 11/12).

Double materiality: Beyond Climate: ‚EU Taxonomy‘ Criteria, Materiality, and CDS Term Structure by Andreas G. F. Hoepner, Johannes Klausmann, Markus Leippold, and Jordy Rillaerts as of April 18^th, 2023: “… the risks associated with water and biodiversity impacting a firm are perceived to be long-term issues, as evidenced by significantly negative effects on CDS slopes. The negative effects are weaker but still significant for pollution prevention, also suggesting a long-term vision. The financing benefits due to a firm’s commitment to pollution prevention, however, have stronger long-term implications rather than short-term advantages. In contrast, a firm’s impact on biodiversity has no such timing differential, revealing a more imminent awareness. … Overall, our findings identify the long-term focus on infrastructure firms’ financing conditions with regard to the environmental topics covered in the latest EU taxonomy beyond climate change. Moreover, they highlight the importance of considering both materiality sides, i.e., the impact of the environment on firms and the impact of firms on the environment“ (p. 23).

Listed impact? Guidance for Pursuing Impact in Listed Equities by the Global Impact Investing Network as of March 30^th, 2023: “Developed with input from over 100 investors, Guidance for Pursuing Impact in Listed Equities uses the GIIN’s “Core Characteristics of Impact Investing” to provide baseline practices and expectations for asset managers seeking to achieve positive impacts in listed equities. The guidance is structured around four main aspects of listed equities impact investing: setting fund/portfolio strategy, portfolio design and selection, engagement and performance data usage. Additionally, it introduces two key concepts, investor contribution and theory of change, that investors should consider when designing and managing listed equities impact funds”.

Traditional investment research

Good industry diversification: Market Segmentation and International Diversification Across Country and Industry Portfolios by Mehmet Umutlu, Seher Gören Yargı and Adam Zaremba as of April 14^th, 2023 (#22): “We conjecture that partially segmented stock indexes that are characterized by low correlation with the world market are mainly priced by local factors and should produce abnormal returns relative to a global asset-pricing model. This implies a negative relation between correlation and future index returns in the presence of segmented indexes. Empirical evidence confirms such a relationship for the sample of industry indexes, suggesting a heterogeneous segmentation. Nonetheless, we do not observe a similar pattern for country indexes. Thus, cross-industry diversification is superior to cross-country diversification. The international diversification potential of industries does not vanish during volatile periods” (abstract).

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ESG or impact? Researchpost #123

ESG or impact: 15x new research on (social) housing, AI lawyers, DWS, climate models, divestments, sustainability loans and greenium, green fees, ESG ratings, ESG labels, Article 9 funds, fiduciary duty and suppliers by Marco Wilkens, Maximilian Görgen, Martin Rohleder, Daniel Engler, Gunnar Gutsche, Paul Smeets, Mauricio Vargas, Marie Kuhn and many more

Ecological and social research

Housing risks: European Housing Markets at a Turning Point – Risks, Household and Bank Vulnerabilities, and Policy Options by Laura Valderrama, Patrik Gorse, Marina Marinkov, and Petia Topalova as of April 5^th, 2023 (#6): „European housing markets are at a turning point as the cost-of-living crisis has eroded real incomes and the surge in interest rates has made borrowers more vulnerable to financial distress. … Under the baseline IMF macroeconomic forecast, the share of households that could struggle to meet basic expenses could rise by 10 pps reaching a third of all households by end 2023. Under an adverse scenario, 45 percent of households could be financially stretched, representing over 40 percent of mortgage debt and 45 percent of consumer debt. The impact on the banking sector seems contained under the baseline forecast, though there are pockets of vulnerability. … Fiscal measures, such as subsidies to the bottom income tercile, could save 7 percent of households from financial distress at an estimated cost of 0.8 percent of GDP” (abstract).

Social housing: The Global Housing Affordability Crisis: Policy Options and Strategies by Albert Saiz as of March 29^th, 2023 (#320): “… I described the basic parameters and foundations behind global affordable housing policies and strategies. I also provided several case studies that inform the discussion. At least thirty different economic strategies can be combined to conform a large field of potential interventions” (p. 39). My comment see Wohnteilen: Viel Wohnraum-Impact mit wenig Aufwand – (prof-soehnholz.com)

AI lawyer: GPT-4 Passes the Bar Exam by Daniel Martin Katz, Michael James Bommarito, Shang Gao, and Pablo David Arredondo as of March 20^th, 2023 (#3225): “The exam, which includes both multiple-choice and open-ended tasks testing theoretical knowledge and practical lawyering, has long been viewed as an insurmountable summit for even domain-specific models. This assumption no longer holds; large language models can meet the standard applied to human lawyers in nearly all jurisdictions in the United States by tackling complex tasks requiring deep legal knowledge, reading comprehension, and writing ability“ (p. 10).

Kein Vorbild: DWS: Hohe Boni durch Greenwashing von Mauricio Vargas und Marie Kuhn von Greenpeace vom 15. März 2022: „ … DWS-CEO unter Berücksichtigung der Unternehmensgröße mit Abstand Deutschlands bestbezahlter Manager eines börsennotierten Unternehmens … Im Vergütungsbericht 2021 ist die problematische Zielgröße des „ESG-spezifisch verwalteten“ Vermögens aus den Leistungszielen für den CEO verschwunden. Allerdings wurde auch der überarbeitete Katalog der Nachhaltigkeitsziele auf weitgehend wirkungslose Pseudo-Nachhaltigkeitsindikatoren reduziert“ (p. 4). My comment: My engagement focuses on CEO pay ratio see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

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Green cover investments: Researchpost #120

Green cover investments: 10x new research on carbon offset accounting, green cover and fading green investments, greenium, divestment criticism, SDG benchmarks, and real estate inflation risk

Ecological research

Offset-Accounting: Accounting for carbon offsets – Establishing the foundation for carbon-trading markets by Robert S. Kaplan, Karthik Ramanna, and Marc Roston as of Feb. 28^th, 2023 (#198): “Tackling climate change requires not only reducing GHG emissions but also removing GHG from the atmosphere. … But existing carbon-offset markets have been criticized for poor measurement practices and inadequate controls, resulting in transaction of products that do not materially sequester carbon. … we apply basic financial-accounting principles to develop an accurate and auditable framework for offset accounting. … rigorous accounting for emissions and offsets can improve and expand markets for impactful decarbonization” (abstract).

Responsible investment research: Green cover investments

Green cover investments? Do Investors Compensate for Unsustainable Consumption Using Sustainable Assets? by Emily Kormanyos as of Feb. 28^th, 2023 (#61): “… high-footprint consumers seem to understand the environmental impacts of their consumption patterns, and aim to offset them by investing specifically in securities which have extremely low-emission profiles. I present additional evidence that investors use only these specific securities to offset their carbon-based emissions, whereas portfolios with high general ESG ratings do not exhibit such a relation to unsustainable consumption. … I show that Catholicism, historically tied to financial offsetting practices through the 15th and 16th-century letters of indulgence, is significantly and positively related to the sustainability profile of retail investor portfolios … Finally, I conduct a survey with 3,646 clients of the same bank that provided the administrative data analyzed in this paper, finding that the majority of investors underestimate their own carbon footprints from consumption. This underestimation increases systematically in the size of the survey participants’ real footprints …” (p. 45/56).

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Critical ESG and more: Researchposting 118

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

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

ESG investment research: Critical ESG

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

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Wohnteilen: Viel Wohnraum-Impact mit wenig Aufwand

Wohnteilen: Mit Fokus auf Full-Service für 2er SeniorInnen WGs kann sehr ökologisch mit wenig Geld viel und t.w. seniorengerechter Wohnraum geschaffen werden. Das Konzept kann einfach auf andere Zielgruppen erweitert werden, auch als Werkswohnungsalternative. Mit unserem Beitrag präsentieren wir Ideen, die von anderen umgesetzt werden können: Startups oder Großunternehmen, Politikern, Stiftungen und Nicht-Regierungsorganisationen, Kommunen oder anderen.

Das Konzept

Die Wohnteilen-Idee

Es einen großen Mangel an bezahlbarem Wohnraum und gleichzeitig leben ziemlich viele Personen allein in relativ großen Wohnungen oder Häusern. Wenn man diese „Singles“ dazu bringen würde, andere Personen bei sich aufzunehmen, könnte man sehr kostengünstig und ökologisch zusätzlichen Wohnraum schaffen.

Die Idee ist nicht neu. „Wohnen gegen Hilfe“ beispielsweise solle an Universitätsstandorten Wohnraum für Studierende bei Senioren schaffen. Außerdem bemühen sich einige Wohnungsgesellschaften und Städte, SeniorInnen zum Umzug in kleinere Wohnungen zu finden sind. Aber bisher hat es offenbar noch niemand geschafft, solche Projekte in einem größeren Maßstab umzusetzen.

Das ist auch uns noch nicht gelungen. Gemeinsam mit einem ehemaligen Kollegen von der Boston Consulting Group versuche ich seit 2017, Geldgeber für ein solches Projekt zu finden. Zunehmende Wohnungsknappheit, Inflation und vor allem Brennstoff- und Stromkostenerhöhungen machen unser Wohnteilen genanntes Projekt jetzt aber attraktiver.

Großes Potenzial durch einen positiven Schneeball-Effekt

Die Grundidee ist einfach: Im Idealfall bringt Wohnteilen zwei Singles zum zusammenwohnen und die freiwerdende Wohnung wird von 2 weiteren Singles belegt. So werden zwei weitere Wohnungen vermietbar, die wiederum von 4 Singles bewohnt werden können. Scherzhaft nennen wir das 1+1=4. Das bezeichnen wir als positiven Schneeball- oder Multiplikationseffekt.

Interessenten müssen aber weder Singles sein noch eigenen Wohnraum mitbringen, denn das Projekt soll für möglichst viele Teilnehmer interessant sein. Das heißt, dass auch größere Wohngemeinschaften gebildet werden können und auch Mieter und nicht nur Eigentümer von Wohnraum zu unserer Zielgruppe gehören.

Unser überregional angelegtes Konzept erfordert eine Anschubfinanzierung von mindestens einer Million Euro für Programmierungen einer Online-Matchingplattform und für ein kleines Full-Service Team, das auch persönliche Beratung leisten kann. Wohnteilen ist nicht auf Gewinn ausgelegt und soll als gemeinnützige GmbH gegründet werden, die sich im Idealfall nach wenigen Jahren selbst finanzieren kann. Auch eine gewinnorientierte Variante ist denkbar. Leider ist es uns bisher noch nicht gelungen, Sponsoren bzw. Anschubfinanzierer dafür zu finden.

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ESG confusion and more (Researchposting 114)

ESG confusion: 19x new research on energy, mining, home offices, UN PRI, D&O, ESG ratings, greenwashing, shareholder and bondholder engagements, CEO pay, asset allocation, trading fee, private equity, cryptos

Political (social and ecological) research

Energy tax chaos: Carbon conundrum – How to Save Climate Change Policy from Government Failure by Philip Booth and Carlo Stagnaro from the Institute of Economic Affairs as of Jan. 19^th, 2023 (#5): “In principle, environmental taxes and subsidies should reflect externalities. However, in practice, policy is chaotic with tax treatment reflecting the nature of the fuel, who consumes the fuel and for what purpose the fuel is used. … On average, oil products are taxed at €405 per tonne of oil equivalent in the UK and €334 in the EU27, as compared with €135 and €101 for natural gas and €112 and €84 for coal. This is despite the fact that coal, not oil, poses the largest environmental challenges as far as climate change is concerned. … Subsidies were higher for solar photovoltaics (€1,468 per tonne of oil equivalent in the UK and €2,019 in the EU27), followed by wind power (€961 and €743, respectively). Hydro power and bio-energies received, on average, much lower subsidies. … Subsidies to fossil fuels were generally intended to support consumption rather than production. On average, oil, natural gas and coal received €130, €61 and €86 per tonne of oil equivalent in subsidies in the UK and €320, €47 and €27 respectively in the EU27. … The net effect of taxes and subsidies leads to substantially greater net taxes on oil than on natural gas while coal is taxed the least. The level of net taxes on energy sources does not, in any way, relate to the externalities from the energy source” (Viii-X)

Social mining: Mining for Peace by Roland Hodler, Paul Schaudt, and Alberto Vesperoni as of Jan. 25^th, 2023 (#9):“The energy transition increases the demand for minerals from ethnically diverse, conflict-prone developing countries. We study whether and where mining is possible in such countries without raising the risk of civil conflict. … A crucial insight is that new mining projects do not necessarily translate into more conflict but may pacify the country under the right conditions and the right policies“ (abstract). My comment: Ca. 1% of my investable ESG universe consists of mining stocks

Good home offices: Time Savings When Working from Home by Cevat Giray Aksoy, Jose Maria Barrero, Nicholas Bloom, Steven J. Davis, Mathias Dolls, and Pablo Zarate as of Jan. 17^th, 2023 (#53): “We quantify the commute time savings associated with work from home, drawing on data for 27 countries. The average daily time savings when working from home is 72 minutes in our sample. … Workers allocate 40 percent of their time savings to their jobs and about 11 percent to caregiving activities. People living with children allocate more of their time savings to caregiving“ (abstract).

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

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Greenhushing and more (Researchposting 112)

Greenhushing: 15x new research on air quality, ESG audits, emerging markets, methane, private equity, impact tools, engagement, algos, large caps, robo advisors and other fintechs

Social and ecological research

Deadly air: Air quality and suicide by Claudia Persico and Dave E. Marcotte as of Jan. 17^th, 2023 (#144): “We conduct the first-ever large-scale study of the relationship between air pollution and suicide using detailed cause of death data from all death certificates in the U.S. between 2003 and 2010. … we find that a 1 g/m3 increase in daily PM2.5 is associated with a 0.49% increase in daily suicides and 0.171 more suicide-related hospitalizations (a 50% increase)” (abstract).

ESG data audits: ESG Assurance in the United States by Brandon Gipper, Samantha Ross, and Shawn X. Shi as of Nov. 21^st, 2022 (#307): “We examine the landscape and evolution of ESG assurance in the U.S. from 2010-2020, as well as the determinants of ESG assurance. … We document a remarkable increase in not only the number of firms issuing ESG reports and obtaining assurance but also the number of metrics disclosed and assured within reports. We further document considerable heterogeneity in which metrics receive assurance, differential assurance patterns between non-financial assurors and traditional auditors, and evolving assurance practices. … peer effects and especially ESG reporting frameworks are major determinants of ESG assurance. … the vast majority of ESG assurance is limited and/or process assurance …” (p. 34/35).

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Engagement test (Blogposting #300)

The background

Engagement test: I am skeptical regarding the effectiveness of shareholder voting and engagements (compare Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink and Impact Investing mit Voting und Engagement? (Opinionpost #194) – Responsible Investment Research Blog (prof-soehnholz.com).

Nevertheless, I wanted to try an engagement myself. The starting point was a call with a Linkedin contact in April 2022. He mentioned a German engagement startup and introduced me to its founder, David Hamel. David and I talked on May 3^rd, 2022 and David suggested to review the portfolio of my investment fund (FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) for engagement opportunities.

My fund

For my fund, I select 30 stocks globally almost only according to sustainability criteria. I use strict activity and country exclusions and high requirements for environmental, social and governance (ESG) best-in-universe ratings. This means that I do not look for the best ecological, social and governance ratings in pre-defined industries (best-in-class approach), but for the best ESG rated stocks globally across all industries. In addition, I try to include only companies which are best aligned with one or more of the Sustainable Development Goals of the United Nations (SDG).

More focused and therefore often smaller companies can have a better fit with my approach than diversified companies. Unsurprisingly, the median capitalization of the stocks in my portfolio is only slightly higher than 10 billion USD, meaning that a significant part of my stocks are so-called small- or midcaps.

The targets and topics of my engagement test

David’s startup, DeRisk.earth, tries to identify existing engagements as well as potential new engagement topics for stock listed companies worldwide. When I sent David my portfolio, he found no current engagements on any of the stocks by major activists or asset managers. That was to be expected, though, since statistics from MSCI show that for more than 70% of the almost 9000 Stocks in the MSCI ACW IMI Index there are no known active engagements of large asset managers (Net-Zero Alignment: Engaging on Climate Change – MSCI). Also, I try to select the best stocks according to environmental, social and governance ratings. Therefore I did not expect to find many engagements for my portfolio companies.

Comparing different data sources, all of the stocks in my portfolio showed good ESG scores. Nevertheless, David recommended to start an engagement with an US water utility and infrastructure company to try to even further improve that company. The reason for this recommendation was that the company was subject to litigation claims due to a chemicals spill.

My subsequent own analysis of that company made me suggest CO2 improvement, too, and in addition the use of ESG criteria for supplier selection and a supplier ESG improvement program.

The first contacts

On May 30st, we wrote our first Email to the head of investor relations of American Water Works (Amwater) with our suggestions. I mentioned that through the German mutual fund which I advise I only held shares of approximately three hundred thousand US Dollars.

Three weeks later, we received an answer and started an exchange of Emails. To support our proposals we referred to two research studies: Do Scope 3 Carbon Emissions Impact Firms’ Cost of Debt? by Ahyan Panjwani, Lionel Melin, and Benoit Mercereau as of Oct. 17^th, 2022 and Making supply-chain decarbonization happen | McKinsey).

Amwater informed us that the learnings from the chemical spill as well as employee education topics were already covered by their Environmental Policy and their educational activities for employees. Therefore, we focused on other points and made our proposal regarding CO2 emissions more concrete. We specifically asked for “clear GHG emission targets, including separately disclosed scope 1, 2 and 3 emissions and their alignment with the Paris Agreement” and “comprehensive ESG-evaluation … of all major suppliers and clear minimum ESG-standards for new suppliers and for retention of existing suppliers”.

First results of my engagement test

On October 31st, Amwater publicly announced new targets: “By 2035, reduce absolute scope 1 and scope 2 emissions by 50% (2020 baseline). Achieve net zero scope 1 and scope 2 emissions by 2050. First time disclosure of scope 3 emissions”.

On November 9^th, we had a videocall with two investor relations representatives, one of them focusing on ESG matters. In this call, we repeated our suggestion to set concrete scope 3 reduction goals. We also proposed to use water companies and not utilities overall as benchmarks. In addition, we suggested improved supplier codes of conduct, ESG evaluations especially for CO2-critical suppliers for fuels, energy and capital goods and supplier ESG audits. We further exchanged views on topics such as ESG- and climate data and data providers and greenwashing risks. We also agreed to continue our discussions.

Engagement test conclusion

It is very likely that Amwater would have made these public announcements without our input. On the positive side, the direct exchange of information and opinion potentially helped us and perhaps also the company to better understand obstacles towards more sustainability.

In general, shareholder engagement can only focus on a very select number of topics out of the many, which could be improved by almost all companies. And to measure the effects of engagements and the attribution to any one investor seems to be very difficult.

It is probably much more effective to hope that (the leaders of) companies are intrinsically motivated to significantly improve their sustainability. Engagement can very likely be much more effective with such companies than with ESG-skeptics. Also, strict regulation for all market participants may lead to more sustainability. Nevertheless, this case encouraged me to continue testing further engagements.

Disclaimer

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

Trustee or steward? Researchblogposting 104

Trustee or steward? 13x new research on climate tech and finance, interest rates, plant-based food, greenwashing, reporting, engagement, benchmarks, age, PFOF, and private equity by Richard Ennis at al.

Social and ecological research: Trustee or steward?

Climate tech advantage: Empirically grounded technology forecasts and the energy transition Rupert Way, Matthew C. Ives, Penny Mealy, and J. Doyne Farmer as of Sept. 21^st, 2022: “Most energy-economy models have historically underestimated deployment rates for renewable energy technologies and overestimated their costs. … Here, we use an approach based on probabilistic cost forecasting methods that have been statistically validated by backtesting on more than 50 technologies. … Compared to continuing with a fossil fuel-based system, a rapid green energy transition will likely result in overall net savings of many trillions of dollars—even without accounting for climate damages or co-benefits of climate policy” (p. 1).

Climate interest risk: The effects of climate change on the natural rate of interest: a critical survey by Francesco Paolo Mongelli, Wolfgang Pointner, and Jan Willem van den End as of Nov. 1^st, 2022 (#37): “This survey is the first to systematically review the possible effects of climate change on the natural rate of interest. While r* is a theoretical concept, it is used as a benchmark by central banks to assess the stance of their monetary policy and the room for policy manoeuvre. … In most cases, we find that climate change would have a rather dampening effect on r*, which implies a narrower room for manoeuvre for central banks. … the uncertain impact of climate change on main r* may call for an increasing flexibility in the monetary policy strategy, both in terms of objectives and time horizon. …. An orderly transition will mitigate the economic and financial risks of climate change and thereby also prevent potential downward effects on r*. In addition, active fiscal policies to mitigate climate change might also spur investment demand and thereby put upward pressure on the natural rate” (p. 26/27).

Advert for German investors: “Sponsor” my research e.g. by buying my Article 9 fund. The minimum investment is approx. EUR 50 and so far return and risks are relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T: I focus on social SDGs and midcaps and use best-in-universe as well as separate E, S and G minimum ratings.

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