Archiv der Kategorie: Impact

Sustainable investment: Picture by Peggy and Marco-Lachmann-Anke from Pixabay

Nachhaltige Geldanlage = Radikal anders?

Nachhaltige Geldanlage kann radikal anders sein als traditionelle. „Asset Allocation, Risiko-Overlay und Manager-Selektion: Das Diversifikationsbuch“ heißt das Buch, dass ich 2009 mit ehemaligen Kollegen der Bad Homburger FERI geschrieben habe. Nachhaltigkeit spielt darin keine Rolle. In meiner aktuellen Vorlesung zu diesen Themen ist das anders. Nachhaltigkeit kann eine sehr wichtige Rolle spielen für die Allokation auf Anlagesegmente, die Manager- bzw. Fondsselektion, die Positionsselektion und auch das Risikomanagement (Hinweis: Um die Lesbarkeit zu verbessern, gendere ich nicht).

Strenge Nachhaltigkeit kann sogar zu radikalen Änderungen führen: Mehr illiquide Investments, erheblich höhere Konzentration innerhalb der Anlagesegmente, mehr aktive statt passive Mandate und ein anderes Risikomanagement. Im Folgenden erkläre ich, wieso:

Zentrale Rolle von Investmentphilosophie und Nachhaltigkeitsdefinition für die nachhaltige Geldanlage

Dafür starte ich mit der Investmentphilosophie. Unter Investmentphilosophie verstehe ich die grundsätzlichen Überzeugungen eines Geldanlegers, idealerweise ein umfassendes und kohärentes System solcher Überzeugungen (vgl.  Das-Soehnholz-ESG-und-SDG-Portfoliobuch 2023, S. 21ff.). Nachhaltigkeit kann ein wichtiges Element einer Investmentphilosophie sein. Anleger sollten ihre Investmentphilosophie möglichst klar definieren, bevor sie mit der Geldanlage beginnen.

Beispiel: Ich verfolge eine konsequent nachhaltige regelbasiert-prognosefreie Investmentphilosophie. Dafür definiere ich umfassende Nachhaltigkeitsregeln. Zur Operationalisierung nutze ich das Policy for Responsible Investment Scoring Concept (PRISC) Tool der Deutschen Vereinigung für Asset Management und Finanzanalyse (DVFA, vgl. Standards – DVFA e. V. – Der Berufsverband der Investment Professionals).

Für die nachhaltige Geldanlage ist mir vor allem wichtig, was für Produkte und Services die Unternehmen und Organisationen anbieten, an denen ich mich beteilige oder denen ich indirekt Kredite zur Verfügung stelle. Dazu nutze ich viele strenge Ausschlüsse und vor allem Positivkriterien. Dabei wird vor allem der Umsatz- bzw. Serviceanteil betrachtet, der möglichst gut mit Nachhaltigen Entwicklungszielen der Vereinten Nationen (UN SDG) vereinbar ist („SDG Revenue Alignment“). Außerdem lege ich viel Wert auf niedrige absolute Umwelt-, Sozial- und Governance-Risiken (ESG). Meine Möglichkeiten zur Veränderung von Investments („Investor Impact“) gewichte ich aber nur relativ niedrig (vgl. Das-Soehnholz-ESG-und-SDG-Portfoliobuch 2023, S. 141ff). Impact möchte ich dabei vor allem über Shareholder Engagement ausüben, also direkte Nachhaltigkeitskommunikation mit Unternehmen.

Andere Anleger, denen Impact- bzw. eigene Veränderungsmöglichkeiten besonders wichtig sind, legen oft viel Wert auf sogenannte Additionalität bzw. Zusätzlichkeit. Das bedeutet, dass die entsprechenden Nachhaltigkeitsverbesserungen nur durch ihre jeweiligen Investments zustande gekommen sind. Wenn ein Anleger einen neuen Solar- oder Windparkt finanziert, gilt das als additional und damit als besonders nachhaltig. Bei Geldanlagen an Börsen werden Wertpapiere nur anderen Anlegern abgekauft und den Herausgebern der Wertpapiere fließt – außer bei relativ seltenen Neuemissionen – kein Geld zu. Der Kauf börsennotierter Anleihen oder Aktien von Solar- und Windparkunternehmen gilt bei Additionalitätsanhängern deshalb nicht als Impact Investment.

Nachhaltige Geldanlage und Asset Allokation: Viel mehr nicht-börsennotierte bzw. alternative Investments und mehr Anleihen?

Eine additionalitätsfokussierte Investmentphilosophie bedeutet demnach im Extremfall, nur noch illiquide zu investieren. Die Asset Allokation wäre radikal anders als heute typische Geldanlagen.

Lieber keine Mehrallokation zu illiquiden Investments?

Aber wenn Additionalität so wichtig ist, dann muss man sich fragen, welche Art von illiquiden Investments wirklich Zusätzlichkeit bedeutet. Dazu muss man Investoren- und Projektimpact trennen. Die Finanzierung eines neuen Windparks ist aus Anlegersicht dann nicht zusätzlich, wenn andere Anleger den Windpark auch alleine finanzieren würden. Das ist durchaus nicht untypisch. Für Infrastruktur- und Private Equity Investments gibt es oft einen sogenannten Kapitalüberhang. Das bedeutet, dass über Fonds sehr viel Geld eingesammelt wurde und um Anlagen in solche Projekte konkurriert.

Selbst wenn nur ein Fonds zur Finanzierung eines nachhaltgien Projektes bereit ist, wäre die Beteiligung an einem solchen Fonds aus Anlegersicht dann nicht additional, wenn alternativ andere Anleger diese Fondsbeteiligung kaufen würden. Nicht nur Fonds renommierter Anbieter haben oft mehr Anfragen von potenziellen Anlegern als sie akzeptieren wollen. Investments in solche Fonds kann man nicht unbedingt als additional ansehen. Klare Additionalität gibt es dagegen für Investments, die kein anderer machen will. Ob solche Investments aber attraktive Performances versprechen, ist fragwürdig.

Illiquide Investments sind zudem längst nicht für alle Anleger geeignet, denn sie erfordern meistens relativ hohe Mindestinvestments. Hinzu kommt, dass man bei illiquiden Investments in der Regel erst nach und nach investiert und Liquidität in Bezug auf Zeitpunkt und Höhe unsichere Kapitalabrufe bereithalten muss. Außerdem sind illiquide meistens erheblich teurer als vergleichbare liquide Investments. Insgesamt haben damit illiquide Investments kaum höhere Renditepotenziale als liquide Investments. Durch die Art ihrer Bewertungen zeigen sie zwar geringe Schwankungen. Sie sind durch ihre hohen Mindestinvestments und vor allem Illiquidität aber teilweise hochriskant.

Hinzu kommt, dass illiquiden Investments ein wichtiger sogenannter Wirkungskanal fehlt, nämlich individuelle Divestmentmöglichkeiten. Während liquide Investments jederzeit verkauft werden können wenn Nachhaltigkeitsanforderungen nicht mehr erfüllt werden, muss man bei illiquiden Investments teilweise sehr lange weiter investiert bleiben. Divestmentmöglichkeiten sind sehr wichtig für mich: Ich habe in den letzten Jahren jeweils ungefähr die Hälfte meiner Wertpapiere verkauft, weil sich ihre Nachhaltigkeit verschlechtert hat (vgl. Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com)).

Nachhaltigkeitsvorteile für (Unternehmens-)Anleihen gegenüber Aktien?

Auch liquide Anlagesegmente können sich in Bezug auf Impactmöglichkeiten unterscheiden. Für Aktien kann man Stimmrechte ausüben (Voting), für Anleihen und andere Anlagesegmente nicht. Allerdings finden nur selten Aktionärsversammlungen statt, zu denen man Stimmrechte ausüben kann. Zudem stehen nur selten umfassende Nachhaltigkeitsveränderungen zur Abstimmung. Falls das dennoch der Fall ist, werden sie meistens abgelehnt (vgl. 2023 Proxy Season Review – Minerva-Manifest).

Ich bin überzeugt, dass Engagement im engeren Sinn wirkungsvoller sein kann als Stimmrechtsausübung. Und direkte Diskussionen mit Unternehmen und Organisationen, um diese nachhaltiger zu machen, sind auch für Käufer von Anleihen möglich.

Unabhängig von der Frage der Liquidität bzw. Börsennotiz könnten nachhaltige Anleger Kredite gegenüber Eigenkapital bevorzugen, weil Kredite speziell für soziale und ökologische Projekte vergeben werden können. Außerdem können Auszahlungen von der Erreichung von nachhaltigen Meilensteinen abhängig gemacht werden können. Letzteres kann bei Private Equity Investments aber ebenfalls gemacht werden, nicht jedoch bei börsennotierten Aktieninvestments. Wenn ökologische und soziale Projekte aber auch ohne diese Kredite durchgeführt würden und nur traditionelle Kredite ersetzen, relativiert sich der potenzielle Nachhaltigkeitsvorteil von Krediten gegenüber Eigenkapital.

Allerdings werden Kredite meist mit konkreten Rückzahlungszeiten vergeben. Kurz laufende Kredite haben dabei den Vorteil, dass man öfter über die Wiederholung von Kreditvergaben entscheiden kann als bei langlaufenden Krediten, sofern man sie nicht vorzeitig zurückbezahlt bekommen kann. Damit kann man aus einer als nicht nachhaltig genug erkannter Kreditvergabe meistens eher aussteigen als aus einer privaten Eigenkapitalvergabe. Das ist ein Nachhaltigkeitsvorteil. Außerdem kann man kleinere Kreditnehmer und Unternehmen wohl besser nachhaltig beeinflussen, so dass zum Beispiel Staatsanleihen weniger Nachhaltigkeitspotential als Unternehmenskredite haben, vor allem wenn es sich dabei um relativ kleine Unternehmen handelt.

In Bezug auf Immobilien könnte man annehmen, dass Kredite oder Eigenkapital für oft dringend benötigte Wohn- oder Sozialimmobilien als nachhaltiger gelten können als für Gewerbeimmobilien. Ähnliches gilt für Sozialinfrastruktur gegenüber manch anderen Infrastruktursegmenten. Andererseits kritisieren manche Marktbeobachter die sogenannte Finanzialisierung zum Beispiel von Wohnimmobilien (vgl. Neue Studie von Finanzwende Recherche: Rendite mit der Miete) und plädieren grundsätzlich für öffentliche statt private Investments. Selbst Sozialkredite wie Mikrofinanz im ursprünglichen Sinn wird zumindest dann kritisiert, wenn kommerzielle (Zins-)Interessen zu stark werden und private Verschuldungen zu stark steigen.

Während nachwachsende Rohstoffe nachhaltig sein können, gelten nicht industriell genutzte Edelmetalle aufgrund der Abbaubedingungen meistens als nicht nachhaltig. Kryptoinvestments werden aufgrund fehlender Substanz und hoher Energieverbräuche meistens als nicht nachhaltig beurteilt.

Bei der Annahme von potenzieller Additionalität für illiquide Investments und Wirkung vor allem über Investments mit ökologischem bzw. sozialem Bezug kann man zu der folgenden vereinfachten Anlagesegmentbeurteilung aus Nachhaltigkeitssicht kommen:

Nachhaltige Geldanlage: Potenzielle Gewichtung von Anlagesegmenten bei Annahme von Additionalität für illiquide Investments und meine Allokation

Quelle: Eigene Darstellung

Anleger sollten sich ihre eigene derartige Klassifikation erstellen, weil diese entscheidend für ihre jeweilige nachhaltige Asset Allokation ist. Unter Berücksichtigung von Mindestkapitaleinsatz und Kosten sowie Divestment- und Engagementmöglichkeiten investiere ich zum Beispiel nur in börsennotierte Investments. Bei einem Multi-Milliarden Vermögen mit direkten Nachhaltigkeits-Einflussmöglichkeiten auf Beteiligungen würde ich zusätzliche illiquide Investments aber in Erwägung ziehen. Insgesamt kann strenge Nachhaltigkeit also auch zu wesentlich geringerer Diversifikation über Anlageklassen führen.

Nachhaltige Geldanlage und Manager-/Fondsselektion: Wieder mehr aktive Investments?

Wissenschaftliche Forschung zeigt, dass aktives Portfoliomanagement meistens geringe Renditen und oft auch höhere Risiken als passive Investments einbringt. Mit sehr günstigen ETFs kann man in tausende von Wertpapieren investieren. Es ist deshalb kein Wunder, dass in den letzten Jahren sogenannte passive Investments immer beliebter geworden sind.

Diversifikation gilt oft als der einzige „Free Lunch“ der Kapitalanlage. Aber Diversifikation hat oft keinen nennenswerten Einfluss auf Renditen oder Risiken. Anders ausgedrückt: Mit mehr als 20 bis 30 Wertpapieren aus unterschiedlichen Ländern und Branchen sind keine besseren Renditen und auch kaum niedrigere Risiken zu erwarten als mit hunderten von Wertpapieren. Anders ausgedrückt: Der Grenznutzen zusätzlicher Diversifikation nimmt sehr schnell ab.

Aber wenn man aber mit den nachhaltigsten 10 bis 20 Wertpapiern startet und weiter diversifiziert, kann die durchschnittliche Nachhaltigkeit erheblich sinken. Das bedeutet, dass konsequent nachhaltige Geldanlageportfolios eher konzentriert als diversifiziert sein sollten. Konzentration hat auch den Vorteil, dass Stimmrechtsausübungen und andere Formen von Engagement einfacher und kostengünstiger werden. Divestment-Androhungen können zudem wirkungsvoller sein, wenn viel Anlegergeld in nur wenige Wertpapiere investiert wird.

Nachhaltigkeitspolitiken können sehr unterschiedlich ausfallen. Das zeigt sich unter anderem bei den vielen möglichen Ausschlüssen von potenziellen Investments. So kann man zum Beispiel Tierversuche in juristisch vorgeschriebene, medizinisch nötige, kosmetische und andere unterscheiden. Manche Anleger möchten alle Tierversuche konsequent ausschließen. Andere wollen weiterhin in Pharmaunternehmen investieren und schließen deshalb vielleicht nur „andere“ Tierversuche aus. Und Anleger, welche die Transition von wenig nachhaltigen Unternehmen zum Beispiel der Ölbranche zu mehr Nachhaltigkeit fördern wollen, werden explizit in Ölunternehmen investieren (vgl. ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)).

Indizes enthalten oft sehr viele Wertpapiere. Konsequente Nachhaltigkeit spricht aber für Investments in konzentrierte, individuelle und damit meist indexabweichende aktiv gemanagte Portfolios. Dabei ist aktiv nicht im Sinne von viel Handel gemeint. Um über Stimmrechtsausübungen und andere Engagementformen Einfluss ausüben zu können, sind eher längere als kürzere Haltedauern von Investments sinnvoll.

Immer noch nicht genug konsequent nachhaltige ETF-Angebote

Bei der Gründung meines eigenen Unternehmens Anfang 2016 war ich wahrscheinlich weltweit der erste Anbieter eines Portfolios aus möglichst konsequent nachhaltigen ETFs. Aber auch die nachhaltigsten ETFs waren mir nicht nachhaltig genug. Grund waren vor allem unzureichende Ausschlüsse und die fast ausschließliche Nutzung von aggregierten Best-in-Class ESG-Ratings. Ich habe aber hohe Mindestanforderungen an E, S und G separat (vgl. Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com). Ich interessiere mich auch nicht für die am besten geraten Unternehmen innerhalb aus Nachhaltigkeitssicht unattraktiven Branchen (Best-in-Class). Ich möchte branchenunabhängig in die am besten geraten Aktien investieren (Best-in-Universe). Dafür gibt es aber auch heute noch keine ETFs. Außerdem gibt es sehr wenige ETFs, die strikte ESG-Kriterien nutzen und zusätzlich SDG-Vereinbarkeit anstreben.

Auch in den in besonders konsequent nachhaltigen globalen Socially Responsible Paris Aligned Benchmarks befinden sich noch mehrere hundert Aktien aus sehr vielen Branchen und Ländern. Aktive globale nachhaltige Fonds gibt es dagegen schon mit nur 30 Aktien, also potenziell erheblich nachhaltiger (vgl. 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)).

Emittenten nachhaltiger ETFs üben oft nachhaltige Stimmrechtsausübungen und sogar Engagement aus, wenn auch nur in geringem Umfang. Das machen die meisten Anbieter aktiver Investments aber auch nicht besser (vgl. z.B. 2023 Proxy Season Review – Minerva-Manifest). Indexfolgende Investments nutzen aber typischerweise den Impactkanal Divestments nicht, weil sie Indizes möglichst direkt nachbilden wollen.

Nachhaltige Geldanlage und Wertpapierselektion: Weniger Standardprodukte und mehr individuelle Mandate oder Direct Indexing?

Wenn es keine ETFs gibt, die nachhaltig genug sind, sollte man sich aktiv gemanagte Fonds suchen, nachhaltige Mandate an Vermögensverwalter vergeben oder seine Portfolios selbst entwickeln. Aktiv gemanagte konzentrierte Fonds mit strengem ESG plus Impactansatz sind aber noch sehr selten. Das gilt auch für Vermögensverwalter, die solche Mandate umsetzen könnten. Außerdem werden für maßgeschneiderte Mandate oft hohe Mindestanlagen verlangt. Individuelle nachhaltige Portfolioentwicklungen werden dagegen zunehmend einfacher.

Basis-Nachhaltigkeitsdaten werden aktuell von zahlreichen Anbietern für Privatanleger kostengünstig oder sogar kostenlos angeboten. Finanztechnische Entwicklungen wie Discount-(Online-)Broker, Direct Indexing und Handel mit Bruchstücken von Wertpapieren sowie Stimmrechtsausübungstools helfen bei der effizienten und nachhaltigen Umsetzung von individuellen Portfolios. Schwierigkeiten bereiten dabei eher die Vielfalt an Investmentmöglichkeiten und mangelnde bzw. schwer zu beurteilende Datenqualität.

Ideal wäre, wenn Anleger auf Basis eines kuratierten Universums von besonders nachhaltigen Wertpapieren zusätzlich eigene Nachhaltigkeitsanforderungen berücksichtigen können und dann automatisiert in ihren Depots implementieren und rebalanzieren lassen (vgl. Custom ESG Indexing Can Challenge Popularity Of ETFs (asiafinancial.com). Zusätzlich könnten sie mit Hilfe moderner Tools ihre Stimmrechte nach individuellen Nachhaltigkeitsvorstellungen ausüben. Direkte Nachhaltigkeitskommunikation mit den Wertpapieremittenten kann durch den Plattformanbieter erfolgen.

Risikomanagement: Viel mehr Tracking-Error und ESG-Risikomonitoring?

Für nachhaltige Geldanlagen kommen zusätzlich zu traditionellen Risikokennzahlen Nachhaltigkeitskennzahlen hinzu, zum Beispiel ESG-Ratings, Emissionswerte, Principal Adverse Indicators, Do-No-Significant-Harm-Informationen, EU-Taxonomievereinbarkeit oder, wie in meinem Fall, SDG-Vereinbarkeiten und Engagementerfolge.

Nachhaltige Anleger müssen sich entscheiden, wie wichtig die jeweiligen Kriterien für sie sind. Ich nutze Nachhaltigkeitskriterien nicht nur für das Reporting, sondern auch für mein regelgebundenes Risikomanagement. Das heißt, dass ich Wertpapiere verkaufe, wenn ESG- oder SDG-Anforderungen nicht mehr erfüllt werden.

Die von mir genutzten ESG-Ratings messen Umwelt-, Sozial- und Unternehmensführungsrisiken. Diese Risiken sind heute schon wichtig und werden künftig noch wichtiger, wie man zum Beispiel an Greenwashing- und Reputationsrisiken sehen kann. Deshalb sollten sie in keinem Risikomanagement fehlen. SDG-Anforderungserfüllung ist hingegen nur für Anleger relevant, denen wichtig ist, wie nachhaltig die Produkte und Services ihrer Investments sind.

Stimmrechtsausübungen und Engagement wurden bisher meistens nicht für das Risikomanagement genutzt. Das kann sich künftig jedoch ändern. Ich prüfe zum Beispiel, ob ich Aktien bei unzureichender Reaktion auf mein Engagement verkaufen sollte. Eine unzureichende Engagementreaktion von Unternehmen weist möglicherweise darauf hin, dass Unternehmen nicht auf gute Vorschläge hören und damit unnötige Risiken eingehen, die man durch Divestments vermeiden kann.

Traditionelle Geldanleger messen Risiko oft mit der Abweichung von der Soll-Allokation bzw. Benchmark. Wenn die Abweichung einen vorher definierten Grad überschreitet, müssen viele Portfolios wieder benchmarknäher ausgerichtet werden. Für nachhaltige Portfolios werden dafür auch nachhaltige Indizes als Benchmark genutzt. Wie oben erläutert, können Nachhaltigkeitsanforderungen aber sehr individuell sein und es gibt meiner Ansicht nach viel zu wenige strenge nachhaltige Benchmarks. Wenn man besonders nachhaltig anlegen möchte, muss man dementsprechend höhere statt niedrigere Benchmarkabweichungen (Tracking Error) haben bzw. sollte ganz auf Tracking Error Kennzahlen verzichten.

Nachhaltigkeit kann also sowohl zu neuen Risikokennzahlen führen als auch alte in Frage stellen und damit auch zu einem erheblich anderen Risikomanagement führen.

Nachhaltige Geldanlage – Zusammenfassung und Ausblick: Viel mehr Individualität?

Individuelle Nachhaltigkeitsanforderungen spielen eine sehr wichtige Rolle für die Allokation auf Anlagesegmente, die Manager- bzw. Fondsselektion, die Positionsselektion und auch das Risikomanagement. Strenge Nachhaltigkeit kann zu stärkeren Unterschieden zwischen Geldanlagemandaten und radikalen Änderungen gegenüber traditionellen Mandaten führen: Geringere Diversifikation über Anlageklassen, mehr illiquide Investments für Großanleger, mehr Projektfinanzierungen, mehr aktive statt passive Mandate, erheblich höhere Konzentration innerhalb der Anlagesegmente und ein anderes Risikomanagement mit zusätzlichen Kennzahlen und erheblich geringerer Benchmarkorientierung.

Manche Analysten meinen, nachhaltige Geldanlage führt zu höheren Risiken, höheren Kosten und niedrigeren Renditen. Andere erwarten zukünftig überproportional hohe Anlagen in nachhaltige Investments. Das sollte zu einer besseren Performance solcher Investments führen. Meine Einstellung: Ich versuche so nachhaltig wie möglich zu investieren und erwarte dafür mittelfristig eine marktübliche Rendite mit niedrigeren Risiken im Vergleich zu traditionellen Investments.

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Achtung: Werbung für meinen Fonds

Mein Fonds (Art. 9) ist auf soziale SDGs fokussiert. Ich nutze separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement bei derzeit 27 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T oder Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds

ESG research criticism illustration with detective picture from Mariana Anatoneag from Pixabay

ESG research criticism? Researchpost #156

ESG research criticism: 13x new research on e-commerce, petrochemical and corruption problems, good and average sustainable performance, high transition risks, EU Taxonomy, Greenium, climate disaster effects, good investment constraints and private equity benchmarks (# shows SSRN full paper downloads as of Dec. 14th, 2023)

Social and ecological research (ESG research criticism)

Brown e-commerce: Product flows and GHG emissions associated with consumer returns in the EU by Rotem Roichman, Tamar Makov, Benjamin Sprecher, Vered Blass, and Tamar Meshulam as of Dec. 6th, 2023 (#5):“Building on a unique dataset covering over 630k returned apparel items in the EU … Our results indicate that 22%-44% of returned products never reach another consumer. Moreover, GHG emissions associated with the production and distribution of unused returns can be 2-14 times higher than post-return transport, packaging, and processing emissions combined“ (abstract).

US financed European petrochemicals: Toxic Footprints Europe by Planet Tracker as of December 2023: “Petrochemicals, which provide feedstocks for numerous products embedded in the global economy, carry a significant environmental footprint. One of the most important is toxic emissions. The financial market appears largely unconcerned by toxic emissions. This could be for several reasons: • perhaps because they are viewed as an unpriced pollutant or investors’ focus remains on carbon rather than other discharges or for those monitoring the plastic industry the spotlight is on plastic waste rather than toxic releases. In the Trilateral Chemical Region of Europe – an area consisting of Flanders (Belgium), North Rhine-Westphalia (Germany), Planet Tracker identified 1,093 facilities …. These facilities have released and transferred 125 million tonnes of chemicals since 2010 resulting in an estimated 24,640 years of healthy life being lost and 57 billion fractions of species being potentially affected. … BASF and Solvay are the most toxic polluters in the region, appearing in the top 5 of all four metrics analysed (physical releases, ecotoxicity, human toxicity and RSEI hazard).  The financiers behind these toxic footprints are led by BlackRock (5.4% of total investments by equity market value), Vanguard (5.2%) and JPMorgan Chase (3.6%). In terms of debt financing, Citigroup leads with 6.4% of total 10-year capital underwriting (including equity, loans and bonds), followed closely by JPMorgan Chase (6.3%) and Bank of America (5.2%)“ (p. 3).

Corruption Kills: Global Evidence from Natural Disasters by Serhan Cevik and João Tovar Jalles from the International Monetary Fund as of Nov. 2nd, 2023 (#12): “… we use a large panel of 135 countries over a long period spanning from 1980 to 2020 … The empirical analysis provides convincing evidence that widespread corruption increases the number of disaster-related deaths … the difference between the least and most corrupt countries in our sample implies a sixfold increase in the number of deaths per population caused by natural disaster in a given year. Our results show that this impact is stronger in developing countries than in advanced economies, highlighting the critical relationship between economic development and institutional capacity in strengthening good governance and combating corruption“ (p. 11/12).

Investment ESG research criticsm

Complex sustainability: Sustainability of financial institutions, firms, and investing by Bram van der Kroft as of Dec. 7th, 2023 (#22): “… financial institutions will take on additional risk in ways unpriced by regulators when facing financial constraints. Throughout the paper, we provide evidence that this additional risk-taking harms society as banks and insurance corporations acquire precisely those assets most affected in economic downturns” (p. 194) … “we find for over four thousand listed firms in 77 countries, as two-thirds of firms substantively improve their sustainable performance when institutional pressure is imprecise and increases, while one-third of firms are forced to start symbolically responding” (p. 196) … “One critical assumption underlining .. sustainable performance advances is that socially responsible investors can accurately identify sustainable firms. In practice, we show that these investors rely on inaccurate estimates of sustainable performance and accidentally “tilt the wrong firms” (p. 196) … “First, we find that MSCI IVA, FTSE, S&P, Sustainalytics, and Refinitiv ESG ratings do not reflect the sustainable performance of firms but solely capture their forward-looking sustainable aspirations. On average, these aspirations do not materialize up to 15 years in the future” (p. 84). …“Using unique identification in the real estate market and property-level sustainable performance information, we find that successful socially responsible engagement improves the sustainable performance of firms”(p. 196). My comment regarding the already published ESG rating criticism: Not all rating agencies work in the criticized way. My main ESG ratings supplier shifted its focuses to actual from planned sustainability (see my Researchpost #90 as of July 5th, 2022 relating to this paper: Tilting the Wrong Firms? How Inflated ESG Ratings Negate Socially Responsible Investing under Information Asymmetries).

ESG research criticism (1)? Comment and Replication: The Impact of Corporate Sustainability on Organizational Processes and Performance by Andrew A. King as of Dec. 7th, 2023 (#186): “Do High Sustainability companies have better financial performance than their Low Sustainability counterparts? An extremely influential publication in Management Science, “The Impact of Corporate Sustainability on Organizational Processes and Performance”, claims that they do. … after reviewing the report, I conclude that its critical findings are unjustified by its own evidence: its main method appears unworkable, a key finding is miscalculated, important results are uninterpretable, and the sample is biased by survival and selection. … Despite considering estimates from thousands of models, I find no reliable evidence for the proposed link between sustainability and financial performance” (abstract). My comment: If there is no negative effect of sustainability on performance, shouldn’t all investors invest 100% sustainably

ESG research criticism (2)? Does Corporate Social Responsibility Increase Access to Finance? A Commentary on Cheng, Ioannou, and Serafeim (2014) by Andrew A. King as of Dec. 12th, 2023 (#7): “Does Corporate Social Responsibility (CSR) facilitate access to finance? An extremely influential article claims that it does … I show that its research method precludes any insight on either access to finance or its connection to CSR. … I correct the original study by substituting more suitable measures and conducting further analysis. Contrary to the original report, I find no robust evidence for a link between CSR and access to finance” (abstract).

High transition risk: The pricing of climate transition risk in Europe’s equity market by Philippe Loyson, Rianne Luijendijk, and Sweder van Wijnbergen as of Aug. 22nd, 2023 (#46): “We assessed the effect of carbon intensity (tCO2/$M) on relative stock returns of clean versus polluting firms using a panel data set consisting of 1555 European companies over the period 2005-2019. We did not find empirical evidence that carbon risk is being priced in a diversified European equity portfolio, implying that investors do not seem to be aware of or at least do not require a risk premium for the risk they bear by investing in polluting companies“ (p. 32). My comment: Apparently, at least until 2019, there has not been enough sustainable investment to have a carbon risk impact

Green indicator confusion: Stronger Together: Exploring the EU Taxonomy as a Tool for Transition Planning by Clarity.ai and CDP as of Dec. 5th, 2023: „We find that out of the 1,700 NFRD (Sö: EU’s Non-Financial Reporting Directive) companies that published EU Taxonomy reports this year, around 600 identified their revenues and spending as part of their transition plans, and approximately 300 have validated science-based targets, both of which correlate to higher taxonomy alignment overall. There is a large dispersion of eligibility across companies within similar sectors which suggests that individual companies are involved in a variety of economic activities. This influences the low correlation between corporate GHG emissions and Taxonomy eligibility and alignment, as non-eligibility can be the result of exposure to either very high-impact or very low-impact economic activities. We observe that higher taxonomy alignment does not necessarily lead to lower carbon intensity when comparing companies within sectors. It is important to highlight that the largest source of corporate emissions might not always be well reflected in revenue shares” (p. 38). My comment: My experience is that the huge part of Scope 3 CO2 emissions and almost all non-CO2 emissions like methane are still seriously neglected by many corporations and investors

Greenium: Actions Speak Louder Than Words: The Effects of Green Commitment in the Corporate Bond Market by Peter Pope, Yang Wang, and Hui Xu as of Nov. 22nd, 2023 (#64): “This paper studies the effects of green bond issuance on the yield spreads of other conventional bonds from the same issuers. A traditional view of new bond issuance suggests that new bonds (whether green or brown) will increase secondary market bond yields if higher leverage increases default risk and dilutes creditors’ claim over assets. However, we find that the issuance of green bonds reduces conventional bond yield spreads by 8 basis points in secondary markets, on average. The effect is long-lasting (beyond two years) … An event study shows that the “bond” attribute of the green bonds still increases the yield spreads of outstanding conventional bonds by 1 basis point. It is the “green” attribute that lowers the yield spreads and ultimately dominates the net effects. … we show that socially responsible investors increase their demand for, and hold more, conventional bonds in their portfolios following the issuance of green bonds … we show that shareholders submit fewer environment-related proposals following green bond issuance. … Finally, our analysis highlights that green bonds give rise to positive real effects, though such effects are confined to the issuer“ (p. 42/43).

Costly values? Perceived Corporate Values by Stefano Pegoraro, Antonino Emanuele Rizzo, and Rafael Zambrana as of Dec. 4th, 2023 (#54): “…. analyzing the revealed preferences of values-oriented investors through their portfolio holdings … Using this measure of perceived corporate values, we show that values-oriented investors consider current and forward-looking information about corporate misconduct and controversies in their investment decisions. We also show that values-oriented investors sacrifice financial performance to align their portfolios with companies exhibiting better corporate values and lower legal risk” (p. 24). My comment: According to traditional investment theories, lower (ESG or other) risk should lead to lower returns. Any complaints about that?

Some investor impact: Propagation of climate disasters through ownership networks by Matthew Gustafson, Ai He, Ugur Lel, and Zhongling (Danny) Qin as of Dec. 5th, 2023 (#127): “We find that climate-change related disasters increase institutional investors’ awareness of climate change issues and accordingly these investors engage with the unaffected firms in their portfolios to influence corporate climate policies. In particular, we observe that such institutional investors vote in greater support of climate-related shareholder proposals at unaffected firms only after getting hit by climate change disasters in their portfolios and compared to other institutional investors. … In the long-run, firm-level GHG emissions and energy usage cumulatively decline at the same time as the unaffected firms adopt specific governance mechanisms such as linking their executive pay policies to GHG emission reductions, suggesting that changes in governance mechanisms potentially incentivize firms to internalize some of the negative externalities from their activities. … our results are more pronounced in brown industries“ (p. 26). My comment: When changing executive pay, negative effects have to be mitigated, see Wrong ESG bonus math?

Other investment research

Good constraints: Performance Attribution for Portfolio Constraints by Andrew W. Lo and Ruixun Zhang as of Nov. 1st, 2023 (#57): “While it is commonly believed that constraints can only decrease the expected utility of a portfolio, we show that this is only true when they are treated as static. … our methodology can be applied to common examples of constraints including the level of a particular characteristic, such as ESG scores, and exclusion constraints, such as divesting from sin stocks and energy stocks. Our results show that these constraints do not necessarily decrease the expected utility and returns of the portfolio, and can even contribute positively to portfolio performance when information contained in the constraints is sufficiently positively correlated with asset returns“ (p. 42). My comment: Traditional investment constraints are typically used to reduce risks. Looking at a actively managed funds, that does not always work as expected. Maybe responsible investment constraints are better than traditional ones?

PE Benchmark-Magic: Benchmarking Private Equity Portfolios: Evidence from Pension Funds by Niklas Augustin, Matteo Binfarè, and  Elyas D. Fermand as of Oct. 31st, 2023 (#245): “We document significant heterogeneity in the benchmarks used for US public pension fund private equity (PE) portfolios. … We show that general (Soe: investment) consultant turnover predicts changes in PE benchmarks. … we find that public pension funds only beat their PE benchmarks about 50% of the time, that they tend to use public market benchmark indices that underperform private market benchmark indices, and that their benchmarks have become easier to beat over the last 20 years“ (abstract).

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

Skilled fund managers: illustrated with woman by Gerd Altman from Pixabay

Skilled fund managers – Researchpost #155

Skilled fund managers: 22x new research on skyscrapers, cryptos, ESG-HR, regulation, ratings, fund names, AI ESG Tools, carbon credits and accounting, impact funds, voting, Chat GPT, listed real estate, and fintechs (# shows the SSRN full paper downloads as of Dec. 7th, 2023):

Social and ecological research

Skyscaper impact: The Skyscraper Revolution: Global Economic Development and Land Savings by Gabriel M. Ahlfeldt, Nathaniel Baum-Snow, and Remi Jedwab as of Nov. 30th, 2023 (#20): “Our comprehensive examination of 12,877 cities worldwide from 1975 to 2015 reveals that the construction of tall buildings driven by reductions in the costs of height has allowed cities to accommodate greater populations on less land. … one-third of the aggregate population in cities of over 2 million people in the developing world, and 20% for all cities, is now accommodated because of the tall buildings constructed in these cities since 1975. Moreover, the largest cities would cover almost 30% more land without these buildings, and almost 20% across all cities. …. Given the gap between actual and potential building heights we calculate for each city in our data, only about one-quarter of the potential welfare gains and land value losses from heights have been realized, with per-capita welfare gains of 5.9% and 3.1% available by eliminating height regulations in developed and developing economies, respectively. As the cost of building tall structures decreases with technical progress, such potential for welfare gains will only increase into the future. … in most cities it is in landowners’ interest to maintain regulatory regimes that limit tall building construction, … benefits may be greatest for those who would move into the city with the new construction to take advantage of the higher real wages and lower commuting costs“ (p. 47).

Hot cryptos: Cryptocarbon: How Much Is the Corrective Tax? by Shafik Hebous and Nate Vernon from the International Monetary Fund as of Nov. 28th, 2023 (#14): “We estimate that the global demand for electricity by crypto miners reached that of Australia or Spain, resulting in 0.33% of global CO2 emissions in 2022. Projections suggest sustained future electricity demand and indicate further increases in CO2 emissions if crypto prices significantly increase and the energy efficiency of mining hardware is low. To address global warming, we estimate the corrective excise on the electricity used by crypto miners to be USD 0.045 per kWh, on average. Considering also air pollution costs raises the tax to USD 0.087 per kWh“ (abstract).  

ESG attracts employees: Polarizing Corporations: Does Talent Flow to “Good’’ Firms? by Emanuele Colonnelli, Timothy McQuade, Gabriel Ramos, Thomas Rauter, and Olivia Xiong as of Nov. 30th, 2023 (#48): “Using Brazil as our setting, we make two primary contributions. First, in partnership with Brazil’s premier job platform, we design a nondeceptive incentivized field experiment to estimate job-seekers’ preferences to work for socially responsible firms. We find that, on average, job-seekers place a value on ESG signals equivalent to about 10% of the average wage. … Quantitatively, skilled workers value firm ESG activities substantially more than unskilled workers. … results indicate that ESG increases worker utility relative to the baseline economy without ESG. The reallocation of labor in the economy with ESG improves assortative matching and yields an increase in total output. Moreover, skilled workers benefit the most from the introduction of ESG, ultimately increasing wage differentials between skilled and unskilled workers“ (p. 32). My comment: see HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)

Always greenwashing: Can Investors Curb Greenwashing? Fanny Cartellier, Peter Tankov, and Olivier David Zerbib as of Dec. 1st, 2023 (#40): “… we show that companies greenwash all the time as long as the environmental score is not too high relative to the company’s fundamental environmental value. The tolerable deviation increases with investors’ pro-environmental preferences and decreases with their penalization. Moreover, the greenwashing effort is all the more pronounced the higher the pro-environmental preferences, the lower the disclosure intensity, and the lower the marginal unit cost of greenwashing. In particular, we show that beyond a certain horizon, on average, companies always greenwash“ (p. 31).

Insufficient ESG regulation? ESG Demand-Side Regulation – Governing the Shareholders by Thilo Kuntz as of Nov. 30th, 2023 (#45): “Instead of addressing the corporate board and its international equivalents as a supplier of ESG-friendly management, demand-side regulation targets investors and shareholders. It comes in two basic flavors, indirect and direct demand-side regulation. Whereas the first attempts to let only those retail investors become stockholders or fund members who already espouse the correct beliefs and attitudes, the latter pushes professional market participants towards ESG through a double commitment, that is, to the public at large via disclosure and to individual investors through pre-contractual information. .. Judging from extant empirical studies, indirect demand-side regulation in its current form will change the equation only slightly. … for most retail investors, including adherents to ESG, .. beliefs and attitudes seem to lie more on the side of monetary gains“ (p. 49/50).

Big bank climate deficits: An examination of net-zero commitments by the world’s largest banks by Carlo Di Maio, Maria Dimitropoulou, Zoe Lola Farkas, Sem Houben, Georgia Lialiouti, Katharina Plavec, Raphaël Poignet, Eline Elisabeth, and Maria Verhoeff from the European Central Bank as of Nov. 29th, 2023 (#25): “We examined the net-zero commitments made by Global Systemically Important Banks (G-SIBs). In recent years, large banks have significantly increased their ambition and now disclose more details regarding their net-zero targets. … The paper … identifies and discusses a number of observations, such as the significant differences in sectoral targets used despite many banks sharing the same goal, the widespread use of caveats, the missing clarity regarding exposures to carbon-intensive sectors, the lack of clarity of “green financing” goals, and the reliance on carbon offsets by some institutions. The identified issues may impact banks’ reputation and litigation risk and risk management” (abstract).

ESG investment research (Skilled fund managers)

Good fund classification: Identifying Funds’ Sustainability Goals with AI: Financial, Categorical Morality, and Impact by Keer Yang and Ayako Yasuda as of Nov. 30ths, 2023 (#23): “… developing a supervised machine-learning model-based method that classifies investment managers’ stated goals on sustainability into three distinct objectives: financial value, categorical morality, and impact. This is achieved by evaluating two dimensions of investor preferences: (i) whether investors have nonpecuniary preferences or not (value vs. values) and (ii) whether investors have ex ante, categorical moral preferences or ex post, consequentialist impact preferences. … Among the funds identified as sustainable by Morningstar, 54% state they incorporate ESG to enhance financial performance, while 39% practice categorical morality via exclusion and only 33% state they seek to generate impact. Stated goals meaningfully correlate with how the funds are managed. Financially motivated funds systematically hold stocks with high MSCI ESG ratings relative to industry peers, which is consistent with ESG risk management. Morally motivated funds categorically tilt away from companies in controversial industries (e.g., mining), but are otherwise insensitive to relative ESG ratings. Impact funds hold stocks with lower ESG performance than the others, which is consistent with them engaging with laggard firms to generate positive impact. Impact funds are also more likely to support social and environmental shareholder proposals. Hybrid funds are common. Funds combining financial and moral goals are the largest category and are growing the fastest” (p. 37/38). My comment: My fund may be unique: It holds stocks with high ESG ratings, is morally motivated and tries to achieve impact by engaging with the most sustainable companies.

ESG ratings explanations: Bridging the Gap in ESG Measurement: Using NLP to Quantify Environmental, Social, and Governance Communication by Tobias Schimanski, Andrin Reding, Nico Reding, Julia Bingler, Mathias Kraus, and Markus Leippold as of Nov. 30th, 2023 (#345): “… we propose and validate a new set of NLP models to assess textual disclosures toward all three subdomains … First, we use our corpus of over 13.8 million text samples from corporate reports and news to pre-train new specific E, S, and G models. Second, we create three 2k datasets to create classifiers that detect E, S, and G texts in corporate disclosures. Third, we validate our model by showcasing that the communication patterns detected by the models can effectively explain variations in ESG ratings” (abstract). My comments: I selected my ESG ratings agency (also) because of its AI capabilities

AI ESG Tools: Artificial Intelligence and Environmental Social Governance: An Exploratory Landscape of AI Toolkit by Nicola Cucari, Giulia Nevi, Francesco Laviola, and Luca Barbagli as of Nov. 29th, 2023 (#35): “This paper presents an initial mapping of AI tools supporting ESG pillars. Through the case study method, 32 companies and tools supporting environmental social governance (ESG) management were investigated, highlighting which of the different AI systems they use and enabling the design of the new AI-ESG ecosystem” (abstract).

Cheaper green loans: Does mandatory sustainability reporting decrease loan costs? by Katrin Hummel and Dominik Jobst as of Dec. 1st, 2023 (#31): “We focus on the passage of the NFRD, the first EU-wide sustainability reporting mandate. Using a sample of global loan deals from 2010 to 2019, we begin our analysis by documenting a negative relationship between borrowers’ levels of sustainability performance and loan costs. … In our main analysis, we find that loan costs significantly decrease among borrowers within the scope of the reporting mandate. This decrease is concentrated in firms with better sustainability performance. In a further analysis, we show that this effect is stronger if the majority of lead lenders are also operating in the EU and are thus potentially also subject to the reporting mandate themselves “ (p. 26/27).

Widepread ESG downgrade costs: Do debt investors care about ESG ratings? by Kornelia Fabisik, Michael Ryf, Larissa Schäfer, and Sascha Steffen from the European Central Bank as of Nov. 27th, 2023 (#53): “We use a major ESG rating agency‘s methodology change to firms’ ESG ratings to study its effect on the spreads of syndicated U.S. corporate loans traded in the secondary market. We find that loan spreads temporarily increase by 10% relative to the average spread of 4%. … we find some evidence that the effect is stronger for smaller and financially constrained firms, but not for younger firms. We also find that investors penalize firms for which ESG-related aspects seem to play a more prominent role. Lastly, when we explore potential spillover effects on private firms that are in the same industry as the downgraded firms, we find evidence supporting this channel. We find that private firms in highly affected industries face higher loan spreads after ESG downgrades of public firms in the same industry, suggesting that investors of private (unrated) firms also price in ESG downgrades of public firms“ (p. 28).

High ESG risks: Measuring ESG risk premia with contingent claims by Ioannis Michopoulos, Alexandros Bougias, Athanasios Episcopos and Efstratios Livanis as of Nov. 9th, 2023 (#109): “We find a statistically significant relationship between the ESG score and the volatility and drift terms of the asset process, suggesting that ESG factors have a structural effect on the firm value. We establish a mapping between ESG scores and the cost of equity and debt as implied by firm’s contingent claims, and derive estimates of the ESG risk premium across different ESG and leverage profiles. In addition, we break down the ESG risk premia by industry, and demonstrate how practitioners can adjust the weighed average cost of capital of ESG laggard firms for valuation and decision making purposes“ (abstract). … “We find that ESG risk has a large effect on the concluded cost of capital. Assuming zero ESG risk premia during the valuation process could severely underestimate the risky discount rate of ESG laggard firms, leading to distorted investment and capital budget decisions, as well as an incorrect fair value measurement of firm’s equity and related corporate securities” (p. 20).

ESG fund benefits: Renaming with purpose: Investor response and fund manager behaviour after fund ESG-renaming by Kayshani Gibbon, Jeroen Derwall, Dirk Gerritsen, and Kees Koedijk as of Nov. 27th, 2023 (#42): “Using a unique sample of 740 ESG-related name changes …. Our most conservative estimates … suggest that mutual funds domiciled in Europe may enjoy greater average flows by renaming … we provide consistent evidence that mutual funds improve the ESG performance and reduce the ESG risks of their portfolios after signalling ESG repurposing through fund name changes. Finally, we find that renaming has no material impact on funds’ turnover rates or on the fees charged to investors“ (p. 15/16). My comment: Maybe I should have integrated ESG in my FutureVest Equity Sustainable Develeopment Goals fund name (ESG and more see in the just updated 31pager 231120_Nachhaltigkeitsinvestmentpolitik_der_Soehnholz_Asset_Management_GmbH).

Green for the rich? Rich and Responsible: Is ESG a Luxury Good? Steffen Andersen, Dmitry Chebotarev, Fatima Zahra Filali Adib, and Kasper Meisner Nielsen as of Nov. 27th, 2023 (#91): “… we examine the rise of responsible investing among retail investors in Denmark. … from 2019 to 2021. The fraction of retail investors that hold socially responsible mutual funds in their portfolios has increased from less than 0.5% to 6.8%, equivalent to an increase in the portfolio weight on socially responsible mutual funds for all investors from 0.1% to 1.6%. At the same time, the fraction of investors holding green stock has increased from 8.7% to 15.9%, equivalent to an increase in portfolio weight on green stocks from 2.4% to 3.3%. Collectively, the rise of sustainable investments implies that more than 4.9% of the risky assets are allocated to sustainable investments by 2021. The rise in responsible investments is concentrated among wealthy investors. Almost 13% of investors in the top decile of financial wealth holds socially responsible mutual funds and one out of four holds green stocks. Collectively, the portfolio weight on socially responsible assets among wealth investors is 4.8% in 2021. … Using investors’ charitable donations prior to inheritance, we document that the warm glow effect partially explains the documented results“ (p. 20/21).

Emissions control: Carbon Accounting Quality: Measurement and the Role of Assurance by Brandon Gipper, Fiona Sequeira, and Shawn X. Shi as of Nov. 29th, 2023 (#135): “We document a positive association between (Sö: third party) assurance and carbon accounting quality for both U.S. and non-U.S. countries. This relation is stronger when assurance is more thorough. We also document how assurance improves carbon accounting quality: first, assurors identify issues in the carbon accounting system and communicate them to the firm; subsequently, firms take remedial actions, resulting in updated disclosures, faster release of emissions information, and more positive perceptions of emissions figures by reporting firms. …. our findings suggest that even limited assurance can shape carbon accounting quality“ (p. 34).

Impact investment research (Skilled fund managers)

Carbon credit differences: Paying for Quality State of the Voluntary Carbon Markets 2023 by Stephen Donofrio Managing Director Alex Procton from Ecosystem Marketplace as of Oct. 10th, 2023: “Average voluntary carbon markets (VCM) … volume of VCM credits traded dropped by 51 percent, the average price per credit skyrocketed, rising by 82 percent from $4.04 per ton in 2021 to $7.37 per ton in 2022. This price hike allowed the overall value of the VCM to hold relatively steady in 2022, at just under $2 billion. To date in 2023, the average credit price is down slightly from 2022, to $6.97 per ton. … Nature-based projects, including Forestry and Land Use and Agriculture projects, made up almost half of the market share at 46 percent. … Credits that certified additional robust environmental and social co-benefits “beyond carbon” had a significant price premium. Credits from projects with at least one co-benefit certification had a 78 percent price premium in 2022, compared to projects without any co-benefit certification. … Projects working towards the UN Sustainable Development Goals (SDGs) also demonstrated a substantial price premium at 86 percent higher prices than projects not associated with SDGs … Newer credits are attracting higher prices” (p. 6).

Unsuccessful voting: Minerva Briefing 2023 Proxy Season Review as of November 2023: “Most resolutions are proposed by management (96.90% overall) … In 2023, there were 621 proposals from shareholders, mostly in the US (530), and mostly Social- and Governance-related (259 and 184 respectively). However, an increasing number of proposals are also being put forward on Environmental issues. The higher number of shareholder proposals in the US may reflect more supportive regulations on the filing of proposals and the absence of an independent national corporate governance code, as there is in the UK. Although well-crafted shareholder proposals can receive majority support, the overall proportion doing so has decreased (5.80% in 2023 vs. 11.56% in 2022), partly dragged down by ‘anti-ESG’ proposals” (p. 3/4). My comment: 621*6%=37 majority supported shareholder proposals including non ESG-topics seems to a very low number compared to the overall marketing noise asset managers produce regarding their good impact on listed companies. Direct shareholder engagement with companies seems to have more potential for change. My respective policy see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Good impact returns: Impact investment funds and the equity market: correlation, performance, risk and diversification effects – A global overview by Lucky Pane as of July 2021: “Impact investing funds from the twelve economies reported an average return of 10.7% over the period 2004-2019, higher than the average return of the MSCI World Equity Index (8.7%). … Negative/low correlations were observed between impact investment funds and traditional assets of the following countries: Germany, Australia, UK, Brazil, China, Poland, South Korea and Turkey” (p. 35/36). My comment: Unfortunately, there are very few (liquid) impact investing studies. A study including 2022 and 2023 would come to less favorable return conclusions, though.

Other investment research

Skilled fund managers (1): Sharpening the Sharpe Style Analysis with Machine-Learning ― Evidence from Manager Style-Shifting Skill of Mutual Funds by George J. Jiang, Bing Liang, and Huacheng Zhang as of Dec. 3rd, 2023 (#38): “Nine out of 32 indexes are selected as the proxy of style set in the mutual fund industry. We … find that most active equity funds are multi-style funds and more than 85% of them allocate capitals among three to six styles. Single-style funds count less than 3% of the total number of funds. We further find that around 3% of funds shift their investment styles in each quarter and each shifting fund switches styles three times over the whole period … We find that shifting funds perform better in the post-shifting quarter than in the pre-shifting quarter in terms of both total returns and style-adjusted returns, but we do not find performance improvement by non-shifting funds. We further find that style-shifting decision is positively related to future fund returns. … We find that style-shifting in the mutual fund industry is mostly driven by fund managers’ expertise in the new style“ (p. 42).

Skilled fund managers (2): Do mutual fund perform worse when they get larger? Anticipated flow vs unanticipated flow by Yiming Zhang as of Nov. 14th, 2023 (#17): “… I provide empirical evidence from a novel setting that supports the decreasing returns to scale in active mutual funds. My identification strategy relies on the nature of Morningstar Rating, which has a large impact on fund flow. … I find that for each 1% of inflow (outflow), the return will decrease (increase) by around 0.6% on average in the next month, and the return will decrease (increase) by around 0.2% on average in the next month. … I find that for experienced manager, they make more new investment after the flow shock and their performance does not decrease. For inexperienced manager, it is quite the opposite. These results indicate that if fund managers can anticipate the 36th month flow shock, they will try to generate more investment ideas, and execute them when the flow arrives“ (p. 22/23).

Skilled fund managers (3)? Can ChatGPT assist in picking stocks? Matthias Pelster and Joel Val as of Nov. 29th, 2023 (#199): “… we find that ratings of stocks by ChatGPT positively correlate to future (out-of-sample) stock returns. … ChatGPT seems to be able to successfully identify stocks that yield superior performance over the next month. ChatGPT-4 seems to have some ability to evaluate news information and summarize its evaluation into a simple score. We find clear evidence that ChatGPT is able to distinguish between positive and negative news events, and adjusts its recommendation following negative news” (p. 11). My comment: Interesting, because most active fund managers underperform their benchmarks most of the time, but I am skeptical regarding AI investment benefits see How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Listed real estate: Drivers of listed and unlisted real estate returns by Michael Chin and Pavol Povala as of Nov. 2nd, 2023 (#25): “The differences between listed and unlisted real estate appear to reduce over the longer term, where the return correlations between the two segments increases with horizon. In addition, the correlations with the broader equity market are lower at longer horizons for both real estate segments. … We find that both segments of real estate hedge inflation risk more than the aggregate equity market, and that listed real estate has a high exposure to transitory risk premium shocks“ (abstract). My comment: I started “my” first listed real estate fund more than 10 years ago and still like the market segment despite all of its problems

Fintech success factors: Fintech Startups in Germany: Firm Failure, Funding Success, and Innovation Capacity by Lars Hornuf and Matthias Mattusch as of Nov. 29th, 2023 (#75): “ … using a hand-collected dataset of 892 German fintechs founded between 2000 and 2021 … We find that founders with a business degree and entrepreneurial experience have a better chance of obtaining funding, while founder teams with science, technology, engineering, or mathematics backgrounds file more patents. Early third-party endorsements and foreign partnerships substantially increases firm survival. … Fintechs focusing on business-to-business models and which position themselves as technical providers have proven more effective. Fintechs competing in segments traditionally attributed to banks are generally less successful and less innovative.” (abstract).

Skilled fund managers (?) 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 26 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

ESG and Impact: Illuminaed mushroom as illustration

ESG and impact: Researchpost #154

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

Social and ecological research

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

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

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

ESG investment research (ESG and impact)

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

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

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

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

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

Impact investing research (ESG and impact)

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

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

Other investment research

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

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

ESG and Impact + Engagement advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 25 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Purpose scrabble word by wokandapix from pixabay

Purpose – Researchpost #149

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

Social and ecological research (Purpose)

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

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

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

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

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

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

Responsible investment research (Purpose)

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

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

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

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

Other investment research

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

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

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

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

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Liquid impact advert for German investors

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

Liquid impact picture shows water drop by rony michaud from pixabay

Liquid impact – Researchpost #148

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

Ecological and social research

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

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

Responsible investment research: Liquid impact

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

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

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

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

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

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

Liquid impact and other investment research

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

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

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Liquid impact advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 29 of 30 engaged companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Impactinvsting ideas illustrated by picture of tree by umut avci from Puxabay

Impactinvesting ideas – Researchblog #145

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

Social research

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

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

Ecological research

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

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

ESG investment research: Impactinvesting ideas

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

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

Impactinvesting ideas: Research

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

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

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

Other investment research

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

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

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

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Advert for German investors:

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

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Customer ESG engagement picture shows sales increase by Elle Ritter from Pixabay

Customer ESG engagement – Opinion Post #212

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

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

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

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

Customer ESG engagement goal 1: Avoid or reduce negative aspects

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

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

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

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

Customer ESG engagement goal 2: Support positive aspects

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

Here are two recent studies which support this hypothesis:

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

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

Investors can influence corporations

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

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

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

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

My customer ESG engagement recommendations

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

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

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

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

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

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

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

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Advert for German investors:

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

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Supplier ESG illustrated with delivery man by 28819275 from Pixabay

Supplier ESG – Researchpost #144

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

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

Ecological research (corporate perspective)

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

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

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

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

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

Generic ESG Research (investor perspective)

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

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

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

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

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

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

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

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

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

Impact investment research (supplier ESG)

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

Other investment research

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

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

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Advert for German investors:

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

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Supplier Engagement table by CAF as example

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 13th, 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. 6th, 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. 1st, 2022t:  “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 31st, 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. 9th, 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. 25th, 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