Archiv der Kategorie: Musterportfolio

ESG overall: Researchpost 91

ESG overall: >15x new research on fixed income ESG, greenium, insurer ESG investing, sin stocks, ESG ratings, impact investments, real estate ESG, equity lending, ESG derivatives, virtual fashion, bio revolution, behavioral ESG investing (# indicates the number of SSRN downloads on July 25th)

ESG overall: Fixed income ESG investing

Huge sovereign bio-risks: Nature Loss and Sovereign Credit Ratings by Matthew Agarwala, Matt Burke, Patrycja Klusak, Moritz Kraemer, and Ulrich Volz as of June 22^nd, 2022: “… incorporating biodiversity- and nature-related risks into sovereign ratings is no different from including other difficult to quantify risks – such as geopolitical risk or contingent liabilities – that are already embedded in ratings methods. … Using the most advanced AI methodology, this report models the effect of nature loss on credit ratings, default probabilities, and the cost of borrowing for 26 sovereigns. … More than half (58%) of the sovereigns included in the sample would face a downgrade of one notch or more. Those downgrades would in turn trigger between $28-53 billion in additional costs of annual interest payments borne by these downgraded governments…. About a third of the sovereigns (31% of the sample) would see their rating lowered by more than three notches. … China and Malaysia would be hit the hardest, with rating downgrades by more than six notches in the partial collapse scenario. India, Bangladesh and Indonesia would face downgrades of approximately four notches” (p. 8).

ESG positive fixed income: The Case for Integrating ESG into Fixed Income Portfolios by Andrew Clare, Aneel Keswani and Nick Motson as of July 18^th, 2022 (#145): “The .. results indicate that portfolios comprising higher ESG-ranked portfolios outperform those comprising lower ESG ranked issuers … although part of the difference in returns could be attributed to the fact that different ESG ranked portfolios had different sectoral exposures. … we investigated a second approach where we created portfolios that were tilted towards positive ESG characteristics and away from less positive characteristics using two industry-standard tilting methodologies. The results indicated that portfolios can be tilted towards a particular ESG characteristic to enhance the exposure to this characteristic … without having a material effect on the risk and return characteristics of the portfolios relative to the reference portfolio. We also investigated the impact of excluding issuers from four sectors that some investors choose to exclude from their portfolios – Tobacco, Mining, Defence and Oil & Gas. We found that these exclusions had little impact on portfolio performance, mainly because issuers from these sectors made up only a small proportion of the sample of issuers. … Our results showed some indication of a diminution of downside risk in portfolios comprising issuers with higher ESG ratings, but these results were not definitive with regard to this issue” (p. 33/34).

Bond Greenium: The Benchmark Greenium by Stefania D’Amico, Johannes Klausmann, and N. Aaron Pancost as of June 13^th, 2022 (#61): “.. we use a dynamic term structure model to estimate a sovereign risk-free greenium: the premium investors are willing to pay to subsidize environmentally beneficial projects” (abstract). “We estimate the benchmark greenium exploiting the unique “twin” structure of German sovereign green bonds … first, the longer-term greenium is often larger than the raw green spread, highlighting the importance of controlling for idiosyncratic security-level mispricing. Second, the model-implied term structure of the greenium is upward sloping, in contrast to the term structure of green spreads which is downward sloping. Third, the model allows us to estimate expected future returns, while green spreads offer only a measure of ex-post realized returns” (p. 42).

Bond greenium eyplained: Investor ESG Tastes and Asset Pricing: Evidence from the Primary Bond Market by Liying Wang and Juan (Julie) Wu as of June 25^th, 2022 (#40): “We find that green bonds exhibit larger oversubscription ratios than their conventional counterparts offered by the same issuer. Anticipating their greater demand, underwriters propose a slightly lower offering spread for green bonds at the beginning of bookbuilding. Upon a positive realization of investor demand, underwriters and issuers further tighten the offering spread of green bond offerings to a greater extent, resulting in significant greenium. These findings coherently suggest that higher investor demand for green bonds leads to their lower expected returns” (p. 29/30).

Insurer ESG risk? Responsible investments in life insurers’ optimal portfolios under solvency constraints by Sebastian Schlütter, Emmanuel S. Fianu and Helmut Gründl as of July 21^st, 2022 (#5): ”This paper studies the stock selection problem of life insurance companies that are concerned about the social responsibility of stock investments and face solvency regulation. … For a given solvency ratio, expected stock returns remain relatively stable when a moderate responsibility target is introduced. A very ambitious target, however, can reduce expected returns substantially, in particular for insurers with a low target solvency ratio and with a risk profile that is essentially driven by stock risks. Overall, we demonstrate that life insurers’ selection of responsible investments is different from other investors due to their specific risk profile” (p. 28). “A main result of our analysis is that the expected return of the investment portfolio decreases substantially if an insurer aims for a highly ambitious level of responsibility and needs to stick to a certain solvency ratio. The decrease results from a larger risk concentration in the investment portfolio” (p. 26). My comment: I am not sure if expected returns and VaR are adequate measures to answer the research question.

ESG overall: ESG equity investing

Lower return for green equity investors? “Green Companies” and Financial Performance: A Quantitative Study on the Market’s Response to a Company’s Environmental Responsibility by Athanasios Kranias, Dimitrios Psychoyios and Apostolos-Paul Refenes as of July 9^th, 2022 (#20): “This paper shows that financial gains for companies in terms of efficiency, expansion, and profitability have a positive effect on the employment of “green” practices. … our findings contradict the concept of increasing market value by reputation. We establish a statistically significant steady negative coefficient relationship between firms’ “greenness” and risk adjusted excess stock returns for all data sets of S&P500 companies. This suggests that, although firms benefit at a corporate level from environmentally friendly practices, such initiatives are not rewarded by the market via an increase in stock price. … This underperformance can be interpreted as a “Green Premium” for environmentally aware firms, which does not appear for competitors who do not engage in “green” activities” (p. 38).

No-cost ESG investments: Drawing Up the Bill: Does Sustainable Investing Affect Stock Returns Around the World? by Rómulo Alves, Philipp Krueger, and Mathijs van Dijk as of June 2022: “Using a comprehensive dataset spanning 9,253 stocks in 46 countries over the last two decades we find that it is seldom the case that higher ESG ratings are associated with higher future stock returns. This general finding holds for both negative and positive screens, for different dimensions of sustainability (E, S, G, ESG), whether we use ratings in levels or changes, and whether we use either one of the three most widely used ratings in the industry or combinations of these ratings. It also holds in our global sample under different specifications, within all major world regions other than emerging economies, and within the various sectors of economic activity. … First, our results suggest that it has been possible to “do good without doing poorly” in the last two decades. … Second, our results cast doubt on the idea that there is widespread overvaluation in sustainable stocks” (p. 34).

Sin stocks not hurt? Does ESG negative screening work? Robert Eccles, Shiva Rajgopal and Jing Xie as of July 12^th, 2022 (#66): “… we find that after controlling for variations in firm characteristics (i) sin stocks are not undervalued relative to other stocks; and (ii) institutional ownership in sin stocks is not statistically distinguishable from those of no sin stocks. Sin stocks do not differ in the likelihood of exiting the public market, the cost of raising new equity, and in the announcement returns upon negative ESG news relative to other stocks. However, the cost of new debt is higher for sin stocks. Finally, we find that investors submit more ESG proposals for voting in annual meetings and a larger number of ESG proposals are passed, indicating that investors are either actively trying to improve ESG profiles of sin stocks or alternatively indulging in virtue-signaling of their own” (p. 30/31). My comment: As long as “institutional ownership in sin stocks is not statistically distinguishable from those of no sin stocks” I do not expect sin stocks to suffer enough

ESG rating limits: Are ESG Ratings Informative About Companies’ Socially Responsible Behaviors Abroad? Evidence from the Russian Invasion of Ukraine by Daniyal Ahmed, Elizabeth Demers, Jurian Hendrikse, Philip Joos, and Baruch Lev as of July 13^th, 2022 (#83): “First, we find that more highly rated ESG firms were not less likely to operate in Russia nor more likely to meaningfully inform investors about such activities. Second … many firms scrambled to suspend or divest their Russian operations, but those firms that are alleged to be more socially responsible were neither quicker, nor more likely, to announce such actions. Third, we find that … both the materiality of firms’ Russian exposure and the extent of disclosure about such exposure negatively impacted returns after the outbreak of the war, while investing in more highly rated ESG firms did not offer any protection. … we show that ESG rating agencies have failed to adequately incorporate measures of country-level corruption and human rights violations into firm-specific ESG scores (much less their “social” or “human rights” scores), despite the fact that reliable country-specific measures of these anti-social behaviors and associated risks are readily available” (p. 11/12). My comment: Do not expect ESG ratings to do all work for you. Exclusions of unwanted country and industry exposures should be used in addition to ESG ratings. I have avoided many bad investments using this approach since 2017, e.g. excluding Russian and mainland China investments (example: Mein Artikel 9 Fonds: Noch nachhaltigere Regeln – Responsible Investments (Blog) (prof-soehnholz.com)). This approach has worked fine so far compare ESG ok, SDG gut: Performance 1. HJ 2022 – Responsible Investments (Blog) (prof-soehnholz.com)

Very little impact? Proxy Voting: Managers Focus on Environmental and Social Themes – Evaluating 25 asset managers’ approaches to ESG themes by Lindsey Stewart and Hortense Bioy from Morningstar research as of July 12^th, 2022: “The number of shareholder resolutions on E&S themes, as well as the level of support for many of them, has increased significantly in 2022. Asset managers are adding more clarity to their policies on the features of E&S proposals … Nine of the 13 European asset managers analyzed in this study have a high or very high E&S focus in their proxy-voting policies, while 11 of the 12 U.S. asset managers have a medium or low focus. … Among the environmental issues covered, climate, unsurprisingly, is the most common, but biodiversity and other connected topics, such as deforestation and water use, are gaining prominence. Among social issues, diversity, equity, and inclusion, or DEI, is the most common topic, covering issues from the board level to the general workforce. Broader human capital management issues, human rights, and labor rights are often also covered” (p. 1). My comment: Sounds good, but there were only 250 company board opposed E&S resolutions in 2022 which is very few given the overall number of invested stocks. Only 27 of these resolutions gained majority support. There is no information of the effectiveness of the resolutions in this report. I suggest to invest in the best intrinsically E&S motivated companies, instead, compare Absolute and Relative Impact Investing and additionality – Responsible Investments (Blog) (prof-soehnholz.com)

ESG overall: Other ESG topics

Positive Real Estate ESG: Sustainability and Private Equity Real Estate Returns by Avis Devine, Andrew Sanderford , Chongyu Wang as of June 10^th, 2022 (#62): “This paper … examines the relationship between performance for funds in the Open Ended Diversified Core Equity (ODCE) Index and reporting to the Global Real Estate Sustainability Benchmark (GRESB), a platform for disclosure about fund/firm-level ESG strategies and performance. … GRESB participation and performance are both significant predictors of cross-sectional fund returns … and … are associated with the price appreciation component of fund total returns but not with the income component” (abstract).

Positive ESG effects? The effect of ESG on the global equities lending market by Travis Whitmore and Christin Nadeau of State Street Associates as of July 2022: “A significant positive relationship exists between a company’s performance on ESG attributes and the shares available on the securities lending market. … Firms that perform poorly on material ESG attributes are associated with significantly higher fees and increased levels of borrowing demand, a proxy for short selling. … Trends in securities lending share recalls over proxy record dates suggest institutions engage more with companies with poor ESG characteristics. … we find no evidence of borrowing securities to increase short-term influence over proxy votes”. (p.3).

ESG Derivatives: Derivatives and ESG by Colleen Baker as of July 19^th, 2022: “Financial markets are increasingly developing innovative, ESG-related derivatives and relying upon these instruments to hedge ESG-related risks” (abstract). My Comment: Interessing topic but no citations allowed without explicit agreement

ESG skeptical research: Researchpost 90

ESG skeptical: >15x new and skeptical research on ESG and SDG investments, performance, cost of capital, reporting, ratings, impact, bonifications and artificial intelligence (# indicates the number of SSRN downloads on July 5th)

ESG skeptical: Investments and performance

ESG fund growth: European sustainable investment funds study 2022 – Hitting the road to a greener future by zeb and Morningstar as of June 22th, 2022: “Net assets in sustainable funds domiciled in Europe have reached almost EUR 2 trillion in 2021 – this figure is three times as high as in 2019 and up 71% from 2020. The share in total net assets went up to 16%, and half of the net flows were attracted by the sustainable sector. Sustainable passive funds continue their disproportionate increase, now reaching a 27% share in sustainable assets, as opposed to a share of passive funds of only 21% in the conventional fund sector. Equity remains by far the most important asset class of sustainable funds. The integration of ESG factors into money market funds has significantly accelerated, resulting in a share of 25% in total net assets of money market funds. At European level, about 44% of net assets were invested in funds classified by their managers as Article 8 and Article 9 funds according to the Sustainable Finance Disclosure Regulation (SFDR)” (p. 3).

Bad REIT ESG? Does Investing in ESG Pay Off? Evidence from REITs around the Covid-19 Pandemic by Ryan G. Chacon, Zifeng Feng, and Zhonghua Wu as of June 29^th, 2022 (#19): “… we focus on the impacts of ESG performance on firm value, using newly available GRESB ESG performance data for an international sample of REITs. We document a negative relationship between REIT ESG performance and firm value during the pandemic. … we find that firms with higher ESG scores have lower cash flows and higher risk. Our results are consistent with REITs being penalized for overinvestment in ESG, particularly during times of significant market stress” (p. 22). My Comment: According to my experience sector ESG portoflios are difficult to manage in times of crisis, but somewhat sector diversified portfolios not see ESG ok, SDG gut: Performance 1. HJ 2022 – Responsible Investments (Blog) (prof-soehnholz.com)

ESG research criticism: Cost of Capital for ESG and Non-ESG Stocks: Regression- versus Theory-based Approaches by Ahmed Badreldin and Bernhard Nietert as of June 16^th, 2022 (#70): “… to derive cost of capital, .. empirical ESG papers do not use the valuation formulas of theoretical ESG pricing paper. Instead, empirical ESG papers rely on multi-factor regressions to estimate cost of capital. … Our paper brings theory-based ESG pricing formulas into a form that consists of solely observable components and shows that the cost of capital of ESG stocks is a linear function of the risk premium of the ESG sub-market portfolio whereas the cost of capital of non-ESG stocks is a linear combination of the risk premia of the market portfolio and the ESG sub-market portfolio. … we demonstrate that the cost of capital differences between regression- and theory-based cost of capital are both statistically and economically significant, where neither the sign nor the size of cost of capital differences can be forecasted with the help of different ESG rating methodologies or stock characteristics” (abstract).

Positive ESG-effects: Corporate Sustainability Performance and the Cost of Debt – An Analysis of the Impact of Country- and Industry-specific Climate Risk Exposures by Jan Christ, Tobias Hertel, Jannik Kocian as of June 17^th, 2022 (#27): “Our results suggest that high levels of CSP, especially considering the environmental and social dimensions, are associated with lower credit default swaps (CDS) spreads …” (abstract).

ESG skeptical reporting

Bank climate inaction: Climate action or greenwashing? The Oil and Gas Policy Tracker assesses financial players by Reclaim Finance as of July 5^th, 2022: “136 of the 369 financial institutions rated in the OGPT have adopted an oil and gas policy, which means more than 2/3 of them don’t even have a policy. Only 13 financial players rated in the OGPT have a policy tackling (totally or partially) oil and gas expansion, which means less than 4% committed to align their business with climate science to stay below 1,5°C. No more than 27 financial players rated in the OGPT have adopted ambitious commitments on unconventional oil and gas through the exclusion of some developers and/or a phase-out strategy. Yet, 158 of them have committed to carbon neutrality by 2050 joining an alliance of the Glasgow Financial Alliance for Net Zero (GFANZ)”.

Good green revenue reporting: Mandatory Disclosure of Standardized Sustainability Metrics: The Case of the EU Taxonomy Regulation by Marvin Nipper, Andreas Ostermaier, and Jochen Theis as of June 7^th, 2022 (#83): “The European Union’s taxonomy regulation enacts rules to discern sustainable activities and determine the resulting green revenue, whose disclosure is mandatory for many companies. In an experiment, we explore how this standardized metric is received by investors relative to a sustainability rating. We find that green revenue affects the investment probability more than the rating if the two metrics disagree. If they agree, a strong rating has an incremental effect on the investment probability. … Our findings imply that a mandatory standardized sustainability metric is an effective means of channeling investment, which complements rather than substitutes sustainability ratings” (abstract).

Good SDG reporting: Investigating competing Rationales for SDG Reporting by Theresa Spandel as of Juliy 1^st, 2022 (#30): “Overall, the presented evidence on SDG reporting suggests that the SDG framework helps firms to identify financially immaterial but inside-out material sustainability areas with low performance, which are subsequently reported on and improved” (p. 43).

Less ESG disagreement: Does voluntary ESG reporting resolve disagreement among ESG rating agencies? by Michael D. Kimbrough, Xu (Frank) Wang, Sijing Wei, and Jiarui (Iris) Zhang as of June 13^th, 2022 (#78): “We find that ESG disagreement among ESG raters is lower for firms with voluntary ESG reports, indicating that ESG reports are useful to ESG rating agencies. In particular, disclosures about the environmental and social dimensions help reduce disagreement on those corresponding dimensions. Using textual analysis, we show that longer, less positive, and less sticky ESG reports are associated with further reduced disagreement among ESG raters. …Finally, we document that ESG disagreement is significantly positively related to capital market uncertainty” (p. 34).

ESG skeptical ratings

ESG rating criticism: Divestment, information asymmetries, and inflated ESG ratings by Dennis Bams and Bram van der Kroft as of June 14^th, 2022 (#154): “… socially responsible investors shift their portfolios towards firms with high ESG ratings rather than firms with exemplar sustainable performance. We causally show that this provides incentives for firms to reduce their cost of capital by inflating their ESG ratings. Consequently, ESG rating inflation is so prominent that Refinitiv, MSCI IVA, and FTSE ESG ratings are inversely related to sustainable performance because promises of sustainable performance improvements do not materialize up to 15 years in the future” (abstract). “… we capture the promised sustainable performance of firms by assessing their mainly self-reported ESG policies, activities, and targets proposed in sustainability reports and determine their realized sustainable performance with primarily third-party reported ESG controversies, environmental pollution, labor conditions, and governance aspects … We observe a negative relationship when we regress the aggregate realized ESG scores of firms on their overarching promised ESG scores now and up to 10 years in the future” (p. 4) My comment: Not all rating agencies work in the criticized way. My main ESG ratings supplier shifted its focuses to actual from planned sustainability.

ESG rating provider deficits: Outcome of ESMA Call for Evidence on Market Characteristics of ESG Rating and Data Providers in the EU by European Securities and Markets Authority as of June 24^th, 2022: “… our principal finding is that the number of ESG rating providers currently active in the EU is 59. … the structure of the market among providers is split between a small number of very large non-EU entities on one hand, and a large number of significantly smaller EU entities on the other. … The predominant business model is investor-pays, however, provision of ESG ratings on an issuer-pays basis is more prevalent than anticipated and was indicated in around a third of responses from providers. … the majority of users of ESG ratings are typically contracting for these products from several providers simultaneously. Their reasons for selecting more than one provider are most notably to increase coverage, either by asset class or geographically, or in order to receive different types of ESG assessments. A majority of users contract with a small number of the same rating providers, indicating a degree of concentration in the market. The most common shortcomings identified by the users were a lack of coverage of a specific industry or a type of entity and insufficient granularity of data. Complexity and lack of transparency around methodologies were also cited as an issue. … Most of these entities highlighted some degree of shortcoming in their interactions with the rating providers, most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors” (p. 3).

ESG rater comparison: ESG-Datenbieter im Check: Große Divergenzen bei S und G by Cofinpro AG as of June 28th, 2022: „Die für diese Analyse befragten Anbieter stellen jeweils ESG-Daten für mehrere tausend Unternehmen bereit. Vermehrt werden dabei auch nicht-börsennotierte Firmen aufgenommen. Teilweise stellen Anbieter Daten für mehr als 200.000 Unternehmen bereit. Ermöglicht wird dies durch eine automatisierte Auswertung. Modernste Technologien der Künstlichen Intelligenz (KI) wie Machine Learning finden bei der Mehrzahl … der Anbieter Anwendung. Diese zunehmende Konsolidierung und Oligopolisierung am Markt für ESG-Datenanbieter führt zu steigenden Eintrittsbarrieren. Das Leistungsspektrum der ESG-Datenanbieter ist weitgehend homogen. Zum »Standardprogramm« gehört die Ermittlung von ESG-Scores bzw. Ratings, die im Rahmen einer ESG-Datenversorgung von fast allen befragten Unternehmen angeboten wird. Auch die Bereitstellung von Rohdaten oder von automatisierten Schnittstellen gewinnt an Bedeutung. Auffallend: Nur wenige Datenanbieter bieten auch eine Beratung zum Thema Nachhaltigkeit an“ (p. 3, 4).

ESG and impact

(Too) Small ESG steps: Does ESG integration impact the real economy? A theory of change and review of current evidence by Florian Heeb, Anne Kellers, and Julian Kölbel as of June 24^th, 2022: “(1) ESG ratings can reflect company impact when they focus on impact materiality rather than financial materiality, (2) dedicated ESG funds tilt their holdings towards ESG leaders, but many institutional investors who have committed to ESG integration do not, (3) there is some evidence that an ESG premium exists, but it remains uncertain whether it is economically meaningful, and (4) managers readily address low-hanging fruit but hesitate to undertake larger investments to appeal to ESG investors unless there is also pressure from clients, competitors, or regulators. The overall conclusion on whether ESG integration has an impact on the real economy is: “maybe a little bit.” Nevertheless, the strength of ESG integration lies in its scale, so even uncertain and small impacts may add up to a meaningful effect” (p. 5). My comment: see Absolute and Relative Impact Investing and additionality – Responsible Investments (Blog) (prof-soehnholz.com)

Liquid Impact? Impact in der Praxis by Sören Jantzer et al. of the Forum Nachhaltige Geldanlagen as of June 28zh, 2022: „Beim Blick auf die Praxisbeispiele ist auffällig, dass sowohl ökologische als auch soziale Wirkungsziele verfolgt werden, die sich mehrheitlich nach den SDGs oder eigens formulierten Transformationszielen richten. Als Wirkungskanal wird bei fast allen Praxisbeispielen Engagement genutzt, häufig auch Kapitalallokation. Herausforderungen liegen vor allem bei der Wirkungsmessung: die Taxonomie besitzt noch keine Marktreife, weswegen Anbieter:innen meistens die SDGs als internationales Rahmenwerk nutzen. Wirkung kann auf unterschiedlichen Ebenen erfolgen, daher ist Transparenz, die häufig in Form einer festgelegten Berichterstattung erfolgt, entscheidend um der Gefahr von Impact-Washing zu begegnen“ (p. 34).

Complex Incentives (and ESG): Incentives by Brian Harward as of June 28^th, 2022: “Ethically managing incentives can be a complex task. There’s ample research to assist in navigating these challenges. Companies can realize the benefits of incentives while minimizing negative consequences. Examining your organization’s values and most important outcomes can be a key starting point to ethical compensation programs. This means not implementing certain compensation programs just because it’s what other organizations are doing. Rather than choosing to conform, organizations can apply incentives where and how they serve their real needs. Incentives play out over time, and across individuals and groups, in intricate ways, and can lead to unintended consequences, but a better understanding of how these dynamics unfold can enable organizations to apply them with greater efficacy”.

Positive ESG bonifications? Say on ESG: The Adoption of Say-on-Pay Laws and Firm ESG Performance by Andrea Pawliczek, Mary Ellen Carter, and Rong (Irene) Zhong as of June 9^th, 2022 (#112): “Using a large sample of firms from 36 countries during the period 2004-2016 … We document a significant increase in ESG contracting after the adoption of SOP laws, as evidenced by the adoption of ESG-related compensation policies, greater inclusion of CSR and sustainability targets in compensation contracts, and the inclusion of long-term incentives, as well as the higher sensitivity of pay to ESG performance. … We find that ESG performance increases after SOP adoption … we find that pay premiums formerly associated with ESG metrics in compensation go down after SOP“ (p. 31/32). My comment: There remains still a CEO pay premium after Say on Pay (SOP) has been introduced when linking parts of their compensation to ESG which is bad for the average employee/CEO pay gap and thus not necessarily net socially/ESG positive, in my opinion, see ESG Boni abschaffen und mehr radikale Vorschläge – Responsible Investments (Blog) (prof-soehnholz.com)

Evil AI and robots: Robots Enact Malignant Stereotypes by Andrew Hundt, William Agnew, Vicky Zeng, Severin Kacianka, and Matthew Gombolay, as of June 21^st, 2022: “… we evaluate how ML (Soe: Machine Learning) bias manifests in robots that physically and autonomously act within the world. … Our experiments definitively show robots acting out toxic stereotypes with respect to gender, race, and scientifically discredited physiognomy, at scale. Furthermore, the audited methods are less likely to recognize Women and People of Color. … We find that robots powered by large datasets and Dissolution Models (sometimes called “foundation models”, e.g. CLIP) that contain humans risk physically amplifying malignant stereotypes in general; and that merely correcting disparities will be insufficient for the complexity and scale of the problem” (abstract).

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ESG ok, SDG gut: Performance 1. HJ 2022

ESG ok, SDG gut: Im ersten Halbjahr 2022 haben meine Trendfolgeportfolios sowie die Portfolios, die sich an den nachhaltigen Entwicklungszielen der Vereinten Nationen ausrichten (SDG), zwar auch an Wert verloren, aber dafür relativ gut gegenüber Vergleichsgruppen performt.

Das gilt besonders auch für den FutureVest Equities SDG Fonds. Anders als die meist OK gelaufenen globalen haben spezialisierte ESG Portfolios der Soehnholz ESG GmbH im ersten Halbjahr schlechter als traditionelle Vergleichsportfolios abgeschnitten. Dafür war deren Performance in der Vergangenheit oft überdurchschnittlich.

ESG ok, SDG gut: SDG-ETF Portfolios mit relativ guter Rendite

Das nicht-nachhaltige Weltmarkt ETF-Portfolio hat im ersten Halbjahr 2022 -13,5% verloren. Das ist schlechter als aktive Mischfonds, die etwa -11,2% verloren haben. 2021 war der Vorsprung mit +17,9% gegenüber +9,5% aber sehr hoch. Das ebenfalls nicht-nachhaltige Alternatives ETF-Portfolio hat mit -10,5% (+35,8% in 2021) wieder überdurchschnittlich gut im Vergleich zu traditionellen Aktienindizes (-13,5% für einen globalen Aktienindex-ETF) abgeschnitten.

Das relativ breit gestreute ESG ETF-Portfolio, das ebenfalls einen relativ hohen Anteil an Immobilien- und Infrastrukturaktien enthält, schneidet im ersten Halbjahr 2022 mit -13% sehr ähnlich wie das traditionelle Weltmarktportfolio ab, aber performt auch schlechter als traditionelle aktive Mischfonds (-11,2%). In 2021 war es mit +12,2% aber nennenswert besser als aktive Mischfonds (+9,5%).

Das ESG ETF-Portfolio ex Bonds hat im ersten Halbjahr 2022 -16,8% verloren. Traditionelle Aktien-ETFs lagen mit -13,5% besser (2021 +21,4% und +25,4%). Traditionelle aktive Aktienfondsmanager waren mit -17,3% aber etwas schlechter (2021 +23,2%). Leider gibt es (noch) keine gute Vergleichsgruppe nachhaltiger aktiver Fonds. Aber mir scheint, dass das ESG ETF-Portfolio ex Bonds gegenüber solchen Fonds wohl relativ gut abgeschnitten hat.

Das ESG ETF-Portfolio ex Bonds Income rentierten mit -14,6% (2021: +23%) erheblich schlechter als aktive traditionelle Dividendenfonds bei -6,4% (+26,3%). Dagegen hat sich das ESG ETF-Portfolio ex Bonds Trend mit -5,4% (2021: 16%) viel besser als aktive Mischfonds gehalten (-11,2% und +9,5% in 2021).

Das ESG ETF-Portfolio Bonds (EUR) hat im ersten Halbjahr mit -10,3% etwas schlechter abgeschnitten als traditionelle Anleihe-ETFs (-9,1%), nachdem die Performance in 2021 mit -2,8% vergleichbar war.

Das aus thematischen Aktien-ETFs bestehende SDG ETF-Portfolio hat im ersten Halbjahr mit -11,3% (2021: +11,9%) relativ gut im Vergleich zu traditionellen Aktienindizes (-13,5%) abgeschnitten. Das SDG ETF-Trendfolgeportfolio hat mit -6,6% (2021: +7,5%; zum Startkonzept der Portfolios Anfang 2020 vgl. SDG ETF-Portfolio: Innovativer Megatrendansatz mit guter Performance – Verantwortungsvolle (ESG) Geldanlage (prof-soehnholz.com)) erheblich besser performt als aktive Mischfonds (vgl. auch Drittes SDG ETF-Portfolio: Konform mit Art. 9 SFDR – Responsible Investments (Blog) (prof-soehnholz.com).

ESG ok, SDG gut: Sektor- und Länderdiversifizierte pure ESG und SDG Aktienportfolios mit relativ guter Performance

Im ersten Halbjahr 2022 hat das aus 30 Aktien bestehende Global Equities ESG Portfolio mit -14,2% (2021: +19,8%) etwas schlechter abgeschnitten als traditionelle Aktien-ETFs (-13,5%) aber besser als das erheblich stärker diversifizierte ESG ETF-Portfolio ex Bonds (-16,8%). Gegenüber aktiv gemanagten traditionellen Fonds (-17,3% nach +23,2% im Vorjahr) ergibt sich sogar ein nennenswerter Renditevorteil. Das aus nur aus 5 Titeln bestehende Global Equities ESG Portfolio S hat mit -13,5% wieder etwas besser als das 30-Aktien Portfolio abgeschnitten. Mit den +32,1% aus 2021 liegt es weiter hervorragend im Performancevergleich.

Das Infrastructure ESG Portfolio hat -6,2% gemacht (2021: +6,3%) und liegt damit weiter stark hinter traditionellen Infrastrukturportfolios (+1,5% für aktive Fonds und +2,3% für ETFs) zurück. Das liegt vor allem daran, dass Infrastruktur für und Energieerzeugung mit fossilen Energieträgern ausgeschlossen wird.

Der Real Estate ESG Portfolio hat im ersten Halbjahr -19,1% (+22,9% in 2021) verloren. Das ist erheblich mehr als vergleichbare traditionelle aktive und passive Immobilienaktienportfolios (-14,2%).

Das Deutsche Aktien ESG Portfolio hat im ersten Halbjahr -28,4% (+21% in 2021) verloren. Das ist viel schlechter als vergleichbare traditionelle passive Benchmarks (-21,8%) bzw. aktive Fonds (-24,3%). Zusammen mit dem Vorjahr liegt mein nachhaltiges Portfolio im Renditevergleich aber auf einem ähnlichen Niveau.

Das auf soziale Midcaps fokussierte Global Equities ESG SDG hat -11,3% erzielt (+22% in 2021), also erheblich besser als andere globale Aktienportfolios. Das Global Equities ESG SDG Trend Portfolio konnte mit -6,6% (+14,5% in 2021) wesentlich besser abschneiden als traditionelle Mischfonds, nachdem es auch im Vorjahr schon vorne lag. Das Global Equities ESG SDG Social Portfolio wurde erst am 21. Januar gestartet und wird deshalb in diesem Halbjahresvergleich noch nicht berücksichtigt. Die ersten Monate sind jedoch relativ betrachtet sehr gut gelaufen.

Mein FutureVest Equity Sustainable Development Goals R Fonds, der am 16. August 2021 gestartet ist, hat Im ersten Halbjahr -8,8% verloren und liegt damit ebenfalls relativ gesehen sehr gut im Wettbewerbsvergleich (vgl. hier, die Regeln wurden aber Ende 2021 verschärft: Nachhaltigster Aktienfonds? – Verantwortungsvolle (ESG) Geldanlage (prof-soehnholz.com)).

Anmerkungen:

Die Performancedetails siehe www.soehnholzesg.com und zu allen Regeln und Portfolios siehe Das Soehnholz ESG und SDG Portfoliobuch. Benchmarkquelle: Medianfonds relevanter Morningstar-Peergruppen (Eigene Berechnungen, Details auf Anfrage).

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Werbemitteilung: Kennen Sie meinen Artikel 9 Fonds FutureVest Equity Sustainable Development Goals: Fokus auf soziale SDGs und Midcaps, Best-in-Universe Ansatz, getrennte E, S und G Mindestratings.

ESG and impact investments under fire: Researchpost 89

Under fire includes >10x new research on ESG and factors, performance, commitment, regulation, scope 3 GHG, market potential, indices, reporting, engagement, and impact washing (# indicates the number of SSRN downloads on June 28th)

Under Fire: ESG investment criticism

Wrong ESG approach? Does ESG Investing improve risk-adjusted performance? by Véronique Le Sourd from the EDHEC-Risk Institute as of April 2022: “ESG does not really provide a positive risk premium, but rather a negative risk premium, once the performance is explained by the various risk factors and investment sectors. However, ESG can generate positive returns in certain conditions, using ESG momentum. The argument for the outperformance of stocks with high ESG scores is that stock markets underreact to ESG information, and so stocks from firms with a positive ESG impact may be undervalued. The ESG momentum strategy thus consists in overweighting stocks that have improved their ESG rating over recent time periods (see Nagy et al [2016]; Bos [2017]; Kaiser and Schaller [2019] for evidence of outperformance of ESG momentum strategies)”. My comment: I do not agree, see e.g. Absolute and Relative Impact Investing and additionality – Responsible Investments (Blog) (prof-soehnholz.com)

ESG Growth Benchmark: Is ESG’s Growth Tilt Really Necessary? By Jon Hale from Morningstar as of June 24^th, 2022: “Growth funds have borne the brunt of this year’s bear market. The average large-growth fund has lost 29.3% (through June 22) while the average large-value fund has lost 12.3%. … most ESG equity funds skew stylistically toward growth … The 30 large-growth ESG funds have lost 27.9% so far this year. That is actually less than the drop for large-growth funds overall … The 17 large-value ESG funds have lost 15.9% for the year to date …”. My comment: According to Morningstar, my Article 9 fund has a midcap/blend with growth tilt focus and a significant YTD outperformance compared to traditional funds/indices, see FutureVest Equity Sustainable Development Goals R|DE000A2P37T6 (morningstar.de)

Good ESG commitment: Are All ESG Funds Created Equal? Only Some Funds Are Committed by Michelle Lowry, Pingle Wang, and Kelsey Wei as of May 31^st, 2022 (#147): “… we classify ESG funds with high (low) incentives to engage with ESG firms as committed (nominal) ESG funds. We find that committed ESG funds … they tend to make more long-time oriented investments in high ESG stocks and are significantly less likely to sell following poor short-term financial performance. …. committed funds demonstrate greater attention to portfolio firms’ ESG risk exposure with more intensive information production surrounding ESG risk incidents. In contrast to nominal funds’ selling of stocks that are associated with severe ESG risk incidents, committed funds tend to hold or even buy these stocks as they intend to work with management to achieve change. Indeed, we find that firms intensively bought by committed funds subsequently experience significantly larger recovery in their ESG risk exposure, relative to those intensively sold by nominal funds. … we find that committed funds both outperform their nominal counterparts on their high ESG investments and exert greater real impacts on firms’ ESG metrics. However, we do not find evidence that average investors are sophisticated enough to differentiate committed ESG investments versus opportunistic window dressing behavior aimed to attract investor flows” (p. 33/34).

Room for responsible investment growth: UBS Global Family Office Report 2022 as of June 8^th, 2022: “More than half (56%) of family offices allocate to sustainable investments. This varies regionally, with the lowest levels in the US (39%) and the highest in the Middle East (70%) and Western Europe (65%) … Reflecting the greater professionalization of how they approach sustainability, more than half (53%) of those invested have increased due diligence. More than half (52%) aren’t confident that they can identify greenwashing, though, and 60% think that performance evaluation remains a problem in impact investing. Of those family offices that still don’t invest sustainably, more than a quarter (27%) point to lack of standard definitions of sustainability as a barrier to investing” (p.32). “More than a third (38%) take the exclusions approach globally. While ESG integration and the pursuit of specific sustainability objectives have become a more prominent approach for various larger institutional investors, only just under a third (31%) of family offices have embraced it in their investment process. Finally, a quarter (24%) of family offices make impact investments” (p. 35).

SRI or scope 3? Are SRI funds financing carbon emissions? An Input-Output Life Cycle Assessment of investment funds by Ioana-Stefania Popescu, Thomas Gibon, Claudia Hitaj, Mirco Rubin, and Enrico Benetto as of March 28^th, 2022 (#103): “Indirect greenhouse gas (GHG) emissions (scope 3) generally represent more than half of the total life cycle impact attributable to a company or an investment. However, widely used sustainability assessment tools for investment funds fail to take these into account. … we develop an Input-Output Life Cycle Assessment (IOLCA) methodology to estimate life cycle GHG emissions of companies and investment funds. We apply our method to a sample of 1,340 sustainable (SRI) and conventional equity funds domiciled in Europe and their 11,275 unique holdings. … Our model estimates life cycle emissions for 95% of the companies held – compared to 17% coverage in the Climate Disclosure Project (CDP). When including scope 3, the exposure to GHG emissions of both SRI and conventional funds is two to three times larger than when considering only direct impacts from holdings’ operations. Finally, 24% of the sampled Europe-domiciled SRI funds are more exposed to life cycle carbon emissions than the ETF tracking the conventional market index MSCI Europe” (abstract).

Under fire: Indexing and regulation

Curious (ESG) index investing facts: 1 in 1000 Cabinet of Curiosities by Jakob Thomä of the 2 Degree Investing Initiative as of May 23^rd, 2022: “An investor investing in the MSCI World since 2015 would have had higher annual emissions intensity reduction (measured in WACI) than an investor invested in its low-carbon counterparts (p. 3) … Investing in the MSCI Environmental Index involves investing 50% of your assets in one company: Tesla. The same company that according to MSCI is aligned with a 2.63°C temperature outcome (p. 5) … Market-cap weighted benchmarks overweight economic sectors by up to 5x-6x relative to their “economic weight” (p. 6)”.

Anti-ESG backfire: Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies by Daniel G. Garrett and Ivan T. Ivanov as of June 10^th, 2022 (#407): “The recent laws in Texas … stipulate that banks with ESG policies restricting credit to oil & gas companies or to firearms firms can no longer contract with local governments, causing five of the largest underwriters to exit municipal underwriting in the state. … We show that affected issuers … receive fewer and less competitive bids from underwriters, raise less financing, and incur higher borrowing costs after the state prohibits banks with ESG policies from operating in the market. Assuming no other banks leave the state, Texas taxpayers can expect these bills to cost them about $445 million a year in additional borrowing costs” (p. 28/29).

Good regulation for banks, not customers: The Markets in Financial Instruments Directive and sensitivity of investors’ portfolio allocation to analyst recommendations by Falko Fecht, Patrick Weber, and Huiting Xu as of Oct. 26^th, 2021 (#56): “… First, this paper answers the question that after MiFID II has been implemented, whether the information content of the analyst research has been improved? We find some evidence to support the information-content-improvement hypothesis that the earnings per share prediction (EPS) as an important input of analyst recommendation. … Second, … although customers decreased the likelihood of buying, they will buy more in the post-MiFID II period for those stocks their affiliated bank has a Buy-Recommendation once they buy. … We also find evidence to show that in the post-MiFID II era, bank proprietary trading makes customers economically worse” (p. 34/35).

Impact (aligned) investments

Impact potential: What’s material?! by Martin G. Viehöver of positive impact (PI) GmbH as of June 2022: “In a case study on the 100 biggest stock listed companies in Germany … in 2019 only 12% of the companies disclosed the dimensions impact on society and impact on business so that they can be seen as double materiality prepared. This number increased to 27% in 2021 …. No company in 2019 and only one company in 2021 was double materiality ready by applying the double materiality definition. … It is also shown that the stakeholder perception leads to very different outcomes when comparing the results with the impact on society judgments” (p. 8/9).

Investor engagement focus: Impact Case or Impact Washing? An Analysis of Investors’ Strategies to Influence Corporate Behavior by Joel Diener as of June 8^th, 2022 (#9):“This paper outlines how the perspective in the socially responsible investment (SRI) industry has shifted from avoidance to impact. It emphasizes the importance of now also changing the strategies of SRI products. … Based on an extensive review of the SRI literature, various SRI strategies are theoretically evaluated. Subsequently, a best practice example of a bank that applies a sophisticated engagement strategy is presented. Findings: It is shown that there are indeed severe differences in the effects of exclusion, positive approaches, and shareholder engagement. Impact-oriented investment products should employ engagement strategies” (abstract). My comment: I am skeptical about engagement potential, see Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink

Investor impact categories: Sustainability Improvement or Impact Washing? Assessing Ethical Investment Policies of SRI Fund Providers from an Impact Perspective by Joel Diener and André Habisch as of June 8^th, 2022 (#10): “We screened over 400 documents with around 8500 pages from 45 different providers of socially responsible funds from the USA, Germany, Austria, Switzerland, France, Spain, and the United Kingdom (p. 5). … We are the first to provide an impact-focused typology of socially responsible investment companies” (p. 2). … to distinguish three types of fund providers: ESG hermits, ESG ambassadors and ESG evangelists” (abstract).

(table see page 10). My comment: I am skeptical about dialogue, voting and engagement potential and prefer (positive) signaling of good investments (see my publications mentioned in my last comment above)

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Deadline August: Müssen dann andere Fonds angeboten werden?

Deadline August: Ab August müssen AnlegerInnen aufgrund regulatorischer Vorgaben (MiFID II, IDD) nach ihren Nachhaltigkeitspräferenzen befragt werden. Auch künftig ist zunächst weiterhin die sogenannte Geeignetheit zu prüfen, speziell Renditeerwartungen, Risikokriterien, Zeithorizont und individuelle Umstände von InteressentInnen.

Vereinfacht zusammengefasst muss künftig im Anschluss daran gefragt werden, inwieweit eines oder mehrere dreier Nachhaltigkeitsprodukttypen in Anlagen einbezogen werden sollen: Erstens ein Produkt mit einem ein Mindestanteil an ökologisch nachhaltigen Investitionen oder, zweitens, einem Mindestanteil an sozial nachhaltigen Investitionen oder drittens mit einer Mindest-ESG-Gesamtbeurteilung.

Deadline August: 100% Rendite oder 100% Nachhaltigkeit?

Die regulatorischen Vorgaben sind ziemlich detailliert. Andererseits sollen die an Interessenten zu richtenden Fragen in sogenannter einfacher Sprache formuliert sein. Aus Anbietersicht sollten die Fragen zudem so beantwortet werden können, dass noch Produkte übrigbleiben, die man AnlegerInnen anbieten kann. Angesichts der Detailvorgaben wird gerade das aber nicht einfach sein. Denn so wie es keine seriösen Produkte mit 100% Renditeerwartung gibt, wird es auch kaum Produkte geben, die 100% der Nachhaltigkeitsidealvorstellungen von AnlegerInnen entsprechen.

Hier folgt mein juristisch ungeprüfter Vorschlag für mögliche Fragen an AnlegerInnen sowie Hinweise zur Selektion potenzieller Investmentfonds, die ich für eine Diskussionsveranstaltung des VOTUM Verbandes unabhängiger Finanzdienstleister entwickelt habe:

Zuerst würde ich die Erwartungen von AnlegerInnen mit dieser einleitenden Bemerkung begrenzen: „100% Nachhaltigkeit ist kaum möglich. Und mit dem Kauf von Fonds börsennotierter Wertpapiere erhalten die Herausgeber dieser Wertpapiere kein zusätzliches Geld. Aber AnlegerInnen können mit Käufen bzw. Verkäufen Signale setzen, insbesondere wenn sie die Gründe für ihre Entscheidungen kommunizieren“.

Was und Wie-Fragen in einfacher Sprache

Frage 1: Ist es Ihnen wichtig, was für Produkte und Services von den Wertpapieremittenten in den Fonds überwiegend angeboten werden oder wie diese Emittenten arbeiten? Beispiel: Sollen bevorzugt Anbieter von erneuerbaren Energien ausgewählt werden (das Was) oder traditionelle Energieanbieter, die sich bemühen, nach ökologischen (E), sozialen (S) und Unternehmensführungskriterien (G) gut zu sein (das Wie).

Frage 2a, wenn die AnlegerInnen das WAS wählen: Haben Sie bestimmte Mindestanforderungen an E, S oder G oder andere Nachhaltigkeitskriterien oder reicht es Ihnen, wenn die Wertpapiere nicht zu den schlechtesten eines anerkannten Ratinganbieters gehören?

Frage 2b, wenn der AnlegerInnen das WIE wählen: Reichen Ihnen Ausschlüsse von unerwünschten Aktivitäten wie Angeboten fossilen Energie oder wollen Sie vor allem in Wertpapiere von Emittenten investieren, die möglichst vereinbar mit den Nachhaltigen Entwicklungszielen der Vereinten Nationen (17 SDG) sind? Achtung: Ausschlüsse sind selten perfekt möglich und lassen typischerweise geringe kritische Aktivitäten in begrenztem Umfang weiterhin zu und Vereinbarkeit mit den SDG ist meist auf geringe Umsatzanteile begrenzt.

Frage 3a als Folgefrage zu 2a: Wollen Sie ein Portfolio für mehrere SDG-Ziele (ggf. die speziellen Ziele wie „Gesundheit“ abfragen) oder nur eines mit speziellem Fokus z.B. „ökologisch nachhaltige Investitionen“?

Frage 3b als Folgefrage zu 2b: Gibt es Ausschlüsse, die unbedingt und möglichst zu 100% sichergestellt werden müssen (welche?) oder möchten Sie, dass möglichst viele Ausschlüsse erfolgen?

Wenn die AnlegerInnen sowohl das WAS als auch das WIE erfüllt sehen möchten, sollten alle Varianten der Frage 2 und 3 beantwortet werden.

Fondssuche mit Fondsprofilen des Forums Nachhaltiger Geldanlage

Ich kenne nicht alle möglichen Datenbanken, mit denen man Investments finden kann, die den Nachhaltigkeitspräferenzen von AnlegerInnen entsprechen. Die frei zugänglichen Fondsprofile des Forums nachhaltige Geldanlagen sind aber ein guter Startpunkt. Damit können AnlegerInnen auch alleine nach Fonds suchen, die ihren individuellen Nachhaltigkeitskriterien am besten entsprechen. Allerdings werden die Daten von den Fondsgesellschaften selbst eingegeben und nicht immer gut gepflegt.

Aktuell sind circa 600 Fonds in der Datenbank verzeichnet. Davon sind knapp die Hälfte Aktienfonds. ETFs sind bisher aber erst wenige dort vertreten. Die Fonds kann man nach den Ausschlusspräferenzen (WAS-Frage) von AnlegerInnen selektieren und zusätzlich auch nach Positivkriterien (WAS-Frage) suchen. Außerdem kann man über den Nachhaltigkeitsansatz auch die WIE-Frage adressieren. Konkret kann das so aussehen:

Bei Auswahl der beiden Governance-Unterkriterien des FNG stehen noch gut 50 Fonds zur Auswahl. Wenn man alle Umweltausschlüsse selektiert, bleiben knapp 40 Aktienfonds übrig. Falls alle Sozialausschlüsse selektiert werden, kann man sogar nur aus 3 Fonds wählen. Alle Sozial- plus alle Umweltanforderungen der Selektionsliste gleichzeitig erfüllt kein einziger Aktienfonds und nur ein Fonds erfüllt alle Governance-und Sozialkriterien. AnlegerInnen dürfen deshalb nicht zu hohe Nachhaltigkeitsanforderungen stellen, um noch einige Fonds zur Auswahl übrig zu haben.

Für die Positivauswahl kann man nach Fonds suchen, die „Impact Investing“ oder „Investition in nachhaltige Themen“ als Nachhaltigkeitsansatz verfolgen und kommt damit auf insgesamt 55 Aktienfonds. 274 von 285 Fonds nutzen normbasiertes Screening und 245 ESG Integration. Der Best-in-Class bzw. Best-of-Class Ansatz wird von 136 der 285 Fonds genutzt. Ein großer Nachteil ist, dass nicht separat nach Best-in-Universe gesucht werden kann.

Außerdem ist die Datenbank offenbar nicht fehlerfrei programmiert. So habe ich bei meinem Fonds Massenvernichtungswaffen ausgeschlossen. Allerdings wird mein Fonds nicht angezeigt, wenn dieses Ausschlußkriterium selektiert wird. Ich habe zwar schon mehrfach um eine Korrektur gebeten, bisher ist diese aber noch nicht erfolgt.

Deadline August: Änderung traditioneller Fondsselektionskriterien?

Die Kategorie „Siegel und Auszeichnungen“ empfehle ich nicht zur Fondsselektion. Ähnlich wie Kategorisierungen als Artikel 8 oder 9 Fonds werden dafür nur oft relativ niedrige Mindestanforderungen festgelegt. Siegel und Auszeichnungen müssen zudem von Anbietern in der Regel bezahlt werden. Das bringt Vorteile für Anbieter mit größerem Marketingbudgets. Boutiquenfonds können dagegen oft konzentrierter und damit grundsätzlich nachhaltiger investieren als große Fonds, denn Diversifikation kann Nachhaltigkeit reduzieren. Deshalb erwarte ich, dass an Nachhaltigkeit Interessierten künftig eher konzentrierte als diversifizierte Fonds bzw. ETFs angeboten werden.

Weil viele nachhaltige Fonds noch nicht sehr alt und damit oft auch nicht besonders groß sind erwarte ich, dass traditionelle Auswahlkriterien wie Fondsgröße künftig weniger Bedeutung als bisher haben werden. Eine lange Performancehistorie ist auch nicht mehr so wichtig, wenn eine kurze in einem schwierigen Umfeld wie dem bisherigen Börsenjahr vorliegt. Und regelbasierte Fonds wie ETFs müssen meist auch keine lange Historie aufweisen, denn solche Strategien kann man gut zurückrechnen (vgl. z.B. Nachhaltigster Aktienfonds? – Responsible Investments (Blog) (prof-soehnholz.com)).

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Werbemitteilung: Kennen Sie meinen Artikel 9 Fonds FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T mit Fokus auf soziale SDGs und Midcaps, Best-in-Universe Ansatz, getrennte E, S und G Mindestratings?

Benchmarking problems: Researchpost 88

Benchmarking problems: Almost 20x new research on tax avoidance, net-zero illusions, brown and unsocial banks and mutual funds, negative ESG bonus, plastics, real estate, panic, monetary policy, missing data, wrong benchmarks, institutional herding, and fintechs (# indicates the number of SSRN downloads on June 14th)

Social and Ecological Topics

Tax avoidance: Global Profit Shifting of Multinational Companies: Evidence from CbCR Micro Data by Clemens Fuest, Stefan Greil, Felix Hugger, Florian Neumeier as of May 26^th, 2022 (#30): “Our analysis uses firm-level data from country-by-country reports of more than 3 600 multinational groups operating in 238 jurisdictions … The companies in our sample report 7% (30%) of their global profits in countries with effective average tax rates below 5% (15%), but only 0.4% (10%) of their employees and 3% (20%) of their tangible assets are located there. We find that globally, these firms reduce their tax burden by EUR 53 billion (15% of their overall tax payments) by shifting profits to low tax countries. … Globally, 60% of profit shifting is carried out by the 10% largest multinational firms” (p. 30/31).

Greenwashing evidence: Net Zero Stocktake 2022 – Assessing the status and trends of net zero target setting across countries, sub-national governments and companies by Net Zero Tracker and others as of June 2022: “Overall, the transparency and integrity of existing net zero pledges are far from sufficient to ensure a timely transition to global net zero greenhouse gas emissions by mid-century. … Overall, we found that only around half of the companies with net zero targets have some type of interim greenhouse gas (GHG) emission reduction target. Given the scientific imperative of roughly halving global emissions by 2030 in order to give a reasonable chance of holding global warming to 1.5°C, this is unacceptably low. Moreover, about two-thirds (456 out of 702) of corporate pledges do not yet meet minimum procedural standards for target setting” (p. 5/6).

Responsible Investments and benchmarking problems

ESG literature review: Sustainable finance: A journey toward ESG and climate risk by Monica Billio, Michele Costola, Iva Hristova, Carmelo Latino, and Loriana Pelizzon as of April 27^th, 2022 (#193): “Besides the important M&A processes that have been observed, the ESG rating industry has faced the offspring of six major ESG reporting frameworks aiming to guide ESG disclosures: the Carbon Disclosure Project, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, the Sustainability Accounting Standards Board, and the Task Force on Climate-related Financial Disclosures. … Most ESG assessments are still very different in terms of indicators measured (definition of ESG materiality), information sources, and the weights applied to different criteria. …. a very large majority of studies concludes that positive ESG ratings are associated with: an improvement in credit ratings, a reduction in CDS spreads, and a decrease in costs of equity capital and debt” (p. 47/48).

Brown banks? The Carbon Bankroll – The Climate Impact and Untapped Power of Corporate Cash by the Climate Safe Lending Network, The Outdoor Policy Outfit and Bank FWD as of May 17^th, 2022: “… for Alphabet, Meta, and PayPal, the emissions generated by their cash and investments (financed emissions) exceed all their other emissions combined” (p. 4). “… across the Group of 20 leading industrial and developing nations, banks have $13.8 trillion of exposure to carbon-intensive sectors, which constitutes 19% of on-balance sheet loans. … … the average carbon intensity per unit of cash deployed by the US financial sector is 126.03 ktCO2e/billion USD. … a typical passenger vehicle emits roughly 4.6 metric tons of CO2 per year, meaning that for every $1 billion in cash a bank deploys, it generates comparable emissions to 27,398 vehicles’ annual emissions … in February 2022, 13 of the world’s biggest non-financial companies cumulatively held cash and investments that exceeded $1 trillion” (p. 9).

Abusive German finance? Dirty profits 9 by Facing Finance as of May 18^th, 2022: “This report illustrates seven examples of financial flow between 14 financial institutions on the German market and 22 companies that have violated, among others, the right to health, to remedy, or to free prior and informed consent of Indigenous Peoples and of communities with customary tenure rights … The research reveals an extremely high volume of business for ten banks and four life insurers vis-à-vis the 22 companies, amounting to more than 46 billion euros. While Glencore and Airbus were the largest recipients of corporate loans, the financial institutions also have particularly large holdings in the pesticide companies Bayer and BASF as well as in the oil and gas company Total Energies. On a positive note, eight banks and two life insurance companies had no financial interests in the companies studied (p. 5/6). … Since 2018, eight banks on the German financial services market have provided a total of more than 31 billion euros to 14 of the selected companies for the financing of their business models. This amounts to 67% of the identified financial relationships. … Roughly 90% of the identified finance volume is accounted for by UniCredit (HypoVereinsbank), Deutsche Bank, Commerzbank and ING” (p. 6).

Greenwashing evidence: Mutual funds’ strategic voting on environmental and social issues by Roni Michaely, Guillem Ordonez-Calafi, and Silvina Rubio as of Feb. 25^th, 2022 (#25): “Environmental and social (ES) funds in non-ES families must balance incorporating the stakeholder’s interests they advertise and maximizing shareholder value favored by their families. We find that these funds support ES proposals that are far from the majority threshold, while opposing them when their vote is more likely to be pivotal, consistent with greenwashing. This strategic voting is not exhibited in governance proposals, by ES funds in ES families or by non-ES funds in non-ES families, reinforcing the notion of strategic voting to accommodate family preferences while appearing to meet the fiduciaries responsibilities of the funds” (abstract). My comment: Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink

Positive ESG Bonus? Executive Compensation Tied to ESG Performance: International Evidence by Shira Cohen, Igor Kadach, Gaizka Ormazabal and Stefan Reichelstein as of May 3^rd, 2022 (#404): “… we find that ESG pay is more common among larger firms that exhibit higher volatility … our findings show that the proclivity to implement ESG pay increases with existing public commitments to reduce carbon emissions, the level of institutional ownership, and certain board characteristics. … ESG pay adopters tend to achieve lower carbon emissions and improved ESG ratings. … the adopters of ESG pay experience a stronger association between improved ESG performance and the magnitude of the annual executive bonuses” (p. 30). My comment see Pay Gap, ESG-Boni und Engagement: Radikale Änderungen erforderlich – Responsible Investments (Blog) (prof-soehnholz.com)

Profitable traceability? Lifting the rug – How Traceability in Textiles Improves Financial and Sustainability Performance by Planet Tracker and Segura as of June 9^th, 2022: “Traceability and sustainability go hand in hand. Better traceability allows for better measurement of inputs and outputs, both vital to support the measurement of key sustainability metrics. Implementation of traceability tools can improve production efficiencies and therefore profitability. … We estimate implementation of a traceability system could improve the industry’s (defined as brands and retailers) net margin of around USD 80 billion by USD 3 – 6 billion per year. … The tools for companies to have full traceability through their supply chain exist …” (p. 4).

Limited plastics engagement: Breaking the mould – Business-as-usual is a high-risk strategy for the EU plastic industry by Planet Tracker as of May 30^th, 2022: “Banks, brokerage houses, insurance companies and investment advisers have a EUR 689 billion (USD 750 billion) equity position in the EU27 + UK plastics production sector, across basic chemicals, intermediates and plastic resins” (p. 25). “In the last five years, … only 9 resolutions have been discussed at AGMs. This demonstrates that investors are largely disengaged from the problems associated with plastic production. Our analysis of 990 corporate bonds and loans issued by the world-leading plastics manufacturers found only three linked to decreasing plastic pollution. None of the sector’s 40 green bonds or loans are linked to reducing plastic pollution in the EU” (p. 4).

Green real estate: Green Urban Development: The Impact Investment Strategy of Canadian Pension Funds by Alexander D. Beath, Maaike Van Bragt, Sebastien Betermier, and Yuedan Liu as of May 20^th, 2022 (#179): “… large Canadian pension funds … are uniquely involved in the market of direct real estate transactions and implement a strategy that consists of internally developing and greening local urban properties. … Canadian pension funds play a leading role in driving the green development of major Canadian city centers. … Canadian pension funds are able to create a win-win that combines high risk-adjusted return and sustainable urban development“ (p.30).

Traditional investments and benchmarking problems

Positive panic: Economic Narratives and Market Outcomes: A Semi-supervised Topic Modeling Approach by Dat Mai and Kuntara Pukthuanthong as of Jan. 18^th, 2022 (#258): “We … extract narratives from nearly two million and seven million Wall Street Journal and New York Times articles, respectively, over the past 150 years. … We find that Panic and an index constructed from all narratives … can positively predict market returns and negatively predict market volatility … As a robustness check, we extract narratives from WSJ, and the most important narrative is Stock Market Bubble. Stock Market Bubble is a negative stock market predictor” (p. 37/38).

Risky monetary policy: Investment funds, risk-taking, and monetary policy in the euro area by Margherita Giuzio, Christoph Kaufmann, Ellen Ryan, and Lorenzo Cappiello as of Oct. 13^th, 2021 (#45): “We provide evidence of search for yield from fund investors, who flow into riskier fund types in response to accommodative monetary policy shocks. This is particularly the case following monetary policy shocks that directly target the long-end of the yield curve, such as quantitative easing policies. Some of this search for yield may result in flows into funds investing outside of the euro area. … Search for yield by investors is amplified by asset allocation decisions of managers who tend to rebalance their portfolios away from increasingly low yielding cash assets. … Increased demand for risky assets may improve financing conditions for the real economy but may also result in a build-up of risk within the fund sector. Increased liquidity risk-taking by fund managers may be a particular cause for concern, as this may decrease the sector’s capacity to deal with large investor redemptions during a crisis scenario and provide stable credit to the real economy” (p. 33).

Corporate data issues: Missing Financial Data by Svetlana Bryzgalova, Sven Lerner, Martin Lettau, and Markus Pelger as of May 13^th, 2022 (#458): “In our representative data set of the 45 most often used characteristics, more than 70% of firms are missing at least one of them at any given point of time. We show that firm fundamentals are not missing-at-random, but display complex systematic patterns” (p. 46). My comment: Traditional investors have not complained much about this point but cry foul about missing ESG data

Benchmarking problems: Index inefficiencies? The Avoidable Costs of Index Rebalancing by Rob Arnott, Chris Brightman, Vitali Kalesnik, and Lillian Wu as of May 6^th, 2022 (#327): “Traditional capitalization-weighted indices generally add stocks with high valuation multiples after persistent outperformance and sell stocks at low valuation multiples after persistent underperformance. For the S&P 500 Index, in the year after a change in the index, additions lose relative to discretionary deletions by about 22%. Simple rules, such as trading ahead of index funds or delaying reconstitution trades by 3 to 12 months, can add up to 23 basis points (bps).” (abstract). My comment: I use equal weighting for direct equity portfolios

Benchmarking problems: Wrong benchmarks: Self-Declared Benchmarks and Fund Manager Intent: Cheating or Competing? by Huaizhi Chen, Richard Evans, and Yang Sun as of May 6^th, 2022 (#35): “We examine the selection of fund self-declared benchmarks. While the incidence of style mismatched benchmarks is high at the beginning of our sample (41% of fund assets/34% of funds), it declines significantly over time. …. In examining why funds ‘correct’ their benchmarks over time, we find that investor learning, institutional investor governance, product market competition and fund company risk management all play a role. Lastly, we find that funds overseen by entrenched managers are more likely to use a mismatched benchmark“ (abstract). My comment: Before setting tracking error targets, investors better examine if the benchmark is correct, also see ESG-Investments: Warum weder aktive Fonds noch ETFs ideal sind – Responsible Investments (Blog) (prof-soehnholz.com) and EU Klimaindizes und ESG Indexverordnung: Offizielles Greenwashing? – Responsible Investments (Blog) (prof-soehnholz.com)

Institutional herding: Unpacking the Rise in Alternatives by Juliane Begenau, Pauline Liang, and Emil Siriwardane as of May 11^th, 2022 (#91): “We document a large and heterogeneous shift by public pensions into alternative investments (hedge funds, private equity, and real estate) since 2006. … our results are consistent with a sizable shift in beliefs changing the composition of the risky portfolio. … investment consultants explain nearly 25% of the variation of which pensions shifts into alternatives. … we also document evidence of peer effects in the sense that pensions are more likely to invest in alternatives if their neighbors do” (abstract).

Crisis un-diversification: Crisis Stress for the Diversity of Financial Portfolios – Evidence from European Households by Dorothea Schafer, Andreas Stephan and Henriette Weser as of May 7^th, 2022 (#11): “This paper answers the question of whether the Global Financial Crisis and the subsequent European debt crisis affected the diversity of European households’ financial portfolios. … We find that households with risky assets responded to the twin European financial crises with lower levels of portfolio diversity. The loss in diversity was caused by a flight to safe and liquid bank accounts at the expense of mutual funds and stocks. …. The richer households are, the better diversified financial portfolios they have” (p. 25).

Alternative Investments and Fintechs

Over-leveraged: Leverage in Private Equity Real Estate by Jacob S. Sagi and Zipei Zhu as of April 6^th, 2022 (#156): “We review the scant academic literature on the use of leverage in institutional private equity real estate (PERE) investments …. The bulk of available evidence supports the view that leverage, as used by high-risk PERE funds, does not adequately compensate limited partners for the risk that it adds” (abstract).

Good Fintech: Fintech: Financial Inclusion or Exclusion? by Yoke Wang Tok and Dyna Heng as of May 24^th, 2022 (#42): “…greater use of fintech is significantly associated with a narrowing of the class divide and rural divide but there was no impact on the gender divide” (p. 4).

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Factor problems: Researchpost 87

Factor problems includes >20 new studies on plastic, water, children, rich people, the web, ESG indices, ESG reporting, greenwashing, ESG cost, SDG, UN PRI, mutual funds, factor investing, skew, forecasts, institutional investors, infrastructure, fintech, PFOF (# indicates the number of SSRN downloads on June 1st)

Ecology

Supermarket plastic risks: Under Wraps: What Europe’s supermarkets aren’t telling us about plastic by Changing Markets Foundation as of May 23^rd, 2022: “… we have discovered microplastics deep in the lungs of living people, in the tissue of patients undergoing surgery and in people’s blood. We learnt that the chemicals found in everyday plastics are eating away at human fertility such that they may make unassisted reproduction impossible by 2040. … this first-ever analysis of the role that European supermarkets play in addressing the plastic pollution crisis …. reveals that some of the biggest retail chains in Europe are only paying lip service to the problem, while behind the scenes they are trying to delay action and distract consumers and policymakers over their role in the plastic crisis. …. they are focusing on recyclability as their main strategy to deal with the plastic crisis instead of prioritising waste prevention and reuse systems … Only very few companies make serious efforts to reduce their plastic and other single-use packaging and move towards more environmentally friendly business models that prominently feature reuse systems” (p. 5).

Water risks: High and dry – How water issues are stranding assets – A report commissioned by the Swiss Federal Office for the Environment (FOEN) by planet tracker and CDP as of May 26^th, 2022: “Water risk factors are already stranding assets throughout the coal, electric utilities, metals & mining, and oil & gas sectors. … The exposure of the financial sector to water-stranded assets is real and often involves a tail of potential knock-on events … Financial institutions must move now to engage, identify, assess, manage, and disclose water risks across portfolios and loan books to avoid the worst consequences of the water crisis and contribute to actively inhibiting it” (p. 3).

Social Aspects

Children change politics: The Power of Youth: Political Impacts of the “Fridays for Future” Movement by Marc Fabel, Matthias Flückiger, Markus Ludwig, Helmut Rainer, Maria Waldinger, and Sebastian Wichert as of May 11^th, 2022 (#13): “Focusing on the FFF protest movement in Germany, we show that youths‘ engagement in demand of climate action has a robust effect on political outcomes. We estimate that a one standard-deviation increase in local protest activity increases the vote share of the Green Party by 8 percent …. the increased support for the Greens feeds itself entirely on voters with children of FFF-relevant ages. … Green Party candidates react to strong protest activity in their constituency by increasing their climate-related social media presence … local newspapers report more on climate change when FFF engagement in their area of circulation is high. … support of Germany’s far-right party, the AfD, dropped substantially in counties where protest activity was high. … To the contrary, we provide evidence that the FFF movement has caused some voters, those whose political preferences are orthogonal to political agenda of the Greens, to change their vote decision so as to prevent the Greens from gaining political power and exerting influence on policy” (p. 22/23).

Rich people are different: The personality traits of self-made and inherited millionaires by Marius Leckelt, Johannes König, David Richter, Mitja D. Back, and Carsten Schröder as of April 1^st, 2022: “… we have shown that the rich differ from the rest of the population not only with respect to their wealth but also with respect to their personality traits. The prototypical personality profile of the rich is marked by higher Risk tolerance, Openness, Extraversion, and Conscientiousness, and lower Neuroticism. … self-made millionaires most closely tracked the personality profile of the rich, and the more they did, the richer they were“ (p. 10).

Web-transparency: The Promise of a Better Internet: What Is Web 3.0 and What Are We Building by Alex Murray, Dennie Kim and Jordan Combs as of May 11^th, 2022 (#199): “Web 3.0 is built on blockchain technology, allows for increased peer-to-peer interactions without intermediaries, enables individuals and businesses access to networks of users with much lower cost, and stands as a rebuke to large companies’ centralized control of services and information. … Web 3.0 … may fundamentally alter the structure of industries and the ways in which people interface online. Next, we describe ongoing efforts to build Web 3.0, providing an overview of four important components: cryptocurrencies and decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and metaverses. We then highlight successful use cases, emerging trends, and key challenges that innovators are apt to face as Web 3.0 services and applications gain widespread adoption. Finally, we address actions that organizations and managers can take to prepare for the changes to come” (abstract).

Responsible Investment

Many ESG indices: Sustainability Equity Indexes by Meketa Investment Group as of April 2022: “The widening range of sustainability index families present new possibilities for passive equity investing and for benchmarking active equity portfolios. Going forward, we anticipate both continued refinement of existing sustainability index approaches and the introduction of new indices. … Consideration of any specific sustainability index … should include a careful review of the primary investment goals of the index; analysis of how the index construction is expected to effect risk, return, diversification, shareholder voting and engagement, and ESG exposure on the issues of concern; and index license fees” (p. 18). May comment: I suggest concentration instead of diversification see Nachhaltiges Investieren: Konzentrieren statt diversifizieren? (journalistico.com)

Significant Greenwashing: Defining Greenwashing by Ariadna Dumitrescu, Javier Gil-Bazo, and Feng Zhou as of May 16^th, 2022 (#82): “… we quantify the prevalence of greenwashing in the US mutual fund industry and conclude that only 1 in 4 funds that claim to invest according to ESG considerations fail to honor this promise to their investors. Greenwashers are more frequently found in larger and older fund families. Importantly, while asset management companies that have signed the UNPRI pledge do not seem to invest more according to those principles than non-signatories, they are less likely to offer funds that falsely claim to be ESG. …. Morningstar … does not detect funds that are greenwashers according to our definition. … institutional investors seem to be able to distinguish between greenwashers and true ESG funds” (p. 22). My comment: See EU Klimaindizes und ESG Indexverordnung: Offizielles Greenwashing? – Responsible Investments (Blog) (prof-soehnholz.com)

ESG disclosure focus: Institutional Investors and ESG Preferences by Florencio Lopez de Silanes, Joseph A. McCahery, and Paul C. Pudschedl as of May 7^th, 2022 (#383): “… institutional investors have a strong preference for investing in firms with strong ESG rankings relative to other financial metrics and proxies for financial performance. The findings also show that when it comes to the size of the ownership stake the relationship with ESG quality is negative. … We also find that institutional investors have a preference for ESG disclosure over actual ESG quality of portfolio companies. Blockholders on the other hand, appear much less interested in ESG than institutional investors generally. … we find that governance factors trump social and environmental factors in determining institutional investor interest. Again, company disclosure of governance criteria appears more important than actual governance quality rankings. … We find weak but statistically significant evidence to support the view that ESG is related to decreased risk. … We also show that the correlation between decreased risk and better governance ratings is stronger than for the social and environmental dimensions of ESG” (p. 26).

Lower ESG financing cost: ESG Investing in Emerging Markets: Betting on Firm Fundamentals or Riding Investor Preferences? by Adrien Alvero and Wang Renxuan as of May 31^st, 2022 (#24): “…We find a statistically significant ESG premium over the period 2018–2022 … All else being equal, a bond issued by the best ESG company has an average spread approximately 90 bp lower than the worst ESG-rated issuer. … Following the opening of the Chinese onshore capital market, a company with the highest possible ESG score would have seen its cost of borrowing decrease by 48 bp more than a company with the worst ESG score. Overall, both results support the hypothesis that firms with a high ESG score benefit from a lower cost of borrowing because of investors’ non-pecuniary preferences” (p. 35/36).

More (social) SDG focus: ESG Global Study 2022 by the Capital Group as of May 10^th, 2022: “Nearly two-thirds prefer active funds to integrate ESG. …. Almost a third say the ability to report on specific SDGs is one of the most important elements of fund sustainability reporting — nearly double last year’s percentage. And half say the ability to offer the full spectrum of SDG themes is important when selecting funds. …. more are now investing in ESG with the specific and sole remit of generating alpha. Furthermore, investors largely agree that investment returns and sustainable impact go hand in hand. …. Difficulties with the quality and accessibility of data and inconsistent ratings are hampering the ability of investors to adopt, incorporate and implement ESG. … the more investors know about ESG, the more they realise what they don’t know and the more help they need” (p. 4). My comment see Neues SDG Sozialportfolio und noch strengere ESG Anforderungen – Responsible Investments (Blog) (prof-soehnholz.com)

Bad UN PRI cover? Responsible Hedge Funds by Hao Liang, Lin Sun, and Melvyn Teo as of May 2^nd, 2022 (#1238): “Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low ESG exposures and is greater for hedge funds with poor incentive alignment. … we … show that the ESG exposure and relative performance of signatory funds improve post reforms” (abstract) “… low-ESG (UN PRI) signatories … are more likely to trigger regulatory, investment, and severe violations, and more likely to display suspicious patterns in reported fund returns that are potential indicators of fraud … for mutual funds with poor incentive alignment, we still find that those managed by signatories (and by low-ESG signatories, especially) underperform” (p. 30/31).

Traditional Investment: Factor problems

Imperfect mutual fund selectors: Performance and Asset Size in the European Mutual Fund Market by Javier Vidal-Garcia and Marta Vidal as of May 18^th, 2022 (#25): “… we examine the European mutual fund market for the 1990-2021 period …In the demand function, past returns and volatility are important indicators for the investor that select funds taking also into account the commissions applied. On the other hand, we identify the variables that determine the return obtained by European mutual funds. The persistence of results, the positive relationship between profitability and risk, the existence of a negative size effect together with the ineffective management of mutual funds due to the weight of commissions are some of the derived conclusions” (abstract).

Alpha misguidance factor problems: What you see may not be what you get: Return horizon and investment alpha by Hendrik Bessembinder, Michael J. Cooper, and Feng Zhang as of May 5ht, 2022 (#80): “… find that among those mutual funds with positive alphas estimated from monthly returns, nearly a third have negative alphas estimates when returns are measured at the ten-year horizon. Among funds with positive monthly alpha estimates and monthly beta estimates that exceed one, over half have negative alpha estimates at the decade horizon. Alphas estimated from short-horizon (e.g. monthly) returns can be uninformative or misleading regarding fund performance for investors with longer horizons” (abstract).

Equity premium puzzle factor problems: Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2022 Edition by Aswath Damodaran as of April 15^th, 2022 (#5418): “The equity risk premium is the price of risk in equity markets, and it is not just a key input in estimating costs of equity and capital in both corporate finance and valuation, but it is also a key metric in assessing the overall market. Given its importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. … In the standard approach to estimating the equity risk premium, historical returns are used, with the difference in annual returns on stocks versus bonds, over a long period, comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets … We close the paper by examining why different approaches yield different values for the equity risk premium” (abstract).

Forecast fiction factor problems: Equity Premium Forecasts Tend to Perform Worse Against a Buy-and-Hold Benchmark by Gunter Löffler as of May 19^th, 2022 (#12): “I examined two highly cited papers that were published after 2008. The results suggest that the benchmark favored in the literature, which is based on the historical mean computed with the data used for the prediction model, is not particularly stringent. When the buy-and-hold strategy is used as a benchmark, utility and Sharpe ratio gains drop by sizeable amounts, and the statistical significance of the performance advantages disappears. … Researchers usually do not test whether economic gains from following a forecast are statistically significantly different from zero. As it turns out, even gains that appear large may not withstand tests that have been suggested in the literature” (p. 14/15).

Frustrating factor problems: A Comprehensive Look at the Empirical Performance of Equity Premium Prediction II by Amit Goyal, Ivo Welch, and Athanasse Zafirov as of Dec. 7^th, 2021 (#1488): “Our paper reexamines whether 29 variables from 26 papers published after Goyal and Welch (2008), as well as the original 17 variables, were useful in predicting the equity premium in-sample and out-of-sample. … Overall, the predictive performance remains disappointing” (abstract). … “it still seems underwhelming that only a handful of variables—even with reuse of the original identifying data—succeeded. These were, after all, variables from high-quality papers important enough to have been published in the top academic journals—with manuscript rejection rates has high as 18-19 in 20 papers. … For every predictive variable stumbled upon and published by a lucky researcher, there are probably hundreds that failed and were never published. … academic research gives the wrong impression, i.e., that it is possible or even easy to predict the stock market … Authors that write more mundane papers, which fail to show remarkable powers, are likely not to be published and thus disappear from the academic rat-race. … we do not believe that we know what variables should help us today to predict the equity premium forward-looking for 2022” (p. 31/32). My comment see Faktorallokation ist konzeptionell und operationell schwierig, Faktoranalysen sind aber wichtig – Responsible Investments (Blog) (prof-soehnholz.com)

Skew matters factor problems: Conditional Skewness in Asset Pricing: 25 Years of Out-of-Sample Evidence by Campbell R. Harvey and Akhtar Siddique as of May 16^th, 2022 (#200): “Twenty-five years ago, we proposed an empirical asset pricing model that added coskewness as a risk measure. Our results presented in Harvey and Siddique (2000) suggested that the risk premium was greater than 3% on an annualized basis. … In the out-of-sample period, the premium is estimated to be smaller, but is consistent across subperiod and is always positive. … it is very challenging to measure higher moments such as skewness. … Unfortunately, after 25 years and many successful replications, too many students of finance are only exposed to the mean-variance frontier” (S. 6/7).

Tolerant or lazy institutional investors? Forbearance in Institutional Investment Management: Evidence from Survey Data by Amit Goyal, Ramon Tol and Sunil Wahal as of May 10^th, 2022 (#141): “We survey 218 institutional investors from 22 countries representing over $4.1 trillion in AUM … 68%, 65%, and 42% of respondents report average holding periods of longer than 5 years for public equity, fixed income and hedge funds, respectively. Asset managers are terminated for a variety of reasons, … But poor performance is by far the dominant cause. There is also surprising tolerance for underperformance: 66%, 56%, and 50% of respondents report a willingness to tolerate underperformance for 3 years or longer in public equity, fixed income, and hedge funds, respectively. … Contrary to popular narratives, North American institutions are unexpectedly patient relative to their counterparts from Europe and the rest of the world” (abstract).

Alternative Investments and Fintechs

Infrastructure investment segments: Infrastructure Strategy 2022 – A Pivot to the Digital Frontier by Frederic Blanc-Brude, Wilhelm Schmundt et al. from Boston Consulting Group and EDHEC as of March 23^rd, 2022: “2022, global assets under management for infrastructure investments will reach a record high of $950 billion. … Over the past two decades, pension funds and insurance companies, boutique specialist managers and larger multi-asset managers have all entered the infrastructure asset class with different priorities and focus …. Based on an analysis of 379 infrastructure investors in EDHECinfra’s database, we compare the styles and risk-adjusted performance of 16 peer groups of infrastructure investors and provide a ranking based on their risk-adjusted returns in 2021. In the second part of the report, we look at what infrastructure investors say they will focus on in the next three to five years and whether they expect their investment strategies to differ or remain the same. Apart from the significantly increasing importance of operational value creation, our recently conducted survey shows a clear preference for a move toward more digital infrastructure investments …” (p. 4). My comment see Neues ESG-Portfolio aus weltweiten Kern-Infrastrukturaktien ist attraktiv – Responsible Investments (Blog) (prof-soehnholz.com)

Fintech for the rich? FinTech and Robo-Advising: The Transformational Role of AI in Personal Finance by Francesco D’Acunto and Alberto G. Rossi as of May 10^th, 2022 (#79): “We .. focus on four transformational innovations by analyzing their pioneering commercial implementations in the US and abroad—innovations that empower retail investors with the ability to perform highly-technical investment strategies, to engage in complex tax-saving operations (tax-loss harvesting), to easily access the wisdom of the crowd based on the real-time analysis of big data, and to disintermediate financial services and level the playing field between ordinary households and expert financial intermediaries (peer-to-peer lending)” (abstract). “… we are still lacking a comprehensive analysis of whether FinTech and robo-advising applications indeed have the potential for reducing increasing wealth inequalities in the US and abroad by allowing non-expert consumers to make better-informed decisions or whether instead access to such technologies is higher for those who lie at the top of the income and wealth distribution” (p. 24).

Positive PFOF: Studie zur Ausführungsqualität an ausgewählten deutschen Handelsplattformen by BAFIN as of May 16th, 2022: „Die vorliegende Studie bewertet die Ausführungsqualität an ausgewählten deutschen Handelsplätzen, die Payment for Order Flow anbieten … zu Geschäften in allen deutschen Aktien …. Insbesondere bei Transaktionsvolumina bis 2.000 EUR in DAX-Aktien und bis 500 EUR in Nicht-DAX-Aktien erzielen Privatkunden an PFOF-Märkten bessere Gesamtergebnisse als an den gegenübergestellten Referenzmärkten. Zum Vergleich: Die mittlere Transaktionsgröße (Median) von neobroker-Kunden beträgt laut den der BaFin vorliegenden Transaktionsdaten beim Handel in DAX-Aktien ca. 350 EUR und beim Handel in Nicht-DAX-Aktien etwa 250 EUR“ (p. 16/17).

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Inequality and more: Researchpost 86

Inequality: 15x new research on inequality, Amazon, smart homes, scope 3, SRI performance, divestments, passive and ESG flows, market efficiency, Buffett indicator, market timing, Sharpe ratio, and fintech criticism (# indicates the number of SSRN downloads on May 11th)

Inequality: Social and Ecological Research

Widening inequality: The Anatomy of the Global Saving Glut by Luis Bauluz, Filip Novokmet, and Moritz Schularick as of May 10^th, 2022 (#25): “This paper has introduced a new international database on households’ asset portfolios, capital gains and saving flows … for the largest world economies since 1980 … . The data set provides cross-country series for “unveiled” indirect asset ownership through pension and investment funds. … housing capital gains obtained by the middle classes have been the main channel through which the middle-class wealth kept up with the top, and were the most critical factor moderating wealth inequality in recent decades. … we present evidence that the gap between the “haves” and “have-nots” in the global wealth distribution widened as wealth-to-income ratios stagnated or fell for the bottom 50% but surged in the upper half. Typically used inequality measures like top wealth shares or the Gini coefficient tend to overlook this dimension, as they mainly capture the dynamics within the ‘haves’ (e.g., the top-10% and the middle class). … we expose an increase in saving inequality in major world economies since the 1980s, manifested in rising saving at the top and falling saving in the rest of the distribution. … The increase in retained corporate earnings accrues to equity owning households at the top of the distribution” (p. 42). My comment: Wrong ESG bonus math? – Responsible Investments (Blog) (prof-soehnholz.com)

German wealth inequality: Wealth and Its Distribution in Germany, 1895-2018 by Thilo N. H. Albers, Charlotte Bartels, and Moritz Schularick as of May 10^th, 2022 (#18) “… changes in the valuation of existing assets played a major role for changes in the wealth distribution over extended periods. … The equalizing collapse of business valuations during the Great Depression is a case in point, as is the recent real estate boom that lifted the fortunes of house owners. … For the past 70 years, the top 1% wealth share has fluctuated around its postwar level. … The main reason for the stability is that the middle-class made substantial gains in real estate wealth, thus mitigating concentration at the very top. However, a substantial part of the population does not own assets, and, hence, did not profit from rising stock or house prices altogether. … Between 1993 and 2018, the gap between the “haves” and the “have-nots” has widened significantly. In the lower half of the distribution, wealth has barely grown at all while both the top 10% and the 50-90% of households roughly doubled their wealth. As a consequence, a household in the top 10% of the wealth distribution is now 100 times richer, on average, than a household in the bottom half. 25 years ago, the gap was 50 times. … The improved estimates of business and housing wealth that we present in this paper result in a wealth-income ratio that is 120 percentage points higher than when estimated with the official data” (p. 36/37).

Amazon inequality: Megacompany employee churn meets 401(k) vesting schedules: A sabotage on workers’ retirement wealth by Samantha J. Prince as of March 10^th, 2022 (#44): “Some employers, notably Amazon, deliberately churn employees to avoid a “march to mediocrity” by implementing appalling working conditions and policies that result in employees quitting. Additionally, the COVID-19 pandemic brought forth not just job losses but masses of voluntary resignations, particularly by lower-paid workers. When workers change jobs more frequently, they lose an ability to accumulate retirement wealth due in part to the use of disadvantageous, but legally permissible, 401(k) vesting schedules by a majority of America’s employers. Retirement wealth inequality and retirement security are issues that the United States has been grappling with for years. Low-paid and minority workers are directly impacted and suffer from these issues the most. This article shows that sizeable high turnover companies are abusing the system by using 401(k) plan vesting schedules to their own benefit and to worsen retirement wealth inequality” (abstract).

3 Scope 3s: Which Scope 3 Emissions Will the SEC Deem ‘Material’? by Kenji Watanabe and Umar Ashfaq of MSCI Research as of April 28^th, 2022: “Three categories of Scope 3 emissions — purchased goods and services, use of sold products and investments — contributed over 70% of the total carbon footprint for constituents of the MSCI USA Investable Market Index. … The financed emissions could be contentious. Only 2% of financial-sector companies report this category as relevant, while estimates indicate that it accounts for the largest share of GHG emissions for the sector (92%)”.

Human tech stoppers: Smart Tech, Dumb Humans: The Perils of Scaling Household Technologies by Alec Brandon, Christopher M. Clapp, John A. List, Robert D. Metcalfe University, and Michael Price as of November 14^th, 2021 (#47): “…. we find little to no evidence that the installation of a smart thermostat reduces household energy consumption on average. …. We believe that the discord between the results of our field experiment and the extant belief stems from the source of the latter: engineering studies that do not adequately account for how individuals use their smart devices” (p. 31).

ESG Investing Research

Neutral SRI performance: The Performance of Socially Responsible Investments: A Meta-Analysis by Lars Hornuf and Gül Yüksel as of May 22^nd, 2022 (#118): “… we perform a meta-analysis to examine the performance of SRI, which … includes 153 studies and 1,047 observations of SRI performance. We find that, on average, SRI neither outperforms nor underperforms the respective market benchmarks. A reason for this finding could be that, according to modern portfolio theory, SRI should underperform the market portfolio, but increasing demand in recent years has had a positive effect on SRI performance, such that the net effect is no performance difference between SRI and the market portfolio. … high-quality publications, publications in finance journals, and authors who publish more frequently on SRI are all less likely to report SRI outperformance. … including more factors in a model reduces the likelihood that outperformance of SRI is found in studies that investigate stocks only” (S. 25/26). My comment: Verantwortungsvolle (ESG) Portfolios brauchen keine Outperformance – Responsible Investments (Blog) (prof-soehnholz.com) und Q1-2022 Performance: Relativ gute konsequent nachhaltige und passive Portfolios – Responsible Investments (Blog) (prof-soehnholz.com)

Pro tilting: Socially Responsible Divestment by Alex Edmans, Doron Levit, and Jan Schneemeier as of April 30^th, 2022 (#674): “Blanket exclusion of “brown” stocks is seen as the best way to reduce their negative externalities, by starving them of capital and hindering their expansion. We show that a more effective strategy may be tilting — holding a brown stock if it is best-in-class, i.e. has taken a corrective action. While such holdings allow the firm to expand, they also encourage the corrective action” (abstract). My comment: I consider divestment + signaling more powerful than tilting + signaling, see Absolute and Relative Impact Investing and additionality – Responsible Investments (Blog) (prof-soehnholz.com) and Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink

Good bad mood? In the mood for sustainable funds? by Adrian Fernandez-Perez, Alexandre Garel and Ivan Indriawan as of May 3^rd, 2022 (#32). “We find that a worse mood is associated with greater inflows to sustainable funds. This finding is consistent with greater risk aversion pushing investors to favor sustainable funds that they perceive as less risky” (abstract).

Passive and ESG Growth: Active, Passive, Retail, ESG and Value; Oh My! by Daniel Taylor, Ethan Gao and Aaditya Iyer of Man Group as of April 2022: “While the rise of passive has slowed over the last few years, we still believe it has room to grow; 30% does not seem like an upper limit, practically or theoretically, to passive market share. It is difficult to predict what will happen to retail, though it is unlikely that the more speculative components can survive indefinitely. … ESG … will continue to evolve at a rapid pace … up to this point, it is not obvious that the advent of ESG has had a material impact on asset pricing …” (p. 12).

Traditional Investing Research (Inequality)

Bad efficiency? The failure of market efficiency by William Magnuson as of April 30^th, 2022 (#60): “Recent years have witnessed the near total triumph of market efficiency as a regulatory goal. … There is strong evidence that, at least on some metrics, our capital markets are indeed more efficient than they have ever been. …. By focusing our attention narrowly on economic efficiency concerns—such as competition, friction, and transaction costs—we have lost sight of other, deeper values within our economic system, including wider conceptions of duty, fairness, and morality. … New market structures and technologies, from special purpose acquisition companies to social-media oriented trading apps to cryptocurrencies, have emerged to eliminate barriers to trade and compete with institutional incumbents. These strategies may well lead to more efficient markets in so much as they facilitate access to capital, but they also have the side effect of placing unsophisticated regular citizens into complex contractual arrangements with sophisticated market actors. The result is an “efficient” market, but one with steep moral and social costs. This Article examines the limits of market efficiency as a regulatory goal and suggests a set of structural and substantive reforms aimed at better balancing efficiency with the other goals of markets” (abstract).

Buffett crisis tool: The Buffett Indicator: International Evidence by Laurens Swinkels and Thomas S. Umlauft as of May 1^st, 2022 (#511): “… the market value of equities scaled by gross domestic product possesses statistically significant forecast properties for long-term equity returns … The relationship between the market value of equity and economic output is a crude, but straight-forward way of measuring the degree of resources directed to capital markets vis-à-vis the ‘real’ economy. MVE/GDP can thus be viewed as a yardstick to investor sentiment towards stock markets and, by logical extension, towards financial assets in general. … The metric possesses strong and robust predictive properties over longer horizons (c. ten years), as market valuations relative to economic output have tended to mean-revert to a long-term equilibrium since 1973, although the latter half of the observation period has witnessed higher MVE/GDP ratios than the period until the turn of the millennium” (p. 21).

Bad Market Timing: Discounting Market Timing Strategies by Toomas Laarits as of April 8^th, 2022 (#47): “I show that a number of previously documented market timing strategies with high alphas with respect to standard factor models tend to exhibit variance ratios substantially above one at longer horizons, along with lower alphas with respect to popular factor models, and lower Sharpe ratios. Hence such timing strategies are much less appealing from the perspective of a long-term investor than might first appear” (p. 17). My comment: Einfaches Risikomanagement kann erstaunlich gut funktionieren – Responsible Investments (Blog) (prof-soehnholz.com)

Sellingskills: Fund Manager Skill: Selling Matters More! By Onur Kemal Tosun, Liang Jin, Richard Taffler and Arman Eshraghi as of April 29^th, 2022 (#8): “Our key finding is that fund managers with superior selling ability are significantly better at buying stocks and, as a result, earn significantly higher aggregate returns. However, fund managers who buy stocks successfully do not necessarily have parallel selling skills, leading to lower returns overall. Thus, we provide strong evidence that selling skill is the key determinant of overall mutual fund timing performance” (abstract). … “Even for professional investors sell decisions are particularly difficult“ (p. 20).

Sharpe fund power: Mutual Fund Selection and the Investment Horizon by Moshe Levy as of May 2^nd (#6): “Mutual fund investors typically invest for years, or even decades. In contrast, fund rankings are almost invariably based on monthly return parameters. This is a potentially severe problem, because rankings are not invariant to the horizon. … This paper shows … that as the horizon increases the efficient investment set rapidly shrinks towards the fund with the maximal monthly Sharpe ratio. Thus, perhaps surprisingly, monthly Sharpe ratios turn out to be the appropriate performance measure for long-run investors” (abstract).

Fintechlimits: Unfulfilled promises of the fintech revolution by Lindsay Sain Jones amd Goldburn P. Maynard, Jr. a of April 29^th, 2022 (#135): “Racial wealth inequality is complex. … lack of access to credit and financial services, lower rates of return, and discrimination have contributed to this persistent gap. … key players in the industry promote fintech as a primary means to advance financial inclusion for minorities. … we have yet to see these technologies employed to significantly address the underlying causes of the wealth gap. Further, in some instances, fintech may exacerbate existing inequalities” (abstract).

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Complex RI (Responsible Investments): Researchpost 85

Complex RI: >20x new research on strategic sustainability, climate logistics, human rights, ESG flows, climate uncertainty, climate funds, banks, divestments, impact funds, sustainable startups, thematic funds, fund managers, passive investments, PFOF, DCF, REITS, NFT, ICO (# indicates the number of SSRN downloads on May 1st)

I started my first research-blogpost in July 2018. The first 60 posts are included in Das Soehnholz ESG und Impact Researchbuch. Meanwhile, I almost weakly summarize about 20 third party research publications which may be interesting for others as well. Most of the research has been read by only a few people before me, unfortunately. Please feel free to like/comment/share my blogpost (to enhance evidence based and responsible investments).

Complex RI: ESG

Strategic sustainability: Strategic sustainability management pays off – Paper No. 1 of the PI paper series “Demystifying the links between sustainability/ESG and performance” by Martin G. Viehöver, Carla Madueño and Myrna Van Vliet as of April 2022: “…. the present study introduces the PI view on how links between Corporate Sustainability Strategy and Performance (CSSP), including an evaluation of management quality, and Corporate Financial Performance (CFP), should be assessed. … A pilot study was performed using public information on Germany’s largest 100 stock listed companies under normal market situations, i.e., in pre-COVID19 times. … The findings show a significant positive effect of CSSP components on CFP of the same and subsequent years, thus reinforcing the idea that developing a sustainability strategy aligned with the business core activities and managed consistently generates positive (monetary) impacts for the company and society” (p. 8).

Climate logistics: Why industrial location matters in a low-carbon economy by Christopher James Day as of April 22, 2022 (#1): “The cost of transporting renewable energy is relatively high. This creates a significant competitive advantage for regions which can combine surplus clean energy resources with strong institutions and developed capital markets. My findings have major implications for the organisation of global value chains” (abstract).

Human rights deficits: Investing in human rights: overcoming the human rights data problem by Jaap Bartels and Willem Schramade as of April 6^th, 2022 (#3): “Human rights concerns are hardly integrated in investment decisions. … This article investigates why human rights abuses by companies are so persistent. Explanations include the inherent complexity of global value chains; a lack of integration of human rights in business; insufficient legal enforcement; and inadequate data and limited pressure on corporations by investors. Although investors have launched several initiatives to improve their human rights performance they seem not yet able to solve the identified challenges and fulfil the requirements set out in the OECD guidelines and UNGP. We make suggestions to improve human rights data for investors by expanding the existing ecosystem … (abstract).

ESG publication effect: Information Content of ESG Ratings: Evidence from Unanticipated ESG Ratings Disclosure Events by Julia Meyer and Sebastian Utz as of March 15^th, 2022 (#115): “Our empirical results show, that … ESG ratings contain private information. Stocks for which an ESG rating becomes publicly available exhibit a significant reduction in their levels of information asymmetry (abstract) … Liquidity increased significantly for companies that obtained newly available ESG ratings on Bloomberg ….” (p. 28)

ESG flow returns: ESG Investing: A Tale of Two Preferences by Paul Yoo as of April 27^th, 2022 (#42): “What motivates ESG integration? I find both non-pecuniary and risk-mitigating preferences explain its prominence. Using widely endorsed ESG ratings, I show each preference induces sizable ESG equity premium identified through option-implied expected returns. Due to unexpectedly persistent demand growth for ESG-conscious assets, realized returns mask true ESG pricing effects, especially those attributable to non-pecuniary preference” (abstract).

Costly climate uncertainty: Climate policy uncertainty and the cross-section of stock returns by Kam Fong and Ihtisham Malik as of April 15^th, 2022 (#56): “Recent asset pricing literature provides evidence that macroeconomic uncertainty, and political uncertainty, are priced cross-sectionally in equities and corporate bonds. … we find a statistically and economically significant negative relation between a firm’s exposure to climate policy uncertainty … and next-month stock returns … firms with low exposure to climate policy uncertainty are also green stocks with low growth potentials, low crash price risk, and weak price return momentum, and they are associated more with the Democrats” (p. 21/22)

Climate fund diversity: Investing in Times of Climate Change 2022 by Hortense Bioy, Boya Wang, Alyssa Stankiewicz and Amrutha Allad of Morningstar as of April 2022: “We identified 860 mutual funds and exchange-traded funds with a climate-related mandate at the end of last year. Assets in these funds doubled in 2021 to USD 408 billion … The climate funds universe represents a wide range of approaches, which we subdivide into five mutually exclusive categories: Low Carbon, Climate Conscious, Green Bond, Climate Solutions, and Clean Energy/Tech. … Low Carbon funds provide the greatest shield from carbon risk but offer little in the way of climate solutions. Conversely, Climate Solutions and Clean Energy/Tech funds offer high exposure to climate solutions but also currently carry high carbon risk. Many of these funds invest in transitioning companies that operate in carbon-intensive sectors such as utilities, energy, and industrials and that are developing solutions to help reduce their own carbon emissions and that of other” (p. 1). … the main approaches …. applying exclusions, limiting climate risk, seeking climate opportunities, practicing active ownership, targeting climate themes, and assessing impact” (p.27). … “Over 80% of Low Carbon, Climate Conscious, and Climate Solutions funds have lower Fossil Fuel Involvement than the index. However, only 37% of Green Bond funds and 59% of Clean Energy/Tech funds meet this criterion” (p. 35). … “Most notable is the high level of Thermal Coal Involvement with Green Bond funds, with only 36% beating the benchmark” (p. 37). My comment: I have a different approach than most otherss see Neues SDG Sozialportfolio und noch strengere ESG Anforderungen – Responsible Investments (Blog) (prof-soehnholz.com)

Good banks: Banks vs. Markets: Are Banks More Effective in Facilitating Sustainability? By David P., Steven Ongena, Ru Xie, and Binru Zhao as of April 19^th, 2022 (#132): “This paper closes a gap in the literature by demonstrating that firms with a high ESG risk depend less on bank loans and more on public bonds. … First, firms facing higher ESG risk exposure may prefer public bonds over bank loans to evade scrutiny and to insulate themselves from bank monitoring. Second, firms suffering a greater number of negative ESG reputation shocks are less likely to continue obtaining bank loans in response to lenders‘ threats to „exit“ the lending arrangement. … Our results suggest that firm ESG risk decreases after borrowing from banks, demonstrating that banks are more successful at shaping and influencing borrowers‘ ESG performances” (p. 23/24)

Dirty profit: Does it Pay to Invest in Dirty Industries? – New Insights on the Shunned-Stock Hypothesis by Tobias Bauckloh, Victor Beyer and Christian Klein as of April 6^th, 2022 (#34):“… we find firms operating in dirty industries are owned in lower proportions by institutional investors and receive less analyst coverage. We study financial effects of this market segmentation and find that stocks from dirty industries tend to outperform stocks from other industries in the cross-section from 1965 to 2020. The outperformance is particularly pronounced when the degree of shunning is high … Our long-short portfolio yields an abnormal annual return of 2.2 to 3.1% for the time period 1989 to 2020 that cannot be explained by common risk factors. … our results suggest that their impact on firms’ costs of capital is of economic significance” (p. 29/30). My comment: Other recent research reaches other conclusions compare Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink and this:

Divestment works: Global Carbon Divestment and Firms’ Actions by Darwin Choi, Zhenyu Gao, Wenxi Jiang, and Hulai Zhang as of March 15^th, 2022 (#492): “our country-level result shows that the market as a whole is shifting institutions’ capital toward green firms, especially after 2015. … the institutional divestment in a country pushes down equity prices of high-emission firms in the same country. Using the number of natural disasters as an instrumental variable for the reduction in carbon exposure, we show that a carbon divestment of 1% is associated with a 4.4% decrease in prices. Under the price pressure, public (but not private) high-emission firms lower CO2 emissions and increase green innovation activities” (p. 23)

Complex RI: Impact

Critical impact: The impact of impact funds – A global analysis of funds with impact-claim by Lisa Krombholz, Timo Busch, and Johannes Metzler as of April 12^th, 2022 (#56): “The aim of this article is to examine the extent to which (so-called) impact funds refer to financial products that contribute to real-world change. … We find that only a minority of funds meet the outlined impact requirements and that an Article 9 classification alone does not qualify a fund as an impact investment. … our analysis shows that the share of funds that meet the outlined impact requirements is considerably higher for private equity and private debt than for public equity and bonds. In private markets, investors can provide flexible capital to young companies that have limited access to other sources of funding. However, in public markets, investors can also influence companies through active ownership. Yet, many investors do not exercise their shareholder rights effectively because they either do not vote at all, or do not vote in favor of social and/or environmental proposals. … For impact generation, asset managers would have to demonstrate and measure what real-world change shall be achieved through the investment. For impact aligned investments, it is important to demonstrate for instance to which extent the invested companies contribute to achieving the SDGs. The former would be investor impact; the latter company impact – which are two fundamentally different considerations” (p. 10/11). My comment: I propose a somewhat different approach regarding public funds see Absolute and Relative Impact Investing and additionality – Responsible Investments (Blog) (prof-soehnholz.com)

Sustainable Startups: Startups as sustainability transformers: A new empirically derived taxonomy and its policy implications by Yasmin Olteanu and Klaus Fichter as of April 20^th, 2022: “Based on a sample of 1674 startups and cluster analysis …. Our results confirm the existence of a clearly distinguishable subgroup with a particularly high transformation orientation, which we label as “sustainability transformers”” (abstract). … “The members of the cluster thus can be expected to not only aim at high market shares in the mass market, but also strive to have an impact beyond the market on society and the environment because sustainability is at the core of their business …. One hundred fifty-seven of the examined startups, or 9%, can be attributed to this cluster” (p. 11/12).

Clean venture bubble: The Role of Venture Capital and Governments in Clean Energy: Lessons from the First Cleantech Bubble by Matthias van den Heuvel and David Popp as of April 16^th, 2022 (#22): “After a boom and bust cycle in the early 2010s, venture capital (VC) investments are, once again, flowing towards green businesses. … we use Crunchbase data on 150,000 US startups founded between 2000 and 2020 to better understand why VC initially did not prove successful in funding new clean energy technologies. Both lackluster demand and a lower potential for outsized returns make clean energy firms less attractive to VC than startups in ICT or biotech. However, we find no clear evidence that characteristics such as high-capital intensity or long development timeframe are behind the lack of success of VC in clean energy. … the ultimate success rate of firms receiving public funding remains small” (abstract).

General and traditional investment topics

Good themes? Morningstar Global Thematic Funds Landscape 2022 by Jackie Choi et al. of Morningstar as of March 2022: ”… we introduce an updated taxonomy for classifying these funds …. assets under management in these funds have grown nearly threefold to $806 billion worldwide. This represented 2.7% of all assets invested in equity funds globally, up from 0.8% 10 years ago. …. A record 589 new thematic funds debuted globally in 2021, more than double the previous record of 271 new launches in 2020. … Actively managed funds account for the majority of assets invested in thematic funds. Funds tracking multiple technology themes …. represent the most popular thematic grouping globally. …. More than a half of the thematic funds in our global universe both survived and outperformed the Morningstar Global Markets Index over the trailing three years to the end of 2021. However, thematic funds‘ success rate drops to just one in 10 when we look at the trailing 15-year period., … Thematic funds‘ lackluster long-term performance can be partly explained by the fact that their fees tend to be higher than those of their nonthematic counterparts” (p. 1/2). My comment: See Drittes SDG ETF-Portfolio: Konform mit Art. 9 SFDR – Responsible Investments (Blog) (prof-soehnholz.com)

Fund management wisdom statistic: Manager characteristics: Predicting fund performance by Andrew Clare, Meadhbh Sherman, Niall O’Sullivan, Jun Gao, and Sheng Zhu as of April 6^th, 2022 (#122): “…. accumulated wisdom, however this is proxied, has a positive relationship with manager skill: the longer the manager’s tenure, the more experienced the manager is and the older the manager, the better the performance, other things equal. …. we find that more experienced fund managers tend to run portfolios that have: lower exposure to the market, size and momentum risk factors; higher exposure to the Value risk factor; and no significant exposure to idiosyncratic risks. We also find that when a manager has a stake in a fund they tend to have a lower exposure to all of these risk factors relative to managers without a stake in their fund. … we find that performance persistence is most evident among male managers, non-CFA managers, ‘quant’ managers, high SAT score managers, long experience and managers that have managed their fund for a long period of time”. (p. 10/11).

Costly teams: Team Disposition Effects: Vanity or Groupthink? by Daniel Dorna and Pramodkumar Yada as of March 14^th, 2022 (#47): “… our study documents that fund teams are prone to making systematic mistakes in the form of costly disposition behavior; they tend to sell winning investments and hold on to losing investments, despite winners sold subsequently outperforming losers held by an economically meaningful margin. … Pride and regret is amplified in a team setting when a team member carries special responsibility for a position – as a result of specialization, for example. Intuitively, decision makers are loath to admit mistakes to self, let alone to their peers” (p. 34/35).

Bad effects of passive investing? How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing by Valentin Haddad, Paul Huebner and Erik Loualiche as of Oct. 18^th, 2021 (#981): “In the US stock market we find evidence that investors do react to each other but also that this response is much weaker than anticipated by classic views. The effects of changes in the composition of investors on the demand for stock is reduced by 50%. This implies for example that the rise in passive investing leads to substantially more inelastic markets” (p. 40). My comment: Why don`t active manager profit more from this market imperfection?

Expensive options: Payment for Order Flow And Asset Choice by Thomas Ernst and Chester Spatt as of Appril 4^th, 2022 (#403): “In stocks, we show that PFOF is small. While many retail trades are executed off-exchange, we find that they receive meaningful price improvement, particularly when spreads are at their minimum. In single-name equity options, we show that PFOF is large … costing retail investors billions per year” (abstract).

Model criticism: The DCF Valuation Methodology is Untestable by J.B. Heaton as of April 22, 2022 (#114): “The discounted cash flow (DCF) valuation methodology is ubiquitous in finance, but as a single equation in a potentially-infinite set of unobservable unknowns, it is unfalsifiable and therefore untestable. While bonds can be viewed as examples of DCF pricing, this depends on their prices often being observable and their “expected” cash flows typically being bounded above by their promised cash flows. For capital projects, businesses, and common stocks, there is simply no way to determine whether a DCF valuation is a good representation of the causal mechanisms behind market values. The untestable nature of DCF may generate bad consequences for business decision-making, first by causing the rejection of otherwise good projects through heavy discounting of long-term cash flows, and second by making it more likely that only the most excessively optimistic cash flow forecasts make it through the capital budgeting process” (abstract).

Alternative Investments (Complex RI)

Inefficient REIT market: Systematic Mispricing: Evidence from Real Estate Markets by Shaun Bond, Hui Guo, and Changyu Yang as of April 14^th, 2022 (#22): “… we apply recent developments in financial economics, which posit an important role for limited market participation and financial intermediaries, in understanding real estate returns. The risk factors motivated by these theories have significant explanatory power for the cross-section of REITs. However, this relationship is the opposite of what we expected, and the results point to a more complex set of findings that are difficult to reconcile with risk-based explanations. Our results suggest systematic mispricing of real estate assets that is heavily influenced by investor sentiment” (abstract). My comment: See Erstes konsequent verantwortungsvolles ESG-Portfolio aus Immobilienaktien – Responsible Investments (Blog) (prof-soehnholz.com)

Attractive VC: Return to Venture Capital in the Aggregate by Ravi Jagannathan, Shumiao Ouyang, and Jiaheng Yu as of April 20, 2022 (#21): “We examine ventures that had their first funding round in December 2006 or earlier, and follow them till 2018, … we measure the return to equity investors in all the 17,242 venture companies in our sample taken together as a group in several ways: the Kaplan and Schoar (2005) Public Market Equivalent (PME), the Korteweg and Nagel (2016) Generalized PME, and the Internal Rate of Return (IRR). We find that equity investors as group earned a substantial premium over the public market equivalent – with a PME of 1.42 and a GPME of 1.44. The IRR is 22% which is much higher than the IRR of 7% on the venture-mimicking portfolio that invested the amounts raised in the Fama-French industry portfolios till the venture companies’ exit. The higher IRR is compensation for the higher risks due to the higher leverage of venture companies relative to publicly traded firms in their industry as well as compensation for illiquidity. …. in the aggregate, investors have to wait five years from the first funding round for the discounted cash flows from the ventures to become positive. … There is a structural break in 1991Q1 in the return to investing in ventures, and venture returns come down after the break but still earn a premium over their public market equivalent investments” (p. 33/34).

NFT criticism: NFTs and the Art World – What’s Real, and What’s Not by Michael D. Murray as of April 17^th, 2022 (#67): “NFTs as a concept and a technology are probably not going away soon because there are many people with lots of money invested in the emerging metaverse and NFTs are believed to be key to actual ownership of assets and access to services and governance in a virtual universe. NFT artwork, on the other hand, may continue to boom or it may wane in importance and enthusiasm. … NFT … allows digital works to be made scarce … What is for certain is we haven’t seen the end of the story of NFTs in the cryptoverse or metaverse” (p. 27/28).

40% ICO Scams? Trust, but verify: The economics of scams in initial coin offerings by Kenny Phua, Bo Sang Chishen, Wei Gloria and Yang Yu as of April 6^th, 2022 (#34): “Losses from frauds and financial scams are estimated to exceed U.S. $5 trillion annually. … we investigate the market for initial coin offerings (ICOs) using point-in-time data snapshots of 5,935 ICOs. Our evidence indicates that ICO issuers strategically screen for naive investors by misrepresenting the characteristics of their offerings across listing websites. Misrepresented ICOs have higher scam risk, and misrepresentations are unlikely to reflect unintentional mistakes. Using on-chain analysis of Ethereum wallets, we find that less sophisticated investors are more likely to invest in misrepresented ICOs. We estimate that 40% of ICOs (U.S. $12 billion) in our sample are scams” (abstract).

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Advert: Check my article 9 SFDR fund FutureVest Equity Sustainable Development Goals. With my most-responsible selection approach I focus on social SDGs and midcaps and use best-in-universe as well as separate E, S and G minimum ratings.

Wrong ESG bonus math? Opinionpost 188

ESG bonus math: Many asset managers promote voting and engagement to change companies for the better and for positive impact. One of their goals is to promote the inclusion of ESG (Environmental, social and governance) targets in executive bonifications (e.g. „Klimaziele in die Vorstandsvergütung! Immer mehr Unternehmen erkennen, dass es bei der Bekämpfung des Klimawandels auch auf sie ankommt“ by Antje Stobbe and Harlan Zimmerman in Frankfurter Allgemeine Zeitung, April 26th, 2022, who describe the problem of missing incentives very well).

Bonifications will rise

That sounds good. With an adoption of such proposals, I am sure that overall bonifications will increase. This is because I assume that no previously established goals will be substituted for ESG. Instead, ESG will likely be added as a goal (see ESG Boni abschaffen und mehr radikale Vorschläge – Responsible Investments (Blog) (prof-soehnholz.com) and more recently ESG-Linked Pay Around the World -Trends, Determinants, and Outcomes by Sonali Hazarika, Aditya Kashikar, Lin Peng, Ailsa Röell, Yao Shen :: SSRN).

An increase in bonification payments for executives would be bad for the pay gap between low-wage employees and executives. I prefer to support a company which is lowering the pay gap than one which is increasing bonifications (compare Pay Gap, ESG-Boni und Engagement: Radikale Änderungen erforderlich – Responsible Investments (Blog) (prof-soehnholz.com)).

ESG bonus math: Behaviour will not change

I also doubt, that ESG bonifications will significantly change executive ESG behaviour. Here is why: Assume the base pay is 100% and bonifications can add another 100%. The bonifications are typically separated in long-term and short-term parts, e.g. 50/50, leaving 50% for the more relvant long-term part. They are also often separated in overall company and managerial unit bonifications, also assuming a half/half split, leaving 25% for the most relevant long-term manerial unit. Half of the bonifications may be tied to financial goals and the other half (12,5%) to non-financial goals. Assuming ESG-goals make up 50% of the nonfinancial goals (6,25%), the long term managerial unit specific ESG bonification share thus amounts to about 10% of the base pay, depending which term an unit are considered as relevant. Part of that may be related to governance issues which leaves 6 to 7% for ecological and social goals. That is not much and probably too little, to signficantly change managerial behavior.

ESG bonus math: Engagement is not efficient

Even if I am wrong on this point, there is still a “wrong” voting and engagement math. Many asset managers are invested in thousands of companies worldwide. Even with the help of the few international voting services, they most likely will not start many own shareholder proposals. Instead, they will vote on proposals having been brought forward by company management or other shareholders. And shareholder voting is limited to the few shareholder meetings.

Engagement assumes much more time and human resources and thus is typically limited to even fewer companies and often rather limited projects such as demanding climate reduction goals. Even cooperation of shareholders may not help much apart from generating anecdotal evidence and nice marketing stories.

Asset managers thus have only a very limited potential influence on a rather low number of publicly listed companies (compare Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink).

My lesson: I try only to invest in intrinsically sustainable companies (see Neues SDG Sozialportfolio und noch strengere ESG Anforderungen – Responsible Investments (Blog) (prof-soehnholz.com)). And I find enough of them: There are 500 overall out of 30 thousand, thereof about 100 with good SDG-alignment in addition to good E, S and G scores (best-in-Universe).

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ESG overall: Fixed income ESG investing

ESG overall: ESG equity investing

ESG overall: Other ESG topics

Other interesting articles

ESG skeptical: Investments and performance

ESG skeptical reporting

ESG skeptical ratings

ESG and impact

ESG ok, SDG gut: SDG-ETF Portfolios mit relativ guter Rendite

ESG ok, SDG gut: Sektor- und Länderdiversifizierte pure ESG und SDG Aktienportfolios mit relativ guter Performance

Under Fire: ESG investment criticism

Under fire: Indexing and regulation

Impact (aligned) investments

Deadline August: 100% Rendite oder 100% Nachhaltigkeit?

Was und Wie-Fragen in einfacher Sprache

Fondssuche mit Fondsprofilen des Forums Nachhaltiger Geldanlage

Deadline August: Änderung traditioneller Fondsselektionskriterien?

Social and Ecological Topics

Responsible Investments and benchmarking problems

Traditional investments and benchmarking problems

Alternative Investments and Fintechs

Ecology

Social Aspects

Responsible Investment

Traditional Investment: Factor problems

Alternative Investments and Fintechs

Inequality: Social and Ecological Research

ESG Investing Research

Traditional Investing Research (Inequality)

Complex RI: ESG

Complex RI: Impact

General and traditional investment topics

Alternative Investments (Complex RI)

Bonifications will rise

ESG bonus math: Behaviour will not change

ESG bonus math: Engagement is not efficient