Archiv der Kategorie: Politik

Transition? Researchpost 182

Transition: Foto by Clker free Vector Images from Pixabay

Transition? 16x new research on migration, green jobs, green innovation, EU taxonomy, ESG risks, ESG ratings, ESG confusion, diversity, proxy advisors and big tech (# shows SSRN full paper downloads as of June 27^th, 2024)

Social research (Transition)

Germans against migrants? Discrimination in the General Population by Silvia Angerer, Hanna Brosch, Daniela Glätzle-Rützler, Philipp Lergetporer, and Thomas Rittmannsberger as of May 30^th, 2024 (#7): “In our incentivized allocation experiment with more than 2,000 participants representative of the German adult population … We find that discrimination against … Turkish migration background is widespread and substantial in size. Our causal moderation analysis indicates that while all migrant subgroups face discrimination, those with a better education and females experience significantly less. Furthermore, we find higher levels of discrimination among male decision makers, non-migrants, participants with right-wing political preferences, and residents of regions with a lower migrant share“(p. 13).

Inexpensive migration? Local Fiscal Effects of Immigration in Germany by Simone Maxand, Hend Sallam as of June 25^th, 2024 (#7): “We … investigate how the share of the local foreign population affects public finances mainly at the district level. Our analysis utilizes regional administrative data for Germany at the district level, inspecting the period from 2010 to 2019 … our findings … suggest that the foreigners’ share insignificantly impacts collected tax revenues and public investment spending at the district level. … we find that the share of foreigners negatively influences the enrollment rate for children under three in childcare facilities… . By contrast, the share of foreigners in a district does not seem to significantly impact emergency public health spending and public staffing“ (p. 27/28).

Migration emotions beat facts: News, Emotions, and Policy Views on Immigration by Elena Manzoni, Elie Murard, Simone Quercia, and Sara Tonini as of May 29^th, 2024 (#9): “We find evidence that the emotional reaction to the news of a rape committed by an immigrant moves policy views, with a significant increase in anti-immigration attitudes. Providing statistical information corrects factual beliefs … When presented in isolation, information tends to reduce anti-immigration views as it makes participants realize that the percentage of crime committed by immigrants is lower and that rape is a less frequent type of crime perpetrated by immigrants than what they previously thought. Yet, when information is combined with the rape news, the emotional reaction to the news dominates the beliefs-correcting effect of information: participants increase their anti-immigration views to the same extent as when exposed to the rape news only“ (p. 25).

Ecological research

Good green job pledges? Greenwashing the Talents: Attracting human capital through environmental pledges by Wassim Le Lann, Gauthier Delozière, and Yann Le Lann as of June 26^th, 2023 (#93): “… we examine a climate movement initiated by elite French students … To hasten the sustainable transition of businesses, participants in the climate movement threatened to boycott job offers from polluting employers. … environmental pledges have a strong effect on intentions to refuse to work for polluting employers: respondents initially intending to refuse a job offer from a polluting company are, on average, more than three times less likely to maintain these intentions after exposure to an environmental pledge. … Individuals who are not responsive to environmental pledges exclude large companies from their career perspectives, do not believe in the ability of a market economy and technological development to solve the ecological crisis, and support radical action in the name of ecology. … Our results … highlight that companies have incentives to strategically use environmental pledges to mitigate the adverse effects of negative organizational attractiveness shocks caused by a poor environmental responsibility” (p. 26/27). My comment: See HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)

Green job creation: The Greener, the Higher: Labor Demand of Automotive Firms during the Green Transformation by Thomas Fackler, Oliver Falck, Moritz Goldbeck, Fabian Hans, and Annina Hering as of June 19^th, 2024 (#6): “… we exploit the poly-crisis triggered by unexpected escalations of trade conflicts and sustained by consequences of the pandemic and the war in Ukraine. We find green firms’ labor demand is significantly and persistently higher than before the outbreak of the poly-crisis, by 34 to 50 percentage points compared to firms with a focus on combustion technology. This gap widens over time …. Green firms systematically adjust labor demand towards production and information technology jobs” (abstract).

Green innovations: The impact of environmental regulation on clean innovation: are there crowding out effects? by Nicola Benatti, Martin Grois, Petra Kelly, and Paloma Lopez-Garcias from the European Central Bank as of June 19^th, 2024 (#18): “We showed that highly polluting firms tend to respond to environmental policy tightening by increasing their innovation efforts in clean technologies in an economically significant manner, especially in response to large changes in regulation. At the same time, we largely observe no statistically significant change to their innovation efforts in other, non-clean technology classes. This finding suggests that innovation in clean technologies, is not necessarily crowding out innovation elsewhere. … We find that technology support policy and non-market based policy instruments tend to have a stronger impact on clean innovation compared to market-based policy“ (p. 32/33).

ESG investment research (in: Transition)

Willing-to-pay for sustainability: The EU Taxonomy in Action: Sustainable Finance Regulation and Investor Preferences by Henning Cordes, Philipp Decke, and Judith C. Schneider as of June 17^th, 2024 (#7): “We investigate ten sustainability objectives of the European Union (EU) for investment products. Our focus is on Germany as the largest economy affected by the EU regulation and the United States (US) … We show that participants in both countries value the sustainability objectives of the EU, expressed by a significant willingness-to-pay. However, the level is substantially lower in the US. Further, we identify individual as well as group heterogeneity in preferences“ (abstract). … “For example, investors are willing to forego significantly more return for a mutual fund that contributes to, e.g., the protection of biodiversity, than for one that contributes to, e.g., the creation of a circular economy” (p. 41) … the most important objectives for our sample of German participants are mirrored among US participants” (p. 42).

ESG reduces risks: Portfolios mit geringem ESG-Risiko schneiden in Krisenzeiten besser ab von Valerio Baselli von Morningstar vom 20.6.2024: „… Stresstests für ESG-strukturierte Portfolios während dreier vergangener Krisen durchzuführen: der Subprime-Krise 2007-09, der Griechenland-Krise 2010 und der US-Schuldenkrise 2011. In allen Regionen und für alle drei Szenarien erzielten die Portfolios mit geringerem ESG-Risiko eine bessere Rendite …. Geringes ESG-Risiko führt langfristig zu einer besseren risikoadjustierten Performance. Betrachtet man die durchschnittlichen Renditen über den untersuchten Zeitraum (Dezember 2014 bis April 2023), so zeigt sich, dass Portfolios mit niedrigem ESG-Risiko ihre jeweiligen regionalen Portfolios mit hohem ESG-Risiko in allen drei Regionen bei der Rendite übertreffen … Die Ergebnisse zeigen, dass sich Investitionen in Portfolios mit geringem ESG-Risiko besonders in den Sektoren Gesundheitswesen, zyklische Konsumgüter, Versorger und Grundstoffe lohnen“. Mein Kommentar: Der von mir beratene konsequent nachhaltige Fondsmit Fokus auf Gesundheit (und Versorger) hat bisher ebenfalls relativ niedrige Risiken

ESG confusion? Navigating the ESG-Financial relationship: A Sector-by-Sector Analysis of ESG Ratings and Financial Performance by Edmée Hogenmuller, Léna Tuvache, Anthony Schrapffer as of May 18^th, 2024 (#152): “…data on 1298 international firms from 2012 to 2022 … reveals that the correlation between ESG scores and financial performance varies significantly by industry. Some sectors, like Energy & Transportation, exhibit stronger correlations with ESG scores … Credit-based metrics showed slightly stronger relationships with ESG scores than market-based metrics, while market-based metrics had stronger relationships with ESG risk ratings” (abstract).

Noncredible emitters (Transition 1): Credible climate transition plans: Insights from an AI-driven analysis of corporate disclosures by Nico Fettes from Clarity.ai as of June 2024: “Globally, across various sectors, only 40% of companies disclose their decarbonization measures and simultaneously quantify their contribution to achieving emission targets. Both are important criteria for assessing credible transition plans” (p. 1). “… only about 22% of all companies in our sample reported using carbon credits to achieve their targets” (p. 5) … “companies in certain sectors, including aerospace & defense and oil & gas, were found to be among the heavier users of carbon credits compared to other sectors … controversies also exist around the use of negative emissions technologies such as Carbon Capture and Storage (CCS) or reforestation which are still in the early stages of development or have not yet been proven at scale. … across our sample, 38% of companies reported on the use of these technologies for target achievement … the share was much higher in the oil & gas and steel sectors, with over 70% …” (p. 6). My comment see Fraglicher Klimaschutz emissionsintensive Unternehmen | CAPinside

More brown investments (Transition 2): Burn now or never? Climate change exposure and investment of fossil fuel firms by Jakob Feveile Adolfsen, Malte Heissel, Ana-Simona Manu, and Francesca Vinci from the European Central Bank as of June 13^th, 2024 (#14): “… we show that fossil fuel firms with high exposure to climate change raised investment in response to the Paris Agreement relative to firms with low exposure. Importantly, investment sustained current business models, while there are no indications that fossil fuel firms transitioned towards renewable energy sources nor less carbon-intensive production technology after Paris” (p. 29).

ESG-rating details matter: Is ESG a Sideshow? ESG Perceptions, Investment, and Firms’ Financing Decisions by Roman Kräussl, Joshua D. Rauh and Denitsa Stefanova as of May 31^st, 2024 (#12): “… based on Refinitiv’s point-in-time (PIT) ratings product that ensures we … document false inferences about asset growth that would have been made about capital raising if using the standard Refinitiv product instead of the PIT data, which are primarily driven by the fact that the coverage of the standard Refinitiv dataset extends ratings back to time periods when investors did not actually have the information available in the scores. We find that higher environmental scores shift the firm’s capital structure towards equity and away from debt … Separately, we find that governance and social scores are not significantly associated with subsequent changes in either equity or debt issuance. Our findings are consistent with the hypothesis that changes in ESG scores neither affect a firm’s opportunity cost of capital for new investment projects nor relax financing constraints, … we find neither that ESG upgrades raise firm valuation ratios nor that they lead to balance sheet growth. Rather, they lead to firms issuing equity to reduce net debt“ (p. 18/19).

Good “E” lowers risks: Corporate Carbon Performance and Firm Risk: Evidence from Asia-Pacific Countries by Eltayyeb Al-Fakir Al Rabab’a, Afzalur Rashid, Syed Shams and Sudipta Bose as of June 19^th, 2024 (#9): “… using a sample of 9,212 firm-year observation from 13 Asia-Pacific countries from 2002–2021. … We find that CCP is negatively associated with firm risk … finding that the quality of country-level governance accentuates the negative association of CCP with firms’ total risk, idiosyncratic risk and systematic risk. … We also find that country-level business culture, emissions trading schemes (ETSs), climate change performance and attention to carbon emissions accentuate the negative association between CCP and firm risk“ (p. 32/33).

Diversity returns: Do investors value DEI? Evidence from the Stop WOKE Act by Hoa Briscoe-Tran as of June 21^st, 2024 (#10): “… this paper investigates whether capital markets value corporate Diversity, Equity, and Inclusion (DEI) initiatives. In 2022, Florida passed the Stop WOKE Act, which restricted DEI initiatives in the workplace. Upon the Act’s announcement, the market value of affected firms declined by 1.80 percentage points compared to others. The decline was more significant in industries where DEI is financially material and among firms with investors exhibiting stronger pro-social preferences” (abstract).

Other investment research (in: Transition)

Proxy questions: Seven Questions about Proxy Advisors by David F. Larcker and Brian Tayan as of April 29^th, 2024 (#285): “The proxy advisory industry–in which independent third-party firms provide voting recommendations to institutional investors for matters on the annual proxy–has grown in size and controversy. Despite a large number of smaller players, the proxy advisory industry is essentially a duopoly with Institutional Shareholder Services (ISS) and Glass Lewis controlling almost the entire market.
In this Closer Look, we examine seven important questions about the role, influence, and effectiveness of proxy advisors” (abstract).

Big-Tech Finanzkonkurrenz: Mehr Geld, mehr Macht: Big-Techs im Finanzwesen von Carolina Melches und Michael Peters von Finanzwende vom Juni 2024: „In Südostasien und insbesondere China sind die Tech-Giganten tief in der Finanzbranche verankert. … In den USA sind ebenfalls Big-Techs mit einer Vielzahl an Finanzangeboten wie Ratenkrediten („Buy Now Pay Later“- Angebote), Sparkonten und Zahlungsdiensten unterwegs. In der EU bieten sie vorwiegend Zahlungsdienste an und werden vergleichsweise weniger genutzt“ (S. 4).

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Werbehinweis

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

Private company ESG: Researchpost #178

Private company ESG: 10x new research on climate risk and nudging, private company ESG, ESG rating changes, AI and greenwashing, transformation, political engagement and impact asset allocation (# shows number of SSRN full paper downloads as of May 30th, 2024)

Social and ecological research

More climate risks? The globalization of climate change: amplification of climate-related physical risks through input-output linkages by Stephan Fahr, Richard Senner, and Andrea Vismara as of May 21^st, 2024 (#164): “While global supply chains … risks across countries has received surprisingly little attention. … The findings suggest that direct GDP loss estimates can severely underestimate the ultimate impact of physical risk because trade can lead to losses that are up to 30 times higher … than what looking at the direct impacts would suggest. However, trade can also mitigate losses if substitutability across country-sectors is possible“ (abstract).

Easy climate nudging: Misperceived Social Norms and Willingness to Act Against Climate Change by Peter Andre Teodora Boneva Felix Chopra Armin Falk as of May 21^st, 2024 (#237): “Americans vastly underestimate the prevalence of climate norms in the US …. We show that a relatively simple, scalable, and cost-effective intervention – namely informing respondents about the actual prevalence of climate norms in the US – reduces these misperceptions and encourages climate-friendly behavior. Importantly, we find that this intervention is depolarizing and particularly effective for climate change skeptics, the group of people who are commonly difficult to reach. Our results suggest that informing people about the behavior of relevant peers constitutes a particularly effective tool to target, reach, and convince skeptics“ (p. 29/30).

Private company ESG? Do ESG disclosure mandates affect the competitive position of public and private firms? by Peter Fiechter, Jörg-Markus Hitz, and Nico Lehmann as of May 23^rd, 2024 (#46): “… we find that the staggered adoption of ESG disclosure mandates in different economies around the globe has an economically meaningful impact on competition in these domestic markets, as private suppliers gain contracts at the expense of public suppliers. … (i) ESG regulated corporate customers shift contracts from public to private suppliers, consistent with a preference for ESG opaque over ESG transparent supply chains, and (ii) adverse price competition effects for treated suppliers due to incremental direct and indirect costs associated with the ESG disclosure mandate. We also show that treatment effects are concentrated in contractual relations with suppliers of low importance to their corporate customers” (p. 27).

ESG investment research (in: Private company ESG)

ESG mechanics (1): Sovereign Environmental, Social, and Governance (ESG) Investing: Chasing Elusive Sustainability by Ekaterina Gratcheva and Bryan Gurhy from the International Monetary Fund as of May 23^rd, 2024 (#35): “Most sovereign ESG scores used by the industry focus on evaluating sustainability risks that could impact financial returns – and not those that impact positive sustainability outcomes. … This mismatch has prompted regulatory bodies in various jurisdictions, including the FCA (2023), to consider stricter regulations governing the use of terms such as „responsible“ and „sustainable“ in investment fund nomenclature. … ESG factors … have limited effectiveness in reducing national emissions or advancing the achievement of SDGs” (p. 24). My comment see Neues Greenwashing-Research | CAPinside

ESG mechanics (2): Do Investors Respond to Mechanical Changes in ESG Ratings by Seungju Choi, Fabrizio Ferri, and Daniele Macciocchi as of May 24^th, 2024 (#98): “… we study whether investors change their portfolio holdings in response to mechanical changes in ESG ratings––i.e., changes independent of concurrent changes in a firm’s actual ESG activities. To do so, we exploit a change in Refinitiv’s ESG ratings mechanically driven by the expansion of its coverage in 2015. We first document that the coverage expansion automatically and substantially improved the relative position – and thus the ESG rating – of the firms already covered by Refinitiv. Next, we show that these firms did not exhibit any improvement in their ESG performance (as measured using actual ESG outcomes, ESG ratings by other providers, as well as our estimated Refinitiv’s ESG rating absent the coverage expansion). … the probability of being selected by an ESG fund is higher for treatment firms relative to control firms, whereas we do not find that ESG funds increase their holdings of treated stocks already in their portfolio. These findings suggest that ESG funds use ESG ratings mostly in the selection process rather than the portfolio weighting process. … our analyses show that passive ESG funds (those with an index-based investing strategy) and active ESG funds that are more “passive” in their selection strategy (due to resource constraints) are more likely to add to their portfolio firms that experience an increase in ESG ratings independent of concurrent changes in the firm’s ESG activities” (p. 20/21). My comment: I f my ESG rating provider updates its methodology and company ESG ratings change only because of this change, I still react regarding my investment/divestment portfolio decisions. The reason: I assume (and can usually confirm) that the updated rating methdodology I better than the old methodology. “Rule-change” examples see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com)

AI vs Greenwashing: Combining AI and Domain Expertise to Assess Corporate Climate Transition Disclosures by Chiara Colesanti Senni, Tobias Schimanski, Julia Bingler, Jingwei Ni, and Markus Leippold as of May 14^th, 2024 (#417): “… the lack of one clear reference framework paves the way for inconsistencies in transition plans and the risk of greenwashing. We propose a set of 64 common ground indicators from 28 different transition plan disclosure frameworks to comprehensively assess transition plans … Applying the tool to 143 reports from the carbon-intensive CA100+ companies, we find that companies tend to disclose more indicators related to target setting (talk) but fewer indicators related to the concrete implementation of strategies (walk)“ (abstract). My comment: I am not sure if there is an added value compared to the approaches of good ESG rating providers.

Impact investment research (in: Private company ESG)

More transformation? Consistency or Transformation? Finance in Climate Agreements by Sebastian Rink, Maurice Dumrose and Youri Matheis as of May 21^st, 2024 (#21): “Our paper critically examines the role of responsible institutional investors… we show that responsible investors tend to avoid high-emitting companies in their portfolios. Companies with higher ownership by responsible investors do not decarbonize faster. In contrast, companies’ ESG ratings improve significantly with higher responsible investor ownership. This highlights a focus by responsible investors on these widely used ESG metrics instead of real economy decarbonization“ (abstract).

Private company ESG: Entrepreneurial Finance and Sustainability: Do Institutional Investors Impact the ESG Performance of SMEs? by Wolfgang Drobetz, Sadok El Ghoul, Omrane Guedhami, Jan P. Hackmann, and Paul P. Momtaz as of May 22^nd, 2024 (#83): “We show that … investor backing by venture capital and private equity funds leads to an increase in SMEs’ (Sö: Small and medium size enterprises) externally validated ESG scores compared to matched non-investor-backed SMEs. Consistent with ESG-as-insurance theory, we find that the ESG performance of SMEs with a higher probability of failure, especially low-revenue SMEs and SMEs with high revenue volatility, is more likely to benefit from institutional investor backing. The positive effect is non-linear: SMEs with high ex-ante ESG performance are more likely to further improve ESG policies following investor backing, while SMEs with low ex-ante ESG performance are unlikely to improve“ (abstract). My comment: With my shareholder engagement focus on supplier ESG ratings improvement I want to leverage my engagement efforts, see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)

Political engagement: Collaborative investor engagement with policymakers: Changing the rules of the game? by Camila Yamahaki and Catherine Marchewitz as of April 12^th, 2024 (#41): “… this article analyzes what drives institutional investors to engage with government entities and what challenges they find in the process. … We identify a trend that investors conduct policy engagement to fulfill their fiduciary duty, improve investment risk management, and create an enabling environment for sustainable investments. As for engagement challenges, investors report the longer-term horizon, a perceived limited influence toward governments, the need for capacity building for investors and governments, as well as the difficulty in accessing government representatives“ (abstract).

Impact asset allocation: How sustainable fnance creates impact: transmission mechanisms to the real economy by Ben Caldecott, Alex Clark, Elizabeth Harnett, and Felicia Liu as of May 23^rd, 2024: “Our findings suggest that fixed income, notably sustainability-linked bonds and loans, could present the greatest opportunity for impact if they are appropriately designed, passively-managed public equities the least, and hedge funds strategies the most variable. … we suggest how this analysis might be applied to strategic asset allocation by investors with multi-asset portfolios, suggesting that the addition of an “impact budget” as a way of operationalising these decisions” (p.27). My comment see Sustainable investment = radically different? – Responsible Investment Research Blog (prof-soehnholz.com) or Nachhaltige Geldanlage = Radikal anders? – Responsible Investment Research Blog (prof-soehnholz.com)

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Werbehinweis (in: Private company ESG):

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Small-Cap-Anlagefonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds mit aktuell sehr positiver Performance konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement (Investor impact) bei derzeit 28 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T und My fund – Responsible Investment Research Blog (prof-soehnholz.com)

Healthcare IT and more new research: Researchpost #166

Healthcare IT: 17x new research on climate profits, biodiversity, carbon policy, noisiness, brown subsidies, child marriages, diversity returns, ESG ratings, climate measures, index pollution, impact funds, engagement returns, green research, green real estate, green ECB (# shows number of SSRN full paper downloads as of March 7^th, 2024).

Ecological research (in: Healthcare IT)

Climate adaption profits? Fiscal Implications of Global Decarbonization by Simon Black, Ruud de Mooij, Vitor Gaspar, Ian Parry, and Karlygash Zhunussova from the International Monetary Fund as of March 7^th, 2024 (#2): “The quantitative impact on fiscal revenues for countries depends on the balance between rising carbon revenue and a gradual erosion of existing carbon and fuel tax bases. Public spending rises during the transition to build green public infrastructure, promote innovation, support clean technology deployment, and compensate households and firms. Assumptions about the size of these spending needs are speculative and estimates vary with country characteristics (especially the emissions intensity of the energy sector) and policy choices (whether investments are funded through user fees or taxes for the sector or by the general budget). On balance, the paper finds that the global decarbonization scenario will likely have moderately negative implications for fiscal balances in advanced European countries. Effects are more likely to be positive for the US and Japan if public spending is contained. For middle and low-income countries, net fiscal impacts are generally positive and sometimes significantly so—mostly due to relatively buoyant revenue effects from carbon pricing that exceed spending increases. For low-income countries, these effects are reinforced if a portion of the global revenue from carbon pricing is shared across countries on a per-capita basis. Thus, a global agreement on mitigation policy has the potential to support the global development agenda” (p. 26).

Green productivity? The impact of climate change and policies on productivity by Gert Bijnens and many more from the European Central Bank as of Feb. 28^th, 2024 (#26): “The impact of rising temperatures on labour productivity is likely to be positive for Northern European countries but negative for Southern European countries. Meanwhile, extreme weather events, having an almost entirely negative impact on output and productivity, are likely to have a relatively higher impact on Southern Europe. … The impact of climate policies on resource reallocation across sectors is likely negative, as the more carbon-intensive sectors are currently more productive than the sectors that are expected to grow due to the green transition. … Smaller firms that have a harder time in securing finance and less experience in creating or adapting new innovations may initially face challenges and see a decline in their productivity growth. However, their productivity outlook improves as they gradually adjust and gain access to support mechanisms, such as financial assistance and technological expertise. … Market-based instruments, like carbon taxes, are not enough in themselves to spur investment in green innovation and productivity growth. As others have found, the green transition also calls for an increase in green R&D efforts and non-market policies such as standards and regulations, where carbon pricing is less adequate. … In conclusion, while shifting towards a greener economy can lead to temporary declines in labour productivity in the shorter term, it could yield several long-term productivity benefits“ (p. 60/61).

Biodiversity degrowth: Biodiversity Risks and Corporate Investment by Hai Hong Trinh as of Oct. 1^st, 2023 (#188): “I document a strong adverse association between corporate investment and biodiversity risks (BDR) …. More importantly, in line with the life-cycle theory, the relation is pronounced for larger and more mature firms, suggesting that firms with less growth opportunities care more about climate-induced risks, BDR exposures in this case. When environmental policies become more stringer for climate actions, the study empirically supports the rationale that climate-induced uncertainty can depress capital expenditure due to investment irreversibility, causing precautionary delays for firms”.

“Good” carbon policies: Carbon Policy Design and Distributional Impacts: What does the research tell us? by Lynn Riggs as of Sept. 21^st, 2023 (#15): “There are two main veins of literature examining the distributional effects of carbon policy: the effects on households and the effects on production sectors (i.e., employment). These literatures have generally arisen from two common arguments against carbon policies – that these polices disproportionately affect lower income households and that the overall effect on jobs and businesses will be negative. However, existing research finds that well-designed carbon policies are consistent with growth, development, and poverty reduction, and both literatures provide guidance for policy design in this regard” (abstract).

Social research (in: Healthcare IT)

Costly noise: The Price of Quietness: How a Pandemic Affects City Dwellers’ Response to Road Traffic Noise by Yao-pei Wang, Yong Tu, and Yi Fan as of July 15^th, 2023 (#44): “We find that housing units with more exposure to road traffic noise have an additional rent discount of 8.3% and that tenants are willing to pay an additional rent premium for quieter housing units after the pandemic. We demonstrate that the policies implemented to keep social distance like WFH (Sö: working from home) and digitalization during the COVID-19 pandemic have enhanced people’s requirement for quietness. We expect these changes to persist and have long-lasting implications on residents’ health and well-being …” (p. 25/26).

Ungreen inequality subsidies? Do Commuting Subsidies Drive Workers to Better Firms? by David R. Agrawal, Elke J. Jahn, Eckhard Janeba as of March 5^th, 2024 (#5): „Increases in the generosity of commuting subsidies induce workers to switch to higher-paying jobs with longer commutes. Although increases in commuting subsidies generally induce workers to switch to employers that pay higher wages, commuting subsidies also enhance positive assortativity in the labor market by better matching high-ability workers to higher-productivity plants. Greater assortativity induced by commuting subsidies corresponds to greater earnings inequality” (abstract).

Polluted marriages: Marriages in the shadow of climate vulnerability by Jaykumar Bhongale and Oishik Bhattacharya as of May 15^th, 2023 (#26): “We discover that girls and women are more likely to get married in the year of or the year after the heat waves. The relationship is highest for women between the ages of 18 and 23, and weakest for those between the ages of 11 and 14. We also investigate the idea that severe weather influences families to accept less suitable daughter marriage proposals. We discover that people who get married in extremely hot weather typically end up with less educated men and poorer families. Similarly to this, men with less education who married during unusually dry years are supportive of partner violence more than other married men married in normal seasons of the year. These findings collectively imply that families who experience environmental shocks adapt by hastening the marriage of daughters or by settling for less ideal marriage offers “ (abstract).

Diversity returns: Diversity and Stock Market Outcomes: Thank you Different! by Yosef Bonaparte as of Feb. 9^th, 2024 (#30): “… we gather data from 68 countries on key financial results and their level of diversity. We define diversity via four dimensions: ethnicity, language, religion, and gender. … our results demonstrate that the impact of diversity components on the stock market varies, yet overall, the greater the level of diversity the greater the stock market performance, and there is no volatility associated with this high return. In fact, we present some evidence that the overall volatility declines as diversity increases. To sum up, diverse culture is better equipped to understand and serve diverse consumer markets, thereby expanding the potential customer base. This inclusive approach not only reflects social responsibility but also aligns with economic advantages, as it results in improved corporate governance, risk management, and overall corporate performance“ (p. 15).

ESG investment research

ESG rating issues: Unpacking the ESG Ratings: Does One Size Fit All? by Monica Billio, Aoife Claire Fitzpatrick, Carmelo Latino, and Loriana Pelizzon as of March 1^st, 2024 (#70): “In this study, we unpack the ESG ratings of four prominent agencies in Europe …” (abstract) … “First, using correlation analysis we show that each E, S, and G pillar contributes differently to the overall ESG rating. … the Environmental pillar consistently plays a significant role in explaining ESG ratings across all agencies … When analysing the intra-correlations of the E, S and G pillar we find a low correlation between the three E, S, and G pillars. An interesting accounting methodology emerges from RobecoSAM which exhibits notably high intra-correlations. This prompts us to raise questions about the validity of relying exclusively on survey data for calculating ESG ratings as RobecoSAM does. … the Governance pillar displayed the highest divergence across all years, followed by Social, Environmental and finally ESG. … Finally, our study on the main drivers of ESG ratings reveals that having an external auditor, an environmental supply chain policy, climate change commercial risks opportunities and target emissions improves ratings across all agencies, further emphasizing the importance of firms’ environmental strategies“ (p. 12/13). My comment: Unterschiedliche ESG-Ratings: Tipps für Anleger | CAPinside

Pro intensity measures: Greenness and its Discontents: Operational Implications of Investor Pressure by Nilsu Uzunlar, Alan Scheller-Wolf, and Sridhar Tayur as of Feb. 28^th, 2024 (#23): “… We explore two prominent environmental metrics that have been proposed for carbon emissions: an absolute-based target for absolute emissions and an intensity-based target for emission intensity. … we observe that, for high-emission companies, an intensity-based target increases the producer’s expected profit, leading to less divestment compared to the absolute-based target. We also find that the intensity-based target is more likely to facilitate investments in increased efficiency than the absolute-based target“ (abstract).

Index-hugging pollution? Reducing the Carbon Footprint of an Index: How Low Can You Go? by Paul Bouchey, Martin de Leon, Zeeshan Jawaid, and Vassilii Nemtchinov as of Feb. 13^th, 2024 (#31): “… The authors find that an investor may be able to reduce the carbon footprint of a typical index-based portfolio by more than 50%, while keeping active risk low, near 1% tracking error volatility. … We study the effects of constraints on the optimization problem and find that loosening sector and industry constraints enables a greater reduction in carbon emissions, without a significant increase in overall active risk. Specifically, underweights to Utilities, Energy, and Materials allow for a greater reduction in carbon emissions” (abstract). My comment: The Carbon footprint can be reduced much more by avoiding significant emitters altogether. Index deviation will increase in that case, but not necessarily relevant risk indicators such as drawdowns or volatility, see also 30 stocks, if responsible, are all I need (prof-soehnholz.com)

SDG and impact investment research (in: Healthcare IT)

Better sustainability measure: Methodology for Eurosif Market Studies on Sustainability-related Investments by Timo Busch, Eric Pruessner, Will Oulton, Aleksandra Palinska, and Pierre Garrault from University Hamburg, Eurosif, and AIR as of February 2024: “Past market studies on sustainability-related investments typically gathered data on a range of different sustainability-related investment approaches and aggregated them to one of a number of “sustainable investments”. However, these statistics did not differentiate between investments based on their investment strategy and/or objectives to actively support the transition towards a more sustainable economy. The methodology presented in this paper aims to reflect current approaches to sustainability-related investment across Europe more accurately. It introduces four distinct categories of sustainability-related investments that reflect the investments’ ambition level to actively contribute to the transition towards a more just and sustainable economy … Two core features of the proposed approach are that it applies to all asset classes and that investments only qualify as one of the four categories if they implement binding ESG- or impact related criteria in their investment process. The methodology will serve as a basis for future market studies conducted by Eurosif in cooperation with its members“ (p. 2). My comment: I like the four categories Basic ESG, Advanced ESG, Impact-Aligned and Impact-Generating. For further details regarding impact generation see also DVFA-Leifaden_Impact_2023-10.pdf. The “Leitfaden” is now also available in English (not online yet, though)

Engagement returns: Value of Shareholder Environmental Activism: Case Engine No. 1 by Jennifer Brodmann, Ashrafee T Hossain, Abdullah-Al Masum, and Meghna Singhvi as of Feb. 13^th, 2024 (#20): “We observe short-term market reactions to S&P100 index constituents around two subsequent events involving Engine No. 1 – an environment activist investment firm: first, they won board seats at ExxonMobil (the top non-renewable energy producer) on May 26, 2021; and second, on June 2, 2021, they announced their plan to float Transform-500-ETF (an ETF targeting to ensure green corporate policies) in the market. We find that the market reacts significantly positively towards the stocks of the firms with more serious environmental (and emission) concerns around each of these two events. Overall, our findings suggest that a positive move by the environment activist shareholders results in an incremental favorable equity market reaction benefitting the polluting firms. … we posit that this reaction may be a product of market anticipation of a future reduction in environmental (and emission) concerns following the involvement of green investors” (abstract).

Bundled green knowledge: Wissensplattform Nachhaltige Finanzwirtschaft by Patrick Weltin vom VfU as of February 2024: “The final report summarizes the key findings of the Knowledge Platform for Sustainable Finance project. The research project is helping to increase understanding of sustainable finance among various key stakeholders. In addition to policymakers, financial market players, the real economy and civil society, these include employees in the financial sector, in particular trainees, young professionals and students. The final report summarizes and presents the key results of the work packages and possible overarching findings” (p. 5). My comment: I offered the VfU to discuss about a potential inclusion of my research summaries, but I did not get a reply.

Greener real estate: Finanzierung von energetischen Gebäudesanierungen Eine kritische Analyse unter besonderer Berücksichtigung der Sustainable Finance-Regulierung der Europäischen Union von Tobias Popovic und Jessica Reichard-Chahine vom Februar 2024: “Financing of energy-efficient building renovations: … At 1 percent per year, the renovation rates in the building stock in Germany are significantly below the 2-4 percent that would be necessary to achieve the climate targets of the Paris Agreement as well as those of the EU and the German government. The too low renovation rates, the insufficient renovation quality and the associated sluggish standardisation are due to various obstacles, such as a lack of data on the energy status of buildings, a lack of renovation and financial knowledge on the part of building owners and users, a lack of renovation incentives and, last but not least, the lack of availability of appropriate financing and insurance products. … On the market side .. there is still a need for the development of innovative financing instruments …” (p. 5).

Healthcare-IT potential: Next Health – a new way to navigate the healthcare ecosystem by Karin Frick, David Bosshart and Stefan Brei as of Nov. 7^th, 2023 (Deutsch; Francais #27): “Human and artificial intelligence working together have the potential to significantly increase quality in both medicine and productivity, thereby reducing costs. … The more cooperative the approach to data sharing, the greater the amount and quality of data available in the system, and the better the results. These developments will also change the position of patients in the healthcare system and how they see their role. The more frequently they come into contact with the healthcare system while they are healthy, the more their behaviour will come to resemble that of consumers. Even the hierarchical distance between doctor and patient will shrink or perhaps even disappear completely, for the simple reason that both parties will be taking advice from smart assistants when making decisions“ (p. 2). My comment: About a third of my small cap SDG fund is now invested in healthcare companies. With Nexus from Germany and Pro Medicus from Australia there are two healthcare IT companies in my mutual fund. For further information on Medtech also see What to expect from medtech in 2024 by Karsten Dalgaard, Gerti Pellumbi, Peter Pfeiffer, and Tommy Reid from McKinsey.

Other investment research (in: Healthcare IT)

ECB for green? Legitimising green monetary policies: market liberalism, layered central banking, and the ECB’s ongoing discursive shift from environmental risks to price stability by Nicolás Aguila and Joscha Wullweber as of Feb. 17^th, 2024: “Through the analysis of ECB Executive Board member speeches, we have identified three main narratives about the consequences of the environmental crisis in the monetary authority’s spheres of influence: The first emphasises environmental phenomena as financial risks; the second highlights the green investment or financing gap; and the third focuses on the impacts of climate change on price stability. … We show that the third narrative is displacing the first as the dominant discourse around ECB climate policy. The shift in focus from the central bank’s duties to maintain financial stability to its responsibilities regarding price stability under the primary mandate could lead to far-reaching green monetary policies” (abstract).

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ESG bluff? Researchpost #164

ESG bluff: 10x new research on Swiss/sustainable retail, lab meat, Weimar politics, sustainable women, SDG financial research, green funds, real estate ESG, free trading governance effects and bond factors (#shows the number of SSRN full paper downloads as of February 22^nd, 2024)

Social and ecological research (in: ESG bluff?)

Sustainable retail (English version below): Ausgebummelt – Wege des Handels aus der Spass- und Sinnkrise by Gianluca Scheidegger, Johannes Bauer, and Jan Bieser as of Dec. 7th, 2023 (#21): „Die Zeit wird neu verteilt: Was keine Freude oder Sinn stiftet, wird gestrichen … Nachhaltiger Konsum gewinnt an Bedeutung … Umfassend informiert: KI erleichtert die Produktsuche für Konsument:innen …Auf einer Linie: Persönliche Werte werden bei der Produkt- und Händlerwahl entscheidend: Purpose-driven Consumers sind die weltweit größte Kundengruppe. Tendenz steigend. Diese Kund:innen kaufen nur bei Firmen ein, die ihre Werte teilen. Die Konsument:innen erwarten in Zukunft mehr von den Unternehmen. Händler müssen Stellung zu gesellschaftlichen Problemen beziehen und aktiv zu ihrer Lösung beitragen. Die gute Nachricht ist: Die Menschen trauen dies den Unternehmen zu. Jedem Kanal seine Rolle: Transaktion primär online, Inspiration eher offline. Schnell und nachhaltig: … Händler, die beide Ansprüche unter einen Hut bekommen, verschaffen sich einen klaren Wettbewerbsvorteil“ (p. 84).

Sustainable retail (German version above): Going shopping is dead – How to Restore Meaning and Fun in Retail by Gianluca Scheidegger, Johannes Bauer and Jan Bieser as of Dec. 4^th, 2023 (#17): “Time is being reallocated: what’s not fun or meaningful will be crossed off the schedule … Sustainable consumption is gaining in importance Overconsumption has a massive impact on the environment. … Fully informed: AI facilitates consumers’ searches for products … In aligment: personal values becoming decisive in choosing products and retailers Purpose-driven consumers are the largest customer group worldwide. This trend is rising. These customers only buy from companies that share their values. Consumers will expect more from companies in the future. Retailers must take a stand on social problems and actively contribute to solving them. The good news is that people trust companies to do this. Each channel has its role: transactions primarily online, inspiration mostly offline … Fast and sustainable: delivery under greater scrutiny … The fastest form of delivery is often not the most sustainable. Retailers who can reconcile both requirements gain a clear competitive advantage“ (p. 84).

Lab meat: Good conscience from the lab? The State of Acceptance for Cultivated Meat by Christine Schäfer, Petra Tipaldi and Johannes C. Bauer as of Jan. 8^th, 2024 (#12; German version: Gutes Gewissen aus dem Labor? So steht es um die Akzeptanz von kultiviertem Fleisch by Christine Schäfer, Petra Tipaldi, Johannes Bauer :: SSRN, #26): “Lab-grown meat instead of beef fillet, cell-cultured patties instead of burgers – for many Swiss people this sounds far from appetising. A mere 20% would even try cultivated meat, whilst 15% remain undecided. … The Swiss population is also sceptical about other kinds of novel foods, such as insects or coffee made from mushrooms. There are, however, customer groups who may be more inclined to tuck into a steaming plate of crispy lab-grown schnitzel: They are young, male, educated, mainly live in the city, already have experience with a particular diet, such as vegetarian or low carb, and know a lot about sustainable food. … Lab-grown meat is one such example of a novel food. It is cultivated from stem cells in a bioreactor and has many advantages, namely that factory farming and the use of antibiotics are all but eliminated, less space and water is needed for production, no rainforests need to be cut down to cultivate animal feed and the combination of nutrients in the meat can be adapted to specific target groups. But there are risks …. the production facilities needed eat up enormous amounts of energy … Lab-grown meat is still hard to find on the market. Customers can only taste chicken derived from cellular agriculture in a few restaurants in Singapore and the USA at the moment. As yet, it has not been approved anywhere in Europe“ (p. 2). My comment: I am skeptical about the ecological footprint and market potential of lab meat compared to plant-based meat alternatives.

Sustainable women: Sustainable leadership among financial managers in Spain: a gender issue by Elena Bulmer, Iván Zamarrón, and Benito Yáñez-Araque as of Dec. 29^th, 2023 (#13): “A total of 131 senior financial managers (106 men and 25 women), from various sectors in Spanish companies (a multi-sector study), responded to two scales: the Honeybee Sustainable Leadership Scale (focusing on stakeholder orientation and a vision of social and shared leadership) and the Locust Leadership Scale (primarily centered on achieving short-term profits at any cost). … The main finding was that female financial managers scored significantly higher on the Honeybee Leadership Scale compared to their male counterparts, signifying that female presence is key to sustainable leadership” (abstract).

Deglobalization effect? The consequences of a trade collapse: Economics and politics in Weimar Germany by Björn Brey and Giovanni Facchini as of Jan. 17^th, 2024 (#18): “What are the political consequences of de-globalization? We address this question in the context of Weimar Germany, which experienced a 67% decline in exports between 1928-1932. During this period, the Nazi party vote share increased from 3% to 37%. … we show that this surge was not driven by the direct effects of the export decline in manufacturing areas. At the same time, trade shock-induced declines in food prices spread economic hardship to rural hinterlands. We document that this indirect effect and the pro-agriculture policies put forward by the Nazis are instead key to explain their electoral success” (abstract).

Responsible investment research (in. ESG bluff?)

SDG research: Finance Research and the UN Sustainable Development Goals – an analysis and forward look by Yang Sua, Brian M. Lucey, and Ashish Kumar Jha as of Feb. 13^th, 2024 (#183): “This study conducts a comprehensive analysis of the interplay between the United Nations Sustainable Development Goals (UN SDGs) and scholarly output in financial journals from 2010 to 2022. … The findings demonstrate a focus within finance research on Economic Growth (Goal 8) and Peace and Justice (Goal 16), while also identifying areas that warrant further scholarly attention” (abstract). My comment: For mutual funds it seems to be easiest to focus on SDGs 3 (Health), 7 (Energy) and 9 (Industry/Infrastructure). That is my experience with a bottom-up stock selection approach, see www.futurevest.fund “Nachhaltigkeitsreport”.

ESG bluff? Sustainable in Name Only? Does Bluffing or Impact Explain Success in a Moral Market? by Kevin Chuah and Witold Henisz as of Feb. 13^th, 2024 (#16): “… US-domiciled equity-focused investment funds that are labeled as focusing on environmental, social, and governance (ESG) issues. Although we find that product success in terms of investment inflows is more likely for funds with better ESG performance, the draw of larger fund operators and of superior financial returns remains substantial. We further segment our sample, finding that segments offering lower levels of ESG engagement achieve inflows that are unrelated to ESG performance, yet are a substantial part of the overall market. This suggests that bluffing by large product providers may undermine genuine attempts at social impact in moral markets“ (abstract). My comment: It certainly seems to help to grow fund assets to have huge marketing power and good returns, recently often based on high allocations to the glorious 7 which I do not consider to be very sustainable, see Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)

Green disadvantage? Carbon Risk Pricing or Climate Catering? The Impact of Morningstar’s Low Carbon Designation on Fund Performance by K. Stephen Haggard, Jeffrey S. Jones , H. Douglas Witte, and C. Edward Chang as of Jan. 18^th, 2024 (#21): “Our results show insignificant performance differences between Low Carbon Designated (LCD) funds and non-LCD funds for the most recent (three-year) period. For longer periods of five and ten years, we observe excess performance only for the Sharpe and Sortino ratios, but not for Total Return or the Treynor ratio. … our results are consistent with a catering hypothesis of climate investing. Initially, investors seeking low-carbon investments bid up the prices of low-carbon stocks. Firms respond by seeking Low Carbon Designations, whether through real efforts or greenwashing. Once enough low-carbon stocks are available to meet the demand of the lowcarbon clientele, the premium associated with low carbon disappears“ (p. 17). My comment: If low LCD funds have similar performance as high carbon funds, why invest in the latter?

Green disadvantage? Doing Good and Doing Well: The Relationships between ESG and Stock Returns of REITs by Neo Jing Rui Dominic and Sing Tien Foo as of Jan. 29^th, 2024 (#31): “Using a sample of 413 REITs from both the US and other developed countries covering the period from 2018 to 2022 …We find that REITs with an ESG rating have a lower price return of 0.8% relative to REITs not assessed for ESG. … The results show that the total returns of the ESG-rated REITs were even lower when the climate change risks increased, or more specifically, when investors became more salient about climate change news, they increased their preference for ESG-rated REITs, thus reducing the total return of REITs. … we find that higher compliance and operation costs for REITs with strong ESG agendas, which may come in the form of higher compensation for the Board and Senior Management, who take on more ESG responsibilities, may have a negative impact on the ESG-rated REIT stock performance“ (p. 19/20). My comment: The higher compensation for REIT Boards and Senior Management with the associated higher pay gap compared to median employee should be explored further. With my shareholder engagement strategy I try to alert regarding this issue, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Retail anti-governance? Retail Investors and Corporate Governance: Evidence from Zero-Commission Trading by Dhruv Aggarwal, Albert H. Choi, and Yoon-Ho Alex Lee as of Feb. 9^th, 2024 (#102): “We examine the effects of the sudden abolition of trading commissions by major online brokerages in 2019, which lowered stock market entry costs for retail investors, on corporate governance. … Firms with positive abnormal returns in response to commission-free trading subsequently saw a decrease in institutional ownership, a decrease in shareholder voting, and a deterioration in environmental, social, and corporate governance (ESG) metrics. Finally, these firms were more likely to adopt bylaw amendments to reduce the percentage of shares needed for a quorum at shareholder meetings” (abstract).

Other investment research (in: ESG bluff)

Few good bond factors: The Corporate Bond Factor Zoo by Alexander Dickerson, Christian Julliard, and Philippe Mueller as of Nov. 14^th, 2023 (#1299): “We find that the majority of tradable factors designed to price corporate bonds are unlikely sources of priced risk, and that only one factor, capturing the post-earnings an-nouncement drift in corporate bonds, which has not been utilized in prior asset pricing models, should be included in any stochastic discount factor (SDF) with very high probability. Furthermore, we find that nontradable factors capturing inflation volatility risk … and the term structure yield spread … as well as the return on a broad based bond market index, are likely components of the SDF” (p. 37/38).

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Neutral ESG? Researchpost #160

Neutral ESG: 14x new research on migration gender topics, re-migration, AI, broadband, political ESG investments, ESG ratings, ESG alpha, ESG credit risk, greenium, anomalies, robo-advisors, private equity and finfluencers (# shows the number of SSRN full paper downloads as of Jan. 25th, 2024).

Social and ecological research (Neutral ESG)

Female migration disadvantages: Does Granting Refugee Status to Family-Reunified Women Improve Their Integration? by Linea Hasager as of Jan. 18^th, 2024 (#4): “… I estimate the impact of recognizing women, who are initially admitted through family-reunification procedures, as refugees themselves. When they are recognized as refugees, they are able to divorce their husbands without automatically being returned to their origin countries. … I show that the divorce rate increases following asylum recognition. In addition, I document that the risk of being a victim of violence decreases when women change residency. … Asylum recognition also has positive consequences for females’ employment and earnings trajectories“ (p. 14).

Ukrainian return-migration: The Effect of Conflict on Ukrainian Refugees’ Return and Integration by Joop Adema, Cevat Giray Aksoy, Yvonne Giesing, and Panu Poutvaara as of Jan. 18^th, 2024 (#16): “Our analysis has highlighted that the vast majority of Ukrainians in Ukraine plan to stay and most Ukrainian refugees in Europe plan to return. … we find that close to 2% of Ukrainian refugees returned every month. … Ukrainians’ confidence in their government and optimism have reached exceptionally high levels in international comparison (Fig. 6). … Confidence in the judiciary remains low, and corruption is perceived to be high“ (p. 24).

Is AI bad for migrants? The Impact of Technological Change on Immigration and Immigrants by Yvonne Giesing as of Jan. 18^th, 2024 (#17): “We analyse and compare the effects of two different automation technologies: Industrial robots and artificial intelligence … (with) data on Germany … (we) identify how robots decrease the wage of migrants across all skill groups, while neither having a significant impact on the native population nor immigration flows. In the case of AI, we determine an increase in the wage gap as well as the unemployment gap of migrant and native populations. This applies to the low-, medium- and high-skilled and is indicative of migrants facing displacement effects, while natives might benefit from productivity and complementarity effects. In addition, AI leads to a significant inflow of immigrants“ (abstract).

Healthy broadband? Broadband Internet Access and Health Outcomes: Patient and Provider Responses in Medicare by Jessica Van Parys and Zach Y. Brown as of Jan. 23^rd, 2024 (#16): “… we show that patients had better health outcomes and visited higher quality providers when they gained access to broadband internet. Our results imply that internet access makes patient demand more elastic with respect to quality. This mechanism is particularly important in hospital markets that are highly concentrated. … Overall, counterfactual simulations imply that broadband expansion was responsible for 16% of the total reduction in poor health outcomes for joint replacements from 1999 to 2008” (p. 25/26). My comment: I include this rather specific research because I have been discussing e.g. with ratings experts if telecommunications infrastructure can be SDG-aligned or not (for my approach see

ESG investment research (Neutral ESG)

Right-wing or green: Climate Polarization and Green Investment by Anders Anderson and David T. Robinson as of Jan. 24^th, 2024 (#11): “Over the last decade, one of the world’s largest retirement systems (Sö: Sweden) went from offering very few climate-friendly investment choices to being dominated by them. … For men, proximity to extreme weather events increased the likelihood that they grew more concerned about global warming, while women across the board became more concerned about the climate, regardless of their proximity to adverse weather events. At the same time, men living in right-wing strongholds were generally less concerned about climate change after the extreme weather events than they were before” (p.28).

Negative or neutral ESG? Understanding the effect of ESG scores on stock returns using mediation theory by Serge Darolles, Gaelle Le Fol, and Yuyi He as of Dec. 7^th, 2023 (#42): “We show that the information contained in corporate E, S, G or overall ESG scores is effectively incorporated into stock prices through both the investor demand channel and the fundamental/profitability channel. … institutional ownership is positively correlated with a firm’s environmental, social, governance and overall ESG scores. … We also find that they are more sensitive to G-performance and overall ESG performance than S and then E performance. Our results also show that ESG is priced by the market and that all scores have a significant negative impact on future returns. …” (p. 25/26). My comment: It would be interesting to see this approach applied not only to US stocks (mainly large caps) and more recent stock price levels.

Positive or neutral ESG? Material ESG Alpha: A Fundamentals-Based Perspective by Byung Hyun Ahn, Panos N. Patatoukas, and George S. Skiadopoulos as of Jan.17^th, 2024 (#81): “We provide a fundamentals-based perspective on why firms with improving material ESG scores outperform. More financially established firms—firms with larger size, lower growth, and higher profitability relative to their sector—are associated with subsequent improvements in their material ESG score. … we find that the materiality portfolio does not generate alpha after we account for its exposure to profitability and growth pricing factors “ (p. 30). My comment: An investment strategy which focuses on ESG-improvement would have to ignore investments which already have high ESG-ratings or sell them to buy one with lower ratings to show improvement. This is not a responsible investment strategy.

Low ESG credit risks: ESG criteria and the credit risk of corporate bond portfolios by Andre Höck, Tobias Bauckloh, Maurice Dumrose, and Christian Klein as of Oct. 25^th, 2023: “… our findings highlight that the implementation of an ESG-best-in-class strategy significantly affects the credit risk exposure without any performance or diversification penalty. … the higher the sustainability, the lower the credit risk. … The findings of this study are robust to the usage of ESG ratings from different providers and different asset pricing models” (p. 579).

Unstable greenium: The European Carbon Bond Premium by Dirk Broeders, Marleen de Jonge, and David Rijsbergen from De Nederlandsche Bank as of Jan. 16^th, 2024 (#36): “We present evidence of the existence of a significant carbon premium in euro area corporate bonds, which has steadily increased since early 2020. Over the whole sample period, from 2016 to 2022, we observe that a doubling of a firm’s Scope 1 and 2 emissions on average implies 6.6 basis point higher bond yield spreads. … From early 2020, the carbon premium increases steadily so that the effect more recently, in early 2022, is substantially higher than the sample average. A doubling of Scope 1 and Scope 2 emissions by early 2022 on average results in a higher spread of 13.9 basis points. This means that European firms with high levels of carbon emissions face increasingly high financing costs. Our research also reveals a distinctive carbon premium term structure, rising with longer maturities. … the premium between short-term and long-term maturity bonds has diminished in recent years. … Our findings highlight, to some extent, why various studies have come to conflicting conclusions on the presence and magnitude of a carbon premium in financial asset prices. We show that the choice of sample period is an important determinant of the presence and extent of a carbon premium. … Additionally, we illustrate how climate litigation has become an important frontier of transition risk in the last years, which may have urged investors to progressively price a carbon premium” (p. 33/34).

Positive ESG pay: ESG-linked Pay Around the World —Trends, Determinants, and Outcomes by Sonali Hazarika, Aditya Kashikar, Lin Peng, Ailsa Röell and Yao Shen as of April 15^th, 2023 (#308): “We study ESG-linked executive compensation contracts using an inclusive global sample of major firms across 59 countries over the period 2005-2020. We document a substantial increase in firms’ adoption of ESG-linked pay over the last decade, especially for firms from developed markets and those that belonging to the extractive and utility industries. The adoption decision is also strongly associated with the culture, shareholder rights and legal origin of the country where the firm resides. Among firm characteristics, large firms and firms with greater return on assets are more likely to adopt. The ESG-linked pay adopters exhibit significantly higher ESG scores, better ESG disclosure, and higher operating profit margin and return on assets. … we show that the treatment firms’ increased reliance on incentives tied to employee satisfaction is a plausible channel to achieve a “win-win” outcome” (p. 29/30). My skeptical comment: See HR-ESG shareholder engagement: Opinion-Post #210 and especially Wrong ESG bonus math? Content-Post #188

Other investment research

Normalized anomalies: Does U.S. Academic Research Destroy the Predictability of Global Stock Returns? by Guohao Tang, Yuwei Xie and Lin Zhu as of Jan. 16^th, 2024 (#52): “We conduct a thorough investigation into 87 cross-sectional return anomalies, as documented in leading finance and accounting journals, spanning 38 countries. … In the global market, post-sample and post-publication returns diminish by 65% and 73%, respectively, from the in-sample mean. Intriguingly, predictors that demonstrate higher in-sample returns experience a more pronounced reduction in the post-publication phase“ (p. 16).

Robo-limits: Taming Behavioral Biases in Consumer Decision-Making: The Role of Robo-Advisors by Francesco D’Acunto and Alberto G. Rossi as of Dec. 20^th, 2023 (#41): “… in many cases robo-advising applications can help consumers make better choices but this is in no way universal. Indeed, not only do robo-advisors in some cases exacerbate the effect of underlying behavioral biases, but they sometimes even exploit behavioral biases in ways that might improve or worsen choices. Even for those cases in which extant research shows a positive average effect of exposure to robo-advising on medium-term outcomes for consumers, the effects are often highly heterogeneous“ (p. 26).

Political PE: Political Connections and Public Pension Fund Investments: Evidence from Private Equity by Jaejin Lee as of Dec. 29^th, 2023 (#36): “This paper investigates the effects of political connections on private equity (PE) investment decisions by public pension funds, using a regression discontinuity design on U.S. state elections. A comparison of PE managers (GPs) donating to winning and losing candidates reveals a twofold increase in the probability of post-election PE investments from pension funds for GPs supporting winners. Pension funds with such connections show underperformance in PE investments. These effects are pronounced among pension board members with connections and in states with high corruption levels. These connected pension funds pay higher PE fees and exhibit more home-state bias, suggesting politicians influence investment decisions for personal gain” (abstract).

Finfluencer issues: The Finfluencer Appeal: Investing in the Age of Social Media Serena by Espeute and Rhodri Preece from the CFA Institute as of Jan. 25^th, 2024: “Our analysis of finfluencer content posted on YouTube, TikTok, and Instagram in the markets we studied shows that the most discussed asset classes were individual shares, index funds, and exchange-traded funds (ETFs). We found that 45% of this content offered guidance, 36% contained investment promotions, and 32% contained investment recommendations … Only 20% of the finfluencer content that contained recommendations, however, included any form of disclosure (such as the professional status of the finfluencer or whether the finfluencer received commissions or other forms of payment for recommending certain products). Further, just over half (53%) of the content that contained promotions made any form of disclosure. … Moreover, when disclosures regarding affiliate links (such as sign-up links to open accounts with trading platforms or free shares) were made, they were often generic, such as “some of the links may be affiliate links,” which obscured exactly which websites and/or product sign-ups the finfluencers were being remunerated for. … Finfluencers appeal to Gen-Z investors because they produce educational and engaging content that is free and instantly accessible. They are also relatable and, in some cases, perceived to be trustworthy“ (p. 3).

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

Collectibles: Researchpost #158

Collectibles: 14x new research on migration, biodiversity, forests, sustainability disclosures, ESG performance, ESG skills, ESG progress, activists and NFTs (#shows full paper SSRN downloads as of Jan. 11^th, 2024)

Social and ecological research (Collectibles)

Positive naturalization: From Refugees to Citizens: Labor Market Returns to Naturalization by Francesco Fasani, Tommaso Frattini, and Maxime Pirot as of Dec. 20^th,2023 (#12): “… exploring survey data from 21 European … We find that obtaining citizen status allows refugees to close their gaps in labor market outcomes relative to non-refugee migrants … showing that migrants with the lowest propensity to naturalize would benefit the most if they did. This reverse selection on gains can be explained by policy features that make it harder for more vulnerable migrant groups to obtain citizenship, suggesting that a relaxation of eligibility constraints would yield benefits for both migrants and host societies” (abstract).

Fresh water risks: A Fractal Analysis of Biodiversity: The Living Planet Index by Cristina Serpa and Jorge Buescu as of June 15^th, 2023 (#39): “The Living Planet Index (LPI) is a global index which measures the state of the world`s biodiversity. Analyzing the LPI solely by statistical trends provides, however, limited insight. Fractal Regression Analysis …allows us to classify the world`s regions according to the progression of the LPI, helping us to identify and mathematically characterize the region of Latin America and Caribbean and the category of freshwater as worst-case scenarios with respect to the evolution of biodiversity” (abstract).

Science- or politics-based? Taxomania! Shaping forest policy through financial regulation by Anna Begemann, Camilla Dolriis, Alex B. Onatunji, Costanza Chimisso and Georg Winkel as of Dec. 1th, 2023 (#6): “This study investigates the evolution of advocacy coalitions and their strategies in the development of the (Sö: EU sustainability) taxonomy’s forestry criteria. It builds on process tracing involving 46 expert interviews conducted in 2019, 2021, and 2022 and an extensive document analysis. Our findings illustrate a complex process … highlighting strikingly different worldviews and economic and bureaucratic/political interests connected to these. Owing to a rich set of strategies employed, and deals made at different policy levels, as well as an overall lack of transparency, the proclaimed “science-based” decision-making is significantly compromised” (abstract).

Responsible investment research (Collectibles)

Positive regulation: Imposing Sustainability Disclosure on Investors: Does it Lead to Portfolio Decarbonization? by Jiyuan Dai, Gaizka Ormazabal, Fernando Penalva, and Robert A. Raney as of Dec. 22^nd, 2023 (#670): “… we document that the introduction of the EU SFDR (Sö: Sustainable Finance Disclosure Regulation) … was followed by a decrease in the average portfolio emissions of EU funds that claim to invest based on sustainability criteria. … Funds already subject to sustainability disclosure mandates prior to the SFDR have significantly less decarbonization compared to funds being exposed to a sustainability disclosure mandate for the first time and decarbonization patterns are more pronounced for funds with higher levels of portfolio emissions prior to the SFDR and for funds domiciled in countries that are more sensitive to sustainability issues” (p. 29/30). My comment: I promote disclosure, see the details for my fund at www.futurevest.fund

Good SDG returns: Determinants and Consequences of Sustainable Development Goals Disclosure: International Evidence by Sudipta Bose, Habib Zaman Khan and Sukanta Bakshi as of Jan. 2^nd, 2023 (#22): “The study examines the determinants and consequences of firm-level Sustainable Development Goals (SDG) disclosure using a sample of 6,941 firm-year observations from 30 countries during 2016– 2019. … The findings reveal that approximately 48.40% of firms in the sample had active stakeholder engagement programs, 53.90% maintained a sustainability committee, and 62.60% issued standalone sustainability reports. The findings indicate that Environmental, Social and Governance (ESG) performance, stakeholder engagement, and the issuance of standalone sustainability reports positively influence firm-level SDG disclosure. Moreover, the study finds a positive association between higher levels of SDG disclosure and increased firm value” (abstract). My comment: My experience: The good SDG returns lasted until 2022 but did not materialize in the first 9 months of 2023, but I expect them to come back (see 2023: Passive Allokation und ESG gut, SDG nicht gut – Responsible Investment Research Blog (prof-soehnholz.com)

Peers matter? Conform to the Norm. Peer Information and Sustainable Investments by Max Grossmann, Andreas Hackethal, Marten Laudi, and Thomas Pauls as of Dec. 23^rd, 2023 (#74): “We conduct a field experiment with clients of a German universal bank … Our results show that information about peers’ inclination towards sustainable investing raises the amount allocated to stock funds labeled sustainable, when communicated during a buying decision. This effect is primarily driven by participants initially underestimating peers’ propensity to invest sustainably. Further, treated individuals indicate an increased interest in additional information on sustainable investments, primarily on risk and return expectations. However, when analyzing account-level portfolio holding data over time, we detect no spillover effects of peer information on later sustainable investment decisions” (abstract).

More ESG or lower risk? Inferring Investor Preferences for Sustainable Investment from Asset Prices by Andreas Barth and Christian Schlag as of Dec. 20^th, 2023 (#44): “We find that while firm CDS (Sö: Credit Default Swap) spreads co-vary negatively with equity returns, this effect is less pronounced for firms with a high ESG rating. This divergence between equity and CDS spreads for high- vs. low ESG-rated firms suggests that some equity investors have a preference for sustainability that cannot be explained with firm risk” (abstract).

Higher ESG returns? ESG Risk and Returns Implied by Demand-Based Asset Pricing Models by Chi Zhang, Xinyang Li, Andrea Tamoni, Misha van Beek, and Andrew Ang from Blackrock as of Dec. 20^th, 2023 (#68): “We find increases in preferences for ESG may result in increases in downside risk for the stocks with low ESG scores as these stocks may exhibit decreases in stock returns. … Additionally, our analysis shows that if the trend in increasing ESG preferences continues, there may be higher returns from stocks with higher ESG scores as increasing demand drives up the prices for these types of stocks. Naturally, portfolio outcomes depend on many more factors and macro drivers, but according to the demand-based asset pricing framework and estimations in this paper, ESG demand and characteristics does represent a driver of stocks’ risk and returns“ (p. 11). My comment: I also believe in higher future demand for sustainable investments and therefore attractive performances

Best-in-class deficits: Chasing ESG Performance: Revealing the Impact of Refinitiv’s Scoring System by Matteo Benuzzi, Karoline Bax, Sandra Paterlini, and Emanuele Taufer as of Dec. 20^th, 2023 (#19): “… we scrutinize the efficacy and accuracy of Refinitiv’s percentile ranking in ESG scoring, probing whether apparent improvements in scores truly reflect corporate advancement or are influenced by the entry of lower-scoring new companies and the relative performance with respect to the peer group universe. Our analysis uncovers a positive inflation in Refinitiv’s approach, where the addition of companies with limited information distorts ESG performance portrayal. … Our deep dive into score distributions consistently shows that Refinitiv’s method tends to produce inflated scores, especially for top performers“ (p. 19/20). My comment: Best-in-Class ESG-Ratings which cover a limited number of companies per „class“ are most likely much less robust compared to ratings with more peers per calls and best-in-universe ratings (which I use since quite some time, see Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)).

ESG rating changes: ESG Skill of Mutual Fund Managers by Marco Ceccarelli, Richard B. Evans, Simon Glossner, Mikael Homanen, and Ellie Luu as of Dec. 20^th, 2023 (#29): “A proactive fund manager is one who takes deliberate positions in firms whose ESG ratings later improve. By contrast, a reactive fund manager is one who “chases” ESG ratings, i.e., she trades in reaction to changes in ESG ratings. The former type shows ESG skill while the latter does not. We use an international sample of mutual fund managers to estimate these measures of skill … After an exogenous (but un-informative) change in firms’ ESG ratings, reactive fund managers significantly rebalance their portfolios, buying firms whose ratings improve and selling those whose ratings worsen. Proactive funds, on the other hand, do not rebalance their portfolios … Only a relatively small fraction of investors reward ESG skills with higher flows. These are investors holding funds with an explicit sustainability mandate. Presumably, these investors both value ESG skill and have the required sophistication to detect skilled managers” (p.17/18). My comment: In my experience, ESG provider methodology changes lead to more informative ESG ratings which would contradict the interpretation of this study.

ESG progress-limits? Do companies consistently improve their ESG performance? Evidence from US companies by Yao Zhou and Zhewei Zhang as of Dec. 20^th,2023 (#12): “This paper depicts the trend of corporate ESG scores by measuring the growth rate of ESG scores for 8,462 firms from 2002 to 2022. … the empirical results indicate that firms’ ESG scores tend to maintain the status quo after achieving a certain level, rather than being improved consistently. These findings imply that firms tend to improve their ESG score after the first rating, but the degree of improvement lowers down over time” (abstract). My comment: Investment strategies trying to focus on ever increasing ESG-ratings do not seem to make much sense. I try to focus on the already best-rated investments.

Positive activists: Is the environmental activism of mutual funds effective? by Luis Otero, Pablo Duran-Santomil, and Diego Alaizas of Dec. 20th, 2023 (#12): “This paper analyzes the differences between mutual funds that declare ESG commitment and those that do not. Additionally, we explore their behavior in terms of voting on resolutions related to climate change and the environment. Our analysis reveals that activist funds generally exhibit a behavior that is consistent with their sustainable focus and have a lower proportion of greenwashers, contributing to the reduction of carbon emissions. Importantly, this sustainability orientation does not negatively impact their financial performance, as they attract significant flows and do not show worse performance compared to their traditional counterparts“ (abstract).

Other investment research

Low-yield collectibles: Convenience Yields of Collectibles by Elroy Dimson, Kuntara Pukthuanthong, and Blair Vorsatz as of Nov. 29^th, 2023 (#53): “Using up to 110 years of collectibles returns for 13 distinct asset classes … Convenience yield estimates for 24 of our 30 collectibles return series are positive, with an annualized mean (median) of 2.64% (2.53%). Despite various forms of underestimation, these results provide evidence that assets with positive emotional returns have lower equilibrium financial returns” (abstract).

Useless NFTs? The emperor’s new collectibles by Balázs Bodó and Joost Poort as of Dec. 13^th, 2023 (#25): “Over the past years, NFTs (Sö: Non-fungible tokens) have by some been predicted to revolutionize the markets for arts and copyright protected works. In short, the vision was that on the basis of unique, blockchain based tokens, and through their automated exchange, an extension or even a replacement of the traditional art markets, and the copyright-based system of production, circulation and use of cultural works could emerge. Currently, however, the state of the NFT ecosystem can be summarized as an in some sense failed experiment. This chapter starts by unpacking what we consider the four broken promises of NFTs vis-à-vis the CCIs and copyright. We briefly describe the technological underpinning of these promises, and why they were broken. Subsequently, we discuss whether there may still be a future for NFTs as a new asset class related to creative output” (abstract).

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Houseowner risks: Researchpost #157

Houseowner risks: 13x new research on houseowner and job risks, migration, good lobbying, online altruism, criminal lawyers, rule of law, biodiversity, green bank risks, climate votes, private equity and innovation (“#” shows the number of SSRN full paper downloads as of Jan. 4^th, 2023)

Social and ecological research: Houseowner risks

Houseowner risks (1): Feeling Rich, Feeling Poor: Housing Wealth Effects and Consumption in Europe by Serhan Cevik and Sadhna Naik from the International Monetary Fund as of Dec. 13^th, 2023 (#24): “Residential property accounts for, on average, about 55 percent of aggregate household wealth in Europe, but exhibits significant variation across countries. This paper provides a dynamic analysis of housing wealth effects on consumer spending in a panel of quarterly observations on 20 European countries during the period 1980–2023…. Estimation results confirm that household consumption responds strongly to house price movements and disposable income growth in real terms. … Our seasonally-adjusted quarter-on-quarter estimations imply that the average decline of 1.96 percent in real house prices in the first quarter of 2023 could dampen consumer spending by about -0.51 percentage points in our sample of European countries on a cumulative basis over a horizon of eight quarters” (p. 11/12).

Houseowner risks (2): Who Bears Climate-Related Physical Risk? by Natee Amornsiripanitch and David Wylie as of Dec. 1^st, 2023 (#74): “This paper combines data on current and future property-level physical risk from major climate-related perils (storms, floods, hurricanes, and wildfires) that owner-occupied single-family residences face in the contiguous United States. Current expected damage from climate-related perils is approximately $19 billion per year. Severe convective storms and inland floods account for almost half of the expected damage. The central and southern parts of the U.S. are most exposed to climate-related physical risk, with hurricane-exposed areas on the Gulf and South Atlantic coasts being the riskiest areas. Relative to currently low-risk areas, currently high-risk areas have lower household incomes, lower labor market participation rates, and lower education atainment, suggesting that the distribution of climate-related physical risk is correlated with economic inequality” (abstract).

Job climate risks: Do firms mitigate climate impact on employment? Evidence from US heat shocks by Viral V Acharya, Abhishek Bhardwaj, and Tuomas Tomunen as of Dec. 20^th, 2023 (#32): “… we studied how firms respond to extreme temperature shocks … We found that firms operating in multiple counties respond to these shocks by reducing employment in the affected county and increasing it in unaffected ones, … Single location firms simply scale down their employment. We found that the effect is stronger for firms that are more profitable, less levered and financially constrained … We also found that the effect is stronger for firms that are more concerned about their climate change exposure and that have a larger fraction of ESG funds as their owners … We also found that counties experiencing heat shocks experience employment shift from small to large firms within the county” (p. 27).

Positive immigration: The Macroeconomic Effects of Large Immigration Waves by Philipp Engler, Margaux MacDonald, Roberto Piazza, and Galen Sher of the International Monetary Fund as of Dec. 28^th, 2023 (#9): “In OECD, large immigration waves raise domestic output and productivity in both the short and the medium term, pointing to significant dynamic gains for the host economy. We find no evidence of negative effects on aggregate employment of the native-born population. In contrast, our analysis of large refugee flows into emerging and developing countries does not find clear evidence of macroeconomic effects on the host country …”.

Pro lobbying: The Lobbying for Good Movement by Alberto Alemanno as of Dec. 13^th, 2023 (#735): “Lobbying is about providing ideas and sharing concerns with policymakers to make them—and the whole policy process—more responsive. … lobbying is one of the most effective ways to enact political, economic, and social change … Only a handful of nonprofits lobby …. “ (abstract).

Online Altruism: What it is and how it Differs from Other Kinds of Altruism by Katherine Lou and Luciano Floridi as of Nov. 10^th, 2023 (#80): “Online altruism often contrasts with the ideals of Effective Altruism. Altruistic acts online are often not particularly planned by the giver in advance, they are not the most effective uses of a certain amount of money, and they definitely do not aim toward a long-term vision that solves humanity’s most pressing problems. That is because participants in online altruism tend to focus on the experience and immediate effects on another human being, enabled through online platform mechanisms. … creating a more altruistic society and meeting the needs of people in the present, regardless of whether such altruism is maximally effective or in pursuit of any larger vision, seems just as crucial to be able to build a better world. … It is complementary to other forms of altruism, not an alternative” (p. 23/24).

Criminal lawyers? Lawyers and the Abuse of Government Power by Margaret Tarkington as of Nov. 29^th, 2023 (#16): “The legal profession needs to amend the rules of professional conduct to protect our constitutional system of government from those most likely to effectively undermine it: lawyers. The historic federal indictment against former President Donald Trump for conspiring to stay in power after losing the 2020 presidential election included five attorney co-conspirators: … Eight lawyers were indicted in Georgia on similar charges. …. Lawyers weren’t just involved in Trump’s plot; they devised and enabled it. Rather than accurately advise Trump that he had lost and needed to concede, lawyers crafted a plan to circumvent court losses and subvert States’ certified electors—effectively disenfranchising seven entire States to enable Trump to win with only 232 electoral votes. To accomplish this end, lawyers recreated a faux version of the 1876 constitutional crisis by fabricating false electoral slates—manipulating law and fact to enable a coup and give it the trappings of legality and thus legitimacy. Only lawyers could have performed these services” (abstract).

Responsible investment research

Rule of law: Does Rule of Law Matter For Firms? Evidence From Shifting Political Control in Hong Kong by Jonathan S. Hartley as of Dec. 12^th, 2023 (#58): “This paper analyzes Hong Kong’s 2020 National Security Law as introduced and imposed by the Communist Party of China as a natural experiment in diminishing the rule of law in a trade-financial hub …. this paper presents evidence that the National Security Law caused significant uncertainty in the rule of law, emigration of residents and foreign firms, and declines in the valuations of Hong Kong firms and residential real estate as well as a decline in real GDP per capita. … stock prices were most particularly sensitive in the real estate, air travel, and financial/banking sectors while less sensitive in the power and utility, hospital/gaming, and multinational/other industry categories“ (p. 11). My comment: I replaced my minimum country selection requirements for “Human Rights” with demanding minimum requirements for “Rule of Law” a few years ago, because rule of law is a broader “responsibility” measurement criterion. Therefore, I exclude e.g. investments in companies headquartered in BRICS countries.

Biodiversity premium: Do Investors Care About Biodiversity? by Alexandre Garel, Arthur Romec, Zacharias Sautner and Alexander F. Wagner as of Dec. 28^th, 2023 (#2210): “… biodiversity preservation can clash with actions taken to address climate change. For example, renewable energy and electric cars require lithium, cobalt, magnesium, and nickel, the mining of which comes with severe impacts on biodiversity (and on the human communities that rely on biodiversity). … Examining a large sample of international stocks, we find that over our sample period, investors did not care about the impact of firms on biodiversity, on average. However, things appear to be changing, as we document the emergence of a biodiversity footprint premium following the Kunming Declaration (the first part of the COP15). Consistent with this effect, we document negative stock price reactions for firms with large biodiversity footprints in the days following the Kunming Declaration. Stock prices of firms with large biodiversity footprints further dropped after the Montreal Agreement (the second part of the COP15). Our results indicate that investors start to ask for a return premium in light of the uncertainty associated with future biodiversity regulation“ (p. 29/30).

Unknown climate risks: The effects of climate change-related risks on banks: A literature review by Olivier de Bandt, Laura-Chloé Kuntz, Nora Pankratz, Fulvio Pegoraro, Haakon Solheim, Greg Sutton, Azusa Takeyama and Dora Xia as of Dec. 6^th, 2023: “The survey acknowledges the great number of new research papers that have very recently been made available … Apart from a few outliers … the microeconomic impacts of climate change on particular portfolios are relatively small, below 50 bp on loan and bond spreads. … several authors conclude that realized returns on climate change-related risks are below expected return, providing evidence of an underestimation of risk. … Liquidity issues arising from climate change-related shocks are still insufficiently researched. … The overall impact of climate change, which becomes multifaceted and affects various portfolios at the same time and in a correlated fashion, may therefore be more significant. In particular, the difficulty to model possible non-linear effects related to climate change and to capture tipping points might lead to an underestimation of risks. … There are still data issues, notably in terms of granularity, as well as methodological issues, which prevent a definite assessment of the situation, both for physical risks (lack of exact location of the exposures in many instances) and transition risks (notably lack of evaluation for SMEs)” (p. 28/29). My comment: I try to invest in listed stocks with low ESG-risks and high SDG-alignments which should reduce risks, see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com)

Voting deficits: Climate Votes: The Great Deception: An assessment of asset managers’ climate votes in 2023 by Agathe Masson from Reclaim Finance as of December 2023: “… the assessment of 2023 voting reveals that asset managers are encouraging fossil fuel companies to pursue expansion plans, exacerbating the global warming crisis. They therefore fail their responsibility to make long-term investment decisions integrating climate-related risks, and are at real risk of being accused of greenwashing“ (p. 4). My comment: For my direct equity portfolios, I only accept 0% fossil energy production. Unfortunately, many of the strictest “sustainable” ETFs still include such production so that I cannot make sure that my responbile ETF-Portfolios have 0% exposure to fossil energy production. Regarding my opinion on “transition investments” see ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)

ESG affects PE: ESG Incidents and Fundraising in Private Equity by Teodor Duevski, Chhavi Rastogi, and Tianhao Yao as of Dec. 14^th, 2023 (#55): “Using a sample of global buyout investments, we find that experiencing an environvimental and social (E&S) incident in its portfolio companies … Affected PE firms are less likely to raise a subsequent fund and the subsequent funds are smaller. The relative size of subsequent funds are 7.6% smaller for PE firms experiencing higher-than-median number of E&S incidents, compared to those with no incidents. The effect is stronger for less reputable PE firms” (abstract).

Other investment research (in: Houseowner risks)

Innovative VC: How Resilient is Venture-Backed Innovation? Evidence from Four Decades of U.S. Patenting by Sabrina T. Howell, Josh Lerner, Ramana Nanda, and Richard Townsend as of Oct. 5^th, 2023 (#742): “This paper shows that while patents filed by VC-backed firms are of significantly higher quality than the average patent, VC-backed innovation is substantially more procyclical. We trace this to changes in innovation by early-stage VC-backed startups“ (p. 22).

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Green risks: Researchpost #151

Green risks: 9x new research on GPT, influencers, sustainable products, climate policies and city and market risks, environmental metrics, investment fees and art (# shows the number of full paper SSRN downloads as of Nov. 9^th, 2023)

Social and ecological research: Green risks

Good GPT? Capital Market Consequences of Generative AI: Early Evidence from the Ban of ChatGPT in Italy by Jeremy Bertomeu, Yupeng Lin, Yibin Liu, and Zhenghui Ni as of Oct. 11^th, 2023 (#633): “On March 31, 2023, the Italian data protection authority found that ChatGPT violated data protection laws and banned the service in Italy …. Italian firms with greater exposure to the technology exhibit an underperformance of around 9% compared to firms with lower exposure during the ban period. We observe a more significant negative impact on stock value for smaller and newly established companies …. Analysts located in Italy issue fewer forecasts than foreign analysts covering the same Italian firm. Further, bid-ask spreads widen during the ban, particularly for firms with fewer institutional investors, limited analyst coverage, and a lower presence of foreign investors“ (abstract). My comment see How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Hidden sponsors: How Much Influencer Marketing Is Undisclosed? Evidence from Twitter by Daniel Ershov, Yanting He, and Stephan Seiler as of Nov. 8th, 2023 (#133): „… we quantify the importance of undisclosed sponsored content on Twitter based on a unique data set of over 100 million posts …. We find that undisclosed sponsored posts are ubiquitous with 96% of all sponsored content being undisclosed. The share of undisclosed content decreases only slightly over time despite stronger regulation and only a small share of brands responded to a regulatory change that mandated disclosure at the beginning of a post. … We also find that young brands with a larger social media following are less likely disclose sponsored content. These kind of brands will likely rely more heavily on influencers and therefore disclosure rates might remain low in the future“.

Green distribution deficits: Sustainable Product Demand and Profit Potential by Bryan Bollinger, Randi Kronthal-Sacco, and Levin Zhu as of Oct. 13^th, 2023 (#43): “… we flexibly estimate price elasticities for every product in every county in the United States, for which we have sufficient data, in different store formats. … While profit potential and availability of sustainable products increase together with some demographic variables, in other cases the availability of sustainable products does not reflect the profit potential. … for mass merchandiser stores, we find that sustainable products are more available in markets with higher incomes, higher Democratic vote share, and a higher fraction of the population that is white, despite the fact that profit potential is not higher in these markets for the majority of categories. Our findings that the demographic factors still predict availability even after controlling for profit potential suggest that product distribution decisions (either by manufacturers or retailers) may be influenced by prior beliefs about preferences of consumers that fit these criteria. Our findings speak to potential access issues to sustainable products for less “stereotypical” sustainable consumers (non-white, less college education, lower income, and Republican), which also presents a potential market opportunity for manufacturers and retailers“ (p. 30/31).

Climate action framing: Public Support for Climate Change Mitigation Policies: A Cross-Country Survey by Era Dabla-Norris, Salma Khalid, Giacomo Magistretti, and Alexandre Sollaci from the International Monetary Fund as of Nov. 2^nd, 2023 (#11): “This paper uses large-scale public perceptions surveys across 28 emerging market and advanced economies to examines how individuals view different climate mitigation policies and what drives their support. We find there is significant heterogeneity on climate risk perceptions and preferences for policies across individuals and countries. Respondents in emerging market economies (in general, countries more vulnerable to climate change) tend to see it as a bigger problem and are more supportive of policies to mitigate it. Concerns about climate change are also higher among women … Our surveys find that lack of support for carbon pricing is driven by concerns about rising energy prices and the perception that such policies are ineffective at reducing climate change. Another major concern is their perceived regressiveness (disproportionate impact on low-income households). … individuals that are given a short text describing the effectiveness of carbon pricing policies and their co-benefits increase their support by 7 percentage points. In contrast, reading a paragraph highlighting the costs of such policies decreases respondents’ support by 9 percentage points… the majority of respondents in every country in our sample find that all countries should bear the burden of those policies, not only the rich ones. Finally, we also find broad support for policies based on current, rather than historical, emissions …“ (p. 26/27).

City climate costs: A Market-based Measure of Climate Risk for Cities by Alexander W. Butler and Cihan Uzmanoglu as of Oct. 30^th, 2023 (#43): “We estimate the climate news sensitivities—climate news betas—of municipal bonds and invert their signs. This way, we expect bonds with higher (lower) climate news betas to be affected more (less) negatively from future negative climate news. We find that climate news betas are positively associated with yield spreads. The effect is economically meaningful: a one-standard deviation increase in climate news beta is associated with an increase of between 2.48% and 11.17% in average yield spreads. This finding demonstrates that higher climate risk exposure is associated with higher cost of borrowing. … there is substantial variation in climate risk based on cities’ demographics, such as poverty, population density, and climate science acceptance” (p. 29/30).

Responsible investment research: Green risks

Green policy risks: The Effect of U.S. Climate Policy on Financial Markets: An Event Study of the Inflation Reduction Act by Michael D. Bauer, Eric A. Offner, Glenn D. Rudebusch as of Nov. 8th, 2023 (#11): „… We show that the equity market responses to announcements of climate policy actions were quick, substantial, and distinctly heterogeneous with wide variation across firms and industries. Green stocks— equities of firms with lower carbon emission intensities and better environmental and emission scores—benefited from news that the IRA (Sö : US InflationReduction Act) would become law, while brown stocks—those of more carbon-intensive and more polluting firms—lost value. … We find equity movements in the opposite direction—with brown stocks outperforming green stocks—for the earlier event when the prospects for climate action shifted to negligible. … Industries likely to benefit from the new policies—in particular, the utilities, construction, and automobile/transportation sectors—saw their stocks appreciate. However, across all industries, there was little correlation between industry-level greenness and stock market response. This finding suggests that a more granular, firm-level level approach may often be necessary to reliably capture exposure to transition risk“ (p. 27/28).

Green risk reduction: Can environmental metrics improve bank portfolios’ performance? by Gian Marco Mensi and Maria Cristina Recchioni as of Nov. 2^nd, 2023 (#13): “We investigate the effectiveness of three different climate metrics in identifying green banks within a sample of large Eurozone and US lenders in the February 2019 – April 2022 period. … relative exposure to stranded assets, environmental ratings and Scope 2 emissions … The results show that the selected climate loss proxy overperforms in the Eurozone, succeeding in creating an effective climate tilt while containing active risk. Both emission-adjusted and rating-modified portfolios work as well, albeit less effectively. Conversely, the results with respect to US banks are inconclusive, with no metric consistently overperforming … “ (abstract).

Other investment research

More active, more money? Do Fees Matter? Investor’s Sensitivity to Active Management Fees by Trond Døskeland, André Wattø Sjuve, and Andreas Ørpetveit as of Sept. 16^th, 2023 (#324): “… we find that excess fees are negatively related to subsequent quarterly net flows, while the level of active management (measured by active share) is positively related to subsequent quarterly net flows … the fee variables are only moderately related to Morningstar ratings …” (p. 37). My position on active management see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

Attractive art: Portfolio Diversification Including Art as an Alternative Asset by Diana Barro, Antonella Basso, Stefania Funari and Guglielmo Alessandro Visentinas of Oct. 31^st, 2023 (#42): “We have shown that art returns are extremely volatile, and that much of this volatility can be attributed to the seasonal behavior of the time series. Moreover, notwithstanding the high risk, art still performs reasonably well compared with other asset classes, with which it is low correlated, and may even represent a better safe haven than gold“ (p. 24/25).

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Liquid impact advert for German investors

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Emissions trading and more: Researchblog #146

Emissions trading: 16x new research on fossil subsidies, ECB eco policy, GHG disclosures, supplier ESG, workforce ESG, geospatial ESG data, ESG reputation and performance, investor driven greenwashing, sustainable blockchain, active management, GenAI for asset management and more

Emissions trading (ecological) research

Fossil subsidies: IMF Fossil Fuel Subsidies Data: 2023 Update by Simon Black, Antung A. Liu, Ian Parry, and Nate Vernon from the International Monetary Fund as of Oct. 4^th, 2023 (#11): “Fossil fuel subsidy estimates provide a summary statistic of prevailing underpricing of fossil fuels. … falling energy prices provide an opportune time to lock in pricing of carbon and local air pollution emissions without necessarily raising energy prices above recently experienced levels. For example, even with a carbon price of $75 per tonne, international natural gas prices in 2030 (shown in Figure 1) would be well below peak levels in 2022. Energy price reform needs to be accompanied by robust assistance for households, but this should be both targeted at low-income households (to limit fiscal costs) and unrelated to energy consumption (to avoid undermining energy conservation incentives). Assistance might therefore take the form of means-tested transfer payments or perhaps lump-sum rebates in energy bills“ (p. 23). My comment: Total subsidies for Germany for 2022 amout to US$ bln 129 (or 3% of GDP, see table p. 27), one of the largest amounts worldwide.

ECB policy model: Climate-conscious monetary policy by Anton Nakov and Carlos Thomas from the European Central Bank as of Sept. 29^th, 2023 (#23): “We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transition to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds’ spreads” (abstract).

Pollution trade? Are Developed Countries Outsourcing Pollution? by Arik Levinson as of summer 2023: “… in general, the balance of the evidence to date does not find statistically or economically significant evidence of regulations causing outsourcing. For all the talk of outsourcing pollution in the media and politics, there is surprisingly little empirical evidence that high-income regions increasingly and disproportionally import products of the most polluting sectors“ (p. 107).

Emission trading (1): Emissions trading system: bridging the gap between environmental targets and fair competition by Massimo Beccarello and Giacomo Di Foggia as of Aug. 27^th, 2023 (#22)“The effectiveness of the European Emissions Trading System in supporting a level playing field while reducing total emissions is tested. While data show a robust impact on the environment as a steady decrease in carbon emissions is observed, it is reported that its ability to internalize emission costs may improve to better address the import of extra European generated emissions that negatively impact the economy when not properly accounted for. Analyzing data in six European countries between 2016 and 2020, the results suggest competitive advantages for industries with higher extra-European imports of inputs that result in biased production costs that, in turn, alter competitive positioning” (abstract).

Emissions trading (2): Firm-Level Pollution and Membership of Emission Trading Schemes by Gbenga Adamolekun, Festus Fatai Adedoyin, and Antonios Siganos as of Sept. 18^th, 2023 (#7): “Our evidence indicates that firms that are members of ETS emit on average more carbon than their counterparts that are not members of the scheme. Members of emission trading schemes are more effective in their carbon reduction efforts. Firms that are members of an ETS emit significantly more sulphur and volatile organic compounds (VOCs) than their peers that are not members of an ETS. We also find that members of ETS typically have more environmental scandals than their counterparts that are non-members. … We also report that firms that choose to exit the scheme continue emitting more than their counterparts. … new entrants initially do not emit more than their peers at the beginning, but they increase their emissions in the years following” (S. 24/25).

Different disclosures: Climate Disclosure: A Machine Learning-Based Analysis of Company-Level GHG Emissions and ESG Data Disclosure by Andrej Bajic as of August 24^th, 2023 (#39): “One of the key findings of the study indicates that larger firms tend to exhibit a greater tendency to disclose both ESG (partial disclosure) and GHG data (full disclosure) … more profitable and carbon-intensive firms tend to disclose data more frequently. Furthermore, we find that companies from Western, Northern, and Southern demonstrate a stronger propensity towards disclosing GHG emissions data, whereas those from North America, particularly the US, have a higher tendency to provide general ESG data (partial disclosure), but not as much transparency regarding their GHG emissions“ (p. 25/26). My comment: I try to convince small- and midcap companies to disclose GHG scope 3 emissions, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

No intrinsic ESG? Do Major Customers Affect Suppliers‘ ESG Activities? by Feng Dong, John A. Doukas, Rongyao Zhang, Stephanie Walton, and Yiyang Zhang as of Sept. 20^th, 2023 (#18): “Our empirical findings show a significantly negative relation between customer concentration and suppliers‘ ESG engagement, indicating that firms with major customers have fewer incentives to engage in ESG activities to improve their social capital, thereby attracting other customers. Instead, they cater to (maintain) their current major customers by allocating capital resources to other activities aiming to increase their intangible asset base … firms tend to maintain higher levels of ESG engagement when their principal customers exhibit greater financial leverage and bankruptcy risk. … Additionally, we find that suppliers with concentrated customer bases and customers facing lower switching costs tend to have higher levels of ESG engagement, while suppliers with non-diversified revenue streams also exhibit higher levels of ESG activities” (p. 32/33). My comment: Regarding supplier ESG effects see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)

Social research

Green flexibility: More Flexibility, Less Sustainability: How Workforce Flexibility Has a Dual Effect on Corporate Environmental Sustainability by Tobias Stucki and David Risi as of Sept. 24^th, 2023 (#6): “Research suggests a strong link between corporate environmental sustainability and workforce flexibility. On the one hand, forms of workforce flexibility, such as job rotation and temporary employment, are relevant for organizational learning and absorptive capacity. On the other, organizational learning and absorptive capacity influence the adoption of environmental management systems (EMS) and green process innovation. … we hypothesize that (a) workforce flexibility positively affects green process innovation because it stimulates absorptive capacity and that (b) workforce flexibility has a negative moderating effect on the relationship between EMS (Sö: environmental Management systems) adoption and green process innovation … Empirical tests based on two representative datasets support our premises” (abstract). My comment: For the above mentioned reasons I include temporary work providers in my SDG-aligned portfolios and in my fund (see e.g. Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)). I could not find many other investors with a similar approach, though.

Responsible investment research (Emissions trading)

Geo-ESG-Caching? Locating the Future of ESG: The Promise of Geospatial Data in Advancing ESG Research by Ulrich Atz and Christopher C. Bruno as of Sept.20^th, 2023 (#25): “We reiterate that most contemporary critiques of ESG are appropriate. But this does not contradict the enormous progress we have made over the last ten years in measuring ESG performance. The tension rather highlights that there is no shortcut for establishing the next generation of accounting for sustainability performance. Aggregate ESG scores can never serve more than a narrow purpose. Practitioners need to accept that they have to deal with a menu of ESG performance metrics depending on factors that affect their business, industry, or preferences of their investors. We see the frontier and most promising avenue for better ESG measurements in location-based data“ (p. 9).

ESG image costs: ESG Reputation Risk Matters: An Event Study Based on Social Media Data by Maxime L. D. Nicolas, Adrien Desroziers, Fabio Caccioli, and Tomaso Aste as of Sept. 22^nd, 2023 (#73): “… this study is the first to examine how shareholders respond to ESG related reputational risk events and how social media shapes their perception on the matter. … On the event date of an ESG-risk event, we observe a statistically significant decrease of approximately 0.29% in abnormal returns. Furthermore, this effect is stronger for Social and Governance-related risks, specifically “Product Liability”, “Stakeholder Opposition”, and “Corporate Governance”. Environmental-risk events don’t have a significant impact on stock prices, unless they are about “Environmental Opportunities“ (p. 10/11).

ESG risks: ESG Performance and Stock Risk in U.S. Financial Firms by Kyungyeon (Rachel) Koha and Jooh Lee as of Sept. 25^th, 2023 (#45): “This study empirically examines the relationship between ESG performance and firm risks in the U.S. financial services industry. Our findings of a negative relationship between ESG and firm risk (total, idiosyncratic, and systematic) underscore the importance of ESG as both an ethical imperative and a strategic tool to manage risk in financial firms. … Specifically, under-diversified CEOs, with larger stakes in their firms, stand to benefit even more from high ESG performance, reinforcing the negative association between ESG and firm risk. Similarly, the interaction between ESG and leverage provides insight into how ESG can counteract the inherent risks associated with high leverage” (p. 13/14).

Greenwashing differences: Measuring Greenwashing: the Greenwashing Severity Index by Valentina Lagasio as of Sept. 28^th, 2023 (#83): “Using a diverse dataset of 702 globally-listed companies … Our findings reveal variations in greenwashing practices, with certain sectors exhibiting higher susceptibility to greenwashing, while smaller companies tend to engage in fewer deceptive practices. … Key implications highlight the importance of transparent ESG reporting, third-party verification, and regulatory frameworks in combating greenwashing” (abstract).

Investor driven greenwashing? Green or Greenwashing? How Manager and Investor Preferences Shape Firm Strategy by Nathan Barrymore as of Sept. 19^th, 2023 (#72): “This paper examines how managers’ and investors’ preferences with regards to … pressure … for environmental and social (ESG) responsibility – causes firms to either make substantive changes that result in improved outcomes or to greenwash: adopt symbolic policies. I find that managers’ ESG preferences, as proxied using their language on earnings calls, are associated with both ESG policies and outcomes. However, investors’ ESG preferences are associated with policies, but not outcomes, suggestive of greenwashing. … Greenwashing also correlates with ESG ratings disagreement, providing practical insight for managers and investors“ (abstract). My comment: Unfortunately, having policies often seems to be enough for some self-proclaimed responsible investors. I focus much more on outcomes such as SDG-alignment, see e.g. No engagement-washing! Opinion-Post #207 – Responsible Investment Research Blog (prof-soehnholz.com)

Sustainable blockchain? Blockchain Initiatives Dynamics Regarding The Sustainable Development Goals by Louis Bertucci and Jacques-André Fines-Schlumberger as of September 29th, 2023 (#60): “Using an open database of blockchain impact projects, we provide a dynamic analysis of these projects in relation with SDGs. We explain why the Bitcoin blockchain itself can help the development of clean energy infrastructure. … We also show that overall public blockchains are more popular than private blockchain and most importantly that the share of public blockchains as underlying technology is increasing among impact projects, which we believe is the right choice for global and transparent impact projects. More recently a new paradigm is emerging in the decentralized ecosystem called Regenerative Finance (or ReFi). Regenerative Finance merges the principles of Decentralised Finance (DeFi), which has the potential to broaden financial inclusion, facilitate open access, encourage permissionless innovation, and create new opportunities for entrepreneurs and innovators … with regenerative practices. … regenerative finance seeks to build a financial system that generates positive environmental and social outcomes … to fund public goods, encourage climate-positive initiatives and shift current economic systems from extractive models to regenerative ones“ (p. 20/21).

Other investment research (Emissions trading)

More effort, fewer trades? (Not) Everybody’s Working for the Weekend: A Study of Mutual Fund Manager Effort by Boone Bowles and Richard B. Evans as of Sept. 20^th, 2023 (#53): “Our measure compares observable mutual fund work activity between regular workdays and weekends. We find that effort (P ctW k) varies over time (there is generally more effort between November and February) and across mutual funds (larger, more expensive, better run funds put in more effort). Further, we find that within-family increases in effort come in response to poor recent performance, outflows and higher volatility. We … find that after mutual funds increase their effort their portfolios are more concentrated, have higher active share, and experience lower turnover. … more effort leads to better performance in the future in terms of benchmark adjusted alphas“ (p.23/24).

GenAI for investments? Generative AI: Overview, Economic Impact, and Applications in Asset Management by Martin Luk frm Man AHL as of September 19^th, 2023 (#1974): “This paper provides a comprehensive overview of the evolution and latest advancements in Generative AI models, alongside their economic impact and applications in asset management. … The first section outlines the key innovations and methodologies that underpin large language models like ChatGPT, while also covering image-based, multimodal, and tool-using Generative AI models. … the second section reviews the impact of Generative AI on jobs, productivity, and various industries, ending with a focus on use-cases within investment management. This section also addresses the dangers and risks associated with the use of Generative AI, including the issue of hallucinations” (abstract). My comment see AI: Wie können nachhaltige AnlegerInnen profitieren? – Responsible Investment Research Blog (prof-soehnholz.com)

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AI risks: Researchpost #140

AI risks: 16x new research on AI, job risks, migration, climate, food, GHG accounting, biodiversity, broadband, return measures, listed private equity, Ethereum etc. by Lars Hornuf, Marc Elsberg and many more (#: SSRN downloads as of Aug. 24th,2023)

Social and ecological research: AI risks

Firing risks: Does Climate Risk Affect Employment Decisions? International Evidence by Claude Francoeur, Faten Lakhal, Hamza Nizar, Zvi Singer as of Aug. 13^th, 2023 (#32): “Using a cross-country sample of 31,200 observations for the period 2011–2019, we find that climate risk due to extreme weather events is positively associated with underinvesting in labor and, in particular, with over-firing employees. … The results also show that the underinvestment behavior is less severe for firms that are more socially responsible” (abstract).

AI risks for jobs: The Short-Term Effects of Generative Artificial Intelligence on Employment: Evidence from an Online Labor Market by Xiang Hui, Oren Reshef, and Luofeng Zhou as of Aug. 21^st, 2023 (#203): “This paper studies the short-term effects of generative AI and LLMs (Sö: Large language models) on labor outcomes by estimating the effect of ChatGPT on the employment of workers in a large online labor market (Sö: Upwork). Across the board, we find that freelancers who offer services in occupations most affected by AI experienced reductions in both employment and earnings. The release of ChatGPT leads to a 2% drop in the number of jobs on the platform, and a 5.2% drop in monthly earnings. …. top employees are disproportionately hurt by AI” (p. 13). My comment: I include HR service companies with good E, S and G-Ratings in my SDG-aligned portfolios because they help many people to find temporary and permanent new jobs.

AI risks (2): The Algorithmic Explainability “Bait and Switch” by Boris Babic and I. Glenn Cohen as of Aug. 20^th, 2023 (#15): “Explainability in artificial intelligence and machine learning (“AI/ML”) is emerging as a leading area of academic research and a topic of significant regulatory concern. … We argue that for explainability to be a moral requirement — and even more so for it to be a legal requirement — it should satisfy certain desiderata which it currently does not, and possibly cannot. … the currently prevailing approaches to explainable AI/ML are (1) incapable of guiding our action and planning, (2) incapable of making transparent the actual reasons underlying an automated decision, and (3) incapable of underwriting normative (moral/legal) judgments, such as blame and resentment. This stems from the post hoc nature of the explanations offered by prevailing explainability algorithms. As we explain, that these algorithms are “insincere-by design,” so to speak” (abstract).

E-deficits: Is advanced digitalisation the philosopher´s stone or a complex challenge? – Experiences from Austrian and German EA practice by Birthe Uhlhorn, Gesa Geißler, Alexandra Jiricka-Pürre as of June 28^th, 2023 (#9): “… While research increasingly discusses digital developments and their influence on procedural steps, the uptake of advanced digital tools remains limited amongst planning professionals in Germany and Austria. Practitioners still share concerns related to data quality, causalities and legal securities among others. … In addition, EA practice (Sö: Environmental assessment) in Germany and Austria lacks strategic discussion on the opportunities and challenges of digitalisation so far … this paper confirms the potential of digital solutions to improve the quality of EA processes and accelerate EA practice … ” (p. 15).

Pro/Con Migration: Attitudes to Migration and the Market for News by Razi Farukh, Matthias Heinz, Anna Kerkhof, and Heiner Schumacher as of Aug. 21^st, 2023 (#6): “For Germany, we found that most national news outlets adopt an attitude to migration that is in between the two ideological extremes, but closer to pro- than to anti-migration campaigns. … Only the largest newspaper in Europe – the tabloid newspaper Bild – changed its attitude to migration from very positive to fairly negative within a few months, most likely in order to cater to readers’ political preferences. For Hungary, we found that the attitude to migration is on average more negative than in Germany. … for the US, we found that, the average attitude to migration in the market for news is comparable to that in Germany. However, both the most positive and the most negative news outlet in the our US sample are fairly large, which suggests that the degree of polarization in this market is substantial“ (p. 29).

Food risks: Coping with Climate Shocks: Food Security in a Spatial Framework by Diogo Baptista, John Spray, and D. Filiz Unsal of the International Monetary Fund as of Aug. 23^rd, 2023 (#6): “… we show that (i) climate shocks are already having large negative impacts on GDP, nutrition and welfare, (ii) these impacts are disproportionately harming those households which are remote and food insecure, (iii) poverty and food insecurity exacerbates the impact of shocks. We go on to show that policy to lower the cost of trade and migration can lower the impact from climate shocks by allowing households alternative sources of income and affordable food“ (p. 34/35).

Responsible investment research

Green risks: Greening the Economy: How Public-Guaranteed Loans Influence Firm-Level Resource Allocation by Bruno Buchetti, Ixart Miquel-Flores, Salvatore Perdichizzi, and Alessio Reghezza as of July 14^th, 2023 (#185): “First, we established that European banks face a ”green-transition-risk,” as less polluting firms have higher probabilities of default (PDs) than their more polluting counterparts (browner firms). … This higher implicit risk, called ”green transition-risk,” leads to a natural preference for lending to more polluting firms (browner firms). Secondly, we discovered that deploying PGLs (Sö: Public-guaranteed loans) during the pandemic resulted in a relative increase in lending to greener firms … PGLs eliminate (or drastically reduce) the ”green-transition-risk“ (p. 25).

GHG data: A rapid review of GHG accounting standards by Jimmy Jia, Kaya Axelsson, Abrar Chaudhury, and Evan Taylor as of July 29^th, 2023 (#52): “We did a rapid systematic review of GHG (Sö: Green house gas) accounting standards to find that all are derivative works of the GHG Protocol. Further, commonly used GHG accounting standards are based on three methodologies. We found that the field converges quickly and there are fewer options than expected …“ (abstract).

Biodiversity-hole: Biodiversity Confusion: The impact of ESG biodiversity ratings on asset prices by Wei Xin, Lewis Grant, Ben Groom, and Chendi Zhang as of Aug. 14^th, 2023 (#35): “The biodiversity components of ESG ratings are analysed …. biodiversity ratings are largely uncorrelated to firm characteristics other than via firm size, and do not predict stock returns. … A suite of tests suggests that biodiversity as measured in ESG ratings does not appear to provide useful additional information for financial decision makers“ (abstract).

Rules or fiduciary? EU ‚Rule-based‘ ESG Duties for Investment Funds and their Managers under the European ‚Green Deal‘ by Sebastiaan Niels Hooghiemstra as of Aug. 15th, 2023 (#269): “This contribution focusses on explaining that the recently introduced “ESG duties” for European investment funds and their managers under European financial regulatory laws can be classified as “rule-based ESG duties,” largely substituting traditional corporate law “ESG fiduciary duties” applying to European investment funds and their managers” (abstract). My comment: My fund is compliant with Article 9 SFDR and has a social focus. For investors many of the current reporting requirements are not very helpful.

Other investment research: AI risks

Social broadband: Broadband Internet and the Stock Market Investments of Individual Investors by Hans K. Hvide, Tom G. Meling, Magne Mogstad, and Ola L. Vestad as of Aug. 2^nd, 2023 (#422): “We find that broadband use leads to increased stock market participation, to improved portfolio allocation for existing investors, and to increased participation in bonds, bond funds, and unlisted stocks. We do not find adverse effects of internet use; for example, access to high-speed internet does not lead to excessive stock trading among existing investors, except possibly for the very most active investors. … Over the broadband expansion period, we observe a broad trend towards increased internet-based information acquisition and learning. … the effects of broadband on stock market participation are stronger for younger, lower-income, and lower-wealth individuals, who have the lowest stock market participation rates and likely the lowest financial literacy to begin with …“ (p. 34/35). My comment: This is one reason why I include telecom infrastructure providers and servicers in my SDG-aligned portfolios.

Wrong measures? How Should Returns to Long Term Investors be Measured? by Hendrik Bessembinder, Te-Feng Chen, Goeun Choi, and John Wei as of Aug. 2^nd, 2023 (#131) “Widely studied databases contain stock returns measured at the monthly horizon. The most common method of aggregating this information across multiple months is to compute arithmetic means of the monthly returns. … However, arithmetic mean returns are potentially very misleading as to investors’ experiences across multiple months. … We use a broad sample of over 71,000 stocks to demonstrate the extent to which conclusions regarding long-term investment performance can differ across measures, with the goal of guiding market observers to the measure that is most relevant for the task at hand”.

Listed PE: Thematic Investing With Big Data: The Case of Private Equity by Ludovic Phalippou as of March 13^th, 2023 (#1159): “Using natural language processing, we score companies based on the frequency with which news articles contain both their names and terms Private Equity and Leveraged Buy-Out. An index is then created … with the weights set as a function of a company exposure to this theme. … this listed private equity index is highly correlated to commonly used private equity fund market indices …. In addition, our index has similar returns as non-tradable LBO fund indices” (abstract). My comment: Since many years, I include listed private equity in my alternatives allocations for traditional ETF-portfolios.

Good reporting: The Value of Publicly Available Information on Acquired Firms in Corporate Acquisitions by Dan Givoly, Songyi Han, and Sharon P. Katz as of July 5^th, 2023 (#62): “Acquiring privately held firms enables acquirers to benefit from liquidity and information risk discounts extracted from the owners of private firms. The information risk arises from the information asymmetry between the acquirer and the private firm due to the lack of public information. … Our study analyzes the outcomes of acquisitions of three types of target firms: private firms, public firms, and quasi-private firms, i.e., privately-owned firms that are subject to financial reporting obligations. …. the outcomes of acquisitions … are significantly more favorable for the acquisition of quasi-private firms than for acquisitions of both public and private firms. Further, despite all the measures employed by acquirers to mitigate the higher information risk involved in acquiring private firms, including potential price discounts, they do not fully compensate for this added risk“ (p. 26/27).

Fin-MaL = Fin-Good? Financial Machine Learning by Bryan Kelly and Dacheng Xiu as of July 25^th, 2023 (#22312): “We survey the nascent literature on machine learning in the study of financial markets. We highlight the best examples of what this line of research has to offer and recommend promising directions for future research. This survey is designed for both financial economists interested in grasping machine learning tools, as well as for statisticians and machine learners seeking interesting financial contexts where advanced methods may be deployed” (abstract). My comment: See my recent publication AI: Wie können nachhaltige AnlegerInnen profitieren? – Responsible Investment Research Blog (prof-soehnholz.com) or How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

OK crimes? Cybercrime on the Ethereum Blockchain by Lars Hornuf, Paul P. Momtaz, Rachel J. Nam, and Ye Yuan as of Aug. 15^th, 2023 (#557): “We identify more than 1.78 million transactions that are externally verified to be linked to cybercrime, corresponding to an aggregate amount of $1.65 billion of funds lost. … we find that victims increase their overall risk-taking … we show that victim and cybercrime addresses differ systematically, leading to variation that can be exploited in predictive models to screen for cybercriminals ex ante“ (p. 39).

Geo-Engineering: ^{oC Celsius} (kostenpflichtig) ist der neueste Öko-Polit-Thriller von Marc Elsberg vom März 2023. Dabei geht es um Geo-Engineering und dessen potenziellen ökologischen und politischen Chancen und Risiken. Celsius ist kein wissenschaftliches Buch, aber es sollte zum Nachdenken anregen.

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Advert for German investors:

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

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