Archiv der Kategorie: Regulierung

Quant ESG: Researchpost 221

Quant ESG: 12x new research on tariffs, costly pollution, electric vehicles, steel, costly policy uncertainty, green/brown split, quantitative ESG, brown mortgage costs, diversification, bitcoin and financial AI (#shows the SSRN full paper downloads as of April 10th, 2025)

Social and ecological research

Trump trades: Anticipating Trade Turbulence: Assessing the Economic Impacts of President Trump’s Proposed Tariff Scenarios by Jianwei Ai, Wu Huang, Minghao Li, Terry Zhang, and Wendong Zhang as of Jan. 28^th, 2025 (#885): “This paper explores the potential economic consequences of President Donald Trump’s proposed tariff scenarios in his second term. … we study six tariff scenarios based on President Trump’s proposed tariffs … . The scenarios include both escalating US tariffs and retaliatory measures by trade partners. … we find that the proposed tariffs could significantly disrupt global trade and lead to mostly negative impacts on the US and its trading partners. In terms of welfare loss, Canada and Mexico will suffer the most from a trade war with the US. China also will experience substantial welfare decreases from an escalation of its existing trade war with the US but stands to benefit from US tariffs on Mexico and Canada. US will experience mixed welfare changes in different scenarios with smaller magnitudes” (abstract).

Costly pollution: The Cost of Air Pollution for Workers and Firms by Marion Leroutier and Hélène Ollivier as of April 8^th, 2025 (#9): “… even moderate air pollution levels, such as those in Europe, harm the economy by reducing firm performance. Using monthly firm-level data from France, we estimate the causal impact of fine particulate matter (PM2.5) on sales and worker absenteeism. Leveraging exogenous pollution shocks from local wind direction changes, we find that a 10 percent increase in monthly PM2.5 exposure reduces firm sales by 0.4 percent on average over the next two months, with sector-specific variation. Simultaneously, sick leave rises by 1 percent. However, this labor supply reduction explains only a small part of the sales decline. Our evidence suggests that air pollution also reduces worker productivity and dampens local demand” (abstract).

EV mania: The EV Shakeout by Rob Arnott, Bradford Cornell, Forrest Henslee, and Thomas Verghese as of April 8^th, 2025 (#19): “The electric vehicle (EV) sector’s dramatic trajectory from a 900% market capitalization surge in 2020–2021 to a widespread collapse by 2025 exemplifies a „big market delusion“—where investors overestimated the success of early entrants in a transformative industry, ignoring historical consolidation patterns. This paper analyzes how speculative fervor, rather than economic fundamentals, drove valuations to unsustainable heights, only for competition and capital constraints to trigger a brutal shakeout. We document substantial losses, with billions evaporated as firms like Rivian and Nikola faltered or failed. Tesla’s outsized valuation, defying traditional metrics, fueled the bubble, while Chinese manufacturers, leveraging state-backed innovation and pricing, reshaped global competition and pressured Western startups“ (abstract).

Green steel? Estimating firms’ emissions from asset level data helps revealing (mis)alignment to net zero targets by Hamada Saleh, Thibaud Barreau, Stefano Battiston, Irene Monasterolo, and Peter Tankov as of Feb.21^st, 2025 (#35): “We develop a new bottom-up methodology to estimate companies’ (mis)alignment to net-zero scenarios. It uses companies’ asset-level data on greenhouse gas emissions at production units. We apply the methodology to the steel sector globally and we find that companies’ projected emissions at 2030 exceed by up to 20% the levels of the corresponding net-zero scenario of the International Energy Agency …. Further, we find that projected emissions at 2030 exceed companies’ aggregate stated targets, even in the optimistic case of electricity supply decarbonization rate following the net-zero scenario. Moreover, the discrepancy is driven by the largest steel companies” (abstract).

ESG investment research (in: Quant ESG)

Green political cost: Climate Policy Uncertainty and Firms‘ and Investors‘ Behavior by Piero Basaglia, Clara Berestycki, Stefano Carattini, Antoine Dechezleprêtre, and Tobias Kruse as of April 7^th, 2025 (#14): “… This paper introduces a novel Climate Policy Uncertainty (CPU) index … we find that uncertainty surrounding climate policies negatively impacts firm financial outcomes, innovation, and stock-market outcomes for firms that are in CO2-intensive sectors, i.e. exposed to climate policy. Higher CPU reduces capital expenditures, employment, and research and development, which in turn translates to a decrease in innovation (patent filings), particularly for clean technologies. On the stock market, CPU leads to increased stock volatility and decreased returns for exposed firms” (abstract).

Green/brown split: The Political Economy of Green Investing: Insights from the 2024 U.S. Election by Marco Ceccarelli, Stefano Ramelli, Anna Vasileva, and Alexander F. Wagner as of April 1^st, 2025 (#62): “… We provide evidence from incentivized surveys of U.S. investors before and after the 2024 U.S. presidential election. After Trump’s victory, investors reduced green investments on average. However, investors who strongly disapprove of his climate policy increased their green investment taste. These “contrarians” placed greater weight on non-pecuniary considerations and less on financial ones, suggesting they view green investing as a way to compensate for perceived climate inaction. Empirical analyses of real-world ETF flows align with this interpretation …“ (abstract).

Quant ESG (1)? A Systematic Approach to Sustainable and ESG Investing by Andrew Ang, Gerald T. Garvey, and Katharina Schwaiger from Blackrock as of April 3^rd, 2025 (#58): “… Divesting from industries like tobacco, defense, coal, oil, and utilities can only decrease the investment opportunity set. Over 1969 to 2023, excluding these industries has resulted in lower returns: the average return comparing the market constructed excluding these industries is 1.1% lower than the full market. According to the framework of the dividend discount model, sustainable or ESG signals can predict stock prices only if they predict cashflows, or they are related to discount rates, or both. An important insight from this analysis is that, all else equal, higher demand for stocks with more sustainable characteristics or higher ESG ratings would result in lower expected returns. … The second avenue that sustainable signals and ESG ratings can affect returns is if they are related to style factors. Since 2014, MSCI ESG scores have exhibited positive correlations to quality and low volatility factors which, all else equal, would contribute to higher expected returns. By construction, the E, S, and G signals measure or can help effect a real-world ESG outcome: firms with higher carbon-adjusted profits have, by definition, abnormally high earnings relative to the carbon they emit, geographical areas with higher CFPB complaints experience more consumers’ financial vulnerability, and greater board diversity may be an important signal of equality in and of itself …“ (p. 37/38). My comment: This research also shows that the divestment effect depends on the period chosen and taht stock price prediction is problematic. In my opinion, similar performance of sustainable and traditional investments clearly speaks for sustainable investments.

Quant ESG (2): ESG Return and Portfolio Attribution via Shapley Values by Andrew Ang, Debarshi Basu, and Marco Corsi as of April 3^rd, 2025 (#48): “… We show that over 2017 to 2024, Social and Governance scores contribute positively to the ESG portfolio outperforming the MSCI World Index, whereas Environmental scores detracted. Most of the realized active risk of the ESG portfolio is due to Environmental and Governance scores. There is very little contribution to performance, risk, and turnover from reducing carbon emission intensities” (p. 24/25).

Brown mortgage costs: From flood to fire: is physical climate risk taken into account in banks’ residential mortgage rates? by Adele Fontana, Barbara Jarmulska, Benedikt Scheid, Christopher Scheins, and Claudia Schwarz from the European Central Bank as of March 13^th, 2025 (#65): “Physical climate risks can have a large regional impact, which can influence mortgage loans’ credit risk and should be priced by the lenders. … We show that on average banks seem to demand a physical climate risk premium from mortgage borrowers and the premium has increased over recent years. … Banks that were identified as “adequately” considering climate risk in the credit risk management by the ECB Banking Supervision charge higher risk premia which have been increasing particularly after the publication of supervisory expectations. In contrast, the lack of risk premia of certain banks shows that ECB diagnostics in the Thematic Review on Climate were accurate in identifying the banks that need stronger supervisory focus” (abstract).

Other investment research

Implicit diversification: Reclassifying Investment Indexes Based on Sales and Earnings Instead of Legal Domicile by Erblin Ribari as of April 2^nd, 2025 (#21): “Based on two decades of financial and macroeconomic data, it challenges the common view of the S&P 500 as a purely domestic U.S. index, highlighting that around 45 percent of its constituent companies’ revenues come from international markets … the paper shows that the S&P 500 responds strongly to global economic factors“ (abstract).

Bitcoin speculation: The Optimal Long-term Portfolio Share of Bitcoin is Negative (or Zero) by Alistair Milne as of April 1^st, 2025 (#39): ” “Applying the standard Markovitz mean-variance framework to a two asset portfolio consisting of US stocks (S&P500) and Bitcoin (BTC) … With risk (variance and covariance) estimated using data from 02/14 to 02/25 and long-term returns based on standard efficient markets assumptions, the optimal portfolio share for Bitcoin-1.6% (full sample) and-7.3% (recent sample), regardless of investor preferences towards risk. Other studies of BTC in portfolio management report that a positive BTC portfolio share improves risk-return trade-offs. This difference is explained by their focus on short-term dynamic asset allocation strategies and the more recent data used here, exhibiting an increased +ve correlation between BTC and stock returns” (abstract).

Finance AI: Large Language Models in Equity Markets: Applications, Techniques, and Insights by Aakanksha Jadhav and Vishal Mirza as of April 9^th, 2025 (#18): “… This paper presents a comprehensive review of 84 research studies conducted between 2022 and early 2025, synthesizing the state of LLM applications in stock investing. … Our analysis identifies key research trends, commonalities, and divergences across studies, evaluating both their empirical contributions and methodological innovations. We highlight the strengths of existing research, such as improved sentiment extraction and the use of reinforcement learning to factor market feedback, alongside critical gaps in scalability, interpretability, and real-world validation. Finally, we propose directions for future research …“ (abstract).

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Werbung (in: Quant ESG)

Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung mit durchschnittlich einzigartig hohen 99% SDG-vereinbaren Umsätzen der Portfoliounternehmen und sehr hohen E-, S- und G-Best-in-Universe-Scores sowie einem besonders umfangreichen Aktionärsengagement (siehe auch My fund).

Zum Vergleich: Ein traditioneller globaler Small-Cap-ETF hat eine SDG-Umsatzvereinbarkeit von 5 %, ein diversifizierter Gesundheits-ETF 14 %, Artikel 9 Fonds 21%, liquide Impactfonds 39% und ein ETF für erneuerbare Energien 43 % (vgl. Hohe SDG Umsätze? Nur wenige Investmentfonds!).

Insgesamt hat der von mir beratene Fonds seit der Auflage im August 2021 eine ähnliche Performance wie traditionelle globale Small- und Mid-Cap-Fonds (vgl. z.B. Fonds-Portfolio: Mein Fonds | CAPinside und Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds?).

Ein Fondsinvestment war also bisher ein „Free Lunch“ in Bezug auf Nachhaltigkeit: Ein besonders konsequent nachhaltiges Portfolio mit marktüblichen Renditen und (eher niedrigeren) Risiken. Vergangene Performance ist allerdings kein guter Indikator für künftige Performance.

Green voting disaster: Researchpost 215

Green voting disaster illustration from Pixabay by Mabel Amber

20x new research on biodiversity measures,climate catastrophes, hydrogen, brown tech, green and brown returns, green stamps, green reporting, GHG reporting issues, redundant ESG information, greenwashing definitions, green portfolio theory, governance scores, green ventures, green voting disaster, green fund deficit, fear, investment advice, alternatives and LLM overconfidence (#shows the number of full research paper downloads from SSRN as of Feb. 27^th, 2025)

Social and ecological research

2 biodiversity measures: Species metrics by Imène Ben Rejeb-Mzah, Nathalie Jaubert, Alexandre Vincent, and Zakaria Ajerame as of February 20^th, 2025 (#910): “This research paper investigates … two biodiversity measurements …: Rarity Weighted Richness (RWR) and Species Threat Abatement and Restoration (STAR). RWR measures the specific richness of an ecosystem by weighting species according to their rarity, emphasizing ecosystems rare species that are more vulnerable to environmental and human pressures. Conversely, STAR was designed to quantify the impact and contribution of actions to restore habitats and preserve rare and endangered species, as well as broader biodiversity …” (abstract).

Costly catastrophes: Going NUTS: the regional impact of extreme climate events over the medium term from the European Central Bank by Sehrish Usman, Guzmán González-Torres Fernández, and Miles Parker as of Dec. 11^th, 2024 (#91): “.. the impact of an extreme event may not only persist but can also intensify over time … Overall, four years after the event, output is 1.4 percentage points lower in regions affected by a heatwave, and 2.4 percentage points lower in regions affected by a drought. … adaptation capital is less productive than other types of capital in aggregate, total factor productivity falls. Moreover, we document the falling population in affected regions. To the extent that these impacts are more likely to occur in certain countries, there may well be migratory pressures within Europe itself … We also find evidence that economic activity may be higher following an extreme climate event, although this appears to be restricted to just one case: floods occurring in high-income regions. The destruction of capital leads to a period of reconstruction, including higher output and TFP, suggesting these regions are able to “build back better” and upgrade their capital“ (p. 31/32).

Costly hydrogen: Hydrogen in Renewable-Intensive Energy Systems: Path to Becoming a Cost-Effective and Efficient Storage Solution by Chunzi Qu, Rasmus Noss Bang, Leif Kristoffer Sandal, and Stein Ivar Steinshamn as of Jan. 13^th, 2025 (#20): “… reducing hydrogen costs to 12.5% of current levels and increasing round-trip efficiency to 70% could make it competitive. These are challenging targets but feasible given positive predictions on cost reduction and efficiency attainability currently. Hydrogen storage reduces total energy system costs by partly replacing lithium batteries to lower storage costs, due to its suitability for long-term storage, while increasing grid flexibility to lower transmission costs. Moreover, integrating hydrogen can decrease the share of nuclear and fossil fuels in the generation mix, reducing generation costs. Italy and Germany are identified as primary targets for hydrogen expansion in Europe. In scenarios of limited lithium supply, hydrogen becomes more competitive and essential to compensate for system storage capacity shortages, though it may not reduce total system costs” (abstract). My comment: No surprise that funds which have been relying heavily on hydrogen investments have had disappointing results so far.

ESG investment research (in: Green voting disaster)

Brown technology: ESG in Platform Markets by Stefan Buehler, Rachel Chen, Daniel Halbheer, and Helen S. Zeng as of Feb. 25th, 2025 (#17): “Platforms have radically transformed many markets. Initially perceived as the harbinger of a new economy, platforms today can no longer ignore their impact on the triple bottom line of profit, planet, and people …, as their adverse effects on the environment (e.g., massive energy consumption and carbon emissions) and society (e.g., misinformation, hate speech, discrimination, degradation of mental health, and privacy violations) become increasingly evident …. As a result, consumers, regulators, and even business leaders demand greater transparency along the environmental (E), social (S), and governance (G) pillars of a platform’s activities” (abstract). My comment: See why I do not invest in such patforms in my direct equity portfolios even though many ESG ETFs/funds are heavily invested in such stocks: Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog

Indirect ETS effects: Pricing Pollution: Asset-Pricing Implications of the EU Emissions Trading System by Joop Huij, Philip Stork, Dries Laurs, and Remco C.J. Zwinkels as of Feb. 20^th, 2025 (#48): “Our findings point towards a robust influence of carbon prices on stock prices starting from Phase II of the EU ETS in 2008. We find that the transmission of carbon prices to stock prices … also applies to non-European firms that are regulated to a lesser extent” (abtract).

Carbon market premium: Green and brown returns in a production economy from the European Central Bank by Ivan Jaccard, Thore Kockerols, and Yves Schüler as of Feb. 19^th, 2025 (#27): “Using a sample of green and brown European firms, we initially demonstrate that green companies have outperformed brown ones in recent times. Subsequently, we develop a production economy model in which brown firms acquire permits to emit carbon into the atmosphere. We find that the presence of a well-functioning carbon market could account for the green equity premium observed in our data“ (abstract).

Green stamp premium: The Value of Being Green: Assessing the Impact of Green Bond Issuance on Stock Prices of European Listed Companies by Radoslaw Pietrzyk, Sylwia Frydrych, Paweł Węgrzyn, and Krzysztof Biegun as of Feb. 19^th, 2025 (#22): “… generally, the issuance of green bonds does not result in a significant change in the stock prices of the issuing companies. … certified green bonds generally show a more favourable market perception with no significant change in stock prices. In contrast, non-certified green bonds are associated with a decline in the stock prices of the issuing companies“ (abstract).

Green reporting premium: Strategic Transparency: Impact of Early Sustainability Reporting on Financial Performance by Jose Antonio Muñiza, Charles Larkin, and Shaen Corbet as of Feb. 24^th, 2025 (#7): “… by analysing a sample of 2,857 publicly traded companies in the United States … results show a clear financial advantage for firms reporting sustainability information, with those reporting before the Paris Agreement experiencing significantly stronger financial performance than their non-reporting counterparts” (abstract).

Dubious GHG accounting? Corporate Carbon Accounting: Current Practices and Opportunities for Research by Gunther Glenk as of Feb. 24^th, 2025 (#43): “The common framework for determining and reporting corporate greenhouse gas (GHG) emissions today is the GHG Protocol. … Their design and implementation, however, often result in disclosures that obscure firms’ actual emissions and decarbonization progress“ (abstract).

Redundant ESG infos? From KPIs to ESG: Addressing Redundancy and Distortions in ESG Scores by Matteo Benuzzi, Özge Sahin, and Sandra Paterlini as of February 20^th, 2025 (#11): “We investigate the construction of Environmental, Social, and Governance (ESG) scores, focusing on Refinitiv’s (acquired by the London Stock Exchange Group) methodology. We uncover critical challenges, including the inflation of correlations caused by missing data imputation and redundancy among Key Performance Indicators (KPIs). … we demonstrate imputing missing values with zeros distorts relationships between KPIs. … Our findings reveal that a small subset of KPIs can closely replicate Refinitiv’s pillar scores, highlighting that many of the 180 KPIs used are redundant”. My comment: The detailed data which are assembled for ESG-scores should be interesting for many responsible investors, independent of the aggregation method.

Greenwashing definitions: How to enforce ‘greenwashing’ in the financial sector? By Veerle Colaert and Florence De Houwer as of Feb. 24^th, 2025 (#13): “National supervisors have … reported detecting only a limited number of instances of greenwashing, and formal enforcement decisions remain scarce. … We found that there is a plethora of definitions of “greenwashing” in the financial sector …. Those definitions differ in terms of their material scope of application (environmental claims versus any sustainability-related claims), their personal scope of application (certain financial market participants versus all market participants), the objective standard against which greenwashing should be measured (basic environmental or sustainability standards versus prior claims made by the greenwashing entity), the subjective state of the greenwasher (is “intent” relevant or not), the scope of resulting damage (consumer/investor detriment versus unfair competition), and the question whether greenbleaching is deemed an instance of greenwashing. None of those definitions are, however, legally binding” (abstract). My comment: I suggest to use activity-based net SDG-aligned revenues to find sustainable funds and greenwashing, see SDG-Umsätze: Die wichtigste Nachhaltigkeitskennzahl – Responsible Investment Research Blog

Green portfolio theory: Advancing sustainable portfolio selection: Insights from a structured literature review by Sofia Baiocco as of Feb. 19^th, 2025 (#11): “The purpose of this paper is to rigorously analyze the current state of empirical research on sustainable portfolio selection … From an initial pool of 757 papers … we applied a six-step screening procedure resulting in a final sample of 44 high-quality articles addressing the topic. .. these papers revealed two main methodological streams: the first extends Markowitz’s (1952) portfolio selection theory by incorporating sustainability as an additional criterion; the second uses multi-criteria decision-making (MCDM) methodologies to balance returns, risks, and sustainability objectives. The prevalence of MCDM methods underscores their value in accommodating investor preferences … several challenges need to be addressed, including the inconsistency of ESG data, the complexity of calculation methodologies, and the risk of greenwashing, all of which can undermine portfolio performance and the applicability of these models” (abstract). My comment: I have made very good experiences with passive forecast-free allocations, see Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf

Governance confusion: The G in ESG: How good are the governance ratings in ESG ratings? by Kornelia Fabisik as of Feb. 26^th, 2025 (#37): “I examine the governance ratings’ ability to provide useful information to shareholders. My results not only suggest rather limited success in predicting relevant firm outcomes (such as financial-statement restatements, governance incidents, class action law suits, operating performance, firm value, stock returns, and credit ratings), but in the case of most raters, I identify multiple instances of counterintuitive results, that is, with the opposite direction of the effect” (abstract).

SDG and impact investment research

Green voting disaster: Voting Matters 2024 Are asset managers using their proxy votes for action on environmental and social issues? by Danielle Vrublevskis, Felix Nagrawala, and Lia Viasilikiotis from Share Action as of Feb. 18^th, 2025: “Support for shareholder resolutions has hit an all-time low, driven by the voting behaviour of large US asset managers … Asset managers are not voting in line with commitments they have made to net-zero or as part of Climate Action 100+ … Asset managers are increasingly ignoring urgent environmental and social issues … Our first ever analysis of votes on management items shows asset managers fail to use these votes to hold some of the largest companies in the world accountable …” (p. 10/111). My comment: I now use this study to exclude ETF issuers and fund managers of the bottom half of the participants in this study, e.g. Blackrock.

Green venture premium? When does it pay to be green for startups? Sustainability signaling and venture funding by Markus Koenigsmarck, Martin Geissdoerfer, and Dirk Schiereck as of Feb. 24^th, 2025 (#8): „… on a dataset of 27,000 startups … We find a robust U-shaped connection sustainability signaling and venture funding, with the most and least sustainable startups attracting more funding than their peers. This pattern is persistent for just-green and just-brown subsamples …” (abstract).

Missing green funds? Green Finances: Young Adults and Climate Change by Danielle Kent, William Beckwith, Syed Shah, and Robert Wood as of Dec. 4^th, 2024 (#51): “… while the environment is very important to them, young adults struggle to believe their individual actions can make a difference. They want government and large corporations, particularly banks, to take more action towards sustainability. … Most participants wanted to adopt solar panels and electric vehicles, but the required investment was beyond their reach. Our findings highlight that more financial product innovations offering incremental sustainability investment opportunities, that do not require property ownership, are needed to reduce the financial hurdles to sustainability action for young people …” (abstract). My comment: Look at my fund (see “Werbung” below).

Other investment research (in: Green voting disaster)

Fear beats risk: Fear, Not Risk, Explains Asset Pricing by Rob Arnott and Edward F. McQuarrie as of Feb. 7^th, 2025 (#816): “Risk theory has dominated the asset pricing literature since the 1960s. We chronicle empirical failures of risk theory in its prediction of the excess return on equities, to lay the groundwork for a complementary framework, investor-focused rather than asset-focused, and centered on fear rather than objective measures of risk. A fear premium puts fear of missing out on a par with fear of loss. Most anomalies and factors of the past half-century would have been expected, given a fear-based model for returns. The new paradigm is offered as a starting point to advance investment science” (abstract).

Convincing advice? Financial Advice and Investor Beliefs: Experimental Evidence on Active vs. Passive Strategies by Antoinette Schoar and Yang Sun as of Oct. 23^rd, 2024 (#278): “… we test how retail investors assess and update their priors based on different types of financial advice, which either aligns with their priors or goes against it. We compare advice that emphasizes either the benefits of passive investment strategies (such as diversification and low fees) or active strategies (such as stock picking and market timing). We find that participants rate advice significantly higher when it aligns with their priors rather than contradicts them. But people update their beliefs about investment strategies in the direction of the advice they receive, independent of their priors. At the same time, there is significant heterogeneity based on the subjects‘ financial literacy. Financially more literate subjects positively update in response to seeing passive advice, but most do not update (and rate the advice negatively) when exposed to active advice. In contrast, financially less literate subjects are strongly influenced by both types of advice. Finally, we show that subjects rate the advice lower if the advisor is perceived to have misaligned incentives (the advisor in the video mentions receiving commission-based pay) compared to when it is more aligned (advisor receives flat fee)” (abstract). My comment: No wonder that it is very difficult to sell active funds whereas active ETFs are booming

Costly alternatives: What is the Future of Alternative Investing? by Richard M. Ennis as of Feb. 20^th, 2025 (#347): “Alternative investments, or alts, cost too much to be a fixture of institutional investing. A diverse portfolio of alts costs at least 3% to 4% of asset value, annually. Institutional expense ratios are 1% to 3% of asset value, depending on the extent of their alts allocation. Alts bring extraordinary costs but ordinary returns — namely, those of the underlying equity and fixed income assets. Alts have had a significantly adverse impact on the performance of institutional investors since the GFC. Private market real estate and hedge funds have been standout under-performers. Agency problems and weak governance have helped sustain alts-investing. CIOs and consultant advisors, who develop and implement investment strategy, have an incentive to favor complex investment programs. They also design the benchmarks used to evaluate performance …” (abstract). My comment: Maybe private debt and private equity investments are not the best way to generate positive impact and risk-adjusted returns

LLM Overconfidence: How Much Should We Trust Large Language Model-Based Measures for Accounting and Finance Research? by Minji Yoo as of Nov. 4^th, 2024 (#565): “Researchers often ask ChatGPT to provide confidence levels for its predictions, using these scores to measure the likelihood that a sample is correctly labeled. … Experiments using ChatGPT on financial sentiment analysis reveal a substantial 38–43% gap between average accuracy and self-reported confidence under popular prompts … a fine-tuning approach that retrieves probability estimates directly from the model nearly eliminates overconfidence … smaller, non-generative LLMs, such as RoBERTa, show no overconfidence and outperform prompted ChatGPT in both calibration and failure prediction when fine-tuned. Finally, this paper highlights how empirical analyses can be affected by the methods used to obtain confidence scores” (abstract).

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Werbung (in: Green voting disaster)

Zum Vergleich: Ein Gesundheits-ETF hat eine netto SDG-Umsatzvereinbarkeit von 7%, Artikel 9 Fonds haben 21%, Impactfonds 38% und ein ETF für erneuerbare Energien 43% (vgl. SDG-Umsätze: Die wichtigste Nachhaltigkeitskennzahl – Responsible Investment Research Blog).

Insgesamt hat der von mir beratene Fonds seit der Auflage im August 2021 eine ähnliche Performance wie durchschnittliche globale Small- und Midcapfonds (vgl. z.B. Fonds-Portfolio: Mein Fonds | CAPinside und Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds?).

SDG-Umsätze: Die wichtigste Nachhaltigkeitskennzahl

SDG-Umsätze: Attraktive Nachhaltigkeitskennzahl und neue SDG-Vereinbarkeitsdaten für Aktien, ETFs und aktive Investmentfonds mit einer Illustration von Pixabay von Joshua Miranda

Seltsame angeblich nachhaltige Unternehmen: Berechtigte ESG-Kritik

Meiner Meinung nach ist das größte Problem sogenannter nachhaltiger Fonds, dass sie Wertpapiere enthalten, die für viele potenzielle Interessenten nicht nachhaltig sind. Laut Morningstar ist zum Beispiel Iberdrola aus Spanien in den Top 20 vertreten (vgl. „Diese 8 Aktien sind in globalen Nachhaltigkeitsfonds weit verbreitet“ von Morningstar.de vom 29.1.2025). Iberdrola erwirtschaftet aber einen nennenswerten Teil seiner Umsätze mit Gas und Atomenergie. Und Aptiv PLC ist ein traditioneller Automobilzulieferer und auch TE Connectivity gehört zu den Top 20: „Der Konzern entwickelt, fertigt und vermarktet Produkte für Kunden im Automobilsektor sowie im Bereich Luft- und Raumfahrt, Verteidigungssysteme, Telekommunikation, Computer und Unterhaltungselektronik“ (Wikipedia-Abruf vom 16.2.2025). Zu den Top 20 gehört auch Trane Technologies: “… focused on heating, ventilation, and air conditioning (HVAC) and refrigeration systems” (Wikipedia-Abruf vom 16.2.2025).

HQ Trust hat vor kurzem eine Analyse veröffentlicht, nach der bei sogenannten Klimafonds NVIDIA, Microsoft, Apple, Alphabet, Meta, und Amazon besonders häufig hoch allokiert werden (vgl. Hannah Dudeck in Das Investment vom 4.2.2025: Welche Aktien in Klimafonds hoch gewichtet sind). Diese Unternehmen verbrauchen sehr viel Energie und Wasser. Auch das Halbleiterunternehmen Broadcom und Pharmaunternehmen Eli Lilly gehören oft zu den Top Ten solcher Fonds.

Diese Unternehmen haben meistens gute oder sogar sehr gute ESG-Ratings. Das zeigt aber nur, dass sie in Bezug auf ihre Wettbewerber aus derselben Branche relativ (Best-in-Class) ökologisch, sozial und mit guter Unternehmensführung arbeiten. Best-in-Universe ESG-Scores, bei denen ein Vergleich mit allen gerateten Unternehmen erfolgt, werden dagegen selten veröffentlicht. Außerdem kann auch ein Unternehmen, das im Vergleich zu allen anderen Aktien gute ESG-Scores hat, Produkte und Services anbieten, die nicht besonders nachhaltig erscheinen, weil sich die Scores vor allem auf die Prozesse der Unternehmen beziehen.

Gute Zusatzkennzahl verfügbar: SDG-Umsätze

Zusätzlich kann man schätzen bzw. messen, wie gut Unternehmen mit den nachhaltigen Entwicklungszielen der Vereinten Nationen vereinbar sind. Dafür kann man klassische Branchenkategorisierungen nutzen. Danach wären zum Beispiel alle Unternehmen mit dem Fokus Erneuerbare Energien oder Gesundheit komplett SDG-kompatibel. Seit einigen Jahren bieten Nachhaltigkeitsdatenanbieter aber detailliertere Beurteilungen an (vgl. dazu zum Beispiel SDG-Wirkungsmessung – ein Update zu Datenanbietern und deren Methodik von der DVFA vom Oktober 2023).

Dabei sollte man zwischen SDG-Scores und SDG-vereinbaren Umsätzen und -Investments unterscheiden. SDG-Scores umfassen oft viele Elemente von ESG-Scores wie zum Beispiel Strom- und Wasserbrauch oder Diversitätskennzahlen. Aber auch Unternehmen mit guten SDG-Scores können nicht-nachhaltige Produkte und Services anbieten. SDG-vereinbare Umsätze sind deshalb eine hilfreichere Kennzahl. Auch SDG-vereinbare Investitionen können genutzt werden, um Unternehmen zu finden, die aktuell noch relativ geringe SDG-vereinbare Umsätze haben, aber bei denen sich das durch solche Investitionen künftig ändern sollte.

+100% oder -20% bei unterschiedlichen Definitionen der SDG-Umsätze

SDG-vereinbare Umsätze werden bereits von einigen Praktikern genutzt. Anleger müssen dabei auf mindestens zwei Aspekte achten: Wird eine unternehmensbezogene oder eine aktivitätsbasierte Bestimmung genutzt und werden Netto- oder Brutto-Umsätze verwendet. Bei der unternehmensbezogenen Methode („entity based“) wird ein Unternehmen mit Umsätzen oberhalb des selbst festgelegten Mindestwertes von zum Beispiel 30% als komplett SDG-vereinbar eingeschätzt. So wird ein Anbieter mit 60% Umsätzen mit fossiler Energie und 40% Umsätzen mit erneuerbarer Energie als 100% SDG-kompatibel klassifiziert.

Wenn nur der positive „Brutto-„SDG-vereinbare Umsatz betrachtet wird, kommt dasselbe Unternehmen auf 40% SDG-kompatible Umsätze. Bei der „Netto-„SDG-Vereinbarkeits-Umsatzbetrachtung ergeben dagegen 40% erneuerbare (positive) und 60% fossile (negative) Umsätze „netto“ -20% SDG-vereinbare Umsätze.

Auch bei Anwendern der strengen Netto-Aktivitätsmethode kann es noch große Unterschiede geben. In der einfachen Variante werden zum Beispiel alle komplett auf Gesundheit oder erneuerbare Energien fokussierten Unternehmen als zu 100% SDG-kompatibel klassifiziert. Andere Anbieter schränken die Anrechnung aber ein, zum Beispiel nur in Bezug auf bestimmte Regionen, vor allem Entwicklungsländer, ober bestimmte Gesundheitsanwendungen wie zum Beispiel nur die schwersten Krankheiten.

Der von mir genutzte Datenanbieter Clarity.ai zum Beispiel weist mit einem solchen strengen Ansatz für einen diversifizierten Gesundheits-ETF nur 7 % und für einen breit gestreuten ETF für erneuerbare Energien 43 % aktivitätsbasierte SDG Netto-Umsatzvereinbarkeit aus.

Die von diesem Datenanbieter als SDG-kompatibel klassifizierten Unternehmen sind auch von Laien anhand einfacher Analysen der Umsätze dieser Unternehmen sehr gut nachvollziehbar. Für (prozessorientierte) SDG- und ESG-Scores gilt das leider nicht, weil sie sich oft aus Dutzenden von nicht einfach nachvollziehbaren Informationen zusammensetzen.

Ein weiterer Vorteil der Kennzahl SDG-vereinbare Umsätze ist, dass diese nicht nur grüne, sondern auch soziale Umsätze umfasst, die bisher regulatorisch nicht ausreichend definiert sind und deshalb in vielen Nachhaltigkeitsfonds unterrepräsentiert sind. Deshalb ist (aktivitätsbasierter Netto-) SDG-Umsatz eine Kennzahl, die nicht nur für Produkteinschätzungen, sondern auch für Regulierungszwecke gut geeignet ist.

Anleger sollten ESG-Scores und SDG-Umsätze gemeinsam nutzen

Allerdings sollten ESG-Scores (oder SDG Scores) auch eine wichtige Rolle spielen, denn ein Wasserstoff-Spezialist oder ein Elektroautobauer wie Tesla mit schlechten Sozialscores sind keine umfassend nachhaltigen Investments.

Wenn für Anleger zusätzlich noch Ausschlüsse oder Shareholder-Engagement eine Rolle spielen müssen sie entscheiden, wie sie die einzelnen Nachhaltigkeitskriterien kombinieren bzw. gewichten wollen. Dazu hat die Deutsche Vereinigung für Finanzanalyse und Assetmanagement schon vor einigen Jahren ein kostenloses Tool veröffentlicht, das kürzlich aktualisiert wurde (vgl. 18 Dimensionen nachhaltiger Anlagepolitik vom 8. November 2024 und ein aktuelles Anwendungsbeispiel hier Absolut_Report_Spezial_2024_06_DVFA_Anforderung.pdf).

Ich nutze die einzelnen Elemente für direkte Aktieninvestments so: Viele 100% Ausschlüsse, relativ hohe separate Best-in-Universe Umwelt-, Sozial und Governancescore-Anforderungen und möglichst hohe aktivitätsbasierte netto SDG-Umsätze. Außerdem sollten die Unternehmen möglichst positiv auf mein Shareholder Engagement reagieren (zu den Begründungen und Details vgl. Nachhaltigkeitsinvestmentpolitik_der_Soehnholz_Asset_Management_GmbH)).

Es bleiben genug Diversifikationsmöglichkeiten übrig

Vielfach wird kritisiert, dass zu hohe Nachhaltigkeitsanforderungen die mögliche Diversifikation von Portfolios beschränken würden und deshalb zu riskanteren Portfolios führen würden. Sicher ist, dass jede Art von Anlagebeschränkung das Investmentuniversum reduziert. Weniger Aktien im Portfolio zu haben ist aber nicht gleichbedeutend mit mehr Risiko. So gilt die aktuell hohe Gewichtung von Technologie- und US-Aktien in Weltaktienindizes, die sehr viele Wertpapiere enthalten, als ziemlich riskant. Außerdem ist der Grenznutzen von Diversifikation typischerweise sehr gering: Zusätzlich Aktien bringen diversifizierten Portfolios wenig zusätzliche Risikosenkungen.

Hinzu kommt, dass eine Beschränkung auf Aktien mit geringen Umwelt-, Sozial- und Umweltrisiken tendenziell Gesamtrisiko-senkend und nicht Risiko-erhöhend ist. Außerdem lässt sich gut argumentieren, dass Investments in Unternehmen, die gut mit den nachhaltigen Zielen der Vereinten Nationen vereinbar sind, zumindest mittel- bis langfristig gute Renditen haben sollten. Dagegen sollten künftig immer weniger Käufer bzw. verfügbare Investments für SDG-schädliche Unternehmen bereitstehen, was deren Renditeaussichten erheblich reduzieren kann.

Dutzende von Aktien aber nur wenige SDG-aligned ETFs oder aktive Investmentfonds

Aus über dreissigtausend Aktien mit ausreichenden Nachhaltigkeitsdaten sind nach Anwendung meiner strengen Nachhaltigkeitsanforderungen noch ungefähr 150 mit mindestens 50% netto-SDG Umsatzvereinbarkeit übrig. Davon haben etwas mehr als die Hälfte über 90% SDG-Umsatz. Aus diesen bilde ich ein Portfolio aus 30 Aktien unterschiedlicher Branchen und Länder mit inzwischen 99% SDG-Umsatzvereinbarkeit. Weil (SDG-)spezialisierte Unternehmen eher klein sind, ist die durchschnittliche Kapitalisierung ähnlich wie die von Small- bzw. MidCap-Unternehmen. In den letzten Jahren wurde damit eine ähnliche Rendite wie die von traditionellen Sammle-/MidCap-Unternehmen bei erheblich niedrigerer Schwankung erreicht.

Wenn man meine Ausschlusskriterien ändert, zum Beispiel Tierversuche und genetisch modifizierte Organismen zulässt, erfüllen auch einige Großunternehmen meine Nachhaltigkeitsanforderungen.

In einer Studie von Clarity.ai vom Dezember 2024 (s. SDG Revenue Alignment: Bringing Clarity to Impact Investing | Clarity AI) wird auf Basis von deren ziemlich strikten SDG-Umsatzberechnungen festgestellt, dass Artikel 9 Fonds im Schnitt nur eine SDG-Umsatzvereinbarkeit von 21% haben während es bei Impactfonds immerhin 48% sind (siehe Figure 3). Die von Clarity berechneten regulatorisch definierten Sustainable Investment Quoten liegen mit 82% bei Artikel 9 Fonds bzw. 70% bei Impactfonds dagegen erheblich höher (s. Figure 4).

Konkreter wird es mit der von der Soehnholz ESG im Januar 2025 durchgeführten Analyse auf Basis von Daten von Clarity.ai (zu einer früheren unvollständigen Analyse siehe Impactfonds im Nachhaltigkeitsvergleich). Die Datenbasis umfasst knapp fünfhunderttausend Fondstranchen. Davon sind geschätzt ungefähr die Hälfte Tranchen von Aktienfonds, die vermutlich in Deutschland erworben werden können. Etwa fünfzehntausend Tranchen (5,5% der Aktienfonds) bzw. 2.400 Fonds inklusive etwa 150 ETFs haben eine netto SDG-Umsatzvereinbarkeit von mindestens 25%. Circa 3.500 Tranchen bzw. 600 Fonds haben eine netto SDG-Umsatzvereinbarkeit von mindestens 50% (1,3% der Aktienfonds).

Von den Fonds mit mindestens 25% SDG-Umsatzvereinbarkeit haben 96% einen Best-in-Universe ESG Score (eigene Definition auf Basis von Daten von Clarity.ai) von mindestens 50 und 74% mindestens 60. Es gibt allerdings nur 42 Fonds mit einem ESG-Score von 70 oder mehr (2%).

Maximal 95% SDG-Vereinbarkeit oder ein ESG Score von 72

Der höchste Best-in-Universe ESG-Score ist 72. Dabei handelt es sich um einen Fonds mit Investments in Schweizer Aktien. Die anderen Top-Fonds sind fast ausschließlich Gesundheitsfonds. Der ESG-beste diversifizierte Fonds ist der Sycomore Social Impact Fonds mit einem ESG-Score von 71. Dieser Fonds hat einen SDG-Umsatz von 29%.

Nach SDG-Umsatz geordnet gibt es nur zwei Fonds mit 95% (oder mehr) SDG-Umsatzanteil. Neben dem von mir beratenen FutureVest Equity Sustainable Development Goals ist das der Rhenman Healthcare Equities Hedgefonds. Fünf Fonds haben 90% SDG-Umsatzvereinbarkeit oder mehr und für knapp 60 Fonds wird eine SDG-Umsatzvereinbarkeit von 80% oder mehr ausgewiesen.

Bei einem Gleichgewicht von ESG- und SDG-Kriterien liegt der FutureVest Equities SDG mit 82,5 an erster Stelle vor dem Hedgefonds von Rhenman mit 79. Nur knapp über 100 Fonds erreichen 70 und mehr und der Median der ungefähr 2.000 Fonds liegt bei 48,5 (Mittelwert 51).

Aus den nachhaltigsten ETFs bzw. aktiven Fonds stelle ich diversifizierte Portfolios mit aktivitätsbasierten Netto-SDG Umsatzvereinbarkeiten von über 70% und hohen ESG-Best-in-Universe Scores zusammen. Für das SDG ETF-Portfolio 2025 nutze ich 12 (Themen-) ETFs mit einer SDG-Umsatzvereinbarkeit von insgesamt knapp 80%. Bei dem in Bezug auf die zugrunde liegenden Wertpapiere etwas stärker diversifizierten Portfolio aus aktiv gemanagten Fonds sind es insgesamt 70% SDG-Vereinbarkeit.

Die auf besonders gute ESG-Scores statt auf SDG fokussieren Portfolios aus aktiven Fonds erreichen dagegen nur etwas über 40% SDG-Vereinbarkeit und die entsprechenden ETF-Portfolios liegen sogar bei unter 20%.

Die ESG-Scores der unterschiedlichen Portfolios, auch die der SDG-Portfolios, liegen dagegen wesentlich näher zusammen.

Vereinfachend zusammengefasst haben auch diese Portfolios in der Vergangenheit ähnliche Performances wie traditionelle Vergleichsportfolios erreicht.

Zusammenfassung und Ausblick: Nachhaltigere Fonds und bessere Regulierung?

Konsequent nachhaltige Investments sollten niedrige ESG-Risiken haben. Für an nachhaltigen Investments interessierte Anleger können zudem (aktivitätsbasierte) SDG-vereinbare (Netto-)Umsätze eine sehr wichtige weitere Kennzahl sein. Der Hauptvorteil: Diese Kennzahl ist relativ einfach verständlich und nachvollziehbar und kann somit Green- und Sozialwashing viel einfacher erkennbar machen.

Bisher gibt es aber erst wenige Fonds bzw. ETFs, die diese Kennzahl ausweisen und sehr wenige, die hohe Netto-SDG Vereinbarkeiten haben.

ESG-Scores, Principal Adverse Indicators, Do-No-Significant-Harm-Kriterien und Sustainable Investment Quoten sind oft nur aufwändig zu berechnen oder schwer nachzuvollziehen. Mindestquoten von Netto-SDG-vereinbaren Umsätzen und/oder Kapitalinvestitionen sind eine viel bessere Basis für die Selektion von nachhaltgien Investments und auch die Regulierung von Nachhaltigkeitsinvestments.

Return on sustainability: Researchpost 210

Return on sustainability illustration from pIxabay by mageephoto

14x new research on decarbon-now, biodiversity-climate interaction, green investment gap, regulation benefits, ESG literature overview, ESG disclosure effects, confusing supplier ESG, climate bond potential, water costs, return on sustainability, low-beta outperformance, active ETF benefits, trend-following and investment AI problems (#shows the number of SSRN full paper downloads as of Jan. 23rd, 2025: A low number shows a high news-potential).

Social and ecological research

Decarbon-now: Climate Transition: Why Decarbonize Now Not Later? A Literature Review from An Asset Owner Perspective by Wendy Fang, Skye King, Michael Mi, Mohamed Noureldin, Ben Squires, Eliza Wu, and Jing Yu as of Jan. 9^th, 2025 (#39): “… Integrating insights from climate science, economics, and finance, we present three key angles: (1) Scientific evidence demands urgent action to avert irreversible damage from exceeding 1.5◦C global warming. (2) Economic models may underestimate climate impacts by not fully accounting for systemic shocks, nonlinearities, and tipping points. (3) Asset pricing theory predicts a higher carbon premium (higher cost of capital for high-climate-risk assets), yet empirical evidence shows that green assets outperform brown counterparts, especially in recent years. We reconcile this debate by arguing that markets have not fully priced in climate risks; investors’ underestimation of the urgency and magnitude of damage leads to complacency and inaction, exacerbating irreversible physical risks in a feedback loop. Thus, expecting a carbon premium is unwarranted until equilibrium is reached …“ (abstract).

Intertwined risks: Nature Loss and Climate Change: The Twin-Crises Multiplier by Stefano Giglio, Theresa Kuchler, Johannes Stroebel, Olivier Wang as of Jan. 2025: “We study the economic effects of the interaction of nature loss and climate change in a model that incorporates important aspects of both processes. We capture the distinct ways in which they affect economic activity—with nature constituting a key factor of production and climate change destroying parts of output—but also the ways in which they interact: climate change causes nature loss, and nature provides both a carbon sink and adaptation tools to reduce climate damages. Our analysis of these feedback loops reveals a novel amplification channel—the Twin-Crises Multiplier—that systematically affects optimal climate and nature conservation policies” (abstract).

Green investment gap: Investing in Europe’s green future – Green investment needs, outlook and obstacles to funding the gap by Carolin Nerlich and many more from the European Central Bank as of Jan. 10^th, 2025 (#59): “The green transition of the EU economy will require substantial investment to 2030 and beyond. Estimates … all point to a requirement for faster and more ambitious action. Green investment will need to be financed primarily by the private sector. … capital markets need to deepen further, especially to support innovation financing. Progress on the capital markets union would support the green transition. Public funds will be vital to complement and de-risk private green investment. Structural reforms and enhanced business conditions should be tailored to encourage firms, households and investors to step up their green investment activities” (abstract).

Regulation benefits: More Constraints, More Consensus? How Regulation Shapes Investor Information Asymmetry by John M. Barrios, Zachary R. Kaplan, and Yongzhao Vincent Lin as of Nov. 23^rd, 2024 (#144): “We examine the relation between product market regulation (PMR) and information asymmetry among investors. … greater PMR significantly reduces bid-ask spreads and insider trading. This reduction in information asymmetry is driven by decreased operating profit volatility, which lowers uncertainty about firm operations. However, the impact of PMR diminishes when government commitment to regulation is weak, particularly during periods of elevated economic policy uncertainty or among politically active firms capable of strategically influencing regulation …” (abstract).

ESG investment research (in: Return on sustainability)

ESG overview: A Review on ESG Investing by Javier Vidal-García and Marta Vidal as of Jan. 11^th, 2025 (#86): “The overall results show significant heterogeneity, evidencing three predominant positions: some research suggests that ESG investments outperform conventional ones, others indicate a lower performance for ESG, implying a premium paid for sustainability criteria, and a third position indicates an equivalence in performance between the two. These discrepancies are attributed to the period analyzed, the sample, the statistical methodology, the culture and the ESG rating provider” (p. 25/26). My comment: If the performance is similar, why invest traditionally instead of sustainably?

ESG disclosure effects: Profit or Planet? Both! ESG Drivers of Efficient Portfolios and the Costs of Disclosure by Nico Rosamilia as of Jan. 2^nd, 2025 (#13): “This study integrates the ESG variables in the five-factor asset pricing model by Fama and French and a model-free methodology represented by machine learning. The markets‘ main focus for the governance pillar relates to board characteristics and functions. The social pillar shows the significance of employee-related issues, while greenhouse emissions for the environmental pillar. The machine learning results provide the main drivers yielding the excess returns of the best sustainable portfolios. Finally, we test the ESG prediction power of fundamentals and find that ESG disclosure diverts company resources toward long-term sustainable investment over investment for profitability in the short term“ (abstract).

Confusing supplier ESG? ESG Alignment and Supply Chain Dynamics: Evidence from U.S. Customer-Supplier Relationships by Stefan Hirth and Sai Palepu as of Jan. 15^th, 2025 (#21): “We study the role of Environmental, Social, and Governance (ESG) alignment in shaping customer-supplier relationships within U.S. supply chains. … we find that major customers significantly influence supplier ESG performance, with a 6.9% increase linked to one unit increase in the major customer ESG scores. Positive ESG divergence, where a supplier outperforms its major customer, increases the likelihood of relationship termination by 18.1% …. Replacement suppliers generally exhibit higher ESG ratings than their predecessors …” (abstract). My comment: The “positive ESG divergence” confuses me, because I don’t expect suppliers to stop selling to lower-ESG customers and neither I expect customers stop buying from higher-ESG suppliers. My supplier activities see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog

SDG investment research

Climate bond potential: Climate-linked bonds by Dirk Broeders, Daniel Dimitrov, and Niek Verhoeven from the European Central Bank as of Jan. 10^th, 2025 (#68): “Climate-linked bonds, issued by governments and supranational organizations, are pivotal in advancing towards a net-zero economy. These bonds adjust their payoffs based on climate variables such as average temperature and greenhouse gas emissions, providing investors a hedge against long-term climate risks. … The price differential between climate-linked bonds and nominal bonds reflects market expectations of climate risks. This paper introduces a model of climate risk hedging and estimates that approximately three percent of government debt in major economies could be converted into climate-linked bonds” (abstract).

Water opportunity costs: The Pricing of Water Usage by Adrian Fernandez-Perez, Ivan Indriawan and Yiuman Tse as of Jan. 14^th, 2025 (#61) “…we examine the relationship between firms’ water usage and stock returns. Our analysis shows a negative relationship between water usage and excess returns, with high-water-usage firms generating lower returns compared to their industry peers. This effect is stronger in high-water-consumption sectors like mining and manufacturing. We also find a positive link between water usage and operating costs …” (abstract).

Return on sustainability: The Sustainability Dividend: A Primer on Sustainability ROI by Matteo Tonello as of January 4^th,2025: “… companies face growing pressure to determine the return on investment (ROI) of their sustainability efforts, a critical factor in gaining stakeholder trust and ensuring long-term success. This report highlights insights from a series of Member roundtables and polls, discusses the current state of sustainability ROI, and provides guidance for companies to get started. … Few companies are capitalizing on the power of authentic and transparent sustainability communication to showcase their sustainability results and gain internal and stakeholder support for sustainability“ (p. 2).

Other investment research (in: Return on sustainability)

Low-beta outperformance? Persistence in Alphas without Persistence in Skill by Sina Ehsani and Juhani Linnainmaa as of Jan. 8^th, 2025 (#33): “The persistence of mutual fund alphas is often viewed as evidence that some funds possess skill and that this skill persists. … high-alpha funds are predominantly low-beta funds and vice versa. Thus, a strategy of investing in high-alpha funds benefits not from skill, but from a betting-against-multiple-betas effect …” (abstract).

Active ETF (AETF) benefits: ETFs as a disciplinary device by Yuet Chau, Karamfil Todorov and Eyub Yegen as of Jan. 6^th, 2025 (#126): “… Unlike mutual fund shares, ETF shares can be shorted, which enables investors to bet against manager performance. We show that AETFs exhibit over five times greater flow-performance sensitivity than mutual funds, indicating that AETF managers face harsher penalties for poor performance. When an underperforming manager joins an AETF, investors respond by shorting more shares of the fund. Consequently, this manager is more likely to exit the fund management industry, thereby enhancing overall sector efficiency and allowing more high-performing managers to remain. Moreover, the stocks held within AETFs exhibit improved price informativeness. We also find that AETF managers outperform both mutual fund and passive fund managers” (abstract).

Sensible trend-following: Can the variability of trend-following signals add value? By Philippe Declerck and Thomas Vy as of Dec. 6^th,2024 (#67): “We document that there is information in the variability of binary signals used to build a cross-asset trend-following strategy. This information may help building trend-following strategies with slightly higher Sharpe ratios. This added value may come with higher maximum drawdown to vol ratios for short lookback periods (up to one month), while the longest period tested (2.5 months) lead to a reduction of both ratios. The optimal results are obtained for observation periods of 1 to 2 months” (abstract). My comment: Since quite some time, I use 40-day averages for risk-signals if clients want to have risk-managed portfolios.

AI model overload: Design choices, machine learning, and the cross-section of stock returns by Minghui Chen, Matthias X. Hanauer and Tobias Kalsbach as of Dec. 2^nd, 2024 (#3367): “We fit over one thousand machine learning models for predicting stock returns, systematically varying design choices across algorithm, target variable, feature se lection, and training methodology. … we observe a substantial variation in model performance, with monthly mean top-minus-bottom returns ranging from 0.13% to 1.98%. These findings underscore the critical impact of design choices on machine learning predictions, and we offer recommendations for model design. Finally, we identify the conditions under which non-linear models outperform linear models“ (abstract).

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Werbung (in: Return on sustainability)

Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung mit durchschnittlich außerordentlich hohen 99% SDG-vereinbaren Umsätzen der Portfoliounternehmen und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement bei derzeit 28 von 30 Unternehmen (siehe auch My fund).

Zum Vergleich: Ein traditionelle globaler Small-Cap-ETF hat eine SDG-Umsatzvereinbarkeit von 5%, für einen Gesundheits-ETF beträgt diese 1% und für einen ETF für erneuerbare Energien 44%.

Ein Fondsinvestment war also bisher ein „Free Lunch“ in Bezug auf Nachhaltigkeit: Man erhält ein besonders konsequent nachhaltiges Portfolio mit markttypischen Renditen und Risiken.

Smart ESG investors: Researchpost 207

Smart ESG investors illustration from Pixabay by Gerd Altmann

14x new research on CSDDD, ESG charts, missing disclosures, good ESG disagreements, cheap ESG funds, smart ESG investors, ambiguity factor, brown bankruptcies, green premium, ESG literature review, ESG compensation, gender bias, index effects, and multilateral development banks (# shows number of SSRN full paper downloads as of Dec. 19th, 2024)

Social and ecological research

Good CSDDD regulation? The Entrepreneurial Impact of the European Directive on Corporate Sustainability Due Diligence by Juan Dempere, Eseroghene Udjo and Paulo Mattos as of Dec. 13^th, 2024 (#4): “The European Commission’s Directive on Corporate Sustainability Due Diligence, adopted in 2022 and approved in 2024, mandates that companies identify, prevent, and mitigate hostile human rights and environmental impacts across their operations and supply chains, integrating sustainability into corporate governance. … Findings suggest that while the directive imposes compliance challenges and costs, particularly for startups and small and medium-sized enterprises, it offers significant long-term benefits, such as improved risk management, enhanced reputation, and market differentiation. The directive promotes accountability and ethical practices, harmonizing due diligence across the EU and fostering a culture of sustainability. It concludes that companies addressing these impacts can gain a competitive edge and attract sustainability-focused investors, necessitating support mechanisms for startups and small and medium-sized enterprises to mitigate burdens and encourage compliance” (abstract). My comment: Through my shareholder engagement I encourage companies to use third party ESG evaluations of suppliers (see Supplier engagement – Opinion post #211)

ESG investment research (in: Smart ESG investors)

2000 sustainability charts: Course 2024-2025 in Sustainable Finance & Climate Change y Thierry Roncalli from Amundi Asset Management as of Dec. 13^th, 2024 (#1374): “These lectures notes have been written for the course in Sustainable Finance given at the University of Paris-Saclay. The slides cover the following topics: 1. Introduction, 2. ESG Scoring,3. Impact of ESG Investing on Asset Prices and Portfolio Returns, 4. Sustainable Financial Products,5. Impact Investing, 6. Biodiversity, 7. Engagement & Voting Policy, 8. Extra-financial Accounting, 9. Awareness of Climate Change Impacts, 10. The Ecosystem of Climate Change, 11. Economic Models \& Climate Change, 12. Climate Risk Measures, 13. Transition Risk Modeling, 14. Climate Portfolio Construction. 15. Physical Risk Modeling and 16. Climate Stress Testing & Risk Management” (abstract). My comment: Lots of interesting and current information in here (although only little information on listed impact/SDG investments)

More ESG information needed: Learning Fundamentals from Text by Alex G. Kim, Valeri V. Nikolaev, Maximilian Muhn and Yijing Zhang as of Dec. 10^th, 2024 (#364): “… We … analyze a comprehensive set of topics discussed in companies’ annual reports. … sustainability and governance are consistently among the least important topics judging by the market reactions. Building on our approach, we show that regulatory interventions can successfully enhance the relevance of textual communication. We also show that firms strategically position information within MD&A (Sö: Management discussion and analysis) to influence investor focus” (abstract).

Good ESG disagreement? Unveiling the consequences of ESG rating disagreement: An empirical analysis of the impact on the cost of equity capital by Chiara Mio, Marco Fasan, Antonio Costantini, Francesco Scarpa, and Aoife Claire Fitzpatrick as of Dec. 13^th, 2024 (#26): “Using a sample of 23,201 firm-month observations from January 2019 to March 2021, we find that ESG disagreement positively moderates the negative relationship between the average ESG score and cost of equity. … the association between ESG rating disagreement and cost of equity is more pronounced in the presence of high analyst information uncertainty”. My comment: Select the ESG rating provider with the best concept (not necessarily the market leader)

Cheap ESG funds: The Puzzle of ESG Fund Fees by Aaron J. Black and Julian F. Kölbel as of Dec. 13^th, 2024 (#34): “… (Sö: US) ESG funds have expense ratios that are, on average, 9.5 to 12.7 basis points lower than comparable non-ESG funds. This fee reduction for ESG funds first emerged in 2015 and has persisted through 2024. … Our findings highlight the strategic use of fee waivers as a key factor in driving down net expense ratios for ESG funds. These waivers, which are more frequent and larger in magnitude for ESG funds than for non-ESG funds, offset higher gross fees. … First, we examine whether investors expect lower returns for ESG funds. We find evidence for this explanation, which compliments the literature on a negative premium for green stocks by providing fund-level evidence. Second, … We present descriptive evidence that ESG funds exhibit higher holdings overlap with their peers than non-ESG funds, indicating a more competitive environment. Finally, we test whether fund providers use lower fees on ESG funds as a strategy to cross-sell higher-fee funds within the same fund family. Our findings suggests that ESG fund fees covary negatively with the fees of other funds offered by the same provider, which is consistent with the cross-selling explanation …” (p. 34/35). My comment: My ESG SDG fund has very little overlap with other sustainable funds and it’s a stand-alone fund (see e.g. Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds?)

Smart ESG investors: Analyzing Sustainable Investor Returns by Jean-Paul van Brakel, Joop Huij and Georgi Kyosev as of Dec. 13^th, 2024 (#31): “We find that, in aggregate, non-sustainable funds earned 65 basis points higher yearly returns than sustainable funds. However, after accounting for the timing and magnitude of flows, we find that sustainable investors earned 88 basis points higher yearly returns than their non-sustainable peers. We show that this outperformance is driven by an asymmetric response to historical fund performance: sustainable investors invest more after periods of strong returns but do not divest more when returns are disappointing. … The higher returns earned by sustainable investors … result from a combination of their timing skills and their ability to select funds with specific advantageous characteristics” (abstract).

Ambiguity factor? Pricing Climate Ambiguity by Francesco Rocciolo, Monica Billio, Massimo Guidolin, and Yehuda Izhakian as of Dec. 13th, 2024 (#20): “The theoretical literature on climate finance advocates the existence of a tight relation between climate change and uncertainty of the probabilistic models (ambiguity) concerning future climate-related events affecting consumption opportunities. This paper provides empirical evidence for the relevance of this phenomenon to asset pricing. … This paper suggests the existence of a so-far undisclosed climate-ambiguity cross-sectional pricing anomaly. An idiosyncratic cross-sectional climate ambiguity factor explains up to 92% of the abnormal returns linked with the anomaly”.

Brown bankruptcies: Greening the Red: Climate Transition Risk and Corporate Bankruptcy by Matilde Faralli and Costanza Tomaselli as of Nov. 21^st, 2024 (#102): “Using a novel dataset of business bankruptcies from 2000 to 2023 … we find that brown companies are more prone to financial distress and bankruptcy filings …. Analysis of emissions data reveals that facilities of reorganized firms exhibit lower emissions post-bankruptcy … This improvement is potentially driven by debt relief, which provides financial flexibility for green investments” (abstract). My comment: My focus on highly-ESG rated companies so far has not resulted in any bankruptcy

SDG and impact investment research

Green premium illusion? Reevaluating the Carbon Premium: Evidence of Green Outperformance by Christoph Hambel and Floor van der Sanden as of Dec 8^th, 2024: “The carbon premium refers to the excess returns of brown firms over their green counterparts. Our findings provide robust evidence supporting a negative carbon premium in the US based on a sample with more than 3,500 publicly listed firms from 2007 to 2023, indicating that green firms tend to outperform brown firms. The key findings carry over to the global sample with more than 10,000 firms across 90 countries. … those findings are primarily driven by vendor-estimated emissions, and the carbon premium becomes non-significant if we restrict the sample to firms that report their emissions” (abstract). My comment: I prefer to invest in green firms even without a green premium (=free green lunch)

Sustainable investment literature review: Sustainable Investing by Lubos Pastor, Robert F. Stambaugh, and Lucian A. Taylor as of Dec. 9^th, 2024 (#204): “We review the literature on sustainable investing, focusing on financial effects. First, we examine the effects of investor tastes on portfolio tilts and asset prices in a simple equilibrium setting. We establish novel connections, including a direct relation between the green portfolio tilt and the greenium. We also relate our framework to prior modeling of divestment. Finally, we review evidence related to the main concepts from our theoretical analysis, including the greenium, green tilts, climate risk, and investor tastes” (abstract).

ESG compensation issues: Regulatory and Investor Demands to Use ESG Performance Metrics in Executive Compensation: Right Instrument, Wrong Method by Marco Dell’Erbaa and Suren Gomtsian as of Dec 13^th, 2024 (#22): “The analysis highlights the limitations of ESG objectives unrelated to shareholder value and demonstrates the limited circumstances where some company specific ESG objectives can drive rapid changes in targeted performance by drawing attention to these objectives. These findings question the evolving practice of a uniform integration of ESG metrics in compensation plan design of all companies and urge regulators, institutional investors, and corporate boards to adopt a more tailored, focused, and selective strategy in integrating ESG metrics into executive pay” (abstract). My comment: With my shareholder engagement I recommend disclosing the difference between top management and average worker pay (CEO pay ratio) which should not increase with the introduction of ESG compensation.

Other investment research (in: Smart ESG investors)

Risk averse women: What matters most? Exploring the driving forces of gender differences in singles’ investment behavior by Jan-Christian Fey as of Dec. 13^th, 2024 (#9): “… I propose a novel approach for exploring the origins of gender differences in investor behavior… To illustrate my methodology, I use data from the second wave of the Deutsche Bundesbank Panel on Household Finances (PHF). Within this dataset, I limit my analysis to single households. … I find that women are less likely to hold risky financial assets than men. To a significant part, this gender gap in the extensive margin results from females’ lower willingness to take financial risks and lower household net disposable income. In an additional analysis, I attribute women’s higher level of financial risk aversion to factors other than general risk attitude. Moreover, there is substantial heterogeneity in the gender differences observed for the extensive margin and financial risk attitude. For example, the gender gap in financial risk attitude is considerably smaller for younger age groups. With respect to the conditional risky share, I find that both sexes hold a comparable proportion of their financial wealth in risky financial assets. However, within the risky financial assets portfolio, women invest in more conservative securities than men. According to my analyses, this gender gap is mainly due to inherently different investment styles rather … According to my estimates, women’s extensive margin would be 1.34 percentage points higher if they had men’s average net disposable income. That is, due to their lower income, women participate less often in risky financial assets …” (p. 34/35).

Multilateral stability: The Resilience of MDB Bonds to Credit Rating Downgrades by Thea Kolasa, Steven Ongena, and Christopher Humphrey as of Nov. 27^th, 2024 (#33): “We show that credit rating downgrades do not consistently impact multilateral development banks (MDBs) in the same way as they do firms and sovereigns. Unlike other entities, MDBs do not experience significant market reaction in bond yield spreads following credit rating downgrades. Additionally, downgrades of shareholder countries’ credit ratings do not systematically affect bond yield spreads for MDBs. The study suggests that the unique attributes of MDBs, such as preferred creditor treatment and callable capital, may account for these differences. Furthermore, MDBs’ bond issuance behavior is not significantly altered by credit rating downgrades” (abstract). My comment: For my responsible investment portfolios I use MNDB bonds instead of government bonds since many years

Hope for Small Caps: From Realized to Expected: The Passive Investing Impact by Pouya Behmaram as of Dec. 13^th, 2024 (#40): “The core of this study is the Indexing Inclusion ratio (IXI), a new measure of passive ownership. … the data suggests that as the surge in passive strategies slows down and the market moves towards equilibrium, the expected returns for high-indexed stocks may diminish. Another key finding is the concept of the indexing premium, which underscores the difference in expected returns between high and low-indexed stocks. A consistent negative indexing premium throughout the study period suggests that the strong performance of high-indexed stocks may have caught many off-guard. This study also clarifies the ambiguous performance patterns of value and small-cap stocks. The rise of passive investment and the dominance of growth and large-cap stocks in passive portfolios can provide insights into their recent underperformance” (p. 36). My comment: My fund focuses on small and mid-caps and will hopefully benefit from such a future equilibrium

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Werbung (in: Smart ESG investors)

Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-/Mid-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung mit durchschnittlich außerordentlich hohen 95% SDG-vereinbaren Umsätzen der Portfoliounternehmen und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement bei derzeit 27 von 30 Unternehmen (siehe auch My fund).

Bluewashing, bad good ESG and more: Researchpost 199

Bluewashing illustration by from Pasja1000 from Pixabay

16x new research on Chinese cars, carbon market criticism, 9-Euro ticket pollution effects, biodiversity reporting, government bond climate costs, high ESG score greenwashing, ESG performance claim risks, ESG AI and Climate AI tools, circular economy strategies, investor GHG impact, brown stock risks, anti-climate lobbying benefits, and profitable employee ESG satisfaction (#shows the number of SSRN full paper downloads as of Oct. 24^th, 2024)

Social and ecological research

Low Chinese auto threat: Europe’s Shift to EVs Amid Intensifying Global Competition by Philippe Wingender, Jiaxiong Yao, Robert Zymek, Benjamin Carton, Diego Cerdeiro, and Anke Weber from the Intenrational Monetary Fund as of Oct. 16^th, 2024 (#24): “European countries have set ambitious goals to reduce their carbon emissions. These goals include a transition to electric vehicles (EVs)—a sector that China increasingly dominates globally… we analyze a scenario in which the share of Chinese cars in EU purchases rises by 15 percent over 5 years … We find that for the EU as a whole, the GDP cost of this shift is small in the short term, in the range of 0.2-0.3 percent of GDP, and close to zero over the long term. Adverse short-run effects are more significant for smaller economies heavily reliant on the car sector, mainly in Central Europe. Protectionist policies, such as tariffs on Chinese EVs, would raise the GDP cost of the EV transition. A further increase in Chinese FDI inflows that results in a significant share of Chinese EVs being produced in Central European economies, on the other hand, would offset losses in these economies by supporting their shift from supplying the internal combustion engine (ICE) production chain to that of EVs”.

Carbon pricing: The Effectiveness of Carbon Pricing: A Global Evaluation by Suphi Sen, Serhan Sadikoglu, Changjing Ji, and Edwin van der Werf as of Oct. 23^rd, 2024 (#21): “We show that adopting a carbon price reduces per capita CO2 emissions from fossil fuel combustion by 8 to 12 percent on average. … we find gradual adjustments after implementation, resulting in a 19 to 23 percent decrease in per capita emissions after 10 years. … we also show that the estimated effects of carbon pricing policies stabilize after a decade following their enactment. … This result challenges the idea that carbon pricing may not be necessary in low-emitting countries, such as those in Africa. … Furthermore, we show that the effects of carbon pricing policies do not overlap with the potential effects of renewable energy policies to a large extent“ (p. 31/32).

Low GHG reduction? Do carbon markets undermine private climate initiatives? Pat Akey, Ian Appel, Aymeric Bellon, and Johannes Klausmann as of Sept. 25^th, 2024 (#185): “We examine firms’ behaviors in carbon secondary markets following the adoption of climate initiatives. … we confirm that such commitments are associated with lower future emissions, leading to a reduction in allowances surrendered. In response to needing fewer allowances, we observe an increase in net sales of allowances, driven primarily by a rise in sales rather than a reduction in purchases. However, we find no evidence that firms voluntarily retire allowances. … We find evidence that commitments are associated with an increase in ESG scores related to climate” (p. 23).

9-Euro pollution reduction: Public Transport Subsidization and Air Pollution: Evidence from the 9-Euro-Ticket in Germany by Eren Aydina and Kathleen Kürschner Rauck as of Nov. 20^th, 2023 (#141): “We study the short-term effects of the 9-Euro-Ticket, a major German public transport subsidization program, on particulate matter (PM). .. we find declines in PM10 and PM2.5 at core traffic stations, displaying differential effects of −0.44 µg/m3 and −0.41 µg/m3 relative to less frequented locations, which corresponds to approximately 2.8 % and 8.5 % of the current limit guidelines that the WHO suggests to mitigate adverse effects on human health. Pollution reductions materialize in regions with above-average public-transportation accessibility, are most pronounced during peak travel times on weekdays and in regions with above-average population density and larger car fleets, suggesting reductions in car usage sign responsible for our findings” (abstract).

ESG investment research (in: Bluewashing)

Biodiversity underreporting: Mind the Gap?! The Current State of Biodiversity Reporting by Gerrit von Zedlitz as of Oct. 2^nd, 2024 (#647): “… I therefore explore the biodiversity reporting of large European public firms between 2020 and 2022. … firms disclose twice as much content on climate as on biodiversity and focus more on the quantitative dimensions of reporting. But biodiversity reporting is evolving quickly. Firms reported 63% more in 2022 than they did two years ago. … current biodiversity reporting, also by early reporters, remains largely qualitative. Even in 2022, firms provided less than 20% of the recommended disclosures on targets and metrics“ (p. 31/32).

Sovereign bond climate costs: Does Climate Change Impact Sovereign Bond Yields? by Michael Barnett and Constantine Yannelis as of Oct. 1^st, 2024 (#49): “We started our analysis with the following question: Do sovereign bonds prices today incorporate future climate risk? Our theoretical analysis and empirical estimates show that in fact they do. … our empirical analysis shows that projections of future climate change damage have a statistically significant impact on sovereign bond yields. Moreover, we find that these implications are most significant for bonds with the longest maturity horizon. … countries projected to suffer more economic damage from the effects of climate change in the future see higher borrowing costs today. …” (p.38). My comment: With my responsible investment portfolios I invest in Development Bank Bonds instead of Government Bonds

Is good ESG bad? What you see is not what you get: ESG scores and greenwashing risk by Manuel C. Kathana, Sebastian Utz, Gregor Dorfleitner, Jens Eckberg, and Lea Chmel as of Oct. 12^th, 2024 (#39): “This paper shows that ESG scores capture a company’s greenwashing behavior. Greenwashing accusations are most prevalent among large companies with high ESG scores. We empirically employ a novel theoretical model that distinguishes between the communication of a company’s environmental efforts (apparent environmental performance) and its actual environmental impact (real environmental performance). The correlation of the apparent (real) environmental performance with ESG scores is significantly positive (negative). Therefore, ESG scores are unsuitable for measuring real performance. Thus, investors focusing on high ESG-rated companies may unknowingly increase their greenwashing risk exposure, and academics may use misleading information to assess greenwashing risk” (abstract). My comment: That big and high-ESG companies face higher greenwashing risks, seems to be obvious to me. ESG-ratings typically reflect ESG-risks. The authors measure real environmental performance “by Scope 1 intensity, Scope 2 intensity, Misleading communications, Supply-chain issues, Energy management, and Landscape impact” (p. 12).

ESG performance claim risks: Market vs Social norms: Evidence from ESG fund flows by Soohun Kim, S. Katie Moon, and Jiyeon Seo as of July 24^th, 2024 (#44): “Environmental, Social, and Governance (ESG) funds, designed to integrate non-financial considerations into investment strategies, can result in unintended consequences by additionally emphasizing their focus on financial performance. We employ innovative textual analysis methods on fund prospectuses to assess the degree of emphasis that funds place on ESG factors versus traditional financial returns. … ESG fund managers’ emphasis on traditional monetary metrics leads to an increase in fund flow’s sensitivity to monetary performance. Paradoxically, this heightened sensitivity to monetary performance may hinder the long-term objectives of ESG investments“ (abstract).

Bluewashing? Green or Blue? The Effect of Sustainability Committees on ESG Decoupling by Weite Qiu Qiu, Yang Jinghan, Maqsood Ahmad and Sunny Sun as of Oct. 15^th, 2024 (#10) “… we mainly investigate the effect of sustainability committees on the ESG decoupling. … Using a sample of 2,759 unique US listed firms over the 2002 to 2021 period, we find that the ESG decoupling is positively related to the sustainability committees. … decoupling measures find that sustainability committees improve firms’ environmental performance but increase the firms’ symbolic actions in social and governance aspects, indicating the potential bluewashing behavior“ (p. 27). My comment: Some sustainable fund evaluations use the existence and breadth of sustainability committees to judge the sustainability of mutual funds. There may be some bluewashinng of mutual funds, too.

ESG AI-Tool: Chatreport: Democratizing Sustainability Disclosure Analysis through LLM-based Tools by Jingwei Ni, Julia Bingler, Chiara Colesanti-Senni, Mathias Kraus, Glen Gostlow, Tobias Schimanski, Dominik Stammbach, Saeid Ashraf Vaghefi, Qian Wang, Nicolas Webersinke, Tobias Wekhof, Tingyu Yu, and Markus Leippold as of Nov.21^st, 2023 (#1732): “Empowering stakeholders with LLM-based automatic analysis tools can be a promising way to democratize sustainability report analysis. However, developing such tools is challenging due to (1) the hallucination of LLMs and (2) the inefficiency of bringing domain experts into the AI development loop. In this paper, we introduce CHATREPORT, a novel LLM-based system to automate the analysis of corporate sustainability reports, addressing existing challenges by (1) making the answers traceable to reduce the harm of hallucination and (2) actively involving domain experts in the development loop. We make our methodology, annotated datasets, and generated analyses of 1015 reports publicly available“ (abstract).

Climate-AI-Tool: ClimateBERT-NetZero: Detecting and Assessing Net Zero and Reduction Targets by Tobias Schimanski, Julia Bingler, Camilla Hyslop, Mathias Kraus, and Markus Leippold as of Nov. 20^th, 2023 (#453): “… this paper demonstrates the development and exemplary employment of ClimateBERT-NetZero, a model that automatically detects net zero and reduction targets in textual data. We show that the model can effectively classify texts and even outperforms larger, more energy-consuming architectures. We further demonstrate a more fine-grained analysis method by assessing the ambitions of the targets as well as demonstrating the large-scale analysis potentials by classifying earning call transcripts. By releasing the dataset and model, we deliver an important contribution to the intersection of climate change and NLP research” (p. 6/7).

SDG and impact investment research (in: Bluewashing)

Different circular loop effects: Mapping of circular economy strategies in the USA and their impact on financial performance by Josep Oriol Izquierdo-Montfort, Yves De Rongé, James Thewissen, Özgür Arslan-Ayaydin, and Sébastien Wilmet as of Oct. 12^th, 2024 (#26): “This study offers the first comprehensive analysis of circular economy (CE) strategies adopted by U.S. firms and their implications for financial performance. By examining over 2,000 ESG reports from 2007 to 2020 … We observe a growing emphasis on the explicit use of the term CE, alongside a notable focus on specific strategies such as recycling, reducing, and reusing. We find that disclosing CE strategies generally decreases firm value. Specifically, long-loop strategies, where the materials’ use is extended but products lose their original purpose, tend to enhance firm value. In contrast, medium-loop strategies, which involve repairing and upgrading products, negatively impact firm value. Short-loop strategies, aimed at increasing the direct utilization of products and improving resource efficiency, have no significant effect on firm value“ (abstract).

Investor impact: Institutional investors and the fight against climate change by Thea Kolasa and Zacharias Sautner as of May 6^th, 2024 (#346): “We show that climate change has a significant impact on institutional investors. Simutaneously, we demonstrate that institutional investors can have a significant positive impact on fighting climate change, particularly if they actively engage with portfolio firms to reduce carbon emissions. For risk management reasons, this is in their own interest, and it is also in the interests of society” (abstract). My comment: One of my engagement topics is GHG Scope 3 transparence so that all stakeholders can act on this information (see Shareholder engagement: 21 science based theses and an action plan)

Brown stock risks: International Climate News by Maria Jose Arteaga-Garavito, Ric Colacito, Mariano (Max) Massimiliano Croce, and Biao Yang as of Feb. 29^th, 2024 (#520): “We develop novel high-frequency indices that measure climate attention …. This is achieved by analyzing the text of over 23 million tweets published by leading national news papers on Twitter during the period from 2014 to 2022. Our findings reveal that a country experiencing more severe climate news shocks tends to see both an inflow of capital and an appreciation of its currency. In addition, brown stocks in highly exposed countries experience large and persistent negative returns after a global climate news shock” (abstract).

Lucrative anti-clima lobbying: Corporate Climate Lobbying by Markus Leippold, Zacharias Sautner, and Tingyu Yu as of March 22^nd, 2024 (#1179): “In this paper, we quantify corporate anti- and pro-climate lobbying expenses, identify the largest corporate lobbyists and their motives, establish how climate lobbying relates to business models, and document how climate lobbying is priced in financial markets. Firms spend, on average, $277k per year on anti-climate and $185k on pro-climate lobbying. Anti-climate lobbying is highly concentrated, with firms in Utilities and Petroleum & Natural Gas spending the largest total amounts. Pro-climate lobbying is more dispersed across sectors, but the Utility sector also ranks highest based on the aggregate amount of pro-climate lobbying. Recently, firms have tried to camouflage their lobbying activities by avoiding explicitly mentioning climate issues in lobbying reports. …More anti-climate spending is associated with more climate-related incidents. Firms with more anti-climate lobbying earn higher future returns, even after controlling for carbon emissions. The higher returns are not the effect of earnings surprises“ (p. 42). My comment: There seem to be too many buyers of anti-climate lobbying company shares who reward such behavior.

Profitable ESG-satisfaction: Putting the ‘S’ of ESG into Asset Pricing from a First-hand Perspective – Employee Satisfaction and Stock Returns: Evidence from Germany, Austria, and Switzerland by Nils Gimpl as of Aug. 12^th, 2024 (#99): “Utilizing a unique dataset comprising 183,944 employee reviews from the employer rating platform Kununu, the analysis reveals that firms with high levels of employee satisfaction exhibit significant outperformance in stock returns compared to those with low employee satisfaction levels. … dissecting the employer ratings, strong associations between stock return effects and employee perceptions of a firm’s environmental and social awareness, equality, treatment of older colleagues, work-life balance, and working atmosphere are identified …“ (abstract). My comment: With my shareholder engagement I propose to regularly evaluate and publish employee ESG-satisfaction. That seems to be right, see HR-ESG shareholder engagement: Opinion-Post #210

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Werbehinweis (in: Bluewashing)

Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung (aktuell durchschnittlich außerordentlich hohe 97% SDG-vereinbare Umsätze der Portfoliounternehmen) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement bei derzeit 29 von 30 Unternehmen (siehe auch My fund).

Zum Vergleich: Globale Gesundheits- bzw. Renewables- oder SDG-Fonds kommen nur auf wesentlich geringere SDG-Umsatzquoten und Engagement-Quoten.

Nature credits and more: Researchpost 198

Nature credits illustration from Pixabay by MW

14x new research on GHG-data driven innovation, EU taxonomy benefits, diverse green preferences, ESG fund manipulation, ESG rating problems, AI for ESG, Art. 8/9 fund and SDG performance, nature credits, ESG compensation, AI-based financial analysis, retirement surprises and neighbor investment effects („#“ shows SSRN full paper downloads as of Oct. 17th, 2024)

Social and ecological research

GHG-data startup push: Mandatory Carbon Disclosure and New Business Creation by Raphael Duguay, Chenchen Li, and Frank Zhang as of Oct. 14^th, 2024 (#36): “Prior work documents that mandatory GHG disclosure causes existing firms to reduce their GHG emissions by curbing economic activities and/or carbon intensity. We posit that such reductions create business opportunities for new firms. In addition, emissions reports contain information about production levels, allowing prospective entrants to estimate demand and identify profitable business opportunities. Consistent with our hypothesis, we find a significant increase in business births following the implementation of the Greenhouse Gas Reporting Program in affected industries, compared to control industries. This effect is more pronounced in industries in which existing firms actively reduce carbon emissions and face heightened pressure“ (abstract).

Responsible investment research (in: Nature credits)

Good EU taxonomy? Is the EU Taxonomy a Rational Sustainability Tool? by Ibrahim E. Sancak as of Oct. 16^th, 2024 (#89): “This paper examines the EU Sustainability Taxonomy (EUST) … As a regulation-based sustainability classification tool, it differs significantly from typical ESG indicators and perspectives by providing net positive-contribution indicators in terms of revenue, capex, and opex key performance indicators for businesses. … We find that the EUST is in the realm of the rational sustainability concept, indicating that the EUST is a rational sustainability tool, and it supports sustainability at heart by definition and design. The EUST is a real sustainability tool that can restore the losses of our planet and answer to challenges. It does not breach the free market realities. Companies decide their own sustainability policies; they can decide to what extent they should be Taxonomy-aligned, they can decide how much they have to invest in sustainability transformation, and they can freely decide which Taxonomy KPIs they have to focus on …“ (p. 21). My comment: I like the focus of the EUST on revenues, opex and capex but it can only provide politically accepted low minimum standards (see discussion about Gas, nuclear energy and defense industry) and it mostly leaves out social and shareholder engagement topics. It may be rational and not good enough, anyhow.

Different green preferences: The Sustainability Preferences of Individual and Institutional Investors by Gosia Ryduchowska and Moqi Groen-Xu as of Oct. 16^th, 2024 (#16): “We compare the sustainability preferences of institutional investors to other investors, using the universe of holdings in bonds traded in Norway in the years 2010-20. We identify sustainability investors as those who choose Green Bonds over similar non-green bonds by the same issuers. … individual investors hold riskier portfolios with higher volatility and more defaults, although financial investors do not. Our results suggest that individual Green Bond investors have non-pecuniary green preferences but are not representative of the majority of sustainable investment in the market“ (abstract). My comment: I initiated the DVFA PRISC toll which helps investors to easily determine their sustainable investment policies and use this tool to compare investment options (DVFA_PRISC_Policy_for_Responsible_Investment_Scoring.pdf). A new version will be published soon.

ESG fund pushing? ESG Favoritism in Mutual Fund Families by Anna Zsofia Csiky, Rainer Jankowitsch, Alexander Pasler, and Marti G. Subrahmanyam as of Oct. 15^th, 2024 (#34): “We empirically analyze whether mutual fund families favor their ESG funds potentially at the expense of their non-ESG siblings … We use a survivorship bias-free sample obtained from Morningstar Direct, covering domestic US equity open-end funds from 2005 to 2022. … Our approach is built on comparing the performance of ESG with regular funds within and outside the family. Similar to the prior literature, we interpret a higher return differential between ESG and regular funds within the family, compared to outside, as an indication of cross-fund subsidization. We find a significant net-ofstyle return spread of around 2% per year, indicating sizable ESG favoritism within fund families“ (p. 30).

ESG rating problems and improvements: It’s Hard to Hit a Target that Doesn’t Exist: A Novel Conceptual Framework for ESG Ratings by Jorge Cruz-Lopez, Jordan B. Neyland, and Dasha Smirnow as of Oct. 16^th, 2024 (#8): “… Our framework consists of analyzing three different stages in the production of ESG ratings: (1) Data Collection and Disclosure, (2) Measurement, and (3) Dissemination. At each stage, we clearly identify the parties involved, their incentives and limitations, and the noise or bias introduced to ESG ratings due to misaligned incentives, data constraints, or inadequate regulations… solutions include improving disclosure standards, incentivizing public data access to foster competition as well as transparency of rating methodologies, and relying on regular audits to verify the accuracy of corporate disclosures and ESG ratings“ (abstract).

Readability ESG impact: Evaluating the Impact of Report Readability on ESG Scores: A Generative AI Approach by Takuya Shimamura, Yoshitaka Tanaka, and Shunsuke Managi as of July 8^th, 2024 (#46): “This study explores the relationship between the readability of sustainability reports and ESG scores for U.S. companies using GPT-4, a generative AI tool. The findings reveal a positive correlation between context-dependent readability scores and the average of multiple ESG scores …. Conversely, existing readability scores reflecting word features show no correlation with ESG scores“ (abstract).

AI for ESG: AI in ESG for Financial Institutions: An Industrial Survey by Jun Xu as of Oct. 11^th, 2024 (#21): “This paper surveys the industrial landscape to delineate the necessity and impact of AI in bolstering ESG frameworks. … our findings suggest that while AI offers transformative potential for ESG in banking, it also poses significant challenges that necessitate careful consideration. … We conclude with recommendations with a reference architecture for future research and development, advocating for a balanced approach that leverages AI’s strengths while mitigating its risks within the ESG domain“ (abstract).

No Art. 8/9 outperformance: SFDR versus performance classification: a clustering approach by Veronica Distefano, Vincenzo Gentile, Paolo Antonio Cucurachi and Sandra De Iaco as of July 10th, 2024 (#25): EU “… investment companies have to disclose in the key information document the category of each mutual fund. This regulation came into force in March 2021 and the first reaction of the market has been a strong shift of Assets Under Management (AUM) towards art. 8 and art. 9 funds. … This study showed that the expectations of better performances only based on the SFDR (Sö: Sustainable Finance Disclosure Regulation) classification is biased. … the contingency table show a low correlation of the classifications based on ESG declaration and on performances. … using the SFDR classification to create expectations of better future performance could be misleading“ (p. 8). My comment: I rather heard complaints lower performance expectations for Art. 8/9 funds due to perceived investment limitations. If there are similar returns, why not invest more sustainably?

Impact Investment research

Green cost reduction and SDG performance: The effects of ESG performance and sustainability disclosure on GSS bonds’ yields and spreads: A global analysis by Oliviero Roggi, Luca Bellardini, and Sara Conticelli as of July 10^th, 2024 (#30): “Considering a sample of 3,960 green, sustainable, and sustainability-linked (GSS) bonds issued in global capital markets, this study investigates the effects of the issuer’s environmental, social, and governance (ESG) performance on both the issue-specific yield spread — defined as the difference in yield-to-maturity between a corporate debt instrument and a sovereign comparable — and its spread vis-à-vis a sovereign comparable. The findings indicate that there is a negative association between ESG performance and bond spreads, implying that a greater commitment to the sustainable transition today is a winning strategy, for a company, to reduce the cost of debt for future projects. … we find that the real enabler of curbing the unexplained portion of risk is a detailed disclosure on the use of proceeds. This is likely to minimise the likelihood of greenwashing” (abstract).

“… With regard to Core yield, the pursuit of Goal 2 (Zero hunger) and Goal 9 (Industry, innovation and infrastructure) is associated with a reduction in risk, whereas Goal 3 (Good health and well-being) and Goal 12 (Responsible consumption and production) are found to be risk-accruing. With regard to Core spread, Goal 5 (Gender equality), in addition to Goals 2 and 9, is negatively associated with a company’s cost of debt, net of the financial characteristics of the issue. The pursuit of Goal 12 and Goal 8 (Decent work and economic growth) has the opposite effect, but not Goal 3” (p. 6). My comment: This is one of the few studies with SDG-analysis. I hope that more will come.

Nature credits: Advancing Effective and Equitable Crediting: Natural Climate Solutions Crediting Handbook by John Ward, Christine Gerbode, Britta Johnston, and Suzi Kerr as of Oct. 10^th, 2024 (#8): “Natural Climate Solutions, or NCS, are activities to protect, restore, or enhance ecosystems in terms of their ability to remove or sequester carbon. They can deliver about one third of the greenhouse gas emissions reductions needed this decade to achieve key climate goals. Implemented well, they also provide benefits for people and nature. Crediting of NCS mitigation is a powerful way to unlock this potential–but it is also controversial. … By clarifying essential terms and concepts underpinning NCS carbon crediting, highlighting solutions to technical challenges, and providing informed framing to help newcomers understand prominent ongoing debates, the NCS Crediting Handbook seeks to provide the reader with a clear introduction to the world of NCS crediting, and an impartial, accessible guide to support their decision making“ (abstract).

ESG compensation challenges: Implicit versus Explicit Contracting in Executive Compensation for Environmental and Social Performance by Roni Michaely, Thomas Schmid, and Menghan Wang as of Oct. 16^th, 2024 (#31): “We examine whether linking executive pay to environmental and social targets (ES Pay) can help improve firms’ environmental and social performance. … firms that use explicit contracting for targets that can be precisely and objectively measured, such as emissions and incident rates, demonstrate better ES performance. By contrast, firms with implicit contracting show little improvement in these areas. However, for targets that are hard to measure, such as community engagement, or E/S reporting, implicit contracts are effective and can even outperform explicit contracting. … we observe a positive association between the adoption of ES Pay schemes and total CEO compensation … even when an increase in executive pay is observed, it is also associated with improved firms’ ES conduct. We find no increase in CEO pay among those firms using explicit schemes, or implicit schemes for easily measurable targets“ (p. 28/29). My comment: CEO pay is usually already very high with, quite often, >300x the average employee compensation. Introducing sustainability goals in executive compensation should not lead to a growing gap, in my opinion. One of my 5 shareholder engagement topics therefore is CEO to average employee pay ratio disclosure.

Other investment research (in: Nature Credits)

Financial Analyst AI-Risks: Large Language Models as Financial Analysts by Miquel Noguer i Alonso and Hanane Dupouy as of Oct. 7^th, 2024 (#1004): “The ability of … GPT-4o, Gemini Advanced, and Claude 3.5 Sonnet to perform financial analysis highlights their potential as powerful tools for interpreting complex financial data. … When it comes to extrapolation questions that are the core of valuation and stock picking, the level of analysis provided by these LLMs is similar to that of skilled humans” (p. 15). My comment: Given the underperfomance of actively managed funds compared to passive benchmarks, this AI-performance is not enough.

Retirement surprises: Patterns of Consumption and Savings around Retirement by Arna Olafsson and Michaela Pagel as of Oct. 7^th, 2024 (#23): “Using a large transaction-level data set from a financial aggregator on income, spending, account balances, and credit limits in Iceland, we document“ (p. 16) … First, many households have barely any savings and hold substantial amounts of consumer debt at the time of retirement. Second, consumption falls at retirement, possibly due to work-related expenses, bargain shopping, or because households face unexpected adverse shocks. Third, liquid savings increase at retirement. Fourth, wealth increases more over the course of retirement for the average household”.

Neighbor investment-effects: Wealth Accumulation: The Role of Others by Michael Haliassos as of Oct. 7^th, 2024 (#19): “First, interacting with a larger proportion of neighbors with college-level economics or business education tends to promote retirement saving. … Second, college-educated people exposed to greater local wealth inequality as well as more wealth mobility at the start of their economic lives, tend to take more asset risks later in life and thus accrue greater wealth, leaving the less-educated behind. … Third, the current pattern of access to financial advice, under which the young and less experienced are also less likely to receive financial advice, tends to discourage stock market participation and reduce equity in retirement portfolios, because the peers of the young tend to be more conservative in their recommendations to them than professionals would have been. Professional advisors are more conservative towards the older and wealthier people that they do meet, compared to their peers. Finally, background stressors such as crises and wars, but also personal problems, occupy people’s minds as they make saving decisions” (p. 23/24).

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Werbehinweis (in: Nature credits)

Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung (aktuell durchschnittlich außerordentlich hohe 97% SDG-vereinbare Umsätze der Portfoliounternehmen: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen (siehe auch My fund).

Zum Vergleich: Globale Gesundheits- bzw. Renewables- oder SDG-Fonds kommen nur auf wesentlich geringere SDG-Umsatzquoten, ESG-Ratings und Engagement-Quoten.

Sustainability deficits: Researchpost 188

Sustainability deficits picture from Pixabay by Alexas Fotos

11x new research on green jobs, carbon prices, GHG reporting, accountants, ESG disclosures, institutional ESG, Governance returns, kid investments, ETF liquidity, loss aversion and customized investments (# shows SSRN full paper downloads as of August 8^th, 2024)

Social and ecological research

Good green job effects: The Green Future: Labor Market Implications for Men and Women by Naomi-Rose Alexander, Longji Li, Jorge Mondragon, Sahar Priano, and Marina M. Tavares from the International Monetary Fund as of July 25^th, 2024 (#15): “In AEs (Sö: Advanced economies), green jobs are predominantly found among high-skilled workers and cognitive occupations, whereas in EMs, many green jobs are manual positions within the construction sector …. green jobs are disproportionately held by men in both AEs and Ems … Additionally, we observe a green wage premium and narrower gender pay gaps in green jobs … many green jobs are well-positioned to harness the benefits of AI advancements … green jobs with a greater capacity to leverage AI exhibit a reduced gender pay gap” (p. 40/41).

Sustainability deficits (1): Negative carbon price effects: Firms’ heterogeneous (and unintended) investment response to carbon price increases by Anna Matzner and Lea Steininger as of July 29^th, 2024 (#13): “Using balance sheet data of 1.2 million European firms and identified carbon policy shocks, we find that higher carbon prices reduce investment, on average. However, less carbon-intensive firms and sectors reduce their investment relatively more compared to otherwise similar firms after a carbon price tightening shock. Following carbon price tightening, firms in demand-sensitive industries see a relative decrease not only in investment but also in sales, employment and cashflow. Moreover, we find no evidence that higher carbon prices incentivise carbon-intensive firms to produce less emission-intensively. Overall, our results are consistent with theories of the growth-hampering features of carbon price increases and suggest that carbon pricing policy operates as a demand shock“ (abstract).

Sustianbility deficits (2): Corporate carbon deficits: The MSCI Sustainability Institute Net-Zero Tracker from the MSCI Sustainability Institute as of July 2024: “A series of indicators that investors use to guide transition finance … suggest that the world’s listed companies remain largely misaligned with global climate goals … Just over one-fifth (22%) of listed companies have set a decarbonization target that aims to reduce their financially relevant GHG emissions to net-zero by 2050 in line with a science-based pathway, as of May 31, 2024, an increase of eight percentage points from a year earlier … 38% of companies disclosed at least some of their upstream Scope 3 emissions, up eight percentage points from a year earlier, while 28% disclosed at least some of their downstream Scope 3 emissions, up seven percentage points over the same period” (p. 4). My comment: I ask every company within my fund to fully disclose GHG Scope 3 data so that all stakeholders can engage regarding these data.

Sustainability deficits (3): Accountant ESG deficits: ESG Assurance and Comparability of Greenhouse Gas Emission Disclosures by Jenna Burke, Jiali Luo, Zvi Singer, and Jing Zhang as of Aug. 7^th, 2024 (#7): “… a recent rule from the SEC mandates expanded ESG disclosure, including external assurance of reported greenhouse gas (GHG) emissions. …. we … find that companies with ESG assurance report more comparable GHG emissions. Comparability is further enhanced when companies use the same assurance provider and when the provider is more experienced. We also find some evidence that comparability is higher when assurance is provided by consulting and engineering firms than by accounting firms“ (abstract).

ESG investment research (in: Sustainability deficits)

Sustainability deficits (4): No ESG disclosure benefits? Does mandating corporate social and environmental disclosure improve social and environmental performance?: Broad-based evidence regarding the effectiveness of Directive 2014/95/EU by Charl de Villiers, John Dumay, Federica Farneti, Jing Jia, and Zhongtian Li as of July 11^th, 2024 (#33): “The Directive …requires companies that are (i) listed on EU exchanges or have significant operations within the EU; (ii) employing more than 500 people; or (iii) deemed to be public-interest entities; to report their performance on non-financial matters, including environmental issues, social and employee matters, human rights, anti-corruption, and bribery” (p. 1). … “Analysing a cross-country sample from 2009-2020, we find that social and environmental performance has not meaningfully improved since the Directive was enacted, and instead of EU companies increasing their performance more than US companies, there was either no difference (for social performance) or US companies improved more than EU companies (for environmental performance). Thus, the results suggest that the Directive did not have the intended impact on the social and environmental performance of EU companies “ (p. 19). My comment: Is more regulatory pressure required or more stakeholder engagement or both?

Sustainability deficits (5): Institutional ESG deficits: Comparisons of Asset Manager, Asset Owner, and Wealth and Retail Portfolios by Peter Jacobs, Ursula Marchioni, Stefan Poechhacker, Nicolas Werbach, and Andrew Ang from BlackRock as of April 16^th,2024 (#183): “We examine 800 portfolios from European asset managers, asset owners, and wealth/retail managers … The average European institutional portfolio exhibits a total risk hovering between 10 to 11%, with little difference across the average asset manager, asset owner, and wealth/retail portfolios. Equity risk … accounting for almost 90% of the total portfolio risk. Decomposing equity risk further, country-specific tilts are the primary driver of equity risk, contributing approximately half of the overall equity risk. Style factors and sectors represent 35% and 17% of the equity risk, respectively. … the largest style factor exposure is small size. … the average European institution has lower carbon intensities, but perhaps surprisingly lower ESG scores, than the MSCI ACWI benchmark“ (p. 22). My comment: I do not expect significant positive share- and bondholder pressure from these investors. This opens room for more customized investor-driven solutions (see the last research publication of this blog post).

Governance returns: From Crisis to Opportunity: The Impact of ESG Scores and Board Structure on Firms’ Profitability by Luis Seco, Azin Sharifi and Shiva Zamani as of Aug. 6^th, 2024 (#13): “This study … of firms listed in the S&P 500 index from 2016 to 2022 reveals that firms with a higher BSI index (Sö: Board structure index) demonstrate enhanced financial profitability …. Among the ESG components, only the Governance score significantly impacts financial profitability, … whereas Environmental and Social scores do not show a significant direct effect on net profit margins … the positive impact of robust board structures and governance practices is more pronounced in the post-COVID period “ (p. 16/17). My comment: Our study from 2014 revealed similar results, see Fetsun, A. and Söhnholz, D. (2014): A quantitative approach to responsible investment: Using ESG multifactor models to improve equity portfolios, Veritas Investment Arbeitspapier, presented at PRI Academic Network Conference in Montreal, September 23^rd (140227 ESG_Paper_V3 1 (naaim.org))

Other investment research (in: Sustainability deficits)

Kids beat adults: Invest Like for Your Kids: Performance and Implications of Children’s Investment Accounts on Portfolios in Adulthood by Denis Davydov and Jarkko Peltomäki as of April 16^th, 2024 (#78): “… we explore the performance of custodial investment accounts for children and their subsequent impact on portfolio performance in adulthood. We find that children’s investment accounts demonstrate superior performance, boasting an average Sharpe ratio over 35% higher and an annual return three times greater compared to adults’ accounts. Notably, the observed trading activity and account behavior in children’s accounts suggest a preference for passive investment strategies. In addition, the combination of lower volatility and higher returns in children’s accounts may indicate a more effective diversification strategy adopted by parents. … the risk-taking and overall account activity of teenage boys become significantly higher than those of girls, resulting in deteriorated investment performance. … individuals who had investment accounts during childhood consistently demonstrate superior performance compared to their peers who started investing in adulthood” (p. 26/27).

ETF liquidity risk: Passing on the hot potato: the use of ETFs by open-ended funds to manage redemption requests by Lennart Dekker, Luis Molestina Vivar, and Christian Weistroffer as of Aug. 1^st, 2024 (#12): “Investment funds are the largest group of ETF investors in the euro area. Our results … show that investment funds were the most run-prone investor type during the COVID-19 crisis. We then show that ETF selling by open-ended funds during March 2020 was stronger for funds facing larger outflows. … This finding is consistent with funds using ETFs for managing liquidity and raising cash if needed“ (p. 16).

Loss aversion? A meta-analysis of disposition effect experiments by Stephen L. Cheung as of pril 3^rd, 2024 (#53): “This paper reports a meta-analysis of the disposition effect – the reluctance to liquidate losing investments – in three standard experimental environments in which this behaviour is normatively a mistake. … the literature finds that investors are around 10% more willing to sell winning compared to losing assets, despite optimal choice dictating the opposite“ (abstract).

Hyper-managed customized investments? Beyond Active and Passive Investing: The Customization of Finance from the CFA Institute Research Foundation by Marc R. Reinganum and Kenneth A. Blay as of Aug. 6^th, 2024: “…The overwhelming ascendancy of index funds associated within the US Equity Large-Cap Blend category is the exception rather than the rule. … The economics of customizable portfolios, enabled by technology facilitating hyper-managed separate accounts, will yield better outcomes for investors in terms of after-tax returns and alignment with investor attitudes and preferences. … In the future, active and passive investing will coexist but will increasingly take place within hyper-managed separate accounts, where the passive component will be implemented in an unbundled way rather than in a fund to maximize net economic benefits and other objectives. … The next frontier for asset managers and their service providers will be the era of low-cost customization“ (p. 76/77). My comment: See Index- und Nachhaltigkeits-Investing 2.0? | CAPinside

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Werbehinweis

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Green salt: Researchpost 187

Green salt picture by H. Hach from Pixabay

10x new research on green salt, digital aid, ESG risks, ESG ratings, direct ESG indexing, environmental engagement, green regulation, stock return dispersion and equal weigthing

Social and ecological research

Green salt? Expanding the Use of Molten Salt for Renewable Energy Storage and the Role of Green Technology Policies by Lavinia Heisenberg and Richhild Moessner as of July 31^st, 2024 (#6): “This paper discussed expanding the use of molten salt for renewable energy storage and generation, in an environmentally friendly way and making use of existing infrastructure. These include using molten salt to store solar energy in concentrated solar plants, replacing coal by molten salt to power thermal plants and thereby convert existing coal thermal plants to renewables, and linking these two uses. They also include molten salt thermal batteries for grid-scale energy storage, and using molten salt in green hydrogen production” (p. 9).

Digital humanitarian aid: Can Digital Aid Deliver during Humanitarian Crises? by Michael Callen, Miguel Fajardo-Steinhäuser, Michael G. Findley, and Tarek Ghani as of July 31^st, 2024 (#3): “We experimentally evaluated digital payments to extremely poor, female-headed households in Afghanistan …. The payments led to substantial improvements in food security and mental well-being. Despite beneficiaries’ limited tech literacy, 99.75% used the payments, and stringent checks revealed no evidence of diversion. … Delivery costs are under 7 cents per dollar, which is 10 cents per dollar less than the World Food Programme’s global figure for cash-based transfers” (abstract).

ESG investment research (in: Green salt)

Low ESG risks pay: MSCI ESG Ratings and Cost of Capital by Jakub Malich and Anett Husi from MSCI Research as of July 22^nd, 2024: “The objective of our study was to determine whether companies with higher resilience to financially material sustainability-related risks (as measured by MSCI ESG Ratings) did benefit from a lower cost of capital. Key takeaways: We found a significant historical correlation between a company’s MSCI ESG Rating and its financing costs. This relationship held in both equity and debt markets … Companies assessed to be the most resilient to financially material sustainability-related risks consistently financed themselves more cheaply than those considered more vulnerable“ (p. 4). My comment: I invest in stocks with low ESG risks and my returns have been good so far, see e.g. Fonds-Portfolio: Mein Fonds | CAPinside

Better social than green? The Influence of ESG Ratings on the Performance of Listed Companies in Germany during by Crisis by Katharina Neuenroth and Alexander Zureck as of July 29^th, 2024 (#8): “Data of a sample of 20 companies listed in the Deutscher Aktienindex (DAX) was utilised for the analysis and a time period of two years (2020 – 2021) was considered. The required information was gathered from the Refinitiv Thomson Reuters database. The research found no significant influence of environmental and governance ratings on EBITDA. However, a significant positive influence of the social rating was observable.“ (abstract). My comment: My SDG-portfolios have more social than green exposure and most have performed rather well over time see www.soehnholzesg.com

Direct ESG Indexing: Smart Beta, Direct Indexing, and Index-Based Investment Strategies by from Jordan Doyle and Genevieve Hayman from the CFA Research Institute as of July 30^th, 2024: “…. we review the origins of index investing and develop an indexing framework that captures incremental levels of active management for new index-based products within the evolving index investing landscape. This conceptual framework helps investors, firms, and policymakers better understand and define index-based products. Additionally, we offer policy recommendations to clarify terminologies with respect to smart beta products and direct indexing, and we encourage increased disclosure on the part of index providers regarding indexing methodologies” (p. 3). …. “Several recent studies have highlighted the increased calls for personalized strategies and product offerings within investment management. In a Charles Schwab Asset Management (2023) survey, 88% of ETF investors expressed interest in further personalizing their investment portfolio, with 78% wishing to better align investments with their personal values” (p. 7). My comment: I offer direct ESG and SDG index solutions since quite some time now but demand has been very low, see Direct ESG Indexing: Die beste ESG Investmentmöglichkeit auch für Privatkunden?

Good ESG banks? Stock returns and ESG scores of banks by Silvia Bressan and Alex Weissensteiner as of July 29^th, 2024 (#12): “We analyze the relationship between United States bank stock returns and ESG scores from January 2013 to December 2022. Our findings indicate that during bear markets, high ESG banks perform slightly better than low ESG banks. However, during market rebounds, the outperformance of high ESG banks becomes significantly more pronounced. … during the more stable period from March 2021 to December 2022 … high ESG banks exhibiting lower equity performance“ (p. 30/31).

Impact investment research (in: Green salt)

Green bank returns: Does Banks’ Environmental Engagement Impact Funding Costs? by Md Jaber Al Islam, Fernando Moreira, and Mustapha Douch as of July 24^th, 2024 (#12): “This study investigates 853 banks across 59 countries from 2004 to 2021, identifying a significant relationship between banks’ environmental engagement and lower funding costs. This association is more pronounced among banks with better management, lower deposit levels, and operating in countries with higher GDP. Depositors and investors support ecofriendly banks due to their favourable conditions in risk, capital adequacy, profitability, and reputation. Besides, the Paris Agreement has been instrumental in heightening awareness among depositors and investors regarding climate change.” (abstract).

Effective green regulation: The impact of ECB Banking Supervision on climate risk and sustainable finance by Lena Schreiner and Andreas Beyer as of July 23rrd, 2024 (#37): “This paper provides a first empirical analysis of the impact of the European Central Bank’s (ECB’s) climate-risk-related supervisory efforts … We …. find a significant impact on both improvements in climate risk exposure and management and on an increase in banks’ green finance activities“ (abstract).

Oher investment research

Stock return dispersion: Which U.S. Stocks Generated the Highest Long-Term Returns? by Hendrik Bessembinder as of July 16^th, 2024 (#5538): “This report describes compound return outcomes for the 29,078 publicly-listed common stocks contained in the CRSP database from December 1925 to December 2023. The majority (51.6%) of these stocks had negative cumulative returns. However, the investment performance of some stocks was remarkable. Seventeen stocks delivered cumulative returns greater than five million percent (or $50,000 per dollar initially invested) … The highest annualized compound return for any stock with at least 20 years of return data was 33.38%, earned by Nvidia shareholders” (abstract).

Equal weigthing: Worth the Weight by Tim Edwards, Anu R. Ganti, and Hamish Preston from S&P Dow Jones Indices as of July 23^rd, 2024: “The S&P 500 Equal Weight Index has recently displayed underperformance in comparison to the S&P 500, driven primarily by historical extremes of performance in the market’s largest names. Moreover, concentration in the broader U.S. equity market has increased to its highest in many years, while single-stock momentum trends are showing unusual signs of extension. Historically, such periods have tended to eventually revert toward their historical means, with such reversion accompanied by stronger relative performance by equal weight indices” (p. 17). My comment: I use equal weighting for equity portfolios since many years and are happy with the results, see e.g. here Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com)

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Werbehinweis (in: Green salt)

Zur jetzt wieder guten Performance siehe zum Beispiel Fonds-Portfolio: Mein Fonds | CAPinside

Biodiversity finance and more: Researchpost #186

Biodiversity finance illustration from ecolife zone (https://www.ecolife.zone/)

18x new research on climate regulation, green millionaires, donations, fintechs, ESG ratings, climate analysts, ESG funds, social funds, smart beta, asset allocation, research risks, green hedge funds, biodiversity, impact funds, proxy voting, sustainable engagement, and timberland investing

Social and ecological research

Non-negative climate regulation? Firms’ Response to Climate Regulations: Empirical Investigations Based on the European Emissions Trading System by Fotios Kalantzis, Salma Khalid, Alexandra Solovyeva, and Marcin Wolski from the International Monetary Fund as of July 15^th, 2024 (#13): “Using a novel cross-country dataset … We find that more stringent policies do not have a strong negative impact on the profitability of ETS-regulated or non-ETS firms. While firms report an increase in their input costs during periods of high carbon prices, their reported turnover is also higher. Among ETS-regulated firms which must purchase emission certificates under the EU ETS, tightening of climate policies in periods of high carbon prices results in increased investment, particularly in intangible assets” (abstract).

Greening millionaires? Wealth transfer intentions, family decision-making style and sustainable investing: the case of millionaires by Ylva Baeckström and Jeanette Carlsson Hauff as of June 21^st, 2024 (#13): “… little is known about how the wealthy make sustainable investment decisions. Using unique survey data from 402 millionaires … Our results show that funds are more likely to be channeled towards sustainable causes in families that are society-oriented and adopt democratic decision-making styles compared to families whose decision-making style is autocratic and intend for future generations to inherit their wealth” (abstract).

Selfish donations? Donations in the Dark by Ionela Andreicovici, Nava Cohen, Alessandro Ghio, and Luc Paugam as of March 13^th, 2024 (#103): “We examine the impact of the 2013 shift from mandatory to voluntary disclosure of corporate philanthropy in the United Kingdom (UK). … we find that, relative to a sample of United States firms, UK firms (i) reduce corporate philanthropy disclosure and (ii) increase corporate philanthropic donations in the voluntary period. … Overall, our results point towards the idea that the shift to voluntary disclosure (i) reduces managerial incentives to transparently report corporate philanthropic activities and (ii) exacerbates managers’ incentives to engage in self-serving corporate donations“ (abstract).

Limited fintech-inclusion: Promise (Un)kept? Fintech and Financial Inclusion by Serhan Cevik from the International Monetary Fund as of July 15^th, 2024 (#12): „The ownership of accounts in formal financial institutions increased from 51 percent of the world’s adult population in 2011 to 76 percent in 2021, but there is still significant variation across countries. … While digital lending has a significant negative effect on financial inclusion, digital capital raising is statistically insignificant. … the overall impact of fintech is also statistically insignificant for the full sample, but becomes positive and statistically highly significant in developing countries” (abstract).

ESG investment research (in: Biodiversity finance)

Positive High-ESG effects: The Effects of ESG Ratings on Firms’ Financial Decisions by Sahand Davani as of July 12^th, 2024 (#27): “I show that firms with higher ESG ratings (high-ESG firms) have higher ownership by ESG institutional investors, have lower perceived cost of capital, and issue more net equity than net debt compared to similar firms with lower ESG ratings (low-ESG firms). Consistently, I find that high-ESG firms try to maintain their high ESG ratings at the current levels, while the ESG ratings of similar low-ESG firms decline” (abstract).

Analysts climate ignorance: Analysts’ Perspectives on Climate Change: An Examination of Analyst Reports by Jesse Chan as of July 12^th, 2024 (#30): “Despite focusing on firms operating in industries most exposed to climate change, I find a minority of analysts (<11%) discuss climate topics in their analyst reports … analysts are concentrating their discussion among electric utilities and other electronic equipment manufacturers, and typically discuss climate change related business opportunities and regulatory issues related to climate change. Climate related discussions, and particularly discussion of regulatory issues, are associated with more pessimistic long-term growth forecasts and revisions, implying analysts expect these issues to affect firms‘ financial performance in the long run” (abstract).

Easy ESG sell? ESG and Mutual Fund Competition? by Ariadna Dumitrescua and Javier Gil-Bazo as of July 12^th, 2024 (#37): “Investors have heterogenous preferences for ESG. Not all investors care for sustainability, and among those who do, they value different ESG objectives differently. The model predicts that in equilibrium the market is segmented: neutral investors (those with no preference for ESG) invest only in conventional funds and ESG investors invest only in ESG funds. While competition is fierce in the conventional segment of the market and only the best funds survive, it is relaxed by investors’ ESG preferences in the ESG segment of the market. If the intensity of ESG investors’ preferences is sufficiently high, ESG funds of lower quality will be able to survive“ (p. 18/19).

ESG steering? Smarter Beta Investing: Forget Exclusions, add Steering towards lower Emissions by Heiko Bailer and Jonathan Miller as of July 17^th, 2024 (#28): “Steering strategically tilts portfolios towards sustainable factors such as lower emissions … This research investigates the effectiveness of steering compared to exclusion-based strategies. … The analysis, spanning September 2019 to May 2024, reveals that steering maintains or improves risk-adjusted returns compared to exclusions. Additionally, steering portfolios exhibit lower risk and avoid unintended biases toward smaller companies, often observed with exclusions“ (abstract). My comment: The resulting steering strategies appear to have rather limited SDG-revenue alignments. My experience shows attractive risk/return characteristics for strategies using many strict exclusions and demanding ESG- and SDG-Revenue requirements. It would be interesting to compare the results with steering approaches (which may be driven by significant Tech allocations).

Risk reducing ESG: Can Environmental and Social Stocks Weather Market Turbulence? A risk premia analysis by Giovanni Cardillo, Cristian Foroni and Murad Harasheh as of July 23^rd, 2024 (#28): “Analyzing all listed firms in the EU and UK and exploiting COVID-19 as an exogenous shock, our findings challenge prior literature by demonstrating that firm sustainability does not necessarily reduce the cost of equity in adverse states of the economy. … Nevertheless, our results indicate that riskier yet more sustainable firms experience a relatively smaller increase in their cost of equity, suggesting a moderating rather than a first-order effect of sustainability. Second, investors positively value firms that reduce CO2 emissions and offer green and more ethical products, as evidenced by lower risk premia assigned to such firms. Lastly, we provide robust evidence that more sustainable firms exhibit less uncertain and higher cash flows during the pandemic than their less sustainable counterparts“ (abstract).

Green optimization limits: Portfolio Alignment and Net Zero Investing by Thierry Roncalli from Amundi as of July 12^th, 2024 (#28): “First, the solution is parameter and data sensitive. In particular, we need to be careful in choosing the carbon scope metric … Scope 3 and consumption-based emissions need to be taken into account to align a portfolio with a net-zero scenario. The problem is that we see a lack of data reliability on these indirect emissions today. Similarly, the solution is highly dependent on the green intensity target and the level of self-decarbonization we want to achieve. … The second key finding is that portfolio decarbonization and net-zero construction lead to different solutions. … These results are amplified when we add the transition dimension to the optimization program. … it is quite impossible to achieve net zero alignment without allowing the algorithm to exclude companies (or countries) from the benchmark. … As a result, some key players in the transition, such as energy and utility companies, unfortunately disappear. … The final lesson is that it is easier to implement net zero in bonds than in equities. … there is another important point that is missing from our analysis. This is the issue of engagement. … The reason is that engagement is difficult to model quantitatively” (p. 20-22). My comment: Given the many discretionary decisions for “optimizations”, I usually call them “pseudo-optimizations”.

No green outperformance? Do sustainable companies have better financial performance? Revisiting a seminal study by Andrew King as of July 24^th, 2024 (#2180): “Do high-sustainability companies have better financial performance than their low-sustainability counterparts? An extremely influential publication, “The Impact of Corporate Sustainability on Organizational Processes and Performance”, claims that they do. Its 2014 publication preceded a boom in sustainable investing …Yet I report here that I cannot replicate the original study’s methods or results, and I show that a close reading of the original report reveals its evidence is too weak to justify its claims concerning financial performance” (abstract). My comment: It is very important to clearly write, understand and also to replicate scientific studies. But as long as the performance of sustainable investments is similar as the performance of traditional investments, I clearly prefer sustainable investments.

Green hedge funds: Are the Hedges of Funds Green? by Huan Kuang, Bing Liang, Tianyi Qu, and Mila Getmansky Sherman as of April 15^th, 2024 (#59): “… we … find that funds with higher green beta not only outperform other funds but also exhibit lower risk. This outperformance is driven by fund managers’ superior investment skill in both green stock picking and green factor timing. Furthermore, we document that investors reward green funds with higher inflows after the 2015 Paris Agreement, but only within high-performance funds. Finally, we show that political beliefs, climate news sentiment, and participation in the United Nations Principles for Responsible Investment (PRI) all influence hedge funds’ exposure to sustainable investing and investor flows” (abstract).

Biodiversity finance and bond risks: Biodiversity Risk in the Corporate Bond Market by Sevgi Soylemezgil and Cihan Uzmanoglu as of July 14^th, 2024 (#165): “We investigate how risks associated with biodiversity loss influence borrowing costs in the US corporate bond market. … we find that higher biodiversity risk exposure is associated with higher yield spreads among long-term bonds, indicating biodiversity as a long-run risk. This effect is stronger among riskier firms and firms that mention biodiversity, particularly biodiversity regulation, in their financial statements. … we find that the impact of biodiversity risk on yield spreads is more pronounced when biodiversity-related awareness and regulatory risks rise” (abstract).

Impact investment research

RI market segmentation: Styles of responsible investing: Attributes and performance of different RI fund varieties by Stuart Jarvis from PGIM as of July 2^nd, 2024 (#18): “Paris-aligned funds … achieve a low level of portfolio emissions, not just through a combination of significant divestment from sectors but also by selecting companies with low emissions levels. The resulting companies have decarbonised significantly in recent years … Impact funds … have demonstrated willingness to invest in sectors with currently-high emissions … Performance for these funds has been the most challenged in recent years …” (p. 12). My comments see Orientierung im Dschungel der nachhaltigen Fonds | CAPinside

Biodiversity finance overview: Biodiversity Finance: A review and bibliometric analysis by Helena Naffaa and Xinglin Li as of June 26^th, 2024 (#31): “Using bibliometric analysis tools, key features of the literature are revealed, influential works are recognized, and major research focuses are identified. This systematic mapping of the field makes contribution to the existing research by providing historical evolution of the literature, identifying the influential works, and current research interests and future research direction“ (abstract).

Empowering small investors? Open Proxy by Caleb N. Griffin as of July 12^th, 2024 (#27): “This Article has explored how the world’s largest asset managers have voluntarily implemented programs for “voting choice,” agreeing to pass through a measure of voting authority to selected investors. Unfortunately, the current instantiation of voting choice offers only a narrow set of artificially constrained options, which, in effect, merely transfer a fraction of the Big Three’s voting power to another oligopoly. In order to amplify the choices available to investors, this Article proposes that large asset managers shift from the current closed proxy system to an open proxy system wherein any bona fide proxy advisor could compete for the right to represent investors’ interests. Such a policy change would infuse intermediated voting programs with essential competitive pressure and allow for truly meaningful voting choice” (p. 41).

Depreciation-aligned sustainability: Timing Sustainable Engagement in Real Asset Investments by Bram van der Kroft, Juan Palacios, Roberto Rigobon, and Siqi Zheng as of July 3^rd, 2024 (#151): “This paper provides evidence that sustainable engagement improves firms’ sustainable investments only when its timing aligns with the (“real” not “book”) depreciation of their physical assets. … Further, our results appear unexplained by a selection in REITs and are generalized to the US heavy manufacturing industry, heavily relying on real assets. Therefore, this paper argues that sustainable engagement poses an effective tool to improve firms’ sustainable investments when accurately aligned with the depreciation cycles of their physical assets” (p. 35/36).

Other investment research (in: Biodiversity finance)

Attractive timberland: Investing in US Timberland Companies by Jack Clark Francis and Ge Zhang as of June 27^th, 2024 (#11): “Over a 20-year sample period it turns out that the US timberland corporations, on average, perform about as well as the highly diversified US stock market index. It is surprising that the timberland companies do not outperform the stock market indexes because, in order to encourage tree planting, the US Congress has almost completely exempted timberland companies from paying federal income taxes. Furthermore, it is scientifically impossible to assess the value of the large amounts of photosynthesis that the timberland companies produce” (abstract). My comment: In my opinion, similar returns clearly speak for the more responsible investments.

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Werbehinweis (in: biodiversity finance)

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