Archiv der Kategorie: Regulierung

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

……………………………………………………………………………………………………………….

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).

……………………………………………………………………………………………………………….

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

………………………………………………………………………………………………………………………………………..

Werbehinweis

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Smallcap-Investmentfonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG: Investment impact) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement (Investor impact) bei derzeit 29 von 30 Unternehmen: Vgl. My fund.

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)

………………………………………………………………………………………………………………………………………..

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.

………………………………………………………………………………………………………………………………………..

Werbehinweis (in: biodiversity finance)

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

Tiny houses and more: Researchpost 184

Tiny houses: Illustration AI generated by GrumpyBeere from Pixabay

7x new studies on tiny and shared housing, climate-induced stock volatility, sustainability-led bonds, ESG-ETF divestment effects, hedge fund corporate governance effects, SFDR analysis, female SDG fintech power (# shows SSRN full paper downloads as of July 11^th, 2024)

Social and ecological research (Tiny houses and more)

Tiny houses and & shared living: Living smaller: acceptance, effects and structural factors in the EU by Matthias Lehner, Jessika Luth Richter, Halliki Kreinin, Pia Mamut, Edina Vadovics, Josefine Henman, Oksana Mont, Doris Fuchs as of June 27^th, 2024: “This article … studies the acceptance, motivation and side-effects of voluntarily reducing living space in five European Union countries: Germany, Hungary, Latvia, Spain and Sweden. … Overall, the data reveal an initial reluctance among citizens to reduce living space voluntarily. They also point to some major structural barriers: the housing market and its regulatory framework, social inequality, or dominant societal norms regarding ‘the ideal home’. Enhanced community amenities can compensate for reduced private living space, though contingent upon a clear allocation of rights and responsibilities. Participants also reported positive effects to living smaller, including increased time for leisure activities and proximity to services. This was often coupled with urbanization, which may also be part of living smaller in the future” (Abstract). My comment: See Wohnteilen: Viel Wohnraum-Impact mit wenig Aufwand

Responsible investment research

Climate vola: Do Climate Risks Increase Stock Volatility? By Mengjie Shi from the Deutsche Bundesbank Research Center as of July 1st, 2024 (#23): “This paper finds that stocks in firms with high climate risk exposure tend to exhibit increased volatility, a trend that has intensified in recent years, especially following the signing of the Paris Agreement in 2015. … Institutional investors and climate policies help counterbalance the impact of climate risks on stock stability, whereas public concerns amplify it. My baseline findings are robust across alternative climate risk and stock volatility measures, as well as diverse country samples. Subsample analysis reveals that these effects are more pronounced in firms with carbon reduction targets, those in carbon-intensive industries, and those with reported emissions” (p. 23).

Bondwashing? Picking out “ESG-debt Lemons”: Institutional Investors and the Pricing of Sustainability-linked Bonds by Aleksander A. Aleszczyk and Maria Loumioti as of July 2^nd, 2024 (#20): “… classifying SLBs into impact-oriented (i.e., ESG performance-enhancement and transition bonds) and values-oriented (i.e., bonds not written on ambitious and material sustainability outcomes or those issued by firms with less significant sustainability footprint). We find that investors equally price various degrees of sustainability impact in SLBs and likely pay too much for buying an ESG-label attached to SLBs that are unlikely to yield strong sustainability impact. We show that demand for sustainability impact is positively influenced by investors’ ESG commitment and strategy implementation and SLB investment preferences. Heavyweight ESG-active asset managers are more likely to purchase values-aligned SLBs. Focusing on investor pricing decisions, we find that new entrants and investors likely to benefit from adding impact-oriented SLBs to their portfolios are more willing to pay for impact. In contrast, investors with a preference for values-oriented SLBs are less willing to pay a sustainability impact premium“ (p. 31/32). My comment: I focus on bond-ETFs with already good ESG-ratings for my ETF-portfolios not on (“sustainable”) bond labels

Divestments work: The effects of Divestment from ESG Exchange Traded Funds by Sebastian A. Gehricke, Pakorn Aschakulporn, Tahir Suleman, and Ben Wilkinson as of June 25^th, 2024 (#5): “We find that divestment by predominantly passive ESG ETFs has a significant negative effect on the stock returns of firms, especially when a higher number of ESG ETFs divest in a firm in the same quarter …. Such coordinated divestment results in initial negative effects on stock returns, increases in the firms’ equity and debt cost of capital and a delayed decrease in carbon emission intensities. There also seems to be a positive effect on ESG ratings, but only after 8 quarters” (p. 16/17). My comment: my experience with divestments is positive, see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds. Since then, I reinvested in a few stocks which improved their ESG-ratings.

Good hedge funds: Corporate Governance and Hedge Fund Activism by Shane Goodwin as of Feb. 12^th, 2024 (#159): “My novel approach to inside ownership and short-interest positions as instrumented variables that predict a Target Firm’s vulnerability to hedge fund activism contributes to the literature on the determinants of shareholder activism. … My findings suggest that Hedge Fund Activists generate substantial long-term value for Target Firms and their long-term shareholders when those hedge funds function as a shareholder advocate to monitor management through active board engagement“ (p. 155/156).

SFDR clarity? Sustainability-related materiality in the SFDR by Nathan de Arriba-Sellier and Arnaud Van Caenegem as of July 1^st, 2024 (#19): “… we should think about the SFDR as a layered system of sustainability-related disclosures, which combine the concepts of “single-materiality” and the “double-materiality”. … it is not the definition of “sustainable investment” which is relevant, but the additional disclosure requirements that apply as soon as a financial market participant deems its financial product to be in line with the definition. The SFDR encourages robust internal assessments over blind reliance on opaque ESG rating agencies and provides financial market participants with the freedom to justify what a contribution to an environmental or social objective means. This freedom sets it apart from a labeling mechanism with a clearly defined threshold of what a contribution should entail. The … proposed guidelines by ESMA for regulating the names of investment funds that involve sustainable investment … do not create a clear labelling regime” (abstract).

Other investment research (in: Tiny houses and more)

Female SDG power: Measuring Fintech’s Commitment to Sustainable Development Goals by Víctor Giménez García, Isabel Narbón-Perpiñá, Diego Prior Jiménez and Josep Rialp as of May 31^st, 2024 (#8): “This study investigates the performance of Fintech companies in achieving Sustainable Development Goals (SDGs) … Our results show that female founders enhance Fintech sector’s alignment with the SDGs, specially in smaller companies, indicating that gender diversity in leadership promotes sustainable practices. Additionally, companies with more experienced founders and higher funding tend to prioritize growth and financial performance over sustainability” (abstract).

………………………………………………………………………………………………………………………………………..

Werbehinweis (in: Tiny houses and more)

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

Brown banks? Researchpost 180

Brown banks picture from clker free vector images from Pixabay

Brown banks: 9x new research on CO2-costs, climate policy effects, Mittelstand climate, stock prices, ESG, CSR, gender diversity, green projects, and listed real estate (# shows the number of SSRN full research paper downloads as of June 13^th, 2024)

Social and ecological research

Correct CO2 costs? Synthesis of evidence yields high social cost of carbon due to structural model variation and uncertainties by Frances C. Moore, Moritz A. Drupp, James Rising, Simon Dietz, Ivan Rudik, Gernot Wagner as of June 10^th, 2024 (#9): “Estimating the cost to society from a ton of CO2 – termed the social cost of carbon (SCC) – requires connecting a model of the climate system with a representation of the economic and social effects of changes in climate, and the aggregation of diverse, uncertain impacts across both time and space. … we perform a comprehensive synthesis of the evidence on the SCC, combining 1823 estimates of the SCC from 147 studies with a survey of authors of these studies. The distribution of published 2020 SCC values is wide and substantially right-skewed, showing evidence of a heavy right tail (truncated mean of $132). … we train a random forest model on variation in the literature and use it to generate a synthetic SCC distribution that more closely matches expert assessments of appropriate model structure and discounting. This synthetic distribution has a mean of $284 per ton CO2, respectively, for a 2020 pulse year (5%–95% range: $32–$874), higher than all official government estimates … “ (abstract).

Strict policy effects: Climate and Environmental Policy Risk and Debt by Karol Kempa and Ulf Moslener as of April 25^th, 2024 (#95): “… we find that policy determines how firms’ externalities, such as CO2 emissions and different types of environmental pollution, translate into credit risks and corporate bond pricing. The size as well as direction of the effect of externalities on credit risk and bond spreads depends on the stringency of policy. Ambitious policy increases the credit risk and costs of debt for dirty firms and decreases both for clean firms. Lenient regulation can have the opposite effect. … Finally, we find that a higher likelihood of stringent climate policies in the future increases the impact of CO2 emissions on credit risk“ (abstract).

Mittelstandsklima: Die unternehmerische Akzeptanz von Klimaschutzregulierung von Markus Rieger-Fels, Susanne Schlepphorst, Christian Dienes, Rodi Akalan, Annette Icks und Hans-Jürgen Wolter vom 3. Juni 2024: „Nur eine starke Volkswirtschaft kann die für den Klimaschutz erforderlichen Ressourcen aufbringen. Die Unternehmen sind dabei in der Mehrzahl bereit, diesen Weg mitzugehen. Speziell die mittelständischen Unternehmerinnen und Unternehmer weisen tendenziell eine hohe intrinsische Motivation auf, zum Schutz der Umwelt und des Klimas beizutragen. Das ist wichtig, da den Unternehmen stets ein strategischer Spielraum in der Umsetzung bleibt. Das Spektrum reicht dabei von einer Standortverlagerung über eine Produktionseinstellung und dem bewussten Ignorieren von Vorgaben bis hin zur freiwilligen Übererfüllung von Regulierungen …“ (p. 26/27). My comment: The reaction of global “Mittelstand” companies regarding my shareholder engagement activities (see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)) is more open than I thought

ESG investment research (in: Brown banks)

Brown banks? Banking on climate chaos – Fossil fuel finance report 2024 by Urgewald as of May 13^th, 2024: “The 60 biggest banks globally committed $705 B USD to companies conducting business in fossil fuels in 2023, bringing the total since the Paris agreement to $6.9 T. These banks committed $347 billion in 2023 and $3.3 trillion total since 2016 to expansion companies – those companies that the Global Oil & Gas Exit List and the Global Coal Exit List report having expansion plans. … Total financing committed for companies with methane gas (LNG) import and export capacity under development, increased from $116.0 billion in 2022 to $121.0 billion in 2023. … 15.4 % of the financing by dollar value issued in 2023 matures after 2030; 3.7 % matures after 2050. Financing for fossil fuel extraction or infrastructure that matures after 2030 faces a risk of becoming stranded … several banks, including Bank of America and PNC, rolled back their previous exclusions in 2023 (see p. 32). Banks continue to prioritize net zero targets, though early research suggests that these targets, like other bank policies, leave loopholes for ongoing fossil fuel finance (see p. 35)” (p. 4). My comment: Check out you bank based on the detailed data: Banking on Climate Chaos 2024 – Banking on Climate Chaos

Climate correlations: The Cold Hard Cash Effect: Temperature’s Role in Shaping Stock Market Outcomes by Yosef Bonaparte as of April 15^th, 2024 (#8): “The analysis conducted across 67 countries …highlight that warmer climates are linked to lower stock market returns, with a notable economic significance exceeding 9.12%, and reduced volatility, demonstrating an economic significance of at least 36.9%. Conversely, the Sharpe ratio, serving as a gauge of risk-adjusted returns, displays a positive co-movement with temperature change, indicating an economic significance surpassing 1.63%. Furthermore, cold countries earn greater stock market returns but are more negatively affected by temperature changes” (p. 16).

ESG or CSR? Combining CSR and ESG for Sustainable Business Transformation: When Corporate Purpose Gets a Reality Check by David Risi, Eva Schlindwein and Christopher Wickert as of June 7^th, 2024 (#135): “ESG is a compliance-driven and metrics-oriented idea for stimulating sustainable business transformation. It focuses on reducing negative impacts and improving performance in specific areas. Moreover, it provides a reality check on how a firm is doing in light of increasing societal expectations for greater sustainability. By contrast, CSR is often viewed as a more values-based and internally driven approach to sustainability. It provides a strategy for developing a sense of meaning and purpose for responsible business conduct that reflects a firm’s values and identity… In their mutual integration, CSR and ESG create synergy since they can compensate for their respective weaknesses” (p. 12/13).

Good diversity: Board Gender Diversity and Investment Efficiency: Global Evidence from 83 Country-Level Interventions by Dave (Young Il) Baik, Clara Xiaoling Chen, and David Godsell as of May 4^th, 2024 (#177): “We document increases in firms’ investment efficiency after the adoption of BGD interventions relative to firms in countries that do not concurrently adopt BGD interventions. Our results are economically significant, suggesting that treatment firms reduce inefficient investment by 0.6 percent of total assets or 6.5 percent of total investment and are 4 percentage points more likely to have above-median investment efficiency after interventions relative to firms in countries not concurrently adopting interventions“ (p. 33). My comment: I recently divested from a company because the social rating declined which was mainly due to low gender worker and board diversity

Impact investment research

Small climate steps: Inside the Blackbox of Firm Environmental Efforts: Evidence from Emissions Reduction Initiatives by Catrina Achilles, Peter Limbach, Michael Wolff and Aaron Yoon as of June 7^th, 2024 (#35): “This study uses granular data at the firm’s project level, provided by the Carbon Disclosure Project, to present primary evidence on what large U.S. firms actually do to reduce greenhouse gas emissions. … the majority of emissions reduction projects require small investments – the median investment per project is $127,000, with the median of firms’ total annual investment in such projects amounting to only 0.2% of net income. Second, 63% of all projects have payback periods of at most three years, while just about 10% of all projects pay off after more than ten years. These short-term projects mostly target energy efficiency in buildings or production, and typically do not involve new transformative technology and low-carbon energy. … our results suggest that short-term emissions reduction projects generate more CO2e and monetary savings per year, yield greater NPVs, and predict higher environment-related ESG ratings in the near future. However, total CO2e savings over the projects’ lifetime are at least 25% lower for short-term payback projects. Firms that exhibit the most CO2e savings have a mix of short- and longer-term projects, while firms exclusively implementing only short-term or longer-term projects save significantly less CO2e. We also study how characteristics of firms’ emissions reduction projects, such as their payback period and efficiency in saving CO2e, evolve over time and show which firms implement more short-term projects …. the evidence presented in this paper suggests that the majority of large U.S. firms do not act … long-term oriented” (p. 31/32).

Other investment research (in: Brown banks)

Real estate hedge: U.S. and European Listed Real Estate as an Inflation Hedge by Jan Muckenhaupt, Martin Hoesli and Bing Zhu as of May 28^th, 2024 (#27): “This paper investigates the inflation-hedging capability of an important asset class, i.e., listed real estate (LRE), using data from 1990 to the end of 2023 … Listed real estate provides an effective hedge against inflation in the long run, both in crisis and non-crisis periods. In the short term, listed real estate only hedges against inflation in stable periods. LRE effectively serves as a hedge against inflation shocks, particularly protecting against unexpected inflation from the first month and against energy inflation during stable periods. While stocks surpass LRE in long-term inflation protection and LRE has short-term benefits, gold distinguishes itself from LRE by offering reliable long-run protection, but only in economic downturns” (abstract). My comment: My “most-passive” multi-asset ETF portfolios have a target allocation of 10-12% Listed Real Estate, 5 to 6 % Listed Infrastructure and 5% US Treasury Inflation-Protected Securities

………………………………………………………………………………………………………………………………………..

Werbehinweis

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

ESG variety: Researchpost 172

Picture: „The Hands of Children“ by Frauke Riether from Pixabay

ESG variety: 12x new research on migration, climate politics, ESG (regulation, risk, disclosure, weigthings, ratings), Norwegian ESG, climate data, stewardship, impact measurement, and altruists (#shows the number of SSRN full paper downloads as of April 18^th, 2024).

Social and ecological research

Migration to Germany: Walls, Not Bridges: Germany’s Post-WWII Journey with Refugee Integration by Noah Babel and Jackson Deutch as of Dec. 19^th, 2023 (#15): “Given projections that by 2060, a third of its populace will be over 65, the economic argument for integrating a refugee workforce to counter labor shortages is compelling. However, current administrative measures like language proficiency assessments and residency restrictions inadvertently cast refugees as outsiders, hindering true integration. … Prolonged waits for asylum decisions, often extending for years, coupled with employment limitations, don’t just hamper economic advancement, they socially isolate refugees“ (p. 8).

Brown politics: The Behavioral Economics and Politics of Global Warming – Unsettling Behaviors Elements in Quantitative Finance by Hersh Shefrin as of Dec. 12^th, 2023 (#50): “.. there is evidence that carbon continues to be priced in the range of 6 percent to 10 percent of its social cost …. Psychological biases, especially present bias, lie at the root of my analysis of the big behavioral question. In particular, these biases explain the reluctance to use taxes to price GHGs in line with their respective social costs. This reluctance is an unsettling behavior, and results in abatement being more costly than necessary, plausibly by a factor of five to seven. The cost of reluctance is a behavioral cost, and it is large“ (p. 108).

Good ESG regulation: Cross-border Impact of ESG Disclosure Mandate: Evidence from Foreign Government Procurement Contracts by Yongtae Kim, Chengzhu Sun, Yi Xiang, and Cheng (Colin) Zeng as of April 12^th, 2024 (#30): “We find robust evidence that firms from countries mandating ESG disclosure are more likely to secure foreign governments’ procurement contracts with higher values than counterparts in non-regulated countries” (p. 33).

ESG investment research (in: ESG variety)

Financial ESG risk: Market Risk Premium and ESG Risk by Joey Daewoung, Yong Kyu Gam, Yong Hyuck Kim, Dmitriy Muravyev, and Hojong Shin as of April 12^th, 2024 (#29): “Using a panel dataset consisting of US firms for 2010-2021, we find that the stock market beta is positively related to average returns on the days when investors learn about negative ESG incidents that affect the market as a whole. Specifically, we report that the CAPM-implied market risk premium is, on average, 31.52 bps on ESG days, which is, on average, 32.92 bps higher than the market risk premium on non-ESG days (-1.40 bps). The magnitude of the market risk premium is both statistically and economically significant, and robust across different model specifications. Our findings contribute to the existing literature by showing that the ESG risk is systematic and priced” (p. 16).

ESG weighting issues: Comparing ESG Score Weighting Approaches and Stock Performance Differentiation by Matthias Muck and Thomas Schmidl as of April 12^th, 2024 (#22): “… we compare the performance differences of stocks sorted according to ESG scores that utilize the same categories but have different weightings. … Interestingly, an uninformed, equally weighted score leads to larger performance differences compared to Refinitiv’s data-driven weighted score. … As a robustness check, we consider the Paris Agreement as an exogenous event. … the post-Agreement increase in performance differentiation is likely due to investors’ recognition that sustainability information is indeed relevant for stock pricing” (p. 7). My comment: I use separate (Best-in-Universe) E, S and G Scores for stock selection. Unfortunately, I have seen very few studies suing such separate scores so far.

ESG disclosure differences: The impact of real earning management and environmental, social, and governance transparency on financing costs by Adel Necib, Malek El Weriemmi and Anis Jarboui as of April 10^th, 2024 (#21): “We use a fixed effects panel data analysis to examine 97 firm-year observations of UK firms from 2014 to 2023. According to the research, investors place a lower value on ESG disclosure and increase the price of shares, whilst lenders view it favourably and reduce the cost of debt“ (abstract).

Mind the ESG-downgrade: ESG rating score revisions and stock returns by Rients Galema and Dirk Gerritsen as of March 26^th, 2024 (#470): “Because the main users of ESG ratings typically adopt a low rebalancing frequency, we study the effect of ESG rating revisions on stock returns in a period of up to six months. We consider all ESG rating revisions issued by one of the largest ESG rating providers and we present evidence that both ESG and E rating downgrades are followed by six-month negative buy-and-hold abnormal returns in the magnitude of 2.5% to 3% (annualized). For larger downgrades, this effect becomes even more pronounced: Around 4.5% per year. We find that the effect of the E rating is most robust because we can confirm its significance in a calendar-time portfolio analysis. We conclude from additional analyses (i.e., mid-cycle versus annual revisions; pre-event trends) that these BHARs would not have materialized in the absence of rating revisions, despite the fact that rating revisions rely to a large extent on public information. … changes in a quarterly updated sustainable investment index based on ESG ratings explain part of the effect of E rating changes on abnormal returns. Second, institutional investors adjust their portfolios in response to decreases in E ratings. … we show that return volatility slightly increases following both ESG downgrades and E downgrades, a finding which is congruent with a reduced commitment from long-term institutional investors“ (p. 26/27). My comment: I use E, S and G Ratings downgrades (Best-in-Universe) to divest from stocks, see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com) or “Engagementreport” here FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Norwegian ESG? The ESG commitment of the Norwegian sovereign wealth fund: Is the socially responsible behaviour of companies considered in its investment strategy? by Iván Arribas, Fernando García García, and Javier Oliver Muncharaz as of April 11^th, 2024 (#12): “… only seven of the leading sovereign wealth funds include ESG metrics in their investment process. The group includes the Norwegian GPFG, which is the biggest sovereign wealth fund worldwide in terms of assets under management. … findings suggest that favourable ESG performance of firms does have a positive impact on the probability of inclusion in the investment portfolio of Norway’s sovereign wealth fund. Notably, environmental performance is significant. Moreover, the GPFG’s criteria in relation to greenhouse gas emissions for companies in the electricity sector result in a lower probability of these firms becoming part of the fund’s investment portfolio compared with other industry sectors” (p. 20). My comment: The Norwegian SWF still invest in many companies and therefore has to compromise. Smaller investor can focus much better on demanding sustainability criteria, see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

Climate data issues: Climate Data in the Investment Process: Challenges, Resources, and Considerations by Andres Vinelli, Deborah Kidd, CFA, and Tyler Gellasch from the CFA Institute as of April 2024: “Before the maturation of accounting standards, financial data were imperfect for many years and are still imperfect for companies in emerging markets, where accounting and financial reporting practices are evolving. As with financial data, climate-related data availability and quality have improved over recent years and will continue to improve. In the meantime, investors should apply the same data interpretation, checks, and management techniques that they apply when working with other sets of estimated or incomplete data—such as validating data by cross-checking with original source data, understanding data provider methodologies (where disclosed), diversifying sources of data where possible, and using qualitative information and judgment as needed to fill in the gaps. … To help improve the current state of climate-related data, investors can participate in standards-setting processes, encourage issuers to voluntarily adopt standards, and advocate for high-quality, globally consistent disclosure regulations” (p. 13).

Impact investment research (in: ESG Variety)

Stewardship dilution? ESG, Sustainability Disclosure, and Institutional Investor Stewardship by Giovanni Strampelli as of April 10th, 2024 (#20): “Several sets of sustainability standards have been adopted internationally. The European Commission recently adopted the CSRD, which places more stringent obligations and expanded the scope of companies, including unlisted ones, required to publish sustainability reports. … While such sustainability-related disclosure requirements may create a “name-and-shame” obligation for companies to take initiatives to improve their ESG performance, it is doubtful that such obligations can promote ESG-related stewardship activities by institutional investors. … the regulatory framework is still fragmented and there are differences between the various sustainability disclosure sets, concerning in particular the notion of materiality, which make it difficult to compare sustainability reports prepared under different standards. For these reasons, institutional investors rely on ESG ratings and indices for the purposes of their investment and stewardship strategies. … the choice of nonactivist institutional investors to focus part of their engagement initiatives on sustainability disclosure, requiring, for example, a higher degree of transparency or the adoption of a certain set of reporting, appears to be dictated by a desire to avoid more incisive initiatives (perceived as more aggressive) aimed directly at encouraging change in the environmental strategies or policies of the companies concerned” (p. 22/23). My comment: My broad and deep stewardship process see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) or in “Nachhaltigkeitsinvestmentpolitik” here FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Impact measurement: The Evolution of Impact Accounting and Utilization of Logic-Model in Corporate Strategy by Reona Sekino, Toshiyuki Imamura, and Yumiko Miwa as of Dec. 4^th, 2023 (#77): “After discussing the existing methods for impact management, the article focuses on practical issues and investor engagement in impact management by companies. This article also makes recommendations on practical methods based on the current situation and issues. Specifically, this article proposes a method that integrates an Impact-Weighted Accounts framework that can quantify impact in a generalized format and a Logic Model that can visualize the ripple effects of corporate activities and clarify business strategies and value creation stories, thereby making it possible for stakeholders to evaluate impact. In addition, this article makes sample analysis to discuss the usefulness and challenges of the methodology“ (abstract). My comment: This article also includes interesting impact examples, see also Impactaktien-Portfolio mit 80% SDG-Vereinbarkeit? – Responsible Investment Research Blog (prof-soehnholz.com)

Other investment research (in: ESG Variety)

Risk-taking altruists: How Altruism Drives Risk-Taking by Dan Rubin, Diogo Hildebrand, Sankar Sen, and Mateo Lesizza as of Dec. 1^st, 2023 (#51): “Individuals motivated by altruism often put themselves in harm’s way in helping others. … The first explanation, predicated on risk activation, suggests that altruism decreases risk perception by impeding the activation of self-risk information, leading to reduced risk perception and increased risk-taking. Alternatively, the second explanation implies that altruism may increase risk-discounting, whereby the importance of risk is downplayed when deciding whether to help others. Results of three studies … provide strong evidence for the risk-activation account and establish substantive boundaries for this effect“ (abstract).

………………………………………………………………………………..

Advert for German investors

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

SDG performance: Researchpost #168

SDG Performance: 14x new research on CEO pay, greenwashing, greenium, ESG risk, regulation, audits, ungreen ETFs, SDG scores and performance, voting, circular risk, non-normality and mutual funds (# shows SSRN full paper downloads as of March 21^st, 2024)

ESG research

Being CEO pays: The State Of Corporate Sustainability Disclosure 2023 by Magali Delmas, Kelly Clark, Jiaxin Li, and Tyson Timmer as of March 14^th, 2024 (#28): “… we analyze the most commonly disclosed corporate sustainability metrics among S&P 500 firms, based on data from the Open for Good initiative. Our focus is on greenhouse gas emissions (GHG), climate strategy, gender and ethnic diversity, and the ratio of CEO-to-median-employee compensation … Across all (Sö: ESG) metrics, the average disclosure rate is fairly low at 55% … reporting for Scope 1 and 2 GHG emissions is notably high, with average rates exceeding 80%. Conversely, the disclosure rate for Scope 3 emissions drops to 56% … the lack of detailed information on the assumptions and methodologies that these disclosures employ constrain this data’s usefulness … . On average, women comprise only 39% of employees in S&P 500 firms, with Financials and Health Care the sectoral exceptions, reporting averages of 50% and 51% women, respectively. At the board of directors’ level, the representation of women is lower, averaging 32%, with minimal sectoral variation … that average CEO compensation is 305 times greater than that of the median employee … However, this can vary significantly from year to year within each company …” (p. 4). My comment: With my shareholder engagement activities I encourage companies to report the CEO pay ratio so that all stakeholders can comment on them, see e.g. Wrong ESG bonus math? Content-Post #188 (prof-soehnholz.com)

Scope 3 reporting effects: Real Effects of the Proposed SEC Climate Disclosure Rule by Mary Ellen Carter, Lian Fen Lee, and Enshuai Yu as of March 15^th, 2024 (#117): “We examine changes in firm supply chain decisions following the SEC’s proposed climate disclosure rule, which requires Scope 3 emissions disclosure. … we compare the import activity of treated firms (non-SRCs: Sö. Small reporting companies) to unaffected firms (SRCs) before and after the threat of Scope 3 disclosure in the proposed SEC rule was revealed. We find a decrease in import activity for non-SRCs relative to SRCs, implying that the proposed disclosure rule creates costs that make foreign outsourcing less favorable. … we provide evidence that non-SRCs also increase their in-house production, and exhibit greater improvements in environmental efforts, compared to SRCs“ (p. 30/31).

Greenwashing risks: A Greenwashing Index by Elise Gourier Hélène Mathurin as of Feb. 18^th, 2024 (#314): “We construct a news-implied index of greenwashing. Our index reveals that greenwashing has become particularly prominent in the past five years. Its increase was driven by skepticism towards the financial sector, specifically ESG funds, ESG ratings and green bonds. … Unexpected increases in the greenwashing index are followed by decreases of flows into funds advertised as sustainable, both for retail and institutional investors. … When accounting for greenwashing, the climate risk premium becomes small and statistically insignificant” (abstract). My comment: With my shareholder engagement activities I encourage companies to report broadly defined GHG Scope 3 emissions so that all stakeholders can focus on them

ETF-Greenwashing? Unmasking Greenwashing: A call to clean up passive funds by Lara Cuvelier at al. from Reclaim Finance as of March 20^th, 2024: “… the five big asset managers we selected for this report based on the size of their passive portfolios – BlackRock, Amundi, UBS AM, DWS and Legal & General Investment Management (LGIM) – still held at least US$227 billion in fossil fuel developers in 2023, with more than half of this amount coming from passive portfolios. … 70% of the 430 ‘sustainable’ passive funds we analyzed were exposed to fossil fuel expansion. Focusing our analysis on the most significant of these – 25 high-profile ‘sustainable’ passive funds – we found the majority were investing in some of the world’s biggest fossil fuel developers, such as ExxonMobil and Shell. The analysis also shows that especially when these funds are invested in bonds, they provide direct financing for fossil fuel developers“ (p. 4). My comment: This result is not surprising. The reason is that these products are supposed to have very little deviation (tracking error/difference/active share) from standard indices. Therefore, they use best-in-class approaches instead of the far more sustainable best-in-universe sustainability selection approach.

Grey definitions? Greenness confusion and the greenium by Luca De Angelis and Irene Monasterolo as of Feb. 19^th, 2024 (#241): “We use different classifications of green assets and carbon stranded assets and develop six portfolios characterized by shades of green and brown technologies, from the VeryGreen to the VeryDarkBrown, and green-minus-brown factors. Then we analyse the market pricing of the factors in augmented CAPM and Fama-French models, focusing on the firms listed in the STOXX Europe 600 index. … we find that the presence of the greenium, i.e. significant abnormal returns, depends on the classification of green and non-green used. Our results show the presence of greenium for ESG-based portfolios, in particular for the LowESG and LowE portfolios. However, the greenium disappears when we test for the science-based classifications i.e. the CPRS (for carbon stranded assets) and the EU Taxonomy (for green assets) …“ (p. 24).

Risk reducing ESG: Investing During Calm and Crisis: Implied Expected Returns by Henk Berkman and Mihir Tirodkar as of March 15^th, 2024 (#59): “… we use a novel and forward-looking measure of expected returns derived from contemporaneous stock option prices. Our main finding is that stocks with higher ESG scores have lower expected returns, however this is only observed during the Global Financial Crisis and the COVID-19 pandemic. We also find that the ESG risk premium term structure is positively related to ESG scores during crises, indicating that investors expect a reversion to normality within a year. .. we provide partial support for the theoretical prediction that ESG investing lowers expected returns. … our paper suggests that ESG investing may not be a source of systematically superior returns, but rather a way of expressing ethical preferences and temporarily reducing risk during unexpected crises …“ (p. 36).

Wenig Umweltwissen? Kooperation zwischen Aufsichtsrat, Wirtschaftsprüfer und Interner Revision – Empirische Befunde zum Einfluss von CSRD und CSDDD von Patrick Velte und Christoph Wehrhahn vom 15.3.2024: „Der Zusammenarbeit zwischen Aufsichtsrat, Wirtschaftsprüfer und Interner Revision kommt insbesondere vor dem Hintergrund aktueller EU-Nachhaltigkeitsregulierungen (CSRD und CSDDD) eine besondere Bedeutung zu. Eine intensivere Zusammenarbeit könnte u.a. in der Koordinierung von Revisions- bzw. Prüfungsschwerpunkten bei der (gemeinsamen) Überwachung der Nachhaltigkeitsberichterstattung nach der CSRD und der CSDDD bestehen. Hierfür ist eine signifikante Verbesserung der umwelt- und sozialbezogenen Kompetenzen und Ressourcen notwendig“ (p. 36).

Supplier audits: Selection, Payment, and Information Assessment in Social Audits: A Behavioral Experiment by Gabriel Pensamiento and León Valdés as of March 20^th, 2024 (#9): “Companies often rely on third-party social audits to assess suppliers’ social responsibility (SR) practices. … We find that auditors who are paid and chosen by the supplier are more lenient, and the effect is more pronounced when the information observed suggests poor SR practices. … auditors who are merely paid by the supplier do not make more lenient decisions …. Our results … show that removing a supplier’s ability to choose its own auditor is critical to increase the detection of poor SR practices, particularly when the risk of bad practices is high” (abstract). My comment: With my shareholder engagement activities, I encourage companies to broadly evaluate all supplier according to ESG criteria, see Supplier engagement – Opinion post #211 (prof-soehnholz.com)

Impact investing research (in: SDG performance)

Benchmark-hugging: Optimizing Sustainable Performance: A Strategic Approach to Value Creation and Impactful Investing by Heiko Bailer as of Feb. 29^th, 2024 (#51): “Backtests against the historic MSCI World benchmark from September 2019 to November 2023 … showed that stringent universe exclusions negatively impacted performance, increased portfolio size without lowering active risk though also reduced emissions and improved the overall Sustainable Development Goals (SDG) scores“ (abstract). “The amplification of regulatory constraints, coupled with an expanding array of universe exclusions, forms an unfavorable concoction restraining the potential for significant „Value Creation“ in sustainable investing. This circumstance results in a low sustainability threshold, shifting sustainable portfolio construction toward a predominantly “Value Alignment” strategy, albeit at substantial cost of traditional performance. …” (p. 21). My comment: For a detailed analysis see Nachhaltigkeit oder Performance? | CAPinside

Diverging SDG performance: The Costs of Being Sustainable by Emanuele Chini, Roman Kraussl, and Denitsa Stefanova as of Feb. 18^th, 2024 (#24): “We define a new bottom-up measure of fund sustainability that links this concept to the alignment of the fund with the SDGs. Importantly, we disaggregate this measure in four components representative of different dimensions of sustainability: economy & infrastructure, environment, basic needs, and social progress. … funds with a positive impact on the economy & infrastructure and social progress SDGs are associated with higher returns whereas funds with a positive impact on environment and basic needs have lower returns. Second, institutional investors seem to infer this sustainability—returns relationship and show a preference for sustainability dimensions that are positively correlated with abnormal returns” (p. 24/25). My comment: As expected, different investment foci result in different performances. I doubt that good financial return prognostics (for different SDG-goals) are feasible. That speaks for SDG-goal diversification (which I sue in my mutual fund, see https://futurevest.fund/).

Homely shareholder voting: Home bias in shareholder voting by Xuan Li as of Nov. 10thm 2023 (#71): “Using a global data set from 2012 to 2022, I provide robust evidence that there is a significant home bias in shareholder voting. … An systematic review of investors’ voting polices suggests that investors actively seek out more information about domestic firms during the voting process in order to gain an information advantage in their home countries“ (p. 17).

Circular risk reduction: One, no one and one hundred thousand: how many firm risks are affected by the circular economy by Evita Allodi and Maria Gaia Soana as of March 20^th, 2024 (#4): “We use a sample of 1,069 listed European non-financial companies over the period 2010-2022. We find that circular economy practices, implemented together, significantly decrease downside, idiosyncratic, and default risks. However, considering the three dimensions individually, only reduction and reusing mitigate these risks, while recycling does not“ (abstract).

Other investment research (in: SDG performance)

Normal non-normality: Diverging from the Norm: An Examination of Non-Normality and its Measurement in Asset Returns by Grant Holtes as of Feb. 17^th, 2024 (#18): “This paper examines the normality of US equities and fixed income asset-class returns over 104 years” (abstract). “Returns are measurably non-normal … Returns are more normal at longer holding periods … The impacts section demonstrates that a normal assumption does not have a large impact on central estimates, but can have a large impact on estimates of low-probability events such as CVAR calculations …” (p. 10).

Crisis-delegation: Household portfolios and financial literacy: The flight to delegation by Sarah Brown, Alexandros Kontonikas, Alberto Montagnoli, Harry Pickard, and Karl Taylor as of Feb. 21^st, 2024 (13x): “We analyse data on European household financial portfolios over the period 2004-2017, to explore how households change their asset allocations following the recent twin financial crises. … Our estimates show that the post-crisis period is associated with changes in European household asset allocation behaviour. Specifically, there are elevated holdings of safe assets and lower holdings of stocks and bonds, in line with the argument for cautiousness. At the same time, though, our findings reveal higher holdings of mutual funds in the post-crisis period. … This is consistent in line with a “flight to delegation”, that is, the utilisation of the perceived expertise of mutual funds managers. … the most literate households tend to hold significantly more mutual funds. … The findings for females implies a gender gap in financial literacy when investing in mutual funds which worsens following economic turmoil” (p. 14/15).

……………………………………………………………………………………………………………………………………..

Advert for German investors:

Sponsor my research by investing in and/or recommending my global small cap mutual fund (SFDR Art. 9). The fund focuses on the Sustainable Development Goals and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 27 of 30 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or My fund (prof-soehnholz.com).

Healthcare IT and more new research: Researchpost #166

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

Ecological research (in: Healthcare IT)

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

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

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

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

Social research (in: Healthcare IT)

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

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

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

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

ESG investment research

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

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

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

SDG and impact investment research (in: Healthcare IT)

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

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

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

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

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

Other investment research (in: Healthcare IT)

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

……………………………………………………………………………………………………………………………………..

Advert for German investors:

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