Archiv der Kategorie: Responsible Investment

Illustration for HR-ESG is graphic Teamwork by Geralt from Pixabay

HR-ESG shareholder engagement: Opinion-Post #210

HR-ESG is attractive: Environmental, Social and Governance (ESG) aspects are becoming more important for companies who need additional capital, for those who want to increase sales, and also for hiring and keeping good employees (HR for “human resources”)[1].

In addition, employees can help companies to become more sustainable[2]. The Boston Consulting Group, for example, published recently that new ideas generated by employees helped to “overcome roadblocks in reducing Scope 3 emissions”[3].

Little scientific HR-ESG and employee engagement research

Unfortunately, I find very little comprehensive scientific research on HR-ESG[4]. A study by Hoa Briscoe-Tran from the University of Alberta[5] is one of the rare exceptions. Briscoe-Tran writes: “I analyze 10.4 million anonymous employee reviews and find that employees have useful information about firms’ environmental, social, and governance (ESG) practices. Employees discuss ESG topics in 43% of reviews, thereby providing substantial information about firms’ ESG practices. The employees’ inside view predicts various indicators of a firm’s future ESG-related outcomes, beyond the existing ESG ratings, particularly on the S and G dimensions. Using the inside view, I show that a firm’s stated ESG policies often differ from its employees’ view of its practices. … ESG rating agencies could consider incorporating employee reviews into their rating methodology more broadly” (p. 33).

Companies should use the broad employee interest for ESG in a systematic way. And Shareholders should address this change potential when they engage with their portfolio companies.

Even though I have studied scientific publications regarding shareholder engagement quite thoroughly[6], I have found very little engagement with a broad HR-ESG perspective going significantly beyond rather limited diversity, equality, and inclusion (DEI) issues.

Broad HR-ESG activation is easy

With my mutual fund I try to invest in 30 of the most sustainable companies worldwide. Most of these companies actively address the typical HR-ESG-topics such as DEI, workplace safety etc.. I read their sustainability reports and also directly asked them, but I could not find one single company which tries to broadly engage its employees regarding ESG topics[7].

In my shareholder engagement strategy[8] I propose a very simple and efficient approach to activate employees for ESG-issues. Specifically, I write to all my portfolio companies: 

I think that regular and broad questions such as “How satisfied are you with the environmental, social and corporate governance activities of your company?” and “Which environmental, social and corporate governance improvements do you suggest to your company?” plus the (anonymous) publication of the main results of the answers in the sustainability report would be very helpful in seriously engaging employees and getting valuable structured feedback”.

Leveraged shareholder or stakeholder engagement

Most of these companies use regular broad as well as specific pulse employee surveys and typically have high participation rates. Implementation of my questions therefore should be simple and cost-efficient.

In addition, I suggest asking the same questions to customers and they also could be asked to suppliers. Interestingly, “surveys are already very common among employees, but many companies do not yet use them for customers (or at least, they don’t report on it if they do) and surveys of suppliers may be worth adopting as well“[9]. Therefore, the implementation of my suggested regular ESG surveys of customers and suppliers might be somewhat more time-consuming and expensive than employee surveys. But I think that it may well be worth the effort.

If companies regularly ask these questions to employees, customers and suppliers, shareholders can leverage their engagement activities to several stakeholder groups.

I started my respective engagement activities only at the end of 2022. Some companies answered that they like my suggestions and plan to analyze them, but I cannot report implementations so far.

I am only a small investors and cooperative engagement can me more powerful. Unfortunately, my trials for cooperative engagement with other investors have not been fruitful yet. One reason is that I could only find very few sustainable investment funds with a dedicated small-and midcap focus such as mine. With the few such funds I have typically very little overlap. The asset managers and shareholder organizations which I have asked so far want to cooperate with larger asset managers and not with such as small entity as mine.

But I will continue to ask for such surveys and the publication of their results. I am confident, that at least a few companies will adopt such surveys and position themselves even more as ESG-leaders[10]. And, maybe, with publications such as this one, I can encourage other companies, investors etc. to support such broad and easy to implement HR-ESG activities as well.

New research found after the first publication of this post (Sept. 13th, 2023)

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


[1] see Effect of Corporate Environment Social and Governance Reputation on Employee Turnover by Ming Leung, Chuchu Liang, Ben Lourie and Chenqi Zhu as of August 20th, 2023

[2] see Engaging your people as the advocates and enablers of ESG change by Jessica Norton and Hannah Summers from Willis Towers Watson as of July 13, 2020

[3] see People Make the Difference in Green Transformations by Alice Bolton, Marjolein Cuellar, Kristy Ellmer, Elina Ibounig, Camila Noldin, Nick South and Astrid Vikström from The Boston Consulting Group as of August 23rd, 2023

[4] For a broad overview see e.g. Stakeholder Engagement by Brett McDonnell – SSRN as of Oct. 31st, 2022

[5] Do Employees Have Useful Information About Firms’ ESG Practices? by Hoa Briscoe-Tran – SSRN as of Aug. 2nd, 2023

[6] see for example Stakeholder engagement and ESG (Special Edition Researchposting 115) by Dirk Soehnholz as of Feb. 3, 23

[7] compare Active or impact investing? By Dirk Soehnholz as of July 21st, 2023 and 230831_FutureVest_Engagementreport-2830ab605a502648339b4f8f58fa2ee2dce539ef.pdf

[8] see Shareholder engagement: 21 science based theses and an action plan  by Dirk Soehnholz as of Feb. 8th, 2023

[9] see Stakeholder Engagement by Brett McDonnell – SSRN as of Oct. 31st, 2022, p. 48

[10] this study is one of the reasons for optimism on my part: A Test of Stakeholder Governance by Stavros Gadinis and Amelia Miazad as of Aug. 25th, 2021

Smiling robot as illustration for AI risks by MIM326 from Pixabay

AI risks: Researchpost #140

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

Social and ecological research: AI risks

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

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

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

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

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

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

Responsible investment research

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

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

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

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

Other investment research: AI risks

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

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

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

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

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

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

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

………………………………………………………………………………….

Advert for German investors:

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

………………………………………………………………………………….

Grüner Chip als Bild von Chenspec von Pixabay für nachhaltige AI

AI: Wie können nachhaltige AnlegerInnen profitieren?

AI (Artificial Intelligence oder KI für künstliche Intelligenz) kann theoretisch helfen, mehr, bessere, aktuellere und kostengünstigere Informationen für nachhaltige Investments zu generieren. Die Frage ist, wie das erreicht werden kann. Hier sind meine Ideen:

………. ….. Hinweise: Ich nutze Daten von Clarity.ai und ESGBook und berate Allindex, die auch Search4Stocks anbieten. Der Text basiert auf einem Beitrag für GitexIMpact (siehe How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023), der mit Hilfe von Deepl übersetzt wurde und auf LinkedIn als Artikel veröffentlicht wurde. Das Foto des zugehörigen Blogbeitrags stammt von Pixabay. …………………………………..……

KI ist nicht klar definiert. In diesem Artikel unterscheide ich nicht zwischen maschinellem Lernen, Deep Learning und KI. Vereinfachend unterscheide ich auch nicht zwischen Umwelt-, Sozial- und Governance-Investitionen (ESG) sowie Impact Investing oder anderen nachhaltigen Investitionsansätzen.

Gleiche Renditen mit geringeren Risiken durch AI?

Die wichtigste Frage aus AnlegerInnensicht ist meistens, ob KI dazu beitragen kann, die Renditen zu verbessern. In der Vergangenheit wurden enorme Mengen an Gehirn- und Computerleistung und Geld investiert, um höhere Renditen als die Märkte zu erzielen. Viele quantitative traditionelle Investoren mit teilweise tiefen Taschen haben meistens vergeblich versucht, passive Benchmarks zu übertreffen (vgl. Kapitalanlage – Kann man den Markt schlagen? Teil 5 (roboadvisor-portal.com)). Ich erwarte nicht, dass die KI daran etwas ändern wird.

Aber KI kann dazu beitragen, Geldanlagerisiken zu verringern, insbesondere Nachhaltigkeitsrisiken. Diese Risiken können zum Beispiel mit Umwelt-, Sozial- und Governance-Ratings gemessen werden. ESG-Ratings beruhen oft auf einer Vielzahl von Daten und unstrukturierten Informationen aus allen möglichen Formaten, wie z. B. Videokonferenzen von Unternehmen mit Aktienanalysten. Mit KI ist es einfacher, mehr Emittenten von Anlageprodukten und mehr ratingrelevante Daten pro Emittent zu erfassen sowie die Ratings häufiger zu aktualisieren. ESG Book und Clarity.ai sind frühe Anbieter solcher KI-basierten ESG-Ratings.

Wenn KI dazu beiträgt, Anlagerisiken zu verringern, können die risikobereinigten Anlegerrenditen besser werden. Ich bezweifle jedoch, dass das (Overlay-)Risikomanagement von Portfolios durch KI wesentlich verbessert werden kann. In der Vergangenheit haben häufigere oder komplexere Risikosignale zur Änderung von Portfolios in der Regel nicht zu einer höheren Portfolioperformance geführt (vgl. Abschnitt Risiko-Overlay in Asset Allocation, Risiko-Overlay und Manager-Selektion: Das Diversifikationsbuch | SpringerLink).

AI ermöglicht andere Portfolios und zielgerichteteres Marketing

Durch die Nutzung der KI-basierten ESG-Daten von Clarity kann ich mein Portfolio aus etwa zwanzigtausend Aktien mit umfassenden ESG-Daten zusammenstellen (vgl. Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)). So kann ich Portfolios aus Aktien mit geringen Kapitalisierungen (Small Caps) zusammenstellen, für die traditionelle ESG-Rater typischerweise keine Daten liefern. Durch die KI-basierte häufige Aktualisierung der ESG-Daten kann ich zudem schneller reagieren als es bei traditionellen ESG-Ratings mit jährlichen Aktualisierungen der Fall ist. KI kann natürlich auch mit nicht-Nachhaltigkeitsinformationen helfen.

Mehr Auswahlmöglichkeiten bedeutet auch mehr Individualisierungsmöglichkeiten. Es ist bekannt, dass Kunden länger in maßgeschneiderte Anlagen investiert bleiben als in Standard-Anlagen. Insgesamt kann deshalb eine auf KI basierende individuelle Portfolioanpassung für Anleger und Anbieter gleichermaßen attraktiv.

Es liegt auf der Hand, dass KI dazu beitragen kann, Marketingaktivitäten besser auf individuelle Bedürfnisse, auch die von nachhaltigen Investoren, abzustimmen. Maßgeschneidertes Marketing könnte durch KI so billiger und inhaltlich besser und damit überzeugender werden.

KI kann wahrscheinlich auch dazu beitragen, die Finanzbildung und Anlageberatung zu verbessern. Mit Hilfe von KI sollte es für AnlegerInnen einfacher werden, die vielen verschiedenen Facetten nachhaltiger Anlagen besser zu verstehen. Dies könnte zum Beispiel durch KI-basierte Antworten auf Anlegerfragen erreicht werden. Large Language Modelle (LLM) wie Bing, ChatGPT oder Google Bard sollten für solche Themen gut geeignet sein. Einfachen Fragen wie „Kann man mit ESG-Investments Outperformance erreichen“ können mit Standard-Antworten auf häufig geäußerte Fragen (FAQ) beantwortet werden. AI kann aber helfen, wenn es darum geht, zum Beispiel SRI- mit ESG- oder SDG-Fonds zu vergleichen.

Außerdem kann KI dazu beitragen, häufigere und detailliertere Berichte über nachhaltige Anlagen für Kunden zu erstellen. Auch das könnte dazu beitragen, den Umsatz zu steigern und Kunden zu binden. Aber mehr und häufigere Informationen können auch ein Verkaufsrisiko darstellen. In der Regel gibt es zu jeder Anlage auch negative Informationen. Wenn Anleger zusätzliche (KI-basierte) Negativinformationen über mehrere Portfoliobestandteile erhalten, werden sie möglicherweise ganz auf den Versuch verzichten, nachhaltig zu investieren. Meine Empfehlung für solche Fälle ist: Versuchen Sie, so nachhaltig zu investieren, wie Sie können. Auch wenn dies nicht perfekt ist, so ist es doch nachhaltiger als traditionelles Investieren.

Direkte AI-basierte ESG-Indexierung und Portfolio-Selbstanpassung

Meiner Meinung nach gibt es ein noch attraktiveres Angebot als die anbieterbasierte Portfolioindividualisierung, nämlich Portfolioanpassungen durch Anleger selbst. Ich plädiere für die Selbstanpassung besonders für nachhaltige Geldanlagen (vgl. „Custom ESG Indexing Can Challenge Popularity Of ETFs”).

Portfolios auf der grünen Wiese zu erstellen, dürfte für die meisten Anleger schwierig sein. Doch auch dafür gibt es schon KI-Angebote. Search4Stocks von Allindex.com ist ein Beispiel für ein entsprechendes kostenloses KI-basiertes Tool. Alternativ können Standard-Portfolios als Ausgangsbasis für Individualisierungen genutzt werden.

Direkte bzw. benutzerdefinierte ESG-Indizierung ermöglicht es Anlegern, ein regelbasiertes nachhaltiges Startportfolio („Index“) individuell anzupassen. Man könnte zwar auch mit nicht-regelbasierten Portfolios starten, aber die sind für Anleger meistens schwieriger nachvollziehbar. Auch eine starke Vorselektion der Ausgangsportfolios ist sinnvoll, damit Anleger ihre Anpassungen auf Basis von wenigen Dutzend und nicht einigen hundert Investments starten.

Für die Selbstanpassung können Nachhaltigkeitsinformationen genutzt werden. Portfolioanbieter können (KI-basierte) aktuelle Informationen zu ESG-Ratings oder Kontroversen in Bezug auf Portfoliobestandteile zur Verfügung stellen. Basierend auf solchen Informationen sollte es auch ohne detaillierte Finanzbildung einfach sein, Aktien aus den Startportfolio auszuschließen. KI kann auch eingesetzt werden, um Stimmrechtsausübungen und individuelle Engagements von Anlegern oder Aktionären bei Zielunternehmen zu unterstützen.

Selbst-angepasste nachhaltige Portfolios können wahrscheinlich sogar noch „klebriger“ sein als maßgeschneiderte Angebote von Anbietern und deshalb trotz des zusätzlichen Aufwands auch für Anbieter attraktiv sein.

Künstliche Intelligenz mit Nachteilen, aber positive Aspekte überwiegen

Da es nicht genügend gut ausgebildete ExpertInnen für nachhaltiges Investieren gibt, kann KI helfen, Lücken zu füllen und so zu mehr nachhaltigen Investments führen. Arbeitsplätze bei traditionellen Finanzunternehmen könnten durch KI jedoch gefährdet sein. Negativ sind auch Daten- und Knowhow-Sicherheitsprobleme und dass KI-Anwendungen viel Energie verbrauchen können, insbesondere wenn sie Bilder und Videos erstellen. Aber insgesamt könnte KI für nachhaltige Investitionen mehr Vorteile als Nachteile bringen.

Technology risk illustration with nuclear risk picture from Pixabay by clkr free vector images

Technology risks: Researchpost #139

Technology risks: 17x new research on SDGs, nuclear, blockchain and AI risks, innovation, climate, carbon offsets, ESG ratings, treasuries, backtests and trading, big data, forensic finance, private equity and other alternatives by Patrick Behr, Richard Ennis, Christian von Hirschhausen, Thierry Roncalli, Bernhard Schwetzler and many more (# shows SSRN downloads on August 17th, 2023):

Social and ecological research (Technology risks)

SDG or green? Take a Deep Breath! The Role of Meeting SDGs With Regard to Air Pollution in EU and ASEAN Countries by Huynh Truong Thi Ngoc, Florian Horky, and Chi Le Quoc as of July 10th, 2023 (#26): “First, the results show that in ASEAN countries, Goal 10 (Reduced Inequalities) has a negative correlation with most other SDGs while in the EU it shows a broadly positive correlation. … air pollution, particularly SO2 and CO emissions, is positively connected to most SDGs in ASEAN while the trend in the EU is not clear. This could be due to the rapid economic development in ASEAN nations as well …” (p. 19).

Nuclear risks: The Potential of Nuclear Power in the Context of Climate Change Mitigation -A Techno-Economic Reactor Technology Assessment by Fanny Böse, Alexander Wimmers, Björn Steigerwald, and Christian von Hirschhausen as of July 27th, 2023 (#17): “… we synthesize techno-economic aspects of potential new nuclear power plants differentiating between three different reactor technology types: light-water cooled reactors with high capacities (in the range or above 1,000 MWel), so-called SMRs (“small modular reactor”), i.e., light-water cooled reactors of lower power rating (< 300 MWel) (pursued, e.g., in the US, Canada, and the UK), and non-light water cooled reactors (“so-called new reactor” (SNR) concepts), focusing on sodium-cooled fast neutron reactors as well as high-temperature reactors. … Actual development .. shows an industry in decline and, if commercially available, lacking economic competitiveness in low-carbon energy markets for all reactor types. Literature shows that other reactor technologies are in the coming decades unlikely to be available on a scale that could impact climate change mitigation efforts. The techno-economic feasibility of nuclear power should thus be assessed more critically in future energy system scenarios“ (abstract).

Blockchain risks: On the Security of Optimistic Blockchain Mechanisms by Jiasun Li as of August 15th, 2023 (#68): “Many new blockchain applications … adopt an “optimistic” design, that is, the system proceeds as if all participants are well-behaving … We point out that such protocols cannot be secure if all participants are rational” (abstract). “Given that alternative solutions are still technically immature, … the community either has to deviate from its pursuit of decentralization and accept a system that relies on trusted entities, or accept that fact their systems cannot be 100% secure” (p. 33).

AI chains: Determining Our Future: How Artificial Intelligence Creates a Deterministic World by Yuval Goldfus and Niklas Eder as of Aug. 9th, 2023 (#22): “… we demonstrate that AI relies on a deterministic worldview, which contradicts our most fundamental cultural narratives. AI-based decision making systems turn predictions into self-fulfilling prophecies; not simply revealing the patterns underlying our world, but creating and enforcing them, to the detriment of the underprivileged, the exceptional, the unlikely. The widespread utilisation of AI dramatically aggravates the tension between the constraints of environment, society, and past behavior, and individuals’ ability to alter the course of their lives, and to be masters of their own fate. Exposing hidden costs of the economic exploitation of AI, the article facilitates a philosophical discussion on responsible uses. It provides foundations of an ethical principle which allows us to shape the employment of AI in a way which aligns with our narratives and values” (abstract). My comment: My opinion regarding AI for sustainable investments see How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Musical therapy? The Value of Openness by Joshua Della Vedova, Stephan Siegel, and Mitch Warachka as of July 5th (#48): “We construct a novel proxy for openness using MSA-level data (Sö: US Metropolitan Statistical Areas) from radio station playlists. This proxy is based on the adoption of new music and varies significantly across MSAs. Empirically, we find a robust positive association between openness and proxies of value creation such as the number of new ventures funded by venture capital, the number of successful exits by new ventures, the proportion of growth firms, and Tobin’s q. … An instrumental variables procedure confirms that openness is highly persistent with variation across MSAs being evident more than a century before the start of our sample period. … our results are especially strong for young firms that are more likely to depend on new products“ (p. 26/27).

ESG and impact investing research

Climate stress: From Climate Stress Testing to Climate Value-at-Risk: A Stochastic Approach by Baptiste Desnos, Théo Le Guenedal, Philippe Morais, and Thierry Roncalli from Amundi as of July 5th, 2023 (697): „This paper proposes a comprehensive climate stress testing approach to measure the impact of transition risk on investment portfolios. … our framework considers a bottom-up approach and is mainly relevant for the asset management industry. … we model the distribution function of the carbon tax, provide an explicit specification of indirect carbon emissions in the supply chain, introduce pass-through mechanisms of carbon prices, and compute the probability distribution of potential (economic and financial) impacts in a Monte Carlo setting. Rather than using a single or limited set of scenarios, we use a probabilistic approach to generate thousands of simulated pathways” (abstract).

Disaster flows: Flight to climatic safety: local natural disasters and global portfolio flows by Fabrizio Ferriani,  Andrea Gazzani, and Filippo Natoli from the Bank of Italy as of July 5th, 2023 (#35): “… we find that local natural disasters have significant effects on global portfolio flows. First, when disasters strike, international investors reduce their net flows to equity mutual funds exposed to affected countries. This only happens when disasters occur in the emerging economies that are more exposed to climate risk. Second, natural disasters lead investors to reduce their portfolio flows into unaffected, high-climate-risk countries in the same region as well. Third, disasters in high-climate-risk emerging economies spur investment flows into advanced countries that are relatively safer from a climate risk standpoint“ (abstract).

Carbon offsets: Portfolio Allocation and Optimization with Carbon Offsets: Is it Worth the While? by Patrick Behr, Carsten Mueller, and Papa Orge as of Aug. 10th, 2023: “We explore whether the integration of carbon offsets into investment portfolios improves performance. … our results show that investment strategies that include such offsets broadly achieve higher Sharpe Ratios than the diversified benchmark, with the long-short strategy performing best”.

Useless ratings? ESG Ratings Management by Jess Cornaggia and Kimberly Cornaggia as of July 27th, 2023 (#92): “We use data from an ESG rater that incorporates feedback from firms during the rating process and produces ratings at a monthly frequency. We … find that when the rater changes the weight it applies to certain criteria in the creation of its ESG ratings, firms respond by adjusting their reported ESG behavior in the same month. … we do not observe real changes in the likelihood that firms are embroiled in ESG controversies, or that they reduce their release of toxic chemicals because of these adjustments. Rather, it appears firms “manage” their ESG ratings for the benefit of ESG-conscious investors and customers” (p. 26/27). My comment: I do not use market leading MSCI or ISS or Sustainalytics ratings and also because of my custom rating profile (Best-in-Universe with specific approach to treat missing data) the risk of such ratings management should be low, see Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

AI and other investment research (Technology risks)

ETFs effect Treasuries: ETF Dividend Cycles by Pekka Honkanen, Yapei Zhang, and Tong Zhou as of Aug. 10th, 2023 (#340): “… in the “ETF dividend cycle,” ETFs accumulate incoming corporate dividends in MMFs (Sö: Money Market Funds)  gradually but withdraw them abruptly in large amounts when they themselves have to pay dividends to investors. … This … leads to large, sudden outflows from MMFs, forcing these funds to liquidate some of their underlying assets. We find that these liquidations are concentrated in short-term Treasury bonds. … in the aggregate time series, an ETF dividend distribution event of average size leads to increases in short-term Treasury yields by approximately 0.38-0.58 basis points. … The total value fluctuation in the Treasury market could be considerable, as ETFs distribute dividends on 205 trading days in 2019, for example” (p. 9/10).

Backtest-problems: Market Returns Are Estimated with Error. How Much Error? by Edward F. McQuarrie as of July 24th, 2023 (#30): “For periods beginning 1926, it is conventional to suppose that historical market returns are known with reasonable accuracy. This paper challenges that comfortable certainty. Multiple indexes of market return are examined to show that return estimates do not closely agree across indexes and are unstable within index over time. The paper concludes that two-decimal precision—to the whole percentage point, with an error band of plus or minus one percentage point—would better reflect the accuracy of historical estimates of annual market return” (abstract).

Easy profits: Intraday Stock Predictability Everywhere by Fred Liu, and Lars Stentoft as of July 5th, 2023 (#1167): “First, we demonstrate that the market and sector portfolios are highly predictable. … we show that portfolio profitability mostly remains high after accounting for transaction costs, and is largely orthogonal to common risk factors. … we further exploit machine learning forecasts of individual stocks by constructing machine learning intraday portfolios, and demonstrate that a long-short portfolio achieves a Sharpe ratio of up to 4 after transaction costs. … demonstrate that less liquid firms are more predictable and firms which are more actively traded and volatile tend to be more profitable … intraday predictability and profitability generally decrease as the time horizon increases” (p. 28/29). My comment: If this is so easy, why do Quant funds typically disappoint? The information is important for stock trading, though (for my trading approach see Artikel 9 Fonds: Sind 50% Turnover ok? – Responsible Investment Research Blog (prof-soehnholz.com)).

Satellite vs. people: Displaced by Big Data: Evidence from Active Fund Managers by Maxime Bonelli and Thierry Foucault as of Aug. 2nd, 2023 (#325): “We test whether the availability of satellite imagery data tracking retailer firms’ parking lots affects the stock picking abilities of active mutual fund managers in stocks covered by this data. … we find that active mutual funds’ stock picking ability declines in covered stocks after the introduction of satellite imagery data for these stocks. This decline is particularly pronounced for funds that heavily rely on traditional sources of expertise, indicating that these managers are at a higher risk of being displaced by new data sources“ (p. 29/30).

AI bubble? Artificial Intelligence in Finance: Valuations and Opportunities by Yosef Bonaparte as of August 15th, 2023 (#65): “First, we display the current and projected AI revenue by sector, technology type, and geography. Second, present valuation model to AI stocks and ETFs that accounts for AI sentiment as well as fundamental analyses. Our findings demonstrate that the AI revenue will pass $2.7 trillion in the next 10 years, where the service AI technology stack will contain 75% of the market share (as of 2023 it is 50% of the market share). As for AI stock valuation, we present two main models to adopt when we value stocks“ (abstract).

Bad finance: What is Forensic Finance? by John M. Griffin and Samuel Kruger as of Aug. 10th, 2023 (#467): “We survey a growing field studying aspects of finance that are potentially illegal, illicit, or immoral. Some of the literature is investigative in nature to uncover malfeasance that is recent and possibly ongoing. … The work spans newer areas such as cryptocurrencies, financial advisor and broker misconduct, and greenwashing; and newer research in established fields that are still developing, such as insider trading, structured finance, market manipulation, political connections, public finance, and corporate fraud. We highlight investigative forensic finance, common economic questions, common empirical methods, industry and political opposition, censoring, and the importance of avoiding publication biases“ (abstract).

Specialist PE: Specialization in Private Equity and Corporate Financial Distress by Benjamin Hammer, Robert Loos, Lukas Andreas Oswald, and Bernhard Schwetzler as of Aug. 7th, 2023 (#384): “We investigate the impact of industry specialization of private equity firms on financial distress risk of portfolio companies … Difference-in-differences estimates suggest an increase in distress risk through private equity backing. The effect is stronger for specialist-backed firms than for generalist-backed firms relative to a carefully matched control group. However, specialist-backed firms can afford the increase in distress risk because they are less risky than generalist-backed firms before the buyout. Overall, our findings are consistent with the idea that greater idiosyncratic risk in specialized PE portfolios induces more risk-averse target selection” (abstract).

Costly diversification: Have Alternative Investments Helped or Hurt? by Richard M. Ennis as of August 3rd, 2023 (#135): “This paper shows that since the GFC (Sö: Global Financial Crisis in 2007/2008), US public-sector pension funds’ exposure to alternative investments is strongly associated with a reduction in alpha of approximately 1.2 percentage points per year relative to passive investment. While exposure to private equity has arguably neither helped nor hurt, both real estate and hedge fund exposures have detracted significantly from performance. Institutional investors should consider whether continuing to invest in alts warrants the time, expense and reduced liquidity associated with them” (p. 11).

………………………………………………………………………………….

Advert for German investors:

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 28 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T; also see Active or impact investing? – (prof-soehnholz.com)

Noch eine Fondsboutique mit Bild von Pixabay von Thomas G.

Noch eine Fondsboutique?

(„Noch eine Fondsboutique“ ist am 15. August 2023 zuerst auf LinkedIn veröffentlicht worden).

Es gibt schon so viele Fonds und Fondsboutiquen. Noch eine Fondsboutique zu gründen, scheint wenig Sinn zu machen. Trotzdem habe ich das im August 2021 auf Wunsch eines Geschäftspartners gemacht, nachdem ich ursprünglich nur Modellportfolios anbieten wollte. Ziel war es einen Fonds zu starten, der sowohl besonders gut auf ökologische aber auch auf soziale Entwicklungsziele der Vereinten Nationen (SDG) ausgerichtet ist und der zudem besonders geringe Umwelt-, Sozial- und Unternehmensführungsrisiken aufweist.

Nachhaltigkeit wichtiger als Überrendite

Ich habe viele Jahre als Fondsselekteur gearbeitet und weiß, wie schwer es ist, passive Benchmarks zu schlagen. Ich werbe auch bewusst nicht damit, Outperformance liefern zu können. Mein Ziel ist es, so nachhaltig wie möglich zu investieren. Damit strebe ich eine aktienmarkttypische Performance an. Das Modellportfolio, auf dem der Fonds basiert, hat das seit dem Start Ende 2017 weitgehend erreicht. Im Vergleich zu aktiv gemanagten Fonds funktioniert das trotz einer relativ schlechten Rendite im ersten Halbjahr 2023 durch das gute Jahr 2022 bisher auch für den Fonds.

Mein Ansatz ist sehr untypisch: Ich selektiere meine Aktien fast nur anhand von Nachhaltigkeitsinformationen. Die Diversifikation beschränke ich bewusst auf 30 Aktien, weil eine höhere Diversifikation meine Nachhaltigkeitsanforderungen verwässern würde. Trotzdem sind die Risikokennzahlen des Fonds gut.

Konsequente Nachhaltigkeit ist leichter von Small- und Midcaps erfüllbar (noch eine Fondsboutique)

Mein Fonds ist auf Unternehmen fokussiert, deren Produkte und Services möglichst gut mit mindestens einem SDG vereinbar sind. Das trifft eher auf kleinere als auf größere Unternehmen zu. Auch meine zahlreichen konsequenten Ausschüsse sind eher von spezialisierteren als von diversifizierten Unternehmen erfüllbar, so dass der Fonds überwiegend Small- und Midcaps enthält.

Unternehmen mit Hauptsitz in Ländern, die meinen Anforderungen an Gesetzmäßigkeit nicht entsprechen, bleiben unberücksichtigt. In meinem Fonds haben die USA aktuell einen Anteil von leicht über 50%. Der Eurolandanteil liegt ebenso wie der Australien-Anteil derzeit bei etwa 10%. Gesundheits- und Industrieunternehmen machen den Hauptbestandteil aus und auch (Sozial-) Immobilien und (nachhaltige) Infrastruktur sind überdurchschnittlich vertreten. Technologieunternehmen sind dagegen unterrepräsentiert im Vergleich zu traditionellen Aktienbenchmarks.

Große Unterschiede zu anderen Fonds

In Deutschland werden nur wenige global investierende Fonds mit Small- und/oder Midcap-Fokus angeboten. Im Juni habe ich mir die Portfolios potenzieller Wettbewerber angesehen und maximal vier Aktien Überscheidung gefunden.

Unterschiede zu anderen Fonds gibt es vor allem in Bezug auf das Nachhaltigkeitskonzept. Ich kenne keinen anderen Fonds mit so strengen und so vielen Ausschlüssen. Ich kenne auch keinen anderen branchendiversifizierten Fonds, der strenge Best-in-Universe ESG-Ratings nutzt. Dabei werden nur Unternehmen mit besonders geringen absoluten ESG-Risiken ausgewählt. Fast alle anderen Fonds nutzen einen laxeren Best-in-Class ESG-Ratingansatz, bei dem – abhängig vom jeweiligen Marktsegment – relativ gute ESG-Risiken ausreichen.

Viele Fonds haben zudem nur Mindestanforderungen an aggregierte ESG-Ratings und nicht explizit separate Mindestanforderungen an Umwelt-, Sozial- und Unternehmensführungsratings, wie es bei meinem Fonds der Fall ist. Auf Basis eines detaillierten Nachhaltigkeits-Engagementkonzeptes, das auch auf andere Stakeholder wie Mitarbeiter einbezieht, bin ich zudem aktuell mit 28 von 30 Unternehmen in einem aktiven Dialog.

Für die meisten Fondsselekteure ist mein Fonds aber noch zu jung und mit knapp über 10 Millionen Fondsvermögen noch zu klein. Durch meinen regelbasieren Ansatz kann ich aber auch als Ein-Personen Fondsboutique gemeinsam mit meinen Fondspartnern Deutsche Wertpapiertreuhand und Monega sowie mit meinem Beratungs- und IT-Partner QAP Analytic Solutions und meinem Datenlieferanten Clarity.ai alle Anforderungen gut erfüllen.

Ich bin sehr zuversichtlich, dass mein Fonds eine gute Zukunft hat und möchte dauerhaft in großem Umfang im Fonds investiert bleiben.

Weiterführende Informationen siehe www.futurevest.fund und z.B. Active or impact investing? – (prof-soehnholz.com)

Disclaimer zu „Noch eine Fondsboutique)

Dieser Beitrag ist von der Soehnholz ESG GmbH erstellt worden. Die Erstellerin übernimmt keine Gewähr für die Richtigkeit, Vollständigkeit und/oder Aktualität der zur Verfügung gestellten Inhalte. Die Informationen unterliegen deutschem Recht und richten sich ausschließlich an Investoren, die ihren Wohnsitz in Deutschland haben. Sie sind nicht als Verkaufsangebot oder Aufforderung zur Abgabe eines Kauf- oder Zeichnungsangebots für Anteile des in dieser Unterlage dargestellten Fonds zu verstehen und ersetzen nicht eine anleger- und anlagegerechte Beratung. Anlageentscheidungen sollten nur auf der Grundlage der aktuellen gesetzlichen Verkaufsunterlagen (Wesentliche Anlegerinformationen, Verkaufsprospekt und – sofern verfügbar – Jahres- und Halbjahresbericht) getroffen werden, die auch die allein maßgeblichen Anlagebedingungen enthalten. Die Verkaufsunterlagen werden bei der Kapitalverwaltungsgesellschaft (Monega Kapitalanlagegesellschaft mbH), der Verwahrstelle (Kreissparkasse Köln) und den Vertriebspartnern zur kostenlosen Ausgabe bereitgehalten. Die Verkaufsunterlagen sind zudem im Internet unter www.monega.de erhältlich. Die in dieser Unterlage zur Verfügung gestellten Inhalte dienen lediglich der allgemeinen Information und stellen keine Beratung oder sonstige Empfehlung dar. Die Kapitalanlage ist stets mit Risiken verbunden und kann zum Verlust des eingesetzten Kapitals führen. Vor einer etwaigen Anlageentscheidung sollten Sie eingehend prüfen, ob die Anlage für Ihre individuelle Situation und Ihre persönlichen Ziele geeignet ist. Diese Unterlage enthält ggf. Informationen, die aus öffentlichen Quellen stammen, die die Erstellerin für verlässlich hält. Die dargestellten Inhalte, insbesondere die Darstellung von Strategien sowie deren Chancen und Risiken, können sich im Zeitverlauf ändern. Einschätzungen und Bewertungen reflektieren die Meinung der Erstellerin zum Zeitpunkt der Erstellung und können sich jederzeit ändern. Es ist nicht beabsichtigt, diese Unterlage laufend oder überhaupt zu aktualisieren. Sie stellt nur eine unverbindliche Momentaufnahme dar. Die Unterlage ist ausschließlich zur Information und zum persönlichen Gebrauch bestimmt. Jegliche nicht autorisierte Vervielfältigung und Weiterverbreitung ist untersagt.

Active ESG Share: Illustration by Julie McMurrie from Pixabay showing a satisfaction rating

Active ESG share: Researchpost #136

Active ESG share: 26x new research on SDG, climate automation, family firms, greenium and green liquidity, anti-ESG, ESG-ratings, diversity, sustainability standards, disclosure, ESG pay, taxes, impact investing, and financial education by Martijn Cremers and many more (#: SSRN downloads as of July 27th, 2023)

Ecological and social research: Active ESG share

SDG deficits: The Sustainable Development Goals Report Special edition by the United Nations as of July 10th, 2023: “At the midpoint on our way to 2030, the Sustainable Development Goals are in deep trouble. An assessment of the around 140 targets for which trend data is available shows that about half of these targets are moderately or severely off track; and over 30 per cent have either seen no movement or regressed below the 2015 baseline. Under current trends, 575 million people will still be living in extreme poverty in 2030, and only about one third of countries will meet the target to halve national poverty levels. Shockingly, the world is back at hunger levels not seen since 2005, and food prices remain higher in more countries than in the period 2015–2019. The way things are going, it will take 286 years to close gender gaps in legal protection and remove discriminatory laws. And in education, the impacts of years of underinvestment and learning losses are such that, by 2030, some 84 million children will be out of school and 300 million children or young people attending school will leave unable to read and write. … Carbon dioxide levels continue to rise – to a level not seen in 2 million years. At the current rate of progress, renewable energy sources will continue to account for a mere fraction of our energy supplies in 2030, some 660 million people will remain without electricity, and close to 2 billion people will continue to rely on polluting fuels and technologies for cooking. So much of our lives and health depend on nature, yet it could take another 25 years to halt deforestation, while vast numbers of species worldwide are threatened with extinction” (p. 4).

Climate automation: Labor Exposure to Climate Change and Capital Deepening by Zhanbing Xiao as of June 21st, 2023 (#31): “This paper looks into these risks and calls for more attention to the health issues of outdoor workers in the transition to a warmer era. … I find that high-exposure firms have higher capital-labor ratios, especially when their managers believe in climate change or when jobs are easy to automate. After experiencing shocks to physical (abnormally high temperatures) or regulatory (the adoption of the HIPS in California) risks, high-exposure firms switch to more capital-intensive production functions. …I also find that high-exposure firms respond to the shocks by innovating more, especially in technologies facilitating automation and reducing labor costs. … industry-wide evidence that labor exposure to climate change negatively affects job creation and workers’ earnings“ (p. 34/35).

Open or private data? Opening Up Big Data for Sustainability: What Role for Database Rights in the Fourth Industrial Revolution? by Guido Noto La Diega and Estelle Derclaye as of Nov. 8th, 2022 (#159): “… the real guardians of big data – the private corporations that are the key decision-makers in the 4IR (Sö: 4th Industrial Revolution) – are not doing enough to facilitate the sharing and re-use of data in the public interest, including the pursuit of climate justice. … While there may be instances where Intellectual Property (IP) reasons may justify some limitations in the access to and re-use of big data held by corporations, it is our view that, in general, IP should not be used to hinder re-use of data to pursue the SDGs. … First, we will illustrate the triple meaning of ‘data sustainability.’ Second, we will critically assess whether the database right (or ‘sui generis right’) can play a role in opening up corporate big data. Third, will imagine how a sustainable framework for sustainable data governance may look like. This focus is justified by the fact that the Database Directive, often accused of creating an unjustified monopoly on data, is in the process of being reformed by the yet-to-be-published Data Act” (abstract).

Clean family firms: Family Ownership and Carbon Emissions by Marcin Borsuk, Nicolas Eugster, Paul-Olivier Klein, and Oskar Kowalewski as of April 13th, 2023 (#159): “Family firms exhibit lower carbon emissions both direct and indirect when compared to non-family firms, suggesting a higher commitment to environmental protection by family owners. When using the 2015 Paris Agreement as a quasi-exogeneous shock, results show that family firms reacted more to the Agreement and recorded a further decline in their emissions. … Firms directly managed by the family experience a further reduction in their emissions. On the contrary, family firms with hired CEOs see an increase in emissions. We show that family firms record a higher level of R&D expenses, suggesting that they invest more in new technologies, which might contribute to reducing their environmental footprint. … Compared with non-family firms, family firms commit less to a reduction in their carbon emissions and display lower ESG scores“ (p. 26).

Green productivity: Environmental Management, Environmental Innovation, and Productivity Growth: A Global Firm-Level Investigation by Ruohan Wu as of June 18th, 2023 (#5): “… overall, environmental management and innovation both increase firm productivity but substitute for each other’s positive effects. Environmental management significantly increases productivity of firms that do not innovate, while environmental innovation significantly increases productivity of those without environmental management” (p. 30).

Good governance: Governance, Equity Issuance and Cash: New International Evidence by Sadok El Ghoul, Omrane Guedhami, Hyunseok Kim, and Jungwon Suh as of May 9th, 2023 (#18): “… we hypothesize that equity issuance is more frequent and growth-inducing under strong governance than under weak governance. We also hypothesize that cash added to or held by equity issuers creates greater value for shareholders under strong governance than under weak governance. Our empirical results support these hypotheses. Most remarkably, under weak governance, cash assets not only fail to create but destroy value for shareholders if they are in the possession of equity issuers instead of non-equity-issuers. Overall, strong institutions help small growth firms unlock their value through active equity issuance. On the flip side, weak institutions render an economy’s capital allocation inefficient by hindering value-creating equity issuance” (abstract).

ESG Ratings Reearch: Active ESG Share

MSCI et al. criticism? ESG rating agency incentives by Suhas A. Sridharan, Yifan Yan, and Teri Lombardi Yohn as of June 19th, 2023 (#96): “First, we report that firms with higher (lower) stock returns receive higher (lower) ratings from a rater with high index incentives relative to ratings from a rater with low index incentives. … Second, the rater with high index incentives provides higher ESG ratings for smaller firms with less ESG disclosure. … Third, we show that ESG index inclusion decisions are associated with stock returns. Collectively, our findings suggest that ESG data providers’ index licensing incentives influence their ESG ratings“ (p. 22).

Anti-ESG ESG: Conflicting Objectives of ESG Funds: Evidence from Proxy Voting by Tao Li, S. Lakshmi Naaraayanan, and Kunal Sachdeva as of February 6th, 2023 (#840): “ESG funds reveal their preference for superior returns by voting against E&S proposals when it is uncertain whether these proposals will pass. … active ESG funds and non-ESG focused institutions are more likely to cast votes against E&S proposals” (p. 26).

Non-ESG ESG? What Does ESG Investing Mean and Does It Matter Yet? by Abed El Karim Farroukh, Jarrad Harford, and David Shin as of June 26th, 2023 (#77): “… even ESG-oriented funds often vote against shareholder proposals related to E&S issues. When considering portfolio holdings and turnover, firms added to portfolios have better ESG scores than those dropped for both ESG and non-ESG funds. Nevertheless, portfolio additions and deletions do not improve fund scores on a value-weighted basis, and those scores closely track the ESG score of a value weighed portfolio of all public firms. This suggests that while investment filters based on ESG criteria may exist, they rarely bind. … we find that material E&S proposals receive more support, but only a small proportion (4%) of these proposals actually pass. Lastly, unconditional support from funds associated with families that have signed the United Nations Principles for Responsible Investing (UN PRI) would lead to a significant change in the voting outcomes of numerous E&S proposals. Overall, our findings suggest that the effects of ESG investing are growing but remain relatively limited. E&S proposals rarely pass, and the ESG scores of funds declaring ESG preferences are not that different from the rest of funds“ (p. 26).

ESG divergence: ESG Ratings: Disagreement across Providers and Effects on Stock Returns by Giulio Anselmi and Giovanni Petrella as of Jan. 23rd, 2023 (#237): “This paper examines the ESG rating assigned by two providers, Refinitiv and Bloomberg, to companies listed in Europe and the United States in the period 2010-2020. … Companies with higher ESG scores have the following characteristics: larger size, lower credit risk, and lower equity returns. The ESG dimension does not affect stock returns, once risk factors have been taken into account. The divergence of opinions across rating providers is stable in Europe and increasing in the US. As for the individual components (E, S and G), in both markets we observe a wide and constant divergence of opinions for governance as well as a growing divergence over time for the social component“ (abstract).

Active ESG share: The complex materiality of ESG ratings: Evidence from actively managed ESG funds by K.J. Martijn Cremers, Timothy B. Riley, and Rafael Zambrana as of July 21st,2023 (#1440): “Our primary contribution is to introduce a novel metric of the importance of ESG information in portfolio construction, Active ESG Share, which measures how different the full distribution of the stock-level ESG ratings in a fund’s portfolio is from the distribution in the fund’s benchmark … We find no predictive relation between Active ESG Share and performance among non-ESG funds and a strong, positive predictive relation between Active ESG Share and performance among ESG funds” (p. 41). My comment: My portfolios are managed independently from benchmarks and typically show significant positive active ESG shares, see e.g. Active or impact investing? – (prof-soehnholz.com)

Responsible investment research: Active ESG share

Stupid ban? Do Political Anti-ESG Sanctions Have Any Economic Substance? The Case of Texas Law Mandating Divestment from ESG Asset Management Companies by Shivaram Rajgopal, Anup Srivastava, and Rong Zhao as of March 16th,2023 (#303): “Politicians in Texas claim that the ban on ESG-heavy asset management firms would penalize companies that potentially harm the state’s interest by boycotting the energy sector. We find little economic substance behind such claims or the reasoning for their ban. Banned funds are largely indexers with portfolio tilts toward information technology and away from energy stocks. Importantly, banned funds carry significant stakes in energy stocks and hold 61% of the energy stocks held by the control sample of funds. The risk and return characteristics of banned funds are indistinguishable from those of control funds. A shift from banned funds to control funds is unlikely to result in a large shift of retirement investments toward the energy sector. The Texas ban, and similar follow-up actions by Republican governors and senior officials, appear to lack significant economic substance“ (p. 23).

Better proactive: Gender Inequality, Social Movement, and Company Actions: How Do Wall Street and Main Street React? by Angelyn Fairchild, Olga Hawn, Ruth Aguilera, Anatoli Colicevm and Yakov Bart as of May 25th,2023 (#44): “We analyze reactions to company actions among two stakeholder groups, “Wall Street” (investors) and “Main Street” (the general public and consumers). … We identify 632 gender-related company actions and uncover that Wall Street and Main Street are surprisingly aligned in their negative reaction to companies’ symbolic-reactive actions, as evidenced by negative cumulative abnormal returns, more negative social media and reduced consumer perceptions of brand equity” (abstract)

Less risk? Socially Responsible Investment: The Role of Narrow Framing by Yiting Chen and Yeow Hwee Chua as of Dec. 8th, 2022 (#54): “Through our experiment, subjects allocate endowments among one risk-free asset and two risky assets. … Relative to the control condition, this risky asset yields additional payments for subjects themselves in one treatment, and for charities in the remaining two treatments. Our results show that additional payments for oneself encourage risk taking behavior and trigger rebalancing across different risky assets. However, payments for charities solely induce rebalancing“ (abstract). My comment: This may explain the typically lower risk I have seen in my responsible portfolios and in some research regarding responsible investments.

Greenium model: Asset Pricing with Disagreement about Climate Risks by Thomas Lontzek, Walter Pohl, Karl Schmedders, Marco Thalhammer, and Ole Wilms as of July 19th, 2023 (#113): “We present an asset-pricing model for the analysis of climate financial risks. … In our model, as long as the global temperature is below the temperature threshold of a tipping point, climate-induced disasters cannot occur. Once the global temperature crosses that threshold, disasters become increasingly likely. The economy is populated by two types of investor with divergent beliefs about climate change. Green investors believe that the disaster probability rises considerably faster than brown investors do. … The model simultaneously explains several empirical findings that have recently been documented in the literature. … according to our model past performance is not a good predictor of future performance. While realized returns of green stocks have gone up in response to negative climate news, expected returns have gone down simultaneously. In the absence of further exogenous shocks and climate-induced disasters, our model predicts higher future returns for brown stocks. However, if temperatures continue to rise and approach the tipping point threshold, the potential benefits of investments to slow down climate change increase significantly. In this scenario, our model predicts a significant increase in the market share of green investors and the carbon premium“ (p. 39/40).

More green liquidity: Unveiling the Liquidity Greenium: Exploring Patterns in the Liquidity of Green versus Conventional Bonds by Annalisa Molino, Lorenzo Prosperi, and Lea Zicchino as of July 16th, 2023 (#14): “… we investigate the relationship between liquidity and green bond label using a sample of green bonds issued globally. … our findings suggest that green bonds are more liquid than comparable ordinary bonds. … The difference is large and statistically significant for bonds issued by governments or supranationals, while it is not significantly different from zero for corporates, unless the company operates in the energy sector. … companies that certify their commitment to use the proceeds for green projects or enjoy a strong environmental reputation can also benefit from higher liquidity in the secondary market. … the liquidity of ECB-eligible green bonds improves relative to similar conventional bonds, possibly because they become more attractive to banks with access to ECB funding. Finally, we find that the liquidity of conventional bonds issued by green bond issuers improves significantly in the one-year period following the green announcement“ (p. 18/19).

Impact investment and shareholder engagement: Active ESG share

Standard overload: Penalty Zones in International Sustainability Standards: Where Improved Sustainability Doesn’t Pay by Nicole Darnall, Konstantinos Iatridis, Effie Kesidou, and Annie Snelson-Powell as of June 19th, 2023 (#17): “International sustainability standards (ISSs), such as the ISO standards, the United Nations Global Compact, and the Global Reporting Initiative framework, are externally certified process requirements or specifications that are designed to improve firms’ sustainability” (p. 1). “Adopting an International Sustainability Standard (ISS) helps firms improve their sustainability performance. It also acts as a credible market “signal” that legitimizes firms’ latent sustainability practices while improving their market value. … However, beyond a tipping point of 2 ISSs, firms’ market gains decline, even though their sustainability performance continues to improve until a tipping point of 3 ISSs“ (abstract).

Good ESG disclosure (1): Mandatory ESG Disclosure, Information Asymmetry, and Litigation Risk: Evidence from Initial Public Offerings by Thomas J. Boulton as of April 7th, 2023 (#168): “If ESG disclosure improves the information environment or reduces litigation risk for IPO firms, IPOs should be underpriced less when ESG disclosure is mandatory. I test this prediction in a sample of 15,456 IPOs issued in 36 countries between 1998 and 2018. … I find underpricing is lower for IPOs issued in countries that mandate ESG disclosure. From an economic perspective, my baseline results indicate that first-day returns are 15.9 percentage points lower in the presence of an ESG disclosure mandate. The typical IPO firm raises approximately 105.93 million USD in their IPO. Thus, the implied impact of an ESG disclosure mandate is an additional 16.8 million in proceeds. … I find that their impact on underpricing is stronger in countries with lower-quality disclosure environments. … a significant benefit of ESG disclosure mandates is that they lower the cost of capital for the young, high-growth firms that issue IPOs” (p. 27-29).

Good ESG disclosure (2): Environmental, Social and Governance Disclosure and Value Generation: Is the Financial Industry Different? by Amir Gholami, John Sands, and Habib Ur Rahman as of July 18th, 2023 (#24): “The results show that the overall association between corporate ESG performance disclosure and companies’ profitability is strong and positive across all industry sectors. … All corporate ESG performance disclosure elements (ENV, SOC and GOV) are positively associated with corporate profitability for companies that operate in the financial industry. Remarkably, for companies operating in non-financial sectors, except for corporate governance, there is no significant association between corporate environmental and social elements and a company’s profitability“ (p. 12).

Climate pay effects: Climate Regulatory Risks and Executive Compensation: Evidence from U.S. State-Level SCAP Finalization by Qiyang He, Justin Hung Nguyen, Buhui Qiu, and Bohui Zhang as of April 13th, 2023 (#131): “Different state governments in the U.S. have begun to adopt climate action plans, policies, and regulations to prepare for and combat the significant threats of climate change. The finalization of these climate action plans, policies, and regulations in a state results in an adaptation plan— the SCAP. … we find that SCAP finalization leads residents in that state to pay more attention to climate-related topics. Also, it leads firms headquartered in that state to have higher perceived climate regulatory risks … Further analyses show a reduction of total CEO pay of about 5% for treated firms headquartered in the SCAP-adopting state relative to control firms headquartered in non-adopting states. The negative treatment effect also holds for non-CEO executive compensation. … the shareholders of treated firms reduce their CEO’s profit-chasing and risk-taking incentives, probably because these activities will likely incur more future environmental compliance costs. Instead, CEO pay is more likely to be linked to corporate environmental performance, that is, the treated firms adopt environmental contracting to redirect CEO incentives from financial gains to environmental responsibility” (p. 27/28).

Stakeholder issues: Corporate Tax Disclosure by Jeffrey L. Hoopes, Leslie Robinson, and Joel Slemrod as of July 17th, 2023 (#47): “Policies that require, or recommend, disclosure of corporate tax information are becoming more common throughout the world, as are examples of tax-related information increasingly influencing public policy and perceptions. In addition, companies are increasing the voluntary provision of tax-related information. We describe those trends and place them within a taxonomy of public and private tax disclosure. We then review the academic literature on corporate tax disclosures and discuss what is known about their effects. One key takeaway is the paucity of evidence that many tax disclosures mandated with the aim of increasing tax revenue have produced additional revenue. We highlight many crucial unanswered questions …” (abstract). My comment: Nevertheless I suggest to focus on tax disclosure/payment regarding community/government stakeholder engagement see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) rather than on donations or other indicators.

Impact investment status quo: Impact Investing by Ayako Yasuda as of July 23rd, 2023 (#62): “Impact investing is a class of investments that are designed to meet the non-pecuniary preferences of investors (or beneficiaries) and aim to generate a positive externality actively and causally through their ownership and/or governance of the companies they invest in. Impact investing emerged as a new branch of responsible, sustainable or ESG (environmental, social, and governance) investment universe in the last few decades. In this article, we provide a definition of impact investing, review the extant literature, and discuss suggestions for future research” (abstract).

Political engagement: Collaborative investor engagement with policymakers: Changing the rules of the game? by Camila Yamahaki and Catherine Marchewitz as of June 25th, 2023 (#44): “A growing number of investors are engaging with policymakers on environmental, social and governance (ESG) issues, but little academic research exists on investor policy engagement. … We identify a trend that investors engage with sovereigns to fulfil their fiduciary duty, improve investment risk management, and create an enabling environment for sustainable investments. We encourage future research to further investigate these research propositions and to analyze potential conflicts of interest arising from policy engagement in emerging market jurisdictions” (abstract).

General investment research

Good diversity: Institutional Investors and Echo Chambers: Evidence from Social Media Connections and Political Ideologies by Nicholas Guest, Brady Twedt, and Melina Murren Vosse as of June 26th, 2023 (#62): “… we measure the ideological diversity of institutional investors’ surroundings using the social media connections and political beliefs of the communities where they reside” (p. 24/25). “Finally, firms whose investors have more likeminded networks exhibit substantially lower future returns. Overall, our results suggest that connections to people with diverse beliefs and information sets can improve the financial decision making of more sophisticated investors, leading to more efficient markets (abstract).

Good education: The education premium in returns to wealth by Elisa Castagno, Raffaele Corvino, and Francesco Ruggiero as of July 6th, 2023 (#17): “… we define as education premium the extra-returns to wealth earned by college-graduated individuals compared to their non-college graduated peers. We find that the education premium is sizeable … We find that an important fraction of the premium is due to the higher propensity for risk-taking and investing in the stock market of better educated individuals … we document a significantly higher propensity for well-diversified portfolios as well as a higher persistence in stock market participation over time of better educated individuals, and we show that both mechanisms positively and significantly contribute to the education premium” (p. 25).

Finance-Machines? Financial Machine Learning by Bryan T. Kelly and Dacheng Xiu as of July 26th, 2023 (#12): “We emphasize the areas that have received the most research attention to date, including return prediction, factor models of risk and return, stochastic discount factors, and portfolio choice. Unfortunately, the scope of this survey has forced us to limit or omit coverage of some important financial machine learning topics. One such omitted topic that benefits from machine learning methods is risk modeling. … Closely related to risk modeling is the topic of derivatives pricing. … machine learning is making inroads in other fields such as corporate finance, entrepreneurship, household finance, and real estate“ (p. 132/133). My comment: I do not expect too much from financial maschine learning. Simple approaches to investing often work better than pseudo-optimised ones, see e.g. Pseudo-optimierte besser durch robuste Geldanlagen ersetzen – Responsible Investment Research Blog (prof-soehnholz.com)

………………………………………………………………………………….

Advert for German investors:

“Sponsor” my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 28 of 30 companies engagedFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

ESG sales impact picture showing fair trad from suju-foto from Pixabay

ESG sales impact: Researchpost #135

ESG sales impact: 11x new research on ESG sales effects, governance knowledge deficits and policies, corporate purpose measurement, CSR returns, impact frameworks, bad asset managers, financial advice AI and Bitcoin by Christina Bannier, Lars Hornuf, Judith Stroehle and many more (#: SSRN downloads on July 19th, 2023)

Social and ecological research: ESG sales impact

ESG sales impact (1): Do Consumers Care About ESG? Evidence from Barcode-Level Sales Data by Jean-Marie Meier, Henri Servaes, Jiaying Wei, and Steven Chong Xiao as of July 11th, 2023 (#266): “… we find that higher E&S ratings positively affect subsequent local product sales. The positive effect of E&S ratings on local product sales is stronger in markets with more Democratic voters and with a higher average income. … revenue also declines after the release of negative E&S news. … we find a significant increase in the sensitivity of local retail sales to firm E&S performance after (Sö: natural and environmental) … disaster events for counties located closer to the events“ (p. 23).

ESG sales impact (2): How Does ESG Shape Consumption? by Joel F. Houston, Chen Lin, Hongyu Shan, and Mo Shen as of June 21st, 2023 (#280): “Our study explores the effects of more than 1600 negative events captured from the RepRisk database, on 150 million point-of-sale consumption observations … Our baseline findings show that the average negative event generates a 5 – 10 % decrease in sales for the affected product in the six months following the event. … we find that there is considerable heterogeneity in consumer responses, and that the average response varies considerably depending on consumer demographics and the nature of the ESG-related reputation shock“ (p. 23/24).

Governance doubts: Seven Gaping Holes in Our Knowledge of Corporate Governance by David F. Larcker and Brian Tayan as of May 3rd, 2023 (741): “… we highlight significant “holes” in our knowledge of corporate governance. … While the concepts we review are not exhaustive, each is critical to our understanding of the proper functioning of governance, including board oversight, the recruitment of CEO talent, the size and structure of CEO pay, and the advancement of shareholder and stakeholder welfare” (abstract).

Purpose first: Sustainable Corporate Governance. An Overview and an Assessment by Steen Thomsen as of June 8th, 2023 (#144): “This paper outlines what could be some of the key elements of sustainable corporate governance 2.0 including company law (director liability), long-term ownership, ESG investment, company purpose, sustainability committees, sustainability competencies, ESG incentives, climate plans, climate risk management, sustainability reporting, and internal carbon pricing. … the current fixation on regulation and ESG is counterproductive and suggest that a better way forward is to start with company purpose and to adjust corporate governance accordingly. Using this approach, I outline a tentative roadmap for sustainable corporate governance 2.0“ (abstract). My comment: I suggest a Roadmap for corporate and stakeholder engagement here Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Responsible investment research: ESG sales impact

Purpose measurement: Through the looking glass: tying performance and materiality to corporate purpose by Judith C. Stroehle, Kazbi Soonawalla, and Marcel Metzner as of June 7th, 2023 (#18): “The performance principles of corporate purpose suggest that measurement needs to reflect whether companies take into account the growing significance of workers, societies and natural assets both inside and outside a company’s legal boundaries … Purpose without measurement runs the risk of being merely a mirage …. we show that it is not impossible to establish measurement of purpose, in particular when performance in relation to purpose is linked to existing frameworks of measurement and notions of single and double materiality“ (p. 30/31).

Irresponsible returns? The risk‑return tradeoff: are sustainable investors compensated adequately? by Christina E. Bannier, Yannik Bofinger, and Björn Rock as of April 27th, 2023: “… our results show that low CSR (Sö: Corporate Social Responsibility) is … associated with higher portfolio returns. Interestingly, these higher returns even overcompensate the investor for the amount of risk she has to bear. … from an investor’s perspective, the ‘optimal’ return-to-risk ratio is achieved for a portfolio that invests in the lowest CSR-rated firms” (p. 169/170). My comment see ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)

Impact frames: How impact investing firms use reference frameworks to manage their impact performance: An industry-level study by Syrus M. Islam and Ahsan Habib as of July 10th, 2023 (#8): “… we show how impact investing firms use various reference frameworks (e.g., IFC Performance Standards, Impact Management Project framework, UN Sustainable Development Goals) to manage their impact performance throughout the investment lifecycle. … We also discuss … how reference frameworks used in performance management in the impact investing industry differ from those used in some other industries” (abstract). My comment: I use the SDG-Framework see Active or impact investing? – (prof-soehnholz.com)

Bad asset managers? Who’s managing your future? An assessment of asset managers’ climate action by Lara Cuvelier at al. from Reclaim Finance as of June 28th, 2023: “At the parent (or group) level, the 30 asset managers included in this report invested at least $3.5 billion in 74 newly issued bond securities from companies actively engaged in fossil fuel expansion. … The 30 asset managers analyzed held US$597 bn in bonds and shares in the biggest fossil fuel developers as of January 2023. … the majority of these 30 major asset managers do not currently sanction polluting companies for failing to take the right steps for the climate …After five years of intensive dialogue by investors from the CA100+ initiative, only 20% of the companies from the coal mining and oil and gas sectors that have been engaged have even set an ambition to achieve net zero emissions by 2050. … only two of the companies are working to decarbonize their capital expenditures” (p. 7).

General investment research

AI & investments: Executives vs. Chatbots: Unmasking Insights through Human-AI Differences in Earnings Conference Q&A by John (Jianqiu) Bai, Nicole Boyson, Yi Cao, Miao Liu, and Chi Wan as of June 22th, 2023 (#125): “… we use earnings conference calls as a setting and introduce a novel measure of information content (Human Machine Differences, HAID) by exploiting the discrepancy between answers to questions at earnings conference calls provided by actual corporate CFOs and CEOs and those given by several context-preserving Large Language Models (LLM) including ChatGPT. … HAID has significant predictive power for the absolute cumulative abnormal return around earnings call, stock liquidity, earnings growth, analyst forecast accuracy, as well as management’s propensity to provide guidance. … Overall, we find that HAID provides a unique and previously unidentified source and methodology to help investors uncover new information content” (p. 26).

LLM Advice: Using GPT-4 for Financial Advice by Christian Fieberg, Lars Hornuf, David J. Streich as of July 6th, 2023 (#250): “GPT-4 can provide financial advice which is on par with the advice provided by professional low-cost automated financial advisory services. While the portfolios suggested by GPT-4 displayed considerable home bias, its historical risk-return profiles are at least on par with … benchmark portfolios. … To investigate GPT-4’s ability to serve clients’ sustainability preferences (ESMA, 2018), we added sustainability preferences to some of our investor profiles. The portfolios suggested for those profiles included ESG-focused versions of the portfolio components such as the iShares ESG Aware MSCI USA ETF. … risk profiling … can currently not be handled by GPT-4. … GPT-4 cannot offer assistance in implementing the portfolio (opening an account, purchasing and rebalancing portfolio components)“ (p. 11/12).

Bitcoin infects: Is Bitcoin Exciting? A Study of Bitcoin’s Spillover Effects by Minhao Leong and Simon Kwok as of July 13th, 2023 (#16): “… we detect the presence of positive jump spillovers from Bitcoin to risk assets (U.S. equities, developed market equities and emerging market equities) and negative jump spillovers from Bitcoin to defensive assets (gold and emerging market bonds) after COVID-19. … we also find evidence of jump and diffusion spillovers from Bitcoin to U.S. equity sectors, particularly to the financials, technology, consumer discretionary and communication services sectors. … We show that over time, the proportion of blockchain and cryptocurrency exposed U.S. companies (BCEs) has increased in recent years, from 19% during the pre-pandemic period to 28.8%. Specifically, the adoption of blockchain and cryptocurrency related technologies by mega-cap names such as Microsoft (Technology), Amazon (Consumer Discretionary), Alphabet (Communication Services) and Tesla (Consumer Discretionary) has increased the Bitcoin exposures of equity market and sector indices“ (p. 41/42).

………………………………………………………………………………….

Advert for German investors:

“Sponsor” my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 28 of 30 companies engagedFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Engagement washing is illustrated with a money laundering wash maschine with a picture from mohamed hassan from pixabay

No engagement-washing! Opinion-Post #207

Engagement-washing as a term, according to my research, was first used by Kunal Desai in an interesting study in early 2022 (see Active-Engagement-thought-piece-final-2.pdf (gibam.com)). Engagement-washing means pretending that shareholder engagement can create a significant positive real-world impact when it probably can’t. That is different from impact-washing which typically is used to describe overambitious product marketing claims to make the world better.

Impact investing and engagement-washing

Impact investing is clearly on the rise. With impact investing, investors want to improve the world through their investments in equity capital or through credits. Impact investing with secondary-market listed equities or bonds is especially difficult. With those products, one security holder buys the security from another one. With such a transaction, issuers of the securities do not receive any additional funds. Therefore, providers of listed products which want to create impact typically use shareholder voting and shareholder engagement to change the issuers of the securities they are invested in.

Limitation of shareholder voting

Shareholder voting is typically only possible at annual shareholder meetings. Votes can only be used regarding the proposals on the agenda. In most cases, corporate management proposals are supported by the majority of votes. Investors can try to put own proposals on the agenda, but even the largest shareholders alone typically do not have enough votes to get them through.

Shareholder (or bondholder) engagement can be exercised at any time and regarding every topic. If investors can convince the top management of companies to adopt their proposals, they may have impact.

So far, so good. But the reality may not be that simple (data see Kunal Desais paper which refers to ESG Shareholder Engagement and Downside Risk by Andreas G. F. Hoepner, Ioannis Oikonomou, Zacharias Sautner, Laura T. Starks, Xiaoyan Zhou :: SSRN):

7 limitations of ecological and social shareholder engagement

  1. Although engagement becomes more popular, the majority of investors most likely does not engage at all.
  2. Even if investor engage, engagements typically are undertaken only for a minority of investments. That is not surprising, because most institutional investors own very many securities and only have limited resources for engagement.
  3. The majority of engagements involves only one interaction with the targeted companies. Since changes at companies typically take some time, one interaction does not seem enough to change much.
  4. Governance topics typically dominate engagements whereas impact-relevant environmental and social topics are the minority of topics addressed during engagements.
  5. ESG-ratings cover dozens if not hundreds of topics. Engagement typically only focus on one or very few topics. Even very well managed companies have many and sometimes also huge improvement potential in several social and ecological issues. The typical share of actual shareholder engagement topics compared to potentially relevant social and ecological engagement topics therefore is very low.
  6. It is very unclear how many engagements are successful since so far there is no good system to measure engagement success. If anything, shareholders measure engagement activity and not success. Often, marketing only repeats the same case study of a successful corporate engagement over and over. Shareholders for Change (see SfC-ENGAGEMENT-Report2022-1.pdf (shareholdersforchange.eu) page 6) proposes an evaluation scheme but it does not allow to quantity the aggregate success of shareholder engagements.
  7. Mostly, companies do not state clearly what the consequences are, when their engagements are not successful. I assume that there are no divestments or even reductions in investments after most unsuccessful engagements. The reason is the low openness to divestments and benchmark deviations of institutional investors. Most try to stay very close to their selected benchmarks, even though divestments typically would reduce their portfolio diversification only marginally.

Conclusion: No engagement-washing but investing as good as you can

Conclusion: Social and ecological shareholder engagement is the most important tool to create impact with listed companies. But investors should not pretend to be able to significantly change the engaged target companies. Calling listed equity or bond funds “impact” funds does not sound right to me (impact-aligned is somewhat better, though). And reliance on investors to change listed companies is insufficient.

Engagement-washing seems to be a real risk which, if revealed, would hurt the “washer” but also potentially the whole segment of responsible investments. Investors nevertheless should invest as responsibly as possible. They should also try to engage as much as they can afford to. And that should include engagements with industry associations, NGOs, politicians etc. to advance responsible investing in general.

Further reading regarding engagement-washing

Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com): The 21 theses already contain many of my arguments above and show my engagement topics which include leveraged or stakeholder engagement approaches. The article also refers to additional relevant research papers.

Stakeholder engagement and ESG (Special Edition Researchposting 115) – Responsible Investment Research Blog (prof-soehnholz.com)): Current research on shareholder ESG engagement

Active or impact investing? – (prof-soehnholz.com): Explains my engagement approach with a 100% engagement target for invested companies

Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink: approx. 20 pages with long literature list

ESG transition illustration is a wood bridge into green nature by Mjudem McGuire from Pixabay

ESG Transition Bullshit?

No impact on secondary markets?

ESG transition approaches suggest making companies more sustainable. Many providers of so-called responsible investments promote ESG transition investments. Typically, the argumentation is: You have to put money into brown companies so that they can finance the transition to become a greener company. That sounds plausible but may be misleading.

In the case of listed investments, securities are bought from other investors. No capital flows to the companies themselves. This is different with capital increases, new bond issues or private equity and credit investments. Not every such investor investment is truly additional because of an often high investor demand (“capital overhang”). In any case, issuers receive additional capital which they could use to finance a green transition. Unfortunately, even in the case of some so-called green, social or sustainability bonds, it cannot be guaranteed that the proceeds are used to finance greener or more social transitions (compare The Economics of Sustainability Linked Bonds by Tony Berrada, Leonie Engelhardt, Rajna Gibson, and Philipp Krueger as of September 14th, 2022).

ESG Transition? Big Oil throws cash at shareholders, not renewables

According to Nathaniel Bullard from BNN Bloomberg (“Big Oil’s pullback from clean energy matters less than you might think” as of June 25th, 2023) “The world’s five biggest publicly listed oil and gas companies posted just under $200 billion in total profits last year. Faced with three strategic possibilities for how to use their cash piles — extract oil and gas apace, move their businesses into renewable power and energy transition assets or return money to shareholders — the supermajors have largely sprung for the third option in recent weeks”. They invested in transition in the past, but their overall energy-transition investment share is low with about 3% according to Bullard. “And there is no shortage of capital at the moment — according to the International Energy Agency, more has been invested in clean energy than fossil fuels every year since 2016”.

It seems to make little sense to promote investments in Big Oil stocks or bonds as transition investments. Blackrock, one of the largest asset managers with very large holdings in Big Oil companies, probably disagrees with me. Exxon, Chevron and ConocoPhilipps are among the holding of its U.S. Carbon Transition Readiness ETF. According to Blackrock, the ETF provides a “broad exposure to large- and mid-capitalization U.S. companies tilting towards those that BlackRock believes are better positioned to benefit from the transition to a low-carbon economy” and “harness BlackRock’s thinking in sustainable investing through a strategy utilizing research-driven insights” (BlackRock U.S. Carbon Transition Readiness ETF | LCTU (ishares.com)).

I would rather invest in companies specialized in renewable energies. And even with listed investments, investments could have some positive impact.

Shareholder engagement with the bad or the good companies?

In theory, share- and bondholder engagement can have a positive impact on companies. For Big Oil, that did not work well so far: “Resolutions that would have forced the companies to align with Paris Agreement climate targets failed. BP and Shell have also pulled back on their strategies to cut fossil fuel production” (Bullard).

Shareholder engagement seems to be more fruitful when targeted at already somewhat responsible companies (compare Shareholder Engagement on ESG Performance by Barko et al. (2022)). That is also my experience (see Active or impact investing? – (prof-soehnholz.com)).

ESG Transition: But we still need oil and gas!

Certainly, we still need oil and gas for our economy for a long time. But Big Oil will certainly sell us oil and gas as long as we adequately pay for it. I do not expect that they decide to sell oil and gas only to stock- and bondholders.

Maybe, responsible investors should not invest at all in brown companies or companies with social deficits which distribute dividends instead of investing the available capital in a greener or more social future (see Transitionierer: Dividendenverbot für ESG Sünder? – Responsible Investment Research Blog (prof-soehnholz.com)).

Underdiversification and return risks?

Many investment advisors (and promotors of diversified products) argue, that investors should not deviate much from diversified indices. This would mean to also invest in brown and not very social companies. These advisors and promotors rarely mention the – mostly very low – marginal utility of additional diversification. Also, most likely, you will not hear the argument that if you start with very responsible investments and then diversify, the average responsibility score of the portfolio will shrink. There are very few convincing arguments why investors should invest in all the same countries, industries and companies as broad indices. Focusing investments on few of the most responsible investments can generate attractive returns and risk adjusted performances (see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)).

Some argue that theory proves that brown investment should have high returns in the future. According to them, brown companies have to pay higher interest rates to creditors and higher returns to stockholders than responsible companies. Thus, shareholders of brown companies should have higher returns than shareholders of green companies.

Lower brown risks

There are other arguments, though. Brown companies certainly have more ecological risk than green companies. Therefore, the risk adjusted returns of brown companies may not be so attractive. And if brown companies have to invest instead of distributing dividends, higher returns for stockholders mean that in the future, someone has to pay a relatively high price for the (formerly?) brown stock. Instead, investors can invest in already green companies. Those companies have lower capital investment requirements for transitions. But they can still improve their greenness and/or distribute dividends. That seems to be the more attractive investment case. And given the low current share of truly green and social investments, I expect responsible investments to continue to grow for many years to come.

Since 2017 I try to invest in a limited number of most responsible companies. Since even these companies can still improve significantly in terms of responsibility, I also try to engage with all of them (see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)). So far, that approach works well.

Active or impact? Picture from John Hain from Pixabays shows 2 hands with several cooperation words

Active or impact investing?

Active or impact investing is a valid question, since it often requires a long time to reach shareholder impact. Passive or impact investing is an equally valid question, because passive investors do not want or do not have the resources to impact their investments.

With impact investments, investors try to improve the world. Investing in listed securities does not add capital for the issuers. Therefore, responsible investors typically use voting and engagement to try to improve issuers of securities.

I advise a rules-based mutual fund with a very high active share. Here are some of my shareholder engagement experiences and learnings:

My goal: 100% Engagement

With my mutual fund, I invest in only 30 stocks (see 30 stocks, if responsible, are all I need). According to my definition, they are issued by the most responsible listed companies worldwide (see Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen?). In 2022, I was positively surprised by my first shareholder engagement test (see Engagement test (Blogposting #300)). Since I try to invest as responsibly as possible, I decided to try to engage with all 30 companies in my portfolio.

(continues on page 2)