Archiv der Kategorie: Robo Advisor

Biodiversity investment: Researchpost 213

Biodiversity investment illustration from Pixabay by Clkr-Free Vector Images

9x new research on slow Green Deal progress, (too big?) brown banks, green robo investing, performant decarbonization, biodiversity investment growth, greening suppliers, pseudo-optimal portfolios, and 2x investment AI (#shows the number of SSRN full document downloads as of Feb. 12th, 2025)

Social and ecological research

Slow Green Deal? Delivering the EU Green Deal – Progress towards targets by Marelli Luisa et al. from the European Commission as of Feb. 5^th, 2025: “This report provides a comprehensive assessment of progress towards the European Green Deal (EGD), the European Union’s transformative agenda for achieving climate neutrality by 2050. The analysis encompasses 154 quantifiable targets from 44 policy documents between 2019 and 2024 across key sectors such as climate, energy, circular economy, transport, agriculture and food, ecosystems and biodiversity, water, soil and air pollution. … As of mid-2024, 32 of the 154 targets are currently “on track” and 64 are identified as “acceleration needed” meaning that more progress is needed to meet the targets on time. Furthermore, 15 of the targets are found to be “not progressing” or “regressing”, and for 43 of the targets no data is currently available” (abstract).

Big brown banks: Too-big-to-strand? Bond versus bank financing in the transition to a low-carbon economy by Winta Beyene, Manthos D. Delis, and Steven Ongena as of Nov. 7^th, 2024 (#162): “… fossil fuel firms with more stranded asset risk rely less on bond finance and more on bank credit. Investors in the bond market price the risk that reserves held by fossil fuel firms will strand, while banks in the syndicated loan market do not. … Bigger banks provide cheaper and more financing to fossil fuel firms, possibly giving rise to a novel “too-big-to-strand” concern for banking regulators“ (abstract).

ESG investment research (in: Biodiversity investment)

Green robo investing? Nudging Investors towards Sustainability: A Field Experiment with a Robo-Advisor by Lars Hornuf, Christoph Merkle, and Stefan Zeisberger as of Jan. 29^th, 2025 (#84): “In a field experiment with robo-advisor clients, we explore how default investment options shape sustainable investments choices. Setting sustainable investing as the default significantly increases adoption, with 36% of investors selecting it, compared to just 23% when conventional investing is the default. A follow-up survey reveals stark differences in expectations: most conventional investors believe that their choice offers higher returns and a better risk-return trade-off, while sustainable investors are confident that their portfolios will outperform. … the strong focus on financial returns suggests that investors remain reluctant to forgo substantial gains for sustainability in real-world scenarios” (abstract).

Performant decarbonization: Performance and Challenges of Net-Zero Strategies in the Context of the EU Regulation by Fabio Alessandrini, Eric Jondeau, and Lou-Salomé Vallée as of Sept. 3^rd, 2024 (#75): “… an NZ strategy that meets most of the EUSFD Regulation requirements can be implemented at a moderate cost …. The CTB would have resulted in a tracking error of approximately 0.6 0.8% per year, while the PAB would have been more costly, with a tracking error closer to 1.7-1.8% per year. … While tracking error minimization results in a lower ex-post tracking error … Some securities may become substantially overweighted, potentially raising concerns about a lack of liquidity for these securities. … PAB does not suffer from the exclusion of the energy sector in terms of risk-adjusted performance. The Sharpe ratio of the PAB is higher than that of the CTB across all strategies we considered …“ (p. 31). My comment: The authors mention that the results may be influenced by the data (2012-2021).

SDG investment research

Biodiversity investment growth: Current Trends and Projections in Biodiversity Finance by Zannatus Saba as of Feb. 7^th, 2025 (#16): “This chapter delves into the dynamic field of biodiversity finance, outlining key trends and future projections. It highlights the proliferation of specialized investment funds dedicated to biodiversity conservation, the integration of biodiversity considerations into Environmental, Social, and Governance (ESG) criteria, and the development of innovative financial mechanisms such as blended finance, green bonds, and nature bonds. The chapter explores how corporations are increasingly embedding biodiversity considerations into their strategic frameworks and examines the expanding roles of both the public and private sectors in driving investments. Looking forward, it projects a heightened emphasis on nature-based solutions, the evolution of regulatory landscapes, technological advancements in biodiversity monitoring, and enhanced methodologies for impact measurement. These insights underscore the critical necessity for effective biodiversity finance mechanisms to address the global biodiversity crisis and promote sustainable conservation practices. Additionally, the chapter underscores the growing practice of integrating biodiversity into financial decision-making and the development of biodiversity-sensitive financial products. Through relevant case studies, the chapter illustrates the implications for investors, corporations, and policymakers, advocating for the alignment of financial strategies with biodiversity objectives to ensure long-term environmental resilience. This nuanced exploration of current trends and future projections in biodiversity finance provides a comprehensive framework for understanding the multifaceted interactions between finance and biodiversity conservation, emphasizing the urgent need for robust financial solutions to safeguard our planet’s biodiversity“ (abstract) “ (abstract).

Supply decarbonization: Greening the Supply Chain: Financial Tools to Catalyze Decarbonization by Small Businesses (#10) by Kyle J. Blasinsky as of Feb. 10^th, 2025: “… small- and medium-sized enterprises (“SMEs”) … aggregate emissions … account for half of all emissions in the United States annually. … many SMEs express interest in decarbonization, but they often cite insufficient capital and expertise as central barriers to these efforts. … this Article proposes integrating energy savings performance contracts (“ESPCs”) into large firms’ supply chains … ESPCs allow firms to invest in energy efficiency upgrades with an experienced energy services company that oversees the project and accesses financing by guaranteeing savings from those upgrades. …” (abstract). My comment: This is a good idea for shareholder engagement, see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog

Other investment research (in: Biodiversity investment)

Pseudo-optimal portfolios: Low Risk, High Variability: Practical Guide for Portfolio Construction by Antonello Cirulli, Gianluca De Nard, Joshua Traut, and Patrick Walter as of January 20th, 2025 (#306): “This paper explores how various portfolio construction choices influence the performance of low-risk portfolios. We show that methodological decisions critically influence portfolio outcomes, causing substantial dispersion in performance metrics across weighting schemes and risk estimators. This can only be marginally mitigated by incorporating constraints such as short-sale restrictions and size or price filters. … Transaction costs are found to significantly affect performance and are vitally important in identifying the most attractive portfolios … ” (abstract). My comment: I use equal weighted portfolios with yearly rebalancing which typically perform well (for pseudo-optimization see e.g. Kann institutionelles Investment Consulting digitalisiert werden? Beispiele)

Investment AI: Generative AI and Investor Processing of Financial Information by Elizabeth Blankespoor, Joe Croom and Stephanie Grant as of Dec. 13^th, 2024 (#249): “… Our survey of 2,175 retail investors, complemented by an analysis of 40,000 investor questions posed to a GenAI chatbot … we observe widespread adoption, with nearly half of surveyed investors already using GenAI, … nearly two-thirds of investors plan to continue or start using GenAI and believe it will become a standard tool for investors, many non-users remain skeptical. This hesitancy toward future GenAI adoption appears related to concerns about data privacy and response quality, as well as younger and less sophisticated investors having difficulty identifying or leveraging the processing benefits of GenAI …” (abstract).

Good AI advice: Using Large Language Models for Financial Advice by Christian Fieberg, Lars Hornuf, Maximilian Meiler, and David J. Streich as of Feb. 11^th, 2025 (#9): “… we elicit portfolio recommendations from 32 LLMs for 64 investor profiles, which differ in their risk preferences, home country, sustainability preferences, gender, and investment experience. Our results suggest that LLMs are generally capable of generating suitable financial advice that takes into account important investor characteristics when determining market and risk exposures. The historical performance of the recommended portfolios is on par with that of professionally managed benchmark portfolios. We also find that foundation models and larger models generate portfolios that are easier to implement and more sensitive to investor characteristics than fine-tuned models and smaller models. Some of our results are consistent with LLMs inheriting human biases such as home bias. We find no evidence of gender-based discrimination, which can be found in human financial advice“ (abstract).

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Werbung (in: Biodiversity investment)

Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-/Mid-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R) investieren und/oder ihn empfehlen.

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

Zum Vergleich: Ein traditionelle globaler Small-Cap-ETF hat eine SDG-Umsatzvereinbarkeit von 20%, für einen Gesundheits-ETF beträgt diese 7% und für einen ETF für erneuerbare Energien 43%.

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

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

AI for SDGs: Researchpost 209

AI for SDGs illustration by OpenClipArt Vectors from Pixabay

22x new research on smartphones, state aid, green policy, green procurement, public benefit, risk-reducing ESG, ESG dividends, biodiversity costs and risks, ESG willingness to pay, pollution divestments, climate adaptions, green employee value, AI driven financial research, LLM investing help, virtual robo advisors, discount illusion, hedge funds and pixel art (#shows the number of SSRN full paper downloads as of Jan. 16^th, 2025: A low number shows a high news-potential).

Social and ecological research

AI for SDGs: Key Digital Enablers of Sustainability: A Bibliometric Analysis Using Elsevier Sustainable Development Goals (SDGs) Mapping by Jaewoo Bong, Jeongmi Ga, Myeongjun Yu, and Minjung Kwak as of Jan. 14^th, 2025 (#9): “The analysis identified key technologies frequently associated with the 17 SDGs, revealing trends in research volume, dominant technologies, and their impacts on specific SDGs. Notably, artificial intelligence and robotics have emerged as the most influential technologies across multiple goals, whereas other technologies such as 3D printing, cloud computing, and extended reality exhibit more targeted associations, highlighting their specialized applications. This study also highlights emerging research areas such as the integration of digital twins, blockchain, and the Internet of Things in sustainable development …” (abstract).

Stupid smartphones: From Decline to Revival: Policies to Unlock Human Capital and Productivity by Dan Andrews, Balázs Égert, Christine de La Maisonneuve as of Dec. 23^rd, 2024 (#20): “The productivity slowdown in many OECD countries over the last decades coincided with a significant deceleration in human capital growth. We show that nearly one-sixth of this productivity slowdown can be attributed to a decline in human capital growth, mainly driven by the decline in the quality of human capital, as measured by PISA scores. … The results highlight the negative effects of smartphone and social media usage on student performance and suggest that responsible internet use programs and education policy reforms could mitigate these effects. … Without policy intervention, continued declines in PISA scores could reduce long-term MFP (Sö: Multifactor productivity) growth by nearly 3%. Combining education reforms with structural reforms could mitigate these effects and boost long-term MFP by about 1.5%“ (abstract).

Bad state aid: A Bitter Aftertaste: How State Aid Affects Recipient Firms and Their Competitors in Europe by Luis Brandao Marques and Hasan Toprak from the International Monetary fund as of Dec. 16^th, 2024: “This paper estimates the effects of state aid between 2016 and 2023 on listed nonfinancial firms in Belgium, France, Germany, the Netherlands, Spain, and the United Kingdom (until 2020) … It finds that firms that receive state aid increase employment and revenue, but not investment or labor productivity. Moreover, it finds that there are adverse spillover effects to competing firms that significantly undo any positive own effects“ (abstract).

Green over all: Green Investing and Political Behavior by Florian Heeb, Julian F. Kölbel, Stefano Ramelli, and Anna Vasileva as of Jan. 6^th, 2025 (#1586): “A fundamental concern about green investing is that it may crowd out political support for public policy addressing negative externalities. We examine this concern in a preregistered experiment shortly before a real referendum on a climate law with a representative sample of the Swiss population (N = 2,051). We find that the opportunity to invest in a climate-friendly fund does not reduce individuals’ support for climate regulation, measured as political donations and voting intentions. The results hold for participants who actively choose green investing. We conclude that the effect of green investing on political behavior is limited”.

Green procurement: The New EU-US Joint Catalogue of Best Practices on Green Public Procurement: A Breakthrough in International Dialogue on Sustainability and an Opportunity for the WTO Committee on Government Procurement to Move Forward by Robert D. Anderson and Antonella Salgueiro as of Jan. 14^th, 2025 (#29): “In April 2024, the European Union(EU) and the United States (US) jointly issued an extensive “Catalogue” of perceived best practices for promoting green public procurement (GPP) … The Catalogue provides an extremely useful compendium … the examples cited range from relatively standard goods procurement to the provision of public transport services through to building construction and a government-wide contract for IT and related infrastructure in an EU member state. The tools, approaches and innovations relating to the promotion of GPP that are set out in the Catalogue are equally diverse and impressive” (abstract).

Good intentions, bad outcome? For-benefit or For-profit? The Dark Side of Stakeholderism Legislation by Chenchen Li, Frank Zhang, and Kailiang Zhang as of Nov. 23^rd, 2024 (#50): “The Public Benefit Corporation (PBC) legislation redefines corporate purposes by introducing a new legal form of corporate structure, the for-benefit corporation, which must include public benefits in its certificate of incorporation. … We posit that PBC legislation heightens the uncertainty of directors’ fiduciary duties and diminishes the perceived commitment to public interests for traditional for-profit corporations. Consequently, for profit companies will reduce their corporate social responsibility activities following the enactment of PBC laws, a phenomenon we term the corrosion effect. By exploiting the staggered enactment of PBC legislation across U.S. states, we find results consistent with our predictions. … In addition, we find that traditional for-profit corporations become more shareholder-centric at the expense of broader stakeholder interests following PBC legislation, leading to improved financial performance. We also find an overall increase in state-level pollution, suggesting that the environmental efforts of for-benefit companies are insufficient to counterbalance the reduced environmental initiatives by for-profit firms“ (abstract).

ESG investment research (in: AI for SDGs)

Risk-reducing ESG: The Impact of Economic Uncertainty on Corporate ESG Performance by Geyao Zhang, Effie Kesidou, and Muhammad Ali Nasir as of Jan. 8^th, 2025 (#18): “… The results suggest that, in response to heightened economic uncertainty, firms tend to send positive signals by boosting their ESG performance. … the positive impact of economic uncertainty on corporate ESG performance is more significant for firms in consumer-facing and low-pollution industries. Additionally, the highly uncertain economic environment has had a significant positive impact on the ESG performance of firms in countries with lower media freedom and upper-middle income levels” (abstract).

ESG dividend effects: Are ESG ratings relevant? Evidence from dividend cuts by Guner Velioglu as of Jan. 14^th, 2025 (#30): “… the market reactions to dividend cuts are significantly less severe when the underlying firms have high Environmental, Social, and Governance (ESG) ratings. … the environmental pillar rating contributes most significantly to my findings. I further document that high ESG performance premium tend to partially substitute for dividend premium” (abstract).

Corporate biodiversity costs: The Silent Cost of Biodiversity Loss: Unveiling its Impact on Institutional Ownership by Yueyang Wang as of Sept. 11^th, 2024 (#14): “The research utilises a sample of U.S. companies from 2009 to 2023 … Companies facing higher biodiversity risks tend to experience a reduction in institutional ownership, likely due to concerns over increased debt risk and potential reputational damage” (abstract).

Costly biodiversity risks: Biodiversity, Governance, and Municipal Bonds by Yanghua Shi as of Jan. 9^th, 2025 (40): „The paper shows that legislative changes that are harmful to local biodiversity signicantly impact municipal bond markets and are associated with an increase in municipal bond yields. … The analysis is based on a series of statewide regulatory shocks that conservation biologists consider to be detrimental to biodiversity conservation. These regulatory changes result in laws that hinder effective population management of unowned cats a well-known invasive species that contributes to biodiversity loss” (abstract).

ESG Index WTP: Sustainability Preferences of Index Fund Investors: A Discrete Choice Experiment by Rob Bauer, Bin Dong, and Peiran Jiao as of Jan. 9^th, 2024 (#140): “… we show how index fund investors cope with the conflict between index tracking and the pursuit of sustainability. We measure the willingness-to-pay for sustainability in an online discrete choice experiment (DCE) with real index fund investors. On average, our participants are willing to pay for sustainability but are insensitive to ESG intensity. They prefer the negative screening strategy, but are indifferent among other ESG integration strategies. In the meantime, our latent class analysis shows considerable heterogeneity among investors in their sustainability preferences” (abstract).

Impact investment research

Pollution divestment (1): Sustainability or Greenwashing: Evidence from the Asset Market for Industrial Pollution by Ran Duchin, Janet Gao and Qiping Xu as of May 5^th, 2024 (#3616): “We study the asset market for pollutive plants. Firms divest pollutive plants in response to environmental pressures. The buyers are firms facing weaker environmental pressures, with supply chain relationships or joint ventures with the sellers. While pollution levels do not decline following divestitures, the sellers highlight their sustainable policies in subsequent conference calls, earn higher returns as they sell more pollutive plants, and benefit from higher ESG ratings and lower compliance costs. Overall, the asset market allows firms to redraw their boundaries in a manner perceived as environmentally friendly without real consequences for pollution and with substantial gains from trade” (abstract). My comment: If buyers (and owners of these buyers) care for ESG, divesting pollution does not work well. Also, the use of Scope 3 Greenhouse Gas emissions which includes suppliers helps to mitigated pollution divestments.

Pollution divestment (2): Out of Sight, Out of Mind: Divestments and the Global Reallocation of Pollutive Assets by Tobias Berg, Lin Ma, and Daniel Streitz as of Nov. 13^th, 2024 (#762): “We analyze firms’ carbon reduction strategies worldwide and identify one key channel: large, primarily European firms facing increased investor pressure divest pollutive as sets to firms that are less in the limelight. There is no evidence of increased engagement in other emission reduction activities. We estimate that 369 million metric tons (mt) of CO2e are reallocated via divestments in the post-Paris Agreement period, shifting pollutive assets from Europe to the rest of the world. Our results indicate significant global asset reallocation effects and imply that responsible investors who want to truly invest responsibly need to monitor firms’ divestment strategies closely” (abstract).

Adaptation dividends: Why do we need to strengthen climate adaptations? Scenarios and financial lines of defense by Francesco Paolo Mongelli, Andrej Ceglar, and Benedikt Alois Scheid as of Dec. 17^th, 2024 (#39): “… we now have better granular climate data to study the impacts of climate hazards and forecast climate risks … and there is an increasing pool of case studies from which to learn. There is evidence that efficient adaptation investments can yield “triple-dividends” helping to close the financing gap. … Innovative financial instruments, such as catastrophe bonds and climate bonds, might support challenged insurance coverages“ (abstract).

Green employee pressure? Clients, employees and institutional owners: Who influences corporate decarbonisation commitments? by Andreas G. F. Hoepner, Ifigenia Paliampelou and Frank Schiemann as of Jan. 8^th, 2025 (#17): “This study examines the determinants of corporate decarbonization commitments … the findings highlight that institutional ownership (IO) exerts the strongest influence on decarbonization decisions, followed by employees with CSR concerns (SGA). Additionally, companies with higher green revenues are more likely to set decarbonization commitments, often at the subsidiary level, driven by specific customer pressures …” (abstract).

Employee engagement: Bottom-up collaborative approach to transformative sustainable business model innovation: Developing engagement in an incumbent firm by Genet Corine and Rose Bote as of Dec. 6^th, 2024 (#6): “This paper investigates the emergence of employee engagement through the process of transformative sustainable business model innovation (SBMI) within an established organization. … Recognizing the critical role that employees play in these transformations, we aim to examine how their engagement emerges. Based on a qualitative case study of a mature nuclear-based organization … From a practical perspective, we advocate for forums to encourage intrapreneurial creativity for incumbent firms seeking transformation in their business models” (abstract). My comment: I try to include employees in ma stakeholder engagement activities see HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog

Other investment research (in: AI for SDGs)

AI driven financial research: AI and Finance by Andrea Eisfeldt and Gregor Schubert as of November 18th, 2024 (#1102): “We provide evidence that the development and adoption of Generative AI is driving a significant technological shift for firms and for financial research. We review the literature on the impact of ChatGPT on firm value and provide directions for future research investigating the impact of this major technology shock. Finally, we review and describe innovations in research methods linked to improvements in AI tools, along with their applications. We offer a practical introduction to available tools and advice for researchers interested in using these tools” (abstract).

LLM investing help: Stock Portfolio Selection Based on Risk Appetite: Evidence from ChatGPT by Constantin J. Schneider and Yahya Yilmaz as of Dec. 17^th, 2024 (#155): “… We prompt ChatGPT to generate portfolios tailored to different risk appetites of retail investors focusing on U.S. and European equity markets. Our analysis of multiple ChatGPT models reveals that higher risk portfolios generally yield higher returns. However, the models exhibit varying performance across different markets … We further demonstrate that ChatGPT can effectively adjust portfolio risk and return metrics in accordance with individual risk preferences” (abstract).

Virtual robo advice: Artificial Intelligence (AI) and Virtual Reality Convergence in Financial Services: The Power of Digital Twin Robo-Advisers by Marco I. Bonelli and Jiahao Liu as of Dec. 31^st, 2024 (#22): “… By combining AI’s predictive power with the immersive nature of VR, robo-advisors now offer the most advanced toolset available to investors. AI-powered Digital Twins provide real-time simulations of investment portfolios, allowing users to explore multiple scenarios, assess risks, and optimize their strategies with precision. The addition of VR creates a lifelike, 3D financial environment where users can visualize their portfolios, simulate various financial decisions, and gain deeper insights into how these choices impact their long-term financial goals“ (p. 12).

Discount illusion: „Buy the Dip“ – Wie gut funktioniert diese Anlagestrategie? von Gerd Kommer vom 9. Januar 2024: Buy the Dip-Investieren (BTD) … produziert schlechtere Durchschnittsrenditen und Endvermögenswerte als vergleichbares Sofort-All-In Buy-and-Hold Investieren (SAI B&H). Zwar steigt die statistische Renditeerwartung von Aktien nach einem Abschwung in der Tat, dieser Anstieg gleicht die Minderrendite, also die Opportunitätskosten, der für BTD notwendigen Investitionsreserve nicht ausreichend aus. Die Argumentation, dass BTD-Strategien im Allgemeinen ein geringeres Risiko aufweisen als vergleichbare SAI B&H-Strategien relativiert die maue BTD-Performance u. E. nur partiell“ (in: Fazit).

Disappointing hedge funds: Hedge Funds: A Poor Choice for Most Long-Term Investors by Richard M. Ennis as of Dec. 13^th, 2024 (#27): “For years, hedge fund investments have reduced the alpha of most institutional investors (helped drive it negative, actually). At the same time, they deprive long-term investors of desired equity exposure. In other words, hedge funds have been alpha-negative and beta-light. For these reasons, it is difficult to see a strategic benefit to having a diversified hedge fund allocation in the mix for most endowment and pension funds. If, however, an institution has access to a few truly exceptional hedge funds and can resist the temptation to diversify hedge fund exposure excessively, a small allocation may be warranted” (p. 7).

Pixel passion: Passion for Pixels: Affective Influences in the NFT Digital Art Market by Guneet Kaur Nagpal and Luc Renneboog as of Jan. 8^th, 2025 (#23): “Passion investment (e.g., paintings, sculptures, non-fungible tokens [NFTs]) are not based on straightforward valuations. To establish the valuation of collectible NFTs in the nascent market of digital art, this study uses approximately 14,000 transactions by 3,230 unique traders in a highly liquid digital collectibles market … First, there is evidence of subjective valuation of visual (aesthetic) elements of art among market participants, who are homogenous on the value of objectively measurable traits. Second, contrary to popular perception, NFT market participants’ who are naive (in terms of crypto currency experience) or experienced a windfall gain (due to favorable cryptocurrency exchange rates) trade at lower prices. … Third, prior trading activity and prices positively associate with future prices, implying price extrapolation and anchoring. The findings suggest that compared to the traditional art and investment domains, digital ownership might evoke similar, if not stronger, emotional responses among consumers than physical ownership“ (abstract).

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Werbung (in: AI for SDGs)

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

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

Capital-weighted Asset Allocation: Researchpost 191

Capital-weighted Asset Allocation Illustration based on Soehnholz ESG und SDG Portfoliobuch page 79

9x new research on ESG disclosure profits, ESG credit risks, environmental versus social scores, developing country ESG, capital weighted asset allocation, asset allocation glidepaths, social media mania, robo advisor tuning, and venture biases (#shows the number of SSRN full paper downloads as of August 29^th, 2024)

ESG investment research

“Good bank” ESG risks: ESG Relevance in Credit Risk of Development Banks by Jan Porenta and Vasja Rant as of August 21^st, 2024 (#12): “… multilateral development banks exhibit elevated ESG risk relevance, primarily stemming from S risk and G risk. The mandate-oriented engagement of multilateral development banks in financing regions and countries marked by challenges such as deficient labor practices, human rights violations, inadequate supply chain oversight, and occasional insolvency issues may accentuate the relevance of social risk. Additionally, risks associated with the rule of law, institutional robustness, regulatory quality, and internal governance challenges could contribute to the heightened governance risk for multilateral development banks“ (p. 24). My comment: Instead of Government bond ETFs I use ETFs for multilateral development bank bonds since several years because they are much better SDG-aligned. Credit and other risks of these bonds have been satisfactory, so far.

Ecological or social? Return trade-offs between environmental and social pillars of ESG scores by Leyla Yusifzada, Igor Loncarski, Gergely Czupy and Helena Naffa as of Aug. 21^st, 2024 (#17): “We analyse the trade-offs between the environmental (E) and social (S) pillars of ESG scores and their implications for equity market performance using data from the MSCI All Country World Index (ACWI) over the period from 2013 to 2022. We find a persistent negative correlation between the E and S scores across most industries. For example, the correlation between E and S scores for the overall sample reached as low as -0.56 in 2018, indicating a significant inverse relationship where firms that excel in environmental performance often lag in social performance and vice versa“ (p. 9). My comment: Since 2016, I require high minimum standards for E, S and G scores at the same time to avoid too negative tradeoffs and I have been happy with the resulting ESG and financial performances

ESG disclosure profits: The Role of Catering Incentives in ESG Disclosure by King Fuei Lee from Schroder Investment Management as of June 12^th, 2024 (#16): “… The study examines 2,207 US-listed firms from 2005-2022, and finds a significant positive relationship between the ESG disclosure premium and firm ESG reporting. Managers respond to prevailing investor demand for ESG data by disclosing more when investors place a stock price premium on companies with high disclosure levels …” (abstract).

Developing ESG deficits: Are Developing Country Firms Facing a Downward Bias in ESG Scores? by Jairaj Gupta, R. Shruti, and Xia Li as of Aug. 26^th, 2024 (#31): “Using panel regression analysis on a comprehensive cross-country sample of 7,904 listed firms from 2002 to 2022 across 50 countries, we find that corporate ESG scores in developing economies are significantly lower – 57% lower for raw ESG scores and 23% lower for standardized ESG scores – than those in developed economies. Further analysis indicates that this disparity is linked to institutional bias and measurement issues within ESG scoring firms, stemming from information asymmetry. Our empirical evidence also suggests that ESG scoring firms can mitigate these information problems by incorporating analyst coverage and experience into their algorithms” (abstract). My comment: Companies in all (including developing) countries can and should provide high (ESG) transparency and then will receive appropriate ratings and ESG investments without such artificial rating adjustments

Other investment research (in: Capital-weighted Asset Allocation)

Capital-weighted Asset Allocation: The Risk and Reward of Investing by Ronald Doeswijk and Laurens Swinkels as of Aug. 28^th,2024 (#283): “This is the first study documenting the historical risks and rewards of the aggregate investor in global financial markets by studying monthly returns. Our sample period runs from January 1970 to December 2022. The breadth of asset classes in this study is unmatched as it basically covers all accessible financial investments of investors across the world. … Despite its diversification across all globally invested assets, the global market portfolio does not have the highest Sharpe ratio compared to the five asset categories over our 53-year sample period. Its Sharpe ratio is only slightly higher than that of equities broad, but lower than that of nongovernment bonds. However, … The stability of the Sharpe ratio over rolling decade samples is substantially greater than that of individual asset categories. In other words, confidence in a positive Sharpe ratio for the global market portfolio over a decade is highest. … If we adjust the average returns by drawdowns instead of volatility, the global market portfolio has the highest reward for risk, and the shortest maximum drawdown period. All of the results above have been measured in U.S. dollars. If we change the measurement currency to one of the nine other major currencies, we observe substantial heterogeneity in the risks and rewards of investing. … Overall, our new monthly data on the global market portfolio suggests that the aggregate investor has experienced considerable wealth losses compared to savers who earn a nominal risk-free interest rate. Such losses are usually recovered within five years, but recovery can take substantially longer“ (p. 20/21). My comment: I use such asset allocations since the start of my own company in 2015. I am still – to my knowledge – the only portfolio provider worldwide using it for all of its allocation portfolios. Overall, my experience is good, see the Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com) and recently Halbjahres-Renditen: Divergierende Nachhaltigkeitsperformances

Slippy asset allocation glidepaths: The Glidepath Confusion by Edward Hoyle from AHL Partners as of March 30^th, 2024 (#127): “The importance of glidepath choice can be overstated. If a pension saver held a balanced portfolio throughout working life, and then at retirement they find that their investment returns are in the left tail of outcomes, it is likely that they would be similarly placed had they chosen an alternative glidepath. Our examination of contrarian strategies confirmed their outperformance on average. As to their tail properties, we find that they are relatively favourable in historical simulations, but less favourable in bootstrapped simulations. This may clear up some apparent disagreement between previous studies. This also lends credence to the intuition that it is risky to be heavily invested in stocks over short horizons. However, this does not mean that stocks investments should be small as retirement approaches. Holding a balanced portfolio throughout working life and retirement seems entirely sensible if the plan is to generate retirement income by decumulation. In these situations no glidepath is needed“ (p. 18).

Social media mania? Social Media and Finance by J. Anthony Cookson, William Mullins, and Marina Niessner as of May 9^th, 2024 (#591): “Social media has become an integral part of the financial information environment, changing the way financial information is produced, consumed and distributed. This article surveys the financial social media literature, distinguishing between research using social media as a lens to shed light on more general financial behavior and research exploring the effects of social media on financial markets. We also review the social media data landscape“ (abstract).

Robo-advisor tuning: In Design and Humans we Trust“? – Drivers of Trust and Advice Discounting for Robo Advice by Claudia Breuer, Wolfgang Breuer, and Thomas Renerken as of April 16^th, 2024 (#38): “We compare the acceptance of advice in the context of robo-advised individual portfolio allocation decisions with respect to the impact of certain layout and questionnaire characteristics as well as the involvement of a human. Our data are based on incentivized experiments. The results show that a more emotional design of the advice software leads to a higher level of advice acceptance, whereas a detailed exploration questionnaire reduces the level of acceptance. The presence of a human influences trust levels significantly positive, but leads to a lower acceptance of advice in total“ (abstract).

Venture biases: Biases influencing venture capitalists’ decision-making: A systematic literature review by Moritz Sachs and Matthias Unbescheiden as of May 9^th,2023 (#44): “In recent years, researchers have demonstrated that venture capitalists are subject to various biases in their decision-making, but a systematic overview was absent. Our literature review revealed that 15 different biases can influence venture capitalist’s investments. For each of these biases, their effect on venture capitalists’ decisionmaking is explained. We contribute to the research on biased start-up investing by detailing the biases and their expected effects on venture capitalists. Our results will be useful for venture capitalists improving their decision-making” (abstract).

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Neutral ESG? Researchpost #160

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

Social and ecological research (Neutral ESG)

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

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

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

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

ESG investment research (Neutral ESG)

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

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

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

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

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

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

Other investment research

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

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

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

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

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Climate reporting: Researchpost #128

Climate reporting: 13x new research regarding inequality, climate reporting, biodiversity, green bonds, external costs, private equity real estate, gold, equal weighting, correlations, tail risks, robo advisors and AI (# indicates the number of SSRN downloads on May 22nd, 2023)

Ecological and social research

Inequality: Climate Inequality Report 2023 by Lucas Chancel, Philipp Bothe, and Tancrède Voituriez from the World Inequality Lab as of Jan. 30^th, 2023: “The accelerating climate crisis is largely fuelled by the polluting activities of a fraction of the world population. The global top 10% are responsible for almost half of global carbon emissions and the global top 1% of emitters are responsible for more emissions than the entire bottom half of the world’s population. … within-country carbon inequality now makes up the bulk of global emissions inequality, i.e. about two thirds of the total, an almost complete reversal as compared to 1990. The carbon budgets needed to eradicate poverty below the US$ 5.50/day poverty line are equal to roughly one third of the current emissions attributable to the top 10% of global emitters. … Many countries in the Global South are significantly poorer today than they would have been in the absence of climate change. This trend is set to continue and result in income losses of more than 80% for many tropical and subtropical countries by the end of the century. Within countries, the poor suffer stronger losses from climate impacts than more affluent population groups. The income losses from climate hazards of the bottom 40% are estimated to be 70% larger than the average in low- and middle-income countries” (p. 9).

Responsible investment research: Climate reporting

Climate reporting (1): The MSCI Net-Zero Tracker by MSCI Research as of May 2023: “35% of listed companies have disclosed at least some of their Scope 3 emissions … 44% of listed companies have set a decarbonization target … 17% of listed companies have published a climate target that, if achieved, would align carbon emissions across the company’s total value chain with the ambitious 1.5°C goal of the Paris Agreement … Listed companies are on a path to warm the planet by 2.7° above preindustrial levels this century … Just over half (51%) of listed companies align with warming equal to or below 2°C, placing them at the high end of the Paris Agreement’s uppermost temperature threshold … Unlisted companies in four of the five most emissions-intensive industry groups were less carbon-intensive than their listed counterparts on aggregate …Real-assets funds held the most emissions-intensive industries per dollar of financing, followed by mezzanine- and distressed-debt funds … The carbon intensity of all three fund types was more than triple the carbon intensity of buyout funds” (p. 4/5). My comment: I try to engage with all my fund portfolio companies to report broad Scope 3 data, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Climate reporting (2): The Climate Transition Is Increasingly about Opportunity by Chris Cote and Guido Giese of MSCI Research as of May 15^th, 2023: “We have found that in the most emissions-intensive sectors, for example, companies that had a higher share of revenue from alternative energy, energy efficiency and green buildings had significantly faster earnings growth than their sector peers over a period of roughly seven-and-a-half years that ended on March 31, 2023” (p. 3). … only 155 companies (1.7% of the listed universe), with a total market cap of USD 1.6 trillion, earned more than half of their revenues from such (SÖ: alternative energy or energy efficiency) activities, our analysis finds. … We found in our data that many of the more than 3,800 listed companies (42% of that universe) that have published a decarbonization target, for example, do not explain how they plan to meet their climate-related goals” (p. 6).

Biodiversity risks: Nature positive: How the world’s largest companies depend on nature and biodiversity by Esther Whieldon, Shirley Yap, Lokesh Raikwar, and Gautier Desme of S&P Global as of May 10th, 2023: “85% of the world’s largest companies that make up the S&P Global 1200 have a significant dependence onn nature across their direct operations … 46% of companies in this universe … have at least one asset located in a Key Biodiversity Area …”.

Control advantage: Corporate Green Bonds: The role of external reviews for investment greenness and disclosure quality by Tami Dinh, Florian Eugster, and Anna Husmann as of May 19^th, 2023 (#69): „Our results indicate that although companies with worse environmental performance are more likely to obtain at-issuance external reviews for their green bonds, their certified investments are more likely to be greener than companies that did not obtain a review at issuance. … Additionally, we develop a disclosure index for green bond reports and exhibit how post-issuance report assurance is associated with increased transparency” (abstract).

External costs: Auf dem netto-positiven Weg? Wie Unternehmen Wert schaffen – Messung und Integration von Nachhaltigkeit in die strategische Planung von Martin G. Viehöver at al von Positive Impacts vom 2. September 2022: „Im Allgemeinen erzeugen alle Industriesektoren im Durchschnitt einen positiven Gesellschaftlichen Wert, aber auch Gesellschaftliche Verluste aufgrund der entstehenden gesellschaftlichen Kosten (externe Effekte). Es wurde jedoch bestätigt, dass Unternehmen gesellschaftliche Erträge erzielen können, indem die von ihnen gezahlten Steuern höher als die gesellschaftlichen Kosten waren, wie es bei 20 Unternehmen in der Stichprobe der Fall war“ (S. 61).

General investment research

Bad PERE: Persistently Poor Performance in Private Equity Real Estate by Da Li and Timothy J. Riddiough as of May 14^th, 2023 (#629): “We compare Buyout (BO), Venture Capital (VC), and Private Equity Real Estate (RE) funds. RE funds underperform BO and VC, as well as the public market alternative. In RE, worse-performing fund managers survive at a high rate. They are also susceptible to diseconomies of fund scale, with no skill-based persistence to offset the negative scale effects. Analysis of noisy fund manager selection indicates that RE investors are not disadvantaged relative to BO and VC. LP investors in RE funds seem to be optimizing something other than, or in addition to, investment return when selecting fund managers” (abstract).

Good gold? The Safe Asset Shortage Conundrum and Why Gold is a Safe Asset by Dirk G. Baur as of April 19^th, 2023 (#29): “This paper demonstrates that gold is a safe asset based on existing definitions, central bank holdings, history, and risk characteristics such as default risk and currency risk. Changes in the safe asset pool during the 2008 financial crisis and its aftermath led to a safe asset triage that potentially led to the inclusion of gold in the safe asset pool. This is evident in the weakly symmetric opposite movements of gold and US government bond prices since 2008 and also in an increasing correlation especially since 2008. A simple safe asset test that analyzes whether a supposedly “safe asset” can be sold without a loss over different investment horizons or holding periods shows that gold is indeed relatively safe when compared with US government bonds. Finally, we also argue that the “safe asset shortage” is not a “natural” shortage but caused by central bank “QE” asset purchasing programs rendering this shortage rather narrow“ (p. 8).

Easy outperformance: Beating the S&P 500 at Its Own Game – The triumph of the equally weighted index by John Rekenthaler from Morningstar as of May 15^th, 2023: “… only 19 equally weighted U.S. equity funds of any flavor currently exist, and none except for Invesco’s funds possess significant assets … Since summer 1998 … a costless version of the equally weighted S&P 500 portfolio has thrashed the conventional index … Half the equally weighted portfolio is invested in firms with market caps exceeding $30 billion. But the comparable figure for the customary S&P 500 is $150 billion”. My comment: I use equal weight for all my direct equity model portfolios and my fund since many yearsm see e.g. Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

Correlation criticism: Co-Occurrence: A New Perspective on Portfolio Diversification by William Kinlaw, Mark Kritzman, and David Turkington as of May17th, 2023 (#25): “Investors typically measure an asset’s potential to diversify a portfolio by its correlations with the portfolio’s other assets, but correlation is useful only if it provides a good estimate of how an asset’s returns co-occur cumulatively with the other asset returns over the investor’s prospective horizon. And because correlation is an average of sub-period co-occurrences, it only serves as a good estimate of prospective co-occurrence if the assets’ returns are multi-variate normal, which requires them to be independent and identically distributed. The authors provide evidence that correlations differ depending on the return interval used to estimate them, which indicates they are not serially independent. Moreover, the authors show that asset co-movement differs between regimes of high and low interest rates and between turbulent and quiescent markets, and that they are asymmetric around return thresholds, which indicates that returns are not identically distributed. These departures from multi-variate normality cast serious doubt on the usefulness of full-sample correlations to measure an asset’s potential to diversify a portfolio. The authors propose an alternative technique for diversifying a portfolio that explicitly considers the empirical prevalence of co-occurrences and thus the non-normality of returns“ (abstract).

Tail risks: Equity Tail Protection Strategies Before, During, and After COVID by Roni Israelov and David Nze Ndong as of May 10^th, 2023 (#124): “We investigate three common, yet different approaches to hedging equity drawdowns and a few themes emerge. First, hedging is expensive. … Second, the variable equity exposure embedded in option strategies is a source of risk and path dependence. … Third (and related to the previous point), a hedger’s decision on whether to delta-hedge their option exposure to isolate the option convexity or to maintain an unhedged position materially impacts performance in non-forecastable ways. …. Finally, there is enormous dispersion in the performance of tail risk hedging strategies. Well-reasoned arguments can be made in favor or against any number of decisions on how to implement a tail risk hedge. We only considered a few strategies (long options hedged or unhedged, long put protection, and long VIX futures) and the dispersion in outcomes is notable … those who implement hedging solutions should plan for the possibility – as remote as it might be – that their hedges make things worse in times of stress“ (p. 11/12).

Invest-Tech research (Climate reporting)

Robo-risks: Demystifying Consumer-Facing Fintech: Accountability for Automated Advice Tools by Jeannie Paterson, Tim Miller, and Henrietta Lyons as of May 10^th, 2023 (#12): “Currently, the most prominent forms of fintech available to consumers are automated advice tools for investing and budgeting. These tools offer advantages of low cost, convenient and consistent advice on matters consumers often find difficult. … the oft-stated aspiration … should not distract attention from their potential to provide only a marginally useful service, while extracting consumer data and perpetuating the exclusion of some consumer cohorts from adequate access to credit and banking. … Fintech tools that hold out to consumers a promise of expertise and assistance should genuinely be fit for purpose. Consumers are unlikely to be able to monitor this quality themselves …“ (p. 15/16).

AI Advantage? Can ChatGPT Forecast Stock Price Movements? Return Predictability and Large Language Models by Alejandro Lopez-Lira and Yuehua Tang as of May 12^th, 2023 (#32759): “We use ChatGPT to indicate whether a given headline is good, bad, or irrelevant news for firms’ stock prices. We then compute a numerical score and document a positive correlation between these “ChatGPT scores” and subsequent daily stock market returns. Further, ChatGPT outperforms traditional sentiment analysis methods. … Our results suggest that incorporating advanced language models into the investment decision-making process can yield more accurate predictions and enhance the performance of quantitative trading strategies. Predictability is concentrated on smaller stocks and more prominent on firms with bad news, consistent with limits-to-arbitrage arguments rather than market inefficiencies“ (abstract).

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Bank climate risks and more (Researchblog 113)

Bank climate risks: >20x new research on CO2 bio-capture, ESG ratings, inflation, greenwashing, diversity, gender pay gap, shareholder engagement, investment consultants, ML and hybrid robo-advisors

Social and ecological research

CO2 bio-capture: Scalable, Economical, and Stable Sequestration of Agricultural Fixed Carbon by Eli Yablonovitch and Harry Deckman as of Dec. 28^th, 2022 (#129): “We describe a scalable, economical solution to the Carbon Dioxide problem. CO2 is captured from the atmosphere by cellulosic plants, and the harvested vegetation is then salted and buried in an engineered dry biolandfill. Plant biomass can be preserved for hundreds to thousands of years by burial in a dry environment … Current agriculture costs, and biolandfill costs indicate US$60/tonne of sequestered CO2 which corresponds to ~US$0.60 per gallon of gasoline. The technology is scalable owing to the large area of land available for cellulosic crops, without disturbing food production. If scaled to the level of a major crop, existing CO2 can be extracted from the atmosphere, and simultaneously sequester a significant fraction of world CO2 emissions” (abstract).

Regulated innovation: The effects of environmental innovations on labor productivity: How does it pay to be green by Hannu Piekkola and Jaana Rahko as of Jan. 10^th, 2023 (#6): “This paper adds to the literature by examining environmental innovations as part of overall firm innovation activity among Finnish manufacturing and energy sector firms … Our empirical analysis shows that regulation-driven environmental innovations enhance productivity … Introducing new environmental regulations increases environmental innovativeness, which in turn leads to improved firm performance that can apparently compensate for all of the costs of regulation. Nordic firms may have benefited from a first-mover advantage by becoming green in many industries … Many companies set targets for themselves that are even stricter than what the regulations require because they want to set a model for other companies and stakeholders” (p. 21/22).

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Greenhushing and more (Researchposting 112)

Greenhushing: 15x new research on air quality, ESG audits, emerging markets, methane, private equity, impact tools, engagement, algos, large caps, robo advisors and other fintechs

Social and ecological research

Deadly air: Air quality and suicide by Claudia Persico and Dave E. Marcotte as of Jan. 17^th, 2023 (#144): “We conduct the first-ever large-scale study of the relationship between air pollution and suicide using detailed cause of death data from all death certificates in the U.S. between 2003 and 2010. … we find that a 1 g/m3 increase in daily PM2.5 is associated with a 0.49% increase in daily suicides and 0.171 more suicide-related hospitalizations (a 50% increase)” (abstract).

ESG data audits: ESG Assurance in the United States by Brandon Gipper, Samantha Ross, and Shawn X. Shi as of Nov. 21^st, 2022 (#307): “We examine the landscape and evolution of ESG assurance in the U.S. from 2010-2020, as well as the determinants of ESG assurance. … We document a remarkable increase in not only the number of firms issuing ESG reports and obtaining assurance but also the number of metrics disclosed and assured within reports. We further document considerable heterogeneity in which metrics receive assurance, differential assurance patterns between non-financial assurors and traditional auditors, and evolving assurance practices. … peer effects and especially ESG reporting frameworks are major determinants of ESG assurance. … the vast majority of ESG assurance is limited and/or process assurance …” (p. 34/35).

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ESG overall (Researchblog #91)

ESG overall: >15x new research on fixed income ESG, greenium, insurer ESG investing, sin stocks, ESG ratings, impact investments, real estate ESG, equity lending, ESG derivatives, virtual fashion, bio revolution, behavioral ESG investing

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ESG skeptical research (Researchblog #90)

ESG skeptical: >15x new and skeptical research on ESG and SDG investments, performance, cost of capital, reporting, ratings, impact, bonifications and artificial intelligence

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ESG ok, SDG gut: Performance 1. HJ 2022

ESG ok, SDG gut: Im ersten Halbjahr 2022 haben meine Trendfolgeportfolios sowie die Portfolios, die sich an den nachhaltigen Entwicklungszielen der Vereinten Nationen ausrichten (SDG), zwar auch an Wert verloren, aber dafür relativ gut gegenüber Vergleichsgruppen performt. Das gilt besonders auch für den FutureVest Equities SDG Fonds. Anders als die meist OK gelaufenen globalen haben spezialisierte ESG Portfolios der Soehnholz ESG GmbH im ersten Halbjahr schlechter als traditionelle Vergleichsportfolios abgeschnitten. Dafür war deren Performance in der Vergangenheit oft überdurchschnittlich.

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

Auf Seite 2 folgt die Übersicht der Halbjahresrenditen für die 15 nachhaltigen und zwei traditionellen Portfolios von Soehnholz ESG sowie für meinen Fonds.

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