Archiv der Kategorie: Voting

Article 9 funds illustrated with foto from Pixabay by mabel amber

Article 9 funds: Researchpost #175

Foto from Pixabay by Mabel Amber

Article 9 funds: 7x new research on happiness, greenwashing, green fund flows, climate data, climate pay, private equity and structured products („#“ shows number of SSRN full paper downloads as of May 9th, 2024)

Social and ecological research

Be happy! How Can People Become Happier? A Systematic Review of Preregistered Experiments by Dunigan Folk and Elizabeth Dunn as of Aug. 11th, 2023: “Can happiness be reliably increased? Thousands of studies speak to this question. However, many of them were conducted during a period in which researchers commonly “p-hacked,” creating uncertainty about how many discoveries might be false positives. To prevent p-hacking, happiness researchers increasingly preregister their studies, committing to analysis plans before analyzing data. We conducted a systematic literature search to identify preregistered experiments testing strategies for increasing happiness. We found surprisingly little support for many widely recommended strategies (e.g., performing random acts of kindness). However, our review suggests that other strategies—such as being more sociable—may reliably promote happiness. We also found strong evidence that governments and organizations can improve happiness by providing underprivileged individuals with financial support” (abstract). My comment: It would be great to have pre-registration for factor and other “outperformance” or alpha-research in financial services (I first discovered this research in a blog post by Joachim Klement).

ESG and impact investment research (Article 9 funds)

Green Article 9 funds: Greenwashing and the EU’s Sustainable Finance Disclosure Regulation by Daniel Fricke Kathi Schlepper as of May 7th, 2024 (#12): “We propose a simple approach to identify potential greenwashers in the context of mutual funds. Focusing on a sample of actively-managed bond funds in Europe, we find that the greenwashing-risk has decreased around the introduction of the EU’s Sustainable Finance Disclosure Regulation (SFDR). For Article 9 funds, the greenwashing-potential has dropped by a factor of two between March 2022 and September 2023. This is both due to (i) re-classifications towards Article 8 products and (ii) sustainability rating improvements. For Article 8 funds, the improvement is less pronounced and the greenwashing-potential remains elevated“ (abstract).

Article 9 funds: Shades of Green: The Effect of SFDR Downgrades on Fund Flows and Sustainability Risk by Hirofumi Nishi, S. Drew Peabody, Eli Sherrill, and Kate Upton as of May 2nd, 2024 (#24): “… our research provides compelling evidence of the significant impact that the European Union’s Sustainable Finance Disclosures Regulation (SFDR) has had on the European ESG fund market, particularly in the context of funds downgraded from Article 9 to Article 8. We documented a discernible decline in net flows into funds following a downgrade …. Moreover, our analysis reveals a tendency for downgraded funds to actively “de-green,” by adjusting their portfolios towards investments with lower ESG scores post-downgrade” (p. 13). My comment: Maybe I can finally expect some inflows in my article 9 fund (which has been performing nicely in the last months), see My fund – Responsible Investment Research Blog (prof-soehnholz.com) and FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Better climate data: Climate disclosure in financial statements by Maximilian A. Müller, Gaizka Ormazabal, Thorsten Sellhorn, and  Victor Wagner as of March 18th, 2024 (#362): “… we show that large EU-listed firms have substantially increased climate-related disclosures in their financial statements since 2018. …Climate disclosures in financial statements differ from those made elsewhere. The most striking difference is that climate disclosures outside the financial statements are significantly less related to a firm’s climate exposure. Hence, climate disclosures inside financial statements complement the disclosures made elsewhere by filtering out financially immaterial information. Many firms address climate-related matters outside the financial statements – but only those with financially material exposure do so inside their (mandatory and audited) financial statements“ (p. 28/29). My comment: Maybe additional ESG auditing fees deliver value for money.

Climate pay: 2024 Pay for Climate Performance Report by Tina Mavkari, Abigail Paris, Olivia Aldinger, Melissa Walton and Danielle Fugere from As you Sow as of  April 15th, 2024: “This second edition of the Pay for Climate Performance report analyzes how effectively 100 of the largest U.S. companies by market capitalization, across 11 sectors of the economy, are currently linking GHG emissions reduction incentives to CEO remuneration. … For CEOs to be motivated to achieve company-wide, science-aligned climate goals, rewards for climate-related achievements must be measurable, clear, and significant. Too often, where climate-related linkages exist, they are predominantly qualitative, leaving significant and unwarranted discretion to compensation committees; or are non-transparent or overly complex quantitative climate metrics, which are difficult to understand and monitor; or include insignificant metrics not captured in the long-term incentive plan (LTIP), which is the substantial part of CEO pay“ (p. 5). … “Of the 66 companies that do include a climate metric in their CEO compensation, only 20 companies had a measurable climate incentive, which is key to driving outcomes“ (p. 7). My comment: Many shareholder voting and engagement efforts focus on green CEO pay. In my opinion, it is important to avoid simple pay increases (see Pay Gap, ESG-Boni und Engagement: Radikale Änderungen erforderlich – Responsible Investment Research Blog (prof-soehnholz.com)) and this research shows that the pay details matter very much

Other investment research

Private equity nyths: Does the Case for Private Equity Still Hold? by Nori Gerardo Lietz and Philipp Chvanov as of April 25th, 2024 (#498): “All the actions PE firms claim add value to portfolio companies should result in superior returns relative to PMEs (Sö: Public Market Equivalents). The data indicate the average or median PE funds do not actually outperform their PMEs since the GFC (Sö: Global Financial Crisis). … First, General Partner (“GP”) fund performance persistence has eroded materially. Past performance is not necessarily indicative of future performance. While the top quartile GPs outperform relative to PMEs over time, they are not necessarily the same GPs over time. … if there is little persistence among the top quartile firms, then the selection of any GP is potentially a “random walk”. If that is the case, then investors should expect to achieve at best only average or median PE results. … there has been a somewhat shocking concentration of capital flows among a small number of firms. … PE performance may actually underperform PMEs on a risk adjusted basis given the amount of leverage they employ generating equivalent results on a nominal basis“ (p. 4/5). My comment: See my private investment criticism here: Impact divestment: Illiquidity hurts – Responsible Investment Research Blog (prof-soehnholz.com)

Bad structures: Do Structured Products improve Portfolio Performance? A Backtesting Exercise by Florian Perusset and Michael Rockinger as of April 29th, 2024 (#164): “This paper shows that the inclusion of structured products in a typical stocks and bonds portfolio, as might be held by an institutional investor, is detrimental for investors, even when considering simple structured products, which are simpler than the majority of the products on the market, even when products are priced at their fair value. This finding implies that when considering more complex structured products sold at a premium, the cost is expected to be higher since more complex products tend to be more overpriced…. “ (p. 22).

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Werbehinweis (Article 9 funds)

Unterstützen Sie meinen Researchblog, indem Sie in meinen globalen Small-Cap-Anlagefonds (SFDR Art. 9) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die Ziele für nachhaltige Entwicklung (SDG) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement bei derzeit 29 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T und My fund – Responsible Investment Research Blog (prof-soehnholz.com)

Custom voting illustration by ArtRose from Pixabay

Custom voting: Researchpost 173

Picture by ArtRose from Pixabay

Custom Voting: 8x new research on child labour, carbon accounting, ESG ratings, ESG flows, voting and green project finance (# shows SSRN full paper downloads as of April 25th, 2024)

Social and ecological research

Child labour: Issue paper on child labour and climate change by the International Labour Orgnizsation as of November 30th, 2023: “The paper examines more than 100 articles from the peer-reviewed literature and reports from international organizations, think tanks and non-governmental organizations. The available evidence, though still limited, makes abundantly clear that climate change – and public and private responses to it – is already having profound impacts on child labour … Safeguards, for example, are needed so that public policies promoting the clean energy transition do not create labour market disruptions that leave low-skill workers and their families in a position of greater vulnerability and more reliant on their children’s labour” (p. vi).

ESG investment research (in: Custom Voting)

Creative carbon accounting: Incorporating Carbon Emissions into Decision-Making – The Case of Transactional Connectivity by Bastian Distler, Jürgen Ernstberger, Mario Keiling, Felix Müller, and Mike Szabo as of April 16th, 2024 (#65): “To incorporate non-financial information into decision-making, non-financial information must be available on the same level of granularity as financial information. A specific use case is transactional carbon accounting, which adds carbon emission information to transactions recorded in a firm’s general ledger. Consequently, general ledger accounts and, thus, the balance sheet and income statement show monetary values and carbon emissions. This strong connectivity between financial and carbon information (1) enables integrated thinking by considering carbon and financial information equally in decision-making, (2) provides more decision-useful information for investors, and (3) increases the reliability of carbon information as auditors can apply the same procedures as for financial information” (abstract). My comment: Interesting that this proposal is supported by practicioners from SAP

ESG divergence: Do ESG Scores Converge Over Time? Empirical Evidence From Listed US Companies by Christian Lohmann, Steffen Möllenhoff and Sebastian Lehner as of April 14th, 2024 (#12): “The present study shows low correlations between ESG scores of listed US companies from Refinitiv, MSCI, ESG Book, and Moody’s ESG persist during the observation period. There is no observable convergence of ESG scores over time as the correlations are stable or tend to decrease in the analyzed period 2007–2022 … No objective ranking can be derived with regard to the validity and the informative value of the ESG scores from different ESG rating agencies. Likewise, no statement can be made as to which ESG score represents the most valid measure“ (p. 8/9).  My comment: It is very important to select the most adequate ESG rating provider

Differentiated ESG performance: Cutting to the chase on ESG by Guillaume Burnichon, Frederic Lepetit, Théo Le Guenedal, Takaya Sekine, Raphaël Semet and Lauren Stagnol from munid as of April 22nd, 2024 (#190): “Examining the first layer – the surface – of financial performance, ESG, and to a lesser extent, the E, S and G pillars have not been the most important differentiators in terms of financial performance over the studied time window … In particular, we identified a dependence of the Emissions & Energy pillar to commodity price movements. Then, focusing specifically on North America, the remarkable performance of Biodiversity & Pollution and ESG Strategy sub-pillars is a strong indicator that ESG investing has not been halted in North America despite the strong politicization” (p.13).

Normal ESG investors: Are ESG investors more resilient? An examination of ESG fund flows Georgina Yarwood from Vanguard Asset Management as of April 16th, 2024 (#13): “… we assess whether investors in ESG index funds are more resilient against adverse market conditions than those in non-ESG index funds. Based on a sample of mutual funds and ETFs available for sale in Europe, the US and the UK representing 144,154 fund-week observations, observed over a time period ranging from 2009 to 2022 …” (abstract). … “We find weak evidence in support of our hypothesis that ESG fund investors demonstrate greater resilience, or “stickiness”, during times of market drawdown. Our hypothesis appears to hold only when the sample is comprised of retail mutual funds available for sale in Europe. What’s more, we also do not find conclusive evidence that the resilience of ESG investors is dependent on the extent of market drawdown experienced” (p. 14).

Responsible ESG risks? Responsible Asset Managers by Ke Shen, Xuemin (Sterling) Yan, Shuran Zhang, and Haibei Zhao as of April 16th, 2024 (#19): “There is no evidence that PRI signatories act more responsibly than their non-PRI counterparts. PRI signatories also exhibit more, not fewer, ESG risk incidents after signing PRI. We find mixed evidence that funds managed by responsible asset managers tend to invest more responsibly. We show that responsible asset managers are less likely to adopt a blanket approach to vote on contentious ESG proposals; however, they are not more likely to vote for ESG proposals. Finally, we show that funds managed by responsible asset managers tend to underperform those managed by irresponsible asset managers“ (p. 32).

Impact investment research (in: Custom Voting)

Custom Voting: Custom Proxy Voting Advice by Edwin Hu, Nadya Malenko, and Jonathon Zytnick as of April 15th, 2024 (#45): “This paper presents the first empirical analysis of custom proxy voting advice (Sö: With proxy voting shareholders delegate their votes to a third party). We find that customization is widespread and that custom recommendations differ significantly from benchmark recommendations. .. we show that customization serves two purposes. First, it aids shareholders in expressing their preferences, such as those related to ES issues, through voting. Second, it streamlines shareholders’ deliberative process by decreasing the need to pay attention to each individual proposal, enabling shareholders to concentrate their research efforts on the more crucial and contentious matters. … In the first stage, investors work with the proxy advisor to set their custom voting policies, and in the second stage, they decide whether to follow custom recommendations or to conduct additional research. … due to the widespread use of custom recommendations, proxy advisors provide far more than one recommendation on a given proposal“ (p. 30/31). My comment: My approach to impact investing see Impactaktien-Portfolio mit 80% SDG-Vereinbarkeit? – Responsible Investment Research Blog (prof-soehnholz.com) and Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Project greenwashing? Do Voluntary Pledges Make Loans Greener? by Tobias Berg, Robin Döttling, Xander Hut, and Wolf Wagner as of April 16th, 2024 (#45): “We analyze whether voluntary green pledges result in greener loan origination in the project finance (PF) market. The PF market is of key importance for financing large-scale, climate-relevant projects globally. We can directly classify the environmental impact of expenditures financed through PF loans because projects are single-purpose developments. We exploit a tightening of the Equator Principles (EP) that introduced comprehensive climate risk management requirements to newly originated PF loans. … we find no evidence for a shift from brown to green lending by EP members relative to non-EP members after the tightening”.

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Diversification myths: Picture shows reduction of sustainability for more diversified portfolios

Diversification myths: Researchpost #159

Diversification myths: 14x new research on ESG and consumption, ESG data, ESG washing, ESG returns, climate risks, voting, divestments, diversification myths, anomalies, trend following, real estate and private equity (# shows number of full paper downloads as of Jan. 18th, 2024)

Social and ecological research

Low ESG-consumption effect: How Do Consumers Use Firm Disclosure? Evidence from a Randomized Field Experiment by Sinja Leonelli, Maximilian Muhn, Thomas Rauter, and Gurpal Sran as of Jan. 11th, 2024 (#79): “In a sample of more than 24,000 U.S. households, we first establish several stylized facts: (i) the average consumer has a moderate preference to purchase from ESG-responsible firms; (ii) consumers typically have no preference for more or less profitable firms; (iii) consumers rarely consult ESG reports and virtually never use financial reports to inform their purchase decisions. … Consumers increase their purchase intent when exogenously presented with firm-disclosed positive signals about environmental, social, and—to a lesser extent—governance activities. Full ESG reports only have an impact on consumers who choose to view them, whereas financial reports and earnings information do not have an effect. After the experiment, consumers increase their actual product purchases, but these effects are small, short-lived, and only materialize for viewed ESG reports and positive social signals. … we provide explanations for why consumers (do not) change their shopping behavior after our information experiment“ (abstract).

ESG investment research (Diversification myths)

ESG data criticism: ESG Data Primer: Current Usage & Future Applications by Tifanny Hendratama, David C. Broadstock, and Johan Sulaeman as of Jan. 12th, 2024 (#66): “ESG data is important, and will become even more so as time progresses. … There remains a prevalent use of combined ESG scores instead of E, S and G specific pillar scores; The use of combined ESG, and pillar specific scores may themselves detract focus away from crucial underlying raw data; Empirical research depends heavily on a small number of ESG data providers; That some data providers focus more on the E than the S – creating a need for data users to make sure the scoring ethos of each provider aligns with their expectations and requirements; There is a potentially material quantity of ESG data inconsistencies which could result in unintended investment allocation” (p. iv). My comment: I use segregated E, S and G ratings since many years and best-in-universe instead of best-in-class ratings

Costly washing: ESG washing: when cheap talk is not cheap! by Najah Attig and Abdlmutaleb Boshanna as of Dec. 26th, 2023 (#63): “… we introduce an easily replicable ESG washing measure. We then document a robust negative impact of ESG washing on corporate financial performance … we show that the COVID-19 pandemic incentivized firms to engage in increased overselling of their ESG performance. Taken together, our new evidence suggests that ‚cheap talk is not cheap‘ and the misalignment between ‘ESG talk’ and ‘ESG walk’ not only fails to serve shareholders‘ best interests but may also undermine a firm’s social license to operate” (abstract).

Disclosure or performance? The relation between environmental performance and environmental disclosure: A critical review of the performance measures used by Thomas Thijssens as of Jan. 9th, 2024 (#8): “More extensive disclosures may even be a signal for inferior rather than superior performance in terms of actual environmental impact. This suggestion is fueled by the observations that more polluting industries have on average more extensive ED (Sö: Environmental disclosure) and higher environmental commitment is associated with higher GHG emissions“ (p. 18). My comment: Most other studies known to me show – in general – positive effects of more disclosure

Performance-neutral ESG: Drawing Up the Bill: Is ESG Related to Stock Returns Around the World? by Rómulo Alves, Philipp Krüger, and Mathijs van Dijk as of Jan. 13th, 2024 (#47): “… our analysis of a comprehensive global database (including 16,000+ stocks in 48 countries and seven different ESG rating providers over 2001-2020) uncovers very little evidence that ESG ratings are related to stock returns around the world. … thus it has been possible to “do good without doing poorly.” Our findings also suggest that the prices of strong ESG stocks have not consistently been driven up, and that, going forward, ESG investors could potentially still benefit from any demand effects resulting in the pricing of ESG preferences. On the flip side, our analysis implies that ESG investing has so far not been effective in reducing (increasing) the cost of equity capital of strong (poor) ESG firms, which could lead firms to internalize climate and social externalities (Fama 2021, Pástor et al. 2021)“ (p. 14). My comment: I could not agree more for the small and midcap companies on which I focus

Huge climate risks: How climate stress test may underestimate financial losses from physical climate risks by a factor of 2-3x by Jakob Thomä from 1 in 1000 and Theia Finance Labs as of Dec. 1st, 2023: “A high baseline climate risk (i.e. using a climate stress-test model with meaningful baseline GDP losses over the next 30 years) stress-test scenario can create a 10% shock to global equity markets. A combination of climate tipping points, ecosystem decline, and social risks can increase that number as a cumulative risk to 27%, almost 3x the baseline losses. A low baseline scenario of a 4% shock in turn turns into a 14% shock when considering these other factors. These losses are dramatic as they are secular and not cyclical. It is worth flagging that this event would be unprecedented in modern financial market history“ (p. 4). My comment: Thanks to Bernd Spendig for informing me about this study.

Climate risk aversion: Institutionelle Investor:innen und physische Klimarisiken vom Lehrstuhl für Sustainable Finance, Universität Kassel as of September Dec. 17th, 2023: “Approximately 40 percent of the surveyed institutions do not take physical climate risks into account when valuing corporate bonds. In addition, a majority of respondents who already take physical climate risks into account are unsure whether these risks are adequately taken into account. In this regard, Part II reveals that 80% of the surveyed institutional investors believe that physical climate risks are not adequately reflected in the risk premiums of corporate bonds” (abstract).

Impact investing research

Voting deficits: Voting matters 2023 by Abhijay Sood at al from Share Action as of Jan. 11th, 2024: “In 2023, only 3% of assessed resolutions passed, just eight out of 257 resolutions. This is down from 21% of assessed resolutions in 2021 … In 2023, the ‘big four’ (BlackRock, Vanguard, Fidelity Investments, and State Street Global Advisors) only supported – on average – one eighth of those put forward, a marked drop since 2021 … Eight asset managers with public net zero targets supported fewer than half of all climate resolutions … Three quarters of all shareholder proposals covered in our study asked only for greater corporate disclosure, including those which some asset managers have deemed overly “prescriptive”. The other quarter of resolutions ask for movement in line with globally agreed climate goals or international human rights standards. … Resolutions at financial services companies on fossil fuel financing received the lowest support by asset managers of any climate-related topic” (p. 8-10). My comment: I focus more on direct dialogue (engagement) than voting, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Divestment myths: Beyond Divestment by David Whyte as of Jan. 16th, 2024 (#11): “The top 20 shareholders in both BP and Shell have increased their total number of shares by three quarters of a billion in BP, and half a billion in Shell since the Paris Agreement was signed in 2015. Indeed, although 47% of BP shareholders and 54% of Shell shareholders have reduced their stake, net share ownership overall has risen significantly in both companies. … more than a quarter of the 20 investors who made the most significant reductions in shareholdings in either BP or Shell increased their overall fossil fuel investment. … only 60 institutional investors have sold all of their shares in the two oil firms. This represents 3% of BP and 4% of Shell shareholders“ (abstract).

Other investment research (Diversification myths)

Diversification myths: Diversification Is Not A Free Lunch by Dirk G. Baur as of Jan. 3rd, 2024 (#56): “We … demonstrate that diversification generally comes at a cost through lower returns and is thus not a free lunch. While the risk of diversified portfolios is clearly lower than that of less diversified or undiversified portfolios, the return is generally also lower. There is only one exception. If the investor is ignorant and picks stocks randomly, diversification is a free lunch. … if diversification is a free lunch, it would violate the fundamental positive risk – return relationship in finance. Specifically, if risk can be reduced without a cost, risk and return are not positively aligned” (p.15). My comment: Even for randomly picked stocks the marginal gains of diversification are very low (see p. 11) whereas the reductions in sustainability – which are not covered in this paper – can be high, see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

Normal anomalies: Anomalies Never Disappeared: The Case of Stubborn Retail Investors by Xi Dong and Cathy Yang as of Dec. 29th, 2023 (#56): “Our examination of 260 anomalies challenges the prevailing notion that market efficiency erodes anomaly-based profits, these anomalies continue to thrive, especially over longer timeframes. We demonstrate that retail investors play a pivotal role in the persistence of these anomalies. Their stubborn trading patterns, especially against anomalies, not only contribute to initial mispricing but also lead to delayed price corrections“ (p. 37).

Trend following theory: Speculating on Higher Order Beliefs by Paul Schmidt-Engelbertz and Kaushik Vasudevan as of Aug.3rd, 2023 (#187): “We study investors’ higher order beliefs, using survey data from the Robert Shiller Investor Confidence surveys. While previous work has documented instances of non-fundamental speculation – investors taking positions in a risky asset in a direction that conflicts with their fundamental views – we find that such speculation is the norm for the U.S. stock market. The majority of investors in the Shiller surveys, who represent an important class of investors, report that other investors have mistaken beliefs, but nevertheless report positive return expectations from speculating in the direction of these mistaken beliefs. In addition, investors report that they believe that stock markets overreact and exhibit momentum and reversal in response to news. … We find that higher order beliefs may substantially amplify stock market fluctuations. When investors exhibit the same fundamental belief biases that they attribute to other investors, patterns such as overreaction, momentum, and reversal can persist in equilibrium, even though everybody knows about them“ (p. 37/38). My comment: I use simple trend following strategies to reduce drawdown-risks for investors who do not like bond investments but not to try to enhance returns

US Real Estate: A First Look at the Historical Performance of the New NAV REITs by Spencer J. Couts and Andrei S. Goncalves as of Jan.12th, 2024 (#31): “…we study the historical investment performance of NAV REITs relative to public bonds, public equities, and public REITs from 2016 to 2023. … First, the smoothness of NAV REIT returns due to lagged price reactions creates an important challenge to the measurement of the alphas of NAV REIT investments relative to public market indices. Moreover, return unsmoothing methods significantly mitigate (but do not fully solve) this issue. Second, traditional performance analysis indicates that NAV REIT investments generated substantial alpha (above 5% per year) relative to public indices over our sample period“ (p. 26).

PE calculation-uncertainties: Unpacking Private Equity Performance by Gregory Brown and William Volckmann as of Dec. 20th., 2023 (#31): “… complicating the analysis are the increasingly common practices of funds using subscription lines of credit (fund-level debt) and recycling capital. Even the variation in the timing of capital deployment across funds has important implications for common performance measures used to evaluate funds such as internal rate of return (IRR) and multiple on invested capital (MOIC). …. values likely observed during fundraising periods for subsequent funds – are strongly affected by subscription lines and deployment pacing. Intermediate MOICs are only weakly affected by subscription lines, but strongly affected by capital deployment pacing. Both IRRs and MOICs are strongly affected by recycle deal accounting methodology“ (abstract). “When a fund utilizes subscription lines, net IRR is very sensitive over the life cycle of the fund and can massively exaggerate performance during the investment/fundraising period. Net MOIC can also be exaggerated early in the investment period …” (p. 17).

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Collectibles: Picture of Aliens by Gerhard Janson

Collectibles: Researchpost #158

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

Social and ecological research (Collectibles)

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

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

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

Responsible investment research (Collectibles)

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

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

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

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

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

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

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

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

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

Other investment research

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

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

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Houseowner risks illustrated by flooding foto from Pixabay

Houseowner risks: Researchpost #157

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

Social and ecological research: Houseowner risks

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

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

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

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

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

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

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

Responsible investment research

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

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

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

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

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

Other investment research (in: Houseowner risks)

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

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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 27 of 30 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Sustainable investment: Picture by Peggy and Marco-Lachmann-Anke from Pixabay

Sustainable investment = radically different?

Sustainable investment can be radically different from traditional investment. „Asset Allocation, Risk Overlay and Manager Selection“ is the translation of the book-title which I wrote in 2009 together with two former colleagues from FERI in Bad Homburg. Sustainability plays no role in it. My current university lecture on these topics is different.

Sustainability can play a very important role in the allocation to investment segments, manager and fund selection, position selection and also risk management. Strict sustainability can even lead to radical changes: More illiquid investments, lower asset class diversification, significantly higher concentration within investment segments, more active instead of passive mandates and different risk management. Here is why:

Central role of investment philosophy and sustainability definition for sustainable investment

Investors should define their investment philosophy as clearly as possible before they start investing. By investment philosophy, I mean the fundamental convictions of an investor, ideally a comprehensive and coherent system of such convictions (see Das-Soehnholz-ESG-und-SDG-Portfoliobuch 2023, p. 21ff.). Sustainability can be an important element of an investment philosophy.

Example: I pursue a strictly sustainable, rule-based, forecast-free investment philosophy (see e.g. Investment philosophy: Forecast fans should use forecast-free portfolios). To this end, I define comprehensive sustainability rules. I use the Policy for Responsible Investment Scoring Concept (PRISC) tool of the German Association for Asset Management and Financial Analysis (DVFA) for operationalization.

When it comes to sustainable investment, I am particularly interested in the products and services offered by the companies and organizations in which I invest or to which I indirectly provide loans. I use many strict exclusions and, above all, positive criteria. In particular, I want that the revenue or service is as compatible as possible with the Sustainable Development Goals of the United Nations (UN SDG) („SDG revenue alignment“). I also attach great importance to low absolute environmental, social and governance (ESG) risks. However, I only give a relatively low weighting to the opportunities to change investments („investor impact“) (see The Soehnholz ESG and SDG Portfolio Book 2023, p. 141ff). I try to achieve impact primarily through shareholder engagement, i.e. direct sustainability communication with companies.

Other investors, for whom impact and their own opportunities for change are particularly important, often attach great importance to so-called additionality. This means, that the corresponding sustainability improvements only come about through their respective investments. If an investor finances a new solar or wind park, this is considered additional and therefore particularly sustainable. When investing money on stock exchanges, securities are only bought by other investors and no money flows to the issuers of the securities – except in the case of relatively rare new issues. The purchase of listed bonds or shares in solar and wind farm companies is therefore not considered an impact investment by additionality supporters.

Sustainable investment and asset allocation: many more unlisted or alternative investments and more bonds?

In extreme cases, an investment philosophy focused on additionality would mean investing only in illiquid assets. Such an asset allocation would be radically different from today’s typical investments.

Better no additional allocation to illiquid investments?

Regarding additionality, investor and project impact must be distinguished. The financing of a new wind farm is not an additional investment, if other investors would also finance the wind farm on their own. This is not atypical. There is often a so-called capital overhang for infrastructure and private equity investments. This means, that a lot of money has been raised via investment funds and is competing for investments in such projects.

Even if only one fund is prepared to finance a sustainable project, the investment in such a fund would not be additional if other investors are willing to commit enough money to this fund to finance all planned investments. It is not only funds from renowned providers that often have more potential subscriptions from potential investors than they are willing to accept. Investments in such funds cannot necessarily be regarded as additional. On the other hand, there is clear additionality for investments that no one else wants to make. However, whether such investments will generate attractive performance is questionable.

Illiquid investments are also far from suitable for all investors, as they usually require relatively high minimum investments. In addition, illiquid investments are usually only invested gradually, and liquidity must be held for uncertain capital calls in terms of timing and amount. In addition, illiquid investments are usually considerably more expensive than comparable liquid investments. Overall, illiquid investments therefore have hardly any higher return potential than liquid investments. On the other hand, mainly due to the methods of their infrequent valuations, they typically exhibit low fluctuations. However, they are sometimes highly risky due to their high minimum investments and, above all, illiquidity.

In addition, illiquid investments lack an important so-called impact channel, namely individual divestment opportunities. While liquid investments can be sold at any time if sustainability requirements are no longer met, illiquid investments sometimes have to remain invested for a very long time. Divestment options are very important to me: I have sold around half of my securities in recent years because their sustainability has deteriorated (see: Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds).

Sustainability advantages for (corporate) bonds over equities?

Liquid investment segments can differ, too, in terms of impact opportunities. Voting rights can be exercised for shares, but not for bonds and other investment segments. However, shareholder meetings at which voting is possible rarely take place. In addition, comprehensive sustainability changes are rarely put to the vote. If they are, they are usually rejected (see 2023 Proxy Season Review – Minerva).

I am convinced that engagement in the narrower sense can be more effective than exercising voting rights. And direct discussions with companies and organizations to make them more sustainable are also possible for bond buyers.

Irrespective of the question of liquidity or stock market listing, sustainable investors may prefer loans to equity because loans can be granted specifically for social and ecological projects. In addition, payouts can be made dependent on the achievement of sustainable milestones. However, the latter can also be done with private equity investments, but not with listed equity investments. However, if ecological and social projects would also be carried out without these loans and only replace traditional loans, the potential sustainability advantage of loans over equity is put into perspective.

Loans are usually granted with specific repayment periods. Short-term loans have the advantage that it is possible to decide more often whether to repeat loans than with long-term loans, provided they cannot be repaid early. This means that it is usually easier to exit a loan that is recognized as not sustainable enough than a private equity investment. This is a sustainability advantage. In addition, smaller borrowers and companies can probably be influenced more sustainably, so that government bonds, for example, have less sustainability potential than corporate loans, especially when it comes to relatively small companies.

With regard to real estate, one could assume that loans or equity for often urgently needed residential or social real estate can be considered more sustainable than for commercial real estate. The same applies to social infrastructure compared to some other infrastructure segments. On the other hand, some market observers criticize the so-called financialization of residential real estate, for example, and advocate public rather than private investments (see e.g. Neue Studie von Finanzwende Recherche: Rendite mit der Miete). Even social loans such as microfinance in the original sense are criticized, at least when commercial (interest) interests become too strong and private debt increases too much.

While renewable raw materials can be sustainable, non-industrially used precious metals are usually considered unsustainable due to the mining conditions. Crypto investments are usually considered unsustainable due to their lack of substance and high energy consumption.

Assuming potential additionality for illiquid investments and an impact primarily via investments with an ecological or social focus, the following simplified assessment of the investment segment can be made from a sustainability perspective:

Sustainable investment: Potential weighting of investment segments assuming additionality for illiquid investments:

Source: Soehnholz ESG GmbH 2023

Investors should create their own such classification, as this is crucial for their respective sustainable asset allocation.

Taking into account minimum capital investment and costs as well as divestment and engagement opportunities, I only invest in listed investments, for example. However, in the case of multi-billion assets with direct sustainability influence on investments, I would consider additional illiquid investments.

Sustainable investment and manager/fund selection: more active investments again?

Scientific research shows that active portfolio management usually generates lower returns and often higher risks than passive investments. With very low-cost ETFs, you can invest in thousands of securities. It is therefore no wonder that so-called passive investments have become increasingly popular in recent years.

Diversification is often seen as the only „free lunch“ in investing. But diversification often has no significant impact on returns or risks: With more than 20 to 30 securities from different countries and sectors, no better returns and hardly any lower risks can be expected than with hundreds of securities. In other words, the marginal benefit of additional diversification decreases very quickly.

But if you start with the most sustainable 10 to 20 securities and diversify further, the average sustainability can fall considerably. This means that strictly sustainable investment portfolios should be concentrated rather than diversified. Concentration also has the advantage of making voting and other forms of engagement easier and cheaper. Divestment threats can also be more effective if a lot of investor money is invested in just a few securities.

Sustainability policies can vary widely. This can be seen, among other things, in the many possible exclusions from potential investments. For example, animal testing can be divided into legally required, medically necessary, cosmetic and others. Some investors want to consistently exclude all animal testing. Others want to continue investing in pharmaceutical companies and may therefore only exclude „other“ animal testing. And investors who want to promote the transition from less sustainable companies, for example in the oil industry, to more sustainability will explicitly invest in oil companies (see ESG Transition Bullshit?).

Indices often contain a large number of securities. However, consistent sustainability argues in favor of investments in concentrated, individual and therefore mostly index-deviating actively managed portfolios. Active, though, is not meant in the sense of a lot of trading. In order to be able to exert influence by exercising voting rights and other forms of engagement, longer rather than shorter holding periods for investments make sense.

Still not enough consistently sustainable ETF offerings

When I started my own company in early 2016, it was probably the world’s first provider of a portfolio of the most consistently sustainable ETFs possible. But even the most sustainable ETFs were not sustainable enough for me. This was mainly due to insufficient exclusions and the almost exclusive use of aggregated best-in-class ESG ratings. However, I have high minimum requirements for E, S and G separately (see Glorious 7: Are they anti-social?). I am also not interested in the best-rated companies within sectors that are unattractive from a sustainability perspective (best-in-class). I want to invest in the best-performing stocks regardless of sector (best-in-universe). However, there are still no ETFs for such an approach. In addition, there are very few ETFs that use strict ESG criteria and also strive for SDG compatibility.

Even in the global Socially Responsible Investment Paris Aligned Benchmarks, which are particularly sustainable, there are still several hundred stocks from a large number of sectors and countries. In contrast, there are active global sustainable funds with just 30 stocks, which is potentially much more sustainable (see 30 stocks, if responsible, are all I need).

Issuers of sustainable ETFs often exercise sustainable voting rights and even engage, even if only to a small extent. However, most providers of active investments do no better (see e.g. 2023 Proxy Season Review – Minerva). Notably, index-following investments typically do not use the divestment impact channel because they want to replicate indices as directly as possible.

Sustainable investment and securities selection: fewer standard products and more individual mandates or direct indexing?

If there are no ETFs that are sustainable enough, you should look for actively managed funds, award sustainable mandates to asset managers or develop your own portfolios. However, actively managed concentrated funds with a strict ESG plus impact approach are still very rare. This also applies to asset managers who could implement such mandates. In addition, high minimum investments are often required for customized mandates. Individual sustainable portfolio developments, on the other hand, are becoming increasingly simple.

Numerous providers currently offer basic sustainability data for private investors at low cost or even free of charge. Financial technology developments such as discount (online) brokers, direct indexing and trading in fractional shares as well as voting tools help with the efficient and sustainable implementation of individual portfolios. However, the variety of investment opportunities and data qualities are not easy to analyze.

It would be ideal if investors could also take their own sustainability requirements into account on the basis of a curated universe of particularly sustainable securities and then have them automatically implemented and rebalanced in their portfolios (see Custom ESG Indexing Can Challenge Popularity Of ETFs (asiafinancial.com). In addition, they could use modern tools to exercise their voting rights according to their individual sustainability preferences. Sustainability engagement with the securities issuers can be carried out by the platform provider.

Risk management: much more tracking error and ESG risk monitoring?

For sustainable investments, sustainability metrics are added to traditional risk metrics. These are, for example, ESG ratings, emissions values, principal adverse indicators, do-no-significant-harm information, EU taxonomy compliance or, as in my case, SDG compliance and engagement success.

Sustainable investors have to decide how important the respective criteria are for them. I use sustainability criteria not only for reporting, but also for my rule-based risk management. This means that I sell securities if ESG or SDG requirements are no longer met (see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds).

The ESG ratings I use summarize environmental, social and governance risks. These risks are already important today and will become even more important in the future, as can be seen from greenwashing and reputational risks, for example. Therefore, they should not be missing from any risk management system. SDG compliance, on the other hand, is only relevant for investors who care about how sustainable the products and services of their investments are.

Voting rights and engagement have not usually been used for risk management up to now. However, this may change in the future. For example, I check whether I should sell shares if there is an inadequate response to my engagement. An inadequate engagement response from companies may indicate that companies are not listening to good suggestions and thus taking unnecessary risks that can be avoided through divestments.

Traditional investors often measure risk by the deviation from the target allocation or benchmark. If the deviation exceeds a predefined level, many portfolios have to be realigned closer to the benchmark. If you want to invest in a particularly sustainable way, you have to have higher rather than lower traditional benchmark deviations (tracking error) or you should do without tracking error figures altogether.

In theory, sustainable indices could be used as benchmarks for sustainable portfolios. However, as explained above, sustainability requirements can be very individual and, in my opinion, there are no strict enough sustainable standard benchmarks yet.

Sustainability can therefore lead to new risk indicators as well as calling old ones into question and thus also lead to significantly different risk management.

Summary and outlook: Much more individuality?

Individual sustainability requirements play a very important role in the allocation to investment segments, manager and fund selection, position selection and risk management. Strict sustainability can lead to greater differences between investment mandates and radical changes to traditional mandates: A lower asset class diversification, more illiquid investments for large investors, more project finance, more active rather than passive mandates, significantly higher concentration within investment segments and different risk management with additional metrics and significantly less benchmark orientation.

Some analysts believe that sustainable investment leads to higher risks, higher costs and lower returns. Others expect disproportionately high investments in sustainable investments in the future. This should lead to a better performance of such investments. My approach: I try to invest as sustainably as possible and I expect a normal market return in the medium term with lower risks compared to traditional investments.

First published in German on www.prof-soehnholz.com on Dec. 30th, 2023. Initial version translated by Deepl.com

Sustainable investment: Picture by Peggy and Marco-Lachmann-Anke from Pixabay

Nachhaltige Geldanlage = Radikal anders?

Nachhaltige Geldanlage kann radikal anders sein als traditionelle. „Asset Allocation, Risiko-Overlay und Manager-Selektion: Das Diversifikationsbuch“ heißt das Buch, dass ich 2009 mit ehemaligen Kollegen der Bad Homburger FERI geschrieben habe. Nachhaltigkeit spielt darin keine Rolle. In meiner aktuellen Vorlesung zu diesen Themen ist das anders. Nachhaltigkeit kann eine sehr wichtige Rolle spielen für die Allokation auf Anlagesegmente, die Manager- bzw. Fondsselektion, die Positionsselektion und auch das Risikomanagement (Hinweis: Um die Lesbarkeit zu verbessern, gendere ich nicht).

Strenge Nachhaltigkeit kann sogar zu radikalen Änderungen führen: Mehr illiquide Investments, erheblich höhere Konzentration innerhalb der Anlagesegmente, mehr aktive statt passive Mandate und ein anderes Risikomanagement. Im Folgenden erkläre ich, wieso:

Zentrale Rolle von Investmentphilosophie und Nachhaltigkeitsdefinition für die nachhaltige Geldanlage

Dafür starte ich mit der Investmentphilosophie. Unter Investmentphilosophie verstehe ich die grundsätzlichen Überzeugungen eines Geldanlegers, idealerweise ein umfassendes und kohärentes System solcher Überzeugungen (vgl.  Das-Soehnholz-ESG-und-SDG-Portfoliobuch 2023, S. 21ff.). Nachhaltigkeit kann ein wichtiges Element einer Investmentphilosophie sein. Anleger sollten ihre Investmentphilosophie möglichst klar definieren, bevor sie mit der Geldanlage beginnen.

Beispiel: Ich verfolge eine konsequent nachhaltige regelbasiert-prognosefreie Investmentphilosophie. Dafür definiere ich umfassende Nachhaltigkeitsregeln. Zur Operationalisierung nutze ich das Policy for Responsible Investment Scoring Concept (PRISC) Tool der Deutschen Vereinigung für Asset Management und Finanzanalyse (DVFA, vgl. Standards – DVFA e. V. – Der Berufsverband der Investment Professionals).

Für die nachhaltige Geldanlage ist mir vor allem wichtig, was für Produkte und Services die Unternehmen und Organisationen anbieten, an denen ich mich beteilige oder denen ich indirekt Kredite zur Verfügung stelle. Dazu nutze ich viele strenge Ausschlüsse und vor allem Positivkriterien. Dabei wird vor allem der Umsatz- bzw. Serviceanteil betrachtet, der möglichst gut mit Nachhaltigen Entwicklungszielen der Vereinten Nationen (UN SDG) vereinbar ist („SDG Revenue Alignment“). Außerdem lege ich viel Wert auf niedrige absolute Umwelt-, Sozial- und Governance-Risiken (ESG). Meine Möglichkeiten zur Veränderung von Investments („Investor Impact“) gewichte ich aber nur relativ niedrig (vgl. Das-Soehnholz-ESG-und-SDG-Portfoliobuch 2023, S. 141ff). Impact möchte ich dabei vor allem über Shareholder Engagement ausüben, also direkte Nachhaltigkeitskommunikation mit Unternehmen.

Andere Anleger, denen Impact- bzw. eigene Veränderungsmöglichkeiten besonders wichtig sind, legen oft viel Wert auf sogenannte Additionalität bzw. Zusätzlichkeit. Das bedeutet, dass die entsprechenden Nachhaltigkeitsverbesserungen nur durch ihre jeweiligen Investments zustande gekommen sind. Wenn ein Anleger einen neuen Solar- oder Windparkt finanziert, gilt das als additional und damit als besonders nachhaltig. Bei Geldanlagen an Börsen werden Wertpapiere nur anderen Anlegern abgekauft und den Herausgebern der Wertpapiere fließt – außer bei relativ seltenen Neuemissionen – kein Geld zu. Der Kauf börsennotierter Anleihen oder Aktien von Solar- und Windparkunternehmen gilt bei Additionalitätsanhängern deshalb nicht als Impact Investment.

Nachhaltige Geldanlage und Asset Allokation: Viel mehr nicht-börsennotierte bzw. alternative Investments und mehr Anleihen?

Eine additionalitätsfokussierte Investmentphilosophie bedeutet demnach im Extremfall, nur noch illiquide zu investieren. Die Asset Allokation wäre radikal anders als heute typische Geldanlagen.

Lieber keine Mehrallokation zu illiquiden Investments?

Aber wenn Additionalität so wichtig ist, dann muss man sich fragen, welche Art von illiquiden Investments wirklich Zusätzlichkeit bedeutet. Dazu muss man Investoren- und Projektimpact trennen. Die Finanzierung eines neuen Windparks ist aus Anlegersicht dann nicht zusätzlich, wenn andere Anleger den Windpark auch alleine finanzieren würden. Das ist durchaus nicht untypisch. Für Infrastruktur- und Private Equity Investments gibt es oft einen sogenannten Kapitalüberhang. Das bedeutet, dass über Fonds sehr viel Geld eingesammelt wurde und um Anlagen in solche Projekte konkurriert.

Selbst wenn nur ein Fonds zur Finanzierung eines nachhaltgien Projektes bereit ist, wäre die Beteiligung an einem solchen Fonds aus Anlegersicht dann nicht additional, wenn alternativ andere Anleger diese Fondsbeteiligung kaufen würden. Nicht nur Fonds renommierter Anbieter haben oft mehr Anfragen von potenziellen Anlegern als sie akzeptieren wollen. Investments in solche Fonds kann man nicht unbedingt als additional ansehen. Klare Additionalität gibt es dagegen für Investments, die kein anderer machen will. Ob solche Investments aber attraktive Performances versprechen, ist fragwürdig.

Illiquide Investments sind zudem längst nicht für alle Anleger geeignet, denn sie erfordern meistens relativ hohe Mindestinvestments. Hinzu kommt, dass man bei illiquiden Investments in der Regel erst nach und nach investiert und Liquidität in Bezug auf Zeitpunkt und Höhe unsichere Kapitalabrufe bereithalten muss. Außerdem sind illiquide meistens erheblich teurer als vergleichbare liquide Investments. Insgesamt haben damit illiquide Investments kaum höhere Renditepotenziale als liquide Investments. Durch die Art ihrer Bewertungen zeigen sie zwar geringe Schwankungen. Sie sind durch ihre hohen Mindestinvestments und vor allem Illiquidität aber teilweise hochriskant.

Hinzu kommt, dass illiquiden Investments ein wichtiger sogenannter Wirkungskanal fehlt, nämlich individuelle Divestmentmöglichkeiten. Während liquide Investments jederzeit verkauft werden können wenn Nachhaltigkeitsanforderungen nicht mehr erfüllt werden, muss man bei illiquiden Investments teilweise sehr lange weiter investiert bleiben. Divestmentmöglichkeiten sind sehr wichtig für mich: Ich habe in den letzten Jahren jeweils ungefähr die Hälfte meiner Wertpapiere verkauft, weil sich ihre Nachhaltigkeit verschlechtert hat (vgl. Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com)).

Nachhaltigkeitsvorteile für (Unternehmens-)Anleihen gegenüber Aktien?

Auch liquide Anlagesegmente können sich in Bezug auf Impactmöglichkeiten unterscheiden. Für Aktien kann man Stimmrechte ausüben (Voting), für Anleihen und andere Anlagesegmente nicht. Allerdings finden nur selten Aktionärsversammlungen statt, zu denen man Stimmrechte ausüben kann. Zudem stehen nur selten umfassende Nachhaltigkeitsveränderungen zur Abstimmung. Falls das dennoch der Fall ist, werden sie meistens abgelehnt (vgl. 2023 Proxy Season Review – Minerva-Manifest).

Ich bin überzeugt, dass Engagement im engeren Sinn wirkungsvoller sein kann als Stimmrechtsausübung. Und direkte Diskussionen mit Unternehmen und Organisationen, um diese nachhaltiger zu machen, sind auch für Käufer von Anleihen möglich.

Unabhängig von der Frage der Liquidität bzw. Börsennotiz könnten nachhaltige Anleger Kredite gegenüber Eigenkapital bevorzugen, weil Kredite speziell für soziale und ökologische Projekte vergeben werden können. Außerdem können Auszahlungen von der Erreichung von nachhaltigen Meilensteinen abhängig gemacht werden können. Letzteres kann bei Private Equity Investments aber ebenfalls gemacht werden, nicht jedoch bei börsennotierten Aktieninvestments. Wenn ökologische und soziale Projekte aber auch ohne diese Kredite durchgeführt würden und nur traditionelle Kredite ersetzen, relativiert sich der potenzielle Nachhaltigkeitsvorteil von Krediten gegenüber Eigenkapital.

Allerdings werden Kredite meist mit konkreten Rückzahlungszeiten vergeben. Kurz laufende Kredite haben dabei den Vorteil, dass man öfter über die Wiederholung von Kreditvergaben entscheiden kann als bei langlaufenden Krediten, sofern man sie nicht vorzeitig zurückbezahlt bekommen kann. Damit kann man aus einer als nicht nachhaltig genug erkannter Kreditvergabe meistens eher aussteigen als aus einer privaten Eigenkapitalvergabe. Das ist ein Nachhaltigkeitsvorteil. Außerdem kann man kleinere Kreditnehmer und Unternehmen wohl besser nachhaltig beeinflussen, so dass zum Beispiel Staatsanleihen weniger Nachhaltigkeitspotential als Unternehmenskredite haben, vor allem wenn es sich dabei um relativ kleine Unternehmen handelt.

In Bezug auf Immobilien könnte man annehmen, dass Kredite oder Eigenkapital für oft dringend benötigte Wohn- oder Sozialimmobilien als nachhaltiger gelten können als für Gewerbeimmobilien. Ähnliches gilt für Sozialinfrastruktur gegenüber manch anderen Infrastruktursegmenten. Andererseits kritisieren manche Marktbeobachter die sogenannte Finanzialisierung zum Beispiel von Wohnimmobilien (vgl. Neue Studie von Finanzwende Recherche: Rendite mit der Miete) und plädieren grundsätzlich für öffentliche statt private Investments. Selbst Sozialkredite wie Mikrofinanz im ursprünglichen Sinn wird zumindest dann kritisiert, wenn kommerzielle (Zins-)Interessen zu stark werden und private Verschuldungen zu stark steigen.

Während nachwachsende Rohstoffe nachhaltig sein können, gelten nicht industriell genutzte Edelmetalle aufgrund der Abbaubedingungen meistens als nicht nachhaltig. Kryptoinvestments werden aufgrund fehlender Substanz und hoher Energieverbräuche meistens als nicht nachhaltig beurteilt.

Bei der Annahme von potenzieller Additionalität für illiquide Investments und Wirkung vor allem über Investments mit ökologischem bzw. sozialem Bezug kann man zu der folgenden vereinfachten Anlagesegmentbeurteilung aus Nachhaltigkeitssicht kommen:

Nachhaltige Geldanlage: Potenzielle Gewichtung von Anlagesegmenten bei Annahme von Additionalität für illiquide Investments und meine Allokation

Quelle: Eigene Darstellung

Anleger sollten sich ihre eigene derartige Klassifikation erstellen, weil diese entscheidend für ihre jeweilige nachhaltige Asset Allokation ist. Unter Berücksichtigung von Mindestkapitaleinsatz und Kosten sowie Divestment- und Engagementmöglichkeiten investiere ich zum Beispiel nur in börsennotierte Investments. Bei einem Multi-Milliarden Vermögen mit direkten Nachhaltigkeits-Einflussmöglichkeiten auf Beteiligungen würde ich zusätzliche illiquide Investments aber in Erwägung ziehen. Insgesamt kann strenge Nachhaltigkeit also auch zu wesentlich geringerer Diversifikation über Anlageklassen führen.

Nachhaltige Geldanlage und Manager-/Fondsselektion: Wieder mehr aktive Investments?

Wissenschaftliche Forschung zeigt, dass aktives Portfoliomanagement meistens geringe Renditen und oft auch höhere Risiken als passive Investments einbringt. Mit sehr günstigen ETFs kann man in tausende von Wertpapieren investieren. Es ist deshalb kein Wunder, dass in den letzten Jahren sogenannte passive Investments immer beliebter geworden sind.

Diversifikation gilt oft als der einzige „Free Lunch“ der Kapitalanlage. Aber Diversifikation hat oft keinen nennenswerten Einfluss auf Renditen oder Risiken. Anders ausgedrückt: Mit mehr als 20 bis 30 Wertpapieren aus unterschiedlichen Ländern und Branchen sind keine besseren Renditen und auch kaum niedrigere Risiken zu erwarten als mit hunderten von Wertpapieren. Anders ausgedrückt: Der Grenznutzen zusätzlicher Diversifikation nimmt sehr schnell ab.

Aber wenn man aber mit den nachhaltigsten 10 bis 20 Wertpapiern startet und weiter diversifiziert, kann die durchschnittliche Nachhaltigkeit erheblich sinken. Das bedeutet, dass konsequent nachhaltige Geldanlageportfolios eher konzentriert als diversifiziert sein sollten. Konzentration hat auch den Vorteil, dass Stimmrechtsausübungen und andere Formen von Engagement einfacher und kostengünstiger werden. Divestment-Androhungen können zudem wirkungsvoller sein, wenn viel Anlegergeld in nur wenige Wertpapiere investiert wird.

Nachhaltigkeitspolitiken können sehr unterschiedlich ausfallen. Das zeigt sich unter anderem bei den vielen möglichen Ausschlüssen von potenziellen Investments. So kann man zum Beispiel Tierversuche in juristisch vorgeschriebene, medizinisch nötige, kosmetische und andere unterscheiden. Manche Anleger möchten alle Tierversuche konsequent ausschließen. Andere wollen weiterhin in Pharmaunternehmen investieren und schließen deshalb vielleicht nur „andere“ Tierversuche aus. Und Anleger, welche die Transition von wenig nachhaltigen Unternehmen zum Beispiel der Ölbranche zu mehr Nachhaltigkeit fördern wollen, werden explizit in Ölunternehmen investieren (vgl. ESG Transition Bullshit? – Responsible Investment Research Blog (prof-soehnholz.com)).

Indizes enthalten oft sehr viele Wertpapiere. Konsequente Nachhaltigkeit spricht aber für Investments in konzentrierte, individuelle und damit meist indexabweichende aktiv gemanagte Portfolios. Dabei ist aktiv nicht im Sinne von viel Handel gemeint. Um über Stimmrechtsausübungen und andere Engagementformen Einfluss ausüben zu können, sind eher längere als kürzere Haltedauern von Investments sinnvoll.

Immer noch nicht genug konsequent nachhaltige ETF-Angebote

Bei der Gründung meines eigenen Unternehmens Anfang 2016 war ich wahrscheinlich weltweit der erste Anbieter eines Portfolios aus möglichst konsequent nachhaltigen ETFs. Aber auch die nachhaltigsten ETFs waren mir nicht nachhaltig genug. Grund waren vor allem unzureichende Ausschlüsse und die fast ausschließliche Nutzung von aggregierten Best-in-Class ESG-Ratings. Ich habe aber hohe Mindestanforderungen an E, S und G separat (vgl. Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com). Ich interessiere mich auch nicht für die am besten geraten Unternehmen innerhalb aus Nachhaltigkeitssicht unattraktiven Branchen (Best-in-Class). Ich möchte branchenunabhängig in die am besten geraten Aktien investieren (Best-in-Universe). Dafür gibt es aber auch heute noch keine ETFs. Außerdem gibt es sehr wenige ETFs, die strikte ESG-Kriterien nutzen und zusätzlich SDG-Vereinbarkeit anstreben.

Auch in den in besonders konsequent nachhaltigen globalen Socially Responsible Paris Aligned Benchmarks befinden sich noch mehrere hundert Aktien aus sehr vielen Branchen und Ländern. Aktive globale nachhaltige Fonds gibt es dagegen schon mit nur 30 Aktien, also potenziell erheblich nachhaltiger (vgl. 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)).

Emittenten nachhaltiger ETFs üben oft nachhaltige Stimmrechtsausübungen und sogar Engagement aus, wenn auch nur in geringem Umfang. Das machen die meisten Anbieter aktiver Investments aber auch nicht besser (vgl. z.B. 2023 Proxy Season Review – Minerva-Manifest). Indexfolgende Investments nutzen aber typischerweise den Impactkanal Divestments nicht, weil sie Indizes möglichst direkt nachbilden wollen.

Nachhaltige Geldanlage und Wertpapierselektion: Weniger Standardprodukte und mehr individuelle Mandate oder Direct Indexing?

Wenn es keine ETFs gibt, die nachhaltig genug sind, sollte man sich aktiv gemanagte Fonds suchen, nachhaltige Mandate an Vermögensverwalter vergeben oder seine Portfolios selbst entwickeln. Aktiv gemanagte konzentrierte Fonds mit strengem ESG plus Impactansatz sind aber noch sehr selten. Das gilt auch für Vermögensverwalter, die solche Mandate umsetzen könnten. Außerdem werden für maßgeschneiderte Mandate oft hohe Mindestanlagen verlangt. Individuelle nachhaltige Portfolioentwicklungen werden dagegen zunehmend einfacher.

Basis-Nachhaltigkeitsdaten werden aktuell von zahlreichen Anbietern für Privatanleger kostengünstig oder sogar kostenlos angeboten. Finanztechnische Entwicklungen wie Discount-(Online-)Broker, Direct Indexing und Handel mit Bruchstücken von Wertpapieren sowie Stimmrechtsausübungstools helfen bei der effizienten und nachhaltigen Umsetzung von individuellen Portfolios. Schwierigkeiten bereiten dabei eher die Vielfalt an Investmentmöglichkeiten und mangelnde bzw. schwer zu beurteilende Datenqualität.

Ideal wäre, wenn Anleger auf Basis eines kuratierten Universums von besonders nachhaltigen Wertpapieren zusätzlich eigene Nachhaltigkeitsanforderungen berücksichtigen können und dann automatisiert in ihren Depots implementieren und rebalanzieren lassen (vgl. Custom ESG Indexing Can Challenge Popularity Of ETFs (asiafinancial.com). Zusätzlich könnten sie mit Hilfe moderner Tools ihre Stimmrechte nach individuellen Nachhaltigkeitsvorstellungen ausüben. Direkte Nachhaltigkeitskommunikation mit den Wertpapieremittenten kann durch den Plattformanbieter erfolgen.

Risikomanagement: Viel mehr Tracking-Error und ESG-Risikomonitoring?

Für nachhaltige Geldanlagen kommen zusätzlich zu traditionellen Risikokennzahlen Nachhaltigkeitskennzahlen hinzu, zum Beispiel ESG-Ratings, Emissionswerte, Principal Adverse Indicators, Do-No-Significant-Harm-Informationen, EU-Taxonomievereinbarkeit oder, wie in meinem Fall, SDG-Vereinbarkeiten und Engagementerfolge.

Nachhaltige Anleger müssen sich entscheiden, wie wichtig die jeweiligen Kriterien für sie sind. Ich nutze Nachhaltigkeitskriterien nicht nur für das Reporting, sondern auch für mein regelgebundenes Risikomanagement. Das heißt, dass ich Wertpapiere verkaufe, wenn ESG- oder SDG-Anforderungen nicht mehr erfüllt werden.

Die von mir genutzten ESG-Ratings messen Umwelt-, Sozial- und Unternehmensführungsrisiken. Diese Risiken sind heute schon wichtig und werden künftig noch wichtiger, wie man zum Beispiel an Greenwashing- und Reputationsrisiken sehen kann. Deshalb sollten sie in keinem Risikomanagement fehlen. SDG-Anforderungserfüllung ist hingegen nur für Anleger relevant, denen wichtig ist, wie nachhaltig die Produkte und Services ihrer Investments sind.

Stimmrechtsausübungen und Engagement wurden bisher meistens nicht für das Risikomanagement genutzt. Das kann sich künftig jedoch ändern. Ich prüfe zum Beispiel, ob ich Aktien bei unzureichender Reaktion auf mein Engagement verkaufen sollte. Eine unzureichende Engagementreaktion von Unternehmen weist möglicherweise darauf hin, dass Unternehmen nicht auf gute Vorschläge hören und damit unnötige Risiken eingehen, die man durch Divestments vermeiden kann.

Traditionelle Geldanleger messen Risiko oft mit der Abweichung von der Soll-Allokation bzw. Benchmark. Wenn die Abweichung einen vorher definierten Grad überschreitet, müssen viele Portfolios wieder benchmarknäher ausgerichtet werden. Für nachhaltige Portfolios werden dafür auch nachhaltige Indizes als Benchmark genutzt. Wie oben erläutert, können Nachhaltigkeitsanforderungen aber sehr individuell sein und es gibt meiner Ansicht nach viel zu wenige strenge nachhaltige Benchmarks. Wenn man besonders nachhaltig anlegen möchte, muss man dementsprechend höhere statt niedrigere Benchmarkabweichungen (Tracking Error) haben bzw. sollte ganz auf Tracking Error Kennzahlen verzichten.

Nachhaltigkeit kann also sowohl zu neuen Risikokennzahlen führen als auch alte in Frage stellen und damit auch zu einem erheblich anderen Risikomanagement führen.

Nachhaltige Geldanlage – Zusammenfassung und Ausblick: Viel mehr Individualität?

Individuelle Nachhaltigkeitsanforderungen spielen eine sehr wichtige Rolle für die Allokation auf Anlagesegmente, die Manager- bzw. Fondsselektion, die Positionsselektion und auch das Risikomanagement. Strenge Nachhaltigkeit kann zu stärkeren Unterschieden zwischen Geldanlagemandaten und radikalen Änderungen gegenüber traditionellen Mandaten führen: Geringere Diversifikation über Anlageklassen, mehr illiquide Investments für Großanleger, mehr Projektfinanzierungen, mehr aktive statt passive Mandate, erheblich höhere Konzentration innerhalb der Anlagesegmente und ein anderes Risikomanagement mit zusätzlichen Kennzahlen und erheblich geringerer Benchmarkorientierung.

Manche Analysten meinen, nachhaltige Geldanlage führt zu höheren Risiken, höheren Kosten und niedrigeren Renditen. Andere erwarten zukünftig überproportional hohe Anlagen in nachhaltige Investments. Das sollte zu einer besseren Performance solcher Investments führen. Meine Einstellung: Ich versuche so nachhaltig wie möglich zu investieren und erwarte dafür mittelfristig eine marktübliche Rendite mit niedrigeren Risiken im Vergleich zu traditionellen Investments.

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Achtung: Werbung für meinen Fonds

Mein Fonds (Art. 9) ist auf soziale SDGs fokussiert. Ich nutze separate E-, S- und G-Best-in-Universe-Mindestratings sowie ein breites Aktionärsengagement bei derzeit 27 von 30 Unternehmen: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T oder Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds

Skilled fund managers: illustrated with woman by Gerd Altman from Pixabay

Skilled fund managers – Researchpost #155

Skilled fund managers: 22x new research on skyscrapers, cryptos, ESG-HR, regulation, ratings, fund names, AI ESG Tools, carbon credits and accounting, impact funds, voting, Chat GPT, listed real estate, and fintechs (# shows the SSRN full paper downloads as of Dec. 7th, 2023):

Social and ecological research

Skyscaper impact: The Skyscraper Revolution: Global Economic Development and Land Savings by Gabriel M. Ahlfeldt, Nathaniel Baum-Snow, and Remi Jedwab as of Nov. 30th, 2023 (#20): “Our comprehensive examination of 12,877 cities worldwide from 1975 to 2015 reveals that the construction of tall buildings driven by reductions in the costs of height has allowed cities to accommodate greater populations on less land. … one-third of the aggregate population in cities of over 2 million people in the developing world, and 20% for all cities, is now accommodated because of the tall buildings constructed in these cities since 1975. Moreover, the largest cities would cover almost 30% more land without these buildings, and almost 20% across all cities. …. Given the gap between actual and potential building heights we calculate for each city in our data, only about one-quarter of the potential welfare gains and land value losses from heights have been realized, with per-capita welfare gains of 5.9% and 3.1% available by eliminating height regulations in developed and developing economies, respectively. As the cost of building tall structures decreases with technical progress, such potential for welfare gains will only increase into the future. … in most cities it is in landowners’ interest to maintain regulatory regimes that limit tall building construction, … benefits may be greatest for those who would move into the city with the new construction to take advantage of the higher real wages and lower commuting costs“ (p. 47).

Hot cryptos: Cryptocarbon: How Much Is the Corrective Tax? by Shafik Hebous and Nate Vernon from the International Monetary Fund as of Nov. 28th, 2023 (#14): “We estimate that the global demand for electricity by crypto miners reached that of Australia or Spain, resulting in 0.33% of global CO2 emissions in 2022. Projections suggest sustained future electricity demand and indicate further increases in CO2 emissions if crypto prices significantly increase and the energy efficiency of mining hardware is low. To address global warming, we estimate the corrective excise on the electricity used by crypto miners to be USD 0.045 per kWh, on average. Considering also air pollution costs raises the tax to USD 0.087 per kWh“ (abstract).  

ESG attracts employees: Polarizing Corporations: Does Talent Flow to “Good’’ Firms? by Emanuele Colonnelli, Timothy McQuade, Gabriel Ramos, Thomas Rauter, and Olivia Xiong as of Nov. 30th, 2023 (#48): “Using Brazil as our setting, we make two primary contributions. First, in partnership with Brazil’s premier job platform, we design a nondeceptive incentivized field experiment to estimate job-seekers’ preferences to work for socially responsible firms. We find that, on average, job-seekers place a value on ESG signals equivalent to about 10% of the average wage. … Quantitatively, skilled workers value firm ESG activities substantially more than unskilled workers. … results indicate that ESG increases worker utility relative to the baseline economy without ESG. The reallocation of labor in the economy with ESG improves assortative matching and yields an increase in total output. Moreover, skilled workers benefit the most from the introduction of ESG, ultimately increasing wage differentials between skilled and unskilled workers“ (p. 32). My comment: see HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)

Always greenwashing: Can Investors Curb Greenwashing? Fanny Cartellier, Peter Tankov, and Olivier David Zerbib as of Dec. 1st, 2023 (#40): “… we show that companies greenwash all the time as long as the environmental score is not too high relative to the company’s fundamental environmental value. The tolerable deviation increases with investors’ pro-environmental preferences and decreases with their penalization. Moreover, the greenwashing effort is all the more pronounced the higher the pro-environmental preferences, the lower the disclosure intensity, and the lower the marginal unit cost of greenwashing. In particular, we show that beyond a certain horizon, on average, companies always greenwash“ (p. 31).

Insufficient ESG regulation? ESG Demand-Side Regulation – Governing the Shareholders by Thilo Kuntz as of Nov. 30th, 2023 (#45): “Instead of addressing the corporate board and its international equivalents as a supplier of ESG-friendly management, demand-side regulation targets investors and shareholders. It comes in two basic flavors, indirect and direct demand-side regulation. Whereas the first attempts to let only those retail investors become stockholders or fund members who already espouse the correct beliefs and attitudes, the latter pushes professional market participants towards ESG through a double commitment, that is, to the public at large via disclosure and to individual investors through pre-contractual information. .. Judging from extant empirical studies, indirect demand-side regulation in its current form will change the equation only slightly. … for most retail investors, including adherents to ESG, .. beliefs and attitudes seem to lie more on the side of monetary gains“ (p. 49/50).

Big bank climate deficits: An examination of net-zero commitments by the world’s largest banks by Carlo Di Maio, Maria Dimitropoulou, Zoe Lola Farkas, Sem Houben, Georgia Lialiouti, Katharina Plavec, Raphaël Poignet, Eline Elisabeth, and Maria Verhoeff from the European Central Bank as of Nov. 29th, 2023 (#25): “We examined the net-zero commitments made by Global Systemically Important Banks (G-SIBs). In recent years, large banks have significantly increased their ambition and now disclose more details regarding their net-zero targets. … The paper … identifies and discusses a number of observations, such as the significant differences in sectoral targets used despite many banks sharing the same goal, the widespread use of caveats, the missing clarity regarding exposures to carbon-intensive sectors, the lack of clarity of “green financing” goals, and the reliance on carbon offsets by some institutions. The identified issues may impact banks’ reputation and litigation risk and risk management” (abstract).

ESG investment research (Skilled fund managers)

Good fund classification: Identifying Funds’ Sustainability Goals with AI: Financial, Categorical Morality, and Impact by Keer Yang and Ayako Yasuda as of Nov. 30ths, 2023 (#23): “… developing a supervised machine-learning model-based method that classifies investment managers’ stated goals on sustainability into three distinct objectives: financial value, categorical morality, and impact. This is achieved by evaluating two dimensions of investor preferences: (i) whether investors have nonpecuniary preferences or not (value vs. values) and (ii) whether investors have ex ante, categorical moral preferences or ex post, consequentialist impact preferences. … Among the funds identified as sustainable by Morningstar, 54% state they incorporate ESG to enhance financial performance, while 39% practice categorical morality via exclusion and only 33% state they seek to generate impact. Stated goals meaningfully correlate with how the funds are managed. Financially motivated funds systematically hold stocks with high MSCI ESG ratings relative to industry peers, which is consistent with ESG risk management. Morally motivated funds categorically tilt away from companies in controversial industries (e.g., mining), but are otherwise insensitive to relative ESG ratings. Impact funds hold stocks with lower ESG performance than the others, which is consistent with them engaging with laggard firms to generate positive impact. Impact funds are also more likely to support social and environmental shareholder proposals. Hybrid funds are common. Funds combining financial and moral goals are the largest category and are growing the fastest” (p. 37/38). My comment: My fund may be unique: It holds stocks with high ESG ratings, is morally motivated and tries to achieve impact by engaging with the most sustainable companies.

ESG ratings explanations: Bridging the Gap in ESG Measurement: Using NLP to Quantify Environmental, Social, and Governance Communication by Tobias Schimanski, Andrin Reding, Nico Reding, Julia Bingler, Mathias Kraus, and Markus Leippold as of Nov. 30th, 2023 (#345): “… we propose and validate a new set of NLP models to assess textual disclosures toward all three subdomains … First, we use our corpus of over 13.8 million text samples from corporate reports and news to pre-train new specific E, S, and G models. Second, we create three 2k datasets to create classifiers that detect E, S, and G texts in corporate disclosures. Third, we validate our model by showcasing that the communication patterns detected by the models can effectively explain variations in ESG ratings” (abstract). My comments: I selected my ESG ratings agency (also) because of its AI capabilities

AI ESG Tools: Artificial Intelligence and Environmental Social Governance: An Exploratory Landscape of AI Toolkit by Nicola Cucari, Giulia Nevi, Francesco Laviola, and Luca Barbagli as of Nov. 29th, 2023 (#35): “This paper presents an initial mapping of AI tools supporting ESG pillars. Through the case study method, 32 companies and tools supporting environmental social governance (ESG) management were investigated, highlighting which of the different AI systems they use and enabling the design of the new AI-ESG ecosystem” (abstract).

Cheaper green loans: Does mandatory sustainability reporting decrease loan costs? by Katrin Hummel and Dominik Jobst as of Dec. 1st, 2023 (#31): “We focus on the passage of the NFRD, the first EU-wide sustainability reporting mandate. Using a sample of global loan deals from 2010 to 2019, we begin our analysis by documenting a negative relationship between borrowers’ levels of sustainability performance and loan costs. … In our main analysis, we find that loan costs significantly decrease among borrowers within the scope of the reporting mandate. This decrease is concentrated in firms with better sustainability performance. In a further analysis, we show that this effect is stronger if the majority of lead lenders are also operating in the EU and are thus potentially also subject to the reporting mandate themselves “ (p. 26/27).

Widepread ESG downgrade costs: Do debt investors care about ESG ratings? by Kornelia Fabisik, Michael Ryf, Larissa Schäfer, and Sascha Steffen from the European Central Bank as of Nov. 27th, 2023 (#53): “We use a major ESG rating agency‘s methodology change to firms’ ESG ratings to study its effect on the spreads of syndicated U.S. corporate loans traded in the secondary market. We find that loan spreads temporarily increase by 10% relative to the average spread of 4%. … we find some evidence that the effect is stronger for smaller and financially constrained firms, but not for younger firms. We also find that investors penalize firms for which ESG-related aspects seem to play a more prominent role. Lastly, when we explore potential spillover effects on private firms that are in the same industry as the downgraded firms, we find evidence supporting this channel. We find that private firms in highly affected industries face higher loan spreads after ESG downgrades of public firms in the same industry, suggesting that investors of private (unrated) firms also price in ESG downgrades of public firms“ (p. 28).

High ESG risks: Measuring ESG risk premia with contingent claims by Ioannis Michopoulos, Alexandros Bougias, Athanasios Episcopos and Efstratios Livanis as of Nov. 9th, 2023 (#109): “We find a statistically significant relationship between the ESG score and the volatility and drift terms of the asset process, suggesting that ESG factors have a structural effect on the firm value. We establish a mapping between ESG scores and the cost of equity and debt as implied by firm’s contingent claims, and derive estimates of the ESG risk premium across different ESG and leverage profiles. In addition, we break down the ESG risk premia by industry, and demonstrate how practitioners can adjust the weighed average cost of capital of ESG laggard firms for valuation and decision making purposes“ (abstract). … “We find that ESG risk has a large effect on the concluded cost of capital. Assuming zero ESG risk premia during the valuation process could severely underestimate the risky discount rate of ESG laggard firms, leading to distorted investment and capital budget decisions, as well as an incorrect fair value measurement of firm’s equity and related corporate securities” (p. 20).

ESG fund benefits: Renaming with purpose: Investor response and fund manager behaviour after fund ESG-renaming by Kayshani Gibbon, Jeroen Derwall, Dirk Gerritsen, and Kees Koedijk as of Nov. 27th, 2023 (#42): “Using a unique sample of 740 ESG-related name changes …. Our most conservative estimates … suggest that mutual funds domiciled in Europe may enjoy greater average flows by renaming … we provide consistent evidence that mutual funds improve the ESG performance and reduce the ESG risks of their portfolios after signalling ESG repurposing through fund name changes. Finally, we find that renaming has no material impact on funds’ turnover rates or on the fees charged to investors“ (p. 15/16). My comment: Maybe I should have integrated ESG in my FutureVest Equity Sustainable Develeopment Goals fund name (ESG and more see in the just updated 31pager 231120_Nachhaltigkeitsinvestmentpolitik_der_Soehnholz_Asset_Management_GmbH).

Green for the rich? Rich and Responsible: Is ESG a Luxury Good? Steffen Andersen, Dmitry Chebotarev, Fatima Zahra Filali Adib, and Kasper Meisner Nielsen as of Nov. 27th, 2023 (#91): “… we examine the rise of responsible investing among retail investors in Denmark. … from 2019 to 2021. The fraction of retail investors that hold socially responsible mutual funds in their portfolios has increased from less than 0.5% to 6.8%, equivalent to an increase in the portfolio weight on socially responsible mutual funds for all investors from 0.1% to 1.6%. At the same time, the fraction of investors holding green stock has increased from 8.7% to 15.9%, equivalent to an increase in portfolio weight on green stocks from 2.4% to 3.3%. Collectively, the rise of sustainable investments implies that more than 4.9% of the risky assets are allocated to sustainable investments by 2021. The rise in responsible investments is concentrated among wealthy investors. Almost 13% of investors in the top decile of financial wealth holds socially responsible mutual funds and one out of four holds green stocks. Collectively, the portfolio weight on socially responsible assets among wealth investors is 4.8% in 2021. … Using investors’ charitable donations prior to inheritance, we document that the warm glow effect partially explains the documented results“ (p. 20/21).

Emissions control: Carbon Accounting Quality: Measurement and the Role of Assurance by Brandon Gipper, Fiona Sequeira, and Shawn X. Shi as of Nov. 29th, 2023 (#135): “We document a positive association between (Sö: third party) assurance and carbon accounting quality for both U.S. and non-U.S. countries. This relation is stronger when assurance is more thorough. We also document how assurance improves carbon accounting quality: first, assurors identify issues in the carbon accounting system and communicate them to the firm; subsequently, firms take remedial actions, resulting in updated disclosures, faster release of emissions information, and more positive perceptions of emissions figures by reporting firms. …. our findings suggest that even limited assurance can shape carbon accounting quality“ (p. 34).

Impact investment research (Skilled fund managers)

Carbon credit differences: Paying for Quality State of the Voluntary Carbon Markets 2023 by Stephen Donofrio Managing Director Alex Procton from Ecosystem Marketplace as of Oct. 10th, 2023: “Average voluntary carbon markets (VCM) … volume of VCM credits traded dropped by 51 percent, the average price per credit skyrocketed, rising by 82 percent from $4.04 per ton in 2021 to $7.37 per ton in 2022. This price hike allowed the overall value of the VCM to hold relatively steady in 2022, at just under $2 billion. To date in 2023, the average credit price is down slightly from 2022, to $6.97 per ton. … Nature-based projects, including Forestry and Land Use and Agriculture projects, made up almost half of the market share at 46 percent. … Credits that certified additional robust environmental and social co-benefits “beyond carbon” had a significant price premium. Credits from projects with at least one co-benefit certification had a 78 percent price premium in 2022, compared to projects without any co-benefit certification. … Projects working towards the UN Sustainable Development Goals (SDGs) also demonstrated a substantial price premium at 86 percent higher prices than projects not associated with SDGs … Newer credits are attracting higher prices” (p. 6).

Unsuccessful voting: Minerva Briefing 2023 Proxy Season Review as of November 2023: “Most resolutions are proposed by management (96.90% overall) … In 2023, there were 621 proposals from shareholders, mostly in the US (530), and mostly Social- and Governance-related (259 and 184 respectively). However, an increasing number of proposals are also being put forward on Environmental issues. The higher number of shareholder proposals in the US may reflect more supportive regulations on the filing of proposals and the absence of an independent national corporate governance code, as there is in the UK. Although well-crafted shareholder proposals can receive majority support, the overall proportion doing so has decreased (5.80% in 2023 vs. 11.56% in 2022), partly dragged down by ‘anti-ESG’ proposals” (p. 3/4). My comment: 621*6%=37 majority supported shareholder proposals including non ESG-topics seems to a very low number compared to the overall marketing noise asset managers produce regarding their good impact on listed companies. Direct shareholder engagement with companies seems to have more potential for change. My respective policy see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Good impact returns: Impact investment funds and the equity market: correlation, performance, risk and diversification effects – A global overview by Lucky Pane as of July 2021: “Impact investing funds from the twelve economies reported an average return of 10.7% over the period 2004-2019, higher than the average return of the MSCI World Equity Index (8.7%). … Negative/low correlations were observed between impact investment funds and traditional assets of the following countries: Germany, Australia, UK, Brazil, China, Poland, South Korea and Turkey” (p. 35/36). My comment: Unfortunately, there are very few (liquid) impact investing studies. A study including 2022 and 2023 would come to less favorable return conclusions, though.

Other investment research

Skilled fund managers (1): Sharpening the Sharpe Style Analysis with Machine-Learning ― Evidence from Manager Style-Shifting Skill of Mutual Funds by George J. Jiang, Bing Liang, and Huacheng Zhang as of Dec. 3rd, 2023 (#38): “Nine out of 32 indexes are selected as the proxy of style set in the mutual fund industry. We … find that most active equity funds are multi-style funds and more than 85% of them allocate capitals among three to six styles. Single-style funds count less than 3% of the total number of funds. We further find that around 3% of funds shift their investment styles in each quarter and each shifting fund switches styles three times over the whole period … We find that shifting funds perform better in the post-shifting quarter than in the pre-shifting quarter in terms of both total returns and style-adjusted returns, but we do not find performance improvement by non-shifting funds. We further find that style-shifting decision is positively related to future fund returns. … We find that style-shifting in the mutual fund industry is mostly driven by fund managers’ expertise in the new style“ (p. 42).

Skilled fund managers (2): Do mutual fund perform worse when they get larger? Anticipated flow vs unanticipated flow by Yiming Zhang as of Nov. 14th, 2023 (#17): “… I provide empirical evidence from a novel setting that supports the decreasing returns to scale in active mutual funds. My identification strategy relies on the nature of Morningstar Rating, which has a large impact on fund flow. … I find that for each 1% of inflow (outflow), the return will decrease (increase) by around 0.6% on average in the next month, and the return will decrease (increase) by around 0.2% on average in the next month. … I find that for experienced manager, they make more new investment after the flow shock and their performance does not decrease. For inexperienced manager, it is quite the opposite. These results indicate that if fund managers can anticipate the 36th month flow shock, they will try to generate more investment ideas, and execute them when the flow arrives“ (p. 22/23).

Skilled fund managers (3)? Can ChatGPT assist in picking stocks? Matthias Pelster and Joel Val as of Nov. 29th, 2023 (#199): “… we find that ratings of stocks by ChatGPT positively correlate to future (out-of-sample) stock returns. … ChatGPT seems to be able to successfully identify stocks that yield superior performance over the next month. ChatGPT-4 seems to have some ability to evaluate news information and summarize its evaluation into a simple score. We find clear evidence that ChatGPT is able to distinguish between positive and negative news events, and adjusts its recommendation following negative news” (p. 11). My comment: Interesting, because most active fund managers underperform their benchmarks most of the time, but I am skeptical regarding AI investment benefits see How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Listed real estate: Drivers of listed and unlisted real estate returns by Michael Chin and Pavol Povala as of Nov. 2nd, 2023 (#25): “The differences between listed and unlisted real estate appear to reduce over the longer term, where the return correlations between the two segments increases with horizon. In addition, the correlations with the broader equity market are lower at longer horizons for both real estate segments. … We find that both segments of real estate hedge inflation risk more than the aggregate equity market, and that listed real estate has a high exposure to transitory risk premium shocks“ (abstract). My comment: I started “my” first listed real estate fund more than 10 years ago and still like the market segment despite all of its problems

Fintech success factors: Fintech Startups in Germany: Firm Failure, Funding Success, and Innovation Capacity by Lars Hornuf and Matthias Mattusch as of Nov. 29th, 2023 (#75): “ … using a hand-collected dataset of 892 German fintechs founded between 2000 and 2021 … We find that founders with a business degree and entrepreneurial experience have a better chance of obtaining funding, while founder teams with science, technology, engineering, or mathematics backgrounds file more patents. Early third-party endorsements and foreign partnerships substantially increases firm survival. … Fintechs focusing on business-to-business models and which position themselves as technical providers have proven more effective. Fintechs competing in segments traditionally attributed to banks are generally less successful and less innovative.” (abstract).

Skilled fund managers (?) 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 26 of 30 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

ESG and Impact: Illuminaed mushroom as illustration

ESG and impact: Researchpost #154

ESG and impact: 12x new research on AI, poverty, crime, green demand, ESG risks, brown lending, green agency issues, voting, engagement, impact investing, CEO compensation, small caps etc.  (# shows the number of SSRN downloads as of Nov. 30th, 2023)

Social and ecological research

AI job-booster: New technologies and jobs in Europe by Stefania Albanesi, António Dias da Silva, Juan F. Jimeno, Ana Lamo and Alena Wabitsch as of Aug. 24th, 2023 (#111): “… we … find that AI-enabled automation in Europe is associated with employment increases. This positive relationship is mostly driven by occupations with relatively higher proportion of skilled workers … the magnitude of the estimates largely varies across countries, possibly reflecting different economics structures, such as the pace of technology diffusion and education, but also to the level of product market regulation (competition) and employment protection laws. … wages do not appear to be affected in a statistically significant manner from software exposure“ (p. 28).

Climate-induced poverty: Does Global Warming Worsen Poverty and Inequality? An Updated Review by Hai-Anh H. Dang, Stephane Hallegatte, and Trong-Anh Trinh from the World Bank as of Mov. 4th, 2023 (#38): “Our findings suggest that while studies generally find negative impacts of climate change on poverty, especially for poorer countries, there is less agreement on its impacts on inequality. … Our results suggest that temperature change has larger impacts over the short-term than over the long-term and more impacts on chronic poverty than transient poverty” (p. 32).

Refugee crimes: Do Refugees Impact Crime? Causal Evidence From Large-Scale Refugee Immigration to Germany by Martin Lange and Katrin Sommerfeld as of Nov. 14th, 2023 (#21): “Our results indicate that crime rates were not affected during the year of refugee arrival, but there was an increase in crime rates one year later. This lagged effect is small per refugee but large in absolute terms and is strongest for property and violent crimes. The crime effects are robust across specifications and in line with increased suspect rates for offenders from refugees’ origin countries. Yet, we find some indication of over-reporting“ (abstract).

ESG investment research (ESG and impact)

Green demand: Responsible Consumption, Demand Elasticity, and the Green Premium by Xuhui Chen, Lorenzo Garlappi, and Ali Lazrak as of Nov. 27th, 2023 (#122): “… decreasing product price are signals of high price competition and hence high demand elasticity. We sort firms into portfolios based on their demand elasticity and their ESG score. We refer the spread return on this portfolio as the Green Minus Brown (GMB) spread, or green premium” (p. 3). … “… when consumers have a “green” bias, green firms producing high demand elasticity goods are riskier than brown firms producing high demand elasticity products. The riskiness of these firms flips for firms that produce low demand elasticity goods. …. we find that the green-minus-brown (GMB) spread is increasing in the price elasticity of demand. Specifically, the annual spread is 2.6% and insignificant in the bottom elasticity tercile and 11.7% and significant in the top tercile. … we show that the cumulative positive return spread of green vs. brown stocks over the last decade is mainly attributed to high-demand-elasticity stocks, with low demand elasticity stocks earning an insignificant or negative spread“ (p. 32).

Risky calls: ESG risk by Najah Attig and Abdlmutaleb Boshanna as of Oct. 5th, 2022 (#62): “… using Natural Language Processing, we measure firm-level ESGR (Sö: ESG risk) faced by US firms, as reflected in the discussion of ESG issues associated with words capturing risk and uncertainty in the transcripts of firms’ earning calls. We first validate ESGR as measure of risk by documenting its positive association with the volatility of stock returns and CSR concerns. We then show that ESGR is associated with a deterioration in corporate value … We show also that ESGR bears negatively on conference call short-term returns during the COVID-19 pandemic“ (p. 31). My comment: I try to only invest in the best E/S/G rated companies, see e.g. Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)

Retail ESG: Better Environmental Performance Attracts the Retail Investor Crowd during Crisis by Anil Gautam and Grace Lepone as of Nov. 24th, 2023 (#12): “… we use the Robinhood data set to examine the firm size-adjusted changes in investor numbers. We find that investors moved away from holding securities with low (Sö: ESG) scores following the COVID-19 pandemic shock. The observation holds for the bottom quartile of securities sorted by ESG, E, emissions, corporate social responsibility (CSR), human rights, management, shareholder and community scores. … No significant reaction to S and G scores is observed for either quartile“ (p. 16).

Green bank disclosure: Do banks practice what they preach? Brown lending and environmental disclosure in the euro area by Leonardo Gambacorta, Salvatore Polizzi, Alessio Reghezza, and Enzo Scannella from the ECB as of Nov. 14th, 2023 (#21): “… we found that banks that provide higher levels of environmental disclosure lend more to low polluting firms and less to highly polluting firms. … we found that banks that use a more negative tone (i.e. those that are more aware and genuinely concerned about environmental risks and climate change) lend less to brown firms, while banks that use a more positive tone (i.e. those that are less aware and concerned about environmental risks) tend to finance more brown firms. Therefore, we show that the tone of disclosures plays a crucial role in assessing whether a bank is engaging in window dressing or its willingness to inform stakeholders and investors on environmental matters results in actual behaviour to tackle environmental risks by reducing brown lending“ (p. 21).

Good transparency? The Eco-Agency Problem and Sustainable Investment by Moran Ofir and Tal Elmakiess as of Nov. 28th, 2023 (#10): “… we first define the eco-agency problem—the special conflict of interest between the corporate officers who focus on short-term profitability and the other stakeholders who seek long-term profitability and sustainability—and then discuss existing coping measures, such as green bonds, CoCo bonds, and ESG compensation metrics. To assess the extent of the eco-agency problem, we have conducted an experimental study of both professional and nonprofessional investors. According to our findings, both groups exhibit strong and significant preferences for sustainable investments. Revealing the preferences of investors towards sustainability can inspire corporate officers to embrace their role as sustainability advocates, encouraging them to align their decisions with investor preferences, and can thus drive positive change both within their organizations and across industries. … By embracing transparency as a strategic advantage, corporations can transcend traditional reporting boundaries, heralding a new era in which investors implement their ecological preferences in the capital market pricing mechanism” (abstract). My comment: My shareholder engagement strategy seems to focus on the right topics, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Impact investing research (ESG and impact)

Voting and engagement approaches: UK Asset Owner Stewardship Review 2023: Understanding the Degree & Distribution of Asset Manager Voting Alignment by Andreas Hoepner as of Nov. 17th, 2023 (#33): “… Empirically, we observe misalignment between UK asset owners and asset managers to varying degrees. Specifically, misalignment is more pronounced (i) in recent years, (ii) for shareholder resolutions than for management resolutions, (iii) for issuers in the Americas compared with European issuers, (iv) and, on average, for non-participating than for participating asset managers (Sö regarding the survey). … (a) Only very selected asset managers publicly reason like asset owners. (b) Some asset managers somehow see voting and ESG engagement as mutually exclusive and appear to fear the loss of access to management if they voted against management. (c) Among asset managers, there appears to be a substantial divergence as to their interpretation of shareholders’ and even society’s interests. Some asset managers are aligned with asset owners, while others have fundamentally different views that may be consistent with short term commercial interest but do not reflect scientific evidence. Third, we reviewed the ESG Engagement success across all relevant issuers, which revealed three different engagement process types. Type 1 is “textbook style” persistent, long duration, large scale engagement with considerable progress. Type 2 appears to be “quick fix style” engagements which are characterised by less consistency, shorter duration, and more mixed progress. Type 3 engagements are “jumping the bandwagon style” as they appear to target only firms that already have been improved by others” (abstract). My comment: My approach and other potential shareholder engagement strategies see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) and DVFA-Fachausschuss Impact veröffentlicht Leitfaden Impact Investing – DVFA e. V. – Der Berufsverband der Investment Professionals

Risky impact? What Do Impact Investors Do Differently? by Shawn Cole, Leslie Jeng, Josh Lerner, Natalia Rigol, and Benjamin N. Roth as of Nov. 16th, 2023 (#340): “In recent years, impact investors – private investors who seek to generate simultaneously financial and social returns – have attracted intense interest and controversy. … we document that they are more likely to invest in disadvantaged areas and nascent industries and exhibit more risk tolerance and patience. We then examine the degree to which impact investors expand the financing frontier, versus investing in companies that could have attracted traditional private financing. … we find limited support for the assertion that impact investors expand the financing frontier, either in the deal-selection stage or the post-investment stage“ (abstract).

Other investment research

Lower-paid CEOs? CEO Compensation: Evidence From the Field by Alex Edmans, Tom Gosling, and Dirk Jenter as of Oct. 13th, 2023 (#3130): “We survey directors and investors on the objectives, constraints, and determinants of CEO pay. We find .. that pay matters not to finance consumption but to address CEOs’ fairness concerns. 67% of directors would sacrifice shareholder value to avoid controversy, leading to lower levels and one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Intrinsic motivation and reputation are seen as stronger motivators than incentive pay“ (abstract). My comment: Within my shareholder engagement activities, I ask to disclose the CEO-medium employee pay ratio so that other interested parties can engage with the companies to reduce this typically vey large difference

Better big or small? The Size Premium in a Granular Economy by Logan P. Emery and Joren Koëter as of Nov. 21st., 2023 (#81): “… Our analysis provides robust evidence that the expected size premium increases during periods of higher stock market concentration. … we find that smaller firms receive less attention, are less likely to complete a seasoned equity offering, and have higher fundamental volatility during periods of higher stock market concentration. Moreover, our results occur predominantly among firms in industries with a greater dependence on external equity financing, or for firms with relatively low book-to-market ratios (i.e., growth firms). … we find that the expected size premium weakens following idiosyncratic shocks to the largest firms in the stock market” (p. 32).

ESG and Impact + Engagement 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 25 of 30 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Responsible Derivatives illustration shows manager juggler

Responsible derivatives? Researchpost #150

Responsible derivatives: 10x new research on migration, ESG labels, biodiversity measurement, effective shareholder voting, responsible investing mandates, green derivatives, structured products, stock market models, IPOs and alternative investments (# shows the number of full paper SSRN downloads as of Nov. 2nd, 2023)

Social and ecological research (responsible derivatives)

Migration policy backlash: The Effect of Foreign Aid on Migration: Global Micro Evidence from World Bank Projects by Andreas Fuchs, Andre Groeger, Tobias Heidland and Lukas Wellner as of Oct. 2023: “Our short-term results indicate that the mere announcement of a World Bank aid project significantly decreases migration preferences. We find similar effects for project disbursements, which also reduce asylum seeker flows to the OECD in the short run. This reduction seems related to enhanced optimism about the economic prospects in aid recipient provinces and improved confidence in national institutions. In the longer run, aid projects increase incomes and alleviate poverty. The negative effect of aid on asylum seeker flows fades out, and regular migration increases. … There is no evidence in our study that targeting the “root causes” of migration through aid on average increases irregular migration or asylum seeker numbers. … In the short run, aid projects reduce migration preferences and asylum seeker flows to the OECD from Latin America, MENA, and non-fragile Sub-Saharan African countries. However, we do not find a significant effect in fragile countries of Sub-Saharan Africa, which are an important source of irregular migration to Europe. For policymakers, a key takeaway from our study is that aid projects do not keep people from migrating from the 37 most hostile environments, but they can be effective in more stable environments” (p. 37/38).

Sustainable investing research (responsible derivatives)

Rating beats label: Talk vs. Walk: Lessons from Silent Sustainable Investing of Mutual Funds by Dimitrios Gounopoulos, Haoran Wu, and Binru Zhao as of Oct. 26th, 2023 (#81): “… in the Morningstar fund sustainability rating landscape, most funds with top ratings do not self-label as ESG funds (“silent” sustainable investing). … We find that investors tend to overemphasize ESG labels and often overlook sustainability rating signals in the market. More importantly, we show that “silent” funds with high sustainability ratings have comparable return performance to ESG funds and that high sustainability ratings have a stronger influence on mitigating fund risks than the ESG label” (p. 33/34). My comment: In general, I agree. But the type of ESG rating used is also very important. Watch out for my next opinion blogpost on Apple, Amazon, Alphabet etc. and their ESG-ratings

Biodiversity confusion: Critical review of methods and models for biodiversity impact assessment and their applicability in the LCA context by Mattia Damiani, Taija Sinkko, Carla Caldeira, Davide Tosches, Marine Robuchon, and Serenella Sala as of Nov. 17th, 2022 (#139): “… The five main direct drivers of biodiversity loss are climate change, pollution, land and water use, overexploitation of resources and the spread of invasive species. …  this article aims to critically analyse all methods for biodiversity impact assessment … 54 methods were reviewed and 18 were selected for a detailed analysis … There is currently no method that takes into account all five main drivers of biodiversity loss” (abstract).

Explain to change: Voting Rationales by Roni Michaely, Silvina Rubio, and Irene Yi as of Aug. 16th, 2023 (#279): “…studying voting rationales of institutional investors from across the world, for votes cast in US companies’ annual shareholder meetings between July 2013 and June 2021. … institutional investors vote against directors mainly because of (lack of) independence and board diversity. We also find evidence of some well-known reasons for opposing directors, such as tenure, busyness, or firm governance. Institutional investors are increasingly voting against directors due to concerns over environmental and social issues. Our results indicate that voting rationales are unlikely to capture proxy advisors’ rationales, but rather, the independent assessment of institutional investors. … We find that companies that receive a higher proportion of voting rationales related to board diversity (or alternatively, excessive tenure or busy directors) increase the fraction of females on board in the following year (reduce average tenure or director busyness), and the results are driven by companies that receive high shareholder dissent. … our results suggest that disclosure of voting rationales is an effective, low-cost strategy that institutional investors can use to improve corporate governance in their portfolio companies“ (p. 31/32).

Impact impact? Evaluating the Impact of Portfolio Mandates by Jack Favilukis, Lorenzo Garlappi, and  Raman Uppal as of Oct. 2nd, 2023 (#56): “… we examine the impact of portfolio (Sö: e.g. ESG or impact investing) mandates on the allocation of physical capital in a general-equilibrium economy with production and heterogenous investors. … we find that the effect of portfolio mandates on the allocation of physical capital across sectors can be substantial. In contrast, the impact on the equilibrium cost of capital and Sharpe ratio of firms in the two sectors remains negligible, consistent with existing evidence. Thus, a key takeaway of our analysis is that judging the effectiveness of portfolio mandates by studying their effect on the cost of capital of affected firms can be misleading: small differences in the cost of capital across sectors can be associated with significant differences in the allocation of physical capital across these sectors” (p. 31/32). My comment: With my ESG and SDG investing mandates I want to invest as responsibly as possible and hope to achieve similar performances as less responsible investments. With this approach, there is no need to try to prove lower cost of capital for responsible companies.

Responsible derivatives? Climate Risk and Financial Markets: The Case of Green Derivatives by Paolo Saguato as of Oct. 30th, 2023 (#37): “The post-2008 derivatives markets are more transparent and more collateralized than before. However, this regulatory framework might impose excessive regulatory and compliance costs to derivatives market which would undermine market incentives and hamper financial innovation in the green derivatives. … Right now, bespoke OTC sustainable derivatives are the predominant structures in the market, but as soon as green assets and sustainability benchmark standardization will become the norm, then exchange-traded green derivatives might start to develop more strongly, providing a valuable and reliable support to a green transition” (p. 23).

Other investment research

Responsible derivatives? Structured retail products: risk-sharing or risk-creation? by Otavio Bitu, Bruno Giovannetti, and Bernardo Guimaraes as of October 31, 2023 (#151): “Financial institutions have been issuing more complex structured retail products (SRPs) over time. Is risk-sharing the force behind this financial innovation? Is this innovation welfare-increasing? We propose a simple test for that. If a given type of SRP is not based on risk-sharing and pours new unbacked risk into the financial system, we should observe an unusual negative relation between risk and expected return offered to buyers across products of that type. We test this hypothesis using a sample of 1,847 SRPs and find that a relevant type of SRP (Autocallables) creates new unbacked risk” (abstract).

Irrational finance professional? Mental Models of the Stock Market by Peter Andre, Philipp Schirmer, and Johannes Wohlfart as of Oct. 31st, 2023 (#74): “Financial markets are governed by return expectations, which agents must form in light of their deeper understanding of these markets. Understanding agents’ mental models is thus critical to understanding how return expectations are formed. … We document a widespread tendency among households from the general population, retail investors, and financial professionals to draw inferences from stale news regarding future company earnings to a company’s prospective stock return, which is absent among academic experts. This striking difference in their return forecasts results from differences in agents’ understanding of financial markets. Experts’ reasoning aligns with standard asset pricing logic and a belief in efficient markets. By contrast, households and financial professionals appear to employ a naive model that directly associates higher future earnings with higher future returns, neglecting the offsetting effect of endogenous price adjustments. This non-equilibrium reasoning stems from a lack of familiarity with the concept of equilibrium rather than inattention to trading or price responses. … Our findings – that mental models differ across economic agents and that they drastically differ from standard economic theories among important groups of households and financial professionals who advise and trade for these households – are likely to have significant implications. For example, our findings can provide a new perspective on previously documented anomalies in return expectations and trading decisions” (p. 30/31).

M&A not IPO: IPOs on the decline: The role of globalization by M. Vahid Irani, Gerard Pinto, and Donghang Zhang as of Oct. 2nd, 2023 (#37): “Using the average percentage of foreign sales as a proxy for the level of globalization of the U.S. economy or a particular industry, we find that the decline in U.S. initial public offerings (IPOs), particularly small-firm IPOs, is significantly positively associated with the level of globalization at both the macroeconomy and the industry levels. We also find that increased globalization of an industry makes a U.S. private firm in the industry more likely to choose M&A sellouts over IPOs as an exit strategy”“ (abstract).

Unattractive Alternatives: Endowments in the Casino: Even the Whales Lose at the Alts Table by Richard M. Ennis as of Oct. 27th, 2023 (#516): “For more than two decades, so-called alternatives—hedge funds, private-market real estate, venture capital, leveraged buyouts, private energy, infrastructure, and private debt—have been the principal focus of institutional investors. Such investments now constitute an average of 60% of the assets of large endowments and 30% of public pension funds. … … endowments—across the board—have underperformed passive investment alternatives by economically wide margins since the GFC (Sö: Global Financial Crisis) … We observe that large endowments have recorded greater returns than smaller ones because they take greater risk (have a greater equity exposure), not as a result of their alt investing. In fact, their greater returns have occurred in spite of their heavier weighting of alt investments. Alt-investing has not been a source of diversification of stock market risk. … I estimate that institutional investors pay approximately 10 times as much for their alts as they do for traditional stock-bond strategies… despite exhibiting some skill with alts, large endowments would have been better off leaving them alone altogether” (p. 8/9). My comment: See Alternatives: Thematic replace alternative investments (prof-soehnholz.com)

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Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 27 of 28 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)