Archiv der Kategorie: Voting

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. 7^th, 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. 30^th, 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. 28^th, 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. 30^th, 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. 1^st, 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. 30^th, 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. 29^th, 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. 30^th, 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. 29^th, 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. 1^st, 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. 27^th, 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. 9^th, 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. 27^th, 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. 27^th, 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. 29^th, 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. 10^th, 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. 3^rd, 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. 14^th, 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. 29^th, 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. 2^nd, 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. 29^th, 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 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

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. 30^th, 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. 24^th, 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. 4^th, 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. 14^th, 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. 27^th, 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. 5^th, 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. 24^th, 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. 14^th, 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. 28^th, 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. 17^th, 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. 16^th, 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. 13^th, 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. 21^st., 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 companies: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

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. 2^nd, 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. 26^th, 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. 17^th, 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. 16^th, 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. 2^nd, 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. 30^th, 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. 31^st, 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. 2^nd, 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. 27^th, 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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Liquid impact advert for German investors

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Impact strategies: Researchpost 142

Impact strategies: 12x new research on AI, education, diversity, insiders, compensation, impact investing, collaborative engagement, voting and analysts by Olaf Weber and many more (#: SSRN downloads as of Sept. 7^th, 2023)

Social and ecological research (Impact strategies)

Good and bad AI: How We Learned to Stop Worrying and Love AI: Analyzing the Rapid Evolution of Generative Pre-Trained Transformer (GPT) and its Impacts on Law, Business, and Society by Scott J. Shackelford, Lawrence J. Trautman, and W. Gregory Voss as of Sept. 6^th, 2023 (#108): “There is ample reason to believe that novel AI-driven capabilities hold considerable potential to drive practical solutions to address many of the world’s major challenges such as cancer, climate change, food production, healthcare, and poverty. … Even so, there are equally significant warning signs of serious consequences, including the threat of eliminating humanity. These warnings should not be ignored“ (p. 94). My comment: For responsible investing see How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Educational tools: The Emergence of An Educational Tool Industry: Opportunities and Challenges For Innovation in Education by Dominique Foray and Julio Raffo as of May 4^th, 2023 (#16): “… an educational tool industry has emerged; that is to say a population of small firms is inventing and commercialising instruction (mainly ICT-based) technologies. … However the main commercial target of these companies is not the huge K12 public school system. This market does not satisfy most conditions for attracting and sustaining a strong entrepreneurial activity in the tool business. … But other “smaller” markets seem to be sufficiently attractive for entrepreneurs and this connection explains to a certain extent why we have observed the patent explosion and some increase in the number of firms specialised in the tool business“ (p. 19/20).

ESG investment research (Impact strategies)

Unflexible Diversity? Are Firms Sacrificing Flexibility for Diversity and Inclusion? by Hoa Briscoe-Tran as of Aug.14^th, 2023 (#181): “I analyze data from thousands of companies dating back to 2008 and find that diverse and inclusive firms (D&I firms) tend to have lower operating flexibility. Exploration of mechanisms suggest that D&I firms have lower operating flexibility due to their slower operating efficiency in their response to unexpected economic shocks“ (p. 25).

Bad competition? Competitive Pressure and ESG by Vesa Pursiainen, Hanwen Sun, and Yue Xiang as of Sept. 1^st, 2023 (#95): “… Our results suggest that a firm’s exposure to competition is negatively associated with its ESG performance. … The effect of product market competition on ESG performance is higher for firms that are more financially constrained and in more capital-intensive industries. Taken together, our findings suggest that companies face a trade-off in investing in ESG versus other investment needs …” (p. 18).

Bad insiders: Executive Ownership and Sustainability Performance by Marco Ghitti, Gianfranco Gianfrate, and Edoardo Reccagni as of Oct. 19^th, 2022 (#167): “Our results indicate that executive shareholding is negatively associated with corporate E&S (Sö: Environmental and social) performance, indicating that the pursuit of non-financial returns is penalized when executives are more financially vested in the company. … We analogously observe that inside trading intensity is inversely associated with the sustainability footprint, thus confirming that when executives’ primary focus is on financial gains, E&S activities diminish. … we use an exogenous shock in capital gains taxation that specifically affected executive ownership in US public companies. The quasi-natural experiment confirms that it is the degree of executive ownership that affects the E&S footprint“ (p. 12).

CSR compensation: Empirical Examination of the Direct and Moderating Role of Corporate Social Responsibility in Top Executive Compensation by Mahfuja Malik and Eunsup Daniel Shim as of Aug. 9^th, 2023 (#18): “Using a sample of 4,193 firm-year observations and 1,318 public U.S. firms, we find that CSR (Sö: Corporate social responsibility) performance positively moderates the relationship between firms’ total and long-term compensation, along with its direct association with CEO compensation. However, firms’ separate CSR report disclosures are not associated with CEO compensation. … we find that CSR has no moderating role in the relationship between CEO compensation and accounting-based performance. Interestingly, we find that CSR performance plays a moderating role in weakening the positive relationship between executive compensation and firm size“ (p. 18/19). My comment: see Wrong ESG bonus math? Content-Post #188 – Responsible Investment Research Blog (prof-soehnholz.com)

Costly greenwashing: Does Greenwashing Pay Off? Evidence from the Corporate Bond Market by Nazim Hussain, Shuo Wang, Qiang Wu, and Cheng (Colin) Zeng as of Sept. 7^th, 2023 (#127): “Using 3,810 public bonds issued by U.S. firms, we find a positive relationship between greenwashing and the cost of bonds. We identify the causal relation by using the Federal Trade Commission’s 2012 regulatory intervention to curb misleading environmental claims as an exogenous shock to greenwashing. We also find a more pronounced relation between greenwashing and the cost of bonds for firms whose credit rating is adjacent to the investment/speculative borderline, firms within environmentally sensitive industries, and firms with opaque information environments. Moreover, we show that greenwashing leads to higher environmental litigation costs and a higher chance of rating disagreements among credit rating agencies … “ (abstract).

Impact strategies research

Green claims: Market review of environmental impact claims of retail investment funds in Europe by Nicola Stefan Koch, David Cooke, Samia Baadj, and Maximilien Boyne from the 2 Degree Investing Initiative as of August 2023: “27% of all in scope funds were associated with environmental impact claims. No fund with an environmental impact claim could sufficiently substantiate its claim according to the updated UCPD Guidance indicating a substantial potential legal risk. … Of the environmental impact claims deemed to be false or generic, there were 3x more appearing in Art 9 fund marketing materials compared to Art 8 fund marketing materials. … Most environmental impact claims deemed false equated “company impact” with “investor impact”, most environmental impact claims deemed unclear were not substantiated by sufficient information and most environmental impact claims deemed generic were fund names including the term “impact” with insufficient additional information” (p. 3). My comment: see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Impact strategies? New bottle or new label? Distinguishing impact investing from responsible and ethical investing by Truzaar Dordi, Phoebe Stephens, Sean Geobey, and Olaf Weber as of July 27^th, 2023: “… how does the subfield of impact investing differentiate itself from more established ethical and responsible investing … Adopting a combination of bibliometric and content analyses, we identify four distinct features of impact investing – positive impact targeting, novelty of governance structures, long time horizons, and the importance of philanthropy” (abstract). … “This differs from responsible investing, which mainly relies on modern portfolio theory and capital pricing models for research …” (p. 22). My comment: see No engagement-washing! Opinion-Post #207 – Responsible Investment Research Blog (prof-soehnholz.com)

Engagement impact strategies: Tailor-to-Target: Configuring Collaborative Shareholder Engagements on Climate Change by Rieneke Slager, Kevin Chuah, Jean-Pascal Gond, Santi Furnari, and Mikael Homanen as of June 15^th, 2023: “We study collaborative shareholder engagements on climate change issues. These engagements involve coalitions of investors pursuing behind-the-scenes dialogue to encourage target firms to adopt environmental sustainability practices. … we investigate how four coalition composition levers (coalition size, shareholding stake, experience, local access) combine to enable or hinder engagement success. We find that successful coalitions use four configurations of coalition composition levers that are tailored to target firms’ financial capacity and environmental predispositions, that is, target firms’ receptivity. Unsuccessful configurations instead emphasize single levers at the expense of others. Drawing on qualitative interviews, we identify three mechanisms (synchronizing, contextualizing, overfocusing) that plausibly underly the identified configurations and provide investor coalitions with knowledge about target firms and their local contexts, thus enhancing communication and understanding between investor coalitions and target firms” (abstract).

Other investment research

Bad delegation? Voting Choice by Andrey Malenkoy and Nadya Malenko as of Aug. 27^th, 2023 (#346): “Under voting choice, investors of the fund can choose whether to delegate their votes to the fund or to exercise their voting rights themselves. … If the reason for offering voting choice is that investors have heterogeneous preferences, but investors are uninformed about the value of the proposal, then the equilibrium under voting choice is generally inefficient: it features either too little or too much delegation. … In contrast, if the reason for offering voting choice is that investors have information about the proposal that the fund manager does not have, but all investors preferences are aligned, then voting choice is efficient: the equilibrium level of delegation is the one that maximizes investor welfare. … However, if information acquisition is costly, voting choice can also lead to coordination failure: if too few votes are delegated to the fund, the fund has weak incentives to acquire information, which discourages delegation even further and may result in insufficiently informed voting outcomes“ (p. 28/29).

Analyst advantage: Behavioral Machine Learning? Computer Predictions of Corporate Earnings also Overreact by Murray Z. Frank, Jing Gao, and Keer Yang as of May 24^th, 2023 (#184): “We study the predictions of corporate earnings from several algorithms, notably linear regressions and a popular algorithm called Gradient Boosted Regression Trees (GBRT). On average, GBRT outperformed both linear regressions and human stock analysts, but it still overreacted to news and did not satisfy rational expectation as normally defined. … Human stock analysts who have been trained in machine learning methods overreact less than traditionally trained analysts. Additionally, stock analyst predictions reflect information not otherwise available to machine algorithms” (abstract).

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Active ESG share: Researchpost 136

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

Ecological and social research: Active ESG share

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

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

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

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

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

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

ESG Ratings Reearch: Active ESG Share

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

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

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

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

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

Responsible investment research: Active ESG share

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

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

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

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

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

Impact investment and shareholder engagement: Active ESG share

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

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

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

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

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

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

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

General investment research

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

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

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

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No engagement-washing! Opinionpost 207

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

Impact investing and engagement-washing

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

Limitation of shareholder voting

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

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

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

7 limitations of ecological and social shareholder engagement

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

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

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

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

ESG voting, climate WTP and more new research: Researchpost 119

ESG voting: 14x new research on corporate ESG nudges, 3x WTP for climate, ESG strategies, green bonds, greenwashing, ESG ratings, climate stress tests, bad award effects, mental accounting and PE issues (# indicates the number of SSRN downloads on March 2nd, 2023)

Social and ecological research: ESG voting

Corporate ESG nudges: Not Only for the Money: Nudging SMEs to Promote Environmental Sustainability by Manuel Grieder, Deborah Kistler, Felix Schlüter, and Jan Schmitz as of Feb. 9^th, 2023 (#36): “This paper reports the results of a field experiment in Switzerland investigating behavioral economic interventions for promoting an environmental consulting program to SMEs. … The results indicate that loss frames are not more effective than gain frames. Unlike suggested by previous approaches, appealing to the environmental benefits of sustainability measures is just as effective as underlining the financial benefits for the SMEs. Evidence from two surveys with SME decision makers corroborates this latter result: SMEs indicate that personal motivations of owners or managers and long-term environmental impact—rather than potential financial benefits—are the most important factors determining whether they are willing to implement additional environmental sustainability measures” (abstract).

Some WTP: Willingness to Pay for Clean Air: Evidence from the UK Prepared by Giorgio Maarraoui, Walid Marrouch, Faten Saliba and Ada Wossink as of Feb. 23^rd, 2023 (#10): “Our results show that 1 percent higher levels of NO2, PM10 and PM2.5 significantly decrease the odds of the log of happiness by 9, 9.5 and 10.7 percent respectively … Evaluated at the mean income level, households are willing to pay £62.5, £60 and £103 per month to abate 1 mikrogram/cubic meter of these pollutants respectively and remain equally happy, with urban dwellers paying less than this amount and highly educated individuals paying more than that (except for PM2.5)” … Our results show that 1 percent higher levels of NO2, PM10 and PM2.5 significantly decrease the odds of the log of happiness by 9, 9.5 and 10.7 percent respectively” (p. 24/25).

Low WTP: Willingness to Pay for Carbon Mitigation: Field Evidence from the Market for Carbon Offsets by Matthias Rodemeier as of Feb. 14^th, 2023 (#58): “What do markets for voluntary climate protection imply about people’s valuations of environmental protection? I study this question in a large-scale field experiment (N=255,000) with a delivery service, where customers are offered carbon offsets that compensate for emissions. … Salient information increases average WTP for carbon mitigation from zero to 16 EUR/tCO2” (abstract).

WTP nudging: Climate Change and Individual Behavior by René Bernard and Panagiota Tzamourani as of Jan. 18^th, 2023 (#113): “We implement a randomized information provision experiment on a large, representative sample of German households. Providing information on ways to reduce CO2 emissions causally increases the willingness to pay for voluntary carbon offsetting. Individuals receiving information framed as behavior of peers react economically stronger compared to those receiving information framed as scientific research. … we find about half of the sample is interested in reading and learning more about climate change … our results suggest that informing individuals of ways to combat climate change can be a powerful tool in persuading them to reduce their carbon footprint“ (p. 28).

Sustainable investing research: ESG voting

Profitable disclosure: The effects of mandatory ESG disclosure on price discovery efficiency around the world by Qiyu Zhang, Rong Ding, Ding Chen, and XiaoXiang Zhang as of Dec. 28^th, 2022 (#86): “Using data from 40 countries between 2000 and 2019 and a difference-in-difference method, we find that ESG mandatory disclosure increases firm-level stock price nonsynchronicity and timeliness of price discovery suggesting more firm-specific information is incorporated into stock price in a more timely manner. ESG mandatory disclosure improves price discovery efficiency more in countries with strong demands on ESG information and in firms with poor disclosure incentives. It also decreases the cost of equity capital, increases institutional ownership and firm valuation” (abstract).

ESG strategy returns: ESG funds and Eurosif approaches: How sustainable strategies matter by Alessandro Fenili as of Feb. 1^st, 2023 (#86): “I analyze 17’695 … funds distributed respectively in Italy for 2020 and 2021 … being an ESG fund leads to an increase in annual performance relative to the average of the total fund sample of 4.067% and 1.909%, for 2020 and 2021, respectively. Being an art. 9 fund leads to an increase in performance relative to the average of the total fund sample of 6.289% in 2020. In contrast, being an ESG fund that implements ESG integration in 2020, Engagement & voting in 2021, and 5 strategies in 2021, when comparing with other sustainable funds, leads to a decrease in performance relative to the sample average of 2.223%, 1.183%, and 2.852%, respectively” (p. 44).

Green surface bonds? Green Bonds, Empty Promises by Quinn Curtis, Mark C. Weidemaier, and Mitu Gulati as of Feb. 16^th, 2023 (#582): “We examine the legal terms in the market for green bonds … Utilizing a sample of nearly 1000 bonds over the entire history of the market and supplementing this data with interviews with over 50 market participants and policymakers, we find a concerning lack of enforceability of green promises. Moreover, these promises have been getting weaker over time. Green bonds often make vague commitments, exclude failures to live up to those commitments from default events, and disclaim an obligation to perform in other parts of the document. These shortcomings are known to market participants“ (abstract).

Greenwashing measure: Greenwashing premium by Eric Tham as of Jan. 5^th, 2023 (#120): “Greenwashing is a signalling game in which investors identify ex-ante ‘good’ and ‘bad’ firms sending news signals. … Firms greenwash if ex-ante they are in the top decile of a portfolio sorted by ESG news scores, and ex-post not in the top decile for ESG performance scores. The greenwashing premium for ESG in USA is historically not significant but episodic. The premium in 2020 was largely due to consumer at 2.9% and green firms at 4.2%. It was larger for the ‘E’ and ‘G’ than the ‘S’ pillar, except amongst brown firms” (abstract).

Costly doing good? In Search of Inclusive ESG Ratings by Pablo Vilas, Laura Andreu, and José Luis Sarto as of Dec. 17^th, 2023 (#43): “… we consider the specific capabilities of companies by creating inclusive ESG ratings which show their virtuous behaviors. … There are no significant abnormal returns when the portfolios are created on the basis of conventional ratings. However, when portfolios are created based on inclusive ratings, significantly negative abnormal returns are observed. … We show that doing good does not lead to doing well” (p. 18/19).

ESG voting issues: Corporate Democracy and the Intermediary Voting Dilemma by Jill E. Fisch and Jeff Schwartz as of Feb. 24^th, 2023 (#96): “Increasingly, however, environmental and social issues have risen to the fore. This new focus is arguably more about values than value. … because of this shift, institutional intermediaries—namely, pension and mutual fund managers—can no longer vote and engage on the affairs of their portfolio companies without seeking the input of the pension-plan participants and mutual-fund shareholders who are their beneficiaries. … At the same time, we caution against an approach in which fund managers shirk their intermediary role by implementing pass-through voting or rigidly voting in proportion to the preferences expressed by their beneficiaries. Instead, fund managers should act like elected representatives. They should continue to exercise voting power for the securities in the portfolios that they manage and should have discretion in how to incorporate the input they receive from fund beneficiaries“ (abstract). My comment: I consider shareholder engagement to be more ESG relevant than voting, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

More climate stress: Climate Risk Stress Testing: A Conceptual Review by Henk Jan Reinders, Dirk Schoenmaker, and Mathijs van Dijk as of Feb. 23^rd, 2023 (#43): “This paper analyzes the conceptual steps in Climate Risk Stress Testing (CRST), which is a tool to assess the impact of climate-related shocks on the stability of the financial system. … We find that existing CRST exercises may underestimate potential system-wide financial losses, due to their limited scope (not including all asset classes), omittance of certain types of climate shocks (such as Green Swan and Minsky-type events), incomplete modeling (lack of feedback effects), and a strong reliance on historically established relations that may not hold in the future” (abstract).

Other investing research

Bad award effects: Unwanted Attention? Negativity Bias in Mutual Fund Awards by Jerry T. Parwada and Eric K. M. Tan as of Feb. 13^th, 2023 (#25): “We identify a sample of fund managers who won the Morningstar FMOY award in the domestic stock category and the accompanying fund managers who were nominated as finalists but did not win the accolade. Despite our results showing that past performance has already been considered when shortlisting nominees for the award, we find that non-recipient funds suffer negative fund flows after the announcement of the award. This finding is consistent with the negativity bias phenomenon in which investors focus on negative news and generally interpret information negatively” (p. 20/21).

Mental accounting review: Mental Accounting and Decision Making: a systematic review of the literature by Emmanuel Silva, Rafale Moreira, and Patirica Maria Bortolon as of Feb. 11^th, 2023 (#33): “… we performed a bibliometric analysis of the scientific production of the last 10 years (2012-2021) …. Our results reveal that there is a relative concentration of works in developed countries (USA) or countries with strong economies (China); that the “Journal of Marketing Research” is the main source of publication on the subject … research on mental accounting can be distributed into 5 major clusters: (i) Financial Decision Making and Inaction Inertia; (ii) Consumer Behavior, Discounting and Credit Card; (iii) Mental Representation, Categorization and Thinking Style; (iv) Self-Control and Savings Goals; (v) Consumption and Marginal Propensity to Consume” (p. 25/26).

27 PE questions: Asset Allocation with Private Equity by Arthur Korteweg and Mark M. Westerfield as of Auf. 26^th, 2022 (#49): “We survey the literature on the private equity partnership arrangement from the perspective of an outside investor (limited partner). We examine how the partnership arrangement fits into a broader portfolio of investments, and we consider the methods and difficulties in performance measurement, both at the fund level and at the asset class level. We follow with a discussion of performance persistence and the skill and pricing power of both general and limited partners. We continue by examining the limited partner’s problem of managing commitments and investments over time while diversifying across funds in light of both idiosyncratic and systematic shocks. We close with a summary of recent work on optimal portfolio allocation to private equity. Throughout, we consider how empirical and theoretical work match the particular institutional details of private equity, and we identify 27 open questions to help guide private equity research forward.“

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Greenium research and more: Researchpost 117

Greenium research: 25x new research on green subsidies, nature investing, populism, financial crime, ESG regulation, climate agreements, ESG scandals, transition, institutional investors, greenium, CDS, green loans, voting, multi-assets, gold, commodities, real estate, and private equity (# indicates the number of SSRN downloads on February 13^th, 2023)

Social and ecological research

Good green subsidies? Environmental Subsidies to Mitigate Net-Zero Transition Costs by Eric Jondeau, Gregory Levieuge, Jean-Guillaume Sahuc, and Gauthier Vermandel as of Jan. 13^th, 2023 (#298): “The implementation of a pure carbon tax policy to reduce CO2 emissions would result in substantial GDP losses because firms would divert resources to invest in environmental goods and services that are provided by an immature and low-competition sector. Mitigating the induced recession is possible through a massive subsidization of EGSS (Environmental Goods and Services Sector). By reducing labor costs for both entrants and incumbents operating in this sector, such a policy would accelerate its development and offer a large reduction in the selling price of abatement technologies. … Eventually, the GDP loss would be reduced from $266 trillion between 2019 and 2060 to $145 trillion. Importantly, reducing entry costs in EGSS would accelerate the transition and reduce the GDP loss mainly at the beginning of the transition” (p. 41/42).

More public spending? Nature as an asset class or public good? The economic case for increased public investment to achieve biodiversity targets by Katie Kedward, Sophus zu Ermgassen, Josh Ryan-Collins, and Sven Wunder as of Dec. 28^th, 2022 (#671): “Financial instruments for attracting large-scale private finance into conservation often incur high transaction costs to ensure ecological effectiveness, which potentially conflict with institutional investors’ need for competitive returns, market efficiency, and investment scalability. … Strategies to mobilize investor involvement by using public funds to ‘de-risk’ nature investments may not be as promising as assumed, given the costly exercise required to render nature markets conventionally ‘investible’. … Public financing is often more suitable to incentivize the imminent bundled nature of ecosystem services provided” (abstract).

Money crimes (1): Financial Crime: A Literature Review by Monica Violeta Achim, Sorin Nicolae Borlea, Robert W. McGee, Gabriela-Mihaela Mureşan, Ioana Lavinia Safta (Plesa) and Viorela-Ligia Văidean as of Dec. 19^th, 2022 (#52): “This chapter reviews the literature on some of the subfields of economic and financial crime. Among the topics discussed are tax evasion, bribery, money laundering and corruption in general. The determinants of financial crime are also identified. Several demographic variables are also examined to determine whether gender, age, education, income level, religion, geographic region, size of city, etc., are statistically significant. Nearly 150 studies are mentioned“.

Money crimes (2): Financial Crime: Conclusions and Recommendations by Monica Violeta Achim, Sorin Nicolae Borlea, Mihai Gaicu, Robert W. McGee, Gabriela-Mihaela Mureşan, and Viorela-Ligia Văidean as of Dec. 21^st, 2022 (#14): “This chapter discusses the conclusions and recommendations resulting from the study. A series of infographs is included to summaries the results of the study …” (abstract).

Complex ESG compliance: EU Sustainable Finance: Complex Rules and Compliance Problems by Félix E. Mezzanotte as of Feb. 12th, 2023 (#100): “Complexity is first identified in MiFID II rules covering the legal definition of sustainability preferences and the suitability requirements applicable to asset managers and investment advisors. … complex rules have been found to promote noncompliance. The underlying rationale, supported by this article, is that complex rules amplify the compliance burdens faced by companies” (p. 2).

Migration happiness: The Effects of International Migration on Well-Being of Natives and Immigrants: Evidence from Germany, Switzerland and the UK by Eleftherios Giovanis as of Jan.10^th, 2023 (#10) “… we find a positive impact of migration on both native’s and migrants’ well-being in Germany, while a negative effect on life satisfaction of Swiss natives is revealed. Immigrants in Switzerland are happier, while migration has no impact on natives’ and immigrants’ well-being in the UK. However, the results vary according to the education and population density of immigrants in an area. Moreover, after some point, additional increases in net migration rates may negatively affect the well-being of respondents in Germany“ (abstract).

Right emissions: Curb Your Climate Enthusiasm: The Effect of Far-Right Populism on Greenhouse Gas Emissions by Vlad Surdea-Hernea as of Jan. 23rd, 2023 (#43): “… I have quantitatively assessed the impact of far-right populist parties on greenhouse gas emissions in EU member states between 1990 and 2018. … I provide robust evidence that when FRPPs make electoral gains in at least one region of a country during an election compared to the previous election, country-wide emissions increase by more than 3000 tonnes of gases on average“ (p. 21/22).

Scope 3 data issues: Corporate carbon emissions data for equity and bond portfolios by Thijs Markwat and Laurens Swinkels from Robeco as of Feb. 2^nd, 2023 (#183): “We have analyzed the impact of the choice of the data provider on carbon accounting metrics for four large global asset classes. Even though methodologies across data providers differ, the effects are rather small for developed equity markets, and only slightly higher for emerging equity markets, when limited to scope 1 and 2. Coverage is substantially lower for investment grade and high yield corporate bonds, mainly because many corporate bond issuers do not have their shares listed on public equity markets. … Scope 3 intensities and footprints need to be (partly) estimated more often and are therefore noisier and differ more across data providers. Since their magnitude is typically five times as large as scope 1 and 2 emissions, the differences in scope 3 estimates dominate total carbon intensity and footprint data“ (p. 22/23).

Carbon confusion: Designing for comparability: A foundational principle of analysis missing in carbon reporting systems by Jimmy Jia, Nicola Rangeri, and Abrar Chaudhury as of Jan. 20^th, 2023 (#207): “… this paper shows that the commonly used greenhouse gas (GHG) emission metrics are suitable for trend analysis, continuous improvement, and target setting, but not fit-for-purpose in making comparative assertions between multiple entities. … We identify that the problem arises in the merger of two incompatible metric systems – life cycle assessment and financial reporting. We propose three necessary conditions when combining metric systems which preserves the ability to make comparative assertions, which were developed from research on comparability across the accounting, engineering, and social science fields”.

Responsible listed equity research

Good climate agreements: Influence of Global Climate Change Agreements on Firm Performance by Dipti Gupta as of Jan. 23rd, 2023 (#15): “Building on institutional perspective, we investigate the impact of global Climate Change Agreements (CCA), specifically Copenhagen Accord and Paris Agreement, on the association between Environment, Social and Governance (ESG) performance indicators and financial performance of the firms. Using panel data-set of 1162 firms located in ten countries between 2008 and 2018, we find that CCA leads to a strong positive relationship. Results indicate a stronger effect of CCA for firms in developed countries compared to those in developing countries” (abstract).

Physical vs. transition: Climate-Change Risk and Stocks’ Return by Vu Le Tran, Thomas Leirvik, Morten Parschat, and Petter Schive as of Dec. 28^th, 2022 (#119): “Our findings suggests that a positive, consistent across industries, risk premium exists for the disclosure of physical climate change risk. The premium is mostly related to the quantity of physical climate change disclosure … We are not able to find consistent results for the disclosure quantity of total or transitional climate change risks across industries. … After the Paris Agreement, the return premium related to physical climate change risk increased, which confirms an increase in investors’ perception of physical climate change risk“ (p. 46/47).

Good ESG scandals? The Good Left Undone: About Future Scandals, Past Returns and Ineffectual ESG by Ralf Laschinger and Christian Sparrer as of Dec. 16^th, 2022 (#198): “A worldwide sample of 10,500 public companies from 2002 to 2020 shows that high risk-adjusted returns can predict future unethical behavior and corporate scandals. Statistical evidence indicates that risk-adjusted returns are a precursor for, rather than a result of, un-ethical behavior, while scandals do not affect long-term outperformance. This study sheds light on the implication that corporate scandals are a more tangible measure than the ESG score, which can be biased by greenwashing and even has a positive relationship with the number of scandals in our sample“ (abstract).

ESG talk returns: Green Investors and Green Transition Efforts: Talk the Talk or Walk the Walk? by Shuang Chen as of Dec. 10^th, 2022 (#284): “I document that many green investors’ information source, the three main environmental ratings, all assign a better score to firms that hire more staff to engage in environment-related communication, keeping the level of substantive green transitions fixed. The majority of sustainable funds regulated by the EU Sustainable Finance Disclosure Regulation, light green funds, also invest more in these good talkers. Only dark green funds, with the strictest sustainable investing mandate, are not influenced by communication strategies. … The broad institutional investors are also sensitive to communication strategies while not sensitive to substantive green practices. … Firm efforts in environment-related communication predict a higher future stock return, controlling for other firm characteristics. In contrast, firm efforts in substantive green transition cannot predict future stock returns” (p. 26).

Good institutions: Institutional Investors and Corporate Environmental Costs by Wolfgang Drobetz, Sadok El Ghoul, Zhengwei Fu, and Omrane Guedhami as of Jan. 11^th, 2023 (#81): “We provide evidence that institutional investor ownership has a significantly negative impact on corporate environmental costs. This effect is driven predominantly by foreign and long-term institutional investors … the effect of institutional ownership on environmental costs is stronger in low-income countries and in those with weak environmental regulations. … environmental intensity and its related costs negatively affect firm valuation, and positively affect firms’ cost of equity” (p. 27/28)

Greenium research

Greenium research (1): Who pays the greenium? By Daniel Fricke, Stephan Jank, and Christoph Meinerding as of Dec. 30^th, 2022 (#62): “Merging a sample of matched green-conventional bond pairs with confidential data on the dynamic ownership structure of each bond by investor group, we document a set of novel findings. First, the average greenium in our sample amounts to minus three basis points, and it is largely borne by banks, investment funds and insurance companies (or their clients) which are the key investor groups in this market. Second, investment funds and pension funds generally overweight green over matched conventional bonds …. banks and insurances tend to display negative green (i.e., brown) preferences. Third, despite these negative green preferences, a significant share of the overall greenium can still be attributed to banks. More precisely, banks display a tilt towards specific green bonds with a relatively pronounced greenium. This tilt is particularly sizeable when the sample is restricted to young bonds, small bonds, bonds with a long residual maturity, or bonds issued by the financial sector. We draw the tentative conclusion that banks (or their clients) pay a significant greenium because they hold specific green bonds for motives other than green preferences. Examples may be market making, underwriting or liquidity management activities“ (p. 20).

Greenium research (2): ESG Investing Beyond Risk and Return by Rex Wang Renjie and Shuo Xia as of Jan. 30^th, 2023 (#30): “We propose a new method to estimate the greenium by comparing green bonds with equivalent non-green synthetic bonds constructed using bootstrapped yield curves. Empirically, our greenium estimates are statistically significant and economically sizable both at issuance and after trading. … our greenium estimates are higher when investors are less concerned about greenwashing, more aware of climate change, and have more trust in issuers’ environmental commitment because of local environmental regulation and enforcement. More importantly, the significant greenium is direct evidence that investors prefer green assets when expected risk and return are constant” (p. 25).

Greenium research (3): Green Bond Effects on the CDS Market by Jung-Hyun Ahn, Sami Attaoui, and Julien Fouquau as of Jan. 6^th, 2023 (#66): “Our event study shows that the CDS (Sö: Credit default swap) spread decreases when a green bond is issued while it increases when a conventional bond is issued. … the results are less significant in the case of North American firms. … a three or more green bond issuance leads to the appearance of an additional green discount, which suggest a reputation effect that the firm’s credibility is strongly enhanced by multiple issuance. … We show that the negative impact on the CDS spread exists also for conventional bonds that are issued after the third green issuance“ (p. 15).

Greenium research 4: Green versus sustainable loans: The impact on firms’ ESG performance by H. Ozlem Dursun-de Neef, Steven Ongena, and Gergana Tsonkova as of Oct. 26^th, 2022 (#624): “This paper studies the development of a firm’s Environmental, Social, and Governance (ESG) performance following the issuance of “green loans” earmarked for green projects versus “sustainable loans” to firms bench-marked by ESG criteria. Firms issuing green loans appear to be effective in shrinking their environmental emissions; however, they weaken in social performance indicated by a decrease in their human rights, community, and product responsibility scores. … Sustainable loans, on the other hand, we find to incentivize firms to improve their ESG performance by increasing their environmental and governance scores” (abstract).

Impact investment research

Passive voting: Shareholder Monitoring Through Voting: New Evidence from Proxy Contests by Alon Brav, Wei Jiang, Tao Li, and James Pinnington as of Jan. 3^rd, 2023 (#55): “This paper presents a comprehensive analysis of mutual fund voting in proxy contests. Because relevant data have long been unavailable, voting in this setting has not been studied in the corporate governance literature. … although passive funds exhibit a higher average support rate for management in voted contests, we show that the passive–active gap is driven mostly by the Big Three families and that a lack of support by passive funds drives contests toward settlement. Third, we find that passive funds dedicate greater monitoring effort, proxied by views of contest-related SEC filings, than active funds during and after contest periods. Such efforts pay off insofar as the information content in voting by passive funds is on par with that in voting by active funds, with passive funds from the non-Big Three families enjoying slightly higher vote quality than active funds. We conclude that passive funds are diligent and effective monitors in pivotal, high-stakes voting events“ (p. 41). My approach: see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Bad zero-cost? Meme corporate governance by Dhruv Aggarwal, Albert H. Choi, and Yoon-Ho Alex Lee as of Feb. 8^th, 2023 (#56): “… during the same time period as retail investor ownership of meme stocks has increased, the rates of non-voting have significantly risen for meme stocks. … we observe the increase in non-votes beginning in 2019, the same year major brokerages abolished trading commissions. The result is also consistent with the event-study evidence presented in Part III that the 2019 advent of zero-commission trading could have stirred retail investor interest in meme stocks. … the new retail shareholders at these companies do not seem to be active in engaging with the management or in influencing the companies’ governance outcomes“ (p. 34/35).

Traditional investment research

Most-passive multi-assets: Why not a global market capitalization weighted benchmark? by Frederic Jamet as of Jan. 25^th, 2023 (#30): “A standard global benchmark seems to be a 50% equities 50% bonds fixed weight portfolio, or alternatively 60% equities 40% bonds, where the equity and the bond asset classes are market capitalization weighted. Why 50% and why fixed weight ? Using Jorda and Kuvshinov databases, we have computed the performance of a global market capitalization weighted portfolio over 1880-2015 and this portfolio appears to be a good candidate for a global benchmark” (abstract). My comment: Compare Das „most-passive“ Anlageportfolio der Welt ist sehr attraktiv – Responsible Investment Research Blog (prof-soehnholz.com)

Good futures: Financialization, Electronification, and Commodity Market Quality by Tobias Lauter, Marcel Prokopczuk, and Stefan Trück as of Feb. 1^st, 2023 (#15): “Commodity futures markets underwent two substantial changes over the last decades. First, passive long-only index traders became a sizable group that changed the composition of market participants substantially. Second, volume gradually migrated from open-outcry trading pits to electronic limit order books after exchanges introduced side-by-side trading. … After the start of the financialization in 2004 and during the electronification of commodity markets, both illiquidity and price inefficiency decreased in levels and their trends were negative. … We do not find a substantially harmful effect of index investor participation on liquidity and intraday price efficiency” (p. 33).

Sanctions favor gold: Gold as International Reserves: A Barbarous Relic No More? by Serkan Arslanalp, Barry Eichengreen, and Chima Simpson-Bell as of Jan. 17^th, 2023 (#128): “Using data for as many as 144 countries … Aggregate evidence suggests that some reserve managers respond to relative costs and returns: they increase the gold share when the expected return is high while that on financial assets, such as U.S. Treasury securities, is low. … gold shares in advanced countries and emerging markets are increasing with a measure of economic uncertainty, and those in advanced economies increase in addition with a measure of geopolitical risk. In addition, we find that reserve managers in emerging markets increase the share of reserves held in gold in response to sanctions risk“ (p. 30).

Alternative investment research

No so green Swiss RE: How Sustainable Is Swiss Real Estate? Evidence from Institutional Property Portfolios by Fabio Alessandrini, Eric Jondeau, Ghislaine Lang, and Evert Reins as of June 1^st, 2022 (#185): “To collect the data, we designed an online survey, which was sent to all institutional owners of Swiss real estate portfolios. … The final sample includes 66 investment vehicles, which represents a coverage of approximately 65% of the total AUM. We find that in the environmental category, energy issues are given a high level of priority and considerable efforts are being undertaken. … Eventually, we obtain a final ESG score … the score of real estate investment vehicles is comparatively low for the E pillar. The reason is that, for some environmental indicators, in particular waste generation and water use, several entities were not able to disclose the necessary information. … with larger portfolios obtaining higher scores” (p. 50-52).

Even higher fees? Accessing Private Markets Globally: Contracts and Costs by Wayne Lim as of Dec. 22^nd, 2022 (#27): “This article is the first study on the contracts and cost of accessing private markets using a worldwide sample of funds comprising ten private capital fund types. The study goes beyond PE (Sö: private equtity)… The effect of fee payments on gross-to-net TVPI (Sö: Total Value to Paid In) is between 0.1x to 0.7x and 5% to 8% in annualized terms. These estimates suggest that the magnitude of fees on annualized returns for buyout and VC funds may have been previously underestimated. … Funds with higher managerial ownership, on average, performed better“ (p. 37/38).

PE reduces pay gaps: Private Equity and Pay Gaps Inside the Firm by Lily Fang, Jim Goldman, and Alexandra Roulet as of Feb. 8^th, 2022 (#48): “We find that relative to a carefully constructed control group of firms, firms under private equity ownership experience significant and sustained reductions in pay inequality between the 90th and 10th percentile of the wage distribution, as well as in the three demographic dimensions (gender, occupation, age) that we study. The declines in these pay gaps come primarily from the job separations of particularly expensive employees in the high-pay categories (men, managers, and older workers). Instead of across-the-board wage reductions, men and young employees who stay at the target firms experience moderate wage increases relative to their peers in control firms, while the wages of staying older employees are not materially affected by the buyout. Expensive men and managers are replaced with new employees of the same category but who are cheaper. Expensive older employees are replaced by younger (and hence cheaper) employees” (p. 29).

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Stakeholder engagement and ESG (Special Edition Researchpost 115)

Stakeholder engagement: 18x (new) research on stakeholder engagement, human capital, employee activists, employee ESG surveys, ESG wage gap, CEO pay gap, customer alpha, CEO limits and more research which is important for my shareholder engagement activities (see e.g. my earlier blog posts Engagement test, Impact Investing mit Voting und Engagement? and Wrong ESG bonus math?, # indicates the number of SSRN downloads on February 2^nd, 2023):

Stakeholder engagement overview

Stakeholder engagement studies: Exploring the antecedents and consequences of firm-stakeholder engagement process: A systematic review of literature by Avinash Pratap Singh and Zillur Rahman as of Oct. 31st, 2022 (#16): “… we pursued the vast body of literature on firm-stakeholder engagement and comprehensively examined over 170 research articles to accumulate precursors and outcomes of SE processes. … We used thematic analysis to provide evidence of the growing interest of academics and managers in firm-stakeholder engagement. The findings of this study suggest that shared benefits with a long-term perspective are valuable to both corporation and its stakeholders”.

Stakeholder engagement options: Stakeholder Engagement by Brett H. McDonnell as of Oct. 31st, 2022 (#88): “We have seen that the present reality of stakeholder engagement is fairly extensive, and sensible as far as it goes. As one would expect, employees are the most engaged group, followed by customers, and then by nonprofits, suppliers, and government regulators. The most used forms of engagement include meetings and surveys. Employee resource groups are near-universally used. Partnerships, social media, and councils are used less frequently, but still somewhat regularly. … And yet, the current reality falls well short of the future possibilities of stakeholder engagement. Current engagement mostly involves companies listening to what stakeholders have to say. It does not empower stakeholders to be more actively involved in corporate decision making” (p. 53/54). My comment: Very helpful paper for practitioners including reference to the AccountAbility Stakeholder Engagement Standard

Employees and stakeholder engagement

Social impact: Accounting for Employment Impact at Scale by Adel Fadhel, Katie Panella, Ethan Rouen, and George Serafeim as of Jan. 12^th, 2022 (#284): “This paper demonstrates that large scale monetized impact analysis is feasible … Employment impact intensity is calculated for 22,322 firm-year years, providing a robust sample for industry-level benchmark analyses. We find significant heterogeneity within industries … Presenting employment impact intensity in dollar terms allows firms, investors, and policy-makers to effectively calculate future risks and opportunities associated with human capital practices “ (p. 28/29).

Employee activists: Protests from Within: Engaging with Employee Activists by Stephen Miles, David F. Larcker, and Brian Tayan as of March 9th, 2021 (#404): “Recent years have witnessed a growing trend of stakeholder issues becoming prominent in discussions of corporate governance. One source of this pressure comes from an unexpected constituent: the company’s own employee base. In this Closer Look, we examine the rise of employee activism and its implications on corporate mission, the board, and management” (abstract).

Employee ESG surveys: Do Employees Have Useful Information About Firms’ ESG Practices? by Hoa Briscoe-Tran as of Nov. 11^th, 2022 (#818): “… I study whether employees have useful information about firms’ environmental, social, and governance (ESG) practices by analyzing 10.4 million anonymous employee reviews. I find that employees discuss ESG topics in 43% of reviews, thereby providing substantial information about firms’ ESG practices. The employees’ inside view predicts various indicators of a firm’s future ESG-related outcomes, beyond the existing ESG ratings, particularly on the S and G dimensions. Using the inside view, I show that a firm’s stated ESG policies often differ from its employees’ view of its practices” (p. 34).

Employee ESG: Caremark and ESG, Perfect Together: A Practical Approach to Implementing an Integrated, Efficient, and Effective Caremark and EESG Strategy by Leo E. Strine, Jr., Kirby M. Smith, and Reilly S. Steel as of July 2^nd, 2021 (#936): “… Building on an emerging literature connecting EESG (employee, environmental, social, and governance factors) with corporate compliance, this Essay argues that EESG is best understood as an extension of the board’s duty to implement and monitor a compliance program …” (abstract).

UK employee participation law: The Workforce Engagement Mechanisms in the UK: A Way Towards More Sustainable Companies? (Part 2) by Katarzyna Chalaczkiewicz-Ladna, Irene-Marie Esser, and Iain MacNeil as of Jan. 20^th, 2023 (#88): “This study concentrates on evaluating workforce engagement mechanisms as a tool to ensure more sustainable companies in 2020 – the second year this provision is in force. … we assert in this paper that on their own even well-functioning workforce engagement tools are unlikely to improve the standards of workforce engagement and a more integrated (“bundled” or “package”) approach to workforce engagement and participation is required. Finally, as mentioned in the Introduction, we view Provision 5 not only as a stakeholder empowerment tool, but more broadly as the start of a process of experimentation to determine the best ways to engage all stakeholders in board decision-making“ (p. 30).

Employee satisfaction alpha 1: Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World by Alex Edmans, Darcy Pu, Chendi Zhang, and Lucius Li as of Jan. 23^rd, 2023 (#4151): “This paper studies how the relationship between employee satisfaction and stock returns depends critically on a country’s labor market flexibility. The alphas documented by Edmans (2011, 2012) for the US are not anomalous in a global context, in terms of economic significance. However, they do not automatically generalize to every country – the returns to being listed as a Best Company to Work For are increasing in labor market flexibility. We find similar results for current valuation ratios, operating performance, and future earnings surprises. Our findings are consistent with the recruitment, retention, and motivational benefits of employee satisfaction being most valuable in flexible labor markets“ (p. 25).

Employee satisfaction alpha 2: Do high-ability managers choose ESG projects that create shareholder value? Evidence from employee opinions by Kyle Welch and Aaron Yoon as of June 22^nd, 2022 (#1737): “… we find that firms with both high ESG ratings and high employee opinions of senior management significantly outperform those with low ratings on both. … the set of firms with high ESG and high managerial ability exhibits not only superior future accounting performance but also greater earnings surprises versus other firms. … we suggest that employee opinions may be an important factor not yet incorporated in traditional ESG ratings“ (p. 25/26).

Pay gap research

ESG employee advantage? The Sustainability Wage Gap by Philipp Krueger, Daniel Metzger, and Jiaxin Wu as of April 19^th, 2022 (#1058): “Using … data from Sweden … we provide evidence that firms with better sustainability characteristics tend to pay lower wages (about 9%) and attract and retain workers that are more skilled. We coin this empirical regularity as the Sustainability Wage Gap. We argue that workers are willing to give up part of their financial compensation because they derive nonpecuniary benefits related to their preferences to work in more sustainable firms or sectors. … we show that the wage gap is indeed more pronounced for workers that are more highly skilled and increasing over time” (p. 38).

Pay gap research 1: Do firms’ disclosure choices conform to social attitudes? Evidence from the CEO pay ratio estimation by Zinat Alam, Chinmoy Ghosh, Harley E. Ryan, and Lingling Wang as of Oct. 26^th, 2022 (#219): “Congress mandated the disclosure of a CEO-to-employee pay ratio for U.S. public firms as part of the Dodd-Frank Act … Our analysis reveals a strong negative association between the disclosed pay ratio and the complexity of the CACM (consistently applied compensation method) choice … This systematic relation suggests that firms can influence the disclosed pay ratio by choosing a different CACM without actually changing either CEO or employee pay. Our analysis of the determinants of the CACM choice reveals that firms with headquarters in states that exhibit stronger aversion toward income inequality are more likely to choose a more complex CACM, which results in a lower disclosed CEO pay ratio. … Firms’ tendencies to use a more complex estimation method, however, declines when the CEO has lower pay and is close to retirement, suggesting that firms rationally trade off the benefits of reducing the pay ratio with the costs of strategic disclosure” (p. 37). My comment: In my engagement activities I suggest all firms to disclose CEO pay ratios because I fear that the introduction of ESG compensation may further increase this gap.

Pay gap research 2: Spinning the CEO pay ratio disclosure by Audra Boone, Austin Starkweather, and Joshua T. White as of Dec. 17^th, 2021 (#1112): “We find that firms avail themselves of exemptions and other choices that can help boost reported median employee pay and lower the ratio, but such firms, on average, still tend to have higher ratio values. … Those firms that have better prior performance, more compensation consultants, and prior wage-related labor violations are less likely to use spin even if they have a higher ratio. Firms reporting a higher ratio experience declines in employees’ view of the CEO’s performance and their own pay, particularly when the reported ratio is unexpectedly high. These firms also experience lower gains in employee productivity, especially in industries where employees could directly impact sales, such as those that interact frequently with customers. Placebo and falsification tests suggest that employees are responding to the disclosure of the ratio and not just the existence of the vertical pay disparity. Prior investments in employee-related CSR help attenuate the negative employee response to a high ratio” (p. 29/30).

Customers stakeholder engagement

Sustainable stakeholders: Corporate Law and Social Risk by Stavros Gadinis and Amelia Miazad as of May 22^nd, 2020 (#1683): “Social risk has proven highly destructive for corporate value even when the company’s key failure is not violating laws, as the recent crises at Facebook and Uber demonstrate. Sustainability can help avoid such crises, because it provides corporate boards with input from stakeholders such as employees, NGOs, local authorities, and regulatory agencies. These stakeholders are uniquely placed to register the impact of company policies on the ground and can communicate concerns early … the intractability of many sustainability concerns, combined with management’s confidence in the company’s success, lead to systematically downplaying social risk“ (abstract).

Covid stakeholder boost: Test of Stakeholder Capitalism by Stavros Gadinis and Amelia Miazad as of Aug. 21st, 2021 (#461): “Our findings suggest that companies turned to stakeholders during the pandemic with increasing frequency and asked for input on issues that are central to their business. Companies relied on stakeholder communications with employees to negotiate the remote working environment and arrange for continuous operation and reopenings, and with suppliers under immense strain as global trade contracted. Through stakeholder governance, companies understood better the needs of consumers in financial difficulty and the concerns of local authorities about unnecessary population movements …. Stakeholder governance emerges from our interviews as a systematic framework that companies are developing in order to obtain information about the social impact of their practices. In the past, companies communicated with their stakeholders about specific issues as the need arose. Today, stakeholder governance seeks to proactively cover the company’s social profile as comprehensively as possible, collecting information in a regular and standardized manner” (abstract).

Customer satisfaction alpha: Do Contented Customers Make Shareholders Wealthy? – Implications of Intangibles for Security Pricing by Erik Theissen and Lukas Zimmermann as of Jan. 9^th, 2021 (#126): “This paper considers the link between intangible assets and security returns by documenting that firms with higher levels of customer satisfaction (as measured by the American Customer Satisfaction Index, ACSI) have higher risk-adjusted stock returns. … We find that the customer satisfaction premium is larger among firms with high equity duration and higher operating leverage, and is larger among firms which are more exposed to competitive threats … We also document a time-series relation between the return of the customer satisfaction strategy and factors related to measures of innovative activity, such as venture capital financing, aggregate R&D spending, or patenting activity. Based on our findings, we conclude that the customer satisfaction premium is a compensation for risk not captured by standard risk factors“ (p. 34/35).

Shareholders versus other stakeholders

CEO limitations: The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita as of March 24^th, 2022 (#13545): “To address growing concerns about the negative effects of corporations on their stakeholders, supporters of stakeholder governance (“stakeholderism”) advocate a governance model that encourages and relies on corporate leaders to serve the interests of stakeholders and not only those of shareholders. We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. Stakeholderism, we conclude, is an inadequate and substantially counterproductive approach to addressing stakeholder concerns. … recent commitments to stakeholderism were mostly for show rather than a reflection of plans to improve the treatment of stakeholders. Our analysis indicates that, because corporate leaders have strong incentives not to protect stakeholders beyond what would serve shareholder value, acceptance of stakeholderism should not be expected to produce material benefits for stakeholders. Furthermore, we show that acceptance of stakeholderism could well impose major costs. By making corporate leaders less accountable and more insulated from shareholder oversight, acceptance of stakeholderism would increase slack and hurt performance, reducing the economic pie available to shareholders and stakeholders. In addition, and importantly, by raising illusory hopes that corporate leaders would on their own protect stakeholders, acceptance of stakeholderism would impede or delay reforms that could bring real, meaningful protection to stakeholders” (abstract).

No enlightment: Does Enlightened Shareholder Value Add Value? By Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita as of Jan. 25th, 2023 (#1697): “Unlike shareholder value maximization (SV), which merely calls on corporate leaders to maximize shareholder value, enlightened shareholder value (ESV) combines this prescription with guidance to consider stakeholder interests in the pursuit of long-term shareholder value maximization. … corporate leaders often face significant trade-offs between shareholder and stakeholder interests … arguments that using ESV is beneficial in order to (i) counter the tendency of corporate leaders to be excessively focused on short-term effects, (ii) educate corporate leaders to give appropriate weight to stakeholder effects, (iii) provide cover to corporate leaders who wish to serve stakeholders, and/or (iv) protect capitalism from a backlash and deflect pressures to adopt stakeholder-protecting regulation. We show that each of these arguments is flawed. We conclude that, at best, replacing SV with ESV would create neither value nor harm“ (abstract).

Shareholder-focus: Stakeholder Capitalism in the Time of COVID by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita as of Jan. 26^th, 2023 (#1725): “We conduct a detailed examination of all the $1B+ acquisitions of public companies that were announced from April 2020 to March 2022, totaling 122 acquisitions with an aggregate consideration exceeding $800 billion. We find that deal terms provided large gains for the shareholders of target companies, as well as substantial private benefits for corporate leaders. However, although many transactions were viewed at the time of the deal as posing significant post-deal risks for employees, corporate leaders largely did not obtain any employee protections, including payments to employees who would be laid off post-deal. Similarly, we find that corporate leaders failed to negotiate for protections for customers, suppliers, communities, the environment, and other stakeholders. After conducting various tests to examine whether this pattern could have been driven by other factors, we conclude that it is likely to have been driven by corporate leaders’ incentives not to benefit stakeholders beyond what would serve shareholder interests“ (abstract).

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Advert for German investors: “Sponsor” my research by investing in and/or recommending my article 9 mutual fund. I focus on social SDGs and midcaps and use separate E, S and G best-in-universe minimum ratings. The fund typically scores very well in sustainability rankings, e.g. this free new tool, and the performance is relatively good: FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T

Bank climate risks and more (Researchpost 113)

Bank climate risks: >20x new research on CO2 bio-capture, ESG ratings, inflation, greenwashing, diversity, gender pay gap, shareholder engagement, investment consultants, ML and hybrid robo-advisors (# indicates the number of SSRN downloads on January 21st, 2023)

Social and ecological research

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

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

Responsible investment research: Bank climate risks

Biased ESG ratings: Do Commercial Ties Influence ESG Ratings? Evidence from Moody’s and S&P by Xuanbo Li, Yun Lou, and Liandong Zhang as of Oct. 25^th, 2022 (#398): “… we use Moody’s (S&P’s) acquisition of Vigeo Eiris (RobecoSAM) as a shock to firms’ commercial ties with the ESG rating agency. We find that after the acquisition, firms that have existing credit rating business with Moody’s and S&P receive higher ESG ratings than those that do not. The increase in ESG ratings is more pronounced for firms that have more intensive credit rating relationships with Moody’s (S&P) and firms that issue green bonds. … the ESG rating quality appears to deteriorate after the acquisitions and investors are unable to fully see through the inflated ESG ratings. Finally, there is some evidence that the upwardly biased ESG ratings help Moody’s and S&P maintain credit rating business” (p. 30/31).

ESG credit risks: ESG Factors and Firms’ Credit Risk by Laura Bonacorsi, Vittoria Cerasi, Paola Galfrascoli, and Matteo Manera as of Dec. 19^th, 2022 (#56): “… ESG factors help explaining the probability of default: when including the ESG factors in a OLS model in order to explain credit risk, together with the traditional accounting variables, they contribute to improve the fit of the model by reducing the mean squared errors. Our main findings suggest that companies with a moderate, rather than large, proportion of revenues related to carbon emissions or to green building have a higher credit risk, implying that an effort in reducing pollution or energy requirements is costly. On the contrary, hiring more skilled workers reduces credit risk, as it is associated to a greater company’s productivity. Interestingly, we provide evidence of a positive externality from environmental friendly locations, since companies located in regions where carbon regulation is stricter exhibit a lower credit risk. Also companies located in regions with better data protection show a lower credit risk” (p. 16).

CSR versus inflation: Inflation, the Corporate Greed Narrative, and the Value of Corporate Social Responsibility by Ana Mao de Ferro and Stefano Ramelli as of Dec. 28^th, 222 (#23): “Our results, based on the cross-sectional reactions of US stocks to inflation over the period 2018-2022, indicate that after months of higher inflation, equity investors reward firms with stronger social capital, as captured by their corporate social responsibility (“We find that in months following higher inflation, stocks of higher-CSR firms perform significantly better than stocks of lower-CSR firms” p. 1, 2). The effect holds using different measures of inflation, stock returns, and CSR scores” (p. 20/21).

Bank climate risks: Climate Risks in the U.S. Banking Sector: Evidence from Operational Losses and Extreme Storms by Allen Berger, Filippo Curti, Nika Lazaryan , Atanas Mihov, and Raluca Roman as of Dec. 11^th, 2022 (#138): “…. climate risks from extreme storms are a significant source of operational losses at banking organizations. Exposure to extreme storms increases BHC (Sö: bank holding companies) losses from fraud committed by outsiders, failures to meet obligations to clients and improper business practices, damage to BHCs’ physical assets, and business disruption. We show that storms not only increase the frequency of operational loss events on average, but they tend to increase the incidence of severe tail losses that have been associated with financial stability concerns. Major storms have disproportionate, non-linear positive impact on operational losses. Lastly, we find evidence that banking organizations “learn” from exposure to past disasters to mitigate future operational losses” (p. 31).

Bank climate risks (2): Climate Risk, Population Migration, and Banks’ Lending and Deposit-Taking Activities by Mary Brooke Billings, Stephen G. Ryan and Han Yan as of Oct. 18^th, 2022: (#69): “… using forward-looking measures of climate risk at the U.S. county level, we provide evidence that banks’ non-agency residential mortgage and small business lending as well as their branch openings and deposit-taking have exposed banks to increasing climate risk of three specific types (hurricanes, water stress, and wildfires) over time. …. Given the increasing frequency and severity of climate-related natural disasters, our results raise concerns about potential negative consequences for migrating households, for the banks and insurers that provide households with financial services, and for the financial system and society were banks and insurers to fail” (abstract).

Bank climate risks (3): Systemic Climate Risk by Tristan Jourde and Quentin Moreau as of Dec. 23^rd, 2022 (#128): “… we develop a framework for analyzing systemic climate risks based on environmental and stock market data. We then apply our approach to a sample of Europe’s largest financial institutions. We find that many financial institutions are positively and significantly exposed to transition risk, in particular life insurers and real estate investment trusts. Moreover, we reveal that the exposure to transition risk has increased continuously since 2015, mainly for banks, life, and non-life insurance companies. Finally, our article shows that transition climate risk can exacerbate tail dependence among financial institutions, which is a key aspect of systemic risk. By contrast, we do not find evidence of such contagion effects in the case of physical climate risk. Besides, our results show that climate risk exposure is lower for financial institutions committed to environmental risk management and for those providing long-term incentives to board members. We also highlight that financial institutions with cleaner investment and lending portfolios tend to be less exposed to transition risks (p. 33).

Greenwashing profits: Green Bond Pricing and Greenwashing under Asymmetric Information by Yun Gao and Jochen M. Schmittmann as of Jan.11^th, 2023 (#41): “We find that a greenium exists when there is asymmetric information between bond issuers and bond buyers with respect to issuers’ type, transition risks stemming from carbon pricing, and costly greenwashing. The impact of carbon pricing on the greenium and greenwashing depends on the speed with which carbon pricing is introduced – a swift but gradual implementation generates a small greenium and a low level of greenwashing, while a delayed and therefore large carbon pricing has an ambiguous effect on the greenium and greenwashing“ (p. 32).

Improving good ESG: Are Firms’ Disclosed Diversity Targets Credible by Wei Cai, Yue Chen and Li Yang as of Dec. 23^rd, 2022 (#56):“… we examine whether firms that publicly disclose diversity targets truly increase their diversity levels after the target disclosure. Exploiting a novel dataset of detailed firm employee records, we find that firms that disclosed a diversity target have indeed improved their diversity, but the diversity level already increased substantially prior to the target disclosure. …. We show that numerical, forward-looking, and rank-and-file employee-targeted goals are more credible than others. We also find that firms that are historically more compliant, with greater institutional pressure, and with greater innovation demand tend to disclose more credible goals, suggesting the importance of examining firms’ incentives rather than the act of disclosure itself” (abstract). My comment: I try to invest in already very sustainable companies (see Artikel 9 Fonds: Sind 50% Turnover ok? – Responsible Investment Research Blog (prof-soehnholz.com) and hope that they intrinsically become even better but I also try to engage with them (see Engagement test (Blogposting #300) – Responsible Investment Research Blog (prof-soehnholz.com)

ESG misreporting: Misreporting of Mandatory ESG Disclosures: Evidence from Gender Pay Gap Information by McKenna Baileya , Stephen Glaeserb , James D. Omartiana , Aneesh Raghunandan as of Oct. 7^th, 2022 (#326): “We examine misreporting of mandated gender pay gap disclosures in the UK. We find that approximately one out of twenty employers reports mathematically impossible gender statistics, consistent with widespread misreporting—intentional or otherwise. … We find a negative correlation between financial audit quality and misreporting, but no evidence that CSR audits constrain misreporting. … our results suggest that firms are willing and able to misreport gender pay gap information” (p. 31). My comment: Pay gap merits more attention, see Pay Gap, ESG-Boni und Engagement: Radikale Änderungen erforderlich – Responsible Investment Research Blog (prof-soehnholz.com). Therefore one of my shareholder engagement activities focuses on pay gap.

Irresponsibility consequences: Remedial Actions After Corporate Social Irresponsibility by Wei Cai, Aneesh Raghunandan, Shivaram Rajgopal, and Wenxin Wang as of Dec. 28^th, 2022 (#71): “We find that firms do view the reputational damage resulted from ESG-related violations as material enough to take subsequent prosocial actions to restore stakeholders’ trust. Such actions are more likely to be socially-focused and targeted at either consumers or employees, especially in firms with higher board or employee diversity. … we do not find an increase in investment into direct environmental remediation after an environmental violation, although firms that do take such steps enjoy a lower rate of future environmental violations. … it is only indirect social actions that appear to be associated with a lower rate of future social violations – raising questions about the extent to which the types of stakeholders harmed in the initial scandals ultimately enjoy improved treatment by the firm. Finally, we find no evidence that the stock market reacts to reputation-building actions taken in the wake of an environmental or social scandal, relative to actions taken before the violation or with respect to actions taken by a control sample” (p. 25).

Voting and engagement research: Bank climate risks

Illegal engagement? Market Soundings Rules: The challenges and opportunities for board-shareholder engagement by Jennifer Payne as of Dec. 23rd, 2022 (#11): The potential value of effective board-shareholder dialogue for companies, shareholders and participants in the market more generally is well understood. … This paper examines the restrictions placed on such a dialogue by the EU market abuse regime and the solution offered by the market soundings rules for one particular category of board-shareholder engagement. … It is argued that the market soundings regime as currently constructed maps poorly onto a broader vision of board-shareholder dialogue, but that this is unlikely to be unduly problematic for the reasons explored in this paper” (abstract).

Engagement advice: The Contingent Role of Conflict: Deliberative Interaction and Disagreement in Shareholder Engagement by Irene Beccarini, Daniel Beunza, Fabrizio Ferraro, and Andreas Hoepner as of Feb. 10^th, 2022: “We find that while deliberative interaction does not help advance the engagement process, it positively moderates the effect of disagreement in the solution-development stage. By contrast, in the solution-implementation stage, deliberative interaction amplifies the negative effect of disagreement, thus hindering progress in the engagement. Our paper contributes to shareholder engagement, deliberation theory and interactionist organization theory by establishing that engagement effectiveness is an interactional achievement, shaped by both deliberation and disagreement“ (abstract).

Low ESG costs? Trade, Voting, and ESG Policies: Theory and Evidence by John Duffy, Daniel Friedman, Jean Paul Rabanal, and Olga A. Rud as of Jan. 13^th, 2023 (#86): “We model the interaction between ESG policy proposals, shareholder trading and voting under different sets of preferences, and then test the predictions of our model. In one environment, investor preferences regarding the policy are highly polarized while in another they are dispersed. We find that (i) low policy costs favor policy adoption, (ii) intermediate costs lead to a lower rate of policy adoption under dispersed preferences than under polarized preferences, and (iii) share prices are greater than equilibrium predictions when the policy is adopted. This suggests that the cost to shareholders of adopting ESG policies may be less than anticipated (abstract).

Traditional investment research

Yale, Norway etc: The ‘Investor Identity’: The Ultimate Driver of Returns by Ashby Monk and Dane Rook as of Jan. 17^th, 2023 (#581): “What is the most important driver of long-term investment returns? … We argue an investor’s organizational capabilities determine what asset classes are investable and how investors can invest in them. This paper thus conceptualizes an investor’s set of organizational capabilities as its identity. While some have referred to this concept as a “Model” (e.g., Yale Model, Canadian Model, or Norwegian Model), the term „identity“ avoids confusion associated with the numerous other models already at work in the investment business. Accordingly, an investor’s identity is akin to a sort-of “‘kitchen” in that it refers to the specific manner in which an investor “cooks up” its risk-adjusted net returns. Identity thus reflects the true foundations of long-term performance: namely, how an investor organizes its capabilities to allocate assets and implement portfolio strategies” (abstract).

Consultant alpha? Investment Consultants in Private Equity by Jose Vicente Martinez and Yiming Qian as of Jan. 20^th, 2023 (#26): “We find that consultants operating in private equity differ significantly in terms of size, specialization, and number of PE managers they work with. Asset owners that share search consultants tend to choose the same private equity funds and managers. Consultants’ size, private equity specialization, and involvement in fund management do not seem to be related to asset owner performance. The consultant trait that seems to be most associated with asset owner performance is the size of the PE manager list their clients draw from. Asset owners advised by consultants that rely on a narrow list of PE managers do better than asset owners advised by consultants that work with a larger list of managers. Among asset owners that share a consultant, it is asset owners that give more business to the consultant (i.e., those with the largest PE mandates) that end up with better investments, something that cannot be explained by mandate size alone or by any other asset owner or consultant attribute” (p. 27)

Skinny returns? Got skin in the game? Investor reaction to managers’ signaling of private investments in mutual funds by Dominik Scheld and Oscar Anselm Stolper as of Jan. 4^th, 2023 (#19): “—“Skin in the game”—money managers’ private investments in the funds they run—helps aligning potentially conflicted interests of investors and managers. Prior research acknowledges this benefit but remains silent about how investors are supposed to learn if fund managers have skin in the game. … Analyzing ~16,000 shareholder letters of U.S. mutual funds, we first show that fund managers’ disclosure of private investment leads to excess fund inflows up to two weeks after the letter is sent out. Second, outflows are significantly less pronounced following poor performance. Third, the impact of skin in the game communication on fund flows limits to retail shareholders” (abstract). My comment: I have significant skin in the game regarding my fund

Fund flow effects: Mortality, Mutual Fund Flows, and Asset Prices by Alok Kumar, Ville Rantala, and Claudio Rizzi as of Dec. 27^th, 2022 (#20): “… elderly people liquidate their mutual fund holdings regularly. … Periods with high mortality rates are associated with more positive net mutual fund flows and these effects are stronger among high dividend yield and high bond allocation funds. We also find that high mortality exposure stocks consistently earn abnormal returns during abnormal mortality months” (p. 28/29).

Fintech research

Useful machines: Machine Learning Methods in Finance: Recent Applications and Prospects by Daniel Hoang and Kevin Wiegratz as of Dec. 13th, 2022 (#527): “First, we established that different types of ML solve different problems than traditional linear regression with OLS. While the properties of OLS are beneficial for explanation problems, supervised ML is the superior method for prediction problems. … In the second part of this paper, we developed the following taxonomy of ML applications in finance: 1) construction of superior and novel measures, 2) reduction of prediction error in economic prediction problems, and 3) extension of the existing econometric toolset. … In the final part, we provided indications of the future prospects of ML applications in finance by analyzing the ML papers published in major finance journals. … Our results suggest that ML may become even more widespread in finance research in the coming years. They also indicate a particularly large potential of applying ML to unconventional data to construct superior and novel measures of topics related to the field of corporate finance and governance. The fields of behavioral and household finance may also offer a mostly untapped potential for ML in future research“ (p. 47).

Hybrid robos: Algorithm Aversion: Theory and Evidence from Robo-Advice by Cynthia Pagliaro, Tarun Ramadorai, Alberto G. Rossi, Stephen Utkus, and Ansgar Walther as of Dec. 24^th, 2022 (#64): “We study algorithm aversion using a model of robo-advising adoption. … We pair this structural model with empirical work on unique data from a large US hybrid robo-advisor. In the robo-advisor we study, as with other such hybrid services, the algorithm manages the investment portfolio, while the human advisor interacts with investors to help them understand what the algorithm does and provides auxiliary advice on issues such as estate planning. A key feature of this setting is that the assignment of investors to advisors follows mechanical rules driven by workload balancing imperatives rather than any assessment of advisor type. This means that once the current “load” of a given advisor is accounted for, the assignment of new clients to this advisor is orthogonal to the historical client retention of the advisor (a useful proxy for advisor type). … We find that this measure of advisor type predicts the future retention rate of clients that are assigned to them, which can be mapped to both the learning channel and the ongoing disutility channel in the model“ (p. 35/36).

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Social and ecological research

ESG investment research (Skilled fund managers)

Impact investment research (Skilled fund managers)

Other investment research

Skilled fund managers (?) advert for German investors

Social and ecological research

ESG investment research (ESG and impact)

Impact investing research (ESG and impact)

Other investment research

ESG and Impact + Engagement advert for German investors

Social and ecological research (responsible derivatives)

Sustainable investing research (responsible derivatives)

Other investment research

Liquid impact advert for German investors

Social and ecological research (Impact strategies)

ESG investment research (Impact strategies)

Impact strategies research

Other investment research

Advert for German investors:

Ecological and social research: Active ESG share

ESG Ratings Reearch: Active ESG Share

Responsible investment research: Active ESG share

Impact investment and shareholder engagement: Active ESG share

General investment research

Advert for German investors:

Impact investing and engagement-washing

Limitation of shareholder voting

7 limitations of ecological and social shareholder engagement

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

Further reading regarding engagement-washing

Social and ecological research: ESG voting

Sustainable investing research: ESG voting

Other investing research

Social and ecological research

Responsible listed equity research

Greenium research

Impact investment research

Traditional investment research

Alternative investment research

Stakeholder engagement overview

Employees and stakeholder engagement

Pay gap research

Customers stakeholder engagement

Shareholders versus other stakeholders

Social and ecological research

Responsible investment research: Bank climate risks

Voting and engagement research: Bank climate risks

Traditional investment research

Fintech research