Climate hedge illustration by pixur from Pixabay
Climate hedge: 10x new practical research on life-saving trees, good emission trades, complex ESG effects, cost reducing ESG, ESG incident effects, SRI effects, concentrated and thematic ETFs (#shows number of SSRN full paper downloads as of Nov. 21st, 2024)
Social and ecological research
Life-saving trees: Trade, Trees, and Lives by Xinming Du, Lei Li, and Eric Zou as of Nov. 5th, 2024 (#36): “We examine Brazil, which has ramped up agricultural export over the last two decades to meet rising global demand. … we first show that export shocks cause substantial local agricultural expansion and a virtual one-for-one decline in forest cover. .. we establish a causal link between deforestation upstream and subsequent rises in air pollution and premature deaths downstream, with the mortality effects predominantly driven by cardiovascular and respiratory causes. Our estimates reveal a large telecoupled health externality of trade deforestation: over 700,000 premature deaths in Brazil over the past two decades. This equates to $0.18 loss in statistical life value per $1 agricultural exports over the study period“.
Good emission trades: Firms’ Response to Climate Regulations: Empirical Investigations Based on the European Emissions Trading System by Fotios Kalantzis, Salma Khalid, Alexandra Solovyeva, and Marcin Wolski from the International Monetary Fund as of July 15th, 2024 (#41): “Using a novel cross-country dataset, which merges firm-level financials with information on firms’ participation in the European Unions’ Emissions Trading System (ETS) … We find that more stringent policies do not have a strong negative impact on the profitability of ETS-regulated or non-ETS firms. While firms report an increase in their input costs during periods of high carbon prices, their reported turnover is also higher. Among ETS-regulated firms which must purchase emission certificates under the EU ETS, tightening of climate policies in periods of high carbon prices results in increased investment, particularly in intangible assets. … Our findings provide support for the benefits of EU ETS on accelerating firms’ climate transition, while keeping firm-level financial costs at bay” (abstract).
ESG investment research (in: Climate hedge research post)
Climate hedge? Investor Behavior in Response to Climate Risks: Insights from Fund Flows by Camille Baily, Amal Dabbous, Jean-Yves Gnabo, Matthias Horn, and Andreas Oehler as of Sept. 6th, 2024 (#25): “This study examines the impact of climate risk on capital flows in U.S. equity mutual funds using a dataset of 2,633 funds from 2013 to 2018. … Funds with high sustainability ratings have lower average net flows. Yet, they attract significantly higher net flows during periods of negative climate news. These results suggest a strategic allocation of capital to hedge against climate risks or to reflect preferences for environmentally friendly investments“ (abstract). My comment: I expect climate risks to become more prominent. That should favor sustainable fund investment flows.
Climate hedge? Oil-Driven Greenium by Zhan Shi and Shaojun Zhang as of Oct. 24th, 2024 (#215): “As climate attention grows, many argue that investors discipline carbon-intensive firms by increasing their costs of capital, creating a “greenium” favoring green firms. We challenge this view, demonstrating that the observed greenium variation is largely driven by oil demand fluctuations, which boost product prices and growth options for carbon-intensive firms, reducing the greenium. … Revisiting key climate-related events, like the Paris Agreement, we find that once oil’s impact is considered, investor discipline often plays a negligible role. Our findings indicate investors may be less responsive to the climate crisis than anticipated” (abstract). My comment: Investors should focus much more on sustainable investments.
Complex ESG effects? Nonlinear Impact of ESG on Stock Market Performance among Manufacturing and Banking Firms by Ralph Sonenshine and Yan Wang as of Nov.13th, 2024 (#11): “This study assesses the impact of ESG ratings on excess stock market returns and risk adjusted returns among a group of large, U.S. manufacturing and banking companies. … Our findings indicate a non-linear relationship exists between ESG ratings and financial performance. The relationship is usually, but not always, characterized by a U-shape pattern. … In banking, we see increasing returns to governance and decreasing returns to environmental projects relative to excess returns. In manufacturing, there are decreasing returns to investing in governance and environmental projects up to a certain threshold, suggesting large investments in these areas are needed to generate a payback for these investments. Finally, social responsibility ratings appear to have a negative, linear effect on financial performance, with the effect found primarily in the banking industry” (p. 26/27). My comment: I think that separate analysis of E, S and G scores is very important for risk reasons, because I do not want to accept high social risks to be offset by low ecological risks etc.
Good ESG reduces costs: ESG Performance and the Cost of Debt. Evidence from the Corporate Bond Market by Paolo Fiorillo, Antonio Meles, Antonio Ricciardi and Vincenzo Verdoliva as of Nov. 18th, 2024 (#11): “… Using an international sample of 25,234 bonds by 2,677 ESG rated issuers … finding lower yields (by approximately 10 bps) for high-ESG firms. … Finally, we observe lower yield spreads for bond issues occurred after the introduction of the SFDR …Overall, our results suggest that firms can benefit from superior ESG performance in terms of lower cost of debt on the corporate bond market” (abstract). My comment: I only invest in stocks with above-average best-in-universe E, S and G scores
Different incident effects: Beyond Borders: Asset Price Reaction to ESG Incidents at Horne and Abroad by Tomasz Orpiszewski and Mark Thompson as of Nov. 18th, 2024 (#12): “This study examines the impact of ESG incidents on the stock and corporate bond prices … First, environmental incidents are generally associated with a downward movement in both stocks and corporate bonds. ln Europe, governance-related news also triggers a pronounced negative reaction. Second, ESG incidents occurring within the home jurisdiction in the US and Europe often lead to a price increase or a milder drop, … Third, we observe that incidents reported in non-English languages or occurring farther from the corporate headquarters tend to elicit stronger negative market reactions … Incidents in wealthier countries with higher GDP per capita result in a greater price drop across all assets, whereas bond prices exhibit a smaller decline or even increase when incidents occur in developing countries” (abstract). My comment: My data provider includes the effects of ESG-incidents within the ESG-scores. I only divest from stocks if the respective best-in-universe E, S and G scores fall >10% below the average scores (which happened more often than I thought, see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds
No SRI disadvantage: Socially Responsible Investment Funds: A Robust Test of Efficiency by Kwasi Boateng, Dan Daugaard, Vladimir Volkov and Faisal Khan as of Aug. 7th, 2024 (#54): “We test the efficiency of socially responsible investment (SRI) equity mutual funds using linear factor pricing models (LFPM) … the method finds no significant performance difference between SRI mutual funds and the broader fund universe” … (abstract). My comment: I f there is no return and risk difference, why not invest everything sustainably?
SDG investment research
Thematic problems: Morningstar Global Thematic Funds Landscape 2024 by Kenneth Lamont, Monika Calay, Daisuke Motori, and Madeleine Black from Morningstar Fund Research as of October 2024: “Despite several years of widespread underperformance, … Thematic funds attracted USD 360 billion in net flows in the postpandemic recovery period, before losing USD 43 billion in net outflows in the subsequent three and a half years. … In the first half of 2024, fund closures marginally surpassed new launches globally for the first time since 2013. … In Europe, 86% of thematic fund assets are in actively managed funds. In contrast, 81% of US thematic fund assets are in indexed strategies. … Broad thematic funds, which invest across many different themes, represent the most popular theme by assets globally. … Eighteen percent of thematic funds in our global universe both survived and outperformed the Morningstar Global Target Market Exposure Index over the trailing year to mid-2024. … Sixty percent of the thematic funds that were available to investors at the onset of that period have since been closed“ (p. 1 and 2). My comment: I focus on SDG-compliant thematic (fund) investments which – unfortunately- have not performed better than other themes recently.
Inflated thematic ETFs: Ponzi Funds by Philippe van der Beck, Jean-Philippe Bouchaud, and Dario Villamaina as of May 21st, 2024 (#2001): “Many active funds hold concentrated portfolios. Flow-driven trading causes price pressure, which pushes up the funds’ existing positions resulting in realized returns. … We find that flows chasing self-inflated returns predict bubbles in ETFs and their subsequent crashes, and lead to a daily wealth reallocation of $500 Million from ETFs alone. We provide a simple regulatory reporting measure– fund illiquidity– which captures a fund’s potential for self-inflated returns“ (abstract).
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Werbung (in: Climate hedge research post)
Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung mit durchschnittlich außerordentlich hohen 94% SDG-vereinbaren Umsätzen der Portfoliounternehmen und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement bei derzeit 29 von 30 Unternehmen (siehe auch My fund).