Climate investment research: 11x new research on digital productivity, crimes, ESG fees, green home bias, disclosure, infrastructure, brown news, ECB impact, shareholder engagement, and public-private deals
Climate investment research: 11x new research on digital productivity, crimes, ESG fees, green home bias, disclosure, infrastructure, brown news, ECB impact, shareholder engagement, and public-private deals (# indicates the number of SSRN downloads on March 16th, 2023)
Social and ecological research
Digital productivity limits: Digitalisation and productivity: gamechanger or sideshow? by Robert Anderton, Vasco Botelho, Paul Reimers as of March 9th, 2023 (#26): „We use a large balance sheet panel dataset comprising more than 19 million European firm-level observations … the firm that exhibits on average a higher share of investment in digital technologies will exhibit a faster rate of TFP (Soe: total factor productivity) growth … Digitalisation does not seem to have relatively stronger impacts on the productivity of frontier firms compared to laggards, nor does it help to turn laggards into frontier firms. … Digital technologies … seem more like a sideshow for most firms, who attempt to be increasingly digital but are not able to adequately reap its productivity gains” (abstract).
Pollution leads to crimes: Symptom or Culprit? Social Media, Air Pollution, and Violence by Xinming Du as of March 9th, 2023 (#6): „… Together with higher air pollution, I find more aggressive behaviors both online and offline, as well as worse health outcomes near refineries. A one standard deviation increase in surrounding VOCs (Sö: volatile organic compounds) leads to 0.16 more hate crimes against Black people and 0.23 more hospital visits per thousand people each day. … On days with pollution spikes, surrounding areas see 30% more offensive and racist tweets and 12% more crimes; those geographically distant but socially networked regions also see offensive and racist tweets increase by 3% and more crimes by 4.5% …” (abstract).
Responsible and climate investment research
Higher ESG fees: Capitalists or fiduciary conscious agents? ESG mutual fund fees and investor sophistication by Wei Wei and Anna (Ania) Zalewska as of March 16th, 2023 (#19): “We use a sample of 2,055 U.S. equity mutual funds … and find that fund families do exploit retail ESG investor’s low performance sensitivity when setting fees of ESG funds. In contrast, we find no evidence of such practices in the sample of institutional funds. Moreover, we find that the exploitative fee setting practices observed in the retail sample are driven by marketing fees and not by operating fees“ (abstract).
Increasing green home bias: Green bond home bias and the role of supply and sustainability preferences by Anouk Levels, Claudia Lambert, and Michael Wedow as of March 6th, 2023 (#11): “We document that green bond markets are currently more integrated than conventional bond markets across the euro area, as evidenced by significantly lower levels of investors’ home bias in green bond markets. However, green bond markets are generally becoming less integrated over time as domestic green bond markets mature. In the aggregate across all euro area investors, we find that investors who only hold foreign green bonds in the absence of a domestic green bond market, shift their portfolios towards domestic bonds as soon green bonds become available in their home country. After this initial correction, home bias only slowly increases further as the domestic market develops, suggesting that overall positive integration trend (lower home bias) of green bond markets only gradually diminishes as domestic markets continue to gain in size. … The beneficial impact of banks’ sustainability ambition on green bond home bias seems to dissipate quickly, however, as banks rebalance their portfolio towards domestic green bonds as their domestic market grows” (p. 20).
Climate investment research
Positive disclosure: Corporate Disclosure of Climate Change Risk – A Pilot Study by David Hampton and Valerie Li as of March 6th, 2023 (#43): “Using a small sample that covers six industries, we find that 91% of annual reports contain some disclosures of climate-related risks. The extent of the disclosure varies by industry but increases over our sample period … our evidence suggests that climate-risk disclosure is positively associated with firms’ financial performance …” (p. 740).
Climate uncertainties: What integrated assessment models can tell us about asset prices by Riccardo Rebonato in EDHEC Business School climate and Finance special Spring 2023 as of March 14th, 2023: “With the new-generation IAMs (Sö. Integrated Asset Models), the Paris Agreement 1.5–2°C target emerges as an optimal, rather than ‘aspirational’, goal. The paper also shows that following this optimal path requires an unprecedented change in emission trajectory. As a consequence, there is ample scope for negative surprises, which may currently be only imperfectly reflected in asset prices” (p. 2).
Green demand premium: Is there a ‘green’ risk factor in infrastructure investment? By Noël Amenc and Frédéric Blanc-Brude in EDHEC Business School climate and Finance special Spring 2023 as of March 14th, 2023: “While green infrastructure has outperformed the ‘core’ infrastructure market over the past decade, this is largely the result of excess demand for such assets that has pushed asset prices up and discount rates down. …When too few green infrastructure investments are available in the market, asset prices increase and yields compress. Controlling for this effect, any outperformance of the green power sector over the considered period disappears. This phenomenon peaked in 2019 and the expected returns of green power investments are now much lower than they used to be“ (p. 15).
Brown news discount: The impact of climate change news on green[1]minus-brown portfolios by Jean-Michel Maeso and Dominic O’Kane in EDHEC Business School climate and Finance special Spring 2023 as of March 14th, 2023: “Using a variety of language models and high-quality English-language newspaper sources … we construct an unexpected climate news index (UCNI) for each model and source. We measure the impact of these UCNIs, plus an aggregate UCNI over all the news sources, on a range of green, brown, and green-minus-brown (GMB) equity portfolios, constructed by sorting S&P 500 firms based on their carbon intensity. For most of the language models considered, the sensitivity of returns to an increase in the corresponding aggregated UCNI index, is negative and statistically significant at 1% for brown portfolio returns, but it is not significant for green portfolio returns“ (p. 22).
Impact and climate investment research
Climate ECB impact: The climate and the economy by Johannes Breckenfelder, Bartosz Mackowiak, David Marques, Conny Olovsson, Alexander Popov, Davide Porcellacchia, and Glenn Schepens from the European Central Bank as of March 8th, 2023 (#68): “We review the rapidly growing academic literature on the consequences of climate change and climate policies for the real economy. The conclusion we reach is that climate change will lead to permanent changes in the organization of economic interaction. Chief among these are income and growth divergence across individuals, sectors, and countries, major shifts in energy markets, increased inflation variability, stress in various financial market segments, a climate technology revolution, intensified migration flows, higher public debt, and higher likelihood of interpersonal and interstate conflict. … An effective and smooth transition towards a net-zero economy requires a large-scale, coordinated response between fiscal authorities, central banks, regulators, and supervisors. … there will be renewed pressure on the ECB to intervene in sovereign markets“ (p. 29).
Engagement intransparency: Point of No Returns 2023 Part II: Stewardship and Governance by Danielle Vrublevskis and Marina Zorila from ShareAction as of March 8th, 2023: “Most asset managers disclosed case studies and thematic engagement priorities, but less than a third included a full list of companies they engaged with … Membership of most responsible investment industry associations does not indicate strong performance on responsible investment …” (p. 8/9). My comment: See Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)
Good public-private deals: Biodiversity Finance by Caroline Flammer, Thomas Giroux, and Geoffrey M. Heal as of March 13th, 2023 (#72): “… biodiversity can be financed by i) pure private capital and ii) blended financing structures. In the latter, private capital is blended with public or philanthropic capital, whose aim is to de-risk private capital investments. … we provide empirical evidence using deal-level data from a leading biodiversity finance institution. We find that projects with higher expected returns tend to be financed by pure private capital. Their scale is smaller, however, and so is their expected biodiversity impact. For larger-scale projects with a more ambitious biodiversity impact, blended finance is the more prevalent form of financing. While these projects have lower expected returns, their risk is also lower“ (abstract).
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