Complex engagement: 10x new research on hot Nordics, green growth, GHG data, debt-for-nature, quant and placebo ESG, shareholder engagement, bond factors, insider trading and international fintech by Sebastian Grund, Julian Heeb, Julian Kölbel, Florian Berg, Andrew Lo, Roberto Rigobon and many more (# shows the number of SSRN downloads on June 22nd, 2023)
Ecological and social research
Hot Nordic mountains? Does Climate Sensitivity Differ Across Regions? A Varying–Coefficient Approach by Heather Anderson, Jiti Gao, Farshid Vahid, Wei Wei, and Yang Yang as of May 14th, 2023 (#21): “… using data from 1209 weather stations show that mid/high-latitude regions in the northern hemisphere are more sensitive to changes in GHGs (Sö: greenhouse gases) than the equatorial area or the southern hemisphere, and that inland areas are more sensitive than coastal areas. Our latitude-varying model estimates suggest that global temperature would rise by 3.7◦C following a doubling CO2, with areas above 50◦N rising by more than 5 ◦C and areas near 30◦S rising by 2.5◦C. … In an out-of-sample forecasting exercise, we demonstrate that our latitude-varying model outperforms the parsimonious constant coefficient model in forecasting future temperatures“ (p. 25).
Policy failure? Restructuring Reforms for Green Growth by Serhan Cevik and João Tovar Jalles from the IMF as of June 20th, 2023 (#17): “… in a panel of 25 countries during the period 1970– 2020 … First, while electricity and gas sector reforms so far failed in bringing about a reduction in CO2 and GHG emissions per capita, there is some evidence for greater effectiveness in lowering GHG emissions per unit of GDP. Second, although electricity and gas sector reforms are not associated with higher supply of renewable energy as a share of total energy supply, they appear to stimulate a sustained increase in the number of environmental inventions and patents per capita over the medium term … market-oriented electricity and gas sector reforms leading to better environmental outcomes and green growth in countries with stronger environmental regulations”.
GHG data issues: GHG Challenges for the Accurate Measurement and Accounting of Corporate Greenhouse Gas Emissions by Anton Kelnhofer and Benedikt Brauner as of May 9th, 2023 (#23): “ … companies often struggle to ensure the validity and accuracy of GHG emission calculations published and frequently remain reluctant to intensify their efforts due to perceived ambiguity and clarity on their true carbon footprint. This potentially results in substantial deviations between GHG emission data actually incurred and publicly reported. We attempt to identify the drivers at the root of these deviations. To this end, we conduct a multiple-case study among 14 large, public companies operating in emission-intensive sectors. The study reveals that GHG accuracies mostly result from challenges regarding the application of available standards and initiatives, the collection and calculation of GHG emission data along scopes 1, 2 and 3, the transparency, motivation and target definition of published reports as well as objectives and quality of external verification by auditors” (abstract).
Responsible investment research (complex engagement)
Debt-for-Nature? Debt-for-Nature Swaps: The Belize 2021 Deal and the Future of Green Sovereign Finance by Stephanie Fontana-Raina and Sebastian Grund as of May 16th, 2023 (#226): “The Belize debt-for-nature swap was a milestone … Despite representing innovations that facilitated Belize’s significant investments in local environmental protection while providing much needed, if possibly insufficient, fiscal relief, this new model of debt-for-nature swap is limited in terms of scalability and replicability. … For countries with unsustainable debt, a debt-for-nature swap cannot be expected to restore sustainability on its own, unless it involves a sufficiently large share of a country’s debt and substantial debt relief. The model in recent debt-for-nature swaps supports that the transaction may not be financially feasible without grant funding or credit enhancement from a highly creditworthy party, and the larger the stock of external debt that needs to be restructured, the more difficult it may be to attract sufficient credit support from the official sector. Larger debt restructurings involve tens of billions of dollars. … For now, debt-for-nature swaps represent a significant evolution in green sovereign finance and can serve as a “sweetener” in more traditional debt restructurings” (p. 22/23).
No ESG placebo: Is Sustainable Finance a Dangerous Placebo? by Florian Heeb, Julian F. Kölbel, Stefano Ramelli, Anna Vasileva as of June 19th, 2023 (#198): “Some observers argue that sustainable finance is a dangerous placebo that crowds out individual support for policy-driven solutions to societal challenges … with a pre-registered experiment exploiting a real-world climate policy referendum in Switzerland. We find that the opportunity to invest in a climate-conscious fund does not crowd out individual political engagement and costly efforts to advance formal climate policy. If anything, we observe moderate, not statistically significant, evidence for a crowding-in effect of sustainable investing on political engagement … on average, voters do not consider sustainable finance a substitute for political action“ (p. 18/19).
Quant ESG: Quantifying the Returns of ESG Investing: An Empirical Analysis with Six ESG Metrics by Florian Berg, Andrew W. Lo, Roberto Rigobon, Manish Singh, and Ruixun Zhang as of June 16th, 2023 (#1210): “… we quantify the excess returns of arbitrary ESG portfolios … for firms in the U.S., Europe and Japan from 2014 to 2020. … We also propose a number of methods to aggregate ESG scores across vendors to produce the best signal within the data, simultaneously addressing measurement errors and yielding a single measure of ESG that can potentially be used for portfolio management. Empirically, we find significant ESG excess returns in the U.S. and Japan. We also find positive and higher than market risk-adjusted returns” (p. 30). My comment: Including 2021 and 2022 experiences, investors should not expect excess ESG returns but they may still have lower risks with ESG investments. Instead of “pseudo-optimizing” portfolios and aggregating ESG scores from different providers which reduces transparency and explainability, more efforts should go into comparing rating approaches and finding the best (fitting) ones.
Complex engagement: Shareholder Engagement Inside and Outside the Shareholder Meeting by Tim Bowley, Jennifer G. Hill, and Steve Kourabas as of June 1st, 2023 (#199): “First, contemporary shareholder-company engagement is a multi-dimensional and evolving phenomenon. Shareholders use, to varying degrees, a wide range of engagement techniques. These include the shareholder meeting, behind-the-scenes interactions, public campaigns, and online technologies such as discussion boards and messaging apps. The latter technologies are particularly favoured by younger retail investors and have been used with remarkable effect to marshal the governance influence of such investors in recent high-profile cases. Second, shareholders often mix and match different engagement techniques in a synergistic manner to leverage their governance influence. Third, shareholders increasingly undertake their engagement activities collectively, highlighting the growing capacity of public company shareholders to overcome traditional collective action challenges. Finally, despite the engagement alternatives available to shareholders, the shareholder meeting remains an important engagement mechanism. … the processes which shape corporate decisions are becoming more diffuse and potentially less transparent. Ensuring accountability is a more complex issue in these circumstances …” (abstract). My comment: My most recent engagement experience see Active or impact investing? – (prof-soehnholz.com)
Traditional investment research (complex engagement)
No bond outperformance? Priced risk in corporate bonds by Alexander Dickerson, Philippe Mueller, and Cesare Robotti as of June 15th, 2023 (#1191): “… we explore the limitations of evaluating factor models on corporate bonds …. Overall we find that it is difficult for newly proposed specifications to outperform the simple bond CAPM, economically and statistically. … given the nontrivial transaction costs in the over-the-counter trading of corporate bonds, it would be valuable to formally compare the performance of alternative pricing models for bonds based on economically meaningful metrics that take into account transaction costs …” (p. 22/23).
Insider ETFs: Using ETFs to conceal insider trading by Elza Eglīte, Dans Štaermans, Vinay Patel, and Tālis J. Putniņš as of Feb. 1st, 2023 (#2097): “We show that exchange traded funds (ETFs) are used in a new form of insider trading known as “shadow trading.” Our evidence suggests that some traders in possession of material non-public information about upcoming M&A announcements trade in ETFs that contain the target stock, rather than trading the underlying company shares, thereby concealing their insider trading” (abstract).
International fintech: Global Fintech Trends and their Impact on International Business: A Review by Douglas Cumming, Sofia Johan and Robert S. Reardon as of June 19th, 2023 (#82): “Firstly, fintech facilitates entrepreneurial internationalization, as evidenced by the role of crowdfunding in numerous start-ups‘ internationalization processes. Crowdfunding, along with P2P lending, has lowered barriers across countries by opening global markets and providing alternative funding sources. Fintech can also be harnessed to enhance financial inclusion in developing nations, promoting access to capital and financial services for underserved populations. Secondly, fintech can be incorporated into multinational corporations‘ research to uncover opportunities for growth and market expansion worldwide. The digital nature of online banking and the agility of fintech platforms can potentially transform corporate culture and streamline business processes, offering new ways to optimize operations and drive innovation. Thirdly, effective global regulation and regulatory technology are essential to fully realize fintech’s benefits. … concerns include potential risks associated with consumer protection, data privacy, and illicit activities. Developing and implementing appropriate regulatory frameworks can help mitigate these risks …“ (p. 30).
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