Corporate governance illustration shows office worker with surveillance camera from Mohamed Hassan from Pixabay

Corporate governance and more: Researchpost #138

Corporate governance: 19x new research on German wealth, ESG real world impact, CDR, circular economy, ESG ratings, ESG AI, supplier ESG, climate data, green govvies and corporates, private equity ESG, VCs and UBS by Reiner Braun, Florian Ederer, Andreas Egert, Arnd Huchzermeier, Tim Kröncke and many more (# of SSRN downloads on August 10th, 2023) 

Social and ecological research

Rich Germans: Distributional National Accounts (DINA) for Germany, 1992-2016 by Stefan Bach, Charlotte Bartels, and Theresa Neef as of June 26th, 2023 (#36): “… Our DINA series show that economic growth has been pro-rich from 1992 to 2007 and pro-poor from 2007 to 2016. But although incomes of the bottom 50% have resumed to grow since 2007, the income gap between the bottom 50% and the top 10% has widened between 1992 and 2016. The ratio of top 10% to bottom 50%’s average incomes has increased from eight to ten. … Germany’s highly concentrated economic elite – Germany’s top 0.1% and 0.01% income share is similar to the United States and far above France. Germany’s top business income recipients primarily hold firms as partnerships predominantly owned by two to four shareholders, while top business income earners in the United States and France hold shares in corporations“ (p. 30/31).

CDR case studies: How Responsible Digitalization Creates Profitable Pathways to Sustainability by Niklas Werle and Arnd Huchzermeier as of June 24th, 2023 (#21): “… we show that companies that committed to CDR (Sö: Corporate Digital Responsibility) successfully implemented digitally enabled sustainability strategies. … we conclude that responsible digitalization enables improved sustainability and contributes to reaching not only the UN SDG goals but also carbon neutrality. This study contributes to the research on CDR by showcasing exemplary outcomes from pioneering companies and developing a framework explaining the effects of CDR practices“ (p. 23).

No ESG sales impact? Do consumers vote with their feet in response to negative ESG news? Evidence from consumer foot traffic to retail locations by Svenja Dube, Hye Seung (Grace) Lee, and Danye Wang as of July 20th, 2023 (#118): “We conduct an event-study analysis in the 21-day window around the release of negative ESG news. … individuals in counties with higher ESG consciousness (proxied with income, education, political affiliation, and population density) decrease their visits to stores following negative ESG news. … However, the magnitude of the response is inconsequentially small even for these most affected consumers” (p. 36).

Circular definition: Circular Economy by Mark Anthony Camilleri, Benedict Sheehy, and Kym Fraser as of June 26th, 2023 (#7):“This contribution features the submission of one of the most important sustainability keywords to Springer’s Encyclopedia of Sustainable Management. It provides a definition and an introduction to the circular economy (CE). It describes key policies and regulatory interventions that are meant to promote the CE agenda“ (abstract).

ESG investment research: Asset class independent (Corporate Governance and more)

ESG rating criticism: ESG Ratings—Guiding a Movement in Search for Itself by Andreas Engert as of July 31st, 2023 (#114): “ESG ratings deliver the short-hand evaluation that investors need to incorporate environmental, social, and governance aspects in their decision-making. … an ESG rating can serve two distinct purposes: either to inform financial investors about long-term risks and returns from ESG-related factors or to guide prosocial investors in awarding a “greenium” subsidy for social performance. Because the information demands differ, ESG rating providers should commit to either one of these missions. The paper analyzes the specific problems of ratings serving prosocial investors. Implicitly or explicitly, such ratings reflect an ordering of political priorities that rating providers have to set. … Standardizing ESG ratings would further strengthen the effect of impact investing but seems unlikely to be attainable“ (abstract). My comment: ESG ratings typically (should) measure ESG-risks for the rated entities and SDG ratings typically (should) measure the SDG-alignment of products and services offered

Chat ESG: Overcoming Complexity in ESG Investing: The Role of Generative AI Integration in Identifying Contextual ESG Factors by Yash Jain, Shubham Gupta, Serhan Yalciner, Yashodhan Joglekar, Parth Khetan, and Tony Zhang as of July 18th, 2023 (#171): “… The results of this study suggest that GPT 3.5 is capable of generating informative and accurate responses to prompts related to ESG. … we found that it has the ability to provide insights into various ESG-related topics, such as climate change, social responsibility, and corporate governance. Furthermore, the use of APIs in this study allowed for efficient and effective data collection and analysis“ (p. 32).

Supplier ESG: The Sustainability Reporting Ripple: Direct and Indirect Implications of the EU Corporate Sustainability Reporting Directive for SME Actors by Deirdre Ahern as of July 27th, 2023 (#31): “The unique regulatory lens of the Corporate Sustainability Reporting Directive challenges affected companies, not just to mechanically report on, but to qualitatively consider how other partners in their value chain (including SMEs) impact on achievement of the company’s sustainability goals. … although the Corporate Sustainability Reporting Directive has not imposed any new reporting requirements on SMEs, except for those with securities listed on regulated markets in the EU, the indirect impact on the SME sector can be expected to be far broader. … The signal that the information required from value chain SMEs should be no more onerous that under the simplified reporting standards for listed SMEs is important to ensure regulatory coherence, feasibility, and to reduce the administrative burden on regulated actors and SMEs in the value chain” (p. 20/21). My comment: One of the focus areas of my shareholder engagement activities is to include suppliers in ESG-improvements across the whole value chain, see Shareholder engagement: 21 science based theses and an action plan – (

Governance research 1: Corporate Governance Characteristics and Involvement in ESG Activities: Current Trends and Research Directions by Anand Kumar, Tatiana Garanina, and Mikko Ranta as of July 26th, 2023 (#38): “Our unique combined approach towards conducting a literature review allows us to come up with the key research topics in the area, their deep analysis and identification of the current and future research trends. A review of corporate governance and ESG literature suggests a shift towards a more strategic and practically oriented papers” (abstract).

Governance research 2: A Literature Review on Corporate Governance and ESG research: Emerging Trends and Future Directions by Bruno Buchetti and Francesca Romana Arduino as of August 5ht, 2023 (#112): “… our findings reveal that a variety of elements, such as the inclusion of female directors, the participation of institutional investors, the appointment of independent directors, the existence of specific CEO traits, a strategically formulated directors’ compensation scheme, and the establishment of a sustainability committee, all positively influence ESG outcomes. On the other hand, it seems that family ownership may adversely impact ESG performance. Our review has also highlighted several research areas where, we believe, future research should contribute“ (p. 30).

Climate data chaos: Are Implied Temperature Rise Metrics as Inconsistent as ESG Ratings?: Examining Firm-Level Disagreement among Data Providers by Lea Chmel, Manuel C. Kathan, and Sebastian Utzas of June 29th, 2023 (#20): “This study documents substantial heterogeneity in valuating firms regarding their ITR (Sö: Implied Temperature Rise) values across different providers. Pairwise Pearson correlations range from −0.133 to 0.313 and indicate disagreement among providers. … We find that energy-intensive industry sectors and a headquarter located in North America seem to be the strongest drivers for the disagreement. … size and tangibility also appear to be determinants of higher divergence in the ITR values of firms. This is puzzling since larger firms are covered by more analysts, on average. … underlying assumptions are not observable to investors, making the exact methodology to determine an ITR value a black box …”.

ESG investment research: Bonds and Loans (Corporate Governance and more)

Brown Govvies: A framework to align sovereign bond portfolios with net zero trajectories by Inès Barahhou, Philippe Ferreira, and Yassine Maalej from Kepler Cheuvreux as of July 26th, 2023 (#76):  “The first conclusion that we drew from our analysis is that it is necessary to impose significant constraints on the optimisation programme. Otherwise, the resulting net zero portfolios may appear unrealistic for investors. … We also highlighted that the choice of the carbon metric is fundamental for net zero alignment. …. Production-based metrics tend to favour developed countries because their industries are more efficient, and they have relocated carbon-intensive activities overseas. In contrast, consumption-based carbon metrics favour emerging countries which tend to have more carbon-efficient consumption habits. … considering carbon emissions or carbon intensities paints very different pictures of the carbon dynamics. … we are not able to find solutions to our net zero problem until 2050. … that unless there is a significant improvement in countries’ behaviours, the main sovereign bond universe will be highly incompatible with an increase in global temperature below 1.5°C“ (p. 40/41). My comment: For my responsible multi-asset portfolios, since many years I use bonds of multilateral development banks instead of government bonds, see

Green cover: Corporate Green Bonds: Market Response and Corporate Response by Sanjai Bhagat and Aaron Yoon as of July 13th, 2023 (#81): “… per the Green Stakeholder Hypothesis, announcement of green bond issuance should elicit a positive stock market response for the company … Per the Greenwashing Hypothesis, the stock market will respond non-positively to green bond issuance announcements. … Consistent with the Greenwashing Hypothesis, we do not find any significant market response to these green bond announcements. … We document no change in carbon emissions subsequent to the announcement of green bonds. … In the year of the green bond announcements, the abnormal operating performance of these announcing firms is significantly negative. This is consistent with the argument that managers of these firms are using the green bond announcements as a cover for their poor business performance“ (p. 24/25).

Sustenium: The Pricing of Sustainability Linked Bonds on the Primary and Secondary Bond Market  by Jannis Poggensee as of July 13th, 2023 (#33): “The central innovation SLBs provide is that their financial characteristics can vary depending on whether a predefined sustainable performance target has been achieved or not. Typically, the coupon steps-up 25bps for the remaining lifetime of the bond if the target will not be achieved. … investor pay higher prices (accept lower returns) for green assets reflected in the premium SLBs trade both on the primary and on the secondary market on average. Issuers benefit from lower cost of capital, although this effect is decaying“ (p. 32).

Green innovation premium: Can firms adopting a green innovation policy fetch better deals from debtholders? A study on G7 countries by Vu Quang Trinh, Hai Hong Trinh, Tam Huy Nguyen, and Giang Phung as of June 26th,2023 (#38):.“… We find that high green innovation lowers the corporate cost of debt … Specifically, high-level green innovation engagement facilitates firms to reduce their carbon intensity (risk) and the likelihood of bankruptcy … The better borrowing deals underneath green innovation are also more likely to be acquired in financially constrained businesses. … prolonged green innovation engagement helps firms secure a lower cost of debt because it signifies both a richer experience and higher commitment, increasing trust from debt providers …”(abstract).

ESG investment research: Equities (Corporate Governance and more)

Costly ESG: The Cost of Being Green: How ESG Ratings Affect a Firm’s Cost of Equity by Alessio Galluzzi, Fergus O’Donnell, and Reuben Segara as of July 10th, 2023 (#123): “We find that a one standard deviation increase in ESG ratings is linked to a significant 15 basis points increase in a firm’s COE on average. This relationship is predominantly observed among S&P 500 firms or large firms, while its impact is less pronounced for energy-intensive firms. These findings highlight the importance of considering industry-specific dynamics, firm-level characteristics, and the broader investment climate when assessing the impact of ESG ratings on a firm’s COE“ (abstract).

Brown Private Equity: ESG in the Top 100 US Private Equity Firms by Garen Markarian, Calvin Rakotobe, and Alexander Semionov as of July 17th, 2023 (#96): “… we conduct an examination of the ESG practices of the top 100 private equity firms in the United States, a sector that represents over $1.5 trillion of committed capital and directly employs 12 million individuals. … We find that approximately 58% of these private equity firms disclose no information about their ESG practices. Moreover, of the firms that do disclose, two-thirds provide sparse and uninformative ESG information. … Internal Rate of Return (IRR) does not predict ESG scores overall but relates to higher social scores.“ (p. 31).

Other investment research

Unquant PE: Limited Partners versus Unlimited Machines; Artificial Intelligence and the Performance of Private Equity Funds by Reiner Braun, Borja Fernández Tamayo, Florencio López-de-Silanes, Ludovic Phalippou, and Natalia Sigrist as of July 3rd, 2023 (#1556): “… traditional quantitative factors and document readability proxies, are poor predictors of future performance. In addition, we do not find our proxies of fundraising success at the beginning of a fund’s life are actually correlated with ultimate fund performance. … Results show that approaches exploiting the qualitative information disclosed to investors in PPMs (Sö: Private placement memorandum) have important predictive power for ultimate fund success …“ (p. 25/26).

Big tech control: The Great Startup Sellout and the Rise of Oligopoly by Florian Ederer and Bruno Pellegrino as of Aril 14th, 2023 (#638): “… we documented a secular shift from IPOs (Sö: Initial public offerings) to acquisitions by VC-backed startups. … firms face an increasingly high (opportunity) cost of going public … dominant companies that are disproportionately active in the corporate control market for startups (such as GAFAM) appear to have become more insulated from the product market competition over the same period. These facts are consistent with the hypothesis that startup acquisitions have contributed to rising oligopoly power in high-tech sectors …” (p. 7). My comment: One more reason for not investing with big techs?

Swiss bailout: The UBS-Credit Suisse Merger: Helvetia’s Gift by Pascal Böni, Tim Kröncke, and Florin Vasvari as of July 13th, 2023 (#204): “We show that the UBS-CS-merger … created a net value of 22.8 bn USD, distributed to UBS stockholders (5.1 bn USD), CS stockholders (-1.1 bn USD), and CS bondholders (18.8 bn USD). The combined wealth effect cannot be explained by the participating firms’ abnormal returns on securities. … we find that there have likely been large transfers of wealth from taxpayers to UBS/CS stakeholders. … First, we argue that UBS stockholders have profited from bidding restrictions imposed by the government. … Second, we believe that CS bondholders profited from substantial coinsurance effects. Third, the “too-big-to-fail” channel, combined with a material loss protection agreement which covered a specific portfolio of CS assets (corresponding to approximately 3% of the combined assets of the merged bank) may have contributed to the combined wealth effect. Finally, and importantly, we infer from our analysis that the government intervention likely came at the cost of a significant jump in Switzerland’s sovereign credit risk and thus an increase in its expected cost of debt, implying the risk of a substantial taxpayer wealth transfer in the magnitude of approximately six to seven billion USD” (p.23/24).


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