Costly ESG? Illustration from Pixabay by Peggy and Marco Lachmann-Anke

Costly ESG? Researchpost 211

Costly ESG illustration from Pixabay by Peggy and Marco Lachmann-Anke

16x new research on ESG performance, costly ESG and nature risks, green index differences, brown commodity premium, carbon capture, director climate risks, divestment effects, rich polluters, stock market participation, model-free asset allocation, US excess returns, rebalancing costs, end-of day anomaly, private equity problems (#shows SSRN full paper downloads as of Jan. 31st, 2025).

ESG investment research

ESG meta study? Sustainability Reporting – A Global Analysis of Sustainability Reporting and its Impact on Cost of Capital – A Bibliographic and Content Analysis by Guido Sopp and Björn Bunzel as of January 23rd, 2025 (#18): “… we found that empirical studies are clearly dominating the academic research. … Surprisingly, only few studies define a specific focus industry. … we found that most studies refer to cost of equity, followed by cost of debt. Studies using a combined cost of capital measure seem to be less relevant. … Based on our sample, Bloomberg ESG score is by far the most frequently used measure, followed by Thomson Reuters/Refinitiv and KLD STATS (today MSCI ESG Research). … 35% of empirical studies put emphasis on environmental disclosures or performance. The share of studies that specifically investigate the social and/or Governance dimension is considerably lower. We identified only one study that made use of a further breakdown within the environmental, social or Governance categories, disentangling factors like resource use and greenhouse gas emissions disclosures. … In line with previous research, we can confirm based on our sample that a high percentage of studies (84% for cost of equity-studies and 71% for cost of debt-studies) evidences a significant negative relationship of CSR disclosure/performance and cost of capital. This supports the value creation theory. The relation seems to be weaker at the E-, S- and G-disclosure sublevel, indicating that investors consider the overall CSR disclosure/performance rather than the individual contributions” (p. 22). My comment: I conducted some very detailed ESG research very early, see Fetsun, A. und Söhnholz, D. (2014): A quantitative approach to responsible investment: Using ESG multifactor models to improve equity portfolios, Veritas Investment Arbeitspapier, präsentiert auf der PRI Academic Network Conference in Montreal, 23. September.

Costly ESG incidents? Do consumers (have to) pay for ESG? by Lisa Hillmann, Martin Jacob, Gaizka Ormazabal and Robert A. Raney as of Jan. 26th, 2025 (#42): “This paper examines the pricing of ESG (i.e., environmental, social, and governance) in product markets. Price effects may be demand-driven, reflecting consumers’ willingness to pay for ESG outcomes, or supply-driven, as firms pass ESG-related costs onto consumers. For identification, we focus on ESG-related incidents in the airline industry, which offers comprehensive public data on consumer prices. We observe that airlines increase ticket prices following ESG incidents. … our results show that consumers (at least partly) pay for the ESG initiatives and that ESG-related price increases cannot be fully explained by consumer demand for better environmental or social outcomes” (abstract). My comment: Mutual ESG funds do not seem to be more expensive than non-ESG funds, fortunately

Green index differences: Lower Carbon Emissions, Higher Rating Scores? Insights from Green MSCI Indices by Jan Heldmann, Thomas Brückner and Huong D. Dang as of Jan. 24th, 2025 (#7): “… we analyse four MSCI green indices namely Climate Change (CC), Paris-Aligned Benchmark (PAB), Socially Investment (SRI), and SRI filtered PAB (SRI PAB), … An investment of US$1,000 in January 2015 in the CC, PAB, SRI, and SRI PAB index (instead of the standard index) would respectively result in an average reduction of 982 kg (-53%), 1429 kg (-77%), 1147 kg (-61%), and 1355 (-73%) kg CO2 emissions at the end of December 2022. …“ (abstract).

Costly ESG (nature-risk): Nature-Related Risks in Syndicated Lending by Aras Canipek, Santanu Kundu, Jiri Tresl, and Lukas Zimmermann as of January 23rd, 2025 (#39): “… Our analysis shows that a 1% increase in a firm’s nature-dependency leads to an approximate 0.2% rise in loan spreads, suggesting that banks do indeed perceive these firms as carrying higher risk. … Additionally, banks tend to shorten loan maturities and require more collateral from firms with higher nature-dependency, further reflecting their heightened risk perceptions. … nature dependent firms with higher growth potential (or higher refinancing risk as proxied by more short term debt) is perceived as more risky by the lenders“ (p. 22/23).

Brown commodity premium: A Tale of Commodities and Climate-driven Disasters by Filippo Pellegrino as of Jan. 14th, 2025 (#53): “… I develop a global geospatial dataset to identify the locations of key commodity-producing sites at subnational level since the 1970s. By linking these regions to climate disaster events, I find that, over time, production has become increasingly concentrated in high-risk areas. Leveraging this dataset, I analyze how commodity futures respond to climate-driven shocks and uncover significant cross sectional differences. Specifically, a long-only portfolio of vulnerable commodities yields a significant monthly α of 0.90%, whereas that of resilient commodities, albeit still significant, is negative at–0.43%, reflecting a premium paid for protection against climate shocks. Furthermore, I find that vulnerable commodities experience slower recoveries from past shocks” (abstract).

SDG and impact investment research (in: Costly ESG?)

Good CCS? Corporate Climate Change Mitigation by Zenu Sharma and Bill B. Francis as of Jan. 28th, 2025 (#6): “… carbon capture and storage (CCS)… entails capturing carbon dioxide from the atmosphere or an emitting source and has considerable potential to reduce greenhouse gases (GHG). … we look at the innovation and development of CCS in the US from 2000-2023. We document that the industry structure matters for CCS. We also determine that due to high costs, investment in CCS has been sluggish; however, recent regulation on the 45Q incentives has channeled corporate funds to CCS. Finally, CCS has been effective in reducing emissions and has a positive impact on firm value” (abstract).

Directors disclose! Climate Disclosure and Director Elections by Alexandre Garel, Roni Michaely and Arthur Romec as of Jan. 9th, 2025 (#105): “This study investigates the impact of climate-related disclosure on investor support for directors in board elections. Firms not disclosing carbon emissions receive significantly lower support for their director … Firms initiating climate disclosure see increased director support. Sustainable funds and universal investors are key drivers of this trend. Moreover, investors supporting shareholder-sponsored climate proposals are more likely to vote against directors in firms lacking carbon disclosure …” (abstract).

Diverging divestment effects: Changes in the Relationship between Corporate Social Performance and Cost of Equity: Insights from a Multi-Decade Analysis of Sin Stocks and ESG Laggards by Dominic Gutknecht as of Jan. 24th, 2025 (#17): “Financial theory suggests that exclusionary investing increases divested firms’ cost of equity. … Using panel regression and propensity score matching on a dataset of 6,336 U.S. firms from 1990 to 2023, this study presents a more nuanced view. While firms in carbon-intensive industries exhibit a growing cost of equity premium, no consistent premium is found for traditional sin stocks (i.e., alcohol, tobacco, gambling and military, firearms). Furthermore, recent years have seen a shift in how ESG scores affect the cost of equity. The relationship between ESG scores and the cost of equity has shifted from being positive to negative, suggesting a changing market perception of ESG risks. These findings challenge the investor base channel and suggest that the perception of risks, rather than exclusionary practices, drives higher equity costs“ (abstract).

Rich polluters: Climate change and wealth: understanding and improving the carbon capability of the wealthiest people in the UK by Hettie Moorcroft, Sam Hampton, and Lorraine Whitmarsh as of Feb. 23rd, 2024 (#214): “… The richest 10% of the population account for over half of global emissions, but the impacts of climate change will affect them the least. … We draw on a comprehensive, nationally representative survey of UK households with more than 300 measures, and combine this with in-depth interviews with individuals defined as being in the wealthiest decile in the UK. Our findings indicate that besides their high consumption-based emissions, wealthy people possess several carbon capabilities compared to the rest of the population, including knowledge and awareness about climate change, the capacity to rapidly adopt low-carbon technologies, high levels of support for climate policies, and the ability to exert climate-positive influence amongst their social and professional networks. However, we also find little motivation amongst wealthy participations for reduced consumption, which they associate with lifestyle sacrifice and the loss of wellbeing. … The research finds that a carbon capability lens offers significant potential for creating a policy-relevant evidence base to address the individual, social, and structural dimensions of wealth-based emissions inequality“ (abstract).

Other investment research

Stock buying obstacles: Rethinking the Stock Market Participation Puzzle: A Qualitative Approach by Kamila Duraj, Daniela Grunow, Michael Haliassos, Christine Laudenbach  and Stephan Siegel as of Jan. 23rd, 2024 (#575): “We revisit the limited stock market participation puzzle … Many of the factors proposed by the literature are mentioned by interviewees. However, non-investors perceive surprisingly high entry and participation costs due to a fundamental misconception of the potential for selecting “good” stocks and avoiding “bad” ones and for market timing through continuous monitoring and frequent trading. Surprisingly, the investors we interview often share these views. However, they find a way to overcome these perceived costs with the help of family, friends, or financial advisors they trust …“ (abstract).

Simple asset allocation: Uninformative Portfolio Choice: Model-Free Asset Allocation by Jan Vecer as of Dec. 30th, 2024 (#73): “Traditional portfolio choice theory often assumes that investors know the statistical properties of asset returns, such as mean returns (µ) and the variance-covariance matrix (Σ) under a given physical measure PM. In practice, however, such information may be unavailable or unreliable. This paper introduces an “uninformative portfolio choice“ framework that dispenses with the need for prior beliefs or specific assumptions about price distributions. … Frequentist Approach …corresponds to investing in the asset achieving the highest observed return …Bayesian Approach … directly translates into an equally weighted 1 N-portfolio … By connecting frequentist and Bayesian principles to fundamental financial constructs, this uninformative framework enhances robustness, adaptability, and applicability in uncertain market environments“ (abstract). My comment: I prefer the most-passive approach, using the last observed aggregate (real) global asset allocation as the basis for my multi-asset portfolios, compare Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf.

US-Outperformance? New Evidence on the US Excess Return on Foreign Portfolios by Carol C. Bertaut, Stephanie E. Curcuru, Ester Faia, and Pierre-Olivier Gourinchas as of Dec. 18th, 2024 (#59): “We provide new estimates of the return on US external claims and liabilities using confidential, high-quality, security-level data. The excess return is positive on average, since claims are tilted toward higher-return equities. The excess return is large and positive in normal times but large and negative during global crises … Controlling for issuer’s nationality, we find that US investors have a larger exposure to equity issued by Asia-headquartered corporations than reported in the aggregate statistics. Finally, equity portfolios are concentrated in ’superstar’ firms, but for US liabilities foreign holdings are less concentrated than the overall market” (abstract).

Rebalancing strategies: Index Rebalancing and Stock Market Composition: Do Index Funds Incur Adverse Selection Costs? (#722) by Marco Sammon and John J. Shim as of Jan.9th, 2025: “ We find that index funds incur adverse selection costs from changes in the composition of the stock market. This is because indices rebalance in response to composition changes, both on the extensive margin (IPOs/delistings or additions/deletions) and intensive margin (issuance/buybacks). This rebalancing approach successfully captures the market as it evolves, but effectively buys at high prices and sells at low prices. … We estimate that a “sleepy” strategy that rebalances annually improves fund returns by 40 bps per year relative to rebalancing quarterly …” (abstract). My comment: I use yearly rebalancing.

Stock trading pattern: End-of-Day Reversal by Guido Baltussen, Zhi Da, and Amar Soebhag as of Dec. 17th, 2024 (#2057): “We find that individual stock returns display a strong intraday reversal that is most pronounced at the end of the trading day. This ”end-of-day reversal” pattern is economically and statistically highly significant …. The end-of-the-day reversal is extremely robust … the end-of-day reversal primarily comes from positive price pressure on intraday losers and reflects a transitory price pressure. … we argue two novel channels related to attention-induced retail trading during the end of the day and risk management by short-sellers contribute to the effect” (p. 27).

Limited Private Equity Alpha: Do Public Equities Span Private Equity Returns? Eric Ghysels, Oleg Gredil, and Mirco Rubin as of Dec. 2nd, 2024 (#136): “… we show that, albeit over 90% of PE returns may be explained by factors common with the matched public equities, the remaining variation exhibits robust factors that are distinct to PE. These PE-specific factors significantly increase a portfolio’s Sharpe ratio through higher expected return and better diversification. The optimal allocation to PE is positive at the 95% confidence level—at 11 to 24% of risky portfolio, depending on the public equity portfolio characteristics – … Additionally, we show that the two most commonly used datasets on PE fund returns have virtually identical common factors with public equities, but over half of their PE-specific variation is distinct from one another “ (abstract).

Private equity illusion: Are IRR performances of Private Equity funds comparable? By Xavier Pintado Jer ome Spichiger as of Jan. 16th, 2025 (#76): “… the Internal Rate of Return (IRR) … performance of a PE fund is neither comparable to that of traditional liquid assets nor to that of other PE funds. The root cause of non comparability is … that only a fraction of the financial resources provided by the investor is used by the PE manager to generate wealth … the Capital Deployment Factor (CDF). .. the CDF of PE funds rarely exceeds 60% during the fund’s lifetime and generally falls somewhere between 15 and 30% at liquidation date. … We argue that no meaningful comparison or ranking of PE performances is possible without referring to both the IRR and the CDF. We provide formulas to calculate equivalent performance between PE funds with different CDFs and listed equity investments“ (abstract).

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Zum Vergleich: Ein traditionelle globaler Small-Cap-ETF hat eine SDG-Umsatzvereinbarkeit von 5%, für einen Gesundheits-ETF beträgt diese 1% und für einen ETF für erneuerbare Energien 44%.

Insgesamt hat der von mir beratene Fonds seit der Auflage im August 2021 eine ähnliche Performance wie durchschnittliche globale Small- und Midcapfonds (vgl. z.B. Fonds-Portfolio: Mein Fonds | CAPinside und Globale Small-Caps: Faire Benchmark für meinen Artikel 9 Fonds?).

Ein Fondsinvestment war also bisher ein „Free Lunch“ in Bezug auf Nachhaltigkeit: Man erhält ein besonders konsequent nachhaltiges Portfolio mit markttypischen Renditen und Risiken.