Critical ESG rating: ESG Ratings: A Compass without Direction by David F. Larcker, Lukasz Pomorski, Brian Tayan, and Edward M. Watts as of Aug. 4th, 2022 (#3388): “We review the demand for ESG information, the stated objectives of ESG ratings providers, how ratings are determined, the evidence of what they achieve, and structural aspects of the industry that potentially influence ratings. … We find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments” (abstract).
Governance matters: A Systematic Literature Review on Corporate Governance and ESG research: Trends and Future directions by Bruno Buchetti, Francesca Romana Arduino, and Antonio De Vito as of Dec. 14th, 2022 (#363): “… our findings suggest that female directors, institutional investors, independent directors, some specific CEO characteristics, directors’ compensation, the sustainability committee (presence) and the frequency of board meetings positively impact ESG indicators. Relatedly, state ownership and the characteristics of board of directors appear to enhance ESG disclosure. Finally, the family ownership seems to have a negative impact on ESG performance” (p. 26).
Green shock-absorbers: Green Transmission: Monetary Policy in the Age of ESG by Alba Patozi as of Jan. 17th, 2023 (#48): “… evidence from stock price, credit risk and investment data at the firm-level, shows that greener firms are considerably less responsive to monetary policy shocks than their brown counterparts. … the dampened sensitivity of green firms to monetary policy shocks is the result of investors’ preferences for sustainable investing. This is because investors are more reluctant to substitute away from green stocks following a contractionary monetary policy shock, when they derive a non-pecuniary benefit from holding green assets” (p. 46).
Cross-Border climate risk: Measuring the Climate Transition Risk Spillover by Runfeng Yang, Massimiliano Caporin, and Juan-Angel Jiménez-Martin as of Jan. 4th, 2023 (#55): “… we first construct a proxy of climate transition risk using the risk premium between low-emission companies and high-emission companies to capture the transition risk, and proxy the transition risk as the changes in the risk premium. … we find that for positive extreme shocks, the US and Japan is the major risk transmitter, and for negative extreme shocks, the US and Canada are the major transmitters. The level of transition risk spillover is the highest around the event of Paris Agreement and the outbreak of COVID and can change across time. … We find that it takes around three weeks for transition risk to be fairly transferred. When there is a extreme positive shock in one market, around 40-50% will be transferred within five weeks. … We also find that a more stringent climate policy in one country means a higher risk spilled over and a lower risk received from outside” (p. 23/24).
Impact and SDG investments: Critical ESG
Shareholder engagement skepticism: Institutional Investor ESG Engagement: the European Experience by Gaia Balp and Giovanni Strampelli as of Feb. 13th, 2023 (#32): “… in spite of the growing practical relevance of active share ownership, including in its environmental and social dimensions, whether institutions are motivated, and are actually able, to effectively play such crucial a role remains controversial … Limitations not only derive from the deficient incentives structure and the collective action issues that are typical of asset managers. They also depend on factors not in control of the asset manager, such as voluble end-investor preferences and availability of better ESG data and information. … Some skepticism … seems to be justified also on account of evidence referred to their actual voting behavior at investee firms” (abstract). My comment: See my stakeholder engagement policy Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) as of Feb. 8th, 2023 and updated on Feb. 22nd, 2023. I recently addressed 12 of my investee companies with proposals to publish this ratio so that all stakeholders can discuss it.
Inequality reduction: What Does ‘Tackling Inequality’ Mean as a Sustainable Investment Objective for Article 9 SFDR Funds? An Initial Interpretive Roadmap by Daniel Litwin as of Jan. 23rd, 2023 (#30): “ … Article 9 SFDR funds can have ‘tackling inequality’ as a sustainable investment objective. Yet the scope and meaning of ‘tackling inequality’ are not defined. This paper provides the first interpretive roadmap for funds with ‘tackling inequality’ as a sustainable investment objective” (abstract). The research focusses on “Gender pay gap …. Compensation indicators, Excessive CEO pay ratio … Tax compliance, absence of tax avoidance and aggressive tax planning … Decent work (living wage), adequate wages” (p. 12). My comment: One of my shareholder engagement focus points is “CEO pay ratio”, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)
Traditional and alternative investment research
Bad outperformance research: Peer-reviewed theory does not help predict the cross-section of stock returns by Andrew Y. Chen, Alejandro Lopez-Lira, and Tom Zimmermann as of Dec. 20th, 2022 (#98): “To examine whether theory helps predict the cross-section of returns, we combine text analysis of publications with out-of-sample tests. Based on the original texts, only 18% predictors are attributed to risk-based theory. 58% are attributed to mispricing and 24% have uncertain origins. … Out-of-sample, risk-based predictors fail to outperform data-mined accounting predictors that are matched on in-sample summary statistics. … Overall, peer-reviewed research adds little information about future mean returns above naive back testing”(abstract).
Good listed RE: Listed Real Estate as an Inflation Hedge across Regimes by Jan Muckenhaupt, Martin Hoesli, and Bing Zhu as of Feb. 21st, 2023 (#73): “This paper investigates the inflation hedging capability of listed real estate (LRE) companies from 1990 to 2021 in four economies: the US, the UK, Australia, and Japan. … we identify that the short-term hedging ability moves towards being negative or zero during crisis periods. In non-crisis periods, LRE provides good protection against inflation. In the long term, LRE offers a good hedge against expected inflation and shows a superior inflation hedging ability than stocks” (abstract). My comment: Since 2016, I offer one of the very few listed Real Estate ESG portfolios, see www.soehnholzesg.com and Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com) chapter 3.5.3.
ChatGPT explains finance: Democratizing financial knowledge with ChatGPT by OpenAI: Unleashing the Power of Technology by Thomas Yue, David Au Chi Chu, Xavier Au Chi Chung, and Kwan Yuen as of Feb. 2nd, 2023 (#198): “The results show that ChatGPT has great potential as a tool for explaining complex financial concepts to a wide range of target audiences. The ability of ChatGPT to effectively transform financial knowledge into language that can be easily understood by non-financial professionals is a key advantage. … Ultimately, the use of ChatGPT has the potential to level the playing field and empower all individuals, regardless of their financial background, to make informed investment decisions“ (p. 26).