Direct Indexing (ESG) shows Pixabay picture of colorful face from Alexandr Ivanov

Direct Indexing (ESG) and more: Researchpost #130

Direct Indexing (ESG): 10x new research on brownshifting, denials, greenwashing, lack of ESG products, missing research, sin premium, female private equity, fintech and AI-accountants by Lubos Pastor, Robert Stambaugh, George Serafeim, Andreas Hoepner, Marc Eulerich and many more (# shows SSRN downloads on June 8th)

Social and ecological research

Brownshifting? Are Firms Voluntarily Disclosing Emissions Greener? by Yilin Shi, Christopher S. Tang, and Jing Wu as of May 22nd, 2023 (#132): “… we use different regression models to show that disclosing firms tend to have lower internal emissions (Scope 1) and yet they have higher Scope 3 external emissions generated by their upstream suppliers. This finding reveals that disclosing firms are not necessarily greener. Instead, they may have shifted their emissions to their upstream suppliers knowingly or unknowingly” (p. 27).

Denial based violations: Climate Change Denial and Corporate Environmental Responsibility by Mansoor Afzali, Gonul Colak,  and Sami Vähämaa as of April 25th, 2023 (#85): “… firms located in counties with higher levels of climate change denial have weaker environmental performance ratings … Furthermore, … firms headquartered in high climate change denial counties are more likely to commit federal environmental compliance violations. … strong corporate governance mechanisms and corporate culture moderate the negative relationship between climate change denial and corporate environmental responsibility” (p. 31).

Responsible investment research: Direct Indexing (ESG)

Clear Greenwashing? Green Tilts by Lubos Pastor, Robert F. Stambaugh, and Lucian A. Taylor as of May 31st, 2023 (#80): “The total amount of ESG investing is substantial but much smaller than the aggregate AUM of institutions that proclaim to invest in line with ESG-related principles. Our estimates indicate that the total amount of ESG-related tilts in institutional equity portfolios is about 6% of the institutions’ total equity AUM. This fraction has been fairly steady throughout our sample from 2012 to 2021. … our approach allows the three dimensions of ESG to enter separately, recognizing, for example, that investors may assess Tesla’s environmental virtues separately from Tesla’s treatment of its employees. We find that using only a composite ESG score misses over 40% of the tilts associated with the E, S, and G characteristics. We also find that each of those three dimensions contributes about equally to ESG-related tilts. … institutions divest from brown stocks mostly by reducing positions rather than eliminating them. … the … steady rise in the investment industry’s aggregate net green tilt is fully driven by the largest third of institutions … whereas smaller institutions are increasingly brown … the least green institution type is banks“ (p. 23/24). My comment: This analysis clearly shows that there is still a huge potential for additional green investments (or that we currently can observe is a lot of greenwashing)

Few ESG products? ESG: From Process to Product by George Serafeim as of June 7th, 2023 (#2250): “ESG is the process of measuring relevant resources and outcomes, analyzing the resource allocation process that could derive optimal outcomes for an organization, managing those resources to improve outcomes, and communicating the management of those resources and outcomes to stakeholders of the organization. Therefore, as a process, it can be implemented by any organization as they see fit with their purpose and strategy. … A conceptual framework for ESG investment products defines their objectives, identifies their fundamental characteristics, and highlights enhancing characteristics that could create ‘shades of ESG,’ in a continuum range rather than as a binary outcome. Central to the conceptual framework is the need for verifiability of intentions, through documentation of organizational beliefs, processes, and capabilities, and the measurement of outcomes from those intentions. Given lack of those attributes across many investment funds, the market size of eligible ESG investment products is likely to be much smaller than otherwise thought” (p. 15/16). My comment: My approach is documented in detail see Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (

Direct Indexing (ESG): Portfolio Choice with ESG Disagreement: Customizing Sustainability Through Direct Indexing by Paul Ehling, Stig Roar Haukø Lundeby, and Lars Qvigstad Sørensen as of Jan. 18th, 2023 (#150): “Previous research has demonstrated that, despite similar aims, there is considerable diversity across the ESG ratings. This paper has detailed that this divergence persists when maximizing ESG scores subject to a tracking error constraint. … from a risk point of view, the optimized ESG portfolios differ more across each other than they differ relative to the benchmark. Further, we showed that on average the optimization tilts toward good ESG scores for large stocks with low specific risk. The implication is that an ESG-motivated portfolio differs substantially based on the agency chosen for the ESG ratings. If clients choose a single ESG rating provider, this must be a deliberate decision after ascertaining that the vendor provides ratings in accordance with the client’s values and beliefs. … The techniques detailed in this paper to manage ESG uncertainty could be made available to direct indexing clients, enabling them to choose portfolios aligned with their ESG preferences as there is mounting evidence that ESG is in the eye of the beholder“ (p. 12/13). My comments: First: There are millions of indices available. Tracking error to any one index should not be an investor priority. Second: Aggregating different ESG-ratings creates intransparency: Why which rating I good or bad cannot be identified easily anymore. Third: It is better to start direct indexing (ESG) with a universe with very sustainable investments according to convincing ESG-ratings and then deselect investments based on personal values, see Custom ESG Indexing Can Challenge Popularity Of ETFs ( or Direct ESG Indexing: Die beste ESG Investmentmöglichkeit auch für Privatkunden? – Responsible Investment Research Blog (

Missing research: Sustainability in Private Capital Investing: A Systematic Literature Review by Majid Mirza, Truzaar Dordi, Pedro Alguindigue, Ryan Johnson, and Olaf Weber as of April 23rd, 2023 : “… It was found that less than 1% of the literature, written in English, between 1960−2020 on private equity and venture capital addresses topics related to sustainability. … The objective of this paper is to provide evidence of the dearth of academic literature on the topic of private capital markets and sustainable investment, while identifying current themes in the existing literature so that future work may address gaps in research” (abstract).

General investment research: Direct Indexing (ESG)

Sin Premium? Measuring Business Social Irresponsibility: The Case of Sin Stocks by Hamid Boustanifar and Patrick Schwarz as of March 30th, 2023 (#222): “We propose a novel method based on the textual analysis of corporate annual reports to identify sin stocks and to measure their sinfulness. Our method performs much better than the procedure used in the prior literature, which relies on using industry classification codes. … Contrary to the findings of several recent studies, we find strong evidence consistent with the existence of a sin premium. A sin-weighted (but not necessarily an equal- or value-weighted) portfolio of sin stocks generates a FF6 alpha (Söhnholz: Fama French Six Factor Ouperformance) of 4% per year from 1997 to 2021. This suggests that investors require higher expected returns to hold more sinful stocks“ (p. 27/28). My comment: I doubt that there will be enough buyers willing to pay sin premia in the future, see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (

Female PE impact: Does Gender Influence the Investment Strategy of Private Equity Firms? Evidence from Impact Investing by Theodor Cojoianu, Pia Helbing, Andreas G. F. Hoepner, Xi Hu and Beiyun Xiao as of April 25th, 2023 (#68): “Using a comprehensive dataset on all PE deals from 2010-2021, we uncover new evidence that … female ownership significantly increases the probability of impact investment strategy. We find pronounced differences of this relationship between Common (positive) and Civil (negative) Law countries. … It appears that there is a gender difference on impact investing strategy that can be identified at the PE, syndicate or deal level …” (p. 13).

Mind the Gap: Fintech, investor sophistication and financial portfolio choices by Leonardo Gambacorta, Romina Gambacorta, and Roxana Mihet as of May 31st, 2023 (#13):“… we present a simple micro-founded model that derives testable predictions on the links between financial technologies, investors’ degree of sophistication, and their portfolio choices and financial returns. Using microdata from the Survey on Household Income and Wealth conducted by Banca d’Italia over the period 2004-20, we … find that the gaps in financial returns and share of risky assets between sophisticated and unsophisticated investors increase with progress in financial technology. This means that inequality is reduced only if financial technology is accessible to everyone, and if all investors have the same capacity to use it“(p. 35/36).

AI-Accountants: Can Artificial Intelligence Pass Accounting Certification Exams? ChatGPT: CPA, CMA, CIA, and EA? by Marc Eulerich, Aida Sanatizadeh, Hamid Vakilzadeh and David A. Wood as of June 3rd, 2023 (#1228): “We … examine if newly released ChatGPT models and capabilities can pass major accounting certification exams including the CPA, CMA, CIA, and EA (enrolled agent) certification exams. We find that the early released ChatGPT 3.5 model is unable to pass any exam … However, with additional efforts … ChatGPT averaged a score of 85.1 percent across all sections of exams and passed them all. This high performance suggests ChatGPT has sufficient performance that it likely will prove disruptive to the accounting and auditing industries” (abstract).


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