ESG audits illustration by xdfolio from Pixabay
ESG audits: 9x new research on migration, floods, biodiversity risks, credit risks, ESG assurance, share loans, LLM financial advice, mental models and gender investing (# shows number of SSRN full paper downloads as of June 20th, 2024).
Social and ecological research
Complementary migrants: Do Migrants Displace Native-Born Workers on the Labour Market? The Impact of Workers‘ Origin by Valentine Fays, Benoît Mahy, and François Rycx as of April 9th, 2024 (#34): “… native-born people with both parents born in the host country (referred to as ‘natives’) and native-born people with at least one parent born abroad (referred to as ‘2nd-generation migrants’) … Our benchmark results … show that the relationship between 1stgeneration migrants, on the one hand, and natives and 2nd-generation migrants, on the other hand, is statistically significant and positive, suggesting that there is a complementarity in the hirings or firing of these different categories of workers in Belgium … tests support the hypothesis of complementarity between 1st-generation migrants on the one hand, and native and 2nd-generation migrant workers on the other. … complementarity is reinforced when workers have the same (high or low) level of education and when 1st-generation migrant workers come from developed countries” (p. 22/23).
ESG investment research (in: ESG audits)
Corporate flood risk: Floods and firms: vulnerabilities and resilience to natural disasters in Europe by Serena Fatica, Gábor Kátay and Michela Rancan as of April 16th, 2024 (#76): “…. we investigate the dynamic impacts of flood events on European manufacturing firms during the 2007-2018 period. … We find that water damages have a significant and persistent adverse effect on firm-level outcomes, and may endanger firm survival, as firms exposed to water damages are on average less likely to remain active. In the year after the event, an average flood deteriorates firms’ assets by about 2% and their sales by about 3%, without clear signs of full recovery even after 8 years. While adjusting more sluggishly, employment follows a similar pattern, experiencing a contraction for the same number of years at least. “ (p. 35).
Too green? Impact of ESG on Corporate Credit Risk by Rupali Vashisht as of May 30th, 2024 (#23): “… improvements in ESG ratings lead to lower spreads due to the risk mitigation effect for brown firms. On the other hand, for green firms, ESG rating upgrades lead to higher spreads. Next, E pillar is the strongest pillar in determining the bond spreads of brown firms. All pillars E, S, and G pillars are important determinants of bond spreads for green firms. Lastly, improvements in ESG ratings are heterogeneous across quantiles“ (abstract). “… “findings in the recent literature substantiate the results of this paper by providing evidence that green companies are deemed safe by investors and that any efforts towards improving ESG performance may be considered wasteful and therefore, penalized” (p. 47). My comment: In may experience, even companies with good ESG ratings can improve their sustainability significantly. Investors should encourage that through stakeholder engagement. My approach see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) or my engagement policy here Nachhaltigkeitsinvestmentpolitik_der_Soehnholz_Asset_Management_GmbH
Independent ESG audits: Scrutinizing ESG Assurance through the Lens of Reporting by Cai Chen as of June 7th, 2024 (#33): “… I examine three reporting properties (materiality, verifiability, and objectivity) relevant to the objectives of ESG assurance (Söhnholz: independent verification) across an international sample. I document positive associations between ESG assurance and all three reporting properties … These associations strengthen with assurers’ greater industry experience, companies’ ESG-linked compensation, and companies’ high negative ESG exposure” (abstract).
Biodiversity ESG audits: Pricing Firms’ Biodiversity Risk Exposure: Empirical Evidence from Audit Fees by Tobias Steindl, Stephan Küster, and Sven Hartlieb as of as of May 14th, 2024 (#73): “… we find that biodiversity risk is associated with higher audit fees for a large sample of listed U.S. firms. Further tests reveal that auditors do not increase their audit efforts due to firms’ higher biodiversity risk exposure but rather charge an audit fee risk premium. We also find that this audit fee risk premium is only charged (i) by auditors located in counties with high environmental awareness, and (ii) if the general public’s attention to biodiversity is high“ (abstract).
Other investment research (in: ESG audits)
Share loaning: Long-term value versus short-term profits: When do index funds recall loaned shares for voting? by Haoyi (Leslie) Luo and Zijin (Vivian) Xu as of May 22nd, 2024 (#20): “… we analyze the share recall behavior of index funds during proxy voting and investigate the implications for voting outcomes. … We find that higher index ownership is more likely associated with share recall, particularly in the presence of higher institutional ownership, lower past return performance, smaller firms, and more shares held by younger fund families with higher turnover ratios or higher management fees. … a higher recall prior to the record date is associated with fewer votes for a proposal if opposed by ISS“ (p. 29). My comment: ETF-selectors should discuss if loaning shares is positive or negative.
AI financial advice: Using large language models for financial advice by Christian Fieberg, Lars Hornuf and David J. Streich as of May 31st, 2024 (#162): “…. we elicit portfolio recommendations from 32 LLMs for 64 investor profiles differing with respect to their risk tolerance and capacity, home country, sustainability preferences, gender, and investment experience. To assess the quality of the recommendations, we investigate the implementability, exposure, and historical performance of these portfolios. We find that LLMs are generally capable of generating financial advice as the recommendations can in fact be implemented, take into account investor circumstances when determining exposure to markets and risk, and display historical performance in line with the risks assumed. We further find that foundation models are better suited to provide financial advice than fine-tuned models and that larger models are better suited to provide financial advice than smaller models. … We find no difference in performance for either of the model features. Based on these results, we discuss the potential application of LLMs in the financial advice context“ (abstract).
Mental constraints? Mental Models in Financial Markets: How Do Experts Reason about the Pricing of Climate Risk? by Rob Bauer, Katrin Gödker, Paul Smeets, and Florian Zimmermann as of June 3rd, 2024 (#175): “We investigate financial experts’ beliefs about climate risk pricing and analyze how those beliefs influence stock return expectations. … most experts share the view that climate risks are insufficiently reflected in stock prices, yet they hold heterogeneous beliefs about the source and persistence of the mispricing. … Differences in experts’ mental models explain variation in return expectations in the short-term (1-year) and long-term (10-year). Furthermore, we document that experts’ political leanings and geography determine the type of mental model they hold” (abstract).
Gender investments: Gender effects in intra-couple investment decision-making: risk attitude and risk and return expectations by Jan-Christian Fey, Carolin E. Hoeltken, and Martin Weber as of Nov. 29th, 2023 (#147): “Using representative data on German households … we show that the relation between gender, risk attitudes (both in general and financial matters) and risky investment is much more complex than prior literature has acknowledged. … This analysis has shown that risk-loving, wife-headed households seem to have a less optimistic risk and return assessment than their husband-headed counterparts. Overall, 40 percent of the 10.57 percentage point gap in capital market participation potentially arises from a less favourable view on investment Sharpe ratios taken by female financial heads. … General risk attitudes are our preferred measure of innate risk attitudes since the financial risk attitude question can easily be contaminated by financial constraints, and understood by survey participants as a question of their capacity to take risks rather than their willingness“ (p. 42/43).
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