Responsible investment research: ESG bonus
Pay for ESG: How Do Investors Value ESG? by Malcolm Baker, Mark Egan and Suproteem K. Sarkar as of Dec. 13th, 2022 (#126): “… we estimate that investors are willing to pay an additional 20 basis points to invest in an ESG index fund over an otherwise equivalent non-ESG fund. The value investors place on ESG has increased nearly three fold over our sample period, from 9 basis points in 2019 to 28 basis points in 2022. … In locations with a greater reported concern for climate change and in industries that emit less carbon, investor interest in ESG is greater“ (p. 25/26). My comment: For recent ESG performance see Konzentration und SDG-Fokus gut: Meine 9 Monats Performance 2022 – Responsible Investment Research Blog (prof-soehnholz.com)
Diversity swindle: Diversity Washing by Andrew C. Baker, David F. Larcker, Charles G. McClure, Durgesh Saraph, and Edward M. Watts as of Dec. 18th, 2022 (#561): “We provide large-sample evidence showing many firms have significant discrepancies between their disclosed commitments to diversity and their actual hiring practices. … we find diversity washers have less workplace diversity, experience future outflows of diverse employees, and are subject to higher diversity-related fines. Despite these negative DEI outcomes, we show diversity washers receive higher ESG scores from commercial rating organizations and attract more investment from ESG-focused institutional investors” (p. 27).
Ungreen PRI members: Do Responsible Investors Invest Responsibly? by Rajna Gibson Brandon, Simon Glossner, Philipp Krueger, Pedro Matos, and Tom Steffen as of Set. 9th, 2022 (#3995): “We document that PRI signatories who report that they fully or partially incorporate ESG into their active equity holdings have better portfolio ESG scores than non-PRI signatories – but this holds only for institutions domiciled outside of the U.S. In the U.S. … We do not find better portfolio ESG scores for US PRI signatories …. US PRI signatories that report no ESG incorporation in fact have, on average, worse scores than non-PRI investors, which is consistent with greenwashing” (p. 26).
Green bond motivation: Determinants of Firms’ Choice between Green and Conventional Bonds: Why is the Corporate Green Bond Market Still so ‘Green’? by Marie Dutordoir, Shuyu Li, João Quariguasi, and Frota Neto as of July 20th, 2022 (105): „… firms with lower costs of disclosure, higher reputational gains from being seen as green, and a stronger focus on innovation are more likely to issue green instead of conventional bonds. Conversely, we only find weak evidence that borrowing constraints drive green bond issuance”.
Green finance innovation: Financial Innovations for Sustainable Finance: An exploratory research by Marco Quatrosi as of July 25th, 2022 (#152): “… this work investigates the possible role financial innovations can play in the transition towards sustainability. In some cases, existing structures were adjusted to include environmental-oriented projects extending de-facto their use-of-proceeds (e.g., green securitization, green covered bonds). Some other instruments have been developed, including non-financial dimensions within their pricing models (e.g., weather derivatives). … new financial products were designed to merge existing ones (i.e., PRS). New technologies (i.e., blockchain) have improved existing business models favoring alternative ways of financing (i.e., microfinance, crowdfunding) with the pivotal role of public-private initiatives (i.e., Blended Finance, PACE)” (abstract).
ESG tokens? Building Blocks of a Green Fintech System – Towards an Regulatory Antidote to Greenwashing by Dirk A. Zetzsche and Linn Anker-Sørensen as of July 25th, 2022 (#165): “… the sustainability transformation of financial markets may be … achieved by imprinting a sustainability mark on the cash flow … Tokenization may allow, for instance, sustainable finance to be segregated from non-sustainable finance: retail and institutional investors (but also the state) could, with standard IT tools, directly identify which financial products cater to their sustainability preferences – and forego the informational intermediaries with additional agency conflicts and costs that currently form the sustainable finance industry“ (p. 17).
Green incompetence? The Impacts of Greenwashing and Competence Greenwashing on Sustainable Finance and ESG Investing by Kim Schumacher as of Dec. 15th, 2022 (#496): “ … a growing disconnect among many financial-sector and corporate stakeholders can be observed between their positive sustainability performance claims and the organizational resources and capacities dedicated to assuring proper ESG impact MRV (Söhnholz: measurement, reporting, and verification). … Competence greenwashing … relates to overstated claims of environmental competence or non-financial sustainability-related expertise in absence of material or credible educational or professional track records. … this paper (Söhnholz: shows)… how greenwashing and subject matter expertise-related competence greenwashing have been increasing alongside those trends (abtract).
ESG for employees: Altruism or Self-Interest? ESG and Participation in Employee Share Plans by Maxime Bonelli, Marie Brière, and François Derrien as of Juy 25th, 2022 (#211) “We ask how the ESG performance of firms affects the asset allocation of a large sample of French employees between their employer’s stock and alternative investments in firm-sponsored savings plans. After ESG incidents, employees are less likely to invest and they invest smaller amounts in their company’s stock. Incidents in the “Social” category, especially those related to working conditions and local incidents, are the ones that affect these investment decisions the most” (abstract).
ESG bonus and engagement research
Inefficient ESG bonus (1): The Economic (In) Significance of Executive Pay ESG Incentives by David I. Walker as of Feb. 15, 2022 (#304) “Economists have long been concerned about executive incentives. … The concern today is whether equity incentives are so large that they swamp and render ineffective the modest incentives that have been adopted to encourage executives to pursue ESG goals. This article suggests that most ESG incentives are trivial in this context and that ESG incentives are meaningful only in rare cases in which equity-based pay is tied to ESG. From a normative perspective, however, the current state of affairs may actually be in the best interest of stakeholders and beefing up ESG incentives undesirable. Even advocates of pursuing ESG goals, in general, may agree that executive incentives are a poor way of getting the job done“ (p. 34). My comment: See Wrong ESG bonus math? Content-Post #188 – Responsible Investment Research Blog (prof-soehnholz.com)
Inefficient ESG bonus (2): The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita as of Dec. 13th, 2022 (#2796): “… the use of ESG-based compensation has, at best, a questionable promise and poses significant perils. … First, ESG metrics commonly attempt to tie CEO pay to limited dimensions of the welfare of a limited subset of stakeholders. … Second, … the push for ESG metrics overlooks and exacerbates the agency problem of executive pay. … our empirical analysis shows that in almost all cases in which S&P 100 companies use ESG metrics, it is difficult, if not impossible, for outside observers to assess whether these metrics provide valuable incentives or merely line CEO’s pockets with performance insensitive pay. Current practices for using ESG metrics, we conclude, likely serve the interests of executives, not of stakeholders“ (abstract).
Efficient ESG bonus? A ‘green light’ for executive pay? Shareholder monitoring and pay-for-carbon-performance by Danial Hemmings, Lynn Hodgkinson and Gwion Williams as of Jan. 17th, 2022 (#127): “We document that a significant association exists between excess executive compensation and carbon performance, both based on ESG scores and actual carbon emissions, suggesting that managers earn a compensation premium for improving carbon performance. We obtain mixed findings on whether shareholder monitors endorse or oppose such pay awards. … Overall, our findings are consistent with the pre-existence of incentives for managers to improve carbon performance to extract rents through more lucrative pay packages“ (abstract).
Engagement boost: Emerging ESG-Driven Models of Shareholder Collaborative Engagement by Peter O. Mülbert and Alexander Sajnovits as of Dec. 12th, 2022 (#158): “The received view of shareholder engagement from a micro perspective holds that the difficulties of collective action and the resultant rational apathy on the part of shareholders discourage effective (collaborative) engagement. … funds compete with each other in offering the lowest fees, and any engagement at the level of a single portfolio company entails increased costs. Free rider problems also contribute to shareholder passivity. In practice, however, shareholder involvement has increased in recent years … attributed to four main factors: (i) the “Big Three” of the investment fund industry are often too big to remain passive, (ii) institutional investors increasingly use proxy advisors, (iii) political pressure and stewardship considerations spur on proactive shareholder involvement, and (iv) institutional investors, in particular hedge funds, collaborate with each other … We look at new forms of collaboration which are currently emerging: (i) among the Big Three, (ii) between hedge and impact funds (wolf pack activism?), (iii) between non-activist institutional investors and (iv) on new institutionalized platforms (Climate Action 100+; PRI). We explore potential legal risks associated with and obstacles to these (new) forms of collaboration (acting in concert, insider trading rules, antitrust law) and suggest ways of bolstering opportunities for future collaboration“ (abstract). My approach see Engagement test (Blogposting #300) – Responsible Investment Research Blog (prof-soehnholz.com)
Traditional investment research
Naive is good: Why Naive 1/N Diversification Is Not So Naive, and How to Beat It? by Ming Yuan and Guofu Zhou as of Nov. 21st, 2022 (#567): “… the estimated Markowitz portfolio rule and most of its extensions underperform the naive 1/N rule (that invests equally across N risky assets) in many practical data sets. … we provide a number of analytical insights on why the estimated rules perform poorly and why the 1/N rule is hard to beat. First, as long as the dimensionality is high relative to sample size, we show that the usual estimated rules are biased even asymptotically due to estimation errors. Second, we show that the 1/N rule is optimal in a one-factor model with diversifiable risks as dimensionality increases …” (p. 27). My comment: I use 1/n since many years successfully, see Faktor-ETFs: Gut für Anbieter aber schlecht für Anleger? Ein Plädoyer für gleichgewichtete Benchmarks – Responsible Investment Research Blog (prof-soehnholz.com)