ESG End: Heidefoto von Maria Schuetz als Illustration

ESG End? (Researchblog #98)

Waste payments: The Intended and Unintended Consequences of Taxing Waste by Tommaso Colussi, Matteo Romagnoli, and Elena Villar as of September 22nd (#7): “… the adoption of pay-as-you-throw (PAYT) taxation schemes generates large environmental gains. … we find a large and persistent drop in total waste (-9%), which translates into a reduction of GHG emissions comparable to the one coming from taking 92,000 passengers vehicles off the road in a year. … following the implementation of the policy, individuals living in treated municipalities become more concerned about the environment, leading them to increase their use of low-polluting vehicles and of renewable energy. … we find that the largest reduction in waste production is in municipalities where the share of low-educated and low-income households is larger. … we estimate that the reduction in tax revenues, after the introduction of the policy, is offset by the reduction in waste management expenditures, ultimately leaving municipal finances unaffected” (p. 29/30).

Health-Wealth Link: The Impact of Health on Wealth: Empirical Evidence by Umesh Ghimire as of September 2nd, 2022 (#12): “… suffering one more health deficit leads to a 2.23 percent reduction in household net worth. In particular, the individuals without a college degree and the elderly suffer the biggest wealth loss due to poor health. … the impact of poor health among retirees is significant, while it is insignificant among the non-retirees. … the impact of bad health is largest on financial wealth and smallest on housing wealth” (p. 20). “The impact of wealth on health is statistically insignificant” (abstract).

Responsible investing: ESG End?

ESG End: The End of ESG by Alex Edmans as of September 25th, 2022 (#1713): “Like other intangibles, ESG mustn’t be reduced to a set of numbers, and companies needn’t be forced to report on matters that aren’t value-relevant. … We can embrace differences of opinion about a company’s ESG performance just as we do about its management quality, strategic direction, or human capital management. And, perhaps most importantly, ESG needn’t be politicized“ (p. 18). My comment: I do not agree, since bad ESG behavior very often has negative external effects which cannot be reduced by leaving the company (as clients, employees, suppliers or investors can do).

Emma ESG Growth: Sustainable Finance in Emerging Markets: Evolution, Challenges, and Policy Priorities by Rohit Goel, Deepali Gautam, and Fabio Natalucci as of September 22nd, 2022 (#11): “2021 was a breakout year for EM ESG markets with record flows across asset classes, most notably the fixed income …. with a meaningful pickup in issuance in EMs excluding China (China was the second largest issuer globally in 2021), and sustainable debt excluding green bonds. …. (the) EM ESG ecosystem is still more concentrated, embeds a significant risk premia, and is dominated by the financial sector. EMs also face a number of challenges including data disclosure quality, data standards and declining ESG scores” (p. 24).

ESG performance is OK: The trade-off between ESG screening and portfolio diversification in the short and in the long run by Costanza Torricelli and Beatrice Bertelli as of September 12th, 2022 (#14): “… we prove overperformance of screened portfolios in the long run only in the presence of negative screening strategies. Second, we show underperformance in the short run even in period of financial crises …” (p. 26).

Credible greenium: Pricing of green bonds: drivers and dynamics of the greenium by Allegra Pietsch, and Dilyara Salakhova as of September 23rd, 2022 (#12): “… in the absence of regulatory standards, investors seek credibility of green bonds and issuers. … we find that only bonds with external review trade at both a statistically and economically significant greenium. Regarding issuers’ credibility, we define firms in the alternative energy sector as credible as well as banks that signed for the United Nations Environmental Program for Financial Initiative (UNEP FI). We find that only green bonds issued by credible companies trade at a statistically and eco[1]nomically significant greenium. … We also find that the greenium evolves over time and that it is (retail) investors’ demand that explains these dynamics” (p. 35/36).

Irresponsible supply? Limits of ESG investing? Challenges from the supply chain by Fan Zhang, Shipeng Yan, and Zhengyu Li as of September 23rd, 2022 (#14): “…. revealing a negative relationship between a firm’s ownership by responsible investors and its suppliers’ environmental performance. … We show that this phenomenon can be best explained by the possibility that investors drive firms to outsource pollution to suppliers by downgrading supply chain management standards” (abstract). My comment: Investors should make sure that portfolio companies use responsible suppliers. In my current engagement process I propose that ESG-criteria should be used for supplier selection. ESG rating agencies could incorporate ESG performance of major suppliers in their ratings of the buyers.

Impact transition: Classification Scheme for Sustainable Investments – Accelerating the just and sustainable transition of the real economy by Timo Busch, Victor van Hoorn, Matthias Stapelfeldt, and Eric Pruessner as of July 12th, 2022: “This white paper develops a classification of sustainable investment categories based on their ambition to contribute to a more sustainable economy. This is important since both established classification schemes for investment categories as well as the EU sustainable finance regulation (SFDR, MiFID II) do not have transition as their focus. We include existing sustainable investment strategies like exclusions or engagement as defining criteria and combine them with further dimensions from the classification proposed by the impact task force established by the G7 …. Regulatory approaches like PAIs and the EU Taxonomy alignment can be smoothly integrated into our five categories … It goes beyond the current ability of concepts used in the SFDR, the EU Taxonomy and MiFID II which focus predominantly on identifying companies that are already sustainable, aligned, or have a positive company impact“ (p. 16). My comment: My approach see Absolute and Relative Impact Investing and additionality – Responsible Investment Research Blog (prof-soehnholz.com)

Traditional and alternative investing

Arbitrary investment frameworks? Selecting investment analytic framework for both top down and bottom up investors: Using global equity as the example by Xi Li as of September 24th, 2022 (#11): “In establishing the foundation of their investment process, investors usually set up the investment framework first by dividing their investment universes into different buckets along the possible combinations of multiple dimensions. As this framework applies to every stage of the investment process, it has fundamental implications on the investment outcomes. However, the decision to select the framework among practitioners and in the academic literature is currently ad hoc. There is no economic intuition or theory on how to determine the optimality and feasibility. Using global equities as the example, my paper is the first to propose a methodology based on economic intuition. My paper thoroughly investigates and offers recommendations for both the feasibility and optimality across all the possible frameworks based on both the geographic and industry dimensions. … I find that the region sector framework is generally the optimal one among the feasible ones generally for the developed, developing, and combined developed and developing markets. It offers the strongest ability to group similar stocks together among the feasible ones and maximize the covement within the groups and the diversification benefits” (p. 23/24). “Industries generally dominate countries in developed markets, whereas countries generally dominate industries in developing markets. The importance of countries declines absolutely and relative to industry over time …” (abstract).

Robos with little AI: How much Artificial Intelligence do Robo-Advisors really use? by Christian Thier and Daniel dos Santos Monteiro as of September 27th, 2022 (#12): “.. RAs see the most promising AI applications in sales and client directed areas. …. the most important goals associated with AI are customer knowledge and personalization … Personalization of product offerings and client communication in particular is an important topic for RAs and one in which they see opportunities from AI. … even though companies see higher potential in sales and client-directed areas, actual implementation is driven by portfolio management applications … and were often found in subsidiaries of large asset managers … there is evidence that the larger a company is, the more advanced it tends to be with respect to AI implementation… on average, RAs’ engagement in AI implementation is limited. In particular, we find live applications of AI in less than a fifth of the companies, even though a larger part of companies has already taken concrete measures toward AI implementation. … most companies currently see no need to engage in AI at a larger scale due to obstacles like unclear added value, lack of budget and, for startups only, the lack of data” (p. 21-23).

Positive buyouts: Spillovers of PE Investments by Huynh Sang Truong and Uwe Walz as of September 7th, 2022 (#50): “… we investigate a primary potential impact of leveraged buyout (LBOs) transactions … on the peers of the LBO target in the same industry. Using a data sample based on US LBO transactions between 1985 and 2016 … Our study supports a learning factor hypothesis: peers gain by learning from the LBO target to improve their operational performance”.

Democratic climate advantage: Does a VC’s commitment lead to improved investment outcomes? Evidence from climate startups by Aaron Burt, Jarrad Harford, Jared Stanfield, and Jason Zein as of Septmebr 19th, 2022 (#10): “Our results suggest that VC investor commitment significantly improves portfolio company performance. … we find that climate-related startups invested in by democrat VC partners significantly outperform those invested in by non-democrats, overcoming a baseline underperformance of climate-related deals on average. … while democrat VCs are not more likely to invest in a climate startup, they are more likely to invest in one with more patenting activity prior to the deal, consistent with democrats receiving better deal flow or selecting more innovative startups. … democrat VCs tend to be more involved with monitoring the startup: they are more likely to sit on the board of a climate-related startup and the startup is more likely to file patents (even after controlling for pre-deal patenting) following the deal. … we find that climate-related deals invested in by non-democrat VC partners who have experienced a recent natural disaster perform significantly better. … we continue to find that climate-related startups invested in by democrats continue to exhibit superior exit performance” (p. 26/27).