ESG-Exit: 12x new research on carbon pricing, brown loans, brown default risk, climate M&A challenges, greenwashing, stranded real estate, impact investing potential, worker-CEO pay gap, carbon border taxes and volatility as a risk measure (#shows SSRN full paper downloads as of June 5th, 2025)
ESG investment research
Carbon value: Do Carbon Pricing Policies Harm Firm Performance? Worldwide Evidence by Tinghua Duan, Frank Weikai Li, and Hong Zhang as of May 27th, 2025 (#63): “Carbon pricing initiatives are effective in reducing GHG emissions … By examining their worldwide, staggered enactment across different jurisdictions, we find no evidence that these policies reduce the aggregate profitability, investments, or employment of publicly listed firms in the adopting jurisdictions. Instead, carbon pricing policies redistribute profits and investments from firms with high emission intensity to those with low emission intensity. Moreover, high-emission intensity (low-emission-intensity) firms receive lower (higher) market values after the enactment of carbon pricing policies, driven by both a reduction in expected future cash flows and an increase in the discount rate. The lower profitability of high emission intensity firms relative to lower emission intensity firms is driven by both a decrease in sales growth and an increase in operating costs. Cross-country analyses show that the effect is more pronounced for firms headquartered in countries that rely more on fossil fuel energy, and the effect does not vary with countries’ exposure to physical climate risks” (abstract).
Brown loan advantages: The green banking gap: how bankability, business models, and regulations challenge banks’ decarbonisation by Nicolás Aguila, Paula Haufe, Riccardo Baioni, Jan Fichtner, Janina Urban, Simon Schairer, and Joscha Wullweber as of May 7th, 2025 (#131): “Banks have been slow to increase green lending while they continue to finance high GHG-emitting activities, a phenomenon we call the “green banking gap”. Based on interviews … we argue that explanations for the green banking gap can be grouped into three broad categories: bankability, business model, and regulation. First, there are not many green firms and projects that meet banks’ desired risk/return profile, while high-GHG-emitting activities remain bankable. Second, there are constraints to decarbonise banks’ portfolios arising from the significant change in their business model in recent decades, making (green) corporate, and particularly project, lending relatively less important. Even when they lend, the characteristics of the lending process imply a bias towards high-GHG-emitting over green activities as balance sheets are locked in old loans and banks prioritise long-term relationships with their clients. Finally, there are constraints on green lending and incentives to high-GHG-emitting lending arising from financial (liquidity and capital requirements) and sustainability regulations and overall policy uncertainty over the future decarbonisation path of the economy” (abstract). My comment: I do not invest in bank stocks or bank loans, if I can avoid it
Brown default risks: Climate stress test for the German banking sector: Impact of the green transition on corporate loan portfolios by Christian Gross, Laura-Chloé Kuntz, Simon Niederauer, Lena Strobel, and Joachim Zwanzger from the Deutsche Bundesbank as of May 19th, 2025 (#35): “We develop a novel stress testing framework to quantify the risks to the German banking sector from the green transition. … We find that potential losses over the near term from a green transition are non-negligible, highlighting that banks’ loan portfolios are vulnerable to climate policy. Our estimates show that there are large differences across sectors and firms depending on their characteristics, most notably their carbon footprint, highlighting the importance of concentration risk in bank portfolios” (abstract) … “For a scenario that envisages an orderly transition to net zero emissions by 2050 (NGFS scenario), our results show an average increase of up to 40% in the probabilities of default for non-financial corporations after three years. In an alternative scenario assuming an abrupt increase in the carbon price to €200 (STS scenario), the probabilities of default rise to a similar extent. In the micro approach, there is an aggregate increase in probabilities of default of up to 30% in the short term … Whilst significantly stronger increases in PDs emerge for emissions-intensive firms, credit risk is not as high for firms with low emissions” … (p.38).
Climate M&A challenges: Climate change exposure and M&A: Global evidence by Yongyi Xue, Shehub Bin Hasan and Muhammad Kabir as of May 30th,2025 (#8): “We find that firms facing higher CCE (Soe: climate change exposure) exhibit a reduced propensity to engage in M&A, and experience a decrease in deal numbers and value. … Our results indicate that the cost of financing and cash holdings explain this negative relationship. The effect is more concentrated among US acquirers and developed economies. We also find that firms proactively engage in sustainable practices to mitigate such adverse impacts of CCE. Finally, firms with higher climate change exposure also take more time to complete a deal, earn insignificant announcement returns, and exhibit poor operating performance” (abstract).
Growing greenwashing: Greenwashing Games: Playing the ESG Mandates by Amjad Ali, Jairaj Gupta, and Emad Elkhashen as of May 6th, 2025 (#61): “… Analysing 3,642 non-financial listed firms across 41 countries (2003–2022) …, we find an 8% overall increase in greenwashing following the adoption of ESG disclosure mandates. … However, this aggregate trend masks differing firm behaviours: pre-mandate greenwashers reduce greenwashing by 26.9%, while pre-mandate non greenwashers increase it by 14.3% …” (abstract).
ESG-Exit: Post-Brexit ESG Penalty Arbitrage by Narmin and Imtiaz Sifat as of June4th, 2025 (#13): “Brexit offers a natural experiment for observing how multinational enterprises (MNEs) recalibrate sustainability strategy … We show that, after 2017, EU MNEs became 28% more likely to book ESG violations in their UK subsidiaries, while environmental fines in those units rose by a factor of four; tax, antitrust, and other non-ESG infractions display no parallel shift … insider-trading patterns suggest managers privately capitalized on the newly opened enforcement gap” (abstract). My comment: In my opinion, negative external effects require a strict regulation.
ESG-Exit (2)? Does ESG Information Deliver Investment Value? A High-Dimensional Portfolio Perspective by Giovanni Bruno, Felix Goltz, and Antoine Naly from Scientific Beta as of June 3rd, 2025 (#48): “… we build on a high dimensional information set of more than 200 ESG characteristics and employ a host of robust portfolio construction methods … Our results show that ESG information is not redundant, increasing the portfolio Sharpe Ratio by up to 25 percent in-sample, compared with using financial information alone. However, out-of-sample benefits are insignificant as estimation errors offset any information advantage. We also show that optimal use of ESG information does not necessarily imply positive sustainability, as portfolios contain both green tilts to factors like human rights and brown tilts to factors like sin stocks. Furthermore, using ESG metrics provides no measurable risk reduction compared with using financial characteristics alone“ (abstract). My comment: With similar risks and returns I certainly prefer a good-ESG to a bad-ESG portfolio. Also, I assume that a test of often-used traditional (non-ESG) information shows comparable results.
Stranded real estate: Pricing or panicking? Commercial real estate markets and climate change by Kai Foerster, Ellen Ryan, Benedikt Scheid from the European Central Bank as of May 23rd, 2025 (#13): “This paper provides the first study of climate risk pricing in euro area commercial real estate markets. … We find evidence of investors applying a penalty to buildings exposed to physical risk and that this penalty has increased significantly over the 2007-2023 period we study … towards the end of our sample the market response to transition risk appears to be playing out via market liquidity. This indicates that older buildings- which are more exposed to transition risks- may already be at risk of becoming “stranded assets”” (abstract).
SDG and impact investment research (in: ESG-Exit)
Impact investment potential: Mind the Gap: Why European retail investors don’t get what they want by Nicola Stefan Koch, Ana Rivera Moreno, and David Cooke from the Sustainable Finance Observatory as of May 2025: “Key regulatory reforms (SFDR, MiFID II, IDD) required integrating sustainability preferences into financial advice and product governance. To assess their effectiveness, the Sustainable Finance Observatory conducted one of Europe’s largest research programmes (2017–2024), analysing investor demand, product supply, and advisory practices across 14 Member States. Key Findings: … 74% of EU retail investors have sustainability-related objectives (i.e. value alignment and/or impact), yet in key markets only 19% hold sustainable financial products … Key barriers preventing retail investors from walking their talk include limited expertise, high information costs, and a lack of trust in the credibility of sustainable financial products. … In 57% of advice meetings (2022–2024), sustainability preferences were not automatically assessed. In 54% of German cases, advisors altered client preferences while in 53% of French cases, unsubstantiated impact claims were made. Advisor knowledge has improved overall but remains weak on investor impact across Member States. … 51% of EU retail investors want to generate real-world impact with their savings, but impact products make up only 0.7–1.3% of the market in key countries such as Germany and Austria. A majority of impact-oriented investors are willing to pay for real-world impact but mistakenly believe that low-carbon funds directly reduce emissions, making them vulnerable to misleading claims and potential exploitation. 27% of 450 Art. 8 and 9 funds reviewed in 2023 made explicit environmental impact claims — none substantiated, while 76% of investors expected real impact from such claims. … The definitions of “sustainability preferences” or “sustainable investments” exclude impact-generating investments, misaligning with 51% of investor objectives. MiFID II and SFDR lack definitions for sustainability-related objectives, leading to inconsistent classification and advice. Oversight and enforcement remain inadequate across the EU, allowing persistent compliance failures and greenwashing risks” (p. 3/4). My comment see Maximale Portfolio-Nachhaltigkeit: Was geht?
Positive inequality? Learning About Income Inequality: Long-Run Evidence from Pay Ratio Disclosures by Alok Kumar, Van Anh Tran, and Chendi Zhang as of April 23rd, 2025 (#70): “We find that although first-time high (Sö: CEO-worker) pay ratio disclosures generate negative announcement returns …, returns exhibit a reversal within three months and become positive. This reversal is stronger for firms with high inequality averse institutional shareholders. High pay ratio firms also have stronger operating performance, consistent with the view that high pay ratios reflect managerial talent …. institutional investors progressively increase their holdings and overweigh high pay-ratio firms …” (abstract). My comment: One of my top 5 shareholder engagement topics is pay ratio disclosure (Shareholder engagement: 21 science based theses and an action plan). My motive has not been better performance but – in my opinion- potentially problematic effects of ESG bonifications on pay ratios.
Other investment research
Carbon barriers: The Global Effects of Carbon Border Adjustment Mechanisms by Kimberly Clausing, Allan Hsiao, Jonathan Colmer, and Catherine Wolfram as of April 28th, 2025: “We study carbon border adjustment mechanism (CBAM) policies, as currently being implemented by the EU and UK. … Our data cover the most emissions-intensive and heavily traded sectors targeted in the first phase of EU and UK implementation. We find that CBAMs can effectively boost competitiveness, curb leakage, and encourage regulation, while also avoiding disproportionate impacts on lower-income countries” (abstract).
Vola-deficits? Volatility: A Dead Ringer for Downside Risk by Javier Estrada as of June 4th,2025 (#18): “Volatility is as widely used as is widely criticized as a risk metric. This short article argues that despite its many shortcomings volatility is pervasive for two mutually‐reinforcing reasons: First, it is very well known; and second, it is a very good proxy for the downside risk that investors really dislike. The evidence discussed here shows that a ranking of assets by volatility is very highly correlated with rankings made by different metrics that directly assess downside risk”. My comment: Interesting result but not surprising, see the respective research by Martin Ehling and Frank Schumacher
…………………………………………………………………………………………………………………………………………..
Werbung (in: ESG-Exit)
Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-/Mid-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R) investieren und/oder ihn empfehlen.
Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung mit durchschnittlich einzigartig hohen 99% SDG-vereinbaren Umsätzen der Portfoliounternehmen und sehr hohen E-, S- und G-Best-in-Universe-Scores sowie einem besonders umfangreichen Aktionärsengagement (siehe auch My fund).
Zum Vergleich: Ein traditioneller globaler Small-Cap-ETF hat eine SDG-Umsatzvereinbarkeit von etwa 5 %, ein diversifizierter Gesundheits-ETF 13 %, Artikel 9 Fonds circa 20%, liquide Impactfonds und ein ETF für erneuerbare Energien ungefähr 40 % (vgl. Hohe SDG Umsätze? Nur wenige Investmentfonds!).
Insgesamt hat der von mir beratene Fonds seit der Auflage im August 2021 eine ähnliche Performance wie traditionelle globale Small- und Mid-Cap-Fonds (vgl. z.B. Fonds-Portfolio: Mein Fonds | CAPinside).
Ein Fondsinvestment war also bisher ein „Free Lunch“ in Bezug auf Nachhaltigkeit: Ein besonders konsequent nachhaltiges Portfolio mit marktüblichen Renditen und (eher niedrigeren) Risiken. Vergangene Performance ist allerdings kein guter Indikator für künftige Performance.