ESG or impact: Results or Excuses Picture from Gerd Altmann from Pixabay

ESG or impact? Researchpost #123

Responsible investment research: ESG or impact?

Climate model risks: Climate Stress Testing by Viral V Acharya, Richard Berner, Robert Engle, Hyeyoon Jung, Johannes Stroebel, Xuran Zeng, and Yihao Zhao as of April 6th, 2023 (#21): “… there is much model risk involved in projecting climate change in different scenarios and mapping them into economic damages and bank loan loss or mark-to-market corrections. Hence, it may be prudent to complement the balance-sheet or bottom-up approach of regulatory stress tests with a market-value or top-down approach that has a greater chance of reflecting shifts in market expectations around climate risk and its impact on firms, banks, and the broader economy. … climate change might also influence financial stability through its implications for non-bank institutions such as insurance companies, mutual funds, and pension funds. … various physical and regulatory risks related to biodiversity might become similarly important going forward …” (p. 28).

Coal divestment works: Can Finance Save the World? Measurement and Effects of Coal Divestment Policies by Banks by Daniel Green and Boris Vallee as of April 29th, 2022 (#167): “… using coal lending bans by banks …we find large effects of these policies. We first develop a comprehensive measure of the strength of such bans, and document a large heterogeneity along this dimension. … We observe large effects of the policies on coal firm loan issuances, as well as on their outstanding debt and total assets. Substitution between divesting lenders and non-divesting ones, as well as with bond and equity issuances, appears to be limited. Coal power plants owned by firms exposed to bank divestment policies are more likely to be retired” (abstract). My comment: I focus on non-investment and divestment see Impact Investing mit Voting und Engagement? (Opinionpost #194) – Responsible Investment Research Blog (prof-soehnholz.com)

No equity greenium: Equity Greenium, Futures Pricing, and Lending Fees by Marco Wilkens, Maximilian Görgen, and Martin Rohleder as of April 7th, 2023 (#95): “In the theoretical part of this paper, we have shown that a persistent Equity Greenium and therefore a separated capital market can only exist, if lending fees for green stocks are higher and prices for futures on green stocks are lower compared to brown stocks. … In the empirical part … did not prove the existence of a consistent and economically significant Equity Greenium and a separation of the capital market at present” (p. 23/24).

Dubious ESG loans: Who Benefits from Sustainability-linked Loans? by Kai Du, Jarrad Harford, and David Shin as of Oct. 29th, 2022 (#507):“We find that loan spreads are not lower for SLL contracts, and borrower sustainability performance does not improve after SLL initiation. On the other hand, SLL lenders can attract more deposits post-origination and consequently increase their loan volume. We do not, however, find evidence that SLL lenders issue sustainable loans to safer borrowers. Overall, our findings suggest that the economic incentives for entering SLL contracts are likely to lie on the side of the lenders, who capture most of the benefits from such loans” (p.27).

Irresponsible fees? Why Do Investors Pay Higher Fees for Sustainable Investments? An Experiment in Five European Countries by Daniel Engler, Gunnar Gutsche, and Paul Smeets as of March 10th, 2023 (#142): “We find that social preferences play an important role in individual sustainable investment behavior in all five countries. Investors who are willing to give to others without expecting anything in return invest a larger fraction of their money in sustainable funds. However, social preferences do not explain how sensitively investors react to fees. Rather, investors with low financial literacy react insensitively to higher fees on sustainable investments. This suggest that investors pay high fees on sustainable investments because they do not fully understand the negative consequences for their financial returns. We also find that the sensitivity to higher fees on sustainable funds varies across countries and is highest in the Netherlands and Germany“ (p. 26/27).

ESG research: ESG or impact?

Bad ESG aggregates: Deconstructing ESG Scores: How to Invest with your own Criteria? by Torsten Ehlers, Ulrike Elsenhuber, Anandakumar Jegarasasingam, and Eric Jondeau as of March 17th, 2022 (#263): “… devising investment strategies based on an amalgamation of three fundamentally different topics underpinning ESG investing has also been a practical hurdle, especially given the potential for weak scores in one pillar to be offset by strong scores in another pillar. … First, a focus on specific categories would enable investors to overcome the “aggregate confusion” created by consolidated ESG scores or ratings and directly focus on factors that are most relevant to their investment mandates. … Second, focusing on specific themes would help them better track the sustainability performance trajectory of their investments vis-à-vis their stated sustainable investment objectives. … Finally, over time, the focus on themes would also enable investors to develop their own ESG assessment models using actual and observed third-party vendor data, thereby overcoming vendor-specific concerns” (p. 21/22). My comment: I focus since many years on separate best-in-universe E, S and G ratings see Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? – (prof-soehnholz.com)

ESG or impact? Are the top ESG tech leaders actually impact laggards? Revealing the global impact of Apple, Google and Microsoft by Impak Analytics as of March 29th, 2023: “…Apple, Microsoft, and Alphabet have some of the best ESG (Environmental, Social and Governance) scores … analyzing Apple, Alphabet, and Microsoft with an impact approach, each has an impak Score™ lower than 200 points out of 1,000, making them average rather than leaders. To put things in perspective, the average impak Score™ of our large cap universe is 145 out of 1,000 points, with best-in-class scores being above 400” (p. 1).

ESG label differences: Do sustainability signals diverge? An analysis of labeling schemes for socially responsible investments by Sofia Brito-Ramos, Maria Céu Cortez, and Florinda Silva as of March 2nd, 2023 (#31): “Several labels for sustainable investment funds sponsored by government and nonprofit organizations (GNPOs) have emerged in Europe. … While some GNPO-labeled funds are perceived as bearing high Environmental, Social and Governance (ESG) risks, we find that labeled funds are more likely to be assessed as top ESG funds by private rating providers. … GNPO-labeled funds show greater alignment with article 9 of the Sustainable Finance Disclosure Regulation …” (abstract).

Article 9 risks: How green is ‘dark green’? An analysis of SFDR Article 9 funds by Marc Chesney and Adrien-Paul Lambillon as of Feb. 28th, 2023 (#1188): “We examine the inclusion of companies into so-called ‘dark green’ funds categorized as Article 9 under the European Sustainable Finance Disclosure Regulation (SFDR). While these funds should conceptually go beyond screening and ESG integration approaches and invest only in ‘sustainable investments’, our findings raise questions on fund managers’ definition of ‘sustainable investments’. Our dataset consists of 290 public equity SFDR Article 9 funds and a resulting set of 4’463 global stocks. We develop a metric of a company’s implied ‘greenness’ based on the frequency it is included in our fund sample and analyze the factors driving this greenness score. … we find differences between global and regional SFDR Article 9 funds regarding corporate sustainability coefficients and sector exposure, suggesting that regional funds’ consideration of double materiality might be more limited and the share of ‘sustainable investments’ lower …” (abstract).

Complex investor duties: Fiduciary deadlock by Roberto Tallarita as of Sept. 7th, 2022 (#147): „In May 2022, the shareholders of BlackRock, the world’s largest asset manager, voted on a proposal to push portfolio companies to reduce their social and environmental externalities, even if doing so would reduce the companies’ stock value. The proposal was based on the theory that BlackRock should maximize the value of its whole portfolio (portfolio primacy), rather than the value of individual companies (shareholder primacy) … Although the proposal was rejected, portfolio primacy is gaining increasing support and will likely inspire similar proposals in the next proxy seasons. … I argue that portfolio primacy creates a fiduciary deadlock: a situation in which multiple fiduciary relationships—between investment adviser and fund investors, between corporate managers and shareholders, between controlling and minority shareholders—come into conflict with each other“ (abstract).

Selective disclosure: Green Image in Supply Chains: Selective Disclosure of Corporate Suppliers by Yilin Shi, Jing Wu, and Yu Zhang as of Sept. 9th, 2022 (#2015): “We uncover robust empirical evidence showing that listed firms selectively disclose environmentally friendly suppliers while selectively not disclosing suppliers with poor environmental performance, i.e., they conduct supply chain greenwashing. This is a prevalent behavior in the sample of more than 40 major countries or regions around the world that we study. … we find that customer firms that face more competitive pressure, care more about brand image and reputation, and have larger shares of institutional holdings are more likely to conduct such selective disclosure. … we find that information transparency reduces such behavior. Finally, we study the outcomes of selectively disclosing green suppliers and find that customers benefit from the practice in terms of sales, profitability, and market valuation“ (p. 22/24). My comment: With my engagements, I propose more supplier ESG transparency, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)