ESG regulation: Das Bild von Thomas Hartmann zeigt Blumen in Celle

ESG overall (Researchblog #91)

ESG overall: Fixed income ESG investing

Huge sovereign bio-risks: Nature Loss and Sovereign Credit Ratings by Matthew Agarwala, Matt Burke, Patrycja Klusak, Moritz Kraemer, and Ulrich Volz as of June 22nd, 2022: “… incorporating biodiversity- and nature-related risks into sovereign ratings is no different from including other difficult to quantify risks – such as geopolitical risk or contingent liabilities – that are already embedded in ratings methods. … Using the most advanced AI methodology, this report models the effect of nature loss on credit ratings, default probabilities, and the cost of borrowing for 26 sovereigns. … More than half (58%) of the sovereigns included in the sample would face a downgrade of one notch or more. Those downgrades would in turn trigger between $28-53 billion in additional costs of annual interest payments borne by these downgraded governments…. About a third of the sovereigns (31% of the sample) would see their rating lowered by more than three notches. … China and Malaysia would be hit the hardest, with rating downgrades by more than six notches in the partial collapse scenario. India, Bangladesh and Indonesia would face downgrades of approximately four notches” (p. 8).

ESG positive fixed income: The Case for Integrating ESG into Fixed Income Portfolios by Andrew Clare, Aneel Keswani and Nick Motson as of July 18th, 2022 (#145): “The .. results indicate that portfolios comprising higher ESG-ranked portfolios outperform those comprising lower ESG ranked issuers … although part of the difference in returns could be attributed to the fact that different ESG ranked portfolios had different sectoral exposures. … we investigated a second approach where we created portfolios that were tilted towards positive ESG characteristics and away from less positive characteristics using two industry-standard tilting methodologies. The results indicated that portfolios can be tilted towards a particular ESG characteristic to enhance the exposure to this characteristic … without having a material effect on the risk and return characteristics of the portfolios relative to the reference portfolio. We also investigated the impact of excluding issuers from four sectors that some investors choose to exclude from their portfolios – Tobacco, Mining, Defence and Oil & Gas. We found that these exclusions had little impact on portfolio performance, mainly because issuers from these sectors made up only a small proportion of the sample of issuers. … Our results showed some indication of a diminution of downside risk in portfolios comprising issuers with higher ESG ratings, but these results were not definitive with regard to this issue” (p. 33/34).

Bond Greenium: The Benchmark Greenium by Stefania D’Amico, Johannes Klausmann, and N. Aaron Pancost as of June 13th, 2022 (#61): “.. we use a dynamic term structure model to estimate a sovereign risk-free greenium: the premium investors are willing to pay to subsidize environmentally beneficial projects” (abstract). “We estimate the benchmark greenium exploiting the unique “twin” structure of German sovereign green bonds … first, the longer-term greenium is often larger than the raw green spread, highlighting the importance of controlling for idiosyncratic security-level mispricing. Second, the model-implied term structure of the greenium is upward sloping, in contrast to the term structure of green spreads which is downward sloping. Third, the model allows us to estimate expected future returns, while green spreads offer only a measure of ex-post realized returns” (p. 42).

Bond greenium eyplained: Investor ESG Tastes and Asset Pricing: Evidence from the Primary Bond Market by Liying Wang and Juan (Julie) Wu as of June 25th, 2022 (#40): “We find that green bonds exhibit larger oversubscription ratios than their conventional counterparts offered by the same issuer. Anticipating their greater demand, underwriters propose a slightly lower offering spread for green bonds at the beginning of bookbuilding. Upon a positive realization of investor demand, underwriters and issuers further tighten the offering spread of green bond offerings to a greater extent, resulting in significant greenium. These findings coherently suggest that higher investor demand for green bonds leads to their lower expected returns” (p. 29/30).

Insurer ESG risk? Responsible investments in life insurers’ optimal portfolios under solvency constraints by Sebastian Schlütter, Emmanuel S. Fianu and Helmut Gründl as of July 21st, 2022 (#5): ”This paper studies the stock selection problem of life insurance companies that are concerned about the social responsibility of stock investments and face solvency regulation. … For a given solvency ratio, expected stock returns remain relatively stable when a moderate responsibility target is introduced. A very ambitious target, however, can reduce expected returns substantially, in particular for insurers with a low target solvency ratio and with a risk profile that is essentially driven by stock risks. Overall, we demonstrate that life insurers’ selection of responsible investments is different from other investors due to their specific risk profile” (p. 28). “A main result of our analysis is that the expected return of the investment portfolio decreases substantially if an insurer aims for a highly ambitious level of responsibility and needs to stick to a certain solvency ratio. The decrease results from a larger risk concentration in the investment portfolio” (p. 26). My comment: I am not sure if expected returns and VaR are adequate measures to answer the research question.

ESG overall: ESG equity investing

Lower return for green equity investors? “Green Companies” and Financial Performance: A Quantitative Study on the Market’s Response to a Company’s Environmental Responsibility by Athanasios Kranias, Dimitrios Psychoyios and Apostolos-Paul Refenes as of July 9th, 2022 (#20): “This paper shows that financial gains for companies in terms of efficiency, expansion, and profitability have a positive effect on the employment of “green” practices. … our findings contradict the concept of increasing market value by reputation. We establish a statistically significant steady negative coefficient relationship between firms’ “greenness” and risk adjusted excess stock returns for all data sets of S&P500 companies. This suggests that, although firms benefit at a corporate level from environmentally friendly practices, such initiatives are not rewarded by the market via an increase in stock price. … This underperformance can be interpreted as a “Green Premium” for environmentally aware firms, which does not appear for competitors who do not engage in “green” activities” (p. 38).

No-cost ESG investments: Drawing Up the Bill: Does Sustainable Investing Affect Stock Returns Around the World? by Rómulo Alves, Philipp Krueger, and Mathijs van Dijk as of June 2022: “Using a comprehensive dataset spanning 9,253 stocks in 46 countries over the last two decades we find that it is seldom the case that higher ESG ratings are associated with higher future stock returns. This general finding holds for both negative and positive screens, for different dimensions of sustainability (E, S, G, ESG), whether we use ratings in levels or changes, and whether we use either one of the three most widely used ratings in the industry or combinations of these ratings. It also holds in our global sample under different specifications, within all major world regions other than emerging economies, and within the various sectors of economic activity. … First, our results suggest that it has been possible to “do good without doing poorly” in the last two decades. … Second, our results cast doubt on the idea that there is widespread overvaluation in sustainable stocks” (p. 34).

Sin stocks not hurt? Does ESG negative screening work? Robert Eccles, Shiva Rajgopal and Jing Xie as of July 12th, 2022 (#66): “… we find that after controlling for variations in firm characteristics (i) sin stocks are not undervalued relative to other stocks; and (ii) institutional ownership in sin stocks is not statistically distinguishable from those of no sin stocks. Sin stocks do not differ in the likelihood of exiting the public market, the cost of raising new equity, and in the announcement returns upon negative ESG news relative to other stocks. However, the cost of new debt is higher for sin stocks. Finally, we find that investors submit more ESG proposals for voting in annual meetings and a larger number of ESG proposals are passed, indicating that investors are either actively trying to improve ESG profiles of sin stocks or alternatively indulging in virtue-signaling of their own” (p. 30/31). My comment: As long as “institutional ownership in sin stocks is not statistically distinguishable from those of no sin stocks” I do not expect sin stocks to suffer enough

ESG rating limits: Are ESG Ratings Informative About Companies’ Socially Responsible Behaviors Abroad? Evidence from the Russian Invasion of Ukraine by Daniyal Ahmed, Elizabeth Demers, Jurian Hendrikse, Philip Joos, and Baruch Lev as of July 13th, 2022 (#83): “First, we find that more highly rated ESG firms were not less likely to operate in Russia nor more likely to meaningfully inform investors about such activities. Second … many firms scrambled to suspend or divest their Russian operations, but those firms that are alleged to be more socially responsible were neither quicker, nor more likely, to announce such actions. Third, we find that … both the materiality of firms’ Russian exposure and the extent of disclosure about such exposure negatively impacted returns after the outbreak of the war, while investing in more highly rated ESG firms did not offer any protection. … we show that ESG rating agencies have failed to adequately incorporate measures of country-level corruption and human rights violations into firm-specific ESG scores (much less their “social” or “human rights” scores), despite the fact that reliable country-specific measures of these anti-social behaviors and associated risks are readily available” (p. 11/12). My comment: Do not expect ESG ratings to do all work for you. Exclusions of unwanted country and industry exposures should be used in addition to ESG ratings. I have avoided many bad investments using this approach since 2017, e.g. excluding Russian and mainland China investments (example: Mein Artikel 9 Fonds: Noch nachhaltigere Regeln – Responsible Investments (Blog) ( This approach has worked fine so far compare ESG ok, SDG gut: Performance 1. HJ 2022 – Responsible Investments (Blog) (

Very little impact? Proxy Voting: Managers Focus on Environmental and Social Themes – Evaluating 25 asset managers’ approaches to ESG themes by Lindsey Stewart and Hortense Bioy from Morningstar research as of July 12th, 2022: “The number of shareholder resolutions on E&S themes, as well as the level of support for many of them, has increased significantly in 2022. Asset managers are adding more clarity to their policies on the features of E&S proposals … Nine of the 13 European asset managers analyzed in this study have a high or very high E&S focus in their proxy-voting policies, while 11 of the 12 U.S. asset managers have a medium or low focus. … Among the environmental issues covered, climate, unsurprisingly, is the most common, but biodiversity and other connected topics, such as deforestation and water use, are gaining prominence. Among social issues, diversity, equity, and inclusion, or DEI, is the most common topic, covering issues from the board level to the general workforce. Broader human capital management issues, human rights, and labor rights are often also covered” (p. 1). My comment: Sounds good, but there were only 250 company board opposed E&S resolutions in 2022 which is very few given the overall number of invested stocks. Only 27 of these resolutions gained majority support. There is no information of the effectiveness of the resolutions in this report. I suggest to invest in the best intrinsically E&S motivated companies, instead, compare Absolute and Relative Impact Investing and additionality – Responsible Investments (Blog) (

ESG overall: Other ESG topics

Positive Real Estate ESG: Sustainability and Private Equity Real Estate Returns by Avis Devine, Andrew Sanderford , Chongyu Wang as of June 10th, 2022 (#62): “This paper … examines the relationship between performance for funds in the Open Ended Diversified Core Equity (ODCE) Index and reporting to the Global Real Estate Sustainability Benchmark (GRESB), a platform for disclosure about fund/firm-level ESG strategies and performance. … GRESB participation and performance are both significant predictors of cross-sectional fund returns …  and … are associated with the price appreciation component of fund total returns but not with the income component” (abstract).

Positive ESG effects? The effect of ESG on the global equities lending market by Travis Whitmore and Christin Nadeau of State Street Associates as of July 2022: “A significant positive relationship exists between a company’s performance on ESG attributes and the shares available on the securities lending market. … Firms that perform poorly on material ESG attributes are associated with significantly higher fees and increased levels of borrowing demand, a proxy for short selling. … Trends in securities lending share recalls over proxy record dates suggest institutions engage more with companies with poor ESG characteristics. … we find no evidence of borrowing securities to increase short-term influence over proxy votes”. (p.3).

ESG Derivatives: Derivatives and ESG by Colleen Baker as of July 19th, 2022: “Financial markets are increasingly developing innovative, ESG-related derivatives and relying upon these instruments to hedge ESG-related risks” (abstract). My Comment: Interessing topic but no citations allowed without explicit agreement

Other interesting articles

Ecological metaverse aspect: Can Virtual Fashion Solve the Apparel Industry’s Dirty Problem? by Planet Tracker a of June 20th, 2022: To summarise, digital fashion offers an interesting new market opportunity for brands and one they would be wise to look to participate in. It should not however distract from the significant structural changes needed to the traditional fashion industry if it is to meet its goals to reduce its environmental impact.

Bio-changes: The Bio Revolution: Innovations transforming economies, societies, and our lives by Michael Chui, Matthias Evers, James Manyika, Alice Zheng, and Travers Nisbet from McKinsey & Co. as of May 13th, 2022: A confluence of advances in biological sciences—decades in the making—with the accelerating development of computing, automation, and artificial intelligence (AI), is fueling a new wave of innovation that could have significant impact on economies and societies, from health and agriculture to consumer goods and energy. These new capabilities and applications are already improving our response to global challenges from climate change to pandemics; at the time of writing this report, they were being used to help respond to the COVID-19 pandemic. But these innovations come with profound risks, arguing for a serious and sustained debate about how this innovative wave should proceed. This report assesses progress in these innovations, their potential for economic and societal impact, and the risks involved. Key findings include the following: Increasing ability to understand and engineer biology. … Transformative new capabilities … Substantial potential direct and indirect impact. … Visible pipeline of applications. … Unique risks that require debate and mitigation. … The timing of applications’ adoption and impact hinges on multiple factors. … Stakeholders and contributors need to inform themselves about the Bio Revolution” (p. vi/vii).

Distorting affects? The Affect Heuristic and Financial Expectations: Risk, Return, and ESG by Christoph Merkle as of July 8th, 2022 (#4): “Stocks that are viewed positively are associated with high expected returns and low risk, while stocks that are viewed negatively are associated with low expected returns and high risk. Aggregating individual beliefs … one would find it very difficult to draw an efficient frontier or capital market line, as individual stocks cluster in the top-left and bottom-right quadrants of the diagram. … Aggregated expectations can lead to a distortion of market prices, when positive affect stocks are overvalued and negative affect stocks are undervalued. … What makes the affect heuristic potent in asset pricing is that it is not cancelling out across market participants, but that affective impressions are much aligned between market participants. These affective impressions also guide investors’ subjective assessments of a stocks’ sustainability. A belief that good ESG performance, high returns, and low risks all align, can make investors rally behind a limited number of stocks and drive up their prices” (p. 24/25).

Irrational beliefs? Subjective Risk-Return Trade-off by Chanik Jo, Chen Lin, and  Yang You as of May 5th, 2022 (#109): “We elicit individuals’ subjective risk and return for savings, stocks, real estate, gold, cryptocurrencies, and government bonds based on a representative sample of 2,548 U.S. survey respondents. The majority of respondents do not expect higher returns on an asset that is perceived as being riskier than other assets, while objective measures exhibit a positive risk-return trade-off. This result is mainly driven by respondents whose beliefs about expected returns are misaligned with objective average returns. Misaligned respondents tend to perceive a higher risk and are less likely to be asset holders. Our findings highlight the importance of heterogeneous beliefs in understanding subjective risk-return trade-offs” (abstract). My comment: See comment by my source for this research “The fundamental problem for every investment adviser” by Joachim Klement

ETFs or ESG? Sind ETFs unvereinbar mit nachhaltigen Investments? by me in exxecnews institutional as of July 15th, 2022: Eine Durchschau zeigt bei auch meinen „nachhaltigsten“ ETFs immer noch etliche Wertpapiere, die ich aus Nachhaltigkeitssicht lieber vermeiden möchte. Das liegt auch am Grundprinzip von ETFs, die Märkte meistens möglichst vollständig abbilden wollen und deshalb eine hohe Diversifikation anstreben. Wenn man nur in die nachhaltigsten Anlagen investieren möchte, reduziert jede zusätzliche Diversifikation aber die Nachhaltigkeit. Das spricht für konzentrierte Investments“.