Nutritious or ecological? Estimating the environmental impacts of 57,000 food products by Michael Clark, Marco Springmann, Mike Rayner, and Richard a. Harrington as of August 8, 2022: “Using the approach on 57,000 products in the United Kingdom and Ireland shows food types have low (e.g., sugary beverages, fruits, breads), to intermediate (e.g., many desserts, pastries), to high environmental impacts (e.g., meat, fish, cheese). Incorporating NutriScore reveals more nutritious products are often more environmentally sustainable but there are exceptions to this trend, and foods consumers may view as substitutable can have markedly different impacts (abstract).
Different climate risks: Acute climate risks in the financial system: examining the utility of climate model projections by Andy J. Pitman et al. as of July 29th, 2022 (#558): “We show that global mean temperature provides little insight on how acute risks likely material to the financial sector (“material extremes”) will change at a city-scale. We conclude that “top-down” approaches are likely to be flawed when applied at a granular scale, and that there are risks in employing the approaches used by, for example, the Network of Central Banks and Supervisors for Greening the Financial System. Most fundamental, uncertainty associated with projections of future climate extremes must be propagated through to estimating risk” (abstract).
Increased climate risks: Estimating Macro-Fiscal Effects of Climate Shocks From Billions of Geospatial Weather Observations by Berkay Akyapi, Matthieu Bellon, and Emanuele Massetti of the International Monetary Fund as of August 10th, 2022 (#6): “A growing literature estimates the macroeconomic effect of weather using variations in annual country-level averages of temperature and precipitation. However, averages may not reveal the effects of extreme events … we rely on global daily weather measurements with a 30-km spatial resolution from 1979 to 2019 and construct 164 weather variables and their lags. … We find that an increase in the occurrence of high temperatures and droughts reduce GDP, whereas more frequent mild temperatures have a positive impact. The share of GDP variations that is explained by weather … is much higher than what was previously implied by using annual temperature and precipitation averages. We also find evidence of counter-cyclical fiscal policies that mitigate adverse weather shocks, especially excessive or unusually low precipitation episodes” (abstract).
ESG reporting and regulation
Green central bank push? Financial Markets and Green Innovation by Philippe Aghion at al. of the European Central Bank (ECB) as of July 27th, 2022 (#54): “An active tilting of central bank interventions in favour of green technologies is in conflict with the principle of market neutrality and, in any case, central bank policies that operate by supporting bond financing or encouraging bank lending are not effective in stimulating innovation. Still, the ECB can reinforce government actions to promote green technologies by enhancing disclosure requirements of climate risks by banks and firms eligible for asset purchases, by adjusting prudential frameworks to reflect climate risks, by purchasing sovereign green bonds through its asset purchase programme, and by supporting the push for a “green” CMU (Capital Markets Union) with a strong equity component” (p. 46/47).
Positive ESG disclosure effects: ‘Mere puffery’ or credible disclosure? The real effects of adopting voluntary ESG disclosure standards by Khrystyna Bochkay, Seungju Choi, and Jeffrey Hales as of July 25th, 2022 (#93): “… we examine the time-series of firms’ adoption of industry-specific sustainability standards developed by Sustainability Accounting Standards Board (SASB). In terms of determinants, we find that pressure from peer firms and sustainability-conscious institutional investors, as well as firm visibility and performance, are the main determinants of reporting following SASB standards. … In terms of consequences, we find improvements in various ESG outcomes including the decrease in work-related injuries, decrease in toxic releases, fewer negative ESG-related incidents, and higher ESG ratings” (p. 25).
More ESG data and transparency: The forces that shape mandatory ESG reporting by Sellhorn, Thorsten and Victor Wagner as of August 3rd, 2022 (#43): “Financial reporting and ESG reporting … are merging into a holistic corporate reporting that seeks to inform not only capital providers, but also a firm’s wider contract parties, stakeholders, and society as a whole. …. 2. Mandatory reporting requirements will continue to establish themselves within policymakers’ toolboxes. … 3. The amount of new mandatory reporting requirements emerging out of the EU’s Green Deal can appear daunting, with affected firms voicing concerns about massive implementation costs and disclosure overload … at their core, the evolving ESG reporting requirements demand only what well-managed firms (should) have been doing all along – for strategic reasons: regular internal monitoring of, and external accountability to key stakeholders about, the material risks and opportunities for the firm that arise from foreseeable developments, including those related to ESG. … 4. When implemented, the evolving suite of new mandatory reporting requirements will pave the way for unprecedented amounts of data on a large number of firms’ ESG-related impacts, risks, and opportunities becoming publicly available” (p. 31).
ESG info matters: Sustainability: Performance, Preferences, and Beliefs by Valentin Luz, Victor Schauer, and Martin Viehweger as of August 1st, 2022 (#32): “Comparing the results to a control group that only receives financial information, we find that investors incorporate both financial and sustainability information. We find that investors invest less in a firm with weak sustainability performance even when the other investment opportunity performs worse financially and does not provide any sustainability information. This investor behavior is even more pronounced when the alternative investment opportunity provides information about a strong sustainability performance … We … find that investors invest more in the firm with comparatively strong sustainability performance if they believe other market participants have sustainability preferences” (p. 28). My comment: I publish ESG information for every holding of my fund see “Nachhaltigkeitsreport” at FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T
Taxonomy beats ratings: Revenue Alignment with the EU Taxonomy Regulation by Alexander Bassen, Othar Kordsachia, Weiqiang Tan, and Kerstin Lopatta as of July 31st, 2022 (#24): “This study examines the evolution of the stock price premium paid for green assets that are aligned with the TR (Taxonomy Regulation). … we provide robust evidence for a TR alignment premium in 2020 when the TR was published. … we show that the cumulative TR alignment premium and cumulative investor attention to the TR increased synchronously over the sample period. … investors began to apply this new governmentally endorsed classification scheme to identify sustainable companies over sustainability assessments from private companies derived from proprietary methodologies” (p. 17/18).
Attractive ESG ratings and article 9 classification: The importance of labels for sustainable investments: SFDR versus Morningstar globes by Fabrizio Ferriani of the Bank of Italy as of July 25th, 2022 (#32): “We find investor flows to systematically respond to Morningstar’s sustainability ratings, with low-ESG risk funds attracting larger net flows, whereas regulation-induced labels positively affect fund flows only when sustainable goals are the core investment objective. i.e. in the case of Article 9 funds; these latter funds also outperform their peers in terms of returns, possibly reflecting a strenghtening of investors’ ESG concerns” (p. 6). My comment: “Sample of one”: My article 9 funds with 5 Morningstar globes outperforms, details see FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T
Voting, engagement, divestments and impact (ESG reporting)
Good divestments: Mechanisms to incentivise fossil fuel divestment and implications on portfolio risk and returns by Marupanthorn Pasin, Christina Sklibosios Nikitopoulos, Eric D. Ofosu-hene, Gareth W. Peters, and Kylie-Anne Richards as of August 1st, 2022 (#56): “Mechanisms to incentivize divestment strategies, such as divestment schedules, are an important component of carbon reduction strategies. We find that the risk/return profile of divested S&P 500 portfolios is typically indifferent to divestment schedules, … Investing in funds with low carbon footprints results in lower dividend returns and management fees. Even though the return profile of ETFs is insensitive to divestment strategies, their risk profile is proportionally (to their carbon intensity) affected by such strategies” (abstract).
Bad banks: Ethics and Banking: Do Banks Divest Their Kind? by Diego P. Guisande, Andreas Hoepner, and Conall O’Sullivan as of July 28th, 2022 (#8): “… we have tested whether banks divest their kind after some misconduct case is known (p. 23) … our results highlight that: 1. Banks do divest their equity holdings from misconducting banks with less intensity than other investors. … 2. PRI signatories banks, at best, do not trade differently from non signatories. The same result is found when comparing fined banks to non-fined banks. 3. European banks are slightly more likely to divest than US based banks” (p. 23/24).
More responsible debtholder? Debtholder Stewardship by Suren Gomtsian as of July 29th, 2022 (#20): “The (UK) Stewardship Code 2020 attempts to broaden the concept of investor stewardship by encompassing investors in debt securities. … debtholder oversight … has … focused on maintaining the solvency of borrowers. … This article shows that although there are good reasons for including debtholders in the corporate governance and stewardship frameworks of companies, the existing infrastructure is not fully ready for this … (p. 51) … The UK has been a stewardship norm exporter as several countries modelled their stewardship codes on the earlier versions of the UK code. … The fixed term of debt limits the holder’s time horizon and creates a bias towards stewardship activities that give priority to investments with lower risk profile and to short-term targets within the maturity term. By contrast, shareholders have potentially unlimited time-interest because future performance is reflected in the firm’s net present value. This difference in time horizons may, (p. 52) for example, reduce the interest of debtholders in distant risks, including climate risk. To the contrary, debtholders may be interested in reducing costly investments in addressing distant risks, especially in firms facing financial distress” (p.53).
ESG partners in virtue: ESG risk and Syndicated Lending Relationship by David P. Newton, Pietro Perotti, Ru Xie, and Binru Zhao as of July 29th, 2022 (#23): “We show that enterprises with high ESG scores are more inclined to borrow from banks with high ESG scores. … high ESG borrowers face lower loan spreads and fewer financial covenants when lenders also have high ESG performance or are committed to being responsible due to “cheaper credit” hypothesis. … enterprises with low ESG ratings are less likely to borrow from high ESG lenders to avoid bank monitoring. … firms borrow from banks with strong ESG performance are more likely to enhance their ESG performance in the year after loan origination. This is because high ESG banks have stronger motivation to monitor borrowers’ ESG performance after the loan origination” (p. 20).
Basic impact research: Social Impact Operations at the Global Base of the Pyramid by Jónas Oddur Jónasson, Kamalini Ramdas, and Alp Sungu as of July 29th, 2022 (#23): “… Research in our field that explicitly emphasizes an objective of social impact in the most unprivileged parts of the world – the so-called global base of the pyramid (which refers to the 2.7 billion people living on less than $2.50 per day, the largest but most resource-poor economic group globally) has seen an increase in recent years …. we pull together representative examples from our field of what we consider as social impact research aimed at improving living conditions at the base of the pyramid” (abstract).
ESG investing (ESG reporting)
ESG influences capital costs: Can ESG shape cost of capital? A bibliometric review and empirical analysis through ML by N. Bussman, A. Tanda, and E.P. Yu as of August 2nd, 2022 (#16): “Overall, we find that key fundamental variables and country characteristics keep their important role in predicting cost of capital, but ESG factors are becoming more important and some features have a role relatively important in the prediction of cost of capital for large listed companies with respect to more “traditional” ones, including leverage and GDP” (p. 9).
Good institutions, bad slack: Institutional investment and ESG performance of firms: new evidence from cross-country analyses by Amrit Panda, Soumya Guha Deb, and Ranjan Dasgupta as of Austust 6th, 2022 (#16): “Using an elaborate panel dataset of 18,436 firm-year … observations between 2010 to 2020 from 29 countries, we show that institutional investors’ presence positively affects the ESG score of a firm, and good ESG performance also attracts institutional investors. Further, we also find that organizational ‘slack’ dampens this relation between institutional holdings and ESG score” (p. 9/10).
Greening reduces bank risks: Environmental engagement and stock price crash risk: Evidence from the European banking industry by Franco Fiordelisi, Ornella Ricci, and Gianluca Santilli as of July 25ht, 2022 (#21): “We analyse a sample of European banks … from 2015 to 2021, characterised by an unprecedented evolution towards sustainable finance. … we find a significant negative association between banks’ green activities and future stock price crash risk, measured by the crash occurrence, the negative skewness, and the down-to-up volatility of stock returns” (p. 32).
Green conviction pays: Personal Convictions and ESG Investing by Charlie Costello, Rachel Li, Sugata Ray, and Parth Venkat as of August 8th, 2022 (#18): “For a large sample of U.S. equity mutual funds, we show that funds with managers who are personally environmentally committed weight their portfolios more heavily towards green stocks and outperform on those equity holdings, when compared to funds with environmentally neutral managers. Importantly, the signal from managers’ personal convictions is informative over and above funds’ stated environmental preferences and past holdings” (p. 20/21). My comment: I am happy to answer questions about my convictions (dirk@soehnholzesg.com) and for concentration conviction see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com) and all together here Nachhaltigster Aktienfonds? – Responsible Investment Research Blog (prof-soehnholz.com)
Improving SRI ETFs: Hidden Gem or Fool’s Gold: Can Passive ESG ETFs Outperform the Benchmarks? By Ariadna Dumitrescu, Jesse Järvinen, and Mohammed Zakriya as of August 8th, 2022 (#198): “… we examine the potential benefits of SRI ETFs for investors. … We do so by exploiting a unique survivorship-free dataset of 121 passive U.S. equity SRI ETFs from January 2010 to December 2020, and comparing the performance of the SRI ETF portfolio with a benchmark portfolio comprising passive S&P500 ETFs. … during the second half of the sample period (i.e., between 2015 and 2020), when this industry developed and flourished, we find no statistically significant difference between SRI ETFs’ performance and that of their benchmarks. Importantly, we find that investors could have potentially gained significant value from SRI ETFs in the last two years of our sample. … we find that only the SRI ETFs that incorporate inclusion (positive screening), and in particular, those that employ the environmental inclusion strategy, are drivers of abnormal returns. … SRI ETFs’ declining market concentration may have most likely benefited SRI ETFs and fuelled their outperformance in recent years” (p. 33). My comment: A similar performance as traditional investments should be sufficient to convince investors. SRI ETF real track record since 2015 see my ESG ETF-Portfolio and recent performance here ESG ok, SDG gut: Performance 1. HJ 2022 – Responsible Investment Research Blog (prof-soehnholz.com)
Islamic drift: Islamic Equity Fund Investment Styles by Iftekhar Hasan Chowdhurya, Faruk Balli, and Anne de Bruin as of May 7th, 2022 (#10): “This study investigates the investment styles in IEFs based on a survivorship bias-free sample, consisting of 224 funds across Islamic countries and non-Islamic countries, from January 2004 to December 2018. … First, from the historical portfolio holdings perspective, we find Islamic funds initially overwhelmingly tilted to high .. value stocks in Islamic countries … and high .. growth stocks in non-Islamic domiciles …. However, over recent years, Islamic fund managers are moving to portfolios that are more tilted to blend types. … Similarly, Islamic funds initially overwhelmingly picked mid-cap stocks in Islamic countries, but over the recent years, the majority have been heavily skewed to large-cap stocks. “ (p. 25).
Traditional investments
Low real estate manager value: Did Closed-End Real Estate Funds Add Value? by Will Robson and Niel Harmse of MSCI as of August 3rd, 2022: “We assessed the performance of 145 U.S.-focused, closed-end real estate funds … with the MSCI U.S. Quarterly Property Index as benchmark. … The arithmetic average across all funds was 1.07, indicating a cumulative outperformance of the index. After applying each fund’s own leverage to the index, however, the average … was 1.01, barely above parity with the index, indicating that, on average, performance amounted to little more than levered-up market returns”.