Bild zum Beitrag ESG skeptical zeigt eine Ansicht einer Allee aus dem Celler Französischen Garten

ESG skeptical research (Researchblog #90)

ESG skeptical: Investments and performance

ESG fund growth: European sustainable investment funds study 2022 – Hitting the road to a greener future by zeb and Morningstar as of June 22th, 2022: “Net assets in sustainable funds domiciled in Europe have reached almost EUR 2 trillion in 2021 – this figure is three times as high as in 2019 and up 71% from 2020. The share in total net assets went up to 16%, and half of the net flows were attracted by the sustainable sector. Sustainable passive funds continue their disproportionate increase, now reaching a 27% share in sustainable assets, as opposed to a share of passive funds of only 21% in the conventional fund sector. Equity remains by far the most important asset class of sustainable funds. The integration of ESG factors into money market funds has significantly accelerated, resulting in a share of 25% in total net assets of money market funds. At European level, about 44% of net assets were invested in funds classified by their managers as Article 8 and Article 9 funds according to the Sustainable Finance Disclosure Regulation (SFDR)” (p. 3).

Bad REIT ESG? Does Investing in ESG Pay Off? Evidence from REITs around the Covid-19 Pandemic by Ryan G. Chacon, Zifeng Feng, and Zhonghua Wu as of June 29th, 2022 (#19): “… we focus on the impacts of ESG performance on firm value, using newly available GRESB ESG performance data for an international sample of REITs. We document a negative relationship between REIT ESG performance and firm value during the pandemic. … we find that firms with higher ESG scores have lower cash flows and higher risk. Our results are consistent with REITs being penalized for overinvestment in ESG, particularly during times of significant market stress” (p. 22). My Comment: According to my experience sector ESG portoflios are difficult to manage in times of crisis, but somewhat sector diversified portfolios not see ESG ok, SDG gut: Performance 1. HJ 2022 – Responsible Investments (Blog) (

ESG research criticism: Cost of Capital for ESG and Non-ESG Stocks: Regression- versus Theory-based Approaches by Ahmed Badreldin and Bernhard Nietert as of June 16th, 2022 (#70): “… to derive cost of capital, .. empirical ESG papers do not use the valuation formulas of theoretical ESG pricing paper. Instead, empirical ESG papers rely on multi-factor regressions to estimate cost of capital. … Our paper brings theory-based ESG pricing formulas into a form that consists of solely observable components and shows that the cost of capital of ESG stocks is a linear function of the risk premium of the ESG sub-market portfolio whereas the cost of capital of non-ESG stocks is a linear combination of the risk premia of the market portfolio and the ESG sub-market portfolio. … we demonstrate that the cost of capital differences between regression- and theory-based cost of capital are both statistically and economically significant, where neither the sign nor the size of cost of capital differences can be forecasted with the help of different ESG rating methodologies or stock characteristics” (abstract).

Positive ESG-effects: Corporate Sustainability Performance and the Cost of Debt – An Analysis of the Impact of Country- and Industry-specific Climate Risk Exposures by Jan Christ, Tobias Hertel, Jannik Kocian as of June 17th, 2022 (#27): “Our results suggest that high levels of CSP, especially considering the environmental and social dimensions, are associated with lower credit default swaps (CDS) spreads …” (abstract).

ESG skeptical reporting

Bank climate inaction: Climate action or greenwashing? The Oil and Gas Policy Tracker assesses financial players by Reclaim Finance as of July 5th, 2022: “136 of the 369 financial institutions rated in the OGPT have adopted an oil and gas policy, which means more than 2/3 of them don’t even have a policy. Only 13 financial players rated in the OGPT have a policy tackling (totally or partially) oil and gas expansion, which means less than 4% committed to align their business with climate science to stay below 1,5°C. No more than 27 financial players rated in the OGPT have adopted ambitious commitments on unconventional oil and gas through the exclusion of some developers and/or a phase-out strategy. Yet, 158 of them have committed to carbon neutrality by 2050 joining an alliance of the Glasgow Financial Alliance for Net Zero (GFANZ)”.

Good green revenue reporting: Mandatory Disclosure of Standardized Sustainability Metrics: The Case of the EU Taxonomy Regulation by Marvin Nipper, Andreas Ostermaier, and Jochen Theis as of June 7th, 2022 (#83): “The European Union’s taxonomy regulation enacts rules to discern sustainable activities and determine the resulting green revenue, whose disclosure is mandatory for many companies. In an experiment, we explore how this standardized metric is received by investors relative to a sustainability rating. We find that green revenue affects the investment probability more than the rating if the two metrics disagree. If they agree, a strong rating has an incremental effect on the investment probability. … Our findings imply that a mandatory standardized sustainability metric is an effective means of channeling investment, which complements rather than substitutes sustainability ratings” (abstract).

Good SDG reporting: Investigating competing Rationales for SDG Reporting by Theresa Spandel as of Juliy 1st, 2022 (#30): “Overall, the presented evidence on SDG reporting suggests that the SDG framework helps firms to identify financially immaterial but inside-out material sustainability areas with low performance, which are subsequently reported on and improved” (p. 43).

Less ESG disagreement: Does voluntary ESG reporting resolve disagreement among ESG rating agencies? by Michael D. Kimbrough, Xu (Frank) Wang, Sijing Wei, and Jiarui (Iris) Zhang as of June 13th, 2022 (#78): “We find that ESG disagreement among ESG raters is lower for firms with voluntary ESG reports, indicating that ESG reports are useful to ESG rating agencies. In particular, disclosures about the environmental and social dimensions help reduce disagreement on those corresponding dimensions. Using textual analysis, we show that longer, less positive, and less sticky ESG reports are associated with further reduced disagreement among ESG raters. …Finally, we document that ESG disagreement is significantly positively related to capital market uncertainty” (p. 34).

ESG skeptical ratings

ESG rating criticism: Divestment, information asymmetries, and inflated ESG ratings by Dennis Bams and Bram van der Kroft as of June 14th, 2022 (#154): “… socially responsible investors shift their portfolios towards firms with high ESG ratings rather than firms with exemplar sustainable performance. We causally show that this provides incentives for firms to reduce their cost of capital by inflating their ESG ratings. Consequently, ESG rating inflation is so prominent that Refinitiv, MSCI IVA, and FTSE ESG ratings are inversely related to sustainable performance because promises of sustainable performance improvements do not materialize up to 15 years in the future” (abstract). “… we capture the promised sustainable performance of firms by assessing their mainly self-reported ESG policies, activities, and targets proposed in sustainability reports and determine their realized sustainable performance with primarily third-party reported ESG controversies, environmental pollution, labor conditions, and governance aspects … We observe a negative relationship when we regress the aggregate realized ESG scores of firms on their overarching promised ESG scores now and up to 10 years in the future” (p. 4) My comment: Not all rating agencies work in the criticized way. My main ESG ratings supplier shifted its focuses to actual from planned sustainability.

ESG rating provider deficits: Outcome of ESMA Call for Evidence on Market Characteristics of ESG Rating and Data Providers in the EU by European Securities and Markets Authority as of June 24th, 2022:  “… our principal finding is that the number of ESG rating providers currently active in the EU is 59. … the structure of the market among providers is split between a small number of very large non-EU entities on one hand, and a large number of significantly smaller EU entities on the other. … The predominant business model is investor-pays, however, provision of ESG ratings on an issuer-pays basis is more prevalent than anticipated and was indicated in around a third of responses from providers. … the majority of users of ESG ratings are typically contracting for these products from several providers simultaneously. Their reasons for selecting more than one provider are most notably to increase coverage, either by asset class or geographically, or in order to receive different types of ESG assessments. A majority of users contract with a small number of the same rating providers, indicating a degree of concentration in the market. The most common shortcomings identified by the users were a lack of coverage of a specific industry or a type of entity and insufficient granularity of data. Complexity and lack of transparency around methodologies were also cited as an issue. … Most of these entities highlighted some degree of shortcoming in their interactions with the rating providers, most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors” (p. 3).

ESG rater comparison: ESG-Datenbieter im Check: Große Divergenzen bei S und G by Cofinpro AG as of June 28th, 2022: „Die für diese Analyse befragten Anbieter stellen jeweils ESG-Daten für mehrere tausend Unternehmen bereit. Vermehrt werden dabei auch nicht-börsennotierte Firmen aufgenommen. Teilweise stellen Anbieter Daten für mehr als 200.000 Unternehmen bereit. Ermöglicht wird dies durch eine automatisierte Auswertung. Modernste Technologien der Künstlichen Intelligenz (KI) wie Machine Learning finden bei der Mehrzahl … der Anbieter Anwendung. Diese zunehmende Konsolidierung und Oligopolisierung am Markt für ESG-Datenanbieter führt zu steigenden Eintrittsbarrieren. Das Leistungsspektrum der ESG-Datenanbieter ist weitgehend homogen. Zum »Standardprogramm« gehört die Ermittlung von ESG-Scores bzw. Ratings, die im Rahmen einer ESG-Datenversorgung von fast allen befragten Unternehmen angeboten wird. Auch die Bereitstellung von Rohdaten oder von automatisierten Schnittstellen gewinnt an Bedeutung. Auffallend: Nur wenige Datenanbieter bieten auch eine Beratung zum Thema Nachhaltigkeit an“ (p. 3, 4).

ESG and impact

(Too) Small ESG steps: Does ESG integration impact the real economy? A theory of change and review of current evidence by Florian Heeb, Anne Kellers, and Julian Kölbel as of June 24th, 2022: “(1) ESG ratings can reflect company impact when they focus on impact materiality rather than financial materiality, (2) dedicated ESG funds tilt their holdings towards ESG leaders, but many institutional investors who have committed to ESG integration do not, (3) there is some evidence that an ESG premium exists, but it remains uncertain whether it is economically meaningful, and (4) managers readily address low-hanging fruit but hesitate to undertake larger investments to appeal to ESG investors unless there is also pressure from clients, competitors, or regulators. The overall conclusion on whether ESG integration has an impact on the real economy is: “maybe a little bit.” Nevertheless, the strength of ESG integration lies in its scale, so even uncertain and small impacts may add up to a meaningful effect” (p. 5). My comment: see Absolute and Relative Impact Investing and additionality – Responsible Investments (Blog) (

Liquid Impact? Impact in der Praxis by Sören Jantzer et al. of the Forum Nachhaltige Geldanlagen as of June 28zh, 2022: „Beim Blick auf die Praxisbeispiele ist auffällig, dass sowohl ökologische als auch soziale Wirkungsziele verfolgt werden, die sich mehrheitlich nach den SDGs oder eigens formulierten Transformationszielen richten. Als Wirkungskanal wird bei fast allen Praxisbeispielen Engagement genutzt, häufig auch Kapitalallokation. Herausforderungen liegen vor allem bei der Wirkungsmessung: die Taxonomie besitzt noch keine Marktreife, weswegen Anbieter:innen meistens die SDGs als internationales Rahmenwerk nutzen. Wirkung kann auf unterschiedlichen Ebenen erfolgen, daher ist Transparenz, die häufig in Form einer festgelegten Berichterstattung erfolgt, entscheidend um der Gefahr von Impact-Washing zu begegnen“ (p. 34).

Complex Incentives (and ESG): Incentives by Brian Harward as of June 28th, 2022: “Ethically managing incentives can be a complex task. There’s ample research to assist in navigating these challenges. Companies can realize the benefits of incentives while minimizing negative consequences. Examining your organization’s values and most important outcomes can be a key starting point to ethical compensation programs. This means not implementing certain compensation programs just because it’s what other organizations are doing. Rather than choosing to conform, organizations can apply incentives where and how they serve their real needs. Incentives play out over time, and across individuals and groups, in intricate ways, and can lead to unintended consequences, but a better understanding of how these dynamics unfold can enable organizations to apply them with greater efficacy”.

Positive ESG bonifications? Say on ESG: The Adoption of Say-on-Pay Laws and Firm ESG Performance by Andrea Pawliczek, Mary Ellen Carter, and Rong (Irene) Zhong as of  June 9th, 2022 (#112): “Using a large sample of firms from 36 countries during the period 2004-2016 … We document a significant increase in ESG contracting after the adoption of SOP laws, as evidenced by the adoption of ESG-related compensation policies, greater inclusion of CSR and sustainability targets in compensation contracts, and the inclusion of long-term incentives, as well as the higher sensitivity of pay to ESG performance. … We find that ESG performance increases after SOP adoption … we find that pay premiums formerly associated with ESG metrics in compensation go down after SOP“ (p. 31/32). My comment: There remains still a CEO pay premium after Say on Pay (SOP) has been introduced when linking parts of their compensation to ESG which is bad for the average employee/CEO pay gap and thus not necessarily net socially/ESG positive, in my opinion, see ESG Boni abschaffen und mehr radikale Vorschläge – Responsible Investments (Blog) (

Evil AI and robots: Robots Enact Malignant Stereotypes by Andrew Hundt, William Agnew, Vicky Zeng, Severin Kacianka, and Matthew Gombolay, as of June 21st, 2022: “… we evaluate how ML (Soe: Machine Learning) bias manifests in robots that physically and autonomously act within the world. … Our experiments definitively show robots acting out toxic stereotypes with respect to gender, race, and scientifically discredited physiognomy, at scale. Furthermore, the audited methods are less likely to recognize Women and People of Color. … We find that robots powered by large datasets and Dissolution Models (sometimes called “foundation models”, e.g. CLIP) that contain humans risk physically amplifying malignant stereotypes in general; and that merely correcting disparities will be insufficient for the complexity and scale of the problem” (abstract).