Explainable ESG: 9x new research on migration, pay, carbon disclosure, carbon impact, human rights, green innovation, SDG 17, buyouts (#shows SSRN full paper downloads as of June 6th, 2024)
Social and ecological research
Migrant platform disadvantage? Digital labour platforms and migrant workers by Wouter Zwysen and Agnieszka Piasna as of April 18th, 2024 (#20): “…migrants being a fifth more likely than similar native-born residents to work on platforms. This greater prevalence is mainly driven by migrants from outside the EU who are likely to face more regulatory hurdles and who may also experience greater disadvantage and discrimination in the labour market. The difference is further driven by migrants with high qualifications who are likely to see the biggest mismatch in the traditional labour market as their skills are generally downgraded. Finally, students are generally more likely to do platform work and, among this group, there is a sizeable overrepresentation of migrants. Migrant workers are also primarily engaged in ride-hailing and delivery platform work. … there is a pay gap for migrant workers relative to those that are native-born” (p. 27/28).
Pay disclosure effects: Is Pay Transparency Good? by Zoë Cullen as of June 2023: “Horizontal pay transparency policies that reveal pay gaps between coworkers doing similar work at the same firm … reduce pay gaps but also have unintended spillovers between worker negotiations that lower worker bargaining power and wages. In contrast, vertical and cross-firm pay transparency policies that ameliorate information frictions in the labor market more broadly have shown potential to improve motivation and talent allocation and sharpen competition, and, in so doing, raise wages, productivity, and equity” (p. 21/22). My comment: As part of my shareholder engagement activities, I ask every invested company to reveal the CEO to average worker pay gap, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com). This helps me and other investors to focus in real – and not only planned – reductions in the future.
Partially effective disclosure: Mandatory Carbon Disclosure: Evidence from France by Thomas Bourveau, Alexandre Garel, and Arthur Romec as of April 15th, 2024 (#113): “We examine firms’ response to a carbon disclosure mandate imposed on French firms with more than 500 employees …. We find that only half of the firms subject to the mandate comply and file at least one carbon report between 2014 and 2021. … only a fraction of the firms report their scope 3 emissions. … the propensity to file a carbon report and to include an action plan is lower for firms in more carbon-intensive industries. Finally, we find that expected carbon emission reduction is associated with the actual reduction in emissions, especially for firms that provide clear action plans with quantitative metrics“ (abstract).
ESG investment research (in: Explainable ESG)
Explainable ESG: CO2e/CaRe Attributable Emissions in Dutch Portfolios by Arun Muralidhar as of April 15th, 2024 (#12): “… the biggest driver of the carbon impact of portfolios is the asset allocation and, prima facie, it appears that portfolios with higher proportions of Fixed Income, and further with Global Sovereign Bond rather than Credit allocations, contribute to higher carbon emissions. … the analysis ignores any carbon offsets a fund might hold within individual asset class holding or carbon futures offsets … it is important to find a way to convert measures like tCO2e into normalized measures. … it is important to develop measures of carbon impact that are easily understood by a broader group of stakeholders. We have proposed the CaRe/€1bn/year statistic as one way to capture this” (p. 17/18; CaRe: Car Emission Equivalents).
Risks to people: Human Rights in EU Sustainable Finance Legislation by Daniel Litwin and Elsa Savourey as of May 29th, 2024 (#15): “This paper has demonstrated how human rights are widely embedded in key pieces of EU sustainable finance legislation through direct and indirect references to human rights and to BHR frameworks (Sö: Business and human rights) such as the UNGPs and the OECD Guidelines. … a significant divide persists between investors‘ preparedness and expertise in human rights and the efforts required to implement human rights-related provisions in EU sustainable finance legislation. … Additionally, important concepts such as ‘risks’ and ‘impacts’ found in BHR differ from their traditional meaning in the financial sector, with the former adopting a ‘risks to people’ approach and the latter a ‘risks to returns’ …” (S. 36/37). My comment: Risks to people should lead to financial risks but in order to achieve this, shareholder engagement and divestments must be a real and not only theoretical option.
Impact investment research
Green innovation: The Green Transition: Evidence from Corporate Green Revenues by Johannes Klausmann, Philipp Krueger, and Pedro Matos as of June 14th, 2024 (#20): “… we use data on green corporate revenues to provide novel evidence on the green transition, which accelerated after the Paris Agreement. We find that regulatory initiatives have led to an acceleration in the growth of the green economy in Europe. We show that innovative US firms possessing green patents can effectively translate these patents into tangible green revenues, which also contributes to the transition. Finally we document that the presence of institutional owners is associated with the post-Paris shift to green. We also examine the stock returns of firms with high green revenues and find only modest evidence of a green alpha, which is concentrated in US stocks in the post-Paris period“ (p. 29). My comment: There is no need for a green alpha for investors. With the same performances, investors should select the more sustainable investment option which I call the free green lunch.
Green bonus problems: Climate-linked Pay and Supply Chain Management by Minjia Li as of May 30th, 2024 (#31): “This study finds that the use of climate-linked pay leads firms to outsource their GHG emissions to their upstream supply suppliers, measured as the proportion of upstream scope 3 emissions out of total emissions. I find that firms with climate-linked pay reduce their scope 1 emissions by redirecting emissions to their suppliers, while the total emissions remain unchanged. This effect is primarily driven by firms with higher bargaining power over suppliers and lower supplier switching costs. … I … find evidence that firms with climate-linked pay initiate fewer and terminate more contracts with “hard-to-shift-emissions” suppliers, proxied by suppliers from countries or jurisdictions with higher enforcement of environmental regulation, mandatory ESG reporting laws, and legal origins of civil law“ (p. 29/30). My comment: Unfortunately too many companies and investors focus on green pay instead of real outcomes such as Scope 3 emissions or potentially increasing pay ratios between top managers and average employees, see Wrong ESG bonus math? Content-Post #188 – Responsible Investment Research Blog (prof-soehnholz.com)
On SDG 17: About SDGs, reading the manual with NLP by Leila Bennani, Amina Cherief, Theo Le Guenedal, and Takaya Sekine from Amundi as of June 4th, 2024 (#13): “… We also find a strong link between our geographic transformation and SDGs, especially with SDG17, suggesting the importance of cooperation for their successful achievement. … there might be a common belief that the goals can be achieved in both developed and developing countries, while the objective is actually to support developing countries. … despite the need to close the financing gap to achieve the SDGs by 2030, cooperation does not seem to be happening from developed to developing countries” (p. 15/16).
Other investment research (in: Explainable ESG)
Buyout manipulations? Loss Avoidance in Private Equity by Maria N. Borysoff and Gregory W. Brown as of Feb. 23rd, 2024 (#632): “This paper provides evidence that buyout funds manage multiples of invested capital (MOICs) for portfolio companies to avoid incurring and reporting capital losses. … we document an unusually low frequency of multiples just below 1.0 and an unusually high frequency of payouts that are equal to or just above 1.0. This behavior is consistent with funds attempting to minimize loss ratios which are commonly used to assess the riskiness of funds by outside investors and consultants. We document that more experienced general partners (GPs) appear more likely to engage in loss avoidance and do so while they are fundraising for their next fund. Loss avoidance may provide financial benefits because loss-avoiding GPs raise significantly larger subsequent funds relative to their vintage year peers. While loss avoidance may benefit GPs, it is negatively associated with the final fund returns that investors receive“ (abstract).
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Werbehinweis (in: Explainable ESG)
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