Ecological research: Female ESG power
Climate defaults: The Rise of Climate Risks: Evidence on Firms’ Expected Default Frequencies by Matilde Faralli and Francesco Ruggiero as of Jan. 4th, 2023 (#28): “After 2015, our results suggest that firms with high carbon footprints became riskier. We observe that this relation is driven by a decrease (increase) in asset volatility of small (large) emitters. … We find that the relationship is stronger for large emitters, firms belonging to “brown” sectors, firms with low public ownership, and firms in the US. In summary, using our methodology we are able to provide evidence on how firms’ probability of default is affected by climate risk and through which component of the credit risk this effect is channeled” (p. 34/35).
Few brown offloads: The Shifting Finance of Electricity Generation by Aleksandar Andonov and Joshua D. Rauh as of Dec. 7th, 2022 (#55): “Using data on U.S. power plants accounting for 99% of the electricity generation over the 2008-2020 period, we find that incumbent domestic listed corporations have reduced their ownership from 69% to 54%, while new entrants, such as private equity, institutional investors, and foreign corporations, have increased their ownership stakes from 8% to 24%. Private equity and foreign corporations have increased their ownership share largely through the creation of new solar, wind and natural gas power plants in states with deregulated competitive electricity markets and states where the population is highly concerned about climate change. We find limited support for the leakage hypothesis that incumbent domestic listed corporations, which are subject to higher disclosure requirements and public scrutiny, sell older fossil fuel power plants to the new ownership types. Domestic corporations have the highest probability of decommissioning a power plant conditional on plant age and capacity, but private equity is the second most likely ownership structure to shut down power plants. Institutional investors and foreign corporations maintain very low exposure to plants subject to decommissioning“ (p. 37/38).
Green consumers? Green consumer research: Trends and way forward based on bibliometric analysis by Herman Fassou Haba, Christophe Bredillet and Omkar Dastane as of Dec. 21st, 2022 (#11): “The study provides a comprehensive view of the research that has been conducted in the previous three decades on the topic of ‘green consumer’ in the marketing management domain … The study identified major contributors in the field (the most productive author: Li Y.), articles with the highest impact, the leading journals in the field (the most prolific journal: Journal of Cleaner Production), geographical locations where research of the field is concentrated (leading country: China) and the universities emphasizing on green consumer research (leading university: Florida International University). In addition, five major themes that characterize the body of knowledge on green consumer topics were identified namely, consumer buying behaviour, sustainable development, green products, human behavioural aspects, and green marketing. Evolving themes were identified as renewable energy and environmental policy“ (abstract).
Responsible investing research
Green or brown benchmark? Net Zero Investment Portfolios – Part 1. The Comprehensive Integrated Approach by Inès Barahhou, Mohamed Ben Slimane, Noureddine Oulid Azouz, and Thierry Roncalli from Amundi as of Dec. 13th, 2022 (#64):“The goal of this paper is to participate in the debate on climate investing by showing that it is not a free lunch. Net zero investment portfolios may involve some substantial costs in terms of tracking, diversification, and liquidity risks. … Compared to a business-as-usual benchmark, the tracking error cost may be relatively high, especially for equity portfolios. Moreover, the diversification risk is critical for equities and bonds because we see significant deformation of investment universes. Of course, these results depend on the parameter values we use. Nevertheless, they clearly indicate that climate investing is not just a tilt of traditional investing. In this context, the reference to business-as-usual benchmarks is not always relevant” (abstract). My comment: There are >3 million investment indices. And diversification benefits decrease fast. Why not focus on the most responsible stocks and bonds. The results may be attractive, see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com), especially when negative external effects are considered.
Expensive brown risks: Physical and transition risk premiums in euro area corporate bond markets by Joost V. Bats, Giovanna Bua, and Daniel Kapp as of Jan.4th, 2023 (#11): “Our findings show that physical risk is significantly priced in euro area corporate bonds with longer-term maturities since the anticipation of the Paris agreement. Physical risk is also priced in short-term bonds, but the premium is smaller and less significant. Accounting for bond characteristics, the physical risk premium for long-term bonds is negative and estimated to be 15 basis points 1-month ahead and 34 basis points 2- to 6-months ahead. The negative physical risk premium mostly reflects investors demanding higher future returns on bonds that are bad hedges against physical risk. Similar to the findings in the stock market literature, corporate bonds did not contain significant physical risk premiums before 2015, indicating that investors’ incentives to hedge against physical risk intensified after the Paris agreement. By contrast, there is no strong evidence for transition risk premiums in euro area corporate bond markets” (p. 18).
Downside ESG risks: ESG Risk Exposure: A Tale of Two Tails by Runfeng Yang, Massimiliano Caporin and Juan-Angel Jiménez-Martin as of Dec. 13th, 2022 (#195): “Our paper provides a new measurement – the ESG risk contribution (△CoESGRisk) – to quantify how ESG affects the downside risk of a company. … Under our proposed setting, high-ESG companies would suffer even when the market is in favor of high-ESG companies, mainly due to the increase in the volatility. In addition, ESG risk contributions under this setting change over time. … We find that a higher ESG score leads to a more positive exposure and thus a more positive contribution. … Specifically, large and profitable companies will suffer less under extreme market ESG conditions. A higher book-to-market ratio means higher ESG risk contribution. The level of contribution varies among sectors, which means that sector characteristics should be taken into account when evaluating the impact of ESG on downside risk. … the central idea behind our method is that we use the co-movement between a company’s downside risk and the ESG risk factor as a measurement of ESG risk contribution” (p. 22/23).
Positive ESG shocks? Becoming virtuous? Mutual Funds’ Reactions to ESG Scandals by Bastian von Beschwitz, Fatima Zahra Filali Adib, and Daniel Schmidt as of Dec. 14th, 2022 (#33):“… we show that managers of active funds (but not those of passive funds) that have experienced an ESG scandal for one of their portfolio stocks are more likely to vote in favor of ESG-related shareholder proposals for other portfolio stocks, as compared to other mutual funds voting on the same proposal but that were not exposed to an ESG scandal. … we find that managers react more to the scandal when it is accompanied by negative stock returns, and we document that ESG scandals lead to additional outflows from mutual funds holding the scandal stock. Together, these findings suggest that mutual fund managers do not change their voting behavior out of a shift in personal preferences, but rather because they are worried about being punished by their investors for holding scandal stocks in their portfolios. … we also find evidence that mutual funds exposed to ESG scandals subsequently tilt their portfolios away from high-ESG risk companies …” (p. 23).
Activated leasing: Brick or Treat: Shareholder Activism and Corporate Leasing by Fang Li, Gaizka Ormazabal, and Carles Vergara-Alert as of Dec. 11th, 2022 (#37): “Based on the universe of CRSP-Compustat firm-year observations between 1995 and 2018, we find a strong association between shareholder activism and increases in corporate leasing activity. Consistent with a substantial number of publicized cases where activists encouraged firms to sell property and lease it back, we observe that the documented association between leasing and activism is shaped by real estate prices and is more pronounced for firms with a higher amount of real estate assets. … We observe a substantial increase in shareholder payouts accompanied by a remarkable decline in investment in years with activism and higher leasing. We also find that leasing activity is negatively correlated with acquisitions and proxy fights, suggesting that leasing could be a way for the management of the firm to obtain the liquidity necessary to increase short-term payouts for investors“ (p. 31).
UN PRI sells: Catering through transparency: Voluntary ESG disclosure by asset managers and fund flows by Marco Ceccarelli, Simon Glossner, and Mikael Homanen as of Jan. 3rd, 2023 (#380): “We find that mutual funds that disclose superior ESG practices through the PRI’s standardized reporting framework receive more assets from institutional clients, suggesting that market participants are using this framework to guide their capital allocation decisions. This effect is more pronounced when the ESG disclosure is corroborated by high ESG fund ratings from Morningstar …. The disclosure correlates with more sustainable investment practices, such as holding more sustainable stocks and managing more assets in mutual funds with an explicit ESG mandate“ (p. 24/25).
Traditional and alternative investment research
Timberland advantage: Inflation Hedging Effectiveness of Farmland and Timberland Assets in the United States by Srijana Baral and Bin Mei as of Dec. 3rd, 2022 (#5): “Private-equity farmland can hedge all inflation types with a 15-year investment horizon, whereas private- and public-equity timberland can hedge expected and unexpected inflation with a 15- and 30-year investment horizon. … There is also evidence that the financial crisis of 2008 is the cutoff period after which the public-equity farmland and timberland assets become more effective inflation hedges and the ability gets stronger as the investment horizon goes beyond 10 years. Results suggest that the inflation hedging effectiveness depends on the investment horizon and the state of the economy, and differs across farmland and timberland assets“ (abstract).
Hedge fund criticism:Hedge fund factor exposures with daily data by Christos Antoniadisa an Spyros Skouras as of Dec. 14th, 2022 (#49): “We find that performance evaluation of hedge funds at daily resolution suggests exposures to more factors and consequently less alpha than identical analyses at monthly resolution … we report several new findings for hedge fund returns, including exposure to commodity puts and daily variation in exposures as a function of market liquidity. Since hedge fund returns have been analyzed almost exclusively with monthly returns and a limited set of static factors, our findings suggest that much outstanding research on hedge fund alpha and risk exposures should be interpreted with caution” (abstract). My comment: See Faktorallokation ist konzeptionell und operationell schwierig, Faktoranalysen sind aber wichtig – Responsible Investment Research Blog (prof-soehnholz.com)