Sharing is Caring: Infrastructure Sharing in Cities by Sheila R. Foster as of November 3rd, 2022 (#13):“Cities around the world responded to the pandemic by repurposing their streets and sidewalks into outdoor seating, dining spaces, and car-free pedestrian corridors. At the same time, many cities and states also faced calls to “reclaim” underutilized public and private structures like empty houses and hotels and put them to a use responsive to the crisis”. (abstract). … “They do so both in their role as trustees of public spaces and parks that are largely kept in the public realm, and in their proprietary role with land and buildings that they can sell or transfer freely, much as a private property owner would. … However, despite the examples of infrastructure sharing we saw during the pandemic, these efforts did not fully reach communities most in need, and too many remain infrastructure deserts” (p. 29).
Responsible investment research: German ESG citicism
ESG history: The Making and Meaning of ESG by Elizabeth Pollman as of October 31st, 2022 (#1695): “This Article has provided an in-depth examination of the term and its implications, starting from its history and evolution in usage to the promise and perils of its construction. This exploration reveals that ESG has a specific origin, but is not a fixed concept beyond the combination of three categories of issues that comprise the acronym. Just as the opaque features of legal standards can create a salutary “fog” that allows for moral deliberation, the flexibility and big tent approach of the term ESG, and its facilitation of claims of alignment between value and values, are at once part of the success story in diffusing ESG widely and forming a diverse movement of proponents. The ambiguity of ESG and varying usages that developed over time have facilitated buy-in from a great variety of market actors. However, these very features that have fostered a global dialogue, attracted trillions of investment dollars, and fueled regulatory reform, are also the source of challenges and critiques that have emerged and will continue into the foreseeable future“ (p. 46).
Low ESG downside risk: Doing Well by Doing Good? Risk, Return, and Environmental and Social Ratings by Sudheer Chava, Jeong Ho (John) Kim, and Jaemin Lee as of Nov. 8th, 2022 (#54): “We find strong evidence that firms with high ES ratings have statistically significantly lower downside risk, whereas such firms do not differ from the others based on standard, unconditional market risk or average returns. … the effect is not materially large enough to support ES-focused investment vehicles based solely on economic considerations. … firm values for high ES firms covary less with the average firm’s value, especially when the average firm’s value is declining. … institutional investors have preference for high-ES stocks: they hold on to these stocks when the market suffers extremely negative shocks.” (p. 28).
Good ESG funds: What’s in a name: The ESG edition by Rob Stubbs and Melissa Brown from Qontigo as of October 21st, 2022 “(Most) Sustainability-focused funds … looked good on a variety of metrics … This was particularly true for exposures to the Sustainable Development Goals …. We also found that in many cases attractive metrics were achieved by eliminating whole industries or sectors, some of which (such as renewable energy) were puzzling” (p. 28).
German ESG criticism (1): Was Investoren über E(SG) wissen müssen by Bernd Scherer as of Oct. 12th, 2022:„Aus Sicht der Theorie müssen grüne Assets im Kapitalmarktgleichgewicht schlechter als braune Assets performen.5 Erstens erhalten Investoren einen nichtfinanziellen Zusatznutzen, für den sie bereit sind auf Rendite zu verzichten. Zweitens müssen Anlagen, die nicht diversifizierbare Klimarisiken absichern auch geringere systematische Risiken enthalten und damit geringere Renditen erwarten lassen … Während neuere Studien eine negative Risikoprämie für grüne Assets finden,6 gibt es auch abweichende Ergebnisse7 mit allerdings zumeist fehlender interner und externer Validität“ (p. 3). … „Alle Portfolioaktivitäten zum Erzielen risikoadjustierter Outperformance sind bereits Bestandteil rationalen Investierens. Jeder CIO verlangt solche Überlegungen von seinen Portfoliomanagern, auch ohne ESG Regulierung“ (p. 9). My comment: Empirically, most (traditional and sustainable) portfolio managers (and CIOs) underperform their passive benchmarks. Also, most (good) empirical studies show that responsible investments had similar returns and risks as traditional investments. The future may look different, but investment flows seem to focus more and for a long time to come on sustainable compared to traditional investments. Therefore, my personal expectation for risks and returns of sustainable investments is positive. And why invest traditionally, when even strict sustainable investments can generate similar returns with potentially lower risks? My own portfolios mostly support this view, see www.soehnholzesg.com; also compare Absolute and Relative Impact Investing and additionality – Responsible Investment Research Blog (prof-soehnholz.com)).
International and German ESG criticism (2): The role of capital markets in saving the planet and changing capitalism – just kidding by Michael H. Grote and Matthew A. Zook as of March 2nd, 2022 (#770): “Our contribution is to offer a critique of ESG financing on “its own terms” and show how it is largely failing to deliver the outcomes that the finance literature and economic theory would predict. Three main arguments back our analysis: First, actual real-world climate-change prevention driven by capital markets are rather minuscule. Slightly higher capital costs do not translate into meaningful price changes, and in any case, demand often has very low elasticity. Second, while some investors are willing to sacrifice returns for climate-change prevention, most intermediaries are not. Instead, the risk of greatest concern to the finance community is not a warming planet, but potentially upcoming climate-change regulation (“transition risk”). Absent clear standards for measuring impact on climate change, many standard financial products are easily “greenwashed”, providing opportunities for higher fees by funding managers and other financial actors but little actual impact. Third, many green investments would have been done anyway, and so green financing is hard to distinguish from conventional funding. Given this, we argue that even fully green capital markets will not save the planet and may be counter-productive to the extent they provide arguments and political cover against enacting stricter real-world regulation” (abstract). My comment: I agree with many arguments, but if responsible investing does not hurt returns or risks and encourages some real life changes, it can be still helpful.
SDG versus ESG: ESG to SDG: Do Sustainable Investing Ratings Align with the Sustainability Preferences of Investors, Regulators, and Scientists? by Jan Anton van Zanten and Joop Huij from Robeco as of Nov. 8th, 2022 (#863): “The SDG score performed well on our tests. This score: (i) captures investors’ revealed sustainability preferences by assigning poor scores to companies on asset owners’ exclusion lists and giving good scores to companies in sustainable thematic funds; (ii) aligns well with the EU taxonomy by giving poor scores to companies breaching the ‘do-no-significant-harm’ principle and good scores to firms generating significant revenues from taxonomy-aligned activities; and (iii) contributes to climate change mitigation ambitions by assigning poor scores to the majority of companies with very high emissions. We found that ESG ratings, which generally gauge if companies face sustainability risk rather than measuring their sustainability impacts, do not score well on these tests” (p. 22).
Transition risk dividends: Carbon Boards and Transition Risk: Explicit and Implicit exposure implications for Total Stock Returns and Dividend Payouts by Matteo Mazzarano, Gianni Guastella, Stefano Pareglio, and Anastasios Xepapadeas as of Nov. 24th, 2021 (#55): “There are two ways these (Soe: US listed) companies can disclose their transition risk exposure and are not alternatives. One is the explicit declaration of exposure to transition risk in the legally binding documents that listed companies must provide authorities. The other is the disclosure of GHG equivalent emissions, which is implicitly associated with transition risk exposure. … both explicit and implicit risks are positively related to dividend payouts … while the overall effect on total stock returns is negative. Evidence supports the view that market operators price negatively the transition risk exposure and, probably as a consequence, boards in carbon intensive companies use dividend policies to attract investment in risky companies“ (abstract).
Traditional investment research (German ESG criticism)
New allocation data: Asset Demand of U.S. Households by Xavier Gabaix, Ralph S.J. Koijen, Federico Mainardi, Sangmin S. Oh, and Motohiro Yogo as of Oct. 27th, 2022 (#447): “Our data have two important advantages. First, we have data on UHNW individuals, with well over a thousand households who own more than $100 million in assets. This group of households that may be relevant for asset prices is typically under-represented in other data sources. … Second, we have broad coverage across asset classes and at high frequencies. … our empirical results show that the flow to risky assets (and particularly equities) is pro-cyclical for less wealthy households (assets below $3 million) and counter-cyclical for wealthy households (assets above $10 million and in particular above $100 million). … Due to the skewness in the wealth distribution, the value-weighted average correlation between flows and returns for U.S. equities is negative for the representative household in our sample. … our preliminary results indicate that asset demand elasticities are smaller than those implied by standard theories, vary significantly across the wealth distribution …” (p. 38/39).
Private factor investing? Which Investors Drive Anomaly Returns and How? by Yizhang Li, Stanislav Sokolinski, and Andrea Tamoni as of Oct. 21st, 2022 (#90): “We decompose the time-variation in returns on anomaly portfolios into the effects of different investor types and their trading motives. Trading due to changes in investor preferences for observed stock characteristics explains nearly 50% of the variation, while the effects of changes in stock characteristics themselves account only for 3%. Flow-induced trading explains 15% of the variation, and the remaining part is mostly driven by unobserved characteristics. Households are the most consequential investors, since changes in their preferences account for approximately 40% of the variation in returns on the average anomaly portfolio. These findings support theories of anomalies where information-based trading by less sophisticated investors plays an important role. Our results are inconsistent with theories which emphasize the importance trading by institutions, including flow-induced trading” (abstract).
High risks with low returns? The Impact of Ageing Property on Portfolio Risk, Performance and Executive Compensation: The Case of REITs by Zifeng Feng, Joseph Ooi, and Zhonghua Wu as of Oct. 20th, 2022 (#13): “We first document that REITs owning proportionately more older properties in their portfolio pay more on maintenance and repairs, lower operational efficiency, and lower occupancy rate. … Although owning older properties is associated with higher firm risks, we do not detect any superior returns associated with owning older properties. … Interestingly, executives of these REITs receive higher compensation relative to their peers” (p. 26).
Negative public to private: Impact of private equity by Morten Sorensen and Ayako Yasuda as of Aug. 3rd, 2022 (#291): “We survey the academic literature about the impact of private equity investments in the broader economy. … Innovation tends to increase with … private-to-private deals while it either declines relatively or becomes more narrowly focused with … public-to-private deals. For employees, post-buyout high-skilled workers tend to benefit from increased IT investments and upskilling in the jobs, whereas low-skilled workers tend to be hurt from automation and job cuts. For consumers, private-to-private deals imply greater variety and broader geographic availability of products, whereas public-to-private deals imply higher prices and reduced availability. In regulated or subsidized industries, distortion in incentives given by the regulatory framework tends to get magnified when combined with high-powered incentives of private equity. The literature provides evidence of this in healthcare, for-profit education, insurance, and the fracking industry …“ (abstract).