Good green returns picture from Monika Schroeder from Pixabay
Good green returns: 14x new research on 20% energy efficiency returns, profitable green nudging, externalization returns, SRI value investing, green bond investor motives, private ownership ESG deficits, good biodiversity measures, biodiversity policy recommendations, wrong sustainable investment advice, huge green investment potential, investors love high CEO pay, planetary limits, real estate diversification limits, and ChatGPT financial deficits (# shows number of SSRN downloads as of Nov. 14th, 2024).
Social and ecological research
20% energy efficiency return: The Efficacy of Energy Efficiency: Measuring the Returns to Home Insulation by Linde Kattenberg, Piet Eicholtz and Nils Kok as of Nov. 7th, 2024 (#14): “… this study examines the effect of roof, wall and basement insulation on gas consumption in a large sample of (rental and owner-occupied) residential homes. The results of the difference-in-difference analysis show that home insulation measures significantly reduce gas consumption, with an average treatment effect of about 19%. … we observe an average reduction in the energy bill of €350 per year. Compared to the investment to install insulation, this yield an annual return of 19.9%, translating into a payback period of 5 years. Wall insulation has the highest return, of 21.8%, while basement insulation returns 14.9% and roof insulation returns 11,8% per year” (p. 21/22).
Profitable green nudging: Small Changes, Big Impact: Nudging Employees Toward Sustainable Behaviors by Laura Cappellucci, Lan Ha, Jeremy Honig, Christopher R. Knittel, Amy Vetter, and Richard Wilner as of June 25th, 2024 (#25): “… in partnership with a large biopharmaceutical company … we focused on reducing operational errors that led to dropped collection materials, long freezer door open times, and improper recycling practices. To achieve these goals, we employed social norms to nudge employees towards 1) reducing wasted collection materials, 2) minimizing the duration of freezer door openings, and 3) improving recycling practices. We found an average reduction of roughly 70 percent in plastic waste from dropped collection materials and cost associated with these materials. The frequency of freezer door alarms decreased by over 80 percent, and the duration of alarms decreased by over 45 percent, depending on the empirical specification. We also observed a roughly 40 percent reduction in uncollapsed cardboard …” (abstract).
ESG investment research (in: Good green returns)
Externalization returns: Peer Evaluations of Corporate Externalities by Darren Bernard, Elsa Juliani, and Alastair Lawrence as of Sept. 23rd, 2024 (#62): “Using responses from corporate executives across Australia, Europe, and North America, we form a measure of the perceived externalities of peer firms and validate it based on the extent of agreement among independent respondents, correlations with popular ESG ratings and measures of environmental impact, firm- and industry-level determinants, and other tests. Our extensions suggest that private companies are rated well, as are public companies with powerful CEOs (namely, CEOs who founded their firms). … We find that firms deemed deficient by peers have higher stock returns … We also find that named firms are more likely to be included in compensation peer groups, and deficient peers are more likely to be included than aspirational peers“ (p. 28/29).
SRI = value investing? Finding Value in Sustainable and Responsible Investments by Sebastian Lobe and Gerhard Halbritter as of June 20th, 2024 (#20): “Collecting a comprehensive set of 100 international sustainable and responsible invest ments (SRI) indices from mainly developed markets we find that SRI pursues first and foremost a “pure” value strategy … SRI’s pure value strategy is present in most interna tional markets. … By and large, the financial performance is neutral with slight indications that score-weighted indices and a combined screening approach (positive and negative screens) are financially more beneficial“ (p. 15/16). My comment: This is a surprising result since previous research such as the one mentioned in this paper (p. 3) showed a growth rather than a value tilt of ESG-investments. My own small cap SDG fund also has a slight growth tilt.
Green bond investor motives: Who pays the greenium and why? A decomposition by Daniel Fricke and Christoph Meinerding from Deutsche Bundesbank as of Nov. 1st, 2024 (#26): “… the average greenium in our sample amounts to minus 3 basis points. Decomposing this average greenium along the bonds’ ownership, we then document that it is largely borne by banks, investment funds and insurance companies (or their clients). … Investment funds generally overweight green over matched conventional bonds, potentially reflecting strong non-pecuniary green preferences of their clients. … banks display a tilt towards specific green bonds with a relatively pronounced greenium. This tilt is particularly sizeable when the sample is restricted to young bonds, small bonds, bonds with a long residual maturity, or bonds issued by the financial sector. … intermediaries may be marginal investors for certain green bonds because of market making, underwriting or liquidity management activities“ (p. 24/25).
Private ownership ESG: Corporate Ownership and ESG Performance by Belén Villalonga, Peter Tufano, and Boya Wang as of Nov. 8th, 2024 (#36): “Firms whose material owners include managers and governments perform better on ESG metrics, while those with individual, family, and corporate shareholders perform worse. … While firms with family ownership show less commitment to ESG activities, management matters. In particular, firms with family CEO-owners do better than those in which the CEO is not a family member (both family and non-family firms). The revealed preference of family CEOs for ESG seems to be greater among descendants than among founders of family firms“ (p. 39).
Good biodiversity measures: Mapping the transgression of the planetary boundary for functional biosphere integrity by Fabian Stenzel, Liad Ben Uri, Johanna Braun, Jannes Breier, Karlheinz Erb, Dieter Gerten, Helmut Haberl, Sarah Matej, Ron Milo, Sebastian Ostberg, Johan Rockström, Nicolas Roux, Sibyll Schaphoff, and Wolfgang Lucht as of Oct. 25th, 2024 (#18): “Two new control variables have been suggested for quantitatively assessing the core planetary boundary for functional biosphere integrity: 1) Human appropriation of net primary production (HANPP) and 2) a metric for ecological disruption (EcoRisk). … We find that EcoRisk and BioCol are good predictors of degradation for a variety of ecological empirical datasets. … We find that the local boundary is currently transgressed on 66% of the global ice-free land surface, with 47% already at high risk of degradation” (p. 1).
Biodiversity policy recommendations: Biodiversity and Financial Risk Assessments by Timo Busch, Alexander Bassen, Kerstin Lopatta, Lisa Knob, and Sven Remer from the Research Platform Sustainable Finance as of May 2024: “The rapid loss of biodiversity is threatening the ecosystem services that many industries rely on, also posing significant risks to financial institutions and the overall financial system. Regulations like the SFDR, Taxonomy, and CSRD, therefore, aim to push companies and financial institutions to be more transparent about how their activities affect and depend on biodiversity. But financial institutions have been slow to account for biodiversity risks in their decision-making, often blaming the complexity of the issue and the lack of reliable, high-quality data. While several tools and metrics exist to help assess biodiversity risks, each has limitations and often needs to be used in combination to be effective. In addition, gaps and inconsistencies in current disclosure requirements do make this task even more daunting. This policy brief offers recommendations to policymakers, financial institutions, and businesses on how they can better analyse and manage biodiversity risks” (p. 1).
Wrong sustainable investment advice: Do advisors respond to investors’ preferences? by Thomas Cauthorn, Julia Eckert, Christian Klein, and Bernhard Zwergel as of Feb. 1st, 2024: “To understand if investment advisors are responsive to private investors’ preferences, we send trained mystery shoppers to 414 investment consultations. Our findings show that investment advisors generally recommend products that match investors’ risk preferences but only show limited consideration of investors’ sustainability preferences even when preferences are explicitly signaled. … Sustainability preferences that limit advisors’ ability to make an offer are altered in legal preference documentation. Investment advisors working for banks that primarily sell products from a single asset manager are more likely to wrongly document investors’ sustainability preferences. Inaccurate documentation persists even if advisors are monitored” (abstract). My comment: I recommend to use SDG-aligned revenues as key metric to measure sustainability. It is rather easy to determine and easy to understand.
SDG and impact investment research
Huge green investment potential: Household Climate Finance: Theory and Survey Data on Safe and Risky Green Assets by Shifrah Aron-Dine, Johannes Beutel, Monika Piazzesi, and Martin Schneider as of July 1st, 2024: “We use (Sö: German) household survey data …We find that the net effect of green investing is to increase the price of green assets and lower the cost of capital for green firms. … Green convenience yields and hedging demand for green equity are actually holding back green investment. Without them, green equity demand would be roughly 30% larger than its current level. … Many households currently invest in traditional equity to hedge a slower-than-expected transition to a green economy. Looking ahead, we show that widespread availability of green safe assets to households, in the form of green bank deposit accounts, could dramatically increase green investment. … If, for instance, green deposits could be offered at a 50 basis points lower interest rate than traditional deposit accounts, the overall share of green assets in the economy would grow from 8% to 37% of total financial wealth. This effect is entirely driven by a rise in the share of green safe assets. We show that the share of green equity would remain largely unchanged. We document that households’ current holdings of green assets are overwhelmingly in equity, while they generally prefer to hold safe assets. … in our model, we show that more information about green finance leads to a dramatic rise in the demand for green equity“ (p. 46/47). My comment see Neues Research: Warum grüne Geldanlagen noch gering sind | CAPinside
Investors love high CEO pay: Failed Say on Pay: How Do Companies Course Correct after to a ‚No‘ Vote? by Amit Batish, David F. Larcker, Lucia Song, Brian Tayan and Courtney Yu as of Oct. 14th, 2024 (#90): “When “say on pay” was legislated in the U.S. under the Dodd Frank Act of 2010, many observers hoped an advisory vote on executive compensation would provide a catalyst to “reign in” CEO pay that was perceived to be out of control … Over the last 14 years, companies in the Russell 3000 Index received average support of 91 percent for their pay programs. Moreover, average support has proven remarkably stable, fluctuating narrowly between a low of 89.2 percent (in 2022) and a high of 91.7 percent (in 2017). Meanwhile, the annual failure rate (companies receiving less than 50 support) averaged a mere 2 percent” (p. 1). My comment: Shareholder engagement focusing on CEO pay has not been effective in the past. We should not expect much from the introduction of ESG incentives, therefore.
Planetary limits: Boundary Conditions for Organizations in the Anthropocene: A Review of the Planetary Boundaries Framework Ten Years On by Amanda Williams, Paolo Perego, and Gail Whiteman as of Nov. 7th, 2024 (#18): “Our systematic review of the business literature demonstrates that business research on the planetary boundaries concept and on the climate boundary is increasing, though work on the other boundaries remains limited. Despite increased attention in business research, key gaps remain—scholarly conversations related to the planetary boundaries remain confined to sustainability journals, and there is little cross-analysis between the boundaries. … We propose a framework that addresses these gaps and establishes the planetary boundaries as cross-scale ecological boundary conditions for all organizations and managers operating under volatile and non-linear ecosystem conditions—key characteristics of the Anthropocene. Implementing our framework requires a transformation of the field in how scholars theorize, measure, and engage“ (p. 29/30).
Other investment research (in: Good green returns)
Real estate diversification limits: Market Risk of Real Estate: Using Direct Data to Understand Direct Risk by Hongyuan Zhang and Felix Schlumpf from the Zurich Insurance Company as of June 26th, 2024 (#245): “This research aimed to develop and validate an unsmoothing technique within the risk factor analysis framework to provide a more accurate representation of real estate market risk. By incorporating distributed lags in the risk factor model, we addressed the smoothing effects inherent in appraisal based data … The higher volatility and increased correlation with equity markets observed in the unsmoothed data suggest that real estate investments may not provide as much diversification as previously thought“ (p. 9/10).
ChatGPT financial limits: How Much Does ChatGPT Know About Finance? by Douglas (DJ) Fairhurst and Daniel Greene as of Oct. 11th, 2024 (#141): “This paper investigates the extent that large language models (LLMs) understand finance by analyzing responses to licensing exam preparation questions. … Our findings suggest that LLMs could be used to augment to finance professionals, as LLMs are skilled at summarizing large quantities of data and text. They also appear to be proficient at generating descriptions of basic finance principles and investment strategies. However, the frequency of inaccurate answers implies that caution and human oversight are required. … findings suggest that LLMs may be best used to give an overview of a topic and answer higher-level, broader questions rather than more specific, detailed, or nuanced prompts” (p. 29/30).
Werbung (in: Good green returns)
Unterstützen Sie meinen Researchblog, indem Sie in den von mir beratenen globalen Small-Cap-Investmentfonds (siehe FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T) investieren und/oder ihn empfehlen. Der Fonds konzentriert sich auf die UN-Ziele für nachhaltige Entwicklung (aktuell durchschnittlich außerordentlich hohe 94% SDG-vereinbare Umsätze der Portfoliounternehmen) und verwendet separate E-, S- und G-Best-in-Universe-Mindestratings sowie Aktionärsengagement bei derzeit 29 von 30 Unternehmen (siehe auch My fund).