Effective violence: The Polarizing Effect of Anti-Immigrant Violence on Radical Right Sympathies in Germany by Maureen A. Eger and Susan Olzak as of Dec. 8th, 2022 (#8): “… Analyses of the German portion of the European Social Survey (ESS 2014 −2019) and the Anti-Refugee Violence in Germany (ARVIG 2014−2017) datasets reveal a powerful interaction effect: exposure to higher levels of collective violence (Sö: against immigrants) increased the probability of feeling closest to radical right parties among those who held neutral, negative, and extremely negative views of immigrants. … when violence against immigrants resonates with public opinion on immigrants, it opens new political opportunities for radical right parties” (abstract).
Carbon-free industries? The Green Industrial Revolution – Investment Pathways to Decarbonize the Industrial Sector in Europe by Markus Zimmer and Patrick Hoffmann from Allianz SE as of June 14th, 2023 (#6): “… we examine the state of various industries and employ different modelling frameworks to study investment pathways consistent with a net zero industry transformation. We find that a mix of measures, including energy efficiency improvements, using hydrogen and biomass as feedstock or fuel, producing heat through electric means and the adopting carbon-capture technologies can reduce a sector’s carbon dioxide emissions to almost zero. Global investment efforts needed for a green transition of the analyzed sectors amount to EUR2.7trn until 2050 of which 8% or EUR210bn is invested in the EU. The largest single sector investments for the EU countries are required in the pulp & paper industry with EUR 78.4bn until 2050 – followed by iron & steel (EUR55.4bn) and cement (EUR37.6bn). The achievable emission reduction for the European industrial sector is estimated at 265 MtCO2 (-92%), which yields an average abatement investment of EUR790 per tCO2“ (abstract).
Good taxes: De-Fueling Externalities: How Tax Salience and Fuel Substitution Mediate Climate and Health Benefits by Pier Basaglia, Sophie M. Behr, and Moritz A. Drupp as of June 14th, 2023 (#4): “… we compare carbon and air pollutant emissions of the actual and synthetic German transport sector following the 1999-2003 German eco tax reform. We demonstrate sizable average reductions in CO2 (12%), PM2.5 (10%) and NOX (6%) emissions between 1999 and 2009 across a range of specifications. Using official cost estimates, we find that the eco-tax saved more than 40 billion euros of external damages. More than half of the reductions in external damages are health benefits … Our fuel and emission specific tax elasticity estimates suggest much stronger demand responses to eco tax increases than to market price movements …“ (abstract).
Eco car crash? Cars and the Green Transition: Challenges and Opportunities for European Workers by Oya Celasun, Galen Sher, Petia Topalova, and Jing Zhou from the IMF as of June 9th, 2023 (#7): “The transition to electric vehicles represents a historic transformation of vehicle manufacturing activity, on which about 7 percent of the workforce in Europe depends for its livelihood. … We find that the expansion of EV production between 2015 and 2020 led to smaller increases in employment in ICE-supplying sectors (Sö: internal combustion engine) than in other sectors, and to smaller increases in employment in vehicle-producing locations than in other locations. Both findings confirm that workers are already being affected by the transition to EVs. … A one percentage point increase in the share of EVs in total car exports is associated with a one percent relative decline in employment in ICE-focused sectors. … On average, workers in the auto sectors would have a similar chance to reallocate to “green” sectors as the average worker in manufacturing (p. 22/23).
ESG investment research: Good immigrants
Good climate disclosure: Do Foreign Institutional Investors Influence Corporate Climate Change Disclosure Quality? International Evidence by Sudipta Bose, Edwin Lim, Kristina Minnick, and Syed Shams as of May 9th, 2023 (#37): “Our cross-country analysis shows that firms with foreign institutional ownership provide better quality climate change disclosures. … Utilizing … a firm’s inclusion in the MSCI index, we find that disclosures improve for our treatment firms after they are included in the index. … Furthermore, we find that the positive association between foreign institutional ownership and climate change disclosure quality is more pronounced for: (1) firms domiciled in stakeholder-orientated countries; (2) firms domiciled in countries that adopt emission trading schemes; and (3) firms with a greater level of information asymmetry, which magnifies foreign institutional investors’ incentives to drive such disclosures in response to regulatory-economic pressures and information uncertainties. Finally, we find that climate change disclosure quality is a critical channel through which foreign institutional investors enhance companies’ valuations“ (p. 30/31).
Carbon-reporting guts? Corporate Carbon Disclosures: a critical review by Matthew Brander, Andreas G.F. Hoepner, Joeri Rogelj, Tushar Saini, and Fabiola Schneider as of May 14th, 2023 (#116): “… There is clear evidence that companies need to provide more accurate carbon reporting data. … The literature provides ample evidence about the support shown by stakeholders, especially, shareholders, in regards to reporting carbon emissions … the majority of companies currently report carbon emissions in such a way that they just meet the disclosure requirements without much ethical consideration for the environment. … companies need a validation procedure to assess the expectations of shareholders in regards to climate change reporting and its effects on long-term prospects” (p. 6/7).
Carbon liabilities: What’s Next After Carbon Accounting? Emissions Liability Management by Marc Roston, Alicia Seiger, and Thomas Heller as of June 2nd, 2023 (#207): “Emissions liability management provides a straightforward calculation to evaluate and constrain greenhouse gas emissions: Only generate emissions if the value gained exceeds the cost of immediate removal. … The implications of this approach are clear. Firms modify supply chains and production processes to avoid creating costly liabilities in the first place. Immediate demand for credible, fixed-duration nature-based removals rises substantially, providing greater funding to restore and enhance damaged ecosystems today. The relative cost of technology-based removals falls, and the attractiveness of investments in technology-based solutions rise. Markets develop to provide transparent and liquid carbon removal term structures, efficiently trading-off risky, temporary removals with truly permanent solutions. Emissions disclosures and audits provide investors, customers, regulators and other stakeholders with transparency into verifiable net zero claims and transition pathways” (p. 10).
Public or private ESG ratings? Enhancing Equity Factor Model with Publicly-reported ESG Data by Tsuyoshi Iwata and Marc Weibel as of June 10th, 2023 (#92): “… the source difference is the leading cause of the negative correlation between the public-report-based ESG scores and the self-disclosure-based ESG scores … the combination of the ESG score based on the publicly reported ESG information and the ESG score based on the self-disclosed ESG information significantly improves the risk-return profiles of the ESG factor returns in the US, the EU and Japan. … the pure factor portfolio suggested by the cross-factor model is a long-short portfolio, which is challenging to overlay on the existing portfolio given the practical constraints such as the prohibition of short positions and the upper/lower limits on relative over/underweighting versus the predetermined benchmark and on the number of constituents in the portfolio” (p. 11). My comment: Especially interesting are the differences between self- and third party reported ESG-ratings.
Good transparency: Employee Responses to Increased Pay Transparency: An Examination of Glassdoor Ratings and the CEO Pay Ratio Disclosure by Mary Ellen Carter, Lisa LaViers, Jason Sandvik, and Da Xu as of May 2nd, 2023 (#125): “We posit that, when additional pay information becomes available to employees through the CEO pay ratio disclosure, employees recalculate their reference wages, causing their pay satisfaction to change. We … document a … significant increase in within-firm employee pay satisfaction after the first year’s disclosure of pay ratio information. We conjecture that this increase in pay satisfaction is likely the result of workers adjusting their reference wages downward after they learn about the pay of the median employee in their firm. … we show that the level of median employee pay, not the level of CEO pay or the magnitude of the pay ratio itself, drives our results. … We find that the pay satisfaction effect is driven by ratings from employees who work at firms with less overall transparency about pay and from non-managers and short-tenured employees” (p. 28/29). My comment: My corporate engagement focuses on CEO pay ratio disclosure because I want to make the effects of executive incentive changes, e.g. introduction of ESG-targets, more transparent, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)
Impact investing research
Good CEOs: CEOs’ Endorsements of Stakeholder Values: Cheap Talk or Meaningful Signal? An Empirical Analysis by Jens Dammann and Daniel Lawrence as of May 31st.2023 (#33): “In 2019, 181 CEOs of major companies … signed the Business Roundtable Statement, endorsing the idea that corporations are meant to serve all their constituencies and not just their shareholders. … we demonstrate that when the Statement was originally published on August 19, 2019, corporations whose CEOs had signed the Statement experienced statistically significant positive abnormal stock market returns relative to other corporations. … Using Refinitiv ESG scores, we find that the 2019 signatories of the Statement were, at the time, more committed to employees, communities, human rights, a responsible use of resources, and low emissions than other corporations. We also show that signing the Statement is associated with high future ESG scores in most of these fields. … Third, we show that firms that signed the Roundtable Statement in 2019 were more likely to terminate their business activities in Russia following Russia’s 2022 invasion of Ukraine” (abstract).
Field building: The Impact of Sustainable Investing: A Multidisciplinary Review by Emilio Marti, Martin Fuchs, Mark R. DesJardine, Rieneke Slager and Jean-Pascal Gond as of June 2nd, 2023: “We define field building as an impact strategy whereby shareholders try to make companies more sustainable by influencing the fields in which companies are embedded. Shareholders can influence fields by, for example, stigmatizing certain business activities (Ferns et al., 2022) or establishing voluntary reporting standards for companies (MacLeod and Park, 2011)” (p. 2). … “… shareholders can create impact not only through (1) portfolio screening and (2) shareholder engagement (two impact strategies most used by mainstream shareholders) but also through (3) field building (an impact strategy most used by shareholders at the periphery of the financial sector). … We identify 15 impact mechanisms through which the impact strategies produce three types of impact: portfolio screening and shareholder engagement mostly create direct impact on companies, while field building creates indirect impact via other shareholders and indirect impact via the institutional context“ (abstract).
Engaging banks: When Banks Become Shareholder Activists by Keke Song and Jun Wang as of May 31st, 2023 (#12): “Bank shareholder activists are more likely to target firms with poorer credit quality and higher reliance on syndicated loan financing. Bank activism is associated with changes in risk-related characteristics and policies of the target firm, including lower financial leverage, improved credit quality, more cash holding, lower CEO risk-taking incentives, and less intensive M&A activities. … bank activism is not associated with higher abnormal stock returns … The positive association between bank activism and abnormal bond returns only exists in the subsample where bank shareholder activists also have a loan stake in the target firms (i.e., dual-holding)“ (p. 35).
Traditional investment research
Bad Bankers? Beyond the Corner Office: Employee Characteristics and Bank Performance by Vladimir Mukharlyamov as of June 4th, 2023 (#92): “I find that banks with a higher proportion of employees with certain characteristics—MBA and top school degrees, tendency to shift jobs and shorter job tenures—perform worse during periods of crisis. A one standard deviation increase in the fraction of MBAs lowers stock returns between July 2007 and December 2008 by 3.8 percentage points. Similar statistics for top degree holders, workers with short tenures, and job-jumpers are 7.9 percentage points, 13.2 percentage points, and 11.8 percentage points, respectively. A one standard deviation increase in the W-index—the standardized sum of the other four measures—is related to a 13.9 percentage point decrease in stock returns during the recent financial crisis. …I show that high W-index banks had a predisposition to take on risk in the pre-crisis period as measured by the ratio of highly rated securitization tranches to assets, the ratio of private mortgage-backed securities to assets, the interest rates on loans, and the involvement in securitization. They also had relatively poor risk management practices“ (p. 32/33).
VC nets: Venture Capital Networks by Stefano Caselli and Marta Zava as of May 30th, 2023 (#342): “Investors and entrepreneurs are the fundamental players in developing companies and they coexist in a complex networked system. Innovation, funding, information, and know-how are spread through it, by means of a multitude of connections formed in a variety of ways. The chapter provides an overview of the state of the literature …” (abstract).
Bad crowds: When Crowds Aren’t Wise: Biased Social Networks and its Price Impact by Edna Lopez Avila, Charles Martineau, and Jordi Mondria as of May 16th, 2023 (#76): “… information production on social media displays excessive positively skewed optimism about future outcomes on earnings announcements. Such biased optimism … leads to price run-ups before earnings announcements, thus, distorting prices from fundamentals before negative earnings announcements” (p. 26).
Own publication
Bad ETFs? ETFs für professionelle Anleger: Zu viele Voreingenommenheiten? ExxecNews Institutional No. 5, as of June 13th 2023, S. 2: „Viele professionelle Anleger und Intermediäre nutzen gerne ETFs, weil sie einen Diversifikationsbias haben, also lieber (viel) mehr Diversifikation haben wollen als nötig. Wenn Nachhaltigkeit gewünscht wird, ist das aber kontraproduktiv. Solche Anleger und Intermediäre weichen auch ungerne von Benchmarks ab, haben also einen Benchmarkbias. Das liegt vor allem daran, dass positive Performances bei Benchmarkabweichungen kaum honoriert werden, negative Abweichungen dagegen als sehr schlecht angesehen werden. Man könnte zusätzlich auch von einem Peergroupbias sprechen. Wissenschaftliche Untersuchungen zeigen, dass selbst große institutionelle Anleger oft lieber so ähnlich wie vergleichbare Anleger agieren als Geldanlagen auf ihre individuellen Bedürfnisse auszurichten. Professionelle Anleger und vor allem Intermediäre haben auch einen Standardisierungsbias. Standardangebote machen weniger Aufwand in der Beratung und Umsetzung und gerade bei Anlageprodukten mit großen Volumina kann man immer darauf hinweisen, dass viele andere bei Verlusten genauso betroffen sind. Außerdem haben viele Intermediäre und professionelle Anleger einen Beharrungsbias. „Das haben wir schon immer so gemacht“ ist ein häufig genutztes Argument“ (p. 2).
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