Molehills as picture for green cover investments

Green cover investments: Researchpost #120

Fading green: Greenwashing in Zeiten von Ukrainekrieg und Energiekrise von Alison Schultz und Magdalena Senn und von Finanzwende vom 21. Februar 2023: „… untersuchen wir den Aktienbesitz von 2.434 aktiv gemanagten und in Europa erhältlichen Fonds aus der Datenbank Morningstar, welche sich nach Artikel 8 oder Artikel 9 der Sustainable Finance Disclosure Regulation (SFDR) als nachhaltig vermarkten dürfen. … Die Fonds werden entsprechend ihrer Anlagestrategie vier Unterkategorien zugeordnet: ESG-Fonds, Fonds mit Negativer-Screening-Strategie, Fonds, die Ausschlusskriterien anwenden, und Fonds, die sich durch sogenanntes „Engagement” für mehr Nachhaltigkeit in der investierten Firma einsetzen. … Die untersuchten Fonds haben preisbereinigt insgesamt Aktien von Energiefirmen im Wert von 2,6 und Versorgungsunternehmen im Wert von 1,7 Milliarden US-Dollar zugekauft und Aktien aus dem Technologie- und Finanzsektor im Wert von 16,1 beziehungsweise 9,9 Milliarden US-Dollar verkauft. Die Zukäufe im Bereich der Energie kamen dabei vor allem dem fossilen Sektor zugute: Die untersuchten Fonds investierten 940 Millionen US-Dollar zusätzlich in Aktien von Firmen im Bereich der fossilen Energien. Lediglich 138 Millionen US-Dollar gingen an Unternehmen, deren Geschäftsmodell auf erneuerbaren Energien basiert. Dadurch sind die Portfolios insgesamt um 7,9 Prozent CO2-intensiver geworden“ (S. 3).

Green investment impact: Climate Capitalists by Niels Joachim Gormsen, Kilian Huber, and Sangmin S. Oh as of March 4th, 2023 (#139): “… we find that the average difference in the perceived cost of capital between the greenest and the brownest firms was close to zero before 2016 but has fallen to -2.6 percentage points in the years since 2016, concurrent with the rise of green investing. Similarly, the difference in discount rates was small before 2016 and has fallen to -5.8 percentage points since 2016. In a simple stylized model, the observed differences in discount rates are large enough to reduce firm-level emissions by 20 percent. We survey corporate managers to study how firms incorporate greenness into their discount rates. Overall, the results are consistent with an important role for climate capitalists in stimulating climate-friendly production“ (abstract).

ESG discounts: Do ESG Factors Influence Firm Valuation? Evidence from the Field by Franck Bancel, Dejan Glavas, and G. Andrew Karolyi as of March 6th, 2023 (#363): “Our surveyed financial executives confirm that ESG is being integrated into the valuation process because, as with all intangible assets, it is a necessity to consider long-term valuation factors. … a large majority of respondents use ESG data to value firms. … is mostly outsiders (i.e., shareholders and debtholders) rather than firm insiders (i.e., managers) that appear to lead this process. … respondents seemed to adjust DCF models by adjusting their discount rate rather than adjusting cash flow components“ (p. 33/34).

ESG OK in 2022: ESG Factor Returns: 2022 in Review by Xinxin Wang, Guido Giese, and Zoltán Nagy from MSCI as of March 7th, 2023: “ESG factor returns were lower in 2022 than the previous five years but remained positive. Within the MSCI ACWI Investable Market Index (IMI), companies in the top ESG quintile outperformed those in the bottom quintile consistently over 1-, 3- and 5-year periods. Over longer time periods, the ESG factor has consistently shown positive or neutral performance across sectors, although results have been more mixed over shorter periods”.

Divestment-citicism: Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms by Samuel M. Hartzmark and Kelly Shue as of March 17th, 2023 (#115): “We show empirically that a reduction in financing costs for firms that are already green leads to small improvements in impact at best. Increasing financing costs for brown firms leads to large negative changes in firm impact. We further show that the dominant sustainable investing strategy provides very weak incentives for brown firms to become less brown. Due to a mistaken focus on percentage reductions in emissions, the sustainable investing movement primarily rewards green firms for economically trivial reductions in their already low levels of emissions. … Our findings and conclusions are not meant as a negative assessment of all possible sustainable investment strategies. Rather, they highlight potential problems with the most popular sustainable investment strategy to date, which divests from brown firms and invests in green firms, while offer weak incentives for brown firms to improve.” (p. 21/22). My comment: See Impact Investing mit Voting und Engagement? (Opinionpost #194) – Responsible Investment Research Blog (

SDG-Benchmarks: Authentic Sustainability Assessment – A User Manual for the Sustainable Development Performance Indicators by the United Nations Research Institute for Social Development as of Nov. 9th, 2022: “In Part 1, the Manual outlines the issues, indicators and targets that should figure far more centrally in sustainability disclosure and reporting if accounting is to facilitate the type of transformative change needed to realise the 2030 Agenda. Part 2 presents a two-tiered framework comprised of 61 indicators for measuring and assessing sustainability performance and progress at the organizational level. Each indicator includes a definition, a description of how the indicator is contextualized, and its relevance to the SDGs” (p. 1).

Traditional investment research: Green cover investments

Magic fund selection? Searching for mutual fund winners? The strategy is to outbid both, the benchmark and the peer group by Cesario Mateus, Irina B. Mateus, and Natasa Todorovic as of Jan. 10th, 2023 (#48): “The literature on mutual fund performance and performance persistence overwhelmingly support the fact that persistence, particularly among winner funds, is rare. … we propose a new two-fold procedure that allows identifying “true” winner and loser funds: those that outperform the benchmark and are at the top of their peer group at the same time, based on factor-risk-adjusted measures of performance. … We illustrate on the sample of 989 US active equity mutual funds … across all Morningstar categories, higher Sharpe ratios, … alphas and excess returns are achieved …” (p. 18/19). My comment: Trivial if backward-looking but I doubt that outperformance can be predicted well

Real estate inflation risk: House prices and ultra-low interest rates: exploring the non-linear nexus by Daniel Dieckelmann, Hannah S. Hempell, Barbara Jarmulska, Jan Hannes Lang, and Marek Rusnák as of Feb. 24th, 2023 (#27): “… we have shown that most prior studies of the relationship between real interest rates and real house prices disregard basic implications from asset-pricing theory, i.e. the non-linearity between the two factors, and, as a result, produce mis-specified estimates. … Taking the ultra-low interest rate level of Q4 2021 as an example, an increase of real interest rates by 0.1 percentage points could lead to downward pressure on real house prices in the range of -2.4% and -1.2% which is about four to eight-fold the magnitude the literature would predict. … sharp declines in house prices, especially after long periods of credit-sustained expansion, have historically been frequently associated with banking crises …” (p. 32).