Heidelandschaft von Gudrun Becker als Bild für den Beitrag Grüne Pillen

Green pills (Researchblog #95)

Big ESG reporting deficits: The State of Corporate Sustainability in 300 of the Largest US companies by Magali Delmas, Kelly Clark, Tyson Timmer, and Moana McClellan as of May 2022: “We assess the (Sö: World Economic Forum) WEF-proposed 21 core metrics and find that, on average, these 300 companies disclose just under half (49.6%) of the metrics. …we see a distinct favoring of firms reporting on process-based metrics over outcome ones. … We also find a higher percentage of reporting on qualitative (61.8%) rather than quantitative metrics (43.1%) …. On average, the compensation package of the CEOs in the 300 companies was 529 times that of the median employee” (p. 3, 4).

Little transparency harm for CEO pay: Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform by Wonjae Chang, Michael Dambra, Bryce Schonberger, and Inho Suk as of July 26th (#389): “We examine the consequences for CEO compensation of the SEC’s mandated disclosure of the ratio of total CEO pay to that of the median employee. … we fail to find evidence that total CEO pay changes in response to the disclosure … firms are more likely to include non-financial (stakeholder) metrics, such as those measuring sustainability or diversity, in a CEO’s annual incentive plan awards following the pay ratio disclosure …” (p. 35/36). My comment: See Wrong ESG bonus math? Content-Post #188 – Responsible Investment Research Blog (prof-soehnholz.com)

Responsible investments: Green pills

Expensive emissions: The financial cost of carbon by Patrick Bolton, Zachery Halem, and Marcin Kacperczyk as of Ma 10th, 2022 (#496): „Driven by investor beliefs about the impact of climate change on corporations, markets are beginning to price a new and increasing aggregate risk. This pricing is reflected in the price-to-earnings discounts for companies that stand out in the size of their carbon emissions. We find that the extent of the price-earnings discount varies significantly by sector and across firm size, with larger companies experiencing the larger discounts. Although the pricing of carbon transition risk is similar generally in the U.S. and in Europe, we find significantly higher discounts applied to EU industries directly covered by EU ETS (Sö: Emission Trading Systems). We also find evidence of a small price discount on corporate debt of mainly smaller issuers, in the form of CDS spreads rising slightly with carbon emissions” (p. 37).

Unrewarded black bond risks: The performance of green bond portfolios under climate uncertainty: A comparative analysis with conventional and black bond portfolios by Florinda Silva, André Ferreira, and Maria Céu Cortez as of August 4th, 2022: “This paper investigates the financial performance of bond portfolios composed of green bonds, conventional bonds, and black bonds from January 2015 to March 2021. … Our findings show some underperformance of the bond portfolio composed of all black bonds. Comparing green with black or conventional bond portfolios, in general, the results show no statistically significant performance differentials between them. … A consistent finding is the significantly higher exposure to the Default risk factor of black bond portfolios when compared to green bond portfolios, which is likely associated to the higher financial risk of the fossil fuel industry …. Overall, our findings suggest that investors can invest on green bond portfolios without penalizing their financial returns” (p. 15).

Green bond shocks: How Climate Transition Risk May Impact Sovereign Bond Yields by Bhaveer Shah from MSCI Research as of August 15th, 2022: “The magnitude of government bond yield shocks could become sizable. For example, U.S. five-year yields risk could rise by almost 100 basis points (bps) in the short term under the “Net-Zero 2050” scenario versus the baseline. … Shocks to the front end of the yield curve (e.g., five-year yields) are larger in the more orderly Net-Zero 2050 scenario, whereas the largest shocks at the back end of the curve (e.g., 20-year yields) arise from more disorderly scenarios, such as “Divergent Net-Zero”” (p. 3).

Legal issues: Green pills

Wrong regulators? Asset Managers as Regulators by Dorothy S. Lund as of August 24th, 2022 (473): “… the large diversified asset managers that specialize in index funds (the so-called “Big Three”—Vanguard, State Street, and BlackRock) collectively hold nearly controlling stakes across the public equity market. In addition to intervening in traditional areas of corporate governance, they have adopted sweeping board diversity mandates, as well as “ESG” disclosure and carbon emission reduction requirements, and enforced them through their proxy voting policies. … Asset managers will only supply regulation if doing so has a positive impact on their profits; therefore, demand from clients—which include not just individuals, but also institutions— will govern the choice of policies and the substance of their rules. … for-profit asset managers lack democratic accountability and oversight for their policymaking, with no guarantee that it will further the public interest. To the extent that their policies are shaped by the corporate clients that provide much of the assets they manage, they are unlikely to be as impactful as many perceive. The provision of regulation by asset managers may also take pressure off the government to respond to these issues with policies better calibrated toward advancing social welfare” (abstract). My comment: Direct ESG indexing can help, see Custom ESG Indexing Can Challenge Popularity Of ETFs (asiafinancial.com)

No poison pills: Green Pills by John Armour, Luca Enriques, and Thom Wetze as of August 30th, 2022 (#63): “… the corporate governance mechanisms commonly proposed for managing climate risk have limited power to generate credible commitments. … In response, we introduced the idea of “green pills:” mechanisms that firms could deploy using private law to deliver credible commitments to transition. …  In particular, green pills serve to align the interests of shareholders focused solely on profits with those of climate-conscious investors. We have also shown that adopting a green pill is in line with directors’ fiduciary duties. … If firms adopt credible commitments to reduce emissions, we know they are serious” (p. 60).

Many responsible investing barriers: Regulatorische und systembedingte Barrieren im Bereich Nachhaltige Geldanlagen in der Anlageberatung im Retail Banking by Christian Klein, Bernhard Zwergel, Julia Eckert, and Maurice Dumrose as of July 29th, 2022: „Auswirkungen von MiFID II sowie die Umsetzung der vierten Maßnahme „Berücksichtigung der Nachhaltigkeit in der Anlageberatung“ des EU Aktionsplan … es konnten .. die folgenden Barrieren auf Seiten der Anlageberater identifiziert werden: (1) Fehlende einheitliche Definition des Begriffs „Nachhaltige Geldanlage“, (2) fehlendes einheitliches Label für Nachhaltige Geldanlagen, (3) Wahrnehmung von Greenwashing, (4) fehlende Wirkungsberichterstattung von Nachhaltigen Geldanlagen, (5) Risikoaversion der deutschen Retail-Investoren, (6) Umfang von nachhaltigen Produkten in den Produktkörben ist nicht ausreichend sowie (7) hohe wahrgenommene Komplexität der zukünftig verpflichtenden Abfrage der Nachhaltigkeitspräferenz“ (p. ii). My comment: This approach may help: Deadline August: Müssen dann andere Fonds angeboten werden? – Responsible Investment Research Blog (prof-soehnholz.com)

Traditional and alternative investments

Fund rating criticism: Rating Morningstar’s Fund Ratings by Jeffrey Ptak as of July 6th, 2022: „We found that, on balance, these ratings have done a good job of sorting funds based on future performance. Higher-rated funds were more likely to survive and outperform over subsequent horizons, while lower-rated funds were likelier to lag or go out of business. … star rating … not even the highest-rated cohorts were able to generate positive average annual excess returns versus their assigned indexes … These … returns do not, however, incorporate the results of funds that started but didn’t survive to the end of the trailing periods shown … it has struggled lately, with lower-rated funds outperforming higher-rated funds. … sustainability ratings: … Intentional funds, unlike nonintentional, clearly prioritize environmental, social, and governance-related investing, typically by putting “ESG” in the fund’s name and making it a central part of the strategy’s mandate. … we found that they’ve sorted future performance pretty well since inception, if less so recently. My comment: Also, low persistence of ratings can be observed and further criticism see here Morningstar jumpstarts its star rating system with favorable self-review yet audit finds it misses the mark in bear markets, supporting claim of dubious predictive value cited by Wall Street Journal | RIABiz

Predictor for returns? Average Tail Risk and Aggregate Stock Returns by Yingtong Dai and Richard D.F. Harris as of August 9th, 2022 (#49): “We find that average tail risk has statistically and economically significant predictive ability for market returns, even after controlling for market tail risk, suggesting that average idiosyncratic tail risk contains information about future returns” (abstract).

Overvalued active funds? The Information Content of Aggregate Mutual Fund Alpha by Trevor Young as of August 19th, 2022 (#61): “I find that aggregate alpha is a powerful negative predictor of future market returns. … The predictability indeed stems from funds tilting toward overvalued stocks and small-cap or growth styles. Furthermore, aggregate alpha predicts future anomaly returns and aggregate earnings surprises in a manner consistent with a mispricing explanation. Ancillary evidence shows that rational explanations related to benchmarking, flow, or catering appear insufficient to account for the results” (p. 30).

Lucky hedge funds: Luck or skill: What drives hedge fund performance persistence? by Ekaterina Ipatova, Mamata Parhi, Tapas Mishra, and Kaizad Doctor as of August 4th, 2022 (#22): “We examine a sample of 2173 hedge funds downloaded at random from the Hedge Fund Research database between January 1998 and December 2015. … We performed out-of-sample returns analyses across various market cycles that included three financial crisis events. … performance persistence exists as tested in an out-of-sample framework. A large proportion of hedge funds with significant alpha can be declared „lucky“ after applying robustness measures” (p. 21/22). “… after the 2008 crisis, the proportion of genuinely persistent funds got significantly reduced” (abstract).

Un- or oversmart Fintech? Smart Contracts: Myths and Implications for Economics and Financial Regulation by William Lehr as of September 2nd, 2022 (#64): “This paper seeks to situate an understanding of the long-term implications of Smart Contract (SC) technologies as a cluster of technologies that together with AI (shorthand for software applications) and 5G (shorthand for networked ICTs) will prove important for enabling a future wherein any task may be automated. … SC technologies (which include cryptocurrencies, blockchain, and smart contracts as distinct elements) … will play an important role in FINTECH’s future and the regulation of that future will require significant focused research attention, it is unclear how useful such research will be as a template for addressing the challenges that will emerge as SCs migrate to other sectors where the economic implications are expected to be much larger” (abstract).

In eigener Sache

Alexandra Habdank hat zum einjährigen Bestehen am 26.8. einen Beitrag über meinen Fonds geschrieben Fondsmanager verrät: Auf diese drei Klima-Aktien setze ich – Business Insider (Paywall): … „„Die Rendite von nachhaltigen Aktien ist laut dem ESG-Experten Dirk Söhnholz mindestens genauso hoch wie von nicht-nachhaltigen Unternehmen. Sie sind aber weniger riskant. … „Immer mehr Anleger werden sich an den Nachhaltigen Entwicklungszielen der Vereinten Nationen, den SDGs, orientieren“ …. Bei ansonsten vergleichbaren Unternehmen seien die Firmen mit besseren ESG-Ratings und besserer Vereinbarkeit mit den SDGs deshalb risikoärmer, sagt Söhnholz.“ …