Ungreen healthcare? The environmental footprint of the Dutch Healthcare sector: beyond climate impact by Michelle A. Steenmeijer, João F.D. Rodrigues, Michiel C. Zijp, and Susanne L. Waaijers-van der Loop as of May 18th, 2022 (#377): “This study presents the first footprint study for the Dutch healthcare sector assessing multiple environmental impact categories (greenhouse gas emissions, abiotic material extraction, blue water consumption, land use and waste generation). We find that abiotic material extraction from health care contributes significantly more to the national footprint (13%) than the greenhouse gases (8%). We also find that pharmaceuticals and chemical products are the highest contributor to most of the impact categories, but the impacts occur in different sectors. Also, carbon emissions occur more domestically and operationally, while the other impacts occur mostly abroad and within the value chain of purchased products and services” (p. 9). My comment: My fund (see ESG plus SDG-Alignment mit guter Performance: FutureVest ESG SDG – Responsible Investment Research Blog (prof-soehnholz.com) with a social focus has a significant healthcare exposure. I hope that this kind of research is already or will soon be considered by ESG rating agencies and investors.
Green banking limitations: Green Capital Requirements by Martin Oehmke and Marcus Opp as of November 22nd, 2022 (#292): “… results highlight that increases in capital requirements for dirty loans can reduce clean lending. Conversely, decreases in capital requirements for clean loans can crowd in dirty lending. This result obtains because changes in capital requirements affect credit allocation only via the marginal loan. … using capital requirements to discourage the funding of carbon-intensive activities is less promising. First, as long as activities with high carbon emissions remain profitable, removing loans that fund these activities from the banking sector may either be impossible altogether or may require lowering capital requirements on loans with small carbon footprints below the prudentially optimal level, thereby sacrificing financial stability. Second, even if capital regulation can successfully remove dirty loans from the banking system, high-emitting activities will likely attract funding elsewhere as long as they offer a positive return to investors. Therefore, interventions that directly reduce the profitability of carbon-intensive investments (e.g., a carbon tax) are more effective tools to reduce carbon emissions. In this context, capital requirements can play an indirect role: By ensuring sufficient loss-absorbing capital in the banking sector, they can help facilitate carbon taxes or stricter environmental regulation, which governments may otherwise be reluctant to introduce because the resulting revaluation of bank assets and the associated stranded asset risk could trigger a banking crisis” (p. 29/30).
Green research (investing)
Green research deficits: Green finance research around the world: a review of literature by Peterson K. Ozili as of June 13th, 2022 (#916): “The findings show that green finance has the potential to make a significant difference in the environment and society but many challenges abound such as the lack of awareness, inconsistent definitions, lack of policy coordination, inconsistent policies, and lack of incentives to investors and financial institutions, among others. Some suggested areas for further research include: the need for more research on green innovation and risk-return tradeoff; two, the need to explore the causality between green investment and environmental change; three, the need to identify the boundaries of private and public sector involvement in green financing; four, the need to examine the synergy between green finance, social finance and digital finance; five, the need to investigate the effect of regulation on green businesses and activities; six, the need to explore the green finance opportunity in developing countries, and finally, more research is needed to explore the usefulness of mainstream tools of financial analysis in assessing the viability of green projects and investment opportunities” (p. 22).
Fossil fuel investments: Sustainable Investing During the War in Ukraine by Linquan Chen, Yao Chen, and Chendi Zhang as of August 12th, 2022 (#118): In this paper, we study how sustainable investing strategies perform during the war in Ukraine. “We find that funds with high sustainability ratings, low carbon risk, and low involvement in controversial industries earn lower risk-adjusted returns during the war. These funds also experience bigger outflows. In addition, we show that the lower returns of sustainable funds are mainly explained by lower involvement in weapons and fossil fuel stocks. … we find that funds …. with higher fossil fuel involvement attract higher flows“ (p. 21/22). My comment: Fortunately, my Article 9 with its many strict exclusions fund did relatively well in the crisis
Green deal advantage: Do Green Deals Create Value? The 2022 M&A Report by Jens Kengelbach, Daniel Friedman, Georg Keienburg, Dominik Degen, Tobias Söllner, Yiran Wang, and Sönke Sievers from The Boston Consulting Group as of October 24th, 2022: “Green dealmaking is gaining steam as a tool to support environmental transformations, but these deals often command a substantial premium. … green deals generally create more value than nongreen deals upon announcement and over the ensuing two years. At a more granular level, however, the industry, region, boldness of the deal, and characteristics of the parties are important variables”.
High ESG (dis)advantages: Do sustainable company stock prices increase with ESG scrutiny? Evidence using social media by Emilie Kvam, Peter Molnár, Ingvild Wankel and Bernt Arne Ødegaard as of September 29th, 2022 (#182): “In our analysis we use ESG scores provided by Refinitiv to assess the sustainability level of a company. Investor concerns related to these companies, the general stock market and ESG topics are measured using Google search volumes, Twitter and VIX. Our dataset consists of 2030 companies trading on NYSE or NASDAQ for the period 2010-2019. We first analyze the ESG level effect, and establish that the stocks of companies with high ESG scores on average underperform. … We find that high search volumes on ESG topics are related to higher stock returns for companies with high ESG, environmental and governance scores. … A more negative ESG mood on Twitter is associated with higher stock returns for companies with high ESG scores. … in the crises of 2008 and 2020 … the resiliency of high ESG ranked firms goes beyond the two mentioned crises, and is a general feature of episodes of high economy-wide volatility” (p. 19/20).
Effective climate disclosures: The Information Content of Managers’ Climate Risk Disclosure by Brian Bratten and Sung-Yuan (Mark) Cheng as of April 29th, 2022 (#238): “Results in our study provide evidence that manager’ voluntary climate risk disclosures convey decision-useful information to investors. Specifically, stock prices respond negatively to climate risk disclosures, suggesting that the level of climate risks faced by the disclosing firms are higher than the investors’ prior expectation” (p. 30).
Huge climate voting deficits: Proxy voting for the earth system: institutional shareholder governance of global tipping elements by Ami Golland, Victor Galaz, Gustav Engström, and Jan Fichtner as of March 26th, 2022: “… studying proxy voting by large financial institutions in corporate annual general meetings (AGM), … emphasising the largest asset managers, the “Big Three”. We analyse over 180,000 votes relating to ecological sustainability, across 597 AGMs in 263 companies, from 2010-2019. Results indicate that pension and sovereign wealth funds lead in supporting these resolutions, particularly in deforestation categories (around 75%). Asset managers support these resolutions less (approximately 25% of votes), while the “Big Three” average lower (between 6-20%)” (abstract). My comment: See Engagement test (Blogposting #300) – Responsible Investment Research Blog (prof-soehnholz.com)
>700 Lecture Pages: A Course in Sustainable Finance by Thierry Roncalli from Amundi Asset Management as of Februar 2nd, 2022 (#539): “Lecture 1: Introduction Definition, Actors, the Market of ESG Investing (42 slides) Lecture 2: ESG Investing ESG Scoring, ESG Ratings, Performance of ESG Investing, ESG Financing, ESG Premium (132 slides) Lecture 3: Other ESG Topics Sustainable Financing Products, Impact Investing, Voting Policy & Engagement, ESG and Climate Accounting (82 slides) Lecture 4: Climate Risk Definition, Global Warming, Economic Modeling, Risk Measures (176 slides) Lecture 5: Climate Investing Portfolio Decarbonization, Net Zero Carbon Metrics, Portfolio Alignment (164 slides) Lecture 6: Mathematical Methods, Technical Tools and Exercises Scoring System, Trend Modeling, Geolocation Data, Numerical Computations, Optimization (150+ slides)”
Traditional and alternative investing research
Bad mutual funds? Who creates and who bears flow externalities in mutual funds? by Daniel Fricke, Stephan Jank, and Hannes Wilke of the Deutsche Bundesbank as of Nov. 25th, 2022 (#34): “Prior work provides robust evidence on flow-induced negative externalities in open-ended mutual funds. … we find that investment funds are the main drivers of flow externalities in euro area equity mutual funds. In stark contrast, households and insurers are at the receiving end of these externalities” (p. 34).
Equal weight advantage: Why do equally weighted portfolios beat value-weighted ones? by Alexander Swade, Sandra Nolte, Mark Shackleton, and Harald Lohre as of November 22nd, 2022 (#431): “Historically, the equal-weighted portfolio has outperformed its value-weighted counterpart as well as a variety of other more intricate allocation approaches. … By design, the EW portfolio is putting more weight into small cap companies which reflects in a massive size exposure relative to a VW portfolio. Also, regular rebalancing to equal weights sees the EW portfolio selling winners and buying losers which is reflected in negative momentum exposures and a positive loading to the Short Term Reversal factor. On average, the EW-VW spread is long higher volatility stocks and thus betting against the Low Volatility anomaly. The over-weighting of small firms also results in negative quality exposure and abnormal high January returns …” (p. 14). My comment: I use equal weighting for all my direct equity portfolios since many years and are happy with that approach, see Konzentration und SDG-Fokus gut: Meine 9 Monats Performance 2022 – Responsible Investment Research Blog (prof-soehnholz.com)
Pro direct indexing: Do Retail Investors Have a Preference for Low-priced Stocks? by Can Yilanci as of November 21st, 2022 (#15):: “Retail investors are more likely to sell stocks with high prices than to sell stocks with low prices. … Investor sophistication and wealth reduce the effect size but do not fully explain my findings. Investors who hold a large part of their portfolio in low-priced stocks realize significantly lower returns per unit of risk. Investors who hold a large part of their portfolio in high-priced stocks have Sharpe ratios that are almost twice as large. I also analyze why investors are more likely to sell stocks with high prices than stocks with low prices. Selling stocks with high prices reduces trading costs, i.e. both commissions paid to the broker and transaction costs as measured by the relative bid-ask spread“ (p. 25). My comment: Direct indexing ca reduce this bias, see Custom ESG Indexing Can Challenge Popularity Of ETFs (asiafinancial.com)
Private equity ESG premium? ESG Disclosures in the Private Equity Industry by Jefferson Abraham, Marcel Olbert, and Florin Vasvari as of November 15th, 2021 (#291): “We show that ESG disclosures of PE firms are on average less prevalent than those of publicly listed industrial firms, but PE firms’ ESG disclosures have been strongly growing in the last twenty years. We demonstrate that PE firms’ ESG disclosures increase in PE firms’ exposure to countries with mandatory ESG disclosure regulation for publicly listed firms, and when PE firms’ commit to sustainable investment strategies as well as when they intend to raise capital. We also document that PE firms with higher environmental disclosures invest in portfolio companies with better ex-ante environmental performance and lower emissions in the PE ownership period relative to peer companies. Finally, greater ESG disclosures are positively associated with fund performance” (p. 35/36).