Picture from Sergio Cerrato from Pixabay
Greeniums: 15x new research on transition risk, emissions assurance, biodiversity risks, materiality, climate commitments, investment consultants, green innovation, biodiversity premium, sustainable fund flows, brown home bias, greenwashing, retail governance, and private debt performance
Ecological research
Transition or not? How you measure transition risk matters: Comparing and evaluating climate transition risk metrics by Philip Fliegel as of March 28th, 2024: “We employ a new dataset containing for the first-time reported EU taxonomy alignment of both capex and revenues as a proxy for companies transition risk. … We find a strong divergence in transition risk metrics for similar companies. … We find that only taxonomy and TRBC (Sö: Refinitiv Business Classification) based portfolios are able to measure green firms’ climate transition risk. … notably, emission based green portfolios are highly invested in service, technology and finance, not typical green sectors enabling the transition …” (abstract).
CO2-Negative assurance? On the Importance of Assurance in Carbon Accounting by Florian Berg, Jaime Oliver Huidobro, and Roberto Rigobon as of March 25th, 2024: “Firms that obtain assurance for their carbon emissions report on average a 9.5% higher carbon intensity than their peers without assurance. When controlling for assurance, we do not find evidence that SBTi target-setters reduce their future emissions. Instead, firms that audit reduce their future carbon intensity by 3.3%. This has implications for portfolio managers and ESG raters as taking disclosed carbon emissions at face value would lead to penalizing firms that are more serious about their carbon reductions …“ (p. 12).
Biodiversity risk details: Study for a methodological framework and assessment of potential financial risks associated with biodiversity loss and ecosystem degradation, Final Report by Maha Cziesielski, Cosima Dekker-Hufler, Timea Pal, Graeme Nicholls, Foivos Petsinaris, Lisa Korteweg (Trinomics) Michael Obersteiner, Nikolay Khabarov for the European Commission as of February 2024: “Biodiversity and nature loss pose multifaceted risk, … Reviewing best-practices and existing frameworks, the study covers the key definitions and steps in determining risk drivers, types, transmission channels, and exposure assessments. An assessment of the EU’s sectoral exposure furthermore reveals that agriculture, real estate and construction, and healthcare sectors as most susceptible” (p. 5).
Scarce materiality? European corporate sustainability reporting – The Financial Materiality Compass as an auxiliary tool by Christina Bannier and Henry Flach as of Feb. 8th, 2024: “European companies in scope of the new Corporate Sustainability Reporting Directive (CSRD) will have to report on all sustainability topics that are either financially-material or impact-material (or both) to them. Determining materiality in an extensive individual analysis, however, proves to be an expensive undertaking that will encumber resource-constrained and smaller companies in particular. To offer an easily applicable auxiliary tool, we create a comprehensive sector-specific Financial Materiality Compass (FMC) along the lines of the European Sustainability Reporting Standards (ESRS). … We find that for companies in the consumer staples and energy sector nine out of 10 ESRS categories are financially material, but only one, respectively two, of these categories show a strong materiality. For companies in the health care, information technologies and real estate sector, in contrast, we report the lowest number of financially material ESRS categories in total“ (abstract).
Net-zero bullshit? Business as usual: bank climate commitments, lending, and engagement by Parinitha (Pari) Sastry, Emil Verner, David Marques-Ibanez from the European Central Bank as of March 26th, 2024 (2x): “A prominent initiative is the Net Zero Banking Alliance, which constitutes an agreement to set voluntary net zero targets and decrease financed emissions in targeted sectors over the medium-term (2030) and long-term (2050). This paper is the first attempt to quantify whether banks have met their stated goals using administrative data that allows for a comprehensive examination of net zero lending commitments. We find that climate-aligned lenders reduce lending to targeted sectors, both in absolute terms and relative to other sectors. However, once we compare climate-aligned lenders to other lenders, we find that climate-aligned lenders have not differentially divested from emissions-intensive firms, in mining or in the sectors for which they have set targets. … Further, we do not find evidence for engagement. Firms connected to climate-aligned banks are no more likely to themselves set decarbonization targets“ (p. 36/37).
ESG investment research (in: Greeniums)
Dangerous pension consultants? Loading the DICE against pension funds – Flawed economic thinking on climate has put your pension at risk by Steve Keen for Carbon Tracker as of July 27th, 2023: “Investment consultants to pension funds have relied upon peer-reviewed economic research to provide advice to pension funds on the damages to pensions that will be caused by global warming. Following the advice of investment consultants, pension funds have informed their members that global warming of 2 – 4.3oC will have only a minimal impact upon their portfolios. … Economists have claimed, in refereed economics papers, that 6oC of global warming will reduce future global GDP by less than 10%, compared to what GDP would have been in the complete absence of climate change. In contrast, scientists have claimed, in refereed science papers, that 5oC of global warming implies damages that are “beyond catastrophic, including existential threats,” while even 1oC of warming—which we have already passed—could trigger dangerous climate tipping points“ (p. 6).
Variable greeniums: The Monetary Channel of the Green Premium by Xinwei Li as of March 26th, 2024: „I document .. novel empirical facts about the green premium, which refers to the average return of the Green-Minus-Brown (GMB) portfolio. First, I show that the green premium varies substantially over time, where greenness can be measured ether by Trucost carbon emission intensities or by MSCI environmental scores. The green premium ranges from -53 bps to 76 bps on a monthly basis …. Second, I find that the … green premium is positive and significant during periods of expansionary monetary policy and turns zero or even negative during periods of contractionary monetary policy …“ (p. 26).
True greeniums? In Search of the True Greenium by Marc Eskildsen, Markus Ibert, Theis Ingerslev Jensen, and Lasse Heje Pedersen as of March 1st, 2024: “We find widespread robustness problems with the ESG literature that estimates the greenium based on realized returns combined with a variety of greenness measures. … the true greenium … is negative across countries and asset classes. In equities, the estimated annual greenium is −25 bps per standard deviation increase in the robust green score. This greenium corresponds to a −50 bps expected return spread between the top- and bottom third of firms by greenness. Looking at more extreme differences, the greenium corresponds to a near −100 bps expected return spread between the top- and bottom deciles. Further, the greenium becomes more negative over time and is more negative in greener countries“ (p. 45/46).
Greeniums and innovation: Funding the Fittest? Pricing of Climate Transition Risk in the Corporate Bond Market by Martijn A. Boermans, Maurice J. G. Bun, and Yasmine van der Straten as of Jan. 17th, 2024: “We focus on the amount of green patents relative to the total amount of patents of a given company, and assess whether the interaction between emission intensity and the green patent ratio affects bond yield spreads. Our empirical results provide evidence that a firm’s carbon emission intensity positively affects the bond yield spread. At the same time we find that investors reward those emission-intensive companies engaging in green innovation. … we assess whether green patenting is associated with a decline in future emission intensity. We document substantial heterogeneity in the effect over time and across industries. … our results suggest that investors should exercise caution when accommodating emission intensive companies with a smaller bond yield spreads once they innovate in the green space. Finally, our results reveal that European investors, and particularly institutional investors, are more inclined to price exposures to climate transition risk …“ (p. 35).
Biodiversity premium? Biodiversity Risk Premium by Helena Naffaa and Gergely Janos Czupya as of March 27th, 2024: “By analysing almost 3,000 constituents of the MSCI All Country World Index over a decade, spanning from 2013 to 2023 … we observed decreases of 0.9%, 1.5%, and 3.6% in the maximum attainable Sharpe ratio in the universe for low, moderate, and high levels of biodiversity risk mitigation, respectively. … Moreover, there is an additional cost associated with the reduction in portfolio diversification due to the screening process, further diminishing the Sharpe ratio by 1.1%, 2.3%, and 3.5% for the respective risk mitigation levels. Our study also highlights the added benefit of biodiversity alignment on ESG scores, revealing unintended consequences resulting in improvements in the environmental, social and governance pillar metrics, in addition to the incurred reduction in the Sharpe ratio“ (p. 30/31).
Sustainable flows? Sustainability or Performance? Ratings and Fund Managers’ Incentives by Nickolay Gantchev, Mariassunta Giannetti, and Rachel Li as of March 9th, 2024: “Following the introduction of Morningstar’s sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks to attract flows. Such sustainability-driven trades, however, underperformed, impairing the funds’ overall performance. Consequently, a tradeoff between sustainability and performance emerged. In the new equilibrium, the globe ratings do not affect investor flows and funds no longer trade to improve their globe ratings” (abstract). My comment: If there is similar performance, I would select the more sustainable investment (for the most recent performance of my sustainable portfolios see Q1 Renditen der Soehnholz ESG Portfolios – Responsible Investment Research Blog (prof-soehnholz.com)
Pollution home bias: Carbon Home Bias by Patrick Bolton, Marc Eskildsen, and Marcin Kacperczyk as of Feb. 18th, 2024: “We undertake a global analysis of institutional investor portfolios and find widespread underweighting of companies with higher carbon emissions. This underweighting is largely driven by underinvestment in foreign companies with high carbon emissions … Similar domestic firms are overweighted but by a smaller magnitude. Further, the divestment of foreign polluters has increased since 2015“ (abstract).
Beyond Greenwashing: Crosswashing in Sustainable Investing: Unveiling Strategic Practices Impacting ESG Scores by Bertrand Kian Hassani and Yacoub Bahini as of March 26th, 2024: “… cross-washing involves companies strategically investing in sustainable activities to boost Environmental, Social, and Governance (ESG) scores while preserving non-sustainable core operations. The study emphasizes that this specific form of greenwashing is not currently considered in existing ESG assessments, potentially leading to an inflated perception of corporate ethical practices “ (abstract). … “The findings derived from the case study indicate a notable overestimation in current ESG notations. This overestimation, however, is contingent upon the specific industry sectors and the size of the companies involved” (p. 19). My comment: For a detailed comment see Nur ESG-Ratings für Nachhaltigkeitsbeurteilungen? | CAPinside
Retail governance: Corporate Governance Through Social Media by Christina M. Sautter as of March 20th, 2024: “Retail investors are vigorously and loudly taking positions regarding corporate governance issues on social media. … Retail investors have opened tens of millions of new brokerage accounts since 2020. … These wireless investors are taking advantage of social media platforms like YouTube, Reddit, TikTok, X (formerly Twitter), WhatsApp, Telegram, and Discourse, among other venues to transform corporate governance engagement. … Although structural barriers do impede engagement and reforms to the system are necessary … a case study of one particularly illustrious event involving AMC Entertainment Holdings, Inc. .. show(s) that retail investors are anything but silent” (abstract). My comment: Shareholder engagement is not that difficult, see “Engagementresport” at FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T
Other investment research (in: Greeniums)
Unattractive debt investments? Risk-Adjusting the Returns to Private Debt Funds by Isil Erel, Thomas Flanagan, Michael Weisbach as of March 26th, 2024: “Private debt funds are the fastest growing segment of the private capital market. … Using both equity and debt benchmarks to measure risk, a typical private debt fund produces an insignificant abnormal return to its investors. However, gross-of-fee abnormal returns are positive, and using only debt benchmarks also leads to positive abnormal returns as funds contain equity risks. The rates at which private debt funds lend appear to be high enough to offset the funds’ fees and risks, but not high enough to exceed both their fees and investors’ risk-adjusted rates of return” (abstract).
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