Rich polluters: Ecology and Class Structure: Greenhouse Gas Emissions of Social Classes in the United Kingdom by Michael Lindner, Robert Dorschel, and Antonia Schuster as of Dec. 1st, 2022 (#9):“…while the ‘new middle-class’ creates more environmental pressures through their mobility, the ‘old middle-class’ has higher housing emissions. … While the lower class has the smallest carbon footprint, the upper class plays both economically and ecologically in a league of their own” (abstract).
Climate policy influence: Environmental Externalities, Corporate Bonds, and the Role of Policy by Karol Kempa and Ulf Moslener as of November 30th, 2022 (#9): “This paper analyses the role of climate and environmental policy for the relationship between firms’ environmental externalities and their cost of debt using data on European corporate bonds. For direct environmental costs as well as for carbon emissions, we find that policy is a key driver of the capital market’s valuation of these externalities. … Ambitious policy reduces the costs of debt for clean firms and increases the cost for dirty firms. Lenient regulation can have the opposite effect: bond investors seem to reward dirty firms as vis-`a-vis clean firms. We confirm our findings regarding the role of policy for a specific climate regulation, the EU Emissions Trading Scheme. The introduction of the EU ETS increases the risk premium on CO2 emissions of regulated firms, whereas the premium for non-regulated firms declines” (abstract).
Scope 3 measure: Supply Chain Climate Exposure by Greg Hall, Kate Liu, Lukasz Pomorski and Laura Serban as of May 10th, 2022 (#199): “… a firm’s climate risk exposure in the supply chain …. can be modeled as revenue-weighted climate exposures of a company’s customers, or its suppliers. … our supply chain measure captures comovement of stock returns around climate news events, largely subsuming relevant information from other traditional climate data. Our measure is similar to, but not a replacement for the often-discussed scope 3 emissions” (p. 18/19). My comment: This research may be helpful for my engagement case, see Engagement test (Blogposting #300) – Responsible Investment Research Blog (prof-soehnholz.com)
Responsible investment research: Microfinance risk
Biocredit options: Biocredits to finance nature and people – Emerging lessons by Anna Ducros and Paul Steele (iied and UNDP) as of December 2022: “Biodiversity credits, or ‘biocredits’, are emerging as a tradeable unit of biodiversity that can incentivise nature conservation and restoration to benefit marginalised groups living with nature. … biocredits are distinct and are preferred to biodiversity offsets, which can cause net damage to biodiversity. … Biocredits supplied by Indigenous Peoples (IPs) and Local Communities (LCs) can create an innovative way to fund locally-led action. Based on a review of three existing biocredit methodologies and learning from the pitfalls of the carbon market, we describe three challenges in designing and implementing an effective biocredit market: how to rigorously and equitably measure a unit of biodiversity; how to generate sufficient demand and sales of biocredits; and how the majority of the revenue from a biocredit scheme can be channelled back to IPs & LCs who will create biocredits for nature and climate outcomes” (p. 26).
No carbon premium? Carbon Premium: Is It There? by Shaojun Zhang as of Dec. 6th, 2022 (#317): “…. brown firms would need higher required rate of return to compensate investors for the increased carbon-transition risk. … This paper shows that, after accounting for the data release lag and with value weighting, less carbon-intensive firms deliver higher returns in the U.S., while there is no excess return associated with total carbon emissions and emission growth. The international evidence on carbon premium is also largely absent. Further analysis shows that the green premium in the U.S. and the variations across countries are less likely to be a result of data mining. Instead, the shifts in investor preferences and climate concerns are important drivers of the cross-country variations. The strong shifts in the more developed countries generate stronger green returns in these countries” (p. 26).
ESG loan transparency: Do ESG-linked loans enhance the credibility of ESG disclosures? by Judson Caskey and Wen-Hsin (Molly) Chang as of Nov. 21st, 2022 (#120): “… we find that firms with ESG-linked loans more likely to qualify good ESG performance or report bad ESG performance …. In addition, firms with ESG-linked loans are more likely to add quantitative details to claims of having high ESG performance by stating, for example, “we are in the top 10% of our industry” as opposed to “we are an industry leader.” … ESG-related media coverage significantly increases after firms obtain ESG-linked loans. … the evidence is consistent with our prediction that ESG-linked loans increase misrepresentation costs, and therefore induce more credible ESG disclosures” (p. 27).
ESG rating booster: CSR Disclosures and Firm Value: Disentangling the Role of ESG Rating Providers by Albane C. Tarnauda and Mohammed Zakriya as of Nov. 21st, 2022 (#76): “We find that firms that get their CSR ratings artificially boosted by a change in the MSCI ESG reporting methodology tend to have significantly higher firm values. … ESG rating providers do not merely play the role of representative intermediation to collect and communicate firms’ CSR disclosures to outsiders. Furthermore, we found that firms with low financial constraints and institutional ownership seemed to benefit the most from a sudden change in their ESG ratings. … this change was not reflective of any change in the firms’ actual ESG engagement …” (p. 24/25). My comment: Truly responsible investors should look under the hood of companies and ESG ratings
CSR quality can pay off: Does Earnings Quality Influence Corporate Social Responsibility Performance? Empirical Evidence on the Causal Link by Sudipa Bose as of Dec. 2nd, 2022 (30): “… using a sample of US firms from 1992 to 2013 … We find that earnings quality is positively associated with CSR performance … we find no evidence to support the causal link that CSR performance drives earnings quality. Finally, we show that earnings quality reduces the cost of equity capital for firms with higher CSR performance. These findings suggest that firms with higher earnings quality maintain better CSR performance to reduce their costs of equity capital …“ (p. 36/37).
Traditional and alternative investment research: Microfinance risk
Microfinance risks (1): Excessive Focus on Risk? Non-performing Loans and Efficiency of Microfinance Institutions by Stephen Zamore, Leif Atle Beisland, and Roy Mersland as of Dec. 4th, 2022 (3): “Microfinance is a banking market in which operating costs are high while non-performing loans (NPLs) rates are low. While the existing literature tends to explain that the high operating costs arise from the provision of small loans, we argue that excessive efforts to control loan losses can also be a contributing factor. … we find, in contrast to positive linear relationship evidence in commercial banking studies, a nonlinear (U-shape) relationship between operating costs and NPLs. This implies that MFIs need to balance their cost efficiency with asset quality” (abstract).
Microfinance risk (2): Measuring Social Performance in Social Enterprises: A Global Study of Microfinance Institutions by Leif Atle Beisland, Kwame Ohene Djan, Roy Mersland, and Trond Randøy as of Dec. 4th, 2022 (6): “Using a global dataset of 204 socially rated MFIs from 58 countries, we assess the factors that drive the social performance ratings of MFIs. Overall our results show that social ratings of MFIs are significantly related to financial performance, greater outreach especially in rural areas, well-defined social objectives, staff commitment, service quality and an enhanced customer service. We observe that various rating agencies attach different importance to each of the social indicators” (abstract).
“Top” journal factor bullshit: Looking Under the Hood of Data-Mining by Mathias Hasler as of November 22nd, 2022 (#64): “This paper re-evaluates academic research on 92 cross-sectional stock return predictors. … In sample, the returns of predictor portfolios constructed with the precise research decisions made in the original papers are significantly larger than those constructed with a random combination of decisions made in the literature. Out of sample, half of this difference disappears. The effects exist only for predictors published in top-ranked journals. The results suggest that statistical biases from research decisions explain a fifth of the return predictability in the literature” (abstract).
Investment fund power: The growing importance of investment funds in capital flows by Richard Schmidt and Pınar Yeşin as of Dec. 6th, 2022 (#3): “… we first document the growing importance of foreign-domiciled investment funds in countries’ portfolio liabilities over time … We find that the external exposure of countries to investment funds has been steadily increasing both for advanced and emerging market economies. Furthermore, we find that this increased external exposure is coincident with higher exchange rate fluctuations, lower bond yields and higher stock returns. … ESG funds domiciled in European countries tend to invest predominantly in domestic markets, whereas ESG investment in emerging market economies to a large extent originates from foreign-domiciled investment funds” (abstract).
Kickback ban kickback: How Does a Ban on Kickbacks Affect Individual Investors? by Nic Schaub and Simon Straumann as of November 22nd, 2022 (9): “… we study how a ban on kickbacks affects individual investors’ asset allocation and portfolio performance. To do so, we exploit a court ruling in Switzerland that forced some banks to ban kickbacks. Our data allow us to compare portfolio holdings of the same client at the same point in time at two or more banks. … We find that the share of own-bank mutual funds and own-bank structured products increases significantly following a ban on kickbacks. We then document that own-bank mutual funds and own-bank structured products have characteristics that are inferior to those of other products clients are invested in. Consistently, we find that clients’ portfolio performance decreases significantly following a ban on kickbacks. Finally, we show that the increase in portfolio shares of own-bank products is attenuated for investors who are usually considered to be more sophisticated” (p. 24/25).