ESG research criticism illustration with detective picture from Mariana Anatoneag from Pixabay

ESG research criticism? Researchpost #156

ESG research criticism: 13x new research on e-commerce, petrochemical and corruption problems, good and average sustainable performance, high transition risks, EU Taxonomy, Greenium, climate disaster effects, good investment constraints and private equity benchmarks (# shows SSRN full paper downloads as of Dec. 14th, 2023)

Social and ecological research (ESG research criticism)

Brown e-commerce: Product flows and GHG emissions associated with consumer returns in the EU by Rotem Roichman, Tamar Makov, Benjamin Sprecher, Vered Blass, and Tamar Meshulam as of Dec. 6th, 2023 (#5):“Building on a unique dataset covering over 630k returned apparel items in the EU … Our results indicate that 22%-44% of returned products never reach another consumer. Moreover, GHG emissions associated with the production and distribution of unused returns can be 2-14 times higher than post-return transport, packaging, and processing emissions combined“ (abstract).

US financed European petrochemicals: Toxic Footprints Europe by Planet Tracker as of December 2023: “Petrochemicals, which provide feedstocks for numerous products embedded in the global economy, carry a significant environmental footprint. One of the most important is toxic emissions. The financial market appears largely unconcerned by toxic emissions. This could be for several reasons: • perhaps because they are viewed as an unpriced pollutant or investors’ focus remains on carbon rather than other discharges or for those monitoring the plastic industry the spotlight is on plastic waste rather than toxic releases. In the Trilateral Chemical Region of Europe – an area consisting of Flanders (Belgium), North Rhine-Westphalia (Germany), Planet Tracker identified 1,093 facilities …. These facilities have released and transferred 125 million tonnes of chemicals since 2010 resulting in an estimated 24,640 years of healthy life being lost and 57 billion fractions of species being potentially affected. … BASF and Solvay are the most toxic polluters in the region, appearing in the top 5 of all four metrics analysed (physical releases, ecotoxicity, human toxicity and RSEI hazard).  The financiers behind these toxic footprints are led by BlackRock (5.4% of total investments by equity market value), Vanguard (5.2%) and JPMorgan Chase (3.6%). In terms of debt financing, Citigroup leads with 6.4% of total 10-year capital underwriting (including equity, loans and bonds), followed closely by JPMorgan Chase (6.3%) and Bank of America (5.2%)“ (p. 3).

Corruption Kills: Global Evidence from Natural Disasters by Serhan Cevik and João Tovar Jalles from the International Monetary Fund as of Nov. 2nd, 2023 (#12): “… we use a large panel of 135 countries over a long period spanning from 1980 to 2020 … The empirical analysis provides convincing evidence that widespread corruption increases the number of disaster-related deaths … the difference between the least and most corrupt countries in our sample implies a sixfold increase in the number of deaths per population caused by natural disaster in a given year. Our results show that this impact is stronger in developing countries than in advanced economies, highlighting the critical relationship between economic development and institutional capacity in strengthening good governance and combating corruption“ (p. 11/12).

Investment ESG research criticsm

Complex sustainability: Sustainability of financial institutions, firms, and investing by Bram van der Kroft as of Dec. 7th, 2023 (#22): “… financial institutions will take on additional risk in ways unpriced by regulators when facing financial constraints. Throughout the paper, we provide evidence that this additional risk-taking harms society as banks and insurance corporations acquire precisely those assets most affected in economic downturns” (p. 194) … “we find for over four thousand listed firms in 77 countries, as two-thirds of firms substantively improve their sustainable performance when institutional pressure is imprecise and increases, while one-third of firms are forced to start symbolically responding” (p. 196) … “One critical assumption underlining .. sustainable performance advances is that socially responsible investors can accurately identify sustainable firms. In practice, we show that these investors rely on inaccurate estimates of sustainable performance and accidentally “tilt the wrong firms” (p. 196) … “First, we find that MSCI IVA, FTSE, S&P, Sustainalytics, and Refinitiv ESG ratings do not reflect the sustainable performance of firms but solely capture their forward-looking sustainable aspirations. On average, these aspirations do not materialize up to 15 years in the future” (p. 84). …“Using unique identification in the real estate market and property-level sustainable performance information, we find that successful socially responsible engagement improves the sustainable performance of firms”(p. 196). My comment regarding the already published ESG rating criticism: Not all rating agencies work in the criticized way. My main ESG ratings supplier shifted its focuses to actual from planned sustainability (see my Researchpost #90 as of July 5th, 2022 relating to this paper: Tilting the Wrong Firms? How Inflated ESG Ratings Negate Socially Responsible Investing under Information Asymmetries).

ESG research criticism (1)? Comment and Replication: The Impact of Corporate Sustainability on Organizational Processes and Performance by Andrew A. King as of Dec. 7th, 2023 (#186): “Do High Sustainability companies have better financial performance than their Low Sustainability counterparts? An extremely influential publication in Management Science, “The Impact of Corporate Sustainability on Organizational Processes and Performance”, claims that they do. … after reviewing the report, I conclude that its critical findings are unjustified by its own evidence: its main method appears unworkable, a key finding is miscalculated, important results are uninterpretable, and the sample is biased by survival and selection. … Despite considering estimates from thousands of models, I find no reliable evidence for the proposed link between sustainability and financial performance” (abstract). My comment: If there is no negative effect of sustainability on performance, shouldn’t all investors invest 100% sustainably

ESG research criticism (2)? Does Corporate Social Responsibility Increase Access to Finance? A Commentary on Cheng, Ioannou, and Serafeim (2014) by Andrew A. King as of Dec. 12th, 2023 (#7): “Does Corporate Social Responsibility (CSR) facilitate access to finance? An extremely influential article claims that it does … I show that its research method precludes any insight on either access to finance or its connection to CSR. … I correct the original study by substituting more suitable measures and conducting further analysis. Contrary to the original report, I find no robust evidence for a link between CSR and access to finance” (abstract).

High transition risk: The pricing of climate transition risk in Europe’s equity market by Philippe Loyson, Rianne Luijendijk, and Sweder van Wijnbergen as of Aug. 22nd, 2023 (#46): “We assessed the effect of carbon intensity (tCO2/$M) on relative stock returns of clean versus polluting firms using a panel data set consisting of 1555 European companies over the period 2005-2019. We did not find empirical evidence that carbon risk is being priced in a diversified European equity portfolio, implying that investors do not seem to be aware of or at least do not require a risk premium for the risk they bear by investing in polluting companies“ (p. 32). My comment: Apparently, at least until 2019, there has not been enough sustainable investment to have a carbon risk impact

Green indicator confusion: Stronger Together: Exploring the EU Taxonomy as a Tool for Transition Planning by Clarity.ai and CDP as of Dec. 5th, 2023: „We find that out of the 1,700 NFRD (Sö: EU’s Non-Financial Reporting Directive) companies that published EU Taxonomy reports this year, around 600 identified their revenues and spending as part of their transition plans, and approximately 300 have validated science-based targets, both of which correlate to higher taxonomy alignment overall. There is a large dispersion of eligibility across companies within similar sectors which suggests that individual companies are involved in a variety of economic activities. This influences the low correlation between corporate GHG emissions and Taxonomy eligibility and alignment, as non-eligibility can be the result of exposure to either very high-impact or very low-impact economic activities. We observe that higher taxonomy alignment does not necessarily lead to lower carbon intensity when comparing companies within sectors. It is important to highlight that the largest source of corporate emissions might not always be well reflected in revenue shares” (p. 38). My comment: My experience is that the huge part of Scope 3 CO2 emissions and almost all non-CO2 emissions like methane are still seriously neglected by many corporations and investors

Greenium: Actions Speak Louder Than Words: The Effects of Green Commitment in the Corporate Bond Market by Peter Pope, Yang Wang, and Hui Xu as of Nov. 22nd, 2023 (#64): “This paper studies the effects of green bond issuance on the yield spreads of other conventional bonds from the same issuers. A traditional view of new bond issuance suggests that new bonds (whether green or brown) will increase secondary market bond yields if higher leverage increases default risk and dilutes creditors’ claim over assets. However, we find that the issuance of green bonds reduces conventional bond yield spreads by 8 basis points in secondary markets, on average. The effect is long-lasting (beyond two years) … An event study shows that the “bond” attribute of the green bonds still increases the yield spreads of outstanding conventional bonds by 1 basis point. It is the “green” attribute that lowers the yield spreads and ultimately dominates the net effects. … we show that socially responsible investors increase their demand for, and hold more, conventional bonds in their portfolios following the issuance of green bonds … we show that shareholders submit fewer environment-related proposals following green bond issuance. … Finally, our analysis highlights that green bonds give rise to positive real effects, though such effects are confined to the issuer“ (p. 42/43).

Costly values? Perceived Corporate Values by Stefano Pegoraro, Antonino Emanuele Rizzo, and Rafael Zambrana as of Dec. 4th, 2023 (#54): “…. analyzing the revealed preferences of values-oriented investors through their portfolio holdings … Using this measure of perceived corporate values, we show that values-oriented investors consider current and forward-looking information about corporate misconduct and controversies in their investment decisions. We also show that values-oriented investors sacrifice financial performance to align their portfolios with companies exhibiting better corporate values and lower legal risk” (p. 24). My comment: According to traditional investment theories, lower (ESG or other) risk should lead to lower returns. Any complaints about that?

Some investor impact: Propagation of climate disasters through ownership networks by Matthew Gustafson, Ai He, Ugur Lel, and Zhongling (Danny) Qin as of Dec. 5th, 2023 (#127): “We find that climate-change related disasters increase institutional investors’ awareness of climate change issues and accordingly these investors engage with the unaffected firms in their portfolios to influence corporate climate policies. In particular, we observe that such institutional investors vote in greater support of climate-related shareholder proposals at unaffected firms only after getting hit by climate change disasters in their portfolios and compared to other institutional investors. … In the long-run, firm-level GHG emissions and energy usage cumulatively decline at the same time as the unaffected firms adopt specific governance mechanisms such as linking their executive pay policies to GHG emission reductions, suggesting that changes in governance mechanisms potentially incentivize firms to internalize some of the negative externalities from their activities. … our results are more pronounced in brown industries“ (p. 26). My comment: When changing executive pay, negative effects have to be mitigated, see Wrong ESG bonus math?

Other investment research

Good constraints: Performance Attribution for Portfolio Constraints by Andrew W. Lo and Ruixun Zhang as of Nov. 1st, 2023 (#57): “While it is commonly believed that constraints can only decrease the expected utility of a portfolio, we show that this is only true when they are treated as static. … our methodology can be applied to common examples of constraints including the level of a particular characteristic, such as ESG scores, and exclusion constraints, such as divesting from sin stocks and energy stocks. Our results show that these constraints do not necessarily decrease the expected utility and returns of the portfolio, and can even contribute positively to portfolio performance when information contained in the constraints is sufficiently positively correlated with asset returns“ (p. 42). My comment: Traditional investment constraints are typically used to reduce risks. Looking at a actively managed funds, that does not always work as expected. Maybe responsible investment constraints are better than traditional ones?

PE Benchmark-Magic: Benchmarking Private Equity Portfolios: Evidence from Pension Funds by Niklas Augustin, Matteo Binfarè, and  Elyas D. Fermand as of Oct. 31st, 2023 (#245): “We document significant heterogeneity in the benchmarks used for US public pension fund private equity (PE) portfolios. … We show that general (Soe: investment) consultant turnover predicts changes in PE benchmarks. … we find that public pension funds only beat their PE benchmarks about 50% of the time, that they tend to use public market benchmark indices that underperform private market benchmark indices, and that their benchmarks have become easier to beat over the last 20 years“ (abstract).

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Skilled fund managers: illustrated with woman by Gerd Altman from Pixabay

Skilled fund managers – Researchpost #155

Skilled fund managers: 22x new research on skyscrapers, cryptos, ESG-HR, regulation, ratings, fund names, AI ESG Tools, carbon credits and accounting, impact funds, voting, Chat GPT, listed real estate, and fintechs (# shows the SSRN full paper downloads as of Dec. 7th, 2023):

Social and ecological research

Skyscaper impact: The Skyscraper Revolution: Global Economic Development and Land Savings by Gabriel M. Ahlfeldt, Nathaniel Baum-Snow, and Remi Jedwab as of Nov. 30th, 2023 (#20): “Our comprehensive examination of 12,877 cities worldwide from 1975 to 2015 reveals that the construction of tall buildings driven by reductions in the costs of height has allowed cities to accommodate greater populations on less land. … one-third of the aggregate population in cities of over 2 million people in the developing world, and 20% for all cities, is now accommodated because of the tall buildings constructed in these cities since 1975. Moreover, the largest cities would cover almost 30% more land without these buildings, and almost 20% across all cities. …. Given the gap between actual and potential building heights we calculate for each city in our data, only about one-quarter of the potential welfare gains and land value losses from heights have been realized, with per-capita welfare gains of 5.9% and 3.1% available by eliminating height regulations in developed and developing economies, respectively. As the cost of building tall structures decreases with technical progress, such potential for welfare gains will only increase into the future. … in most cities it is in landowners’ interest to maintain regulatory regimes that limit tall building construction, … benefits may be greatest for those who would move into the city with the new construction to take advantage of the higher real wages and lower commuting costs“ (p. 47).

Hot cryptos: Cryptocarbon: How Much Is the Corrective Tax? by Shafik Hebous and Nate Vernon from the International Monetary Fund as of Nov. 28th, 2023 (#14): “We estimate that the global demand for electricity by crypto miners reached that of Australia or Spain, resulting in 0.33% of global CO2 emissions in 2022. Projections suggest sustained future electricity demand and indicate further increases in CO2 emissions if crypto prices significantly increase and the energy efficiency of mining hardware is low. To address global warming, we estimate the corrective excise on the electricity used by crypto miners to be USD 0.045 per kWh, on average. Considering also air pollution costs raises the tax to USD 0.087 per kWh“ (abstract).  

ESG attracts employees: Polarizing Corporations: Does Talent Flow to “Good’’ Firms? by Emanuele Colonnelli, Timothy McQuade, Gabriel Ramos, Thomas Rauter, and Olivia Xiong as of Nov. 30th, 2023 (#48): “Using Brazil as our setting, we make two primary contributions. First, in partnership with Brazil’s premier job platform, we design a nondeceptive incentivized field experiment to estimate job-seekers’ preferences to work for socially responsible firms. We find that, on average, job-seekers place a value on ESG signals equivalent to about 10% of the average wage. … Quantitatively, skilled workers value firm ESG activities substantially more than unskilled workers. … results indicate that ESG increases worker utility relative to the baseline economy without ESG. The reallocation of labor in the economy with ESG improves assortative matching and yields an increase in total output. Moreover, skilled workers benefit the most from the introduction of ESG, ultimately increasing wage differentials between skilled and unskilled workers“ (p. 32). My comment: see HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com)

Always greenwashing: Can Investors Curb Greenwashing? Fanny Cartellier, Peter Tankov, and Olivier David Zerbib as of Dec. 1st, 2023 (#40): “… we show that companies greenwash all the time as long as the environmental score is not too high relative to the company’s fundamental environmental value. The tolerable deviation increases with investors’ pro-environmental preferences and decreases with their penalization. Moreover, the greenwashing effort is all the more pronounced the higher the pro-environmental preferences, the lower the disclosure intensity, and the lower the marginal unit cost of greenwashing. In particular, we show that beyond a certain horizon, on average, companies always greenwash“ (p. 31).

Insufficient ESG regulation? ESG Demand-Side Regulation – Governing the Shareholders by Thilo Kuntz as of Nov. 30th, 2023 (#45): “Instead of addressing the corporate board and its international equivalents as a supplier of ESG-friendly management, demand-side regulation targets investors and shareholders. It comes in two basic flavors, indirect and direct demand-side regulation. Whereas the first attempts to let only those retail investors become stockholders or fund members who already espouse the correct beliefs and attitudes, the latter pushes professional market participants towards ESG through a double commitment, that is, to the public at large via disclosure and to individual investors through pre-contractual information. .. Judging from extant empirical studies, indirect demand-side regulation in its current form will change the equation only slightly. … for most retail investors, including adherents to ESG, .. beliefs and attitudes seem to lie more on the side of monetary gains“ (p. 49/50).

Big bank climate deficits: An examination of net-zero commitments by the world’s largest banks by Carlo Di Maio, Maria Dimitropoulou, Zoe Lola Farkas, Sem Houben, Georgia Lialiouti, Katharina Plavec, Raphaël Poignet, Eline Elisabeth, and Maria Verhoeff from the European Central Bank as of Nov. 29th, 2023 (#25): “We examined the net-zero commitments made by Global Systemically Important Banks (G-SIBs). In recent years, large banks have significantly increased their ambition and now disclose more details regarding their net-zero targets. … The paper … identifies and discusses a number of observations, such as the significant differences in sectoral targets used despite many banks sharing the same goal, the widespread use of caveats, the missing clarity regarding exposures to carbon-intensive sectors, the lack of clarity of “green financing” goals, and the reliance on carbon offsets by some institutions. The identified issues may impact banks’ reputation and litigation risk and risk management” (abstract).

ESG investment research (Skilled fund managers)

Good fund classification: Identifying Funds’ Sustainability Goals with AI: Financial, Categorical Morality, and Impact by Keer Yang and Ayako Yasuda as of Nov. 30ths, 2023 (#23): “… developing a supervised machine-learning model-based method that classifies investment managers’ stated goals on sustainability into three distinct objectives: financial value, categorical morality, and impact. This is achieved by evaluating two dimensions of investor preferences: (i) whether investors have nonpecuniary preferences or not (value vs. values) and (ii) whether investors have ex ante, categorical moral preferences or ex post, consequentialist impact preferences. … Among the funds identified as sustainable by Morningstar, 54% state they incorporate ESG to enhance financial performance, while 39% practice categorical morality via exclusion and only 33% state they seek to generate impact. Stated goals meaningfully correlate with how the funds are managed. Financially motivated funds systematically hold stocks with high MSCI ESG ratings relative to industry peers, which is consistent with ESG risk management. Morally motivated funds categorically tilt away from companies in controversial industries (e.g., mining), but are otherwise insensitive to relative ESG ratings. Impact funds hold stocks with lower ESG performance than the others, which is consistent with them engaging with laggard firms to generate positive impact. Impact funds are also more likely to support social and environmental shareholder proposals. Hybrid funds are common. Funds combining financial and moral goals are the largest category and are growing the fastest” (p. 37/38). My comment: My fund may be unique: It holds stocks with high ESG ratings, is morally motivated and tries to achieve impact by engaging with the most sustainable companies.

ESG ratings explanations: Bridging the Gap in ESG Measurement: Using NLP to Quantify Environmental, Social, and Governance Communication by Tobias Schimanski, Andrin Reding, Nico Reding, Julia Bingler, Mathias Kraus, and Markus Leippold as of Nov. 30th, 2023 (#345): “… we propose and validate a new set of NLP models to assess textual disclosures toward all three subdomains … First, we use our corpus of over 13.8 million text samples from corporate reports and news to pre-train new specific E, S, and G models. Second, we create three 2k datasets to create classifiers that detect E, S, and G texts in corporate disclosures. Third, we validate our model by showcasing that the communication patterns detected by the models can effectively explain variations in ESG ratings” (abstract). My comments: I selected my ESG ratings agency (also) because of its AI capabilities

AI ESG Tools: Artificial Intelligence and Environmental Social Governance: An Exploratory Landscape of AI Toolkit by Nicola Cucari, Giulia Nevi, Francesco Laviola, and Luca Barbagli as of Nov. 29th, 2023 (#35): “This paper presents an initial mapping of AI tools supporting ESG pillars. Through the case study method, 32 companies and tools supporting environmental social governance (ESG) management were investigated, highlighting which of the different AI systems they use and enabling the design of the new AI-ESG ecosystem” (abstract).

Cheaper green loans: Does mandatory sustainability reporting decrease loan costs? by Katrin Hummel and Dominik Jobst as of Dec. 1st, 2023 (#31): “We focus on the passage of the NFRD, the first EU-wide sustainability reporting mandate. Using a sample of global loan deals from 2010 to 2019, we begin our analysis by documenting a negative relationship between borrowers’ levels of sustainability performance and loan costs. … In our main analysis, we find that loan costs significantly decrease among borrowers within the scope of the reporting mandate. This decrease is concentrated in firms with better sustainability performance. In a further analysis, we show that this effect is stronger if the majority of lead lenders are also operating in the EU and are thus potentially also subject to the reporting mandate themselves “ (p. 26/27).

Widepread ESG downgrade costs: Do debt investors care about ESG ratings? by Kornelia Fabisik, Michael Ryf, Larissa Schäfer, and Sascha Steffen from the European Central Bank as of Nov. 27th, 2023 (#53): “We use a major ESG rating agency‘s methodology change to firms’ ESG ratings to study its effect on the spreads of syndicated U.S. corporate loans traded in the secondary market. We find that loan spreads temporarily increase by 10% relative to the average spread of 4%. … we find some evidence that the effect is stronger for smaller and financially constrained firms, but not for younger firms. We also find that investors penalize firms for which ESG-related aspects seem to play a more prominent role. Lastly, when we explore potential spillover effects on private firms that are in the same industry as the downgraded firms, we find evidence supporting this channel. We find that private firms in highly affected industries face higher loan spreads after ESG downgrades of public firms in the same industry, suggesting that investors of private (unrated) firms also price in ESG downgrades of public firms“ (p. 28).

High ESG risks: Measuring ESG risk premia with contingent claims by Ioannis Michopoulos, Alexandros Bougias, Athanasios Episcopos and Efstratios Livanis as of Nov. 9th, 2023 (#109): “We find a statistically significant relationship between the ESG score and the volatility and drift terms of the asset process, suggesting that ESG factors have a structural effect on the firm value. We establish a mapping between ESG scores and the cost of equity and debt as implied by firm’s contingent claims, and derive estimates of the ESG risk premium across different ESG and leverage profiles. In addition, we break down the ESG risk premia by industry, and demonstrate how practitioners can adjust the weighed average cost of capital of ESG laggard firms for valuation and decision making purposes“ (abstract). … “We find that ESG risk has a large effect on the concluded cost of capital. Assuming zero ESG risk premia during the valuation process could severely underestimate the risky discount rate of ESG laggard firms, leading to distorted investment and capital budget decisions, as well as an incorrect fair value measurement of firm’s equity and related corporate securities” (p. 20).

ESG fund benefits: Renaming with purpose: Investor response and fund manager behaviour after fund ESG-renaming by Kayshani Gibbon, Jeroen Derwall, Dirk Gerritsen, and Kees Koedijk as of Nov. 27th, 2023 (#42): “Using a unique sample of 740 ESG-related name changes …. Our most conservative estimates … suggest that mutual funds domiciled in Europe may enjoy greater average flows by renaming … we provide consistent evidence that mutual funds improve the ESG performance and reduce the ESG risks of their portfolios after signalling ESG repurposing through fund name changes. Finally, we find that renaming has no material impact on funds’ turnover rates or on the fees charged to investors“ (p. 15/16). My comment: Maybe I should have integrated ESG in my FutureVest Equity Sustainable Develeopment Goals fund name (ESG and more see in the just updated 31pager 231120_Nachhaltigkeitsinvestmentpolitik_der_Soehnholz_Asset_Management_GmbH).

Green for the rich? Rich and Responsible: Is ESG a Luxury Good? Steffen Andersen, Dmitry Chebotarev, Fatima Zahra Filali Adib, and Kasper Meisner Nielsen as of Nov. 27th, 2023 (#91): “… we examine the rise of responsible investing among retail investors in Denmark. … from 2019 to 2021. The fraction of retail investors that hold socially responsible mutual funds in their portfolios has increased from less than 0.5% to 6.8%, equivalent to an increase in the portfolio weight on socially responsible mutual funds for all investors from 0.1% to 1.6%. At the same time, the fraction of investors holding green stock has increased from 8.7% to 15.9%, equivalent to an increase in portfolio weight on green stocks from 2.4% to 3.3%. Collectively, the rise of sustainable investments implies that more than 4.9% of the risky assets are allocated to sustainable investments by 2021. The rise in responsible investments is concentrated among wealthy investors. Almost 13% of investors in the top decile of financial wealth holds socially responsible mutual funds and one out of four holds green stocks. Collectively, the portfolio weight on socially responsible assets among wealth investors is 4.8% in 2021. … Using investors’ charitable donations prior to inheritance, we document that the warm glow effect partially explains the documented results“ (p. 20/21).

Emissions control: Carbon Accounting Quality: Measurement and the Role of Assurance by Brandon Gipper, Fiona Sequeira, and Shawn X. Shi as of Nov. 29th, 2023 (#135): “We document a positive association between (Sö: third party) assurance and carbon accounting quality for both U.S. and non-U.S. countries. This relation is stronger when assurance is more thorough. We also document how assurance improves carbon accounting quality: first, assurors identify issues in the carbon accounting system and communicate them to the firm; subsequently, firms take remedial actions, resulting in updated disclosures, faster release of emissions information, and more positive perceptions of emissions figures by reporting firms. …. our findings suggest that even limited assurance can shape carbon accounting quality“ (p. 34).

Impact investment research (Skilled fund managers)

Carbon credit differences: Paying for Quality State of the Voluntary Carbon Markets 2023 by Stephen Donofrio Managing Director Alex Procton from Ecosystem Marketplace as of Oct. 10th, 2023: “Average voluntary carbon markets (VCM) … volume of VCM credits traded dropped by 51 percent, the average price per credit skyrocketed, rising by 82 percent from $4.04 per ton in 2021 to $7.37 per ton in 2022. This price hike allowed the overall value of the VCM to hold relatively steady in 2022, at just under $2 billion. To date in 2023, the average credit price is down slightly from 2022, to $6.97 per ton. … Nature-based projects, including Forestry and Land Use and Agriculture projects, made up almost half of the market share at 46 percent. … Credits that certified additional robust environmental and social co-benefits “beyond carbon” had a significant price premium. Credits from projects with at least one co-benefit certification had a 78 percent price premium in 2022, compared to projects without any co-benefit certification. … Projects working towards the UN Sustainable Development Goals (SDGs) also demonstrated a substantial price premium at 86 percent higher prices than projects not associated with SDGs … Newer credits are attracting higher prices” (p. 6).

Unsuccessful voting: Minerva Briefing 2023 Proxy Season Review as of November 2023: “Most resolutions are proposed by management (96.90% overall) … In 2023, there were 621 proposals from shareholders, mostly in the US (530), and mostly Social- and Governance-related (259 and 184 respectively). However, an increasing number of proposals are also being put forward on Environmental issues. The higher number of shareholder proposals in the US may reflect more supportive regulations on the filing of proposals and the absence of an independent national corporate governance code, as there is in the UK. Although well-crafted shareholder proposals can receive majority support, the overall proportion doing so has decreased (5.80% in 2023 vs. 11.56% in 2022), partly dragged down by ‘anti-ESG’ proposals” (p. 3/4). My comment: 621*6%=37 majority supported shareholder proposals including non ESG-topics seems to a very low number compared to the overall marketing noise asset managers produce regarding their good impact on listed companies. Direct shareholder engagement with companies seems to have more potential for change. My respective policy see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Good impact returns: Impact investment funds and the equity market: correlation, performance, risk and diversification effects – A global overview by Lucky Pane as of July 2021: “Impact investing funds from the twelve economies reported an average return of 10.7% over the period 2004-2019, higher than the average return of the MSCI World Equity Index (8.7%). … Negative/low correlations were observed between impact investment funds and traditional assets of the following countries: Germany, Australia, UK, Brazil, China, Poland, South Korea and Turkey” (p. 35/36). My comment: Unfortunately, there are very few (liquid) impact investing studies. A study including 2022 and 2023 would come to less favorable return conclusions, though.

Other investment research

Skilled fund managers (1): Sharpening the Sharpe Style Analysis with Machine-Learning ― Evidence from Manager Style-Shifting Skill of Mutual Funds by George J. Jiang, Bing Liang, and Huacheng Zhang as of Dec. 3rd, 2023 (#38): “Nine out of 32 indexes are selected as the proxy of style set in the mutual fund industry. We … find that most active equity funds are multi-style funds and more than 85% of them allocate capitals among three to six styles. Single-style funds count less than 3% of the total number of funds. We further find that around 3% of funds shift their investment styles in each quarter and each shifting fund switches styles three times over the whole period … We find that shifting funds perform better in the post-shifting quarter than in the pre-shifting quarter in terms of both total returns and style-adjusted returns, but we do not find performance improvement by non-shifting funds. We further find that style-shifting decision is positively related to future fund returns. … We find that style-shifting in the mutual fund industry is mostly driven by fund managers’ expertise in the new style“ (p. 42).

Skilled fund managers (2): Do mutual fund perform worse when they get larger? Anticipated flow vs unanticipated flow by Yiming Zhang as of Nov. 14th, 2023 (#17): “… I provide empirical evidence from a novel setting that supports the decreasing returns to scale in active mutual funds. My identification strategy relies on the nature of Morningstar Rating, which has a large impact on fund flow. … I find that for each 1% of inflow (outflow), the return will decrease (increase) by around 0.6% on average in the next month, and the return will decrease (increase) by around 0.2% on average in the next month. … I find that for experienced manager, they make more new investment after the flow shock and their performance does not decrease. For inexperienced manager, it is quite the opposite. These results indicate that if fund managers can anticipate the 36th month flow shock, they will try to generate more investment ideas, and execute them when the flow arrives“ (p. 22/23).

Skilled fund managers (3)? Can ChatGPT assist in picking stocks? Matthias Pelster and Joel Val as of Nov. 29th, 2023 (#199): “… we find that ratings of stocks by ChatGPT positively correlate to future (out-of-sample) stock returns. … ChatGPT seems to be able to successfully identify stocks that yield superior performance over the next month. ChatGPT-4 seems to have some ability to evaluate news information and summarize its evaluation into a simple score. We find clear evidence that ChatGPT is able to distinguish between positive and negative news events, and adjusts its recommendation following negative news” (p. 11). My comment: Interesting, because most active fund managers underperform their benchmarks most of the time, but I am skeptical regarding AI investment benefits see How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Listed real estate: Drivers of listed and unlisted real estate returns by Michael Chin and Pavol Povala as of Nov. 2nd, 2023 (#25): “The differences between listed and unlisted real estate appear to reduce over the longer term, where the return correlations between the two segments increases with horizon. In addition, the correlations with the broader equity market are lower at longer horizons for both real estate segments. … We find that both segments of real estate hedge inflation risk more than the aggregate equity market, and that listed real estate has a high exposure to transitory risk premium shocks“ (abstract). My comment: I started “my” first listed real estate fund more than 10 years ago and still like the market segment despite all of its problems

Fintech success factors: Fintech Startups in Germany: Firm Failure, Funding Success, and Innovation Capacity by Lars Hornuf and Matthias Mattusch as of Nov. 29th, 2023 (#75): “ … using a hand-collected dataset of 892 German fintechs founded between 2000 and 2021 … We find that founders with a business degree and entrepreneurial experience have a better chance of obtaining funding, while founder teams with science, technology, engineering, or mathematics backgrounds file more patents. Early third-party endorsements and foreign partnerships substantially increases firm survival. … Fintechs focusing on business-to-business models and which position themselves as technical providers have proven more effective. Fintechs competing in segments traditionally attributed to banks are generally less successful and less innovative.” (abstract).

Skilled fund managers (?) advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 26 of 30 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

ESG and Impact: Illuminaed mushroom as illustration

ESG and impact: Researchpost #154

ESG and impact: 12x new research on AI, poverty, crime, green demand, ESG risks, brown lending, green agency issues, voting, engagement, impact investing, CEO compensation, small caps etc.  (# shows the number of SSRN downloads as of Nov. 30th, 2023)

Social and ecological research

AI job-booster: New technologies and jobs in Europe by Stefania Albanesi, António Dias da Silva, Juan F. Jimeno, Ana Lamo and Alena Wabitsch as of Aug. 24th, 2023 (#111): “… we … find that AI-enabled automation in Europe is associated with employment increases. This positive relationship is mostly driven by occupations with relatively higher proportion of skilled workers … the magnitude of the estimates largely varies across countries, possibly reflecting different economics structures, such as the pace of technology diffusion and education, but also to the level of product market regulation (competition) and employment protection laws. … wages do not appear to be affected in a statistically significant manner from software exposure“ (p. 28).

Climate-induced poverty: Does Global Warming Worsen Poverty and Inequality? An Updated Review by Hai-Anh H. Dang, Stephane Hallegatte, and Trong-Anh Trinh from the World Bank as of Mov. 4th, 2023 (#38): “Our findings suggest that while studies generally find negative impacts of climate change on poverty, especially for poorer countries, there is less agreement on its impacts on inequality. … Our results suggest that temperature change has larger impacts over the short-term than over the long-term and more impacts on chronic poverty than transient poverty” (p. 32).

Refugee crimes: Do Refugees Impact Crime? Causal Evidence From Large-Scale Refugee Immigration to Germany by Martin Lange and Katrin Sommerfeld as of Nov. 14th, 2023 (#21): “Our results indicate that crime rates were not affected during the year of refugee arrival, but there was an increase in crime rates one year later. This lagged effect is small per refugee but large in absolute terms and is strongest for property and violent crimes. The crime effects are robust across specifications and in line with increased suspect rates for offenders from refugees’ origin countries. Yet, we find some indication of over-reporting“ (abstract).

ESG investment research (ESG and impact)

Green demand: Responsible Consumption, Demand Elasticity, and the Green Premium by Xuhui Chen, Lorenzo Garlappi, and Ali Lazrak as of Nov. 27th, 2023 (#122): “… decreasing product price are signals of high price competition and hence high demand elasticity. We sort firms into portfolios based on their demand elasticity and their ESG score. We refer the spread return on this portfolio as the Green Minus Brown (GMB) spread, or green premium” (p. 3). … “… when consumers have a “green” bias, green firms producing high demand elasticity goods are riskier than brown firms producing high demand elasticity products. The riskiness of these firms flips for firms that produce low demand elasticity goods. …. we find that the green-minus-brown (GMB) spread is increasing in the price elasticity of demand. Specifically, the annual spread is 2.6% and insignificant in the bottom elasticity tercile and 11.7% and significant in the top tercile. … we show that the cumulative positive return spread of green vs. brown stocks over the last decade is mainly attributed to high-demand-elasticity stocks, with low demand elasticity stocks earning an insignificant or negative spread“ (p. 32).

Risky calls: ESG risk by Najah Attig and Abdlmutaleb Boshanna as of Oct. 5th, 2022 (#62): “… using Natural Language Processing, we measure firm-level ESGR (Sö: ESG risk) faced by US firms, as reflected in the discussion of ESG issues associated with words capturing risk and uncertainty in the transcripts of firms’ earning calls. We first validate ESGR as measure of risk by documenting its positive association with the volatility of stock returns and CSR concerns. We then show that ESGR is associated with a deterioration in corporate value … We show also that ESGR bears negatively on conference call short-term returns during the COVID-19 pandemic“ (p. 31). My comment: I try to only invest in the best E/S/G rated companies, see e.g. Glorreiche 7: Sind sie unsozial? – Responsible Investment Research Blog (prof-soehnholz.com)

Retail ESG: Better Environmental Performance Attracts the Retail Investor Crowd during Crisis by Anil Gautam and Grace Lepone as of Nov. 24th, 2023 (#12): “… we use the Robinhood data set to examine the firm size-adjusted changes in investor numbers. We find that investors moved away from holding securities with low (Sö: ESG) scores following the COVID-19 pandemic shock. The observation holds for the bottom quartile of securities sorted by ESG, E, emissions, corporate social responsibility (CSR), human rights, management, shareholder and community scores. … No significant reaction to S and G scores is observed for either quartile“ (p. 16).

Green bank disclosure: Do banks practice what they preach? Brown lending and environmental disclosure in the euro area by Leonardo Gambacorta, Salvatore Polizzi, Alessio Reghezza, and Enzo Scannella from the ECB as of Nov. 14th, 2023 (#21): “… we found that banks that provide higher levels of environmental disclosure lend more to low polluting firms and less to highly polluting firms. … we found that banks that use a more negative tone (i.e. those that are more aware and genuinely concerned about environmental risks and climate change) lend less to brown firms, while banks that use a more positive tone (i.e. those that are less aware and concerned about environmental risks) tend to finance more brown firms. Therefore, we show that the tone of disclosures plays a crucial role in assessing whether a bank is engaging in window dressing or its willingness to inform stakeholders and investors on environmental matters results in actual behaviour to tackle environmental risks by reducing brown lending“ (p. 21).

Good transparency? The Eco-Agency Problem and Sustainable Investment by Moran Ofir and Tal Elmakiess as of Nov. 28th, 2023 (#10): “… we first define the eco-agency problem—the special conflict of interest between the corporate officers who focus on short-term profitability and the other stakeholders who seek long-term profitability and sustainability—and then discuss existing coping measures, such as green bonds, CoCo bonds, and ESG compensation metrics. To assess the extent of the eco-agency problem, we have conducted an experimental study of both professional and nonprofessional investors. According to our findings, both groups exhibit strong and significant preferences for sustainable investments. Revealing the preferences of investors towards sustainability can inspire corporate officers to embrace their role as sustainability advocates, encouraging them to align their decisions with investor preferences, and can thus drive positive change both within their organizations and across industries. … By embracing transparency as a strategic advantage, corporations can transcend traditional reporting boundaries, heralding a new era in which investors implement their ecological preferences in the capital market pricing mechanism” (abstract). My comment: My shareholder engagement strategy seems to focus on the right topics, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Impact investing research (ESG and impact)

Voting and engagement approaches: UK Asset Owner Stewardship Review 2023: Understanding the Degree & Distribution of Asset Manager Voting Alignment by Andreas Hoepner as of Nov. 17th, 2023 (#33): “… Empirically, we observe misalignment between UK asset owners and asset managers to varying degrees. Specifically, misalignment is more pronounced (i) in recent years, (ii) for shareholder resolutions than for management resolutions, (iii) for issuers in the Americas compared with European issuers, (iv) and, on average, for non-participating than for participating asset managers (Sö regarding the survey). … (a) Only very selected asset managers publicly reason like asset owners. (b) Some asset managers somehow see voting and ESG engagement as mutually exclusive and appear to fear the loss of access to management if they voted against management. (c) Among asset managers, there appears to be a substantial divergence as to their interpretation of shareholders’ and even society’s interests. Some asset managers are aligned with asset owners, while others have fundamentally different views that may be consistent with short term commercial interest but do not reflect scientific evidence. Third, we reviewed the ESG Engagement success across all relevant issuers, which revealed three different engagement process types. Type 1 is “textbook style” persistent, long duration, large scale engagement with considerable progress. Type 2 appears to be “quick fix style” engagements which are characterised by less consistency, shorter duration, and more mixed progress. Type 3 engagements are “jumping the bandwagon style” as they appear to target only firms that already have been improved by others” (abstract). My comment: My approach and other potential shareholder engagement strategies see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) and DVFA-Fachausschuss Impact veröffentlicht Leitfaden Impact Investing – DVFA e. V. – Der Berufsverband der Investment Professionals

Risky impact? What Do Impact Investors Do Differently? by Shawn Cole, Leslie Jeng, Josh Lerner, Natalia Rigol, and Benjamin N. Roth as of Nov. 16th, 2023 (#340): “In recent years, impact investors – private investors who seek to generate simultaneously financial and social returns – have attracted intense interest and controversy. … we document that they are more likely to invest in disadvantaged areas and nascent industries and exhibit more risk tolerance and patience. We then examine the degree to which impact investors expand the financing frontier, versus investing in companies that could have attracted traditional private financing. … we find limited support for the assertion that impact investors expand the financing frontier, either in the deal-selection stage or the post-investment stage“ (abstract).

Other investment research

Lower-paid CEOs? CEO Compensation: Evidence From the Field by Alex Edmans, Tom Gosling, and Dirk Jenter as of Oct. 13th, 2023 (#3130): “We survey directors and investors on the objectives, constraints, and determinants of CEO pay. We find .. that pay matters not to finance consumption but to address CEOs’ fairness concerns. 67% of directors would sacrifice shareholder value to avoid controversy, leading to lower levels and one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Intrinsic motivation and reputation are seen as stronger motivators than incentive pay“ (abstract). My comment: Within my shareholder engagement activities, I ask to disclose the CEO-medium employee pay ratio so that other interested parties can engage with the companies to reduce this typically vey large difference

Better big or small? The Size Premium in a Granular Economy by Logan P. Emery and Joren Koëter as of Nov. 21st., 2023 (#81): “… Our analysis provides robust evidence that the expected size premium increases during periods of higher stock market concentration. … we find that smaller firms receive less attention, are less likely to complete a seasoned equity offering, and have higher fundamental volatility during periods of higher stock market concentration. Moreover, our results occur predominantly among firms in industries with a greater dependence on external equity financing, or for firms with relatively low book-to-market ratios (i.e., growth firms). … we find that the expected size premium weakens following idiosyncratic shocks to the largest firms in the stock market” (p. 32).

ESG and Impact + Engagement advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 25 of 30 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Biodiversity risk illustration with Marine Life picture fom Pixabay

Biodiversity risk: Researchpost #153

Biodiversity risk: 10x new (critical) research on ESG ETF and net-zero, sustainability-linked bonds, lifecycle and thematic investments, altruism and stablecoins

Biodiversity risk research

Broad biodiversity risk: Living in a world of disappearing nature: physical risk and the implications for financial stability by Simone Boldrini, Andrej Ceglar, Chiara Lelli, Laura Parisi, and Irene Heemskerk from the European Central Bank as of Nov. 14th, 2023 (#23): “Of the 4.2 million euro area NFCs (Sö: Non-financial corporations) that were included in our research, around 3 million are highly dependent on at least one ecosystem service. … approximately 75% of euro area banks’ corporate loans to NFCs (nearly €3.24 trillion) are highly dependent on at least one ecosystem service. … we have enough data and knowledge available to enable timely and nature-friendly decision-making” (p. 38).

Biodiversity risk reduction? How could the financial sector contribute to limiting biodiversity loss? A systematic review by Lisa Junge, Yu-Shan Lin Feuer, and Remmer Sassen as of Feb. 7th, 2023 (#109) “the currently available scientific discourse is also not unanimous about the status of biodiversity in finance. Therefore, this paper aims to synthesise existing publications to gain transparency about the topic, conducting a systematic review. Three main concepts emerge about how the private finance sector can aid in halting biodiversity loss, namely: (1) by increasing awareness of biodiversity, (2) by seizing biodiversity-related business opportunities, and (3) by enlarging biodiversity visibility through reporting. Overall, we assume that the private finance sector upholds a great leverage power in becoming a co-agent of positive biodiversity change”(abstract).

Responsible investment research (Biodiversity risk)

Blackrock-problem? Fossil-washing? The fossil fuel investment of ESG funds by Alain Naef from Banque de France as of Nov. 16th, 2023 (#19): “… I analysed all the large equity Exchange Traded Funds (ETFs) labelled as ESG available at the two largest investors in the world: Blackrock and Vanguard. For Blackrock, out of 82 funds analysed, only 9% did not invest in fossil fuel companies. Blackrock ESG funds include investments in Saudi Aramco, Gazprom or Shell. But they exclude ExxonMobil or BP. This suggests a best-in-class approach by the fund manager, picking only certain fossil fuel companies that they see as generating less harm. But it is unclear what the criteria used are. For Vanguard, funds listed as ESG did not contain fossil fuel investment. Yet this needs to be nuanced as information provided by Vanguard on investments is less transparent and Vanguard offers fewer ESG funds” (abstract). My comment: For my ESG and SDG ETF-selection I use demanding responsibility criteria and more so for my direct equity portfolios, see the newly updated Das-Soehnholz-ESG-und-SDG-Portfoliobuch.pdf (soehnholzesg.com)

Listed equity climate deficits: The MSCI Net-Zero Tracker November 2023 – A guide to progress by listed companies toward global climate goals from the MSCI Sustainability Institute as of November 2023: “Listed companies are likely to put 12.4 gigatons (Gt) of GHG emissions into the atmosphere this year, up 11% from 2022. … global emissions are on track reach 60.6 Gt this year, up 0.3% from 2022. … Domestic emissions in eight emerging-market G20 countries examined rose by an average of 1.2% per year over the period, while emissions of listed companies in those markets climbed 3.2% annually. … Just over (22%) of listed companies align with a 1.5°C pathway, as of Aug. 31, 2023 … Listed companies are on a path to warm the planet 2.5°C above preindustrial levels this century … More than one-third (34%) of listed companies have set a climate target that aspires to reach net-zero, up from 23% two years earlier. Nearly one-fifth (19%) of listed companies have published a science-based net-zero target that covers all financially relevant Scope 3 emissions, up from 6% over the same period” (page 6/7).

ESG or cash flow? Does Sustainable Investing Make Stocks Less Sensitive to Information about Cash Flows? by Steffen Hitzemann, An Qin, Stanislav Sokolinski, and Andrea Tamoni as of Oct. 30th, 2023 (#56): “Traditional finance theory asserts that stock prices depend on expected future cash flows. … Using the setting of earnings announcements, we find that sustainable investing diminishes stock price sensitivity to earnings news by 45%-58%. This decline in announcement-day returns is mirrored by a comparable drop in trading volume. This effect persists beyond the immediate announcement period, implying a lasting alteration in price formation rather than a short-lived mispricing“ (abstract).

Similar calls: SLBs: no cal(l)amity by Kamesh Korangi and Ulf Erlandsson as of Nov. 16th, 2023 (#13): A common criticism of sustainability-linked bonds (SLBs) has been around callability, where it is sometimes suggested that bond issuers are pushing this feature into bond structures to wriggle out of sustainability commitments. … Our analysis finds scant quantitative evidence to support this critique. Overall, when comparing SLBs with similar non-SLB issuances, we observe little ‘excess’ callability in SLBs. The key to this result is to control for sectors, ratings and issue age when comparing SLBs with the much larger market of traditional bonds” (p. 1).

Other investment research

100% Equity! Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice by Aizhan Anarkulova, Scott Cederburg and Michael S. O’Doherty as of Nov.1st, 2023 (#950): “We challenge two central tenets of lifecycle investing: (i) investors should diversify across stocks and bonds and (ii) the young should hold more stocks than the old. An even mix of 50% domestic stocks and 50% international stocks held throughout one’s lifetime vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests. These findings are based on a lifecycle model that features dynamic processes for labor earnings, Social Security benefits, and mortality and captures the salient time-series and cross-sectional properties of long-horizon asset class returns” (abstract).

Lemming investors? The Big Shortfall? Thematic investors lose lion’s share of returns due to poor timing by Kenneth Lamont and Matias Möttölä from Morningstar as of Nov. 15th, 2023 : “While thematic funds‘ average total return was 7.3% annualized over the five-year period through June 30, 2023, investors earned only a 2.4% return when the impact of cash inflows and outflows is considered. … Investors lost more value in focused funds such as those tracking Technology or Physical World broad themes compared with more diversified Broad Thematic peers. Return gaps were far wider in exchange-traded funds than in thematic mutual funds. ETFs tend to offer more concentrated bets and lend themselves to tactical usage. The largest return shortfalls occur across highly targeted funds, which posted eye-catching performance, attracting large net inflows before suffering a change of fortune“ (p. 1). My comment: My approach to thematic investments see e.g. Alternatives: Thematic replace alternative investments (prof-soehnholz.com)

Risk-loving altruists? Can Altruism Lead to a Willingness to Take Risks? by Oded Shark as of Mov. 7th, 2023 (#7): “I show that an altruistic person who is an active donor (benefactor) is less risk averse than a comparable person who is not altruistic: altruism is a cause of greater willingness to take risks” (abstract). … “The lower risk aversion of an altruistic person … might encourage him to pursue risky ventures which could contribute to economic growth and social welfare” (p. 7).

Unstable coins? Runs and Flights to Safety: Are Stablecoins the New Money Market Funds? by Kenechukwu Anadu et al. from the Federal Reserve Bank of Boston as of Oct. 9th, 2023 (#743): “… flight-to-safety dynamics in money market funds have been extensively documented in the literature—with money flowing from the riskier prime segment of the industry to the safer government segment … flight-to-safety dynamics in stablecoins resemble those in the MMF industry. During periods of stress in crypto markets, safer stablecoins experience net inflows, while riskier ones suffer net outflows. … we estimate that when a stablecoin’s price hits a threshold of 99 cents (that is, a price drop of 100 basis points relative to its $1 peg), investor redemptions accelerate significantly, in a way that is reminiscent of MMFs’ “breaking the buck … Should stablecoins continue to grow and become more interconnected with key financial markets, such as short-term funding markets, they could become a source of financial instability for the broader financial system” (p. 33).

Liquid impact advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 23 of 30 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Glorreiche 7 Best-in-Universe ESG-Ratings

Glorreiche 7: Sind sie unsozial?

Glorreiche 7 werden die Megaunternehmen Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia und Tesla genannt. Sie haben im Jahr 2022 und bis Juli 2023 besonders gute Aktienkursentwicklungen gehabt (vgl. Marktanalyse: Was ist los mit den Glorreichen Sieben? | Morningstar). Ich habe bewusst keinen dieser Werte in meinen direkten Aktienportfolios und auch nur sehr wenig Allokation dazu in meinen SDG ETF-Portfolios.

Glorreiche 7: Kein expliziter Ausschluss

Dabei schließe ich die „Glorreichen 7“ nicht explizit aus meinen Geldanlageportfolios aus. Sie sind aufgrund ihrer hohen Aktienindexallokationsanteile in meinen traditionellen passiven Allokationsportfolios enthalten. Auch in den ESG ETF-Portfolios sind die meisten der Glorreichen 7 zu finden, weil sie in den von mir genutzten ESG-ETFs enthalten sind. In meinen selbst zusammengestellten direkten Aktienportfolios findet sich jedoch keine der „Glorreichen 7“ Aktien.

Das liegt daran, dass meine ESG-Anforderungen erheblich strenger sind als die der meisten nachhaltigen ETFs. Nachhaltigkeit wird oft anhand von ESG-Ratings gemessen. Dabei werden Umwelt- Sozial- und Unternehmensführungsrisiken zu einer Kennzahl zusammengefasst. Nachhaltige ETFs nutzen meistens aggregierte Best-in-Class ESG-Ratings.

Best-in-Class heißt, dass die Ratings innerhalb der jeweiligen „Klassen“, meist Branchen, untereinander verglichen werden. So kann ein Autohersteller wie Tesla im Vergleich zu anderen Autoherstellern relativ geringe ESG-Risiken haben. Im Vergleich zu Herstellern von Personenzügen oder Fahrrädern kann das jedoch ganz anders aussehen. Wenn Ratings aller Unternehmen branchenunabhängig miteinander verglichen werden, nennt man das Best-in-Universe Ansatz.

ETF-Anbieter nutzen oft Mindestanforderungen an solche Ratings für ihre Wertpapierauswahl und/oder deren Gewichtung. Das geschieht zum Beispiel, indem nur Wertpapiere solcher Unternehmen zugelassen sind, die zur besseren Hälfte der jeweilig ESG-gerateten gehören.

Glorreiche 7: Relativ große Abweichungen bei Sozial- und Umweltratings

Die „Glorreichen 7“ scheinen auf den ersten Blick ziemlich nachhaltig zu sein. Sie erreichen Anfang November 2023 nach Best-in-Class Ansatz jeweils mindestens 55 von maximal 100 Punkten meines Ratinganbieters Clarity.ai. Apple liegt sogar über 70 und auch Microsoft schneidet sehr gut ab. Bei der Nutzung eines vergleichbaren aggregierten Best-in-Universe Ratings sinkt das durchschnittliche Rating zwar, aber alle sieben Werte liegen noch über 50.

Für meine Portfolios sind aber jeweils E, S und G-Mindestratings von 50 erforderlich, denn ich möchte kein Unternehmen im Portfolio haben, das überdurchschnittlich hohe ökologische, soziale oder Unternehmensführungsrisiken hat.

Bei Nutzung der separierten Best-in-Class Ratings meines Anbieters dürften Alphabet, Amazon, Meta und Tesla nicht ins Portfolio aufgenommen werden, weil die Sozialratings jeweils unter 50 liegen. Nur Apple, Microsoft und NVIDIA haben E, S und G Best-in-Class Ratings von jeweils mindestens 50.

Best-in-Universe sind viel anspruchsvoller als Best-in-Class Ratings

Das sieht bei der Nutzung von Best-in-Universe Ratings anders aus. NVIDIA zum Beispiel hat ein durchschnittliches ökologisches Rating im Vergleich zu anderen Halbleiterherstellern. Aber im Vergleich zu allen börsennotierten Unternehmen (BiU-Ansatz) liegt NVIDIA erheblich unter meiner Mindestanforderung von 50. Ähnliches gilt für Apple und Microsoft mit Best-in-Universe-Sozialratings unterhalb der 50.

Bei der Nutzung von Best-in-Universe Ratings liegen Alphabet, Meta und Tesla sogar unterhalb von 40. Ökologische und Unternehmensführungsrisiken werden dagegen bis auf das Umweltrating von NVIDIA auch nach Best-in-Universe Ansatz mit über 50 bewertet.

ESG-Ratings setzen sich aus Dutzenden von Einzelkriterien zusammen und variieren deshalb oft von Anbieter zu Anbieter. Die Ratings meines Anbieters sind aber gut nachvollziehbar. So wird bei Alphabet unter anderem eine fehlende „Freedom of Association“-Politik und der niedrige gewerkschaftliche Organisationsgrad kritisiert, bei Amazon werden Bezahlung und Arbeitsbelastung aufgeführt, bei Apple Vorkommnisse (Incidents) in Zusammenhang mit Produktwerbung, bei Meta die geringe Anzahl von Frauen an den Mitarbeitenden und Managementpositionen, bei Microsoft Themen des Kundendatenschutzes, bei Tesla Produktqualitäts- und Sicherheitsthemen und bei NVIDIA eine geringe Wasserrecyclingquote.

Fehlende Vergleiche von Best-in-Universe Ratings

Das ist durchaus auch für Anleger relevant, die nicht besonders an Nachhaltigkeit interessiert sind. Denn mit ESG-Ratings werden Umwelt-, Sozial- und Unternehmensführungsrisiken gemessen. Und an niedrigen derartigen Risiken sollten auch traditionelle Geldanleger interessiert sein.

Für meine direkten Aktienportfolios ist meine selbst gesetzte Regel klar: Weil keine der „Glorreichen 7“ nach Best-in-Universe Ansatz bei Umwelt-, Sozial- und Governanceratings zugleich über 50 liegt, darf ich keine davon in meine Portfolios aufnehmen.

Bisher habe ich noch keine systematischen Vergleiche von Best-in-Class und Best-in-Universe Ratings gesehen. Meine Analysen nur auf Basis der Glorreichen 7 und nur mit Daten von Anfang November 2023 zeigen Folgendes: Bei den aggregierten ESG-Ratings liegen die Best-in-Universe Ratings im Schnitt um etwa 7 Prozentpunkte unter den Best-in-Class Werten. Bei den Governanceratings gibt es kaum Unterschiede zwischen den beiden Ansätzen. Die Best-in-Universe-Umweltratings der 7 Aktien fallen sogar um 5 Prozentpunkte besser aus, während die Best-in-Universe-Sozialratings sogar 16 Prozentpunkte schlechter sind als die Best-in-Class Sozialratings. Unterschiede für andere Unternehmen sind sogar teilweise noch stärker, wie eine vergleichbare Analyse der 30 Small- und Midcaps meines Fonds ergab.

Warum andere vor allem Best-in-Class Ratings nutzen

Geldanlageanbieter nutzen in der Regel einen Best-in-Class Ansatz. Das liegt daran, dass sie meist über mehrere Branchen gestreute Portfolios anbieten wollen. Mit dem Best-in-Class Ansatz können sie das einfach erreichen. Bei einem konsequenten Best-in-Universe Ansatz so wie ich ihn nutze, müssten viele Marktsegmente aufgrund ihrer hohen ESG-Risiken ganz entfallen.

Generell gilt: Konzentrierte (Best-in-Universe) Ansätze können nachhaltiger sein als stark diversifizierte Portfolios. Grund: Wenn man so wie ich mit den nachhaltigsten Aktien startet, reduziert zusätzliche Diversifikation die durchschnittliche Nachhaltigkeit. Der Grenznutzen weiterer Diversifikation für Risikoreduktion ist aber sehr gering und abnehmend (vgl. dazu 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)).

Privatanleger haben typischerweise keinen Zugang zu Best-in-Universe Ratings. Ich weiß jedenfalls nicht, in welcher frei zugänglichen Datenbank man Investmentfonds finden kann, die einen Best-in-Universe Ansatz oder separate E, S und G Mindestratings nutzen.

Glorreiche 7: Geringe Allokation in meinen SDG ETF-Portfolios

Für meine SDG ETF-Portfolios schließe ich die Glorreichen 7 ebenfalls nicht explizit aus. Aber ich versuche, nur eine geringe Allokation zu den Glorreichen 7 haben. Das mache ich jedoch eher aus Diversifikations- als aus Nachhaltigkeitsgründen. Kerninvestments enthalten typischerweise bereits hohe Alloaktionen zu den Glorreichen 7. Und meine SDG-ETF Portfolios sind als Ergänzung bzw. Satelliteninvestments für Kerninvestments gedacht.

Deshalb versuche ich, Überschneidungen der SDG ETFs mit typischen Kerninvestments und auch untereinander möglichst gering zu halten. Das ist gar nicht so einfach, weil viele SDG-aligned bzw. Themen-ETFs teilweise mehrere der Glorreichen 7 enthalten. Allerdings suche ich vor allem ETFs mit möglichst vielen sogenannten SDG-aligned Pure Plays. Und fokussierte Unternehmen sind meist eher klein. Deshalb nutze ich nur ETFs mit Fokus auf kleine und mittlere Marktkapitalisierungen. Darum enthalten diese meist keine der Glorreichen 7. Und so ist es mir auch in diesem Jahr gelungen, ETFs zu den Themen Dekarbonisierung, Energie, Ernährung, Gesundheit, Immobilien, Pharmazie, Smarte Städte und Wasser zu finden, die untereinander kaum Überschneidungen aufweisen.

SDG rating confusion illustration with picture from GoranH from pixabay

SDG rating confusion: Researchpost #152

SDG rating confusion: 13x new research on emissions, life expectancy, green bonds, physical risks and transition, environmental information, private equity ESG, SDG ratings, bond and equity factors, fraud, health-wealth relations, LLM financial analysts (# shows the number of full paper SSRN downloads as of Nov. 16th, 2023)

Ecological and social research (SDG rating confusion)

Too hot: The State of Climate Action: Major Course Correction Needed from +1.5% to −7% Annual Emissions by the World Economic Forum and The Boston Consulting Group as of November 2023: “As 1.5°C is slipping out of reach, achieving it now calls for a 7% annual emissions reduction, more than the climate reduction impact from COVID-19 and against the current trend of a 1.5% annual increase. … Only 35% of emissions are covered by a national net-zero commitment by 2050, and only 7% by countries that complement bold targets with ambitious policies. Fewer than 20% of the world’s top 1,000 companies have set 1.5°C science-based targets, and, based on the Net Zero Tracker, fewer than 10% also have comprehensive public transition plans. Technologies that are economically attractive now or will be in the near future can only achieve just over half of the emissions reductions needed to reach 1.5°C. … More than half of climate funding needs are still unmet, with critical gaps in early technologies and infrastructure particularly acute, and the climate funding gap twice as large in developing economies as in developed ones” (p. 4).

Longer lifes: The Long-run Effect of Air Pollution on Survival by Tatyana Deryugina and Julian Reif as of Nov. 13th, 2023 (#8): “We show that the short-run mortality effects of acute SO2 exposure can be decomposed into two distinct phenomena: mortality displacement, where exposure kills frail individuals with short counterfactual life expectancies, and accelerated aging, where mortality continues to increase after exposure has ceased. … we calculate that a permanent, ten percent decrease in air pollution exposure would improve life expectancy by 1.2–1.3 years … our estimates imply that value of reducing pollution exposure may be substantially larger than has previously been recognized“ (p. 37).

Responsible investing research (SDG rating confusion)

Green bond limits: Decoding Corporate Green Bonds: What Issuers Do With the Money and Their Real Impact by Yufeng Mao as of Nov. 8th, 2023 (#157): “This paper reveals a distinct motivation for issuing green bonds compared to conventional bonds. Proceeds from green bonds remain as cash for longer periods, largely owing to the time required to identify eligible projects. Contrary to the notion of fungibility, my results indicate that they neither lead to more new investments than conventional bonds nor are used in apparent green-washing. … firms issuing green bonds show improved environmental performance, particularly in the reduction of GHG intensity. However, this improvement appears not to stem from incremental green investments facilitated by green bonds but rather from issuers that would have pursued green initiatives regardless” (p. 44).

Physical risk costs: The cost of maladapted capital: Stock returns, physical climate risk and adaptation by Chiara Colesanti Senni and Skand Goel as of July 23rd, 2023 (#48): “Using S&P Global Sustainable data on Physical Risk and measures of adaptability to physical risk from S&P Global Corporate Sustainability Assessment, we find evidence that higher physical risk is associated with higher expected returns. However, this risk premium diminishes with increased adaptability, signifying that risk management through adaptation reduces a company’s cost of capital. Notably, this adaptability-driven risk discount is more pronounced for high levels of physical risk, reflecting market incentives for efficient adaptation” (abstract).

Carbon-free distance: Carbon-Transition Risk and Net-Zero Portfolios by Gino Cenedese, Shangqi Han, and Marcin Kacperczyk as of Oct. 5th, 2023 (#493): “…. using a novel measure of distance-to-exit (DT E) … we show that companies that are more exposed to exit from net-zero portfolios have lower values and require higher returns from investors holding them. This result is economically large and is consistent with the view that DT E are useful measures of transition risk. Notably, we show that DT E capture distinct variation to that captured by previously used measures based on corporate carbon emissions. Distinct from these, they capture information that is forward-looking and is grounded in climate science“ (p. 29)

Attention, outsiders: Do Insiders Profit from Public Environmental Information? Evidence from Insider Trading by Sadok El Ghoul, Zhengwei Fu, Omrane Guedhami, and Yongwon Kim as of Oct. 19th, 2023 (#26): “We provide evidence that insiders sell their stocks profitably based on publicly available information on environmental costs. Further analysis indicates that these results become more pronounced when the search frequency for environmental information in Google is low, in countries governed by left-leaning governments, and in countries where investor protection is weak. These results … suggest that investor inattention and investor protection are key drivers of insider trading performance“ (abstract).

PE ESG boost: ESG Footprints in Private Equity Portfolios: Unpacking Management Instruments and Financial Performance by Noah Bani-Harounia, Ulrich Hommel, and Falko Paetzold as of Nr. 8th, 2023 (#13): “Based on data covering 206 buyout funds for the time period 2010-2022, … Improving fund-level ESG footprints by 50% explains a statistically and economically significant net IRR increase of up to 12.4% over a fund’s life cycle. The outcome is linked to specific ESG-management instruments of private equity investors, such as centralised ESG management and ESG value enhancement plans, while no significant effect is recorded for other measures, such as ESG reporting frequencies and ESG impact controlling” (abstract).

SDG rating confusion: “In partnership for the goals”? The (dis)agreement of SDG ratings by Tobias Bauckloh, Juris Dobrick, André Höck, Sebastian Utz, and Marcus Wagner as of May 31st, 2023 (#59): „This paper analyzes the (dis)agreement of Sustainable Development Goals (SDGs) ratings across different rating providers and implications for portfolio management. It documents a considerable level of disagreement that is particularly high for large companies and for companies from the Healthcare and the Basic Materials sector. In general, the sector in which the companies are mainly active explains a large part of the variation in disagreement measures of the SDG ratings. Moreover, we document different return characteristics and risk factor exposures of portfolios sorted according to SDG ratings of different rating providers” (abstract). My comment: I expect SDG-Risk-Ratings to have little additional value to ESG-Ratings. I prefer to use SDG-related revenues or Capex in addition to ESG-Ratings to avoid SDG rating confusion (see e.g. Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com)).

Other investment research

Equity factors: Factor Zoo (.zip) by Alexander Swade, Matthias X. Hanauer, Harald Lohre and David Blitz from Robeco as of Nov. 15th, 2023 (#2546): “Using a comprehensive set of 153 U.S. equity factors, we find that a set of 10 to 20 factors spans the entire factor zoo, depending on the selected statistical significance level. This implies that most candidate factors are redundant but also that academic factor models, which typically contain just three to six factors, are too narrowly defined. When repeating the factor selection to factors as they become available over an expanding window, we find that newly published factors sometimes supersede older factor definitions, emphasizing the relevance of continuous factor innovation based on new insights or newly available data. However, the identified factor style clusters are quite persistent, emphasizing the relevance of diversification across factor styles” (p. 20/21). My comment: Without good (almost impossible) forecasts which factors will outperform, outperforming factor investing is difficult.

Bond factors: Corporate Bond Factors: Replication Failures and a New Framework by Jens Dick-Nielsen, Peter Feldhütter, Lasse Heje Pedersen, and Christian Stolborg as of Oct. 26th, 2023 (#1257): “Many corporate bond factors cannot be reproduced even when attempting to use the methodology of the corresponding paper. More broadly, even factors that can be reproduced should be questioned, since the corporate bond literature is based on data full of errors. … we show that the majority of corporate bond factors from the literature fail to replicate, but a minority of factors remain significant. Further, analyzing corporate bond factors based on equity signals, we find a number of significant new factors“ (p. 27/28). My comment: Same as above: Without good (almost impossible) forecasts which factors will outperform, outperforming factor investing is difficult.

Big fraud? How pervasive is corporate fraud? by Alexander Dyck, Adair Morse, and Luigi Zingales as of Oct. 2nd, 2023 (#120): “… we use the natural experiment provided by the sudden demise of a major auditing firm, Arthur Andersen, to infer the fraction of corporate fraud that goes undetected. This detection likelihood is essential to quantify the pervasiveness of corporate fraud in the United States and to assess the costs that this fraud imposes on investors. We find that two out of three corporate frauds go undetected, implying that, pre Sox, 41% of large public firms were misreporting their financial accounts in a material way and 10% of the firms were committing securities fraud, imposing an annual cost of $254 billion on investors“ (p. 31). My comment: It would be interesting to see the relationship between governance-ratings and fraud.

Health-Wealth-Gap: Health Heterogeneity, Portfolio Choice and Wealth Inequality by Juergen Jung and Chung Tran as of Oct. 18th, 2023 (#28): “… the early exposure to health shocks has strong and long-lasting impacts on the portfolio choice of households and the observed wealth gap among households at retirement age. … as sicker individuals often forgo investing in risky assets that pay higher returns in the long-run. This health-wealth portfolio channel amplifies wealth concentration across groups and over the lifecycle. … In the absence of the health-wealth portfolio channel, the observed wealth gap at retirement is 40–50 percent smaller. In addition, we provide new insights into the social benefit of health insurance. The expansion of public or private health insurance in the US can reduce wealth inequality via mitigating exposure to health expenditure shocks and thereby allow households to make riskier investment choices with higher long-term returns” (p. 27/28).

LLM financial analysts: Large Language Models and Financial Market Sentiment by Shaun A. Bond, Hayden Klok, and Min Zhu as of Oct. 23rd, 2023 (#257): “… we use ChatGPT and BARD to recall daily news summaries related to the S&P 500 Index, classify sentiments from these texts, and use these sentiments to forecast future index returns. … we demonstrate ChatGPT and BARD can recall and classify summary market-level financial text from the perspective of a financial analyst. … we show these sentiments proxy for aggregate investor sentiment and forecast future return reversals of the S&P 500 Index … we provide evidence that incorporating ChatGPT-derived sentiments leads to superior economic performance compared to portfolios that incorporate sentiments from BARD, simpler transformer models, and traditional dictionary approaches. LLMs have superior potential to process contextual information around specific topics or themes beyond that of simpler transformer models and context-indifferent word frequency methods. This greater context awareness leads to better identification of aggregate market sentiment, and superior short-term economic performance when taken into account. Further, results suggest LLMs can identify different aspects of sentiment from text, such as information on different frequencies, and the presence of persistent effects“ (p. 45). My comment see AI: Wie können nachhaltige AnlegerInnen profitieren? – Responsible Investment Research Blog (prof-soehnholz.com) or How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

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Liquid impact advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 24 of 30 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Divestment: Arrows by vectyard from Pixabay

Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds

18 Divestments wegen unerwünschter Aktivitäten oder Länder

Divestments erfolgen bei regelbasierten Investments, wenn Regeln nicht mehr eingehalten werden. Mein regelbasieter Artikel 9 Fonds „FutureVest Equities Sustainable Development Goals R“ enthält nur die aus meiner Sicht nachhaltigsten 30 Aktien. Ich prüfe laufend, ob meine Nachhaltigkeitsanforderungen noch erfüllt werden. Einmal pro Jahr analysiere ich zudem anhand aller mir zur Verfügung stehenden (immer mehr) Nachhaltigkeitsdaten aller Aktien, ob ich meine Nachhaltigkeitsanforderungen weiter erhöhen kann.

Seit dem Fondsstart im August 2021 habe ich bis Mitte November 2023 insgesamt 49 Aktien komplett verkauft (Divestments). Das ist mehr, als erwartet. Hier sind die Gründe:

13 der Verkäufe sind auf unerwünschte Aktivitäten der jeweiligen Unternehmen zurückzuführen. Die meisten derartigen Divestments erfolgten zum Jahreswechsel 2022/2023. Grund war, dass ich seitdem nicht nur grausame und kosmetische, sondern auch medizinische Tierversuche und Aktivitäten in Bezug auf Genmanipulierte Organismen (GMO) ausgeschlossen habe. Das war möglich, weil ich auch mit diesen neuen Ausschlüssen genug Aktien identifizieren konnte, die alle meine Selektionskriterien erfüllten. Hinzu kam, dass damit vor allem große Unternehmen der Gesundheitsbranche ausgeschlossen wurden. Das führte zu einer Verringerung des bis dahin besonders hohen Gesundheitsanteils und einer erheblich niedrigeren durchschnittlichen Kapitalisierung der Unternehmen im Fonds.

Durch den zunehmenden Smallcap-Anteil wurde auch die Überlappung mit gängigen Indizes und auch mit anderen konzeptionell grundsätzlich ähnlichen Fonds reduziert (und damit auch die sogenannte Active Share erhöht). Damit wurde der Fonds als Beimischung für Portfolios (noch) interessanter. Eine Mitte des Jahres durchgeführte Analyse ergab eine Active Share von über 99% und nur maximal 4 gleiche Aktien mit anderen Nachhaltigkeitsfonds.

Seit der Fondsauflage konnte auch die Anforderung an zulässige Länder erhöht werden. So werden nur Aktien mit Hauptsitz oder Hauptbörsennotiz in einem Land mit hoher Rechtssicherheit zugelassen. Nachdem ursprünglich noch 50% aller Länder akzeptiert wurden, wurde die Grenze später auf 40% verschärft. Auslöser für die Regeländerung war die für mich überraschende Entwicklung, dass China erstmals zu den Top 50% gezählt wurde. Aufgrund von zunehmend wahrgenommenen direkten Eingriffen chinesischer Behörden, wollte ich chinesische Aktien aber weiterhin ausschließen. Durch die Regelverschärfung mussten insgesamt 5 Aktien aus Südafrika und Italien aus dem Portfolio genommen werden, denn diese Länder gehören nicht zu den Top 40% nach „Rule of Law“.

16 der 17 Verkäufe erfolgten aufgrund von Regeländerungen zum Selektionszeitpunkt und nur ein Aktivitätsausschluss erfolgte unterjährig, weil eine unerwünschte Aktivität erstmals bekannt wurde.

23 Divestments wegen Sozial- bzw. Umweltratings

Von den 23 Verkäufen aufgrund von E, S bzw. G-Ratings erfolgten 17 zum Jahresende und 6 ungeplant unterjährig. Unterjährige Ratings, die unter unsere Mindestanforderungen fallen, werden zunächst geprüft. Dazu erfolgt oft eine Rücksprache mit dem Ratinganbieter und/oder dem Unternehmen selbst. Die Prüfung kann einige Wochen dauern. Zudem erfolgt ein unterjähriger Verkauf typischerweise nur, wenn die Ratingänderung mehr als 10% ausmacht, also zum Beispiel das Sozialrating von 50 auf unter 45 fällt. Für ein Divestment ist zudem normalerweise erforderlich, dass Aktien, die ebenfalls alle Anforderungen erfüllen, mit nennenswert besseren Ratings zur Verfügung stellen. Wenige Monate vor geplanten Jahresselektionen findet ebenfalls kein schneller Verkauf mehr statt, weil zunächst mögliche Regeländerungen abgewartet werden sollen. Bei Jahreselektionen dagegen stehen typischerweise genug Aktien zur Verfügung, die besser geratet sind und die dann auch Aktien ersetzen können, die noch ausreichende Ratings aufweisen.

Normalerweise erwarten wir, dass gerade die von uns selektieren besonders nachhaltigen Unternehmen sich weiterhin anstrengen noch nachhaltiger zu werden. Andererseits bemühen sich immer mehr Unternehmen um Nachhaltigkeit. Datenupdates des Hauptratinganbieters sollten trotzdem insgesamt eher zu besseren als schlechteren Ratings für die von uns selektierten Aktien führen. Das war jedoch 2023 nicht der Fall. Etliche Ratings der von uns selektierten Unternehmen haben sich unterjährig teilweise erheblich verschlechtert, so dass wir keine Nachrücker mehr hatten, die alle unsere Mindestanforderungen erfüllten. Wir haben unsere jährliche Aktienselektion, die normalerweise zu Jahresende stattfindet, deshalb auf Ende September vorgezogen.

Von den 23 ESG-Ratingbedingten Divestments entfielen zwei Drittel auf Sozial- und ein Drittel auf Umweltratings, während Governanceratings nicht zu Divestments geführt haben. Das ist nicht überraschend, denn die meisten Aktien des Fonds sind eher sozial- als ökologieorientiert und weisen damit auch höhere Sozialrisiken aus. Governanceratings sind zudem meist ziemlich stabil. Außerdem wurden sie von uns bis September 2023 zudem zum Ranking der zulässigen Aktien genutzt, so dass die Mindestgovernanceratings der Aktien im Fonds höher waren als die ökologischen oder Sozialmindestratings.

8 Divestments wegen Übernahmen, SDG-Alignment und Kursverlusten

Drei weitere Verkäufe erfolgten, weil die entsprechenden Unternehmen übernommen wurden. Zwei weitere Aktien wurden verkauft, weil sie unsere Anforderungen an die Vereinbarkeit mit den nachhaltigen Entwicklungszielen der Vereinten Nationen nicht mehr erfüllten. Zudem wurden Aufgrund unterjähriger Verluste oberhalb der von uns akzeptierten (relativ hohen) Grenze drei weitere Aktien aus dem Fonds genommen. „Maximaler Verlust“, der einzige „kommerzielle“ beziehungsweise „nicht-nachhaltige“ Regelbestandteil führte also nur zu einem sehr geringen Portfolioturnover.

Zwei dieser sieben Verkäufe erfolgten unterjährig aufgrund von Übernahmen der betreffenden Unternehmen, die sechs anderen im Rahmen der jährlichen Neuselektion. Aufgrund von mangelnder Reaktion auf Engagementversuche wurde bisher noch kein Unternehmen aus dem Fonds ausgeschlossen.

Regeländerungen für 2024 u.a. zur Turnover-Reduktion

Die jährliche Selektion wird vor allem genutzt, um Verschärfungen der Nachhaltigkeitsregeln zu prüfen. Bei der für 2024 etwas vorgezogenen Selektion konnte zum Beispiel das von Ratinganbieter neu zur Verfügung gestellte Kriterium SDG-Umsätze genutzt werden. In der Vergangenheit wurde für das gewünschte möglichst hohe SDG-Alignment nach entsprechenden Branchen bzw. Unternehmensaktivitäten gesucht und zusätzlich Mindestanforderungen an das SDG-Risiko gestellt.

Mit der Festlegung auf mindestens 50% SDG-Umsätze auf Basis der Analyse des Ratinganbieters Clarity.ai wurden die Regeln objektiviert. Gewünscht wären 100% SDG-Alignment, wie es auch für die meisten Portfoliounternehmen ausgewiesen wird. Allerdings konnten nicht genug Unternehmen gefunden werden, die 100% SDG-Alignment sowie die Erfüllung aller anderen Selektionskriterien aufwiesen. Außerdem ist für uns nicht nachvollziehbar, warum zum Beispiel für Sozialimmobilien- und einige Infrastrukturanbieter von dem von uns genutzten Ratinganbieter kein ausreichendes SDG-Alignment ausgewiesen wird. Auch für Arbeitsvermittlungsunternehmen gehen wir weiter von einem guten SDG-Alignment aus und auch diese werden vom Ratinganbieter nicht so klassifiziert. Wir haben uns deshalb entschieden, zumindest bis zur nächsten jährlichen Selektion Ende 2024 solche Unternehmen weiter im Portfolio zu behalten, auch wenn die ausgewiesenen SDG-Umsätze unter 50% liegen.

Die Neuselektion wurde auch deshalb vorgezogen, weil das SDG-Risikorating ab Oktober 2023 nicht mehr zur Verfügung gestellt wird, aber noch für die Selektion genutzt werden sollte.  

Andere, kleinere Regeländerungen wurden aus analysetechnischen Gründen gemacht. So werden nicht mehr tausende potenzielle Unternehmen auf maximale Verluste geprüft, sondern nur noch, ob der maximale Kursverlust über 50% liegt. 50% wurde gewählt, weil im Vorjahr ein Viertel der unsere sonstigen Regeln erfüllenden Unternehmen mehr als 50% Kursverlust aufwies und somit ausgeschlossen wurde. Ähnliches erfolgte in Bezug auf die Mindestratinganforderungen an den zweiten Ratinganbieter. In der Vergangenheit durfte Aktien im Portfolio nicht zu den schlechtesten 25% gehören und bei der aktuellen Selektion wurde ein E, S und G Ratings von mindestens 33/100 angesetzt. Auch das entspricht ungefähr den Vorjahres-Cutoffs.   

Insgesamt kam es aufgrund der neuen Selektionskriterien zum Ersatz von 10 Aktien, was etwas unterhalb des hohen vorjährigen Austauschs lag. Weil 2022 erstmals mit dem Shareholder Engagement begonnen wurde und in 2023 auf alle Unternehmen ausgedehnt wurde, soll künftig der Turnover im Fonds idealerweise weiter sinken. Grund dafür ist, dass Shareholder Engagement relativ lange braucht, um zu wirken. Ich strebe zwar an, auch mit Unternehmen, deren Aktien nicht mehr im Portfolio sind, weiter im Dialog zu bleiben, aber der Engagementfokus liegt natürlich auf den Unternehmen im Bestand.

10 Verkäufe im 4. Quartal 2023 und Portfolioauswirkungen

Die Gründe für die zehn oben bereits mitgezählten Divestments im vierten Quartal 2023 sind ebenfalls unterschiedlich. Für sechs Aktien wurde Ersatz mit besseren Sozialratings gefunden und für zwei Aktien welche mit besseren Umweltratings. Bei einem weiteren Unternehmen haben inzwischen vom Ratinganbieter bestätigte unerwünschte Aktivitäten zum Ausschluss geführt und bei einem anderen der maximale Verlust.

Erwähnenswert ist noch, dass zwei Aktien schon früher im Portfolio waren und jetzt wieder re-investiert werden. Eine davon wurde in einer früheren Jahresselektion ausgeschlossen, weil es andere Unternehmen mit aus meiner Sicht besserer Vereinbarkeit mit den SDGs gab. Clarity-Daten zeigen für diese Gesellschaft aber aktuell über 95% Umsatzvereinbarkeit mit den SDG und sehr gute ESG-Ratings. Die andere Aktie wurde verkauft, weil sie in der Vergangenheit einen Kursverlust größer 50% hatte, der jetzt außerhalb der betrachteten 12-Monatsperiode liegt.

Insgesamt führten diese Änderungen dazu, dass sich der USA-Anteil etwas senkt aber immer noch bei knapp 50% liegt. Dafür stieg der vorher relativ geringe Anteil von ökologisch fokussierten Aktien auf über ein Drittel an. Vor allem aber haben inzwischen 2/3 der Aktien eine Marktkapitalisierung von maximal fünf Milliarden Euro und nur noch drei über 20 Milliarden.

Weiterführende Beiträge

30 stocks, if responsible, are all I need (8-2022)

Mein Artikel 9 Fonds: Noch nachhaltigere Regeln (2-2022)    

Artikel 9 Fonds: Kleine Änderungen mit großen Wirkungen? (3-2023)

Active or impact investing? (6-2023)

Noch eine Fondsboutique? (8-2023)

www.futurevest.fund

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Green risks illustrated with bridge into the jungle by Nile from Pixabay

Green risks: Researchpost #151

Green risks: 9x new research on GPT, influencers, sustainable products, climate policies and city and market risks, environmental metrics, investment fees and art  (# shows the number of full paper SSRN downloads as of Nov. 9th, 2023)

Social and ecological research: Green risks

Good GPT? Capital Market Consequences of Generative AI: Early Evidence from the Ban of ChatGPT in Italy by Jeremy Bertomeu, Yupeng Lin, Yibin Liu, and Zhenghui Ni as of Oct. 11th, 2023 (#633): “On March 31, 2023, the Italian data protection authority found that ChatGPT violated data protection laws and banned the service in Italy …. Italian firms with greater exposure to the technology exhibit an underperformance of around 9% compared to firms with lower exposure during the ban period. We observe a more significant negative impact on stock value for smaller and newly established companies …. Analysts located in Italy issue fewer forecasts than foreign analysts covering the same Italian firm. Further, bid-ask spreads widen during the ban, particularly for firms with fewer institutional investors, limited analyst coverage, and a lower presence of foreign investors“ (abstract). My comment see How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Hidden sponsors: How Much Influencer Marketing Is Undisclosed? Evidence from Twitter by Daniel Ershov, Yanting He, and Stephan Seiler as of Nov. 8th, 2023 (#133): „… we quantify the importance of undisclosed sponsored content on Twitter based on a unique data set of over 100 million posts …. We find that undisclosed sponsored posts are ubiquitous with 96% of all sponsored content being undisclosed. The share of undisclosed content decreases only slightly over time despite stronger regulation and only a small share of brands responded to a regulatory change that mandated disclosure at the beginning of a post. … We also find that young brands with a larger social media following are less likely disclose sponsored content. These kind of brands will likely rely more heavily on influencers and therefore disclosure rates might remain low in the future“.

Green distribution deficits: Sustainable Product Demand and Profit Potential by Bryan Bollinger, Randi Kronthal-Sacco, and Levin Zhu as of Oct. 13th, 2023 (#43): “… we flexibly estimate price elasticities for every product in every county in the United States, for which we have sufficient data, in different store formats. … While profit potential and availability of sustainable products increase together with some demographic variables, in other cases the availability of sustainable products does not reflect the profit potential. … for mass merchandiser stores, we find that sustainable products are more available in markets with higher incomes, higher Democratic vote share, and a higher fraction of the population that is white, despite the fact that profit potential is not higher in these markets for the majority of categories. Our findings that the demographic factors still predict availability even after controlling for profit potential suggest that product distribution decisions (either by manufacturers or retailers) may be influenced by prior beliefs about preferences of consumers that fit these criteria. Our findings speak to potential access issues to sustainable products for less “stereotypical” sustainable consumers (non-white, less college education, lower income, and Republican), which also presents a potential market opportunity for manufacturers and retailers“ (p. 30/31).

Climate action framing: Public Support for Climate Change Mitigation Policies: A Cross-Country Survey by Era Dabla-Norris, Salma Khalid, Giacomo Magistretti, and Alexandre Sollaci from the International Monetary Fund as of Nov. 2nd, 2023 (#11): “This paper uses large-scale public perceptions surveys across 28 emerging market and advanced economies to examines how individuals view different climate mitigation policies and what drives their support. We find there is significant heterogeneity on climate risk perceptions and preferences for policies across individuals and countries. Respondents in emerging market economies (in general, countries more vulnerable to climate change) tend to see it as a bigger problem and are more supportive of policies to mitigate it. Concerns about climate change are also higher among women … Our surveys find that lack of support for carbon pricing is driven by concerns about rising energy prices and the perception that such policies are ineffective at reducing climate change. Another major concern is their perceived regressiveness (disproportionate impact on low-income households). … individuals that are given a short text describing the effectiveness of carbon pricing policies and their co-benefits increase their support by 7 percentage points. In contrast, reading a paragraph highlighting the costs of such policies decreases respondents’ support by 9 percentage points… the majority of respondents in every country in our sample find that all countries should bear the burden of those policies, not only the rich ones. Finally, we also find broad support for policies based on current, rather than historical, emissions …“ (p. 26/27).

City climate costs: A Market-based Measure of Climate Risk for Cities by Alexander W. Butler and Cihan Uzmanoglu as of Oct. 30th, 2023 (#43): “We estimate the climate news sensitivities—climate news betas—of municipal bonds and invert their signs. This way, we expect bonds with higher (lower) climate news betas to be affected more (less) negatively from future negative climate news. We find that climate news betas are positively associated with yield spreads. The effect is economically meaningful: a one-standard deviation increase in climate news beta is associated with an increase of between 2.48% and 11.17% in average yield spreads. This finding demonstrates that higher climate risk exposure is associated with higher cost of borrowing. … there is substantial variation in climate risk based on cities’ demographics, such as poverty, population density, and climate science acceptance” (p. 29/30).

Responsible investment research: Green risks

Green policy risks: The Effect of U.S. Climate Policy on Financial Markets: An Event Study of the Inflation Reduction Act by Michael D. Bauer, Eric A. Offner, Glenn D. Rudebusch as of Nov. 8th, 2023 (#11): „… We show that the equity market responses to announcements of climate policy actions were quick, substantial, and distinctly heterogeneous with wide variation across firms and industries. Green stocks— equities of firms with lower carbon emission intensities and better environmental and emission scores—benefited from news that the IRA (Sö : US InflationReduction Act) would become law, while brown stocks—those of more carbon-intensive and more polluting firms—lost value. … We find equity movements in the opposite direction—with brown stocks outperforming green stocks—for the earlier event when the prospects for climate action shifted to negligible. … Industries likely to benefit from the new policies—in particular, the utilities, construction, and automobile/transportation sectors—saw their stocks appreciate. However, across all industries, there was little correlation between industry-level greenness and stock market response. This finding suggests that a more granular, firm-level level approach may often be necessary to reliably capture exposure to transition risk“ (p. 27/28).

Green risk reduction: Can environmental metrics improve bank portfolios’ performance? by Gian Marco Mensi and Maria Cristina Recchioni as of Nov. 2nd, 2023 (#13): “We investigate the effectiveness of three different climate metrics in identifying green banks within a sample of large Eurozone and US lenders in the February 2019 – April 2022 period. … relative exposure to stranded assets, environmental ratings and Scope 2 emissions … The results show that the selected climate loss proxy overperforms in the Eurozone, succeeding in creating an effective climate tilt while containing active risk. Both emission-adjusted and rating-modified portfolios work as well, albeit less effectively. Conversely, the results with respect to US banks are inconclusive, with no metric consistently overperforming … “ (abstract).

Other investment research

More active, more money? Do Fees Matter? Investor’s Sensitivity to Active Management Fees by Trond Døskeland, André Wattø Sjuve, and Andreas Ørpetveit as of Sept. 16th, 2023 (#324): “… we find that excess fees are negatively related to subsequent quarterly net flows, while the level of active management (measured by active share) is positively related to subsequent quarterly net flows … the fee variables are only moderately related to Morningstar ratings …” (p. 37). My position on active management see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

Attractive art: Portfolio Diversification Including Art as an Alternative Asset by Diana Barro, Antonella Basso, Stefania Funari and Guglielmo Alessandro Visentinas of Oct. 31st, 2023 (#42): “We have shown that art returns are extremely volatile, and that much of this volatility can be attributed to the seasonal behavior of the time series. Moreover, notwithstanding the high risk, art still performs reasonably well compared with other asset classes, with which it is low correlated, and may even represent a better safe haven than gold“ (p. 24/25).

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Liquid impact advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 28 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Responsible Derivatives illustration shows manager juggler

Responsible derivatives? Researchpost #150

Responsible derivatives: 10x new research on migration, ESG labels, biodiversity measurement, effective shareholder voting, responsible investing mandates, green derivatives, structured products, stock market models, IPOs and alternative investments (# shows the number of full paper SSRN downloads as of Nov. 2nd, 2023)

Social and ecological research (responsible derivatives)

Migration policy backlash: The Effect of Foreign Aid on Migration: Global Micro Evidence from World Bank Projects by Andreas Fuchs, Andre Groeger, Tobias Heidland and Lukas Wellner as of Oct. 2023: “Our short-term results indicate that the mere announcement of a World Bank aid project significantly decreases migration preferences. We find similar effects for project disbursements, which also reduce asylum seeker flows to the OECD in the short run. This reduction seems related to enhanced optimism about the economic prospects in aid recipient provinces and improved confidence in national institutions. In the longer run, aid projects increase incomes and alleviate poverty. The negative effect of aid on asylum seeker flows fades out, and regular migration increases. … There is no evidence in our study that targeting the “root causes” of migration through aid on average increases irregular migration or asylum seeker numbers. … In the short run, aid projects reduce migration preferences and asylum seeker flows to the OECD from Latin America, MENA, and non-fragile Sub-Saharan African countries. However, we do not find a significant effect in fragile countries of Sub-Saharan Africa, which are an important source of irregular migration to Europe. For policymakers, a key takeaway from our study is that aid projects do not keep people from migrating from the 37 most hostile environments, but they can be effective in more stable environments” (p. 37/38).

Sustainable investing research (responsible derivatives)

Rating beats label: Talk vs. Walk: Lessons from Silent Sustainable Investing of Mutual Funds by Dimitrios Gounopoulos, Haoran Wu, and Binru Zhao as of Oct. 26th, 2023 (#81): “… in the Morningstar fund sustainability rating landscape, most funds with top ratings do not self-label as ESG funds (“silent” sustainable investing). … We find that investors tend to overemphasize ESG labels and often overlook sustainability rating signals in the market. More importantly, we show that “silent” funds with high sustainability ratings have comparable return performance to ESG funds and that high sustainability ratings have a stronger influence on mitigating fund risks than the ESG label” (p. 33/34). My comment: In general, I agree. But the type of ESG rating used is also very important. Watch out for my next opinion blogpost on Apple, Amazon, Alphabet etc. and their ESG-ratings

Biodiversity confusion: Critical review of methods and models for biodiversity impact assessment and their applicability in the LCA context by Mattia Damiani, Taija Sinkko, Carla Caldeira, Davide Tosches, Marine Robuchon, and Serenella Sala as of Nov. 17th, 2022 (#139): “… The five main direct drivers of biodiversity loss are climate change, pollution, land and water use, overexploitation of resources and the spread of invasive species. …  this article aims to critically analyse all methods for biodiversity impact assessment … 54 methods were reviewed and 18 were selected for a detailed analysis … There is currently no method that takes into account all five main drivers of biodiversity loss” (abstract).

Explain to change: Voting Rationales by Roni Michaely, Silvina Rubio, and Irene Yi as of Aug. 16th, 2023 (#279): “…studying voting rationales of institutional investors from across the world, for votes cast in US companies’ annual shareholder meetings between July 2013 and June 2021. … institutional investors vote against directors mainly because of (lack of) independence and board diversity. We also find evidence of some well-known reasons for opposing directors, such as tenure, busyness, or firm governance. Institutional investors are increasingly voting against directors due to concerns over environmental and social issues. Our results indicate that voting rationales are unlikely to capture proxy advisors’ rationales, but rather, the independent assessment of institutional investors. … We find that companies that receive a higher proportion of voting rationales related to board diversity (or alternatively, excessive tenure or busy directors) increase the fraction of females on board in the following year (reduce average tenure or director busyness), and the results are driven by companies that receive high shareholder dissent. … our results suggest that disclosure of voting rationales is an effective, low-cost strategy that institutional investors can use to improve corporate governance in their portfolio companies“ (p. 31/32).

Impact impact? Evaluating the Impact of Portfolio Mandates by Jack Favilukis, Lorenzo Garlappi, and  Raman Uppal as of Oct. 2nd, 2023 (#56): “… we examine the impact of portfolio (Sö: e.g. ESG or impact investing) mandates on the allocation of physical capital in a general-equilibrium economy with production and heterogenous investors. … we find that the effect of portfolio mandates on the allocation of physical capital across sectors can be substantial. In contrast, the impact on the equilibrium cost of capital and Sharpe ratio of firms in the two sectors remains negligible, consistent with existing evidence. Thus, a key takeaway of our analysis is that judging the effectiveness of portfolio mandates by studying their effect on the cost of capital of affected firms can be misleading: small differences in the cost of capital across sectors can be associated with significant differences in the allocation of physical capital across these sectors” (p. 31/32). My comment: With my ESG and SDG investing mandates I want to invest as responsibly as possible and hope to achieve similar performances as less responsible investments. With this approach, there is no need to try to prove lower cost of capital for responsible companies.

Responsible derivatives? Climate Risk and Financial Markets: The Case of Green Derivatives by Paolo Saguato as of Oct. 30th, 2023 (#37): “The post-2008 derivatives markets are more transparent and more collateralized than before. However, this regulatory framework might impose excessive regulatory and compliance costs to derivatives market which would undermine market incentives and hamper financial innovation in the green derivatives. … Right now, bespoke OTC sustainable derivatives are the predominant structures in the market, but as soon as green assets and sustainability benchmark standardization will become the norm, then exchange-traded green derivatives might start to develop more strongly, providing a valuable and reliable support to a green transition” (p. 23).

Other investment research

Responsible derivatives? Structured retail products: risk-sharing or risk-creation? by Otavio Bitu, Bruno Giovannetti, and Bernardo Guimaraes as of October 31, 2023 (#151): “Financial institutions have been issuing more complex structured retail products (SRPs) over time. Is risk-sharing the force behind this financial innovation? Is this innovation welfare-increasing? We propose a simple test for that. If a given type of SRP is not based on risk-sharing and pours new unbacked risk into the financial system, we should observe an unusual negative relation between risk and expected return offered to buyers across products of that type. We test this hypothesis using a sample of 1,847 SRPs and find that a relevant type of SRP (Autocallables) creates new unbacked risk” (abstract).

Irrational finance professional? Mental Models of the Stock Market by Peter Andre, Philipp Schirmer, and Johannes Wohlfart as of Oct. 31st, 2023 (#74): “Financial markets are governed by return expectations, which agents must form in light of their deeper understanding of these markets. Understanding agents’ mental models is thus critical to understanding how return expectations are formed. … We document a widespread tendency among households from the general population, retail investors, and financial professionals to draw inferences from stale news regarding future company earnings to a company’s prospective stock return, which is absent among academic experts. This striking difference in their return forecasts results from differences in agents’ understanding of financial markets. Experts’ reasoning aligns with standard asset pricing logic and a belief in efficient markets. By contrast, households and financial professionals appear to employ a naive model that directly associates higher future earnings with higher future returns, neglecting the offsetting effect of endogenous price adjustments. This non-equilibrium reasoning stems from a lack of familiarity with the concept of equilibrium rather than inattention to trading or price responses. … Our findings – that mental models differ across economic agents and that they drastically differ from standard economic theories among important groups of households and financial professionals who advise and trade for these households – are likely to have significant implications. For example, our findings can provide a new perspective on previously documented anomalies in return expectations and trading decisions” (p. 30/31).

M&A not IPO: IPOs on the decline: The role of globalization by M. Vahid Irani, Gerard Pinto, and Donghang Zhang as of Oct. 2nd, 2023 (#37): “Using the average percentage of foreign sales as a proxy for the level of globalization of the U.S. economy or a particular industry, we find that the decline in U.S. initial public offerings (IPOs), particularly small-firm IPOs, is significantly positively associated with the level of globalization at both the macroeconomy and the industry levels. We also find that increased globalization of an industry makes a U.S. private firm in the industry more likely to choose M&A sellouts over IPOs as an exit strategy”“ (abstract).

Unattractive Alternatives: Endowments in the Casino: Even the Whales Lose at the Alts Table by Richard M. Ennis as of Oct. 27th, 2023 (#516): “For more than two decades, so-called alternatives—hedge funds, private-market real estate, venture capital, leveraged buyouts, private energy, infrastructure, and private debt—have been the principal focus of institutional investors. Such investments now constitute an average of 60% of the assets of large endowments and 30% of public pension funds. … … endowments—across the board—have underperformed passive investment alternatives by economically wide margins since the GFC (Sö: Global Financial Crisis) … We observe that large endowments have recorded greater returns than smaller ones because they take greater risk (have a greater equity exposure), not as a result of their alt investing. In fact, their greater returns have occurred in spite of their heavier weighting of alt investments. Alt-investing has not been a source of diversification of stock market risk. … I estimate that institutional investors pay approximately 10 times as much for their alts as they do for traditional stock-bond strategies… despite exhibiting some skill with alts, large endowments would have been better off leaving them alone altogether” (p. 8/9). My comment: See Alternatives: Thematic replace alternative investments (prof-soehnholz.com)

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Liquid impact advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 27 of 28 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)

Purpose scrabble word by wokandapix from pixabay

Purpose – Researchpost #149

Purpose: 14x new interesting research on free data, AI, biodiversity, gender gaps, purpose and ESG washing, geodata, shareholder engagement, financial education, ETFs, private equity and asset allocation (# shows SSRN downloads as of Oct. 26th, 2023)

Social and ecological research (Purpose)

Much (free) data: A Compendium of Data Sources for Data Science, Machine Learning, and Artificial Intelligence by Paul Bilokon, Oleksandr Bilokon, and Saeed Amen from Thalesians as of Sept. 12th, 2023 (#942): “… compendium – of data sources across multiple areas of applications, including finance and economics, legal (laws and regulations), life sciences (medicine and drug discovery), news sentiment and social media, retail and ecommerce, satellite imagery, and shipping and logistics, and sports”. My comment: My skeptical view on big data see Big Data und Machine Learning verschlechtern die Anlageperformance und Small Data ist attraktiv from 2018 and more recently How can sustainable investors benefit from artificial intelligence? – GITEX Impact – Leading ESG Event 2023

Unclear AI-Labor relation: Labor Market Exposure to AI: Cross-country Differences and Distributional Implications by Carlo Pizzinelli, Augustus Panton, Marina M. Tavares, Mauro Cazzaniga, Longji Li from the IMF as of Oct. 6th,2023 (#5): “…. a detailed cross-country analysis encompassing both Advanced Economies (AEs) and Emerging Markets (EMs) … high-skill occupations that are more prevalent in AEs, despite being more exposed, can also greatly benefit from AI. Overall, AEs have more employment than EMs in exposed occupations at both ends of the complementarity spectrum. This finding suggests that AEs may expect a more polarized impact of AI on the labor market and are thus poised to face greater risk of labor substitution but also greater benefits for productivity” (p. 31/32).

Pay for biodiversity? Revealing preferences for urban biodiversity as an environmental good by Leonie Ratzke as of Oct. 25th, 2022 (#26): “… relatively little research on urban dwellers’ preferences and willingness to pay (WTP) for urban biodiversity exists. … using a revealed preference approach based on a real estate dataset comprising around 140,000 unique entries of rental and sales transactions of apartments. I find that WTP for biodiversity is exclusively positive and economically relevant” (abstract).

Insurance gender issues: Gender-inclusive Financial and Demographic Literacy: Lessons from the Empirical Evidence by  Giovanna Apicella, Enrico G. De Giorgi, Emilia Di Lorenzo, and Marilena Sibillo as of Jan. 24th, 2023 (#104): “Consistent empirical evidence shows that women have historically experienced lower mortality rates than men. In this paper, we study a measure of the gender gap in mortality rates, we call “Gender Gap Ratio” … The evidence we provide about a Gender Gap Ratio that ranges between 1.5 and 2.5, depending on age and country, translate into a significant reduction of up to 25% in the benefits from a temporary life annuity contract for women with respect to men, against the same amount invested in the annuity. The empirical evidence discussed in this paper documents the crucial importance of working towards a more widespread demographic literacy, e.g., a range of tools and strategies to raise longevity consciousness among individuals and policy makers, in the framework of gender equality policies“ (abstract).

Corporate purpose: Sustainability Through Corporate Purpose: A New Framework for the Board of Directors by Mathieu Blanc and Jean-Luc Chenaux as of July 27th, 2023 (#106): “The definition and implementation of a corporate purpose is the most appropriate process for the board of directors and management to achieve a sustainable as well as profitable business activity, which necessarily encompasses economic, social and environmental components. The corporate purpose statement offers guidance to the managing bodies of a company to determine the necessary and difficult trade-offs between the different stakeholders and set priorities in the long-term interest of the company. In our opinion, this concept is most likely the best tool to reconcile society with business activities and remind shareholders, business leaders, customers and employees that what unites them for the development of society is much stronger that what divides them“ (p. 32). My comment: My corporate purpose is very simple: Offer liquid investment portfolios that are as sustainable as possible.

Purpose-washing? Putting Social Purpose into Your Business by Philip Mirvis of the Babson Institute for Social innovation as of Oct. 15th, 2023 (#9): “… there’s a massive “purpose gap”—large majorities of companies have purportedly proclaimed their purpose but it has not been built into their business and is either unknown to or doubted by their employees and customers. Who get this right? The research reports on how Ben & Jerry’s, Nike, Novo Nordisk, PepsiCo, and Unilever developed and implemented a “social purpose”—a pledge to address serious social problems their business operations, products, partnerships, and social issue campaigns” (abstract).

Responsible investment research (Purpose)

Costly ESG washing: When Non-Materiality is Material: Impact of ESG Emphasis on Firm Value by Sonam Singh, Ashwin V. Malshe, Yakov Bart, and Serguei Netessine as of Oct. 18th, 2023 (#63): “ESG factors are nonmaterial (material) when excluding them from corporate disclosure would not (would) significantly alter the overall information available to a reasonable investor. Using a deep learning model to earnings call transcripts of 6,730 firms from 2005 to 2021 to measure ESG emphasis the authors estimate panel data models for testing this framework. The analysis reveals a 1% increase in nonmaterial ESG emphasis decreases firm value by .30%. This negative impact on firm value is 2.12 times higher than the positive impact of material ESG emphasis. Furthermore, the negative impact of nonmaterial ESG emphasis on firm value grows over time and is more pronounced in regulated industries“ (abstract).

Geodata for ESG: Breaking the ESG rating divergence: an open geospatial framework for environmental scores by Cristian Rossi, Justin G D Byrne, and Christophe Christiaen as of Oct. 19th, 2023 (#20): “… geospatial datasets offer ESG analysts and rating agencies the ability to verify claims of company reported data, to fill in gaps where none is otherwise reported or available, or to provide new types of data that companies would not be able to provide themselves. Free to use geospatial datasets that have broad geographic coverage exist, and some are updated over time. … This paper has proposed a novel framework … to mitigate the reported divergence in ESG scores by using consistent and trusted geospatial data for environmental impact analysis at the physical asset level“ (p. 19).

Green owner success: Divestment and Engagement: The Effect of Green Investors on Corporate Carbon Emissions by Matthew E. Kahn, John Matsusaka, and Chong Shu as of Oct. 13th, 2023 (#72): “We focus on public pension funds, classifying them as green or non-green based on which political party controlled the fund. … Our main finding is that companies reduced their greenhouse gas emissions when stock ownership by green funds increased and did not alter their emissions when ownership by non-green funds changed. We find evidence that ownership and constructive engagement was more effective than confrontational tactics such as voting or shareholder proposals. We do not find that companies with green investors were more likely to sell off their polluting facilities (greenwashing). Overall, our findings suggest that (a) corporate managers respond to the environmental preferences of their investors; (b) divestment in polluting companies may be counterproductive, leading to greater emissions; and (c) private markets may be able to address environmental challenges without explicit government regulation“ (abstract). My comment: My shareholder and stakeholder engagement approach is documented here Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Political Private Equity: ESG Disclosures in Private Equity Fund Prospectuses and Fundraising Outcomes by John L. Campbell, Owen Davidson, Paul Mason, and Steven Utke as of Sept. 9th, 2023 (#105): “We use a large language model to identify Environment, Social, and Governance (ESG) disclosures in private equity (PE) brochures (Form ADV Part 2) … First, we find environmental, but not social or governance, disclosures are negatively associated with the likelihood a PE adviser raises a new fund. Second, using disclosure tone, we separately identify disclosures of ESG risk from disclosures of ESG related investment activity. We find environmental risk disclosure is negatively associated with new fund formation. In contrast, the effect of environmental investment disclosure is positive or negative depending on the political leaning of investors home state” (abstract).

Other investment research

Literate delegation: Household portfolios and financial literacy: The flight to delegation by Sarah Brown, Alexandros Kontonikas, Alberto Montagnoli, Harry Pickard, and Karl Taylor as of Oct. 17th, 2023 (#6): “ … we analyse the asset allocation of European households, focusing on developments during the period that followed the recent twin financial crises. … We provide novel evidence which suggests that the “search for yield” during the post-crisis period of low interest rates took place not by raising the direct holdings of stocks and bonds, but rather indirectly through higher mutual funds’ holdings, in line with a “flight to delegation”. Importantly, this behaviour is strongly linked to the level of financial literacy, with the most literate households displaying significantly higher use of mutual funds“ (abstract).

Fin-Ed returns: Selection into Financial Education and Effects on Portfolio Choice by Irina Gemmo, Pierre-Carl Michaud, and Olivia S. Mitchell as of Sept. 25th, 2023 (#34): “The more financially literate and those expecting higher gains pay more to purchase education, while those who consider themselves very financially literate pay less. Using portfolio allocation tasks, we show that the financial education increases portfolio efficiency and welfare by almost 20 and 3 percentage points, respectively. In our setting, selection does not greatly influence estimated program effects, comparing those participating and those who do not“ (abstract). My comment: I try to contribute to B2B financial literacy with (free) www.prof-soehnholz.com

Passive problems: Passive Investing and Market Quality by Philipp Höfler, Christian Schlag, and Maik Schmeling as of Oct. 5th, 2023 (#127): “We show that an increase in passive exchange-traded fund (ETF) ownership leads to stronger and more persistent return reversals. … we further show that more passive ownership causes higher bid-ask spreads, more exposure to aggregate liquidity shocks, more idiosyncratic volatility and higher tail risk. We … show that higher passive ETF ownership reduces the importance of firm-specific information for returns but increases the importance of transitory noise and a firm’s exposure to market-wide sentiment shocks” (abstract).

New allocation model: The CAPM, APT, and PAPM by Thomas M. Idzorek, Paul D. Kaplan, and Roger G. Ibbotson as of Sept. 9th, 2023 (#114): “Important insights and conclusions include: In the CAPM, there is only one “taste” and that is a single dimension of risk aversion. The CAPM assumes homogeneous expectations, so there is no “disagreement”. Both the APT and the PAPM have a linear structure, but in the APT an unknown factor structure is supplied by the economy, whereas in the PAPM the structure arises out of the investor demand for security characteristics, which need not be risk based. … The PAPM with “disagreement” leads to mispricing, inefficient markets, and the potential for active management. The CAPM, as well as a number of new ESG equilibrium asset pricing models, are special cases of the PAPM, which allows for any number of tastes for any number of characteristics and disagreement“ (p. 25). My comment: I prefer a much simpler and optimization-free passive asset allocation see 230720 Das Soehnholz ESG und SDG Portfoliobuch

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Liquid impact advert for German investors

Sponsor my research by investing in and/or recommending my global small/midcap mutual fund (SFDR Art. 9). The fund focuses on social SDGs and uses separate E, S and G best-in-universe minimum ratings and broad shareholder engagement with currently 28 of 30 companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T or Noch eine Fondsboutique? – Responsible Investment Research Blog (prof-soehnholz.com)