Passive positive picture shows clouds above my hometown Eicklingen

Passive positive (Researchblog #96)

Scope 3 divergences: Scope 3 Emissions: Data Quality and Machine Learning Prediction Accuracy by Quyen Nguyen, Ivan Diaz-Rainey, Adam Kitto, Ben McNeil, Nicholas A. Pittman, and Renzhu Zhang as of August 18th, 2022 (#104): “This paper explores the divergence and the composition of Scope 3 emissions data among third-party data providers (Bloomberg, Refinitiv Eikon, ISS). We find that Scope 3 emissions vary greatly across third-party data providers, with the divergence between ISS (adjusted values) and the other two datasets (reported values) being most prominent. Surprisingly, we find that Bloomberg and Refinitiv only have 68% identical data points, though both datasets rely on firm reported data with no further adjustments. While emission rankings are more consistent among three data providers than that of absolute emissions values, only 22% of the ISS’s emissions data falls into the same ranking decile as the other two datasets. … firms tend to only disclose certain emission categories that are easier to calculate, despite these categories only capture a relatively low proportion of total Scope 3 emissions along the value chain” (p. 29).

Responsible investments

Some cheap climate talk: Cheap talk in corporate climate commitments: The role of active institutional ownership, signaling, materiality, and sentiment by Julia Anna Bingler, Mathias Kraus, Markus Leippold, and Nicolas Webersinke as of Jan. 5th, 2022 (#388): “Applying our model to analyze the corporate climate disclosures in 14,584 annual reports of the constituents of the MSCI World index as of January 2021, for the years 2010- 2020. We used the share of precise to imprecise commitments as an indicator for cheap talk …. We found that institutional ownership and targeted engagement strategies, as well as climate risk exposed sectors and downside risk-focused disclosures are associated with less cheap talk. … contrary to what we expected regarding signaling and credibility strategies, publicly supporting the TCFD is associated with an increase in cheap talk, and the setting of a science-based target is not statistically significant. (p. 26).

Few good ESG leaders: Which institutional investors drive corporate sustainability? by Marco Ceccarelli, Simon Glossner, Mikael Homanen, and Daniel Schmidt as of Ja. 21st, 2022 (#515) “Our paper focuses on the subset of institutional investors, denoted as Leaders, with an exceptionally strong commitment to sustainability and examines their influence on corporate environmental and social performance. The positive link between institutional ownership and corporate sustainability is driven by the small group of Leaders alone. This finding is notable, as Leaders only own 2.2% of the average firm in our sample, a twentieth of the average total institutional ownership. We identify two channels through which the presence of Leaders aids to the improvement of firms’ environmental and social performance: direct engagement and incident prevention. Only firms with high ownership by Leaders respond positively to collaborative engagements. Moreover, ownership by Leaders is also associated with a lower risk of reputation-damaging company incidents, particularly for firms with an existing history of such incidents” (p. 37).

Value or welfare maximization? The New Corporate Governance by Oliver Hart and Luigi Zingales as of August 4th, 2022 (#132): “In the last few years, there has been a dramatic increase in shareholder engagement on environmental and social issues. In some cases shareholders are pushing companies to take actions that may reduce market value. It is hard to understand this behavior using the dominant corporate governance paradigm based on shareholder value maximization. We explain how jurisprudence has sustained this criterion in spite of its economic weaknesses. To overcome these weaknesses we propose the criterion of shareholder welfare maximization and argue that it can better explain observed behavior” (abstract). “Corporations are larger, more complex, and more powerful than they were in 1970. In a more populous world, the importance of externalities has also greatly increased. Finally, the preferences of investors have changed. Investors, especially younger ones, are more sensitive to social issues. … when externalities are important and investors are at least somewhat prosocial, shareholder welfare maximization not value maximization is an appropriate goal. … We outline several ways to achieve this” (p. 216).

Slow, low and smooth ESG effects? The Economic Impact of ESG Ratings by Florian Berg, Florian Heeb, and Julian F. Kölbel as of Sept. 9th, 2022 (#1052): “We find that ESG rating upgrades lead to an increase in firms’ ownership by mutual funds with an explicit ESG strategy and increased buy-and-hold returns over a window of up to two years. We find the opposite effect for downgrades. Regarding impact on the real economy, we find no evidence indicating that firms’ growth is affected by ESG rating changes. We do find that firms improve their governance practices in response to downgrades, but not their social or environmental practices” (p. 45). “ … these funds owned less than 0.2 percent of the total assets in our sample in September 2020” (p. 43). My comment: The results may be driven by the rather stable MSCI ESG ratings: “We observe, in a sample of 3,665 listed U.S. corporations, 4,679 rating changes that take place between February 2013 and September 2020” (p. 8). I do not recall having seen research on ESG ratings stability by different providers, but I assume that this kind of stability is not typical or if typical, not realistic. Maybe there is ESG ratings smoothing.

Traditional and alternative investments: Passive positive

38% passive positive: The Passive-Ownership Share Is Double What You Think It Is by Alex Chinco and Marco Sammon as of Sept 10th,2022 (#247): “We show how to estimate the share of the US stock market held by passive investors  … Our 37.8% estimate is more than double the widely accepted previous value of 15%, which represents the combined holdings of all index funds. What’s more, 37.8% is a lower bound” (p. 40). “Because we start from trading-volume data rather than data on fund holdings, our approach to estimating the passive-ownership share reflects both index-fund investors and direct indexers. Put differently, 37.8% reflects the money held in the iShares Russell 1000 ETF (ticker:IWB) and the money held in state pension funds that are directly indexed to the Russell 1000” (p. 2).

Passive positive (1): Index Mutual Fund Ownership and Financial Reporting Quality by Ahmed Baig, R. Jared DeLisle, Gulnara R. Zaynutdinova as of July 3th, 2022 (#37): “Our main findings suggest that while pure index fund investors are not able to “vote with their feet”, their presence is associated with a lower probability of committing financial reporting fraud and less financial reporting aggressiveness. … The results suggest that passive investors are less likely to adopt a monitoring role for fraudulent reporting as they shift this responsibility to high-quality auditing firms or believe auditing firms fulfill that role already” (p. 30).

Passive positive for active: Passive Investing, Mutual Fund Skill, and Market Efficiency by Da Huang as of Ausust 30th, 2022 (#49): “Greater passive investment reveals active managers’ skill to investors at an accelerated pace, causing unskilled managers to exit faster and making the mutual fund industry more skilled on average. As a result, surviving funds take less risk and the return dispersion of the active management industry declines. … Greater passive investment may be beneficial to market efficiency due to a more skilled active mutual fund industry. I find empirical support that greater passive investment causes stock prices to be more efficient, suggesting that current level of passive investment may be lower than optimal from a market efficiency perspective” (p. 38).

Fintech: Passive positive

Fractional trading take-up: Piecing together the extent of retail fractional trading by David Gempesaw, Joseph J. Henry, and Raisa Velthuis as of August 4th, 2022 (#87): “… we document significant increases in ownership by Robinhood users … the average high-price stock (≥$100) exhibits an incremental increase of approximately 53 percentage points in ownership compared to low-price stocks ($10 to $50) after the rollout of fractional trading” (p.29/30).

Crypto Un-Art: Non-Fungible Token Artworks: More Crypto than Art? by Giulio Anselmi and Giovanni Petrella as of August 25th, 2022 (#17): “… we examine the new and thriving world of NFTs artworks, where crypto-money is traded for digital files representing images and videos with embedded a certificate of guarantee built on blockchain technology. … We … find that the crypto art market is far from being an efficient market as prices present strong autoregressive patterns lasting for several days. We then compare the returns from crypto art with the returns from real-world art and find that the former is severely more volatile than any other asset in our sample and is strongly related to the increase in prices we observe in ETH and other cryptocurrencies. In contrast, real-world art provides low returns and volatility and shares no common ground with the stock market of the underlying economy. We conclude that crypto art is far from being just another medium to express artistic content. … crypto art seems to be the prominent place to park crypto money” (p. 10).

German section (I recommend Deepl to translate)

Clima crimes: „Einmal kurz die Welt retten“ von Jennifer B. Wind (Hrsg.): „24 dramatische, sarkastische, skurrile und tiefsinnige Kurzgeschichten deutschsprachiger Topautorinnen und -autoren widmen sich den drängendsten Themen unserer Zeit und regen zum Nachdenken an. Sie sind ein Appell an uns alle: Der Kampf um das Morgen muss heute beginnen“. Mein Kommentar: Gut zu lesen, aber nichts für Optimisten

In eigener Sache: Artikel 9 als neuer Nachhaltigkeitsstandard? – Der Stiftungsblog für die Stiftungspraxis ( Artikel 9 wird der neue Nachhaltigkeitsstandard. Man kann bereits sehr diversifizierte Aktien- und Anleiheportfolios aus Artikel 9 Fonds bzw. ETFs anbieten. Das wird aber leider zunächst kaum jemand machen …