Private company ESG: 10x new research on climate risk and nudging, private company ESG, ESG rating changes, AI and greenwashing, transformation, political engagement and impact asset allocation (# shows number of SSRN full paper downloads as of May 30th, 2024)
Social and ecological research
More climate risks? The globalization of climate change: amplification of climate-related physical risks through input-output linkages by Stephan Fahr, Richard Senner, and Andrea Vismara as of May 21st, 2024 (#164): “While global supply chains … risks across countries has received surprisingly little attention. … The findings suggest that direct GDP loss estimates can severely underestimate the ultimate impact of physical risk because trade can lead to losses that are up to 30 times higher … than what looking at the direct impacts would suggest. However, trade can also mitigate losses if substitutability across country-sectors is possible“ (abstract).
Easy climate nudging: Misperceived Social Norms and Willingness to Act Against Climate Change by Peter Andre Teodora Boneva Felix Chopra Armin Falk as of May 21st, 2024 (#237): “Americans vastly underestimate the prevalence of climate norms in the US …. We show that a relatively simple, scalable, and cost-effective intervention – namely informing respondents about the actual prevalence of climate norms in the US – reduces these misperceptions and encourages climate-friendly behavior. Importantly, we find that this intervention is depolarizing and particularly effective for climate change skeptics, the group of people who are commonly difficult to reach. Our results suggest that informing people about the behavior of relevant peers constitutes a particularly effective tool to target, reach, and convince skeptics“ (p. 29/30).
Private company ESG? Do ESG disclosure mandates affect the competitive position of public and private firms? by Peter Fiechter, Jörg-Markus Hitz, and Nico Lehmann as of May 23rd, 2024 (#46): “… we find that the staggered adoption of ESG disclosure mandates in different economies around the globe has an economically meaningful impact on competition in these domestic markets, as private suppliers gain contracts at the expense of public suppliers. … (i) ESG regulated corporate customers shift contracts from public to private suppliers, consistent with a preference for ESG opaque over ESG transparent supply chains, and (ii) adverse price competition effects for treated suppliers due to incremental direct and indirect costs associated with the ESG disclosure mandate. We also show that treatment effects are concentrated in contractual relations with suppliers of low importance to their corporate customers” (p. 27).
ESG investment research (in: Private company ESG)
ESG mechanics (1): Sovereign Environmental, Social, and Governance (ESG) Investing: Chasing Elusive Sustainability by Ekaterina Gratcheva and Bryan Gurhy from the International Monetary Fund as of May 23rd, 2024 (#35): “Most sovereign ESG scores used by the industry focus on evaluating sustainability risks that could impact financial returns – and not those that impact positive sustainability outcomes. … This mismatch has prompted regulatory bodies in various jurisdictions, including the FCA (2023), to consider stricter regulations governing the use of terms such as „responsible“ and „sustainable“ in investment fund nomenclature. … ESG factors … have limited effectiveness in reducing national emissions or advancing the achievement of SDGs” (p. 24). My comment see Neues Greenwashing-Research | CAPinside
ESG mechanics (2): Do Investors Respond to Mechanical Changes in ESG Ratings by Seungju Choi, Fabrizio Ferri, and Daniele Macciocchi as of May 24th, 2024 (#98): “… we study whether investors change their portfolio holdings in response to mechanical changes in ESG ratings––i.e., changes independent of concurrent changes in a firm’s actual ESG activities. To do so, we exploit a change in Refinitiv’s ESG ratings mechanically driven by the expansion of its coverage in 2015. We first document that the coverage expansion automatically and substantially improved the relative position – and thus the ESG rating – of the firms already covered by Refinitiv. Next, we show that these firms did not exhibit any improvement in their ESG performance (as measured using actual ESG outcomes, ESG ratings by other providers, as well as our estimated Refinitiv’s ESG rating absent the coverage expansion). … the probability of being selected by an ESG fund is higher for treatment firms relative to control firms, whereas we do not find that ESG funds increase their holdings of treated stocks already in their portfolio. These findings suggest that ESG funds use ESG ratings mostly in the selection process rather than the portfolio weighting process. … our analyses show that passive ESG funds (those with an index-based investing strategy) and active ESG funds that are more “passive” in their selection strategy (due to resource constraints) are more likely to add to their portfolio firms that experience an increase in ESG ratings independent of concurrent changes in the firm’s ESG activities” (p. 20/21). My comment: I f my ESG rating provider updates its methodology and company ESG ratings change only because of this change, I still react regarding my investment/divestment portfolio decisions. The reason: I assume (and can usually confirm) that the updated rating methdodology I better than the old methodology. “Rule-change” examples see Divestments: 49 bei 30 Aktien meines Artikel 9 Fonds – Responsible Investment Research Blog (prof-soehnholz.com)
AI vs Greenwashing: Combining AI and Domain Expertise to Assess Corporate Climate Transition Disclosures by Chiara Colesanti Senni, Tobias Schimanski, Julia Bingler, Jingwei Ni, and Markus Leippold as of May 14th, 2024 (#417): “… the lack of one clear reference framework paves the way for inconsistencies in transition plans and the risk of greenwashing. We propose a set of 64 common ground indicators from 28 different transition plan disclosure frameworks to comprehensively assess transition plans … Applying the tool to 143 reports from the carbon-intensive CA100+ companies, we find that companies tend to disclose more indicators related to target setting (talk) but fewer indicators related to the concrete implementation of strategies (walk)“ (abstract). My comment: I am not sure if there is an added value compared to the approaches of good ESG rating providers.
Impact investment research (in: Private company ESG)
More transformation? Consistency or Transformation? Finance in Climate Agreements by Sebastian Rink, Maurice Dumrose and Youri Matheis as of May 21st, 2024 (#21): “Our paper critically examines the role of responsible institutional investors… we show that responsible investors tend to avoid high-emitting companies in their portfolios. Companies with higher ownership by responsible investors do not decarbonize faster. In contrast, companies’ ESG ratings improve significantly with higher responsible investor ownership. This highlights a focus by responsible investors on these widely used ESG metrics instead of real economy decarbonization“ (abstract).
Private company ESG: Entrepreneurial Finance and Sustainability: Do Institutional Investors Impact the ESG Performance of SMEs? by Wolfgang Drobetz, Sadok El Ghoul, Omrane Guedhami, Jan P. Hackmann, and Paul P. Momtaz as of May 22nd, 2024 (#83): “We show that … investor backing by venture capital and private equity funds leads to an increase in SMEs’ (Sö: Small and medium size enterprises) externally validated ESG scores compared to matched non-investor-backed SMEs. Consistent with ESG-as-insurance theory, we find that the ESG performance of SMEs with a higher probability of failure, especially low-revenue SMEs and SMEs with high revenue volatility, is more likely to benefit from institutional investor backing. The positive effect is non-linear: SMEs with high ex-ante ESG performance are more likely to further improve ESG policies following investor backing, while SMEs with low ex-ante ESG performance are unlikely to improve“ (abstract). My comment: With my shareholder engagement focus on supplier ESG ratings improvement I want to leverage my engagement efforts, see Supplier engagement – Opinion post #211 – Responsible Investment Research Blog (prof-soehnholz.com)
Political engagement: Collaborative investor engagement with policymakers: Changing the rules of the game? by Camila Yamahaki and Catherine Marchewitz as of April 12th, 2024 (#41): “… this article analyzes what drives institutional investors to engage with government entities and what challenges they find in the process. … We identify a trend that investors conduct policy engagement to fulfill their fiduciary duty, improve investment risk management, and create an enabling environment for sustainable investments. As for engagement challenges, investors report the longer-term horizon, a perceived limited influence toward governments, the need for capacity building for investors and governments, as well as the difficulty in accessing government representatives“ (abstract).
Impact asset allocation: How sustainable fnance creates impact: transmission mechanisms to the real economy by Ben Caldecott, Alex Clark, Elizabeth Harnett, and Felicia Liu as of May 23rd, 2024: “Our findings suggest that fixed income, notably sustainability-linked bonds and loans, could present the greatest opportunity for impact if they are appropriately designed, passively-managed public equities the least, and hedge funds strategies the most variable. … we suggest how this analysis might be applied to strategic asset allocation by investors with multi-asset portfolios, suggesting that the addition of an “impact budget” as a way of operationalising these decisions” (p.27). My comment see Sustainable investment = radically different? – Responsible Investment Research Blog (prof-soehnholz.com) or Nachhaltige Geldanlage = Radikal anders? – Responsible Investment Research Blog (prof-soehnholz.com)
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Werbehinweis (in: Private company ESG):
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