Picture of a tree as symbol for the title stewardship

Stewardship etc. (Researchblog #100)

CO2-Tax for the rich? Is There a Green Dividend of National Redistribution? by Eren Gürer, Alfons J. Weichenrieder as of Oct. 12th, 2022 (#13): “Households with high income are responsible for a disproportionally large share of CO2 emissions. In the political arena, this has led to calls for more redistribution, not only to benefit the lower income groups, but also to reduce emissions. … Because in most countries there is a concave relationship between households’ CO2 consumption and their total expenditures, a redistribution from rich to poor is expected to increase CO2 emissions rather than reduce them. For those countries, our simulations suggest that a ten percent income tax (on top of existing taxes), which is used for a lump sum transfer to all households, may increase per capita CO2 consumption between 10 and 110 kg, implying a negative green dividend of redistribution” (p. 14).

Accounting-based emission trades: Trading of Emission Allowances and Financial Frictions by Donald N’Gatta, Gaizka Ormazabal, and Robert Raney as of September 23rd, 2022 (#52): “Based on a wide international sample of firms and data from the European Union Emission Trading System … we document that firms with liquidity needs are significantly more likely to sell allowances. We also observe more frequent selling of allowances when the transaction is likely to boost earnings and avoid accounting losses. This selling behavior is particularly pronounced in the final month of the fiscal year and at times of higher carbon prices. … substantial trading of emission allowances … is driven by reasons other than meeting emission requirements” (abstract).

Biodiversity over-activism: Delivering as one? Investigating the United Nation’s network of biodiversity partnerships by Matilda E. Dunn, Yizhong Huan, and Caroline Howe as of  September 28th, 2022 (#22): “… this study aimed to map the biodiversity-related partnerships between different UN entities … highlighted 124 UN wide biodiversity partnerships. … (and) the need for improved UN system-wide coordination mechanisms” (p. 1).

ESG investment research: Stewardship

ESG-Differences: Deconstructing Corporate Sustainability: A Comparison of Different Stakeholder Metrics by Raquel Antolin-Lopez, Javier Delgado-Ceballos, and Ivan Montiel as of Nov. 18th, 2021 (#31): “Corporate Sustainability Performance Measurement (CSPM) …. The purpose of this article is to compare the most widely used CSPM instruments … developed by different stakeholders (e.g., KLD, DJSI, GRI, Bansal, 2005). … We found the instruments differ quantitatively and qualitatively on how to measure CS, although there seems to be more consensus regarding the CS environmental dimension. Finally, we created a list of sub-dimensions that could be used as a reference for academics, practitioners and other stakeholders interested in measuring CS at the corporate level” (abstract).

Positive ESG reporting effects: Sell-Side Analysts’ Assessment of Operational Risk: Evidence from Negative ESG Incidents by Min Park, Aaron Yoon, and Tzachi Zach as of October 5th, 2022 (#202): “We find that financial analysts’ recommendation revisions predict future negative ESG incidents. … we show that analysts’ revisions of their discount rate estimates account for increased operational risk that is subsequently reflected in the realizations of negative ESG incidents. Finally, we report that analysts’ ability to predict future ESG events significantly improves after SASB issued their guidance on material ESG issues” (p. 27/28).

Less ESG noise: ESG Confusion and Stock Returns: Tackling the Problem of Noise by Florian Berg, Julian F. Koelbel, Anna Pavlova, and Roberto Rigobon as of October 7th, 2022 (#4417): “ESG rating agencies often report different estimates for the same attribute. … using scores of different agencies as noisy measures of true ESG performance. We show that standard regression estimates of the effects of ESG on stock returns are downward biased and, on average, more than double once we apply our noise-correction procedure. … We provide a ranking of ESG rating agencies’ scores, from the least noisy to the noisiest” (p. 43/44). My comment: The main problem with ESG ratings aggregation is the loss of detailed information: With aggregated ESG scores, it is almost impossible to explain the reasons for the final scores. I prefer to select an ESG ratings provider with the best rating concept according to my criteria.

Ecological investment research

Carbon investing: Investing in carbon credits by Laurens Swinkels and Jieun Yang from Robeco as of September 29th, 2022 (#144): “… the global carbon allowance market … currently consists of five accessible markets. The dominant market is the EU allowance market …. Its futures market is growing and lively with about EUR 1.8 billion turnover daily. … the correlation between returns on carbon markets and conventional assets such as stocks, bonds, and commodities, is low. Even though the price of carbon emissions is expected to rise substantially, investors in futures markets should consider the negative effect of the roll yield embedded in carbon futures prices” (p. 35).

Decarbonization? Decarbonization in equity benchmarks: Smoke still rising by John Simmons, Mallika Jain, Edmund Bourne, and Jaakko Kooroshy as of September 22nd, 2022: “Our analysis for the FTSE All-World between 2014 and 2020 highlights the following key findings: Absolute emissions in public equities increased in this period, driven partially by an expanding investment universe. Adjusting for constituent changes in the underlying universe …, emissions reductions are evident beginning in 2019, with over half of constituents seeing year-on-year declines in emissions. … This partially reflects the COVID pandemic … Emissions reductions can particularly be observed in Utilities … Churn in the Energy Industry was a significant contributor to portfolio intensity reductions. This raises some concerns around potential carbon leakage, with the removal of 40 firms contributing to an almost 2% WACI reduction during 2017-2020” (p. 4). My comment: I prefer to invest in the “already best”, see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com)

Anti-theoretical Greenium? Is Capital Structure Irrelevant with ESG Investors? by Peter Feldhütter and Lasse Heje Pedersen as of October 3rd, 2022 (#136): “This paper examines whether capital structure is irrelevant for enterprise value and investment when investors care about environmental, social, and governance issues, which we denote “ESG-Modigliani-Miller” (ESG-MM). Theoretically, we show that ESG-MM holds if ESG is additive and markets are perfect. ESG-MM means that issuing low-yielding green bonds does not lower the overall cost of capital because it makes the issuer’s other securities browner. Hence, a firm’s incentive to make a green investment does not depend on its financing choice. Empirically, we provide evidence of failure of ESG-MM, implying that firms and governments can exploit non-additive ESG or segmented markets” (abstract).

Green RE premium: The Cultural Origin of Green Price Premium by Zinat Alam, Miran Hossain, and Lingling Wang as of September 28th, 2022 (#24): “We document that houses with green features are sold at a higher price than houses without green features. But the houses with green features stay longer on the market and are sold at a greater discount relative to their listing prices, which suggests a liquidity trade-off. We calculate the NPV of the energy savings for these houses and find that the price premium is significantly higher than the economic value of the green features. An upward trend in green house sales over the years is indicative of increased awareness and preference for sustainable real estat …. We further explore homebuyers’ preferences and find that homebuyers from individualistic, indulgent but less uncertainty avoidant culture pay a lower price premium for green houses” (p. 24/25).

Biodiversity accounting: Accounting and Accountability for No Net Loss of Biodiversity by Claire Horner, Anthony O’Grady , Himadri Mayadunne, and Tianrui (Maria) Zhao as of October 14th, 2022 (#15) “… This paper addresses the question of whether existing accounting standards provide a sufficient framework for accounting for the loss of biodiversity in the supply chain of a company. By developing a simple illustrative scenario, we demonstrate that companies can provide the empirical evidence needed to account for changes to ecosystem assets of entities in their supply chain and any impacts to biodiversity related to these changes. The cost to restore the ecosystem assets can then be financially quantified. … By disclosing the implications of their environmental commitments in the financial statements, companies can obtain a competitive advantage against others who make claims solely for greenwashing purposes” (abstract).

Governance and social investment research: Stewardship

Universal owner restrictions: Systemic Stewardship with Tradeoffs by Marcel Kahan and Edward B. Rock as of March 11th, 2022 (#473): “We are quite pessimistic about the potential of systemic stewardship that entails substantial tradeoffs among portfolio companies. … First, universal owners would have to take into account the possibility that inducing some firms to reduce environmental externalities and mitigate risk will generate a competitive response that will eliminate the benefits from these actions for their other portfolio companies. If that were to happen, universal owners would be stuck with the losses without receiving any corresponding gains. Second, corporate law, as it currently stands, has a strong “single firm focus” (“SFF”) that stands in sharp contrast to the potential “multi firm focus” (“MFF”) of large portfolio investors. If universal owners were to work individually or together to protect their overall portfolios from systemic risk, it would clash with corporate law in a fundamental way that could create significant risks of liability. Third, universal owners typically manage a wide variety of different portfolios for different clients each of whom is owed fiduciary duties. A “tradeoff” strategy that would benefit some portfolios at the expense of other portfolios would conflict with these fiduciary duties as well as with the core multi-client multi-portfolio business model. As a result, we expect that universal owners will not act in concert and will not openly pursue a MFF strategy. … because any serious effort to mitigate climate change will involve tradeoffs, we do not expect universal owners to be effective in controlling carbon emissions” (abstract).

Passive governance? Corporate Governance Implications of the Growth in Indexing by Alon Brav, Andrey Malenko, and Nadya Malenko as of October 17th, 2022 (#194):  “Passively managed funds have grown to become some of the largest shareholders in publicly traded companies, but there is considerable debate about the effects of this growth on corporate governance. The goal of this paper is to review the literature on the governance implications of passive fund growth and discuss directions for future research. In particular, we present a framework to understand the incentives of passive and actively managed funds to engage in governance, review the empirical evidence in the context of this framework, and highlight the questions that remain unanswered” (abstract). … For example, there is little data on passive funds’ private engagements with portfolio companies (beyond the summaries in their stewardship reports) and the effectiveness of these engagements” (p. 25).

Challenged governance assumption: The Global ESG Stewardship Ecosystem by Tim Bowley and Jennifer G. Hill as of October 7th, 2022 (#114): “… the “global ESG stewardship ecosystem” …  involves a transnational network of different non-state actors, including globally-active institutional investors, international institutions and agencies, non-governmental organizations, investor networks and representative bodies, as well as the various service providers that support the governance activities of institutional investors. … institutional investors are at its core … This ecosystem exerts significant influence, shaping ESG investor stewardship … Our paper … highlights the scale, complexity and influence of the “global ESG stewardship ecosystem”. … Our analysis … challenges many assumptions of modern corporate governance, such as the supposed “rational reticence” of institutional investors, the nature of “agency capitalism”, the implications of common ownership, the role and potential of stewardship codes” (abstract). My comment: I am sceptical regarding the potential for stewardship, see Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink

Green women: Gender diversity in bank boardrooms and green lending: evidence from euro area credit register data by Leonardo Gambacorta, Livia Pancotto, Alessio Reghezza, Martina Spaggiari as of October 11th, 2022 (#139): “– we show that banks with more gender-diverse boards lend less to more polluting firms. … An investigation of the female-director specific characteristics suggests that better-educated directors pay greater attention to the environment, thereby granting lower credit volumes to browner firms. We also document that the “greening” effect associated with female members in banks’ boardrooms is stronger in countries with more female climate-oriented politicians” (p. 33/34).

Social Taxonomy: Towards a European Social Taxonomy: A Scorecard Approach by Dirk A. Zetzsche, Marco Bodellini, and Roberta Consiglio as of October 4th, 2022 (#46): “Examining the draft Social Taxonomy proposed by the Platform for Sustainable Finance in early 2022, we challenge the decision to follow the methodology provided by the EU’s environmental taxonomy detailed in the Taxonomy Regulation. We criticize in particular its “winner takes all” character whereby only economic activities meeting both furthering and facilitating characteristics and the do-no-significant-harm (DNSH) principle – as narrowly defined by a set of Technical Screening Criteria adopted in Level 2 legislation – can be classified as sustainable. Furthermore, the environmental taxonomy methodology seems to fail to properly incentivize transitional and mitigating economic activities … Despite countless words, taxonomy rules remain incomplete and occasionally vague. This regulatory complexity carries enormous transaction costs for issuers, advisors and financial institutions. … we propose an alternative scorecard approach assigning lower scores for transitional and mitigating activities and higher scores for activities meeting stricter taxonomy system criteria” (abstract).

Traditional and alternative investment research

Unsustainable analysts: The impact of Equity Analysts on Corporate Social Responsibility: Evidence from an Exogenous Shock by Antonio Meles, Paolo Fiorillo, Francesco Gangi, Mario Mustilli, and Dario Salerno as of September 19th, 2022 (#34): “… analysing a unique and distinctive dataset which covers a long period (2001-2018) and uses an international sample of firms incorporated in 46 countries. … find that the loss of an equity analyst results, on average, in a 4.59% increase in the ESG score. Second, we … find that firms affected by the exogenous coverage decrease experience an intensification in CSR engagement in the two subsequent years. … While we do not observe a significant impact on the Governance dimension, we get interesting insights from the Environmental and Social dimensions, with the larger impact observed for the Human Rights and Workforce sub-pillars” (p.19).

Bad fund behavior? Who creates and who bears flow externalities in mutual funds? by Daniel Fricke, Stephan Jank, and  Hannes Wilk as of September 28th,2022 (#14): “Prior work provides robust evidence on flow-induced negative externalities in open-ended mutual funds. … we find that investment funds are the main drivers of flow externalities in euro area equity mutual funds. In stark contrast, households and insurers are at the receiving end of these externalities. … Our findings highlight negative effects arising from the trading activity of short-term institutional investors” (p. 34).

Low withdrawals? The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets by Aizhan Anarkulova, Scott Cederburg, Michael S. O’Doherty, and Richard Sias as of September 28th,2022 (#2098): “Our comprehensive new dataset mitigates the survivor and easy data biases that plague prior work. We find that there is no withdrawal rate that allows most retirees to maintain a reasonable standard of living while being virtually assured they will not outlive their wealth. Even if a couple is willing to bear a 5% ruin probability, the withdrawal rate is just 2.26%” (p. 14).

Wireless investment booster: Broadband Internet and the Stock Market Investments of Individual Investors by Hans K. Hvide, Tom G. Meling, Magne Mogstad, and Ola L. Vestad as of July 7th, 2022 (#305): “We find that broadband use leads to increased stock market participation, to improved portfolio allocation for existing investors, and to increased participation in bonds, bond funds, and unlisted stocks. We do not find adverse effects of internet use; for example, access to high-speed internet does not lead to excessive stock trading among existing investors, except possibly for the very most active investors. Overall, the introduction of broadband internet seems to spur a democratization of finance, with households making investment decisions that are more in line with the advice from portfolio theory. … Over the broadband expansion period, we observe a broad trend towards increased internet-based information acquisition and learning. … the effects of broadband on stock market participation are stronger for younger, lower-income, and lower-wealth individuals …” (p. 34/35).

Art speculation: Art Market Momentum: An analysis on living artists by Francesco Strati as of October 1st, 2022 (#13):  “I set up an art market index based on five highly rated living artists and test for time series predictability and examine the profitability of two different trading strategies: speculative and passive” (abstract). … the investment in the art market index … seems to be pushed by speculator (momentum) strategies that outperform passive ones … driven by the high persistence of past returns’ signs” (p. 8).