Trustee or steward? 13x new research on climate tech and finance, interest rates, plant-based food, greenwashing, reporting, engagement, benchmarks, age, PFOF, and private equity by Richard Ennis at al.
Trustee or steward? 13x new research on climate tech and finance, interest rates, plant-based food, greenwashing, reporting, engagement, benchmarks, age, PFOF, and private equity by Richard Ennis at al. (# indicates the number of SSRN downloads on November 15th):
Social and ecological research: Trustee or steward?
Climate tech advantage: Empirically grounded technology forecasts and the energy transition Rupert Way, Matthew C. Ives, Penny Mealy, and J. Doyne Farmer as of Sept. 21st, 2022: “Most energy-economy models have historically underestimated deployment rates for renewable energy technologies and overestimated their costs. … Here, we use an approach based on probabilistic cost forecasting methods that have been statistically validated by backtesting on more than 50 technologies. … Compared to continuing with a fossil fuel-based system, a rapid green energy transition will likely result in overall net savings of many trillions of dollars—even without accounting for climate damages or co-benefits of climate policy” (p. 1).
Climate interest risk: The effects of climate change on the natural rate of interest: a critical survey by Francesco Paolo Mongelli, Wolfgang Pointner, and Jan Willem van den End as of Nov. 1st, 2022 (#37): “This survey is the first to systematically review the possible effects of climate change on the natural rate of interest. While r* is a theoretical concept, it is used as a benchmark by central banks to assess the stance of their monetary policy and the room for policy manoeuvre. … In most cases, we find that climate change would have a rather dampening effect on r*, which implies a narrower room for manoeuvre for central banks. … the uncertain impact of climate change on main r* may call for an increasing flexibility in the monetary policy strategy, both in terms of objectives and time horizon. …. An orderly transition will mitigate the economic and financial risks of climate change and thereby also prevent potential downward effects on r*. In addition, active fiscal policies to mitigate climate change might also spur investment demand and thereby put upward pressure on the natural rate” (p. 26/27).
Vegan potential: Perceived benefits of plant-based diets by Romain Espinosa and Ricardo Azambuja as of Nov. 11th, 2022 (#12): “A global shift towards plant-based can considerably mitigate the negative externalities generated by the food system. … First, we show that French individuals have on average a good perception of the environmental gains of plant-based diets on land use and GHG emissions. However, we see a strong heterogeneity of perceptions of the environmental impact of meaty diets. Second, we further show that people have good knowledge about the healthiness of single foods, but they systematically underestimate the overall health benefits of adopting a plant-based diet. Third, our results indicate that people considerably underestimate the burden of animal-based diets on farmed animal welfare (number of killed animals, intensity of animal farming). … Last, we find that respondents who negatively perceive plant-based diets … are less willing to get informed on the impacts of animal-based diets.“ (p. 19). My comment: I try to exclude meat products, leather and fur from all of my direct equity portfolios, e.g. my investment fund (see sustainability policy and reporting here FutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T, but I do not many other products with a similar approach.
Responsible investment research: Trustee or steward?
Climate finance gap: Climate Finance Funding Flows and Opportunities – What Gets Measured Gets Financed as of November 2022 by Maria Kozloski at al. for The Rockefeller Foundation and The Boston Consulting Group: “There is no consensus on how to measure and report climate finance. … Significant data gaps result in an incomplete picture. … Despite these limitations, our analysis reveals a seismic shortfall in climate finance. To attain net zero, public and private sector entities across the globe will need approximately $3.8 trillion in annual investment flows through 2025. Our analysis … suggests that the capital deployed provides only about 16% of the total climate finance required to mitigate negative climate effects and adapt processes and infrastructure worldwide. Even when we looked through a wider lens that includes transition finance and financing deployed to intermediaries that target climate impact, our analysis found that financing need outweighed flows by 66%. The deficit extends to all areas of climate action … This report highlights places where overall gaps are likely to close (such as electric vehicles) and where they are widening (such as fuel cell technology). … A&R (Soehnholz: adaption and resilience) is also severely underinvested. Primarily because of its challenging financial returns profiles and unclear bankability, A&R receives only about one-tenth of the $410 billion to $560 billion in annual financing that it requires. Improved data can drive climate finance …” (p. 7/8).
Greenwashing indication: Spotting Portfolio Greenwashing in Sustainable Funds by Rabab Abouarab, Tapas Mishra, and Simon Wolfe as of Oct. 29th, 2022 (#33): “We examine how sustainable fund flows respond to the fund’s announcement about its commitment to sustainability criteria, as shown in sustainable funds prospectus. … on average a sustainable fund portfolio’s footprint increases relative to a conventional fund portfolio’s footprint after the announcement date” (p. 40). My comment: I admit that for my fund the CO2 footprint seems to have increased, because I started to report Scope 3 data which previously was not reliable.
Good disclosures: Social Washing or Credible Communication? An Analysis of Corporate Disclosures of Diversity, Equity, and Inclusion in 10-K Filings by Nathan C. Goldman and Yuan Zhang as of Oct. 18th, 2022 (#102): “Focusing on DEI disclosures in the new mandatory human capital disclosures in 10-K filings, … We first show that these DEI disclosures are positively associated with the presence of strong external stakeholder groups. We then show that these DEI disclosures appear to credibly communicate firms’ true commitments, as evidenced by two key dimensions: (1) better employee ratings on DEI environment and overall job satisfaction, and (2) higher employee productivity. … we also document a more positive market reaction among small firms whose DEI commitments were less publicized and visible before the disclosures” (p. 29/30).
Engagement opportunities: Net-Zero Alignment: Engaging on Climate Change by Chris Cote and Harlan Tufford from MSCI as of November 7th, 2022: “This paper expands on net-zero engagement by discussing four key concepts: Prioritization …Evaluation …. Tactics and Strategy …. Application … to show the governance-driven challenges and opportunities investors could face if they were to engage with these companies on net-zero alignment” (p. 3). My comment: For me, the most interesting information in this paper is that MSCI can not detect any engagement on 73% of the approx. 9000 companies within the MSCI ACW IMI universe (p. 30). Some months ago, my fund was analyzed regarding engagements by other investors. For none of my thirty stocks an engagement could be found. The reason may be my focus on mid- and smallcaps, but also, that I try to select the most responsible companies for my portfolios. Result: I started a test-engagement myself.
Stakeholder engagement evaluation: Exploring the antecedents and consequences of firm-stakeholder engagement process: A systematic review of literature by Avinash Pratap Singh and Zillur Rahman as of Oct. 31st, 2022 (#12): “… we pursued the vast body of literature on firm-stakeholder engagement and comprehensively examined over 170 research articles to accumulate precursors and outcomes of SE processes. … We used thematic analysis to provide evidence of the growing interest of academics and managers in firm-stakeholder engagement. The findings of this study suggest that shared benefits with a long-term perspective are valuable to both corporation and its stakeholders”.
Trustee or steward? Stewardship or trusteeship codes? by Maria Lucia Passador as of March 28th, 2022 (#51): “…etymologically, “a steward is someone who cares for an asset, but whose obligations are voluntary and vague [and if a] trustee, by contrast, has strict legal obligations, [hence if] trusteeship is thus a more formal and rigorous responsibility than stewardship”. 62 … the legal notion of trust is all the more opportune insofar as it requires the definition of a beneficiary, an aspect repeatedly pointed out as elusive in the stewardship relationship. … in a period in which the responses of institutions to climate change have been anything but prompt, in which attention has been focused on stakeholder value and on sensitizing directors to behavior oriented towards public good, the redefinition of the codes as trusteeship codes would certainly lead to the revitalization of the institutional role of stewardship” (p. 15/16). My comment see Impact Investing mit Voting und Engagement? (Opinionpost #194) – Responsible Investment Research Blog (prof-soehnholz.com)
Traditional wealth management investment research
Betterwashing: Lies, Damn Lies and Performance Benchmarks: An Injunction for Trustees by Richard M. Ennis as of Oct. 31st, 2022 (#422): “Most institutional investors, such as public pension funds and endowments, report their performance using biased benchmarks. The benchmarks are biased downwardly, meaning their returns tend to be less than a fair one for the market exposures and risk exhibited by the institutions’ portfolios. Significant samples of both fund types exhibit benchmark bias in the range of 1.4 to 1.7 percentage points per year. This bias enables a sizable majority of both types of funds to report outperforming their chosen benchmarks when, in fact, most underperform an appropriate passive-management benchmark by a wide margin” (abstract). My comment: For my unofficial benchmarks see Konzentration und SDG-Fokus gut: Meine 9 Monats Performance 2022 – Responsible Investment Research Blog (prof-soehnholz.com)
Wrong age bias? The Impact of Investment Horizon on Investment Decisions – New Approach by Erez Levy and Aharon (Roni) Ofer as of Nov. 1st, 2022 (#47): “We find that contrary to our expectations, investors do not hold significantly higher ratio of risky assets in their portfolio as the length of the investment horizon increases. … when comparing between long and medium term investment horizons, our findings indicate that investors do not hold higher ratio of risky assets (and even decrease the ratio of risky assets to non-risky assets) in their portfolio as the length of the investment horizon increases. We find an ambiguous effect of age on the ratio of the allocation to risky assets in the investors’ portfolio. This result indicates that age … might not serve as a good proxy for investment horizon. In addition, we find an ambiguous effect of gender and wealth” (p. 33/34). My comment: I suggest to use loss aversion and time horizon directly, not age or wealth, for risk determination, see “Portfolioselektion” at Soehnholz ESG and Schwankungen sind tolerierbar, Intransparenz nicht – Responsible Investment Research Blog (prof-soehnholz.com)
PFOF disparities: Price Improvement and Payment for Order Flow: Evidence from a Randomized Controlled by Trial by Bradford (Lynch) Levy as of Oct. 3rd, 2022 (#9756): “In place of commissions, retail brokers now rely on payment for order flow (PFOF) to drive revenue. … I find that orders transmitted to TDA receive economically and statistically significant improvement … evidence is consistent with the notion that Robinhood has sacrificed execution quality in exchange for increased PFOF. … my results show that even within the two largest brokers by PFOF revenue, there exists significant heterogeneity in the trading experience due to brokers’ decisions. (p. 23/24).
Good Private Equity? Resilience and Cyclicality in Private Equity: Value Creation and Investment Flows in Economic Cycles by Alexander Juergens and Reiner Braun as of Oct. 31st, 2022 (#140): “We benchmark a large sample of BO (Söhnholz: Buyout) transactions with closely matched public companies from 1986 to 2017. Our results show that BO transactions have created significantly more value overall, but abnormal value creation has disappeared in more recent periods. However, BO transactions are considerably less sensitive to adverse shocks in the real economy than their public counterparts. The adverse impact of a 1% increased exposure to economic distress is between 0.4% and 0.5% lower for BO than for public benchmarks. … Our results imply that PE funds act as liquidity providers during economic distress by providing 45% to 49% more capital to their existing portfolio companies than in undistressed periods” (abstract).
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