Ungreen banks: red bank in the floods as picture by Hans from Pixabay

Ungreen banks: Researchpost #141

Ungreen banks with 13x new research on gas, smart cities, green innovation, auditors, esg news, greenwashing, dividends, investor education by Markus Leippold, Zacharias Sautner, Matthias Sutter, Sascha Steffen, Alexander F. Wagner and many more (# of SSRN downloads on Sept. 1st, 2023):

Social and ecological research: Ungreen banks

Ungreen banks (1): Climate Transition Risks of Banks by Felix Martini, Zacharias Sautner, Sascha Steffen, and Carola Theunisz as of Aug. 29th, 2023 (#116): “… we propose a new bottom-up approach that utilizes syndicated loan portfolio data to measure banks’ exposures to transition risks through their corporate loan books. … we empirically analyze a sample of 38 prominent U.S. lenders spanning the period from 2004 to 2019. … the average exposure in the U.S. banking system gradually declined after the ratification of the Paris Agreement in 2015. … Transition risk exposure is larger at bigger and more leveraged banks, and at banks with fewer female directors on the board“ (p. 25).

Ungreen banks (2):  The Green Energy Transition and the 2023 Banking Crisis by Francesco D’Ercole and Alexander F. Wagner as of August 28th, 2023 (#91): “In March 2023, several U.S. banks collapsed … Specifically, firms at the forefront of environmental technologies significantly suffered from this banking crisis. Like in most crises, however, firms with lower leverage outperformed. … poor financial management, particularly in banks, can dramatically affect the energy transition …” (p. 8).

Gas risks: European Equity Markets Volatility Spillover: Destabilizing Energy Risk is the New Normal by Zsuzsa R. Huszar, Balazs B. Kotro, and S. K. Tan Ruth as of Aug. 2nd, 2023 (#9): “… we examine oil and natural gas price changes in relation to equity market returns for 24 countries in the European Economic Area (EEA) … We find that during the 2003-2022 sample period, the major sources of market volatility primarily emanated from economic or political uncertainty of a specific country or group of countries, e.g., from Greece during the European sovereign debt crisis, from Central and Eastern European countries (CEEC) after the 2004 EU expansion, and from Norway during the oil rout. Energy risks, measured by large crude oil and natural gas price shocks, have become major volatility providers since 2019, with increasing volatility risk arising from natural gas, a green labelled energy source. Lastly, we also show CEEC markets with weakening currencies are more sensitive to oil and gas price shocks” (abstract).

Unsmart cities? SDG-11 and smart cities: Contradictions and overlaps between social and environmental justice research agendas by Ushnish Sengupta and Ulysses Sengupta as of Jan. 4th, 2023 (#37): “This paper focuses specifically on SDG-11 “Make cities and human settlements inclusive, safe, resilient and sustainable” and how cities are increasingly incorporating ICT (Sö:  Information and Communications Technology) toward this goal. … An increased use of ICT has its own energy and resource impacts that has implications for sustainability beyond the geography of individual cities to global impacts. The lifecycle and supply chain impacts of advanced ICT projects are being identified and documented. The end user of the Smart City projects may benefit significantly from the increased use of ICTs, while the environmental costs are often borne by disparate communities” (abstract). My comment: Currently, I only have one public transportation stock in my SDG-aligned mutual fund (www.futurevest.fund) which can still improve ecologically and I try to promote that via engagement (see Active or impact investing? – (prof-soehnholz.com)) but should cause little negative impacts on non-users.

Responsible investment research: Ungreen banks

Hot stocks: Temperature Shocks and Industry Earnings News by Jawad M. Addoum, David T. Ng, and Ariel Ortiz-Bobea as of Jan. 9th, 2023 (#1752): “We find that the effects of temperature extremes are relatively widespread, affecting earnings in over 40% (24 out of 59) of industries, and are not confined to only agriculture-related firms. We … find that revenue effects drive the profitability results in about 75% of cases. … temperature shocks are associated with earnings surprises relative to analyst forecasts. Finally, we find that analysts’ earnings forecasts and stock prices do not immediately react to observable intra-quarter temperature shocks …” (p. 33).

Sensitive green: The Green Innovation Premium by Markus Leippold and Tingyu Yu as of Aug. 7th, 2023 (#342): “Using patent abstracts and earnings call transcripts, we construct a firm-level measure to capture firms’ dedication to climate technology development and investors’ attention to green innovation…. A portfolio that is long on firms with low greenness and short on those with high greenness generates an average return of about 6% per year. … This indicates that investors require lower returns from firms demonstrating substantial green innovation endeavors. … Following Trump’s election victory, firms with a higher degree of greenness underperformed, likely due to the expectations of loosening environmental regulations. Conversely, these firms demonstrated positive performance in response to Biden’s election win, the Russia-Ukraine war disruption, and the IRA’s announcement“ (p. 28).

Audit deficits: Do auditors understand the implications of ESG issues for their audits? Evidence from financially material negative ESG incidents by Daniel Aobdia and Aaron Yoon as of Aug. 28th, 2023 (#32): “We find that during the post SASB (Sö: Sustainability Accounting Standards Board) guidance period, auditors are less likely to detect a material weakness after firms experience financially material negative ESG incidents relative to those that do not experience material negative ESG incidents. … we find an increased probability of misstatements in the post SASB-standards period when material ESG issues are reported. … Overall, the evidence suggests that auditors, especially the larger ones, may not yet fully understand the implications of material ESG issues from a financial reporting standpoint …” (p. 37/38)

ESG risks: News is Risky Business by Kari Heimonen, Heikki Lehkonen, and Vance L. Martin as of Aug. 25th, 2023 (#37): “… the empirical results provide evidence that responsible investors hedge ESG risks resulting in relatively lower expected returns than achieved by less responsible investors. This result holds for the broad ESG risk index as well as its E, S and G subcomponents. The empirical results also provide evidence that risk prices can change over time as is the case with the US withdrawal from the Paris Climate Agreement and the 2008-09 GFC, but not necessarily during the more recent COVID-19 pandemic” (abstract). … “The empirical results corroborate the importance of ESG news on stock returns, revealing a negative impact from ESG news shocks which is not captured by traditionally used risk factors and macroeconomy related variables. … the empirical results also show that ESG investments may not completely override the brown companies’ share in investors’ portfolios” (p. 39). My comment: With my own investments I focus only on responsible investments, see 30 stocks, if responsible, are all I need – Responsible Investment Research Blog (prof-soehnholz.com).

Green expectations: Financing Emissions by Dominique Badoer and Evan Dudley as of Aug. 30th, 2023 (#69): “We examine how investor expectations about the timing of transition risk related to climate change affects the debt financing costs of greenhouse gas emitting firms in the corporate bond market. We find that yield-spreads increase less with maturity for firms that are more exposed to transition risk … Our results imply that investors expect climate related transition risks in some industries to be resolved in the short term” (abstract).

Fund-Greenclean: Do Mutual Funds Greenwash? Evidence from Fund Name Changes by Alexander Cochardt, Stephan Heller, and Vitaly Orlov as of Aug. 24th, 2023 (#192): “We find that small, old, and less attractive funds attempt to regain investor capital flows by changing their names to include ESG terms. Following the name change, funds actively rebalance their holdings, begin to hold more stocks and invest less in each stock, while reducing their exposure to firms with severe and high ESG issues. Consequently, aggregate salient portfolio ESG scores and peer-adjusted ESG ranks increase, attracting significant abnormal flows of over 13% in the 12-month period following the name change toward ESG. … these funds do not change their pre name-change voting patterns, but also become even less supportive of ES proposals when their votes are more likely to be pivotal“ (p. 21). My comment: More holdings can be criticized, too, see Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com)

Other investment research

Dividend research: Corporate Dividend Policy by Mark Leary, and Vasudha Nukala as of July 29th, 2023 (#134): “We survey the empirical literature on corporate dividend policy, with emphasis on developments over the last two decades. … In the second part, we focus on the unresolved question of why dividends matter … such as the channels through which dividends impact firm value. Payout policy can alter a firm’s market value by affecting its future cash flows or its cost of capital (in which case it impacts intrinsic value) or by signaling value-relevant information to investors (affecting only the timing of when that value is reflected in market prices). We organize the survey around these three possibilities, highlighting relevant empirical evidence and areas of remaining uncertainty” (abstract).

Educational profits: Skills, Education and Wealth Inequality by Elisa Castagno, Raffaele Corvino, and Francesco Ruggiero as of Aug. 13th, 2023 (#15): “We document a positive and sizeable effect of education on both the level and returns to wealth due to the impact of education on stock market participation, after controlling for unobserved, individual ability. Our results suggest that policymakers can exploit the role of education to alleviate wealth inequality by promoting the stock market participation of unskilled individuals“ (abstract).

Good education: Financial literacy, experimental preference measures and field behavior – A randomized educational intervention by Matthias Sutter, Michael Weyland, Anna Untertrifaller, Manuel Froitzheim und Sebastian O. Schneider as of May 9th, 2023 (#67): “We present the results of a randomized intervention to study how teaching financial literacy to 16-year old high-school students affects their behavior in risk and time preference tasks. … we find that teaching financial literacy makes subjects behave more patiently, more time-consistent, and more risk-averse. These effects persist for up to almost 5 years after our intervention. Behavior in the risk and time preference tasks is related to financial behavior outside the lab, in particular spending patterns”(abstract).

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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 29 of 30 engaged companiesFutureVest Equity Sustainable Development Goals R – DE000A2P37T6 – A2P37T; also see Active or impact investing? – (prof-soehnholz.com)

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