Unsustainable Bonds: Naturbild von Andres Dressler zur Illustration

Unsustainable bonds? Researchposting 102

Housing health and mobility: Health Implications of Housing Programs: Evidence from a Population-Wide Weatherization Program by Juan Palacios and Steffen Kuenn as of October 21st, 2022 (#5): “We study the massive renovation wave in East Germany in the aftermath of the German reunification … We observe a significant improvement in housing conditions and objective health status of the tenants as reflected by a reduction in days of sick leave. Moreover, we find a reduction in tenants’ probability to change dwellings. … conclusion that an improvement in housing quality enhance individuals’ health condition, in particular, the health of older individuals” (p. 19).

Bad Trump impact: Can Social Media Rhetoric Incite Hate Incidents? Evidence from Trump’s „Chinese Virus“ Tweets by Andy Cao, Jason M. Lindo, and Jiee Zhong as of October 28th, 2022 (#15): “We take advantage of new high-frequency data to demonstrate that his inflammatory remarks about COVID-19 resulted in a significant spike in anti-Asian behavior, with these effects concentrated in counties with greater support for the president, which is notable because these counties are disproportionately rural while the vast majority of Asian Americans live in urban areas. Google search data underscores the direct link between Trump’s remarks, the rise in interest in the “Chinese Virus”, and the spike in subsequent anti-Asian behavior. Our findings provide empirical support for President Trump’s capacity to influence not only the beliefs of his supporters, but also their actions. While a large body of work suggests that high-profile individuals can increase pro-social beliefs and behaviors, we demonstrate that they can have significant detrimental effects as well, even when the technology of social media substantially limits what they can say.” (p. 19).

Responsible Investment Research: Unsustainable bonds?

Forgoing money? How much do investors care about social responsibility? by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz as of October 23rd, 2022 (#302): “… on average individuals—as investors and consumers—are willing to forgo some monetary gains in order to promote social interests. … And there is a significant percentage of individuals with a strong preference to maximize their monetary gains, who are unwilling to forgo even small amounts of value to advance any social goal. … The significant heterogeneity in individuals’ willingness (and unwillingness) to forgo … is most clearly associated with political affiliation, gender and income …” (p. 63). My comment: For my social midcap fund see ESG plus SDG-Alignment mit guter Performance: FutureVest ESG SDG – Responsible Investment Research Blog (prof-soehnholz.com)

Carbon credit deficits: 2022 Carbon Credits Landscape by Madeline Hume from Morningstar as of September 19th, 2022: “A carbon credit is a government-issued permission slip to burn fossil fuels, but surprisingly, we find that carbon credits don’t respond predictably to fossil fuel price movements. … Philosophically, carbon must get more expensive to emit to meet reduction targets. Therefore, carbon credits should steadily increase in value over time–regardless of how compelling fossil fuels may be. However, we find that even the most sophisticated cap-and-trade programs exert little control on how fast emissions fall, especially early on. Companies that reduce emissions faster than expected flood the market with cheap credits, introducing price volatility. … misspecifications have forced both California and the European Union to make major adjustments to their programs in the past three years …an investment in a carbon credit represents an implicit bet on the robustness of its parent carbon market far more than it does an expression of the future cost to society of present emissions”(p. 6).

Carbon credit risk: Carbon Default Swap – Disentangling the Exposure to Carbon Risk through CDS by Alexander Blasberg, Ruediger Kiesel, and Luca Taschini as of October 7th, 2022 (#601): “We .. utilise the information contained in CDS spreads to construct the CR factor — a market-implied proxy for carbon risk exposure. … find a positive relationship between lenders’ perceived exposure to carbon risk and firms’ cost of default protection. The relevance of the observed relationship is significantly stronger in Europe – notably pro-carbon regulation – than in North America. In addition, using QRs, we show that the magnitude of the exposure to carbon risk differs considerably along the entire distribution of CDS spread returns. The marginal impact of carbon risk is exceptionally pronounced when firms experience extraordinary credit movements (i.e. when a firm’s credit improvement or deterioration is especially strong). … the market seems to regard other sectors (Industrials, Technology, Healthcare) as capable of making the necessary adjustments to facilitate a low-carbon transformation. These sectors therefore benefit from a surge in carbon risk. Further analysis suggests that the effect of carbon risk on CDS spread returns is stronger dur[1]ing times of heightened attention to climate change news. When market-wide concern about climate change risk is elevated, lenders demand more credit protection for those borrowers perceived to be more exposed to carbon risk. … carbon risk is particularly salient for shorter time horizons, and confirming that lenders expect adjustments in European carbon regulations to cause relatively larger costs in the near future” (p. 29).

More brown bank loans: “There is No Planet B“, but for Banks “There are Countries B to Z“: Domestic Climate Policy and Cross-Border Lending by Emanuela Benincasa, Gazi Kabas, and Steven Ongena as of August 2nd, 2022 (#141): “…  we use the syndicated loan market as a laboratory … lenders increase their shares in cross-border syndicated loans by 8.6 percent when the climate policy stringency of their home country increases by one standard deviation. … domestic lending to brown borrowers decreases, but cross-border lending increases to such borrowers as climate policy becomes more stringent. We demonstrate a negative correlation between climate policy stringency and firm profits as a possible explanation for why lenders have incentives to increase their cross-border lending” (p. 28/29).

Bond inefficiencies: The Economics of Sustainability Linked Bonds by Tony Berrada, Leonie Engelhardt, Rajna Gibson, and Philipp Krueger as of September 14th, 2022 (#786): “… the industry generally overstates the benefits (in terms of yield discount) for firms that issue SLBs. … overpriced bonds .. represent approximately one-quarter of our sample … Our study contains several policy implications. First, one should require greater transparency in the bond prospectus and certification process by requiring that firms also disclose the parameter f, that is, the cost of implementing the environmental (or social or governance) infrastructure needed to reach the KPI. Second, for overpriced bonds, the wealth transfer to shareholders can be mitigated if part or all of the coupon penalty is actually externalized (as in the case of a charity donation). … institutional investors’ flows should be channeled less mechanically into these issues because their excess demand for sustainable assets is in part driving these abnormal price premiums and their unintended wealth transfers” (p. 32/33).

Harmful index exclusions: Real Effects of ESG Investing by Emil Lakkis as of October 17th, 2022 (#44): “… I investigate the effect of ESG mutual funds’ investment on toxic pollution by firms. I rely on a quasi-exogenous exclusion from the MSCI ESG Leaders index as a source of variation in holdings by ESG funds. I find that firms open new plants and increase their toxic releases following the index exclusion. I explain this result by lower incentives of fund families to monitor the environmental performance of firms after a decrease in holdings of ESG funds in the families” (p. 23). My comment: My approach see Absolute and Relative Impact Investing and additionality – Responsible Investment Research Blog (prof-soehnholz.com)

Traditional Investment Research: Unsustainable bonds?

Unstable index: Tracking the EURO STOXX 50® by Emilio Barone and Gaia Barone as of August 28th, 2022 (#21): “The EURO STOXX 50® Index is one of the most important benchmarks for the asset management industry. Even if its underlying portfolio is made up by only 50 stocks, its tracking is not easy because of reshuffling (additions and deletions of constituent stocks) and rebalancing (review of free-float shares). We showed that in the period from March 11th 2021 to June 11th 2022, the index’s divisor has been changed 16 times, roughly once per month …. A reasonable alternative to the EURO STOXX 50® is the EURO STOXX 50® Equal Weight Index, which better fits the needs for parsimony and transparency” (p. 12). My comment: Since many years, I use equal weighting for my direct equity portfolios

Interest bias? The Factor Multiverse: The Role of Interest Rates in Factor Discovery by Jules H. van Binsbergen, Liang Ma, and Michael Schwert as of September 28th, 2022 (#678): “The past five decades have witnessed the discovery of a very large number of asset pricing anomalies, sometimes referred to as the “factor zoo.” Over this same sample period, there has been a long-term decline in interest rates…. We investigate 153 discovered anomalies as well as 1,395 potential undiscovered anomalies and find that absent the interest-rate decline, the asset pricing literature would likely entertain a different set of anomalies today” (p. 13/14).

Simpler pension savings: Disparities in financial literacy, pension planning, and saving behavior by Tabea Bucher-Koenen, Andreas Hackethal, Johannes Kasinger, and Christine Laudenbach as of October 18th, 2022 (#16): “We test how the introduction of a digital pension dashboard that provides users with an overview of their total pension claims affects saving behavior. Access to the dashboard decreases uncertainty about future pension income and significantly increases savings and wealth. This effect is particularly strong among individuals with ex-ante lower levels of financial literacy. …. In our study, we have seen the challenge of motivating participants to actively self-select into the ’treatment’ given the considerable effort required to upload related pension document” (p. 16/17).

Stupid men? The Influence of Gender on Biased Self-Assessments – Implications for Financial Literacy by Justus Blaschke as of September 28th, 2022 (#27): “I find that woman are on average underconfident in their financial literacy whereas men are on average overconfident. Females show an almost 40% reduced probability of being overconfident compared to males. Furthermore, overconfidence has a negative and significant impact on the financial literacy of man” (p. 15).

Alternative Investment Research and Wealthtech

Inflation hedge? Why Infrastructure? Ivo Ravenhorst and Dirk Brounen as of July 18th, 2022 (#92): “ … infrastructure is useful for portfolio diversification and it also exhibits a strong and stable income yield component. Infrastructure has attractive absolute returns, yet inflation-hedging capabilities are unconfirmed. These may apply to individual assets or sub-sectors, due to business models or regulations, but cannot be generalized to the entire asset class. Finally, infrastructure assets are shown to provide meaningful downside risk protection” (p. 11/12). My comment: See my listed infrastructure ESG portfolio, e.g. Neues ESG-Portfolio aus weltweiten Kern-Infrastrukturaktien ist attraktiv – Responsible Investment Research Blog (prof-soehnholz.com)

Responsible PE? Institutional Investors, Alternative Asset Managers, and ESG Preferences by Joseph A. McCahery, Paul C. Pudschedl, and Martin Steindl as of October 24th, 2022 (#124): “Our new data set is constructed based on a 2020 survey of 106 institutional investors from Europe and North America, as well as a small percentage of respondents from around the world. … we find that LPs are motivated to incorporate ESG, because they believe that ESG usage is more strongly correlated with financial performance. GPs are motivated to integrate ESG factors into their investment strategies in response to increased client demand for sustainable products. Second, we find that PE firms use ESG factors more intensively than VC firms regardless of geography. … We find that PE firms use voice and exit strategies more extensively than VC funds in efforts to promote ESG activities in companies. Finally, we find that the investors consider that the governance score the most important component of ESG” (p. 27/28).

Unfair PE fund valuations? Fair Value Measurement and Private Equity Fund Interim Valuations by Onur Sefiloglu as of October 17th, 2022 (#20): “Previous research documents inaccurate valuations that lag behind the real intrinsic values of the investments. This paper shows that adopting fair value accounting increases the accuracy of the interim fund valuations of buyout funds significantly. … Fair value measurement eliminates the significant heterogeneity in valuation quality stemming from the difference in fund investor profiles” (abstract).

Bad investing apps? Start Small and Stay Small: Anchoring Bias in App-Based Investing by Jennifer Itzkowitz, Jesse Itzkowitz, and Andrew Schwartz as of September 29th, 2022 (#99): “We present evidence that following an initial stock purchase, the value of an individual investor’s subsequent stock purchase remains the same as or near the original purchase value, as predicted by the theory of anchoring. This has serious long-term, real-life, welfare implications for investors. Anchoring causes vast differences in wealth accumulation” (p. 21).

ESG fintech growth: EY European ESG FinTech Landscaping by Ernst & Young Parthenon as of October 21st, 2022: “The segment experienced significant growth in funding and the number of active companies – representing about 5% of all European FinTechs. … We assume that most incumbent players need at least partial support with creating ESG-related products and services … Investments are expected to grow despite macroeconomic developments: Around 70% of the ESG FinTechs are Seed and earlier-stage Start-ups. … ESG Data Providers, Carbon Offsetting, Asset Management and potentially InsurTechs are the segments where we expect the highest funding and M&A activity” (p. 11).

Climate robot? Thus spoke GPT-3: Interviewing a Large-Language Model on Climate Finance by Markus Leippold as of October 15th, 2022 (#174): “This paper is an interview with a Large Language Model (LLM), namely GPT-3, on the issues of climate change. The interview should give some insights into the current capabilities of these large models which are deep neural networks with generally more than 100 billion parameters. In particular, it shows how eloquent and convincing the answers of such LLMs can be. However, it should be noted that LLMs can suffer from hallucination and their responses may not be grounded on facts” (abstract).