Sustainability deficits: Researchpost 188

Sustainability deficits: 11x new research on green jobs, carbon prices, GHG reporting, accountants, ESG disclosures, institutional ESG, Governance returns, kid investments, ETF liquidity, loss aversion and customized investments (# shows SSRN full paper downloads as of August 8th, 2024)

Social and ecological research

Good green job effects: The Green Future: Labor Market Implications for Men and Women by Naomi-Rose Alexander, Longji Li, Jorge Mondragon, Sahar Priano, and Marina M. Tavares from the International Monetary Fund as of July 25th, 2024 (#15): “In AEs (S?: Advanced economies), green jobs are predominantly found among high-skilled workers and cognitive occupations, whereas in EMs, many green jobs are manual positions within the construction sector …. green jobs are disproportionately held by men in both AEs and Ems … Additionally, we observe a green wage premium and narrower gender pay gaps in green jobs … many green jobs are well-positioned to harness the benefits of AI advancements … green jobs with a greater capacity to leverage AI exhibit a reduced gender pay gap” (p. 40/41).

Sustainability deficits (1): Negative carbon price effects: Firms’ heterogeneous (and unintended) investment response to carbon price increases by Anna Matzner and Lea Steininger as of July 29th, 2024 (#13): “Using balance sheet data of 1.2 million European firms and identified carbon policy shocks, we find that higher carbon prices reduce investment, on average. However, less carbon-intensive firms and sectors reduce their investment relatively more compared to otherwise similar firms after a carbon price tightening shock. Following carbon price tightening, firms in demand-sensitive industries see a relative decrease not only in investment but also in sales, employment and cashflow. Moreover, we find no evidence that higher carbon prices incentivise carbon-intensive firms to produce less emission-intensively. Overall, our results are consistent with theories of the growth-hampering features of carbon price increases and suggest that carbon pricing policy operates as a demand shock“ (abstract).

Sustianbility deficits (2): Corporate carbon deficits: The MSCI Sustainability Institute Net-Zero Tracker from the MSCI Sustainability Institute as of July 2024: “A series of indicators that investors use to guide transition finance … suggest that the world’s listed companies remain largely misaligned with global climate goals … Just over one-fifth (22%) of listed companies have set a decarbonization target that aims to reduce their financially relevant GHG emissions to net-zero by 2050 in line with a science-based pathway, as of May 31, 2024, an increase of eight percentage points from a year earlier … 38% of companies disclosed at least some of their upstream Scope 3 emissions, up eight percentage points from a year earlier, while 28% disclosed at least some of their downstream Scope 3 emissions, up seven percentage points over the same period” (p. 4). My comment: I ask every company within my fund to fully disclose GHG Scope 3 data so that all stakeholders can engage regarding these data.

Sustainability deficits (3): Accountant ESG deficits: ESG Assurance and Comparability of Greenhouse Gas Emission Disclosures by Jenna Burke, Jiali Luo, Zvi Singer, and Jing Zhang as of Aug. 7th, 2024 (#7): “… a recent rule from the SEC mandates expanded ESG disclosure, including external assurance of reported greenhouse gas (GHG) emissions. …. we … find that companies with ESG assurance report more comparable GHG emissions. Comparability is further enhanced when companies use the same assurance provider and when the provider is more experienced. We also find some evidence that comparability is higher when assurance is provided by consulting and engineering firms than by accounting firms“ (abstract).

ESG investment research

Sustainability deficits (4): No ESG disclosure benefits? Does mandating corporate social and environmental disclosure improve social and environmental performance?: Broad-based evidence regarding the effectiveness of Directive 2014/95/EU by Charl de Villiers, John Dumay, Federica Farneti, Jing Jia, and Zhongtian Li as of July 11th, 2024 (#33): “The Directive …requires companies that are (i) listed on EU exchanges or have significant operations within the EU; (ii) employing more than 500 people; or (iii) deemed to be public-interest entities; to report their performance on non-financial matters, including environmental issues, social and employee matters, human rights, anti-corruption, and bribery” (p. 1). … “Analysing a cross-country sample from 2009-2020, we find that social and environmental performance has not meaningfully improved since the Directive was enacted, and instead of EU companies increasing their performance more than US companies, there was either no difference (for social performance) or US companies improved more than EU companies (for environmental performance). Thus, the results suggest that the Directive did not have the intended impact on the social and environmental performance of EU companies “ (p. 19). My comment: Is more regulatory pressure required or more stakeholder engagement or both?

Sustainability deficits (5): Institutional ESG deficits: Comparisons of Asset Manager, Asset Owner, and Wealth and Retail Portfolios by Peter Jacobs, Ursula Marchioni, Stefan Poechhacker, Nicolas Werbach, and Andrew Ang from BlackRock as of April 16th,2024 (#183): “We examine 800 portfolios from European asset managers, asset owners, and wealth/retail managers … The average European institutional portfolio exhibits a total risk hovering between 10 to 11%, with little difference across the average asset manager, asset owner, and wealth/retail portfolios. Equity risk … accounting for almost 90% of the total portfolio risk. Decomposing equity risk further, country-specific tilts are the primary driver of equity risk, contributing approximately half of the overall equity risk. Style factors and sectors represent 35% and 17% of the equity risk, respectively. … the largest style factor exposure is small size. … the average European institution has lower carbon intensities, but perhaps surprisingly lower ESG scores, than the MSCI ACWI benchmark“ (p. 22). My comment: I do not expect significant positive share- and bondholder pressure from these investors. This opens room for more customized investor-driven solutions (see the last research publication of this blog post).

Governance returns: From Crisis to Opportunity: The Impact of ESG Scores and Board Structure on Firms’ Profitability by Luis Seco, Azin Sharifi and Shiva Zamani as of Aug. 6th, 2024 (#13): “This study … of firms listed in the S&P 500 index from 2016 to 2022 reveals that firms with a higher BSI index (S?: Board structure index) demonstrate enhanced financial profitability …. Among the ESG components, only the Governance score significantly impacts financial profitability, … whereas Environmental and Social scores do not show a significant direct effect on net profit margins … the positive impact of robust board structures and governance practices is more pronounced in the post-COVID period “ (p. 16/17). My comment: Our study from 2014 revealed similar results, see Fetsun, A. and S?hnholz, D. (2014): A quantitative approach to responsible investment: Using ESG multifactor models to improve equity portfolios, Veritas Investment Arbeitspapier, presented at PRI Academic Network Conference in Montreal, September 23rd (140227 ESG_Paper_V3 1 ( naaim.org ) )

Other investment research

Kids beat adults: Invest Like for Your Kids: Performance and Implications of Children’s Investment Accounts on Portfolios in Adulthood by Denis Davydov and Jarkko Peltom?ki as of April 16th, 2024 (#78): “… we explore the performance of custodial investment accounts for children and their subsequent impact on portfolio performance in adulthood. We find that children’s investment accounts demonstrate superior performance, boasting an average Sharpe ratio over 35% higher and an annual return three times greater compared to adults’ accounts. Notably, the observed trading activity and account behavior in children’s accounts suggest a preference for passive investment strategies. In addition, the combination of lower volatility and higher returns in children’s accounts may indicate a more effective diversification strategy adopted by parents. … the risk-taking and overall account activity of teenage boys become significantly higher than those of girls, resulting in deteriorated investment performance. … individuals who had investment accounts during childhood consistently demonstrate superior performance compared to their peers who started investing in adulthood” (p. 26/27).

ETF liquidity risk: Passing on the hot potato: the use of ETFs by open-ended funds to manage redemption requests by Lennart Dekker, Luis Molestina Vivar, and Christian Weistroffer as of Aug. 1st, 2024 (#12): “Investment funds are the largest group of ETF investors in the euro area. Our results … show that investment funds were the most run-prone investor type during the COVID-19 crisis. We then show that ETF selling by open-ended funds during March 2020 was stronger for funds facing larger outflows. … This finding is consistent with funds using ETFs for managing liquidity and raising cash if needed“ (p. 16).

Loss aversion? A meta-analysis of disposition effect experiments by Stephen L. Cheung as of pril 3rd, 2024 (#53): “This paper reports a meta-analysis of the disposition effect – the reluctance to liquidate losing investments – in three standard experimental environments in which this behaviour is normatively a mistake. … the literature finds that investors are around 10% more willing to sell winning compared to losing assets, despite optimal choice dictating the opposite“ (abstract).

Hyper-managed customized investments? Beyond Active and Passive Investing: The Customization of Finance from the CFA Institute Research Foundation by Marc R. Reinganum and Kenneth A. Blay as of Aug. 6th, 2024: “…The overwhelming ascendancy of index funds associated within the US Equity Large-Cap Blend category is the exception rather than the rule. … The economics of customizable portfolios, enabled by technology facilitating hyper-managed separate accounts, will yield better outcomes for investors in terms of after-tax returns and alignment with investor attitudes and preferences. … In the future, active and passive investing will coexist but will increasingly take place within hyper-managed separate accounts, where the passive component will be implemented in an unbundled way rather than in a fund to maximize net economic benefits and other objectives. … The next frontier for asset managers and their service providers will be the era of low-cost customization“ (p. 76/77). My comment: See Index- und Nachhaltigkeits-Investing 2.0? | CAPinside

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