3Yr·

𝔼𝕊𝔾 𝔸𝕝𝕡𝕙𝕒 𝕦𝕟𝕕 𝕤𝕠𝕟𝕤𝕥𝕚𝕘𝕖𝕣 𝔼𝕊𝔾 ℝ𝕒𝕥𝕚𝕟𝕘 𝕂𝕣𝕒𝕞

Based on a study by the Bürgerbewegung Finanzwende [1], which I didn't find particularly insightful, looked further at what studies are out there. Found a balanced summary of many important points. This is from 12/2020. [2] Anyone who holds sustainable or ESG products or is considering investing in them should take a look. In English.

Since I personally don't care about ESG, I was mainly interested in whether an ESG outperformance is to be expected, as is often postulated. Unfortunately, I am not really satisfied with the contradictory findings. Already in the [2] arguments and studies for both sides are listed.

I found 2021 Honey, I Shrunk the ESG Alpha interesting. [3] With a consideration of the risks and an appropriate adjustment any advantage disappears. This seems logical to me in that a relatively simple signal, like an ESG rating, should not lead to a real advantage in an efficient market. ScientificBeta also solicited opinions, from 58 professional investors, on their study and 67% agreed with the statement that there is no "ESG Alpha." [4]

Or as Morningstar writes, "What we find is that investors are currently paying too much for good ESG companies and too little for bad ESG companies." [5]

This does not devalue ESG or other ratings, they can simply be used for what they are intended: Investors should ask how ESG strategies can help them to achieve objectives other than alpha, such as aligning investments with their values and norms, making a positive social impact, and reducing climate or litigation risk. [3]

For me, much points in the direction that there is no "ESG alpha". Honestly, I myself see the ratings, from some points listed in [2] with skepticism and think nothing in the direction. Whether I am now subject to a confirmation bias you can write me in the comments.

[1] https://www.finanzwende-recherche.de/unsere-themen/nachhaltige-finanzmaerkte/greenwashing-im-grossen-stil/

[2] https://www.man.com/maninstitute/esg-investing

[3] https://cdn.ihsmarkit.com/www/pdf/0521/Honey-I-Shrunk-the-ESG-Alpha.pdf

[4] https://www.scientificbeta.com/factor/download/file/reactions-honey-i-shrunk-the-esg-alpha

[5] https://www.reuters.com/markets/stocks/global-markets-esg-2021-12-17/

10 Comments

Moritz@leveragegrinding

3Yr

GETQUIIIIIINNN WHY DO I SEE THIS only now and not as first when I open the app@getquin

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Europoor@Europoor

3Yr

@getquin pls fix

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Nicolas Professioneller Rolls Royce Großaktionär Coole Leute: @leveragegrinding, @SharkAce und @Lorena(aber die ist nen bisschen schüchtern)@getquinfuermerchverkauft

3Yr

Step 1: follow @Europoor Step 2: switch from trending to followers only

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SharkAce@SharkAce

3Yr

Are ESG/Sri investments usually more expensive than "normal" investments?

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Europoor@Europoor

3Yr

@SharkAce Costs can be many things. Direct costs are not incurred with shares, for example. With funds, however, there are. But costs can also be higher prices due to stronger demand. To quote from [2] Classic economic models like Pástor et al. (2020) suggest that the preference of some investors for 'green' firms will push up the stock price of the latter, leading to lower expected returns in equilibrium. In this model, in equilibrium investors hold the risk-free asset, the market portfolio, and an ESG portfolio. The allocation to each depends on risk aversion and on the relative preferences for ESG assets;

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How$y 🗽@Howsy

3Yr

Soon the nuclear energy sector will be green again! 😍 ⚛️=🌱 Otherwise, I don't care about ESG/SRI. But after all, there is a buyer for every product, otherwise the product would no longer have a raison d'être. The market takes care of that. Isn't that nice?

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Deleted User

3Yr

Comment was deleted

Europoor@Europoor

3Yr

@Eochaid https://www.ft.com/content/a3d67827-1f79-4b18-8c36-f26e18ced9cf

https://citywire.de/news/outperformance-mit-esg-aktien-mythos-oder-realitat/a1548398

https://cdn.lfde.com/wp-content/uploads/2020/05/13084539/Etude-ISR-Perf-2020-DE.pdf

https://www.lfde.com/de/268-esg/%ef%bb%bf-lfde-studie-esg-kriterien-entscheidend-fuer-outperformance-und-widerstandsfaehigkeit-besonders-im-krisenjahr-2020/

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Deleted User

3Yr

Comment was deleted

Europoor@Europoor

3Yr

@Eochaid Schau halt in die zweite Quelle da steht genug drin.

6.3. Evidence That Lower ESG Risks Has Led to Higher Returns

The already quoted study by Gompers et al. (2003) finds that, during the 1990s, a portfolio going long companies with high governance scores (strong shareholder rights) and going short companies with a low governance score produced a 4-factor alpha of about 8.5% per year;
Core et al. (2006) investigate the findings from Gompers et al. (2003) that firms with weaker governance tend to have lower abnormal returns. Firstly, the authors show that firms with weak governance tend to have worse operating performance. To prove that the differences in operating performance cause the differences in future returns, it is necessary to show that the former were unexpected. In an analysis of analyst forecast errors, however, the authors do not find evidence that analysts are surprised when forecasting differences in operating performance for firms with different levels of governance. The authors also study earnings announcements and find that the outperformance of good governance stocks is not concentrated around these events. This implies that investors do not learn about the differences in operating performance during earnings announcements, corroborating the hypothesis that this information does not come as a surprise. Finally, the authors also show that weak and strong governance firms are taken over at similar rates. Hence any differences in takeover probability are also unlikely to explain the differences in stock performance. The authors conclude that it is unlikely that it is the stronger governance that is causing the abnormal returns. They point to sample-specific effects or differences in expected returns as more likely causes;
Bebchuk et al. (2013) document that, while the link between investor rights and operating performance still existed throughout the 2000s, the link with stock performance disappeared, as market participants started paying attention to this factor;
An alternative explanation for the disappearance of the positive relation between governance and returns is provided by Li and Li (2018). The authors look at the value of a firm as the sum of its assets in place, its investment options and its divestiture options. Firms with stronger governance practices suffer from fewer investment distortions which should give them access to both better investment options and better divestiture options. Investment options are ample during booms and are riskier than the assets in place. Therefore, in periods of economic boom, when their investment options are plentiful, we should expect firms with good governance to have a higher beta, and thus higher expected returns. Divestiture options are less risky than assets in place. During economic busts we should expect firms with good governance to have a lower beta and thus lower expected returns. The authors carry out several empirical tests of this idea, finding, among other things, that firms with better governance do tend to have higher (lower) expected returns when growth is strong (weak) than firms with weaker governance;
The already quoted study by Brav et al. (2008) shows that stock prices tend to increase around the announcement of investment from an activist fund, with abnormal returns of approximately 7%;
An older study is Derwall et al. (2005), looking at the performance of SRI stocks in the period from 1995 to 2003. They find that SRI stocks outperform, even after accounting for market, style, and industry exposures. The outperformance is also robust to transaction costs;
Edmans (2011) shows that stocks with high employee satisfaction earned a significant positive four-factor alpha of 3.5% in the period 1984-2009. The author provides potential theoretical explanations for this effect. Satisfaction can bring additional motivation to employees, making them more productive. It can also bring them to identify with the firm, internalise its objectives, and therefore increase effort. Additionally, high employee satisfaction can improve retention, a key source of value in knowledge-based industries. Whatever the exact channel, it is not unreasonable to think that, because employee satisfaction is an intangible, investors might not be able to fully incorporate its effect on stock prices, as they do, for example, with R&D;
Hartzmark and Sussman (2019) do not find evidence that high sustainability funds outperform low sustainability funds. However, they find causal evidence that being categorised as a high sustainability fund increases inflows;
Hong et al. (2019) show that, in countries with positive drought trends, the stocks of food producers tend to exhibit lower future expected returns. This indicates that the investors are not pricing correctly the risk of drought;
Alok et al. (2020) find that money managers within regions that have been affected by a climate disaster underweight within that region more than other managers. They attribute this behaviour to salience bias, i.e. a tendency to overestimate the probability of events based on their emotional significance, vividness, or proximity. This is reminiscent of Dessaint and Matray (2017), who find that, after a hurricane strikes, managers of companies in the affected area temporarily increase corporate cash holdings as a reaction to a perceived increase in liquidity risk, even if actual liquidity risk has not increased;
Choi et al. (2020) find that retail investors tend to reduce their holdings of high emission companies after quarters with abnormally high temperatures. Stocks of companies with a high carbon intensity underperform stocks of companies with low carbon emissions after abnormally hot periods. A potential factor contributing to this is the fact that, as observed by the authors, retail investors tend to sell stocks of carbon-intensive companies.

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