Research

NBER Working paper: Timing Sustainable Engagement in Real Asset Investments 

With: Juan Palacios, Roberto Rigobon, Siqi Zheng

Link: https://ssrn.com/abstract=488A3596 & NBER Working Paper Series 

Abstract:

This paper estimates the effect of sustainable shareholder engagement on firm's investments. We study the real estate industry where investments are sporadic and occur following depreciation cycles. SEC restrictions (rule 240.14a-8) on shareholder proposals, in combination with the asset depreciation cycles, create random variation enabling us to identify firms' sustainable investment decisions. Using unique microdata tracking investments in all public US commercial real estate properties over the past two decades, we find that sustainable engagement effectively steers firms to initiate tangible and long-lasting sustainable retrofits. However, engagement is ineffective or impairs such investments when it does not coincide with reinvestment periods, or investors vote down the proposal. 

Title: Tilting the Wrong Firms? How Inflated ESG Ratings Negate Socially Responsible Investing under Information Asymmetries 

With: Dennis Bams 

Link: https://ssrn.com/abstract=4126986

Abstract:

We use granular ESG information to show that portfolio tilting distorts the aggregate formation of sustainable assets when socially responsible investors use ESG ratings under information asymmetries. We find that ESG ratings are unrelated to sustainable performance as they solely capture sustainable aspirations that, on average, do not improve subsequent sustainable performance. We uncover that socially responsible investors tilt their portfolios toward highly ESG-rated but not more sustainable firms. Using exogenous variation in ESG ratings, we observe that this portfolio tilting lowers capital costs and increases long-term growth rates of highly ESG-rated firms regardless of their sustainable performance. 

Title: Connecting the dots: An integrative framework of CSR antecedents, heterogeneous CSR approaches, and sustainable and financial performance

With: Dennis Bams and Karen Maas

Link: https://ssrn.com/abstract=3906715

Abstract: Not all firms improve their sustainable performance under increasing institutional CSR pressure. Where institutional theory extensively studies firm responses to institutional pressure, we invert the perspective and study how imprecision in institutional pressure leads to sub-optimal responses of firms. Specifically, we show that increased imprecise institutional pressure instigates suboptimal firm responses using a novel method that quantifies substantive and symbolic CSR for 4,370 firms over 17 years and 75 countries. This combination of responses results in a net negative aggregate impact on sustainable performance without significantly improving financial performance. Therefore, it is not whether but rather how firms are pressured on CSR that shapes their sustainable performance.

Title: Capital regulation induced reaching for systematic yield: Financial instability through fire sales

With: Martijn Boermans

Link: https://www.sciencedirect.com/science/article/abs/pii/S0378426623002212

Journal: Journal of Banking & Finance, 158, 107030

Abstract: Credit rating-based capital regulation induces financial institutions to take on additional systematic risk. In this paper, we uncover interconnected channels through which this systematic risk hoarding affects financial stability using a proprietary ECB bond holdings dataset. First, banks and insurance corporations effectively reduce their capital buffers by hoarding bonds with high systematic credit risk. Second, this hoarding increases the portfolio concentration of credit rating-constrained and unconstrained financial institutions. Third, in addition to the general tendency of regulated financial institutions to fire sale bonds after rating downgrades, we reveal even larger fire sales precisely when their regulatory advantages of reaching for systematic yield disappear. Using a shock in capital regulation, we establish this causal relationship between the severity of fire sales and the tendencies of regulatory-constrained financial institutions to seek bonds with high systematic credit risk. Such systematic risk hoarding reduces capital buffer by an additional 16% in economic downturns 

van der Kroft, Bram, Sustainability of Financial Institutions, Firms, and Investing (Successfully Defended 12 January 2024). Available at SSRN: https://ssrn.com/abstract=4648257