NBER Working paper: Timing Sustainable Shareholder Proposals in Real Asset Investments
With: Juan Palacios, Roberto Rigobon, Siqi Zheng
Link: https://ssrn.com/abstract=488A3596 & NBER Working Paper Series
Abstract:
Institutional investors increasingly file shareholder proposals to improve firms’ environmental and social performance, yet evidence on their effectiveness remains limited. This paper shows that timing is critical: proposals only trigger sustainable investment in firms when they coincide with natural reinvestment cycles — periods when firms’ long-lived assets are due for replacement. SEC filing restrictions, combined with the unpredictable timing of asset depreciation, generate quasi-random variation that allows us to identify the causal effect of proposal timing. Using novel microdata on retrofit activity across all U.S. publicly listed commercial real estate firms' properties from 1990 to 2022, we find that proposals filed during reinvestment cycles increase the share of sustainable retrofits by 21.5%; otherwise, they have no effect. We replicate these findings in the U.S. heavy manufacturing industry. Our results suggest that the effectiveness of sustainable finance depends not only on who investors target, but also when they do so.
Title: Tilting the wrong firms? Sustainable investing in transitioning firms
With: Dennis Bams
Link: https://ssrn.com/abstract=4126986
Abstract:
We introduce the concept of a sustainable transition phase to reconcile the growing prevalence of sustainability-motivated portfolio tilting with its seemingly limited short-term impact. Using granular sustainability information of 9,130 firms across 77 countries, we develop a novel method to separate firms’ sustainable aspirations from sustainable performance, enabling us to position firms along their sustainable transition trajectory. We find that portfolio tilting enhances firms’ sustainable performance through a four-step process. First, sustainable investors disproportionately tilt toward firms in the early stages of transition — those with high aspirations but low current performance. Second, this reallocation is associated with lower financing costs for those firms. Third, lower capital costs spur greater sustainable commitments and investment in green innovation. Fourth, firms increasingly fulfill these heightened commitments, mitigating concerns of greenwashing. These findings demonstrate how portfolio tilting can drive long-run improvements in environmental and social outcomes, even if short-run effects appear modest.
Title: Heterogeneous stakeholder pressure
With: Dennis Bams and Karen Maas
Link: https://ssrn.com/abstract=3906715
Abstract: Managers often confront a multitude of social and environmental demands that pull the firm's CSR efforts in multiple directions. We theorize and show that the configuration of those demands through heterogeneity across issues and stakeholders shapes whether firms respond with substantive changes or opt for symbolic gestures. Leveraging 17 years of U.S. shareholder-proposal data, we measure this heterogeneity in stakeholder pressure across CSR issues and stakeholders. We find that a one‑standard‑deviation increase in issue‑ and stakeholder‑level heterogeneity lowers the likelihood of substantive CSR adoption by 8 to 17 percentage points and raises symbolic CSR by comparable amounts. Instrumental-variables estimates that exploit wave-style proposal campaigns confirm that the effect is not driven by stakeholders targeting less sustainable firms more frequently. Heterogeneity in stakeholder pressure also increases CO2, VOC/PM emissions, workplace accidents, and CSR controversies, while eroding risk-adjusted stock returns in some specifications. Our findings recast CSR pressure as a dynamic system rather than a one-to-one relationship between stakeholder and firm; it is the configuration of demands, not simply their presence, that explains why some firms unlock substantive social and environmental gains while others drift into costly symbolism, thereby moving the debate from whether to how stakeholder pressure firms.
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 (2024), 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