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:
This paper estimates the effect of sustainable shareholder proposals on firm's investments. We study the real estate industry where investments are sporadic and occur following depreciation waves. Using unique micro-data tracking investments in all public US commercial real estate properties over the past two decades, we find that sustainable shareholder proposals effectively steer firms to initiate tangible and long-lasting sustainable retrofits. However, proposals are ineffective or impair such investments when they do not coincide with reinvestment periods, or investors vote down the proposal. SEC restrictions in combination with the asset depreciation waves, create random variation enabling us to identify the impact of the shareholder proposal.
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 ESG-motivated portfolio tilting with its seemingly limited short-term impact. Using granular ESG data on 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: 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 (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