AgPa #76: ESG Myth Debunking

Applying Economics – Not Gut Feel – to ESG (2023)
Alex Edmans
Financial Analysts Journal 79(4), URL/SSRN

I like myth debunking and this week’s AGNOSTIC Paper is one from this category. Alex Edmans, one of the leading scholars in the field, takes on a few widespread ESG beliefs. He shows that economics already offers a lot of tools to deal with the issues. To me, this paper was therefore kind of a relief as it shows that ESG doesn’t have to be as complicated as many people make it.

  • #1: Shareholder value is a very long-term concept
  • #2: Shareholders care about more than just money
  • #3: Sustainability risks affect cash flows more than discount rates
  • #4: Sustainable stocks not necessarily outperform
  • #5: Climate risk is an unpriced externality, not investment risk
  • #6: Companies‘ ESG metrics not necessarily capture their impact on society
  • #7: More ESG is not necessarily better than less
  • #8: More investor engagement is not necessarily better than less
  • #9: Paying for ESG performance does not necessarily improve ESG performance
  • #10: Not all market failures justify regulation

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AgPa #52: Happier Employees, Better Returns?

Employee Satisfaction and Long-Run Stock Returns, 1984–2020 (2022)
Hamid Boustanifar, Young Dae Kang
Financial Analysts Journal 78(3), URL/SSRN

A common sales-pitch of ESG strategies is the idea that those strategies not only do good for the planet and other stakeholders, but also generate higher returns. I am generally skeptic about this, but there are studies showing that certain ESG variables historically indeed predicted higher returns. A prominent example for this is the paper on employee satisfaction by Alex Edmans (2011). This week’s AGNOSTIC Paper is an out-of-sample test of this study with somewhat more thorough testing.

  • “Best Companies” outperformed several benchmarks
  • “Best Companies” outperformed during crises and out-of-sample
  • Quality and Low-Risk factors explain some of the premium on “Best Companies”

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AgPa #20: Performance of ESG Exclusions

The Expected Returns of ESG Excluded Stocks. The Case of Exclusions from Norway’s Oil Fund (2022)
Erika Berle, Wanwei (Angela) He, Bernt Arne Ødegaard
SSRN Working Paper, URL

This week’s AGNOSTIC Paper examines the ESG exclusions of a popular investor: the Norwegian sovereign wealth fund, also known as the “oil fund”. Between 2005 and 2021, the fund excluded 189 companies that engage in different types of “bad” practices or products. These exclusions are interesting because they reveal insights about the impact of ESG for a large real-world institutional investor…

  • ESG-excluded stocks generated up to 6.85% alpha per year
  • There seems to be a return premium on “bad” stocks

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AgPa #19: ESG Confusion (2/2)

Aggregate Confusion: The Divergence of ESG Ratings (2022)
Florian Berg, Julian F. Kölbel, Roberto Rigobon
Review of Finance, Corrected Proof, 1-30, URL

The second AGNOSTIC Paper on the confusion around ESG. This one examines the disagreement of ESG ratings in much more detail and provide some explanations why they are so different…

  • ESG ratings disagree: the average correlation is just 0.54
  • 709 indicators and 64 categories: no wonder that there is disagreement
  • Most disagreement comes from “measurement” and “scope”
  • There is a “rater effect” for ESG ratings

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AgPa #18: ESG Confusion (1/2)

ESG Rating Disagreement and Stock Returns (2021)
Rajna Gibson Brandon, Philipp Krueger, Peter Steffen Schmidt
Financial Analysts Journal 77(4), 104-127, URL/SSRN

This week’s AGNOSTIC Paper is about a quite controversial topic: Environmental, Social, and Governance a.k.a. ESG. ESG refers to the idea that investors should consider those dimensions in their decisions and thereby contribute to a more sustainable economy. But as this week’s paper shows, there is little agreement on what ESG actually is…

  • ESG ratings disagree: the average correlation is just 0.45
  • There is less ESG disagreement for larger, more profitable firms with credit ratings
  • Investors demanded a risk premium for ESG uncertainty

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