Market Reactions to ESG News, Outperformance Narrative, the "S", and Carbon Offsets
Here are 5 ESG insights you might have missed this week:
Which Corporate ESG News does the Market React to?-
From George Serafim (Harvard Business School) and Aaron Yoon (Northwestern University), an analysis showing that news related to social capital issues as defined by SASB generate the largest price reactions.
Using a dataset that classifies firm-level ESG news as positive and negative, we examine how stock prices react to different types of ESG news. We analyze 111,020 firm–day observations for 3,126 companies and find that prices react only to issues identified as financially material for a given industry by sustainability accounting standards, and the reaction is larger for news that is positive, receive more attention, and that is related to social capital issues.
We conclude that investors differentiate in their reactions based on whether the news is likely to affect a company’s fundamentals, and therefore their reactions are motivated by a financial rather than a nonpecuniary motive.
The World’s Largest Pension Fund Has Cooled on ESG. Should You?-
If a pioneer investor in ESG is getting cold feet, should you?
In July 2017, Japan’s $1.6 trillion Government Pension Investment Fund — the world’s largest — blazed a trail by putting 1 trillion yen ($9.1 billion) into three indices that track Japanese stocks that put emphasis on environmental, social and corporate governance issues. GPIF then plowed 1.2 trillion yen into two carbon-efficient indices in 2018, and another 1.3 trillion yen into two ESG foreign equity indices last December.
At issue is poor performance. For instance, one of GPIF’s earliest ESG picks was a thematic social index, which invests in domestic companies that hire and promote women. The MSCI Japan Empowering Women Index, the so-called Win index, has fared poorly against the benchmark Topix Index. Performance is all-important to GPIF: the fund is required to pursue a real investment return of 1.7% to support an aging Japan.
ESG Outperformance Narrative ‘Is Flawed’, New Research Shows-
Metrics for ‘quality’ such as profitability and conservative investment explain most of sector’s ‘alpha’, academics say.
A recent NYU paper found that the majority of more than 200 studies published since 2015 concluded that ESG boosted returns. These studies have helped open the floodgates to ESG investing, with self-proclaimed ESG funds attracting $340bn of inflows over the past two years, according to EPFR.
However, fresh analysis by Scientific Beta, a “smart beta” index provider linked to the Edhec Research Institute, a French academic think-tank, disputes the claims that ESG funds have tended to outperform the wider market, or, in industry jargon, generate “alpha”.
The "S" In ESG-
Climate change is frequently front and center in the conversation about environmental, social, and governance (ESG) concerns. However, social issues are becoming increasingly prominent.
Investors’ focus on reporting on issues around diversity, equity, and inclusion could become government-mandated reporting. While it is no surprise that there is an increasing focus on the environment and climate change under the current US administration, social issues are also at the forefront of the agenda. Last week, the Senate Committee on Financial Services considered multiple proposals for legislation on diversity data in a hearing titled “By the Numbers: How Diversity Data Can Measure Commitment to Diversity, Equity, and Inclusion.”
In considering these changes, the US senate recognized the significant benefits diversity and inclusion provides for businesses and shareholders. It may be an indication that the "S" will follow in the path of the "E" in ESG, garnering more attention in the future from investors and governments alike.
How Companies Capture the Value of Sustainability: Survey Findings-
What makes the difference between a sustainability program that produces business value and one that doesn’t? A new McKinsey survey identifies practices that distinguish value-creating companies from others.
Sustainability endeavors often make good business sense, promising to deliver revenue gains, cost savings, and other benefits that lift enterprise value. In our survey, 22 percent of respondents—the value-creating group that this article focuses on—say their companies realized modest or significant value from sustainability in the past five years.
The survey results highlight practices more widely followed by companies that are creating value from sustainability than by companies that aren’t. Experience also suggests that companies with effective sustainability programs tend to plan and manage these programs with the same discipline and commitment that they apply to other business initiatives.
One more thing: From Bloomberg- "These Trees Are Not What They Seem". A 13-minute video discussing the emerging carbon offsets market and the story of how the Nature Conservancy, the world’s biggest environmental group, became a dealer of meaningless carbon offsets.
Find the video here- https://www.youtube.com/watch?v=20xMbGkEIQI
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