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Want to Get on a Corporate Board? Who You Know Matters

Here's what the research says about how to get on a board of directors.

Are ESG strategies more effective for societal impact or performance?

In this article, we examine the research addressing the question of to what extent, if any, ESG strategies improve investment performance on a risk-adjusted basis, or if they are more effectively used for the societal impact they potentially have.

ESG Ratings how do they Compare Across Data Providers?

Investments aligned with environmental, social, and governance (ESG) principles are rapidly growing globally. In the exchange traded fund (ETF) industry, this gives rise to the power of ESG rating firms that have the influence to direct capital flows into ETFs tracking the indexes. This article examines the issues of substantial ESG rating divergence across rating firms, the impact on investors’ choices, and the influence on the ETF industry. The divergence appears to be the greatest in social and governance components, and is often qualitative in nature. The author found that certain economic sectors are more prone to ESG rating divergence than others. She presents a case study about two ESG ETFs that are viewed quite differently under various rating lenses, and offers suggestions to investors, advisors, and analysts on how to research ESG ETFs, given the major rating divergence. The article concludes with ways the ETF industry could improve its practices collectively to better serve investors with clarity and to sustain the growth of ESG impact investments.

Do Equity Markets Care About Income Inequality?

Do equity markets care about income inequality? We address this question by examining equity markets’ reaction and investors’ portfolio rebalancing in response to the first-time disclosure of the ratio of CEO to median worker pay by U.S. public companies in 2018. We find that firms’ disclosing higher pay ratios experience significantly lower abnormal announcement returns. Additional evidence suggests that equity markets “dislike” high pay dispersion rather than high CEO pay or low worker pay. Firms whose shareholders are more inequality-averse experience a more pronounced negative market response to high pay ratios compared to firms with less inequality-averse shareholders. Finally, we find that during 2018 more inequality-averse investors rebalance their portfolios away from high pay ratio stocks relative to other investors. Overall, our results suggest that equity markets are concerned about high within-firm pay dispersion, and investors’ attitude towards income inequality is a channel through which high pay ratios negatively affect firm value.

Financial Markets Responding to Climate Risks

This paper provides new evidence showing that carbon transition risk is becoming increasingly material and is priced both in equity and debt markets. We find that there is a widespread price-earnings discount linked to corporate carbon emissions. This discount varies, however, by sector and trends differently in Europe than in the US. We also find that a small discount emerges for corporate bonds, although it is statistically significant only for small caps. Finally, we find evidence that the pricing discount also emerges, albeit to a smaller extent, for other greenhouse gas emissions.

The Expected Returns to ESG-Excluded Stocks

What are the consequences of widespread ESG-based portfolio exclusions on the expected returns of firms subject to exclusion? We consider two possible theoretical explanations. 1) Short-term price pressure around the exclusions leading to correction of mispricing going forward. 2) Long term changes in required returns. We use the exclusions of Norwegian Government Pension Fund Global (GPFG -`The Oil Fund') to investigate. GPFG is the world's largest SWF, and its ESG decisions are used as a model for many institutional investors. We construct various portfolios representing the GPFG exclusions. We find that these portfolios have significant superior performance (alpha) relative to a Fama-French five factor model. The sheer magnitude of these excess returns (5\% in annual terms) leads us to conclude that short-term price pressure can not be the only explanation for our results, the excluded firms expected returns must be higher in the longer term.

Measuring a Firms’ Environmental Impact

To manage climate risks, investors need reliable climate exposure metrics. This need is particularly acute for climate risks along the supply chain, where such risks are recognized as important, but difficult to measure. We propose an intuitive metric that quantifies the exposure a company has to customers, or suppliers, who may in turn be exposed to climate risks. We show that such risks are not captured by traditional climate data. For example, a company may seem green on a standalone basis, but may still have meaningful, and potentially material, climate risk exposure if it has customers, or suppliers, whose activities could be impaired by transition or physical climate risks. Our metric is related to scope 3 emissions and may help capture economic activities such as emissions offshoring. However, while scope 3 focuses on products sold to customers and supplies sourced from suppliers, our metric captures the strength of economic linkages and the overall climate exposure of a firm’s customers and suppliers. Importantly, the data necessary to compute our measure is broadly accessible and is arguably of a higher quality than the currently available scope 3 data. As such, our metric’s intuitive definition and transparency may be particularly appealing for investors.

Calculating Supply Chain Climate Exposure

To manage climate risks, investors need reliable climate exposure metrics. This need is particularly acute for climate risks along the supply chain, where such risks are recognized as important, but difficult to measure. We propose an intuitive metric that quantifies the exposure a company has to customers, or suppliers, who may in turn be exposed to climate risks. We show that such risks are not captured by traditional climate data. For example, a company may seem green on a standalone basis, but may still have meaningful, and potentially material, climate risk exposure if it has customers, or suppliers, whose activities could be impaired by transition or physical climate risks. Our metric is related to scope 3 emissions and may help capture economic activities such as emissions offshoring. However, while scope 3 focuses on products sold to customers and supplies sourced from suppliers, our metric captures the strength of economic linkages and the overall climate exposure of a firm’s customers and suppliers. Importantly, the data necessary to compute our measure is broadly accessible and is arguably of a higher quality than the currently available scope 3 data. As such, our metric’s intuitive definition and transparency may be particularly appealing for investors.

Is There a Gender Gap in Kickstarter Campaigns?

This study focuses on the launch phase of the leading reward-based crowdfunding market—Kickstarter. It documents the behavior of male and female entrepreneurs in raising early stage capital. We find that women share as entrepreneurs in the platform (34.7%) does not equal to their share in the overall population, and they are concentrated in stereotyped sectors, both as entrepreneurs and as backers. We also find that women do not set lower funding goals than men, they enjoy higher rates of success than men, even after controlling for project categories and funding goals, and that backers of both genders have a tendency to fund entrepreneurs of their own gender. Our survey of Kickstarter backers finds evidence of taste-based discrimination by male backers.

How Race Influences Asset Allocation Decisions

Of the $69.1 trillion global financial assets under management across mutual funds, hedge funds, real estate, and private equity, fewer than 1.3% are managed by women and people of color. Why is this powerful, elite industry so racially homogenous? We conducted an online experiment with actual asset allocators to determine whether there are biases in their evaluations of funds led by people of color, and, if so, how these biases manifest. We asked asset allocators to rate venture capital funds based on their evaluation of a 1-page summary of the fund’s performance history, in which we manipulated the race of the managing partner (White or Black) and the strength of the fund’s credentials (stronger or weaker). Asset allocators favored the White-led, racially homogenous team when credentials were stronger, but the Black-led, racially diverse team when credentials were weaker. Moreover, asset allocators’ judgments of the team’s competence were more strongly correlated with predictions about future performance (e.g., money raised) for racially homogenous teams than for racially diverse teams. Despite the apparent preference for racially diverse teams at weaker performance levels, asset allocators did not express a high likelihood of investing in these teams. These results suggest first that underrepresentation of people of color in the realm of investing is not only a pipeline problem, and second, that funds led by people of color might paradoxically face the most barriers to advancement after they have established themselves as strong performers.

Employee Satisfaction and Stock Returns

“Employees are our greatest asset” is a phrase often heard from companies. However, due to accounting rules requiring that most expenditures related to employees be treated as costs and expensed as incurred, the value of employees is an intangible asset that does not appear on any balance sheet. That leaves the interesting question of whether employee satisfaction provides information on future returns.

What Percentage of Women Serve in Senior Investment Roles?

There is a “Pink” elephant in the room. The paucity of women in the key investment and decisión-making roles in finance is that “pink” elephant. While women are represented at 33%, 37%, and 63% in the law, medical, and accounting professions, respectively (Morningstar 2016), the percentage of female investment decision-makers in investment pales in comparison at less than 10%. And it gets worse if we look at sub-sectors. Take private equity, it’s 6% (Lietz, 2011), hedge funds at 3% (Soloway, 2011), or investment banking documented in this scorecard, at a global median of 0%.

Are Quant Approaches Best for Sustainable (ESG) Investing?

After 40 years or so, quantitative investing has evolved into a thriving practice. A major feature of the quantitative approach involves developing underlying numerical models and testing them on a historical (data) record and then forecasting where alpha may be embedded into the prices of a set of stocks. Whether you agree or disagree with this approach, it is difficult to deny that with the advanced state of data access and computational skill, “quants will win the day in ESG investing”. Such is the premise of this article and happily, it is accompanied by a compelling argument.

An Introduction to Investing in Carbon Markets

Carbon markets are quickly making their way to the forefront of Environmental, Social, and Governance (ESG) investing, as well as the finance community as a whole. The Kraneshares Global Carbon ETF, (Ticker: KRBN) (whose holdings I’ll dive into shortly) was one of the top 5 performing ETFs in 2021 on a % return basis (Ferringer, Best performing ETFs of the Year - etf.com). However, it doesn’t appear that 2021 was a one-hit-wonder for Carbon Markets, but instead, the beginning of a new and very real trend.

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