ESG
The Esg-Innovation Disconnect: Evidence from Green Patenting
Lauren Cohen (Harvard), Umit G. Gurun (UTD), Quoc H. Nguyen (Driehaus)
No firm or sector of the global economy is untouched by innovation. In equilibrium, innovators will flock to (and innovation will occur where) the returns to innovative capital are the highest. In this paper, we document a strong empirical pattern in green patent production. Specifically, we find that oil, gas, and energy producing firms – firms with lower Environmental, Social, and Governance (ESG) scores, and who are often explicitly excluded from ESG funds’ investment universe – are key innovators in the United States’ green patent landscape. These energy producers produce more, and significantly higher quality, green innovation. Our findings raise important questions as to whether the current exclusions of many ESG-focused policies – along with the increasing incidence of explicit divestiture campaigns – are optimal, or whether reward-based incentives would lead to more efficient innovative outcomes.
What is the impact of mutual funds’ ESG preferences on portfolio firms?
Maxime Couvert (UHK)
I manually collect 17,000 of these policies for a sample of 29 of the largest U.S. mutual fund families over 2006-2018. I find that voting policies are a major predictor of funds’ voting behavior. Exploiting staggered changes in funds’ voting policies, I show that investee companies adopt their mutual fund shareholders’ preferred governance provisions. This adoption is the result of mutual fund shareholders’ active voting.
I hand-collect the proxy voting guidelines of 29 of the largest U.S. mutual fund families for the 2006-2018 period from funds’ statements of additional information (SAIs). The dataset covers 2,600 funds that represent over 30% of the equity and balanced funds included in the CRSP Mutual Funds database.
I focus on 100 common ESG proposal topics. I show that these announced preferences are a key predictor of mutual funds’ votes, ahead of ISS and management recommendations.
My analysis reveals that portfolio companies adopt the governance preferences of their mutual fund shareholder base, but not the environmental and social ones. I find that mutual funds convey their governance preferences through their impact on voting results rather than through the use of outspoken activism tools such as proposal submissions.
Finally, I show that proxy voting guidelines do not only reflect preferences but are also an effective governance tool on their own, allowing non-mutual fund shareholders to strategically submit proposals that are more likely to receive shareholder support.
I obtain the announced preferences index (API) of mutual fund m towards provision p in year y, AP Im,p,y, by mapping “for”, “against”, and “case-by-case” policies to the values 1, −1, and 0, respectively. I aggregate the announced preferences of the different mutual fund shareholders at the firm-provision-year level.
The Sustainability Footprint of Institutional Investors: ESG Driven Price Pressure and Performance
Rajna Gibson Brandon (Geneva), Philipp Krueger (Geneva), Shema F. Mitali (Geneva)
We propose a novel way of measuring the equity portfolio-level environmental and social characteristics of a 13F institution (the “sustainability footprint”) and examine the relation between sustainability footprints and risk-adjusted investment performance.
The analysis shows that 13F institutions with better sustainability footprints outperform. The positive effect of sustainability footprints on the risk-adjusted performance of 13F institutions’ equity portfolios is concentrated in the environmental dimension and in more recent periods.
The main hypothesis of this paper is that stocks with good sustainability (or ESG) characteristics have experienced demand-driven price pressure, which has benefited investors with good portfolio-level sustainability characteristics and resulted in a positive link between portfolio sustainability and risk-adjusted portfolio performance.
The measures we propose are based on a combination of (i) institutional investor equity holdings data as reported in quarterly 13F filings to the SEC and (ii) stock-level environmental and social scores collected from different data providers. We refer to these measures as sustainability footprints.
Do Managers Walk the Talk on Environmental and Social Issues?
Sudheer Chava (GaTech), Wendi Du (GaTech), Baridhi Malakar (GaTech)
We train a deep-learning based Natural Language Processing (NLP) model on various corporate sustainability frameworks in order to construct a comprehensive Environmental and Social (E&S) dictionary that incorporates materiality.
We analyze the earnings conference calls of U.S. public firms during 2007-2019 using this dictionary. We find that the discussion of environmental topics is associated with higher pollution abatement and more future green patents.
Firms reduced their air pollution even after the U.S. announced its withdrawal from the Paris Agreement. Similarly, the discussion of social topics is positively associated with improved employee ratings. Overall, our results provide some evidence that firms do walk their talk on E&S issues.
We deploy a newly-developed deep learning model called Robustly optimized BERT approach (RoBERTa) to construct a novel dictionary.
To validate whether the E&S phrases selected by the RoBERTa model are actually used in the business world, we generate a corpus of words from 415 corporate social responsibility (CSR) reports 3 and filter out the phrases which never occur in the CSR corpus. We manually check 14,037 phrases occurring more than five times over three rounds, and get a dictionary of 614 “environmental” phrases and 697 “social” phrases. Since materiality is important for sustainability analysis (Khan, Serafeim, and Yoon, 2016), we further train RoBERTa to classify the resulting phrases into “material” and “immaterial” for each industry under the E&S topics.