The Demand for Sustainable Debt  Securities in Fixed Income Funds

• with S. Ramos-Britos und A.-P. Lambillon

• Meeting global climate goals requires trillions in sustainable investment, much of which depends on investor demand for sustainable debt securities. This paper analyzes green and sustainability-linked bond (SLB) holdings across over 2,500 European and U.S. fixed income funds from 2017 to 2023. The analysis reveals that allocations to green bonds and SLBs have grown steadily over time and are positively associated with the depth of sustainable debt markets. In the U.S., however, this growth was hindered by the 2020 Department of Labor rule and increasing anti-ESG sentiment, which affected both ESG and non-ESG funds. In contrast, the introduction of the Sustainable Finance Disclosure Regulation (SFDR) in Europe in 2021 led to a notable rise in sustainable bond allocations, particularly among ESG-designated funds. These findings highlight the critical role of political and regulatory frameworks in shaping institutional demand for sustainable fixed income assets.

ESG ratings and stock price informativeness

• with A. Kempf and P. Kirsch

• We examine the effect of ESG ratings on stock price informativeness in a difference-in-differences setting. Utilizing an expansion in MSCI’s ESG rating coverage and a variance decomposition model, we find that ESG ratings increase both firm-specific information and noise in stock prices. However, the increase in firm-specific information is much stronger so we conclude that ESG ratings improve stock price informativeness. This improvement is particularly strong for firms with no prior ESG information available and for more liquid stocks. Finally, we evaluate whether firm managers can learn from the more informative stock prices. We find that this is not the case since the increase in private firm-specific information in stock prices is offset by the increase in noise.

Environmental Tastes: Appearance and Effects

• with V. Beyer and C. Klein

• This study identifies environmental tastes in the US stock market and analyses implications for investors and companies. Environmental tastes are present in industries with high toxic emissions and lead to the shunning of high-polluting firms. A high-minus-low portfolio based on emission quartiles yields an average annual return of 5.75%, which remains significant after controlling for common risk factors. Thus, investors with low environmental tastes, such as hedge funds, have benefited from the environmental tastes of other investors over the past three decades. Implied cost of capital analyses, however, suggest a negligible effect on firms’ capital budgeting. Our findings emphasize the need for more granular investigations on the existence and effects of environmental tastes in capital markets.