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This page contains working papers and research reports, that are double-reviewed by researchers within the Sustainable Investment Research Platform or within SIRP's research network. They are submitted to academic journals or in peer-reviewed academic book series.

Working papers of 2013

SIRP WP 13-2
The Added Value of ESG/SRI on Company and Portfolio Levels – What Can We Learn From Research?
Lars G. Hassel, Natalia Semenova

Abstract
The chapter draws together a set of academic papers to reveal if environmental, social, and governance (ESG) practices add value for companies and investors. The key proposition for the market valuation is that ESG factors have a direct impact on both a company’s financial performance and risk profile over a long period of time. The main finding on ESG implications is compelling: back-testing over time indicates that ESG is priced on company level and that market imperfections cannot continue to provide abnormal risk-adjusted returns on portfolio level based on publicly available ESG rankings. By breaking down ESG practices into different categories and adding in an industry focus, we determine where in the mixed bulk of existing empirical evidence, extra-financial value can be found.

Keywords:


SIRP WP 13-1
Delegated Portfolio Management Under Ambiquity Aversion
Annalisa Fabretti,  Stefano Herzel, Mustafa C. Pinar

Abstract
We examine the problem of setting optimal incentives to a portfolio manager (to be employed by an investor through a contract) making an ambiguity-robust portfolio choice with respect to estimation errors in expected returns. We consider a one-period model with a set of risky assets (with multivariate normal returns) whose expected returns are estimated with uncertainty and a linear sharing rule between a risk-neutral investor and a risk averse portfolio manager. The manager accepts the contract if the compensation offered is at least as large as a minimum compensation he determines from his minimum acceptable utility level. Adopting a worst-case max - min approach we obtain in closed-form the optimal compensation in various cases where the investor and the manager, respectively adopt or relinquish an ambiguity averse attitude. We apply our result to compute the compensation fees for an investment strategy restricted by Socially Responsible rules.

Keywords: Delegated Portfolio Management, ambiguity, robustness, socially responsible investment.


Working papers of 2012

SIRP WP 12-8
Asymmetry in Value Relevance of Environmental Performance Information: Contingency Effects of Size and Industry

Natalia Semenova, Lars G. Hassel

Abstract
Contemporary research documents a positive but weak price premium from environmental performance. The specific circumstances of pricing environmental performance of large and small companies and in polluting and clean industries have not, however, been investigated. This study predicts that financial markets price environmental performance beyond financial fundamentals differently depending on company size and the environmental risk of the industry relying on a set of SIX 300 companies listed on OMX Stockholm. Applying a value relevance model, the average results are in line with previous findings that environmental performance adds value beyond the book value of equity and earnings. The asymmetry in environmental performance is, however, driven by company size and the environmental risk of the industry.

Keywords: environmental performance, market premium, asymmetry, industry risk, size, moderated regression analysis



SIRP WP 12-07
Implications of Past Unethical Risk Behaviour of Board Members and CEOs on the Environmental Performance and Reporting Quality of Firms
Lars G. Hassel, Juha-Pekka Kallunki, Henrik Nilsson

Abstract
We investigate how the past unethical risk behaviour (PURB) of board members and top executives relates to the environmental performance and the quality of environmental reporting of Swedish listed firms. By focusing on past criminal convictions, suspected crimes, non-payment records and bankruptcy histories, we create a composite measure of ethical and risk preferences of these important company officials. Besides behavioural aspects, our empirical analysis also addresses how their investments in the firm, relative to their total wealth, influence environmental performance. The goal is to improve our understanding of the importance of the character of board members and the CEO for the environmental strategy of the firm. The results show a negative relation between board members’ PURB and the environmental performance of the firm. Boards with a higher proportion of risk-prone, unethical members seem to focus less on the environmental concerns of their businesses. The relation between board ownership and environmental performance is also negative. The result is consistent with board members with a large stake of their total wealth invested in the company considering environmental performance as costly in the short term. In accordance with prior research, we also document a positive relation between the proportion of women on the board and the environmental performance of the firm. Finally, our findings show that board members are more important than the CEO for the environmental performance of the firm, consistent with the board’s central role of developing the firm’s environmental strategy. Overall, the paper demonstrates the importance of diverse board members for the sustainability of the firm.



SIRP WP 12-06
Corporate Social Responsibility and Stock Market Efficiency
Leonardo Becchetti, 

Rocco Ciciretti, 

Alessandro Giovannelli



Abstract
We investigate the relationship between Corporate Social Responsibility (hereafter CSR) and I/B/E/S Details analysts’ earnings per share (EPS) forecasts using a large sample of US firm forecasts for the 1997-2004 period. We show that the net difference between CSR strengths and weaknesses significantly reduces both the absolute earning forecast error and its standard deviation after controlling for standard regressors and year, industry, and firm/broker effects. Our findings are consistent with the hypothesis that reduced transaction costs (and conflicts) with stakeholders and more transparent accounting practices implied by CSR significantly affect the bias. The CSR effect is strongly asymmetric and mainly driven by CSR weaknesses, consistent with the fact that the predicted channels of influence are mainly captured by CSR weakness scores. A crucial aspect of our findings is that CSR contributes to make financial markets efficient as unbiasedness and efficiency are (in almost all specifications) not violated in the subsample of the top 20 percent (lowest CSR weaknesses) companies, while they are in the bottom 20 percent CSR companies.

Keywords: Earnings per Share; Analyst Forecast; Corporate Social Responsibility.

JEL Classification Numbers: D84; E44; F30; G17; C53.



SIRP WP 12-05
Jūrate Jaraitėa, Andrius Kažukauskasa, Tommy Lundgren
Determinants of environmental expenditure and investment: evidence from Sweden

February 2012

Abstract
This paper provides new evidence on the determinants of environmental expenditure and investment. Also, by employing the Heckman selection models, we study how environmental expenditure and investment by Swedish industrial firms responded to the national and international policies directed to mitigate air pollution during the period 1999 through 2008. We find that firms that use carbon intensive fuels such as oil and gas are more likely to spend to and invest in the environment. Larger, more profitable and more energy intensive firms are more likely to incur environmental expenditure/investment. Overall, an important finding of our econometric analysis is that environmental regulation both on the national and international levels are highly relevant motivations for environmental expenditure and investment.

Keywords: environmental expenditure and investment, environmental policy, EU ETS, panel data



SIRP WP 12-4
Anna Thorsell, Anders Isaksson
Director experience and the performance of IPOs: Evidence from Sweden
February 2012

Abstract
An initial public offering (IPO) represents one of the final stages in the life of a small firm as it transitions from private to public. In this paper the experience of directors is examined to determine the extent of the role they play in ensuring a successful listing. Unique data from 122 IPOs on the Swedish Stock Exchange have been examined in a search for the effect of director experience on aftermarket performance. Specific aspects of director experience within a board, such as interlocking directorships and average tenure, are connected to the underpricing of Swedish IPOs. Contrary to expectations, no statistically significant relationship was found between long-run aftermarket performance and director experience at the time of an IPO. This suggests that the previous experience of directors, as measured in earlier studies, is less relevant to long-term aftermarket performance in Sweden. This stresses the importance of examining different institutional contexts.

Key words: 
Initial Public Offerings, The Board of Directors, Corporate Governance, Underpricing, Aftermarket Performance.


SIRP WP 12-3
Annalisa Fabretti, Stefano Herzel
Active Management Of Socially Responsible Portfolios

Abstract
We consider the problem of an investor who wishes to allocate her wealth according to some socially responsible (SR) criteria. The reduction in the investment set opportunity produces a a cost for the investor which we call ”cost of sustainability”. On the other hand, the investor is aware that the financial performances of some actively managed SR portfolios may be better or comparable to those of conventional portfolios. For this reason, the investor decides to entrust her wealth to a portfolio manager able to produce accurate forecasts of SR asset returns. The investor’s task is threefold: a) hiring a manager who can offset the cost of sustainability; b) setting a bonus to compensate the manager for the investment restriction; c) attracting only the best and more motivated managers. We provide a solution to these problems and apply our results to data consisting of S&P500 firms screened by using the social rating provided by the rating agency KLD.

Keywords: Socially Responsible Investment, Delegated Portfolio Management, Active Portfolio Selection


SIRP WP 12-2
Tommy Lundgren
Environmental performance and profits
Januray 2012

Abstract
In this study we investigate how firm level environmental performance (EP) affect firm level economic performance measured as profit efficiency (PE) in a stochastic profit frontier setting. Analyzing firms in Swedish manufacturing 1990-2004, results show that EP induced by environmental policy is not a determinant of PE, while voluntary or non-policy induced EP seem to have a significant (+) effect on firm PE in most sectors. The evidence generally supports the idea that good EP is also good for business, as long as EP is not brought on by policy measures, in this case a CO2 tax.

JEL-classification: D20, H23

Key words: CO2 tax, environmental performance index, profit efficiency, stochastic frontier analysis



SIRP WP 12-1
Jonas Nilsson, Sebastian Siegl, Fredric Korling

The complex decision making environment of socially responsible mutual fund investors:
Introducing a disclosure framework focusing on information quality

January 2012

Abstract
One of the more significant trends in the retail finance sector in the last few years has been the introduction of different types of socially responsible investment (SRI) products targeted towards private investors. However, the SRI funds available to consumers differ drastically in both the issues they target and the manner in which they incorporate these into the investment process. Because of this, consumers who want to make an educated socially responsible (SR) investment decision do not only have to evaluate the fund’s financial characteristics but also its socially responsible characteristics. Against this background, this article aims to evaluate whether the information provided to retail investors in the marketplace allow them to make educated SR-investment decisions. In order to accomplish this aim, two separate analyses are performed. First, an examination of the decision making environment shows that while there is an abundant quantity of information, it is questionable if this information is of sufficient quality to help investors make appropriate SR-investment decisions. Second, an analysis of the regulatory environment shows that while consumers have some aid from legislators through the regulations that dictate information requirements for the financial aspects of the fund, few rules exist for how mutual fund providers should present information regarding the socially responsible characteristics of the fund. In all, this leaves consumers who want to make a good SR-investment decision in a vulnerable position. In order to improve their situation, a new disclosure framework that emphasizes qualitative information is presented.

Keywords: Socially responsible investment, retail investors, decision making, financial regulation, information disclosure



Working papers of 2011



SIRP WP 11-9
Stefano Herzel, Marco Nicolosi

A Socially Responsible Portfolio Selection Strategy
September 2011

Abstract
We propose a new methodology to integrate Socially Responsible (SR) standards in the process of investment decisions. We use SR scores of companies in the S&P500 and in the Domini Social Index (DSI) to define the level of SR of a portfolio. We model this as a linear combination of the SR scores of the single stocks with coefficients given by the portfolio's weights. We form portfolios that minimize the tracking error from the DSI while improving the SR level. The analysis of the performances of the portfolios show that the improvement of the SR is usually possible at a small cost in terms of tracking error, and that the improved portfolios produced, in most of the cases, better financial performances than the benchmark.

Keywords: Social responsibility, optimal portfolio, tracking error



SIRP WP 11-8

Maria Andersson, Tommy Gärling, Martin Hedesström, Anders Biel
Effects on Stock Investments of Short Versus Long Evaluation Intervals

Abstract
The aim was to investigate whether performance-related bonuses to stock portfolio managers based on short evaluation intervals would have negative effects on performance. Three experiments were conducted in which participants role-played being employees of an investment firm mandating them to invest in stocks. In Experiment 1 36 undergraduates purchased fictitious stocks whose prices differed in volatility and for which there was an increasing, decreasing or no price trend over time. Opening and closing prices of the stocks were in different conditions provided for 15 preceding trading days, only for the last 10 trading days, or only for the last five trading days. The participants’ task was to predict the closing price given an opening price and to choose how many of 100 stocks to purchase to the known opening price (risk aversion) or the unknown closing price (risk taking). In Experiment 2 employing another 36 undergraduates the prices were visually displayed as scatter plots across trading days. The results showed in both experiments that performance was better than chance but not markedly worse for shorter than longer evaluation intervals. Longer evaluation intervals may have increased information processing load to the point where the additional information had no effect. Possibly for this reason visual information had some impact in reducing prediction errors for the longer evaluation intervals. In Experiment 3 another 36 undergraduates performed the same task under three conditions varying in amount and reliability of price information, either stock prices for the preceding 15 days (as in Experiment 1), only for each third day (five days) of the preceding 15 days, or for five days with the prices consecutively aggregated over three days. Only numerical price information was provided. The results showed that accuracy of performance increased for higher reliability due to aggregation, whereas again there was no difference between five and 15 trading days.

Keywords: Stock investment; bonus; evaluation interval; price volatility


SIRP WP 11-7
Rickard Olsson
Optimized sustainable equity portfolios: Performance, screening, factor exposures and tracking error
September 2011 rev

This study constructs, and assesses the performance of, portfolios aimed at satisfying both sustainability criteria and typical constraints on tracking error and style exposures faced by many investors including institutions. For four different portfolio allocation models, it is examined how risk-adjusted performance, tracking error and factor exposures vary with portfolio sustainability. A combination of positive and negative screening is used to define increasingly sustainable investable sets of stocks, from which increasingly sustainable portfolios are constructed using each of the four allocation models; the negative screen is applied to stocks with controversial business issues indicators. This is done for all seven areas of sustainability covered by KLD Research & Analytics (KLD) ratings. The S&P500 is the universe.



SIRP WP 11-6
Ian Hamilton
Fiduciary Duty Obligation and Responsible Investment Models in Swedish National Pension Funds

July 2011

Abstract
As one of the first countries, Sweden introduced a regulatory framework for responsible investment (RI) for the national pension funds (AP funds). This paper reports on an exploratory field study with the purpose of examining how five AP funds, independent of each other, interpreted and implemented the directive within their mandate of fiduciary responsibility. Strategies on how to integrate environmental, social, and governance (ESG) factors in investment decision making are important for pension funds as they traditionally have focused on values-based risk management and seldom on the profit- or alpha-seeking opportunities of integrating ESG with the financials. The diversity of the pension system in Sweden allows the paper to compare a national systems-oriented pension plan with a market-oriented and customer-focused pension plan. The paper shows how two different RI models were the outcome of the same directive and how the models were implemented in investment practice. The main conclusion of this study is that the diversity of pension schemes will have implications for how the fiduciary responsibility has been carried out. Empirical findings also suggest that a toothless RI directive lacking statutory clarifications has had a slowing effect on ESG integration in Swedish AP funds compared to other European countries. The paper concludes with a forward-looking discussion on future RI practices for AP funds.

Keywords: Responsible investment, ESG integration, fiduciary duty, Principles for Responsible Investment, norm-based screening, reputation risk



SIRP Sustainable Value Report 11-05

Ralf Barkemeyer, Frank Figge, Tobias Hahn, Andrea Liesen, Frank Müller

Sustainable ValueCO2 Creation by Pulp & Paper Companies
November 2011

This  study  assesses  the  carbon  performance  of  25  global  pulp  &  paper  companies  using  the   Sustainable   Value   approach.   The   Sustainable   Value   approach   extends   the   concept   of   opportunity  costs  that  is  well  established  on  financial  markets  to  include  environmental  and   social  aspects.  This  allows  for  the  fact  that  companies  not  only  require  economic  capital  for   their   business   activities,   but   also   environmental   and   social   resources.   To   create   positive   Sustainable   Value,   a   company   must   use   its   economic,   environmental   and   social   resources   more   efficiently   than   its   market   peers.   In   this   study,   we   concentrate   on   the   creation   of   Sustainable   Value   with   corporate   emissions   of   carbon   dioxide   (Sustainable   ValueCO2)   and   therefore   align   corporate   contributions   to   climate   change   with   the   valuation   methodology   applied  to  investment  and  financial  market  decisions.    



SIRP WP 11-04
Marco Nicolosi, Stefano Grassi, Elena Stanghellini
Item Response Models to measure Corporate Social Responsibility
October 2011

Abstract
Compliance with Corporate Social Responsibility (CSR) standards may require capacity that varies from one aspect to the other and companies in different industries may encounter different difficulties. Since CSR is a multidimensional concept, latent variable models may be usefully employed to provide a unidimensional measure of the abil- ity of a firm to fulfil CSR standards. A methodology based on Item Response Theory has been implemented on the KLD sustainability dataset. Results show that companies in the industries Oil & Gas, Industrials, Basic Materials and Telecommunications have a higher difficulty to meet the CSR standards. Criteria based on Environment, Community relations and Product quality have a large capacity to se- lect the firms with the best CSR performance, while Governance does not exhibit similar behavior. A stock selection based on the ranking of the firms according to our CSR measure outperforms, in terms of risk-adjusted returns, stock selection based on other criteria.

Keywords: Socially Responsible Investment; CSR ability; latent variable model; item response theory

JEL Classification: C43; G11; G14; G19


SIRP WP 11-03 - UPDATED VERSION 2

Leonardo Becchetti, Rocco Ciciretti


Stock Market Reaction to the Global Financial Crisis: testing for the Lehman Brothers' Event

 (PDF)


April 2011, 

Version 2



Abstract


We analyse with an event study approach the stock market reaction to Lehman Brothers' ling for chapter 11. Our inquiry on abnormal returns of about 2,700 stocks around the event date documents that RiskMetrics-KLD corporate governance and product quality indexes capture factors a ecting investors' reaction to the shock. We also nd that investors rationally attribute more value to the information on each rating domain than to affiliation/non-affiliation to the FTSE KLD 400 Social Index. Investors seem to discover, after the event, that KLD ratings provide original information which is not captured by traditional nancial rating indicators.

Keywords:  Global Financial Crisis, Event Study, Corporate Governance, Product Quality, Ratings.

JEL codes: G14, G24, G01.



SIRP WP 11-02
Jonas Nilsson, Johan Jansson, Sofia Isberg and Anna-Carin Nordvall

Determinants of customer satisfaction with socially responsible investments: Do ethical and environmental factors impact customer satisfaction with SRI profiled mutual funds? (PDF)
April 2011

Abstract
Although much research has been published on green/ethical consumer behaviour, the question of how consumers evaluate pro-socially positioned products in the post-purchase stage is still virtually unexplored. This is troubling given the significance of post-purchase evaluations within general marketing theory. To address this gap in the literature, this study examines how a set of technical and functional quality attributes contribute to customer satisfaction in a socially responsible investment (SRI) setting. The results of the study show that perceived financial quality of the SRI mutual fund is the most important predictor of customer satisfaction. However, perceived social, ethical, and environmental (SEE) quality is also positively related to satisfaction for the SRI mutual fund. Based on these results, it is argued that although SEE quality is important to customers, marketers of pro-socially profiled products should primarily focus on conventional quality attributes, as a good SEE record unlikely to generate customer satisfaction alone.

Keywords: Customer satisfaction, ethics, perceived quality, socially responsible investment, mutual funds




SIRP WP 11-01
Runar Brännlund, Tommy Lundgren and Per-Olov Marklund

Environmental performance and climate policy (PDF)
March 2011

Abstract
This study’s ultimate goal is to analyze environmental performance (EP) at firm level and the effectiveness of environmental policy along with other possible determinants. Especially, the empirical analysis aims at exploring the relationship between the actual EP of firms in terms of CO2 emissions per output unit, and one aspect of Swedish environmental policy, the CO2-tax. Since Sweden was the first country to introduce a specific CO2-tax in 1991 we believe that the Swedish case may serve as an appropriate “test bench” for analyzing EP and the effectiveness of environmental policy in general. To achieve our objective we use a panel data of Swedish manufacturing spanning over the period 1990-2004. The results suggest that EP has improved in all sectors of manufacturing. We also see that production increases while emissions decrease in many sectors, indicating a decoupling of economic growth and environmental degradation. Furthermore, firms’ EP responds to changes in the CO2-tax and fossil fuel price, but is more sensitive to the tax, indicating different EP behavior among firms depending on why the cost of fossil fuels change. Several sectors also display a positive tendency over time in EP, which may suggest that EP is to some extent stimulated by an overall boost in environmental awareness in society and firms.

Keywords: CO2 emissions, CO2-tax, environmental performance. 
JEL codes: D24, Q56, Q58.




Working papers of 2010


SIRP WP 10-16

Joakim Sandberg and Jonas Nilsson

Conflicting Intuitions about Ethical Investment: A Survey among Individual Investors (PDF)

December 22, 2010

Abstract
This present paper relates the results of an exploratory survey distributed among individuals invested in so-called ethical (or socially responsible) mutual funds, and attempts to develop a better understanding of these individuals’ ethical beliefs – especially concerning whether, or why, they think that the practices of contemporary ethical funds indeed are ethical. Survey questions were informed by the contemporary philosophical literature pertaining to the ethics of investing and designed to elicit the respondents’ basic intuitions about the ethics of different investment strategies. Our results indicate that respondents show considerable support for both a moral purity perspective and a moral effectiveness perspective, and they seem to find it difficult to choose between these perspectives. Indeed, we find that this is not just a conflict between different groups of investors with different moral outlooks, but many individuals themselves seem to be struggling with conflicting ethical intuitions. We argue that these results are incompatible with the idea that ethical investors refrain from thinking systematically about ethics simply in order to be able to get away with also investing in non-ethical funds. A more probable explanation is developed building on the contemporary psychological literature concerning intuitions in ethics.




SIRP PhD Dissertation


Cristiana Manescu


Economic Implications of Corporate Social Responsibility and Responsible Investments    (PDF)
November 12, 2010

Abstract
Paper 1 (with Catalin Starica): This study conducts an in-depth analysis of the association between a
unique ten-dimensional set of Corporate Social Responsibility (CSR) scores and firm profitability, as
measured by Return on Assets (ROA). We find that non-linear (semi or non-parametric) regression
methods bring important improvements in explaining profitability relative to a classical linear approach.
While a number of CSR variables like corporate governance, talent attraction and codes of conduct might
have some explanatory power, the CSR scores do not improve over the standard variables known to be
associated with ROA.
Paper 2 (with Constantin Belu): This paper proposes a novel Corporate Social Responsibility (CSR)
index based on a Data Envelopment Analysis (DEA) model. Acknowledging the argument that companies
might favor those CSR dimensions that provide strategic competitive advantages, we argue that the index
can capture companies’ strategic approach to CSR. Furthermore, our findings reveal a neutral
relationship between this strategic CSR index and economic performance as measured by ROA and
Tobin’s Q, when controlling for firm unobserved heterogeneity and past economic performance. By
contrast, an equally-weighted index of the same CSR indicators is found to be negatively related with
ROA, which reinforces our claim that this specific DEA-based index is a measure of strategic CSR.
Paper 3: Using detailed data on seven environmental, social, and governance (ESG) attributes for a long
panel of large publicly-traded U.S. firms during July 1992-June 2008, only community relations were
found to have had a positive effect on risk-adjusted stock returns, which effect was not compensation for
risk but could be due to mispricing. Additionally, a changing effect of employee relations was found from
positive during July 1992-June 2003 to negative during July 2003-June 2008. The positive effect could be
due to mispricing, whereas there is some evidence that the negative effect was compensation for low
non-sustainability risk. A weak negative effect of human-rights and product safety indicators on riskadjusted
stock returns in the more recent period was also found to be likely due to mispricing. The
implications are that certain ESG attributes might be value relevant but they are not efficiently
incorporated into stock prices.
Paper 4: This paper investigates how annual abnormal returns react to current and past rating revisions
in corporate responsible behavior in a panel data spanning 16 years. I find that increases in less
responsible behavior led to persistent negative abnormal returns, which were particularly strong for the
area of corporate governance, and weaker for product safety and the environment. These results are
robust to concerns of endogeneity, i.e., that the negative stock price movements would lead to an update
in the areas of social responsibility concerns. In contrast, increases in already strong responsible
behavior did not generate a systematic reaction in stock returns.


Keywords: Corporate Social Responsibility, Strategic CSR, Socially Responsible Investments,
Sustainability, Firm Profitability, Stock Returns, Statistical Learning Techniques, Variable Selection,
Smooth Splines, Regression Trees, Data Envelopment Analysis, Difference-GMM, Risk-Factor Test,

JEL: C14, C22, C23, C26, C52, C67, G12, G14, G30, M14 



SIRP WP 10-15

Stefano Herzel, Marco Nicolosi and Catalin Starica

The cost of sustainability in optimal portfolio decisions
October 6, 2010

Abstract
We examine the impact of sustainability criteria, as measured by the KLD scores, on optimal portfolio selection performed on an investment universe containing the equities in the S&P500 index and covering the period between 1993 and 2008. The optimizations are done according to the Markowitz mean-variance approach while sustainability constraints are introduced by eliminating from the investment pool those assets that do not comply to di®erent social responsibility criteria (screening). We compare the two efficient frontiers, i.e. the one without and the one with screening. A spanning test is performed to determine if the differences between the two types of efficient frontier are significant. We introduce a measure of how much an investor has to pay (through loss of return or through additional risk) in order to satisfy given sustainability criteria. The analysis is carried on separately on the three main dimensions of sustainability, namely Environmental, Social and Governance.

Keywords: Sustainability; Optimal portfolio



SIRP PhD Dissertation


Jonas Nilsson

Consumer Decision Making in a Complex Environment: Examining the Decision Making Process of Socially Responsible Mutual Fund Investors (PDF)

August 27, 2010

Abstract

During the last few decades, "regular people" have become increasingly involved with investing in the stock market. One way of doing this, which has become more and more popular, is to invest in mutual funds. The mutual fund industry has, due to its explosive growth, been described as a success story of the 20th century. These days, sources report that over 70% of the Swedish population actively invests in mutual funds.
This thesis is an investigation into consumer decision making regarding one specific type of mutual fund: Socially Responsible Investment (SRI). SRI profiled mutual funds are different from "regular" mutual funds in that they incorporate social, ethical, and environmental (SEE) criteria. In this manner, SRI profiled mutual funds could be said to have two separate dimensions. The regular financial dimension has the purpose of generating a high level of financial return while managing risk. The socially responsible dimension, on the other hand, focuses on incorporating SEE issues into the investment process.
However, consumers that desire to choose mutual funds that will both perform well financially and have a good socially responsible dimension face a more difficult decision than consumers who choose to invest in "regular" mutual funds. As each of the dimensions come with its own set of challenges which the consumer must overcome, choosing an appropriate combination of these is a difficult task. In this manner, consumers of SRI profiled mutual funds have to navigate through a complex decision making environment to arrive at a good choice.
Based in this notion of decision making in complex environments, this thesis investigates how consumers combine their "traditional" financial objectives with their "additional" SEE consideration and examines the impact of personal factors related to these two areas on consumer investment in SRI profiled mutual funds. Four separate essays on these topics, each investigating a specific stage in the Engel-Kollat-Blackwell (1968) consumer decision making process, are presented. Moreover, in order to understand how complexity impacts consumer decision making in the area, the results of each study are analyzed against a conceptual framework focusing on the complexity of the market.
The results show that consumers of SRI profiled mutual funds care about both financial and SEE issues. However, how consumers combine these in their decision making differs. Factors, such as the stage of the purchase decision making process, personal abilities, preferences, and perceptions are found to impact consumer decision making. Against this background, this thesis generates an increased understanding of consumer decision making in complex decision making environments in general and of SRI profiled mutual funds in particular.

Keywords
: Consumer decision making, complex decision making environments, socially responsible investment, ethical investment, mutual funds, private investment



SIRP WP 09-09 - UPDATED VERSION 3


Eli Amir, Juha-Pekka Kallunki and Henrik Nilsson

Personal Character and Firm Performance. The Economic Implications of Having Unethical Board Members (PDF)
July 21, 2010, Version 3

Abstract

Unique proprietary data on Swedish board members reveal that a non-trivial proportion of board members in Swedish listed firms have been convicted of crimes. We hypothesize and find evidence supporting the argument that criminal convictions and other proven dishonest behavior impair the boards’ ability to monitor and advice the firm’s management. Specifically, we find that the greater the proportion of unethical board members, the lower is profitability and the higher are the volatility of earnings and cash flows. We also find that earnings of firms with more unethical board members are lower and less value-relevant. Finally, we find that board members exhibiting unethical behavior are more likely to be males than females. Our results suggest that individuals’ behavioral aspects should be considered when appointing them to the board.

Keywords:
Unethical behavior, Convicted board members, Corporate governance, Profitability, Accounting quality, Earnings volatility



ECCE 

Jeroen Derwall, Kees Koedijk and Jenke Ter Horst 


A Tale of Values-Driven and Profit-Seeking Social Investors

July 13 2010

Abstract

A segmentation of the socially responsible investing (SRI) movement by values-versus-profit orientation solves the puzzling evidence that both socially responsible and controversial stocks produce superior returns. We derive that the segment of values-driven investors, who are willing to sacrifice financial return to derive non-pecuniary utility, is primarily served by“negative” screens that avoid controversial stocks. Consistent with values affecting stock prices, controversial stocks produce anomalously positive returns. The profit-driven segment is best served by specific “positive” screens involving environmental and social issues, which also have produced superior returns. The finding that each segment is served by a different form of SRI explains why the average SRI mutual fund, which adopts a mixture of screens, neither outperforms nor underperforms conventional peers. Our conclusions highlight that different views about SRI that are observed in the literature are complementary in the short run, which begs the question whether SRI should be the only term for different types of social investment practices. However, economic theory predicts that profit-generating opportunities disappear in the long run, which is supported by our empirical analysis over the period 1992-2008.

Keywords:
Investor Behavior, Values, Socially Responsible Investing (SRI), Risk, Return.

JEL classification:
A13, G11



ECCE

Rob Bauer and Daniel Hann


Corporate Environmental Management and Credit Risk
June 30, 2010


Abstract

This study analyzes corporate environmental management and its implications for bond investors. We provide support for the view that the credit standing of borrowing firms is influenced by legal, reputational, and regulatory risks associated with environmental incidents. Using environmental information on 582 U.S. public corporations between 1995 and 2006, we document that (i) environmental concerns are associated with a higher cost of debt financing and lower credit ratings, and (ii) proactive environmental practices are associated with a lower cost of debt. The results are robust to numerous controls for company and bond specific characteristics, alternative model specifications, and industry membership.

Keywords:
Environmental risk management, Cost of debt, Credit ratings, Litigation, Regulatory risk, Reputation risk, Climate change

JEL classification:
G32; G33; Q51; Q56; M49; K32



SIRP WP 10-14

Leonardo Becchetti, Claudia Ceniccola and Rocco Ciciretti
Stock Market Reaction to the Global Financial Crisis: the Role of Corporate Governance and Product Quality Ratings in the Lehman Brothers' Event (PDF)
July 8, 2010

Abstract
This paper focuses on the role of social factors for booms-bubbles-busts cycles in stock markets. It is argued that indirect and direct social influences are important contributors by reinforcing stock investors’ cognitive biases exaggerated by affective influences. A review of herding research primarily undertaken by financial economists is followed by a demonstration that psychological theories of direct social influence (imitation) have bearings on the understanding of the herding phenomenon in stock markets. How to continue this research with relevance for regulations of stock markets is discussed.

Keywords:
Global Financial Crisis, Event Study, Corporate Governance, Product Quality, Ratings.


SIRP WP 10-13

Anders Biel, Maria Andersson, Martin Hedesström,  Magnus Jansson, Eva-Lotta Sundblad and Tommy Gärling

Social Influence in Stockmarkets: A Conceptual Analysis of Social Influence Processes in Stock Markets (PDF)
July 1, 2010

Abstract
This paper focuses on the role of social factors for booms-bubbles-busts cycles in stock markets. It is argued that indirect and direct social influences are important contributors by reinforcing stock investors’ cognitive biases exaggerated by affective influences. A review of herding research primarily undertaken by financial economists is followed by a demonstration that psychological theories of direct social influence (imitation) have bearings on the understanding of the herding phenomenon in stock markets. How to continue this research with relevance for regulations of stock markets is discussed.

Keywords:
Social influence, stock investments, conceptual analysis



SIRP WP 10-12

Tommy Lundgren and Per-Olov Marklund

Climate Policy and Profit Efficiency (PDF)
June 28, 2010

Abstract
As widely recognized, human mankind stands before the most challenging problem of preventing anthropogenic climate change. As a response to this, the European Union advocates an ambitious climate policy mix. However, there is no consensus concerning the impact of stringent environmental policy on firms’ competitiveness and profitability. From the traditional ‘static’ point of view there are productivity losses to be expected. On the other hand, the so called Porter hypothesis suggests the opposite; i.e., due to ‘dynamic’ effects, ambitious climate and energy policies within the EU could actually be beneficial to firms in terms of enhanced profitability and competitiveness. Based on Sweden’s manufacturing industry, our main purpose is to specifically assess the impact of the CO2 tax scheme of Sweden on firms’ profit efficiency. The empirical methodology is based on stochastic frontier estimations and, in general, the results suggest we can neither reject nor confirm the Porter hypothesis across industry sectors. Therefore, we do not generally confirm the argument of stringent environmental policies having positive dynamic effects that potentially offset costs related to environmental policy.

Keywords: CO2 tax, efficiency, stochastic frontier analysis, Swedish industry.

JEL classification: D20, H23, Q52, Q55



SIRP WP 10-11

Martin Hedesström, Maria Andersson, Tommy Gärling, and Anders Biel

Preferences for Short-Term Versus Long-Term Bonuses for Stock Investments (PDF)
June 18, 2010

Abstract
Performance-related bonuses in the finance sector are considered important tools to provide incentives. An example is that stock portfolio managers are awarded bonuses conditionally on their portfolios producing superior returns either relative to an index or equivalent funds. Concerns are however expressed that bonuses to portfolio managers are based on too short time intervals, which may impact negatively on the degree to which environmental and social factors are taken into account in investment decisions. The question addressed in this article is how bonus schemes can be designed so that delayed payouts will be equally motivating as short-term payouts. We have conducted two experiments to investigate preference for bonus payments that are paid out either frequently of infrequently. In Experiment 1 employing 27 undergraduates, preferences were measured for one certain long-term bonus versus four certain bonuses evenly distributed across time. A majority chose the short-term bonuses, and in order for a long-term bonus to be equally preferred the results showed that it needs to be approximately 40 percent higher than the four combined short-term bonuses. Experiment 2 employing another 36 undergraduates introduced uncertainty of outcomes which more accurately reflects the setting faced by stock investors. A four-year bonus is compared to four one-year bonuses. Uncertainty was the same, decreasing or increasing over the four years. The results showed that decreasing uncertainty made a majority prefer the four-year bonus to the added one-year bonuses. In conclusion, introducing uncertainty in choices concerning future outcomes is shown to reduce the extent to which future bonus outcomes are discounted relative to immediate bonus outcomes.

Keywords: Portfolio management, Performance-related bonus, Time discounting



SIRP WP 10-10

Jonas Nilsson, Anna-Carin Nordvall and Sofia Isberg

The information search process of socially responsible investors (PDF)
June 16, 2010

Abstract
Largely fuelled by an increasing social and ethical concern among private investors, socially responsible investment (SRI) has, in many ways, gone from having a marginal role to becoming a ‘ mainstream ’ financial service in recent years. SRI is an investment process that, in addition to the ‘ traditional ’ fi nancial objective of investment, also uses social, ethical or environmental (SEE) criteria when making investment decisions. However, despite the growth of the market for SRI profi led mutual funds, very little research has been carried out with the objective of understanding the decision-making process of private SR-investors. In order to address this gap in the literature, this article addresses one stage in the SR-investor decision-making process: consumer prepurchase information search. Using a sample of 369 SR-investors, the results of the study indicate that SR-investors search more for SEE information, such as the criteria used for exclusion of stocks than for ‘ regular ’ fi nancial information such as past financial return and level of risk. Moreover, the study also indicates that involvement and perceived knowledge with regard to both fi nancial and SEE issues impact the nature of the
information search process of private SR mutual fund investors.

Keywords: Socially responsible investment; Ethical investment; Information search; Private investors; Mutual funds




SIRP WP 10-09

Natalia Semenova

Corporate Environmental Performance: Consistency of Metrics and Identification of Drivers  (PDF)
June 14, 2010

Abstract
This study is among the first to provide insight into the assessment of the convergent validity of widely used environmental performance ratings. Using a set of environmental dimensions in KLD, GES, and ASSET4 ratings, this study demonstrates that the different environmental performance aggregated metrics sufficiently correlate and provide consistent information when comparing companies. The KLD environmental concerns measure provides a summary of the environmental impact of industrial activities in contrast to the KLD measure of strengths that is a proxy for environmental performance. The observed different patterns in KLD environmental dimensions suggest that they are distinct constructs and should not be combined in future research. This study demonstrates that GES environmental industry risk and KLD concerns are impact factors that drive corporate environmental performance. Companies in high impact sectors are on average rated with high environmental performance. The contribution of this paper is, therefore, a validation of environmental ratings and a sharper focus upon impact factors that are associated with high levels of environmental performance. In addition, this study discusses the implications of findings for advocates and sceptics of environmental ratings, as well as for academics and practitioners in the realm of SRI and CSR.

Keywords: Environmental performance; Ratings; Convergent validity; Industry risk

 


 

SIRP WP 10-08

Ian Hamilton and Jessica Eriksson 

Influence Strategies in Shareholder Engagement:  A Case Study of Five Swedish National Pension Funds (PDF)
June 12, 2010

Abstract
Investors spend money and resources trying to reduce the environmental, social, and governance risks in companies they own. If unattended, these risks may cause reputational damage not only to the portfolio firm, but also to its owner. In this paper, we study five Swedish national pension funds and the influence strategies used in shareholder engagement. Knowledge about influence strategies is important because successful shareholder engagements can lead to more sustainable corporate behaviour and a lower risk to the investor. Our findings show that, besides traditional power and legitimacy dependencies which have been reported as influential in deciding stakeholder salience, we present five additional factors in determining influence strategies in shareholder engagement. We provide a conceptual model showing how these factors interlink with choices of influence strategies, offering a practical use of this study. Stakeholder theory has been used as our theoretical frame of reference, based on existing influence strategy literature taken from the stakeholder–firm perspective.

Keywords: case study; ESG directive, influence strategy; pension funds, reputation risk, responsible investment; shareholder engagement; shareholder salience; stakeholder theory


SIRP WP 10-07

Annalisa Fabretti and Stefano Herzel

Delegated Portfolio Management with Socially Responsible Investment Constraints 
June 10, 2010
  

Abstract 
We consider the problem of how to set a compensation for a portfolio manager who is required to restrict the investment set, as it happens when applying socially responsible screening. This is a problem of Delegated Portfolio Management where the reduction of the investment opportunities to the subset of sustainable assets involves a loss in the expected earnings for the portfolio manager, compensated by the investor through an extra bonus on the realized return. Under simple assumptions on the investor, the manager and the market, we compute the optimal bonus as a function of the manager's risk aversion and his expertise, and of the impact of the portfolio restriction on the Mean Variance efficient frontier. We conclude by discussing the problem of selecting the best managers when his ability is not directly observable by the investor.

Keywords: Delegated portfolio management; Socially responsible investment; Incentives; Extrinsic incentives; Intrinsic motives



SIRP WP 09-09 - UPDATED VERSION 2

Eli Amir, Juha-Pekka Kallunki, Henrik Nilsson

Personal Character and Firm Performance. The Economic Implications of Having Fraudulent Board Members (PDF)

May 30, 2010, 

Version 2

Abstract


Unique proprietary data on Swedish board members reveal that a non-trivial proportion of board members in Swedish listed firms have been convicted of serious crimes. Analyzing the data shows that board members with personal fraudulent behavior are more likely to be males than females. We also find that the greater the proportion of fraudulent board members, the lower is the profitability and the higher are the earnings (and cash flows) volatility of the firm. However, the negative effect of fraudulent behavior on profitability is mitigated when fraudulent board members have a larger stake in the firm’s equity. Finally, we find that the earnings of firms with more fraudulent board members are lower and less value-relevant. Given the strong legal enforcement in Sweden, our results raise serious concerns about the effects of board members’ personal fraudulent behavior on firm performance and risk-taking in other countries, particularly the United States and the United Kingdom.

Keywords:  Fraudulent behavior, Fraud, Crimes, Convicted board members, Corporate governance, Profitability, Earnings volatility




SIRP WP 10-06

Pontus Cerin and Sindri Reynisson

The Relationships between Economic, Environmental, Social and Corporate Governance Performance – The Moderating effect of Cultural Belongings of the MSCI 3000 Companies (PDF)
May 21, 2010
 

Abstract
Increasingly, information on environmental, social and corporate governance has experienced attention around the world permeating into the focus of not only the general public but corporations, accountants, analysts, investors as well as policy makers. This paper investigates how corporate environmental, social and corporate governance aspects influence economic performance and how they differ between cultural groups. We find a positive relation between a firm's economic performance and it i) having a well functioning and structured board of directors with a fair compensation policy, ii) it being committed and effective in maintaining the company's reputation within the general community and iii) its capacity to increase its workforce loyalty and productivity. Furthermore, once the firms in the sample have been divided into sub-samples according to business culture and geographical position, we find differences in the effects of corporate environmental, social and corporate governance aspects on the financial performance of firms belonging to different sub-samples.

Keywords: socially responsible investments; drivers; institutional investors; investment style



SIRP WP 10-05

Magnus Jansson, Anders Biel, Maria Andersson, and Tommy Gärling

Investment Style and Perceived Drivers of Adoption of Socially Responsible Investment among Swedish Institutional Investors (PDF)
May 1, 2010

Abstract
A survey was conducted to investigate investment style and drivers of socially responsible investment (SRI) among institutional investors. Respondents were 60 professionals working as SRI or non-SRI investors in 19 different Swedish banks, pension funds, or mutual fund companies. The results showed that non-SRI investors perceived market regulations to be a stronger driver of SRI, while SRI investors perceived others´ behaviour to be stronger driver. No differences were found between SRI and non-SRI investors with respect to short- term vs. long-term or active vs. passive investment styles.

Keywords: socially responsible investments; drivers; institutional investors; investment style



SIRP WP 10-04

Pontus Cerin

Analysing the Environmental Content of Financial Analyst Reports by developing an ESG Framework that incorporates Business Opportunities and the Product Perspectives (PDF)
April 30, 2010

Abstract
Unlike most previous research that merely looks at the perceptions of analysts, this report examines the environmental information financial analysts actually use in their analyst reports. Out of almost 4,500 analyst reports about 36 percent contain environmental information, varying between 3 to 79 percent depending on industry sector where, in general, analyst reports in sectors with more severe environmental aspects to a larger degree contain environmental information. The type of environmental information that the analysts foremost focus on in their reports are on how firms’ products and product portfolios are adopted to Environmental regulations facing customers/markets, Customer demands and Eco-Efficiency. This product perspective is strongly related to discussions of business opportunities of the firm. In fact, a good 77 % of the financial analyst reports containing environmental information dealt with opportunities linked to environmental aspects. To a lower extent, financial analysts write about company specific risk issues like emissions and litigation. The financial analyst reports, furthermore, practically lacks environmental preparedness aspects – like environmental strategies, policies, management systems, reporting and auditing – that are core issues of the ethical and SRI analyses. The financial analysts, hence, focus on different environmental aspects than the ethically specialised analysts. For analysing the environmental content in the analyst reports in this study an ESG framework was developed that, unlike previous research, also detects the environmental performance in the product dimension.

Keywords: Financial Analyst Reports, ESG Framework, Environmental Information, Responsible Investments, Business Opportunities, Product Perspectives



ECCE 


Piet Eichholtz, Nils Kok, John M. Quigley

Sustainability and the Dynamics of Green Building
April 2010

Abstract
Research on climate change suggests that small improvements in the “sustainability” of buildings can have large effects on greenhouse gas emissions and on energy efficiency in the economy. We analyze the dynamics of green building and the private returns to the recent surge in investments in energy-efficient office buildings. We examine a comprehensive panel of “green” office buildings and nearby controls first observed in 2007, estimating changes in the economic premium for energy efficiency between 2007 (when green office space was 7 percent of the national inventory and unemployment rates were 4.6 percent) and 2009 (when green space was 14.9 percent of the inventory and the unemployment rate was 9.3 percent). Surprisingly, we find that the large increases in the supply of green buildings during 2007-2009, and the recent downturns in property markets, have not significantly affected the returns to green buildings relative to those of comparable high quality property investments.

We employ an analogous research design to document precisely the very substantial economic returns to energy efficiency and sustainability in commercial property markets using a much larger cross section of office buildings which had been “certified” by independent rating agencies in 2009. We estimate separately the increment to market rents and asset values enjoyed by buildings which have been certified by the two major rating agencies – the U.S. Green Building Council and U.S. Department of Environmental Protection. We relate the estimated premiums for green buildings to the particulars of the rating systems that underlie certification. The analysis of samples of more than 27,000 buildings confirms that the attributes rated for both thermal efficiency and sustainability contribute to increases in rents and asset values. Among green buildings, increased energy efficiency is fully capitalized into rents and asset values.

JEL classification: G51, M14, D92


ECCE WP

Jeroen Derwall Daniel Hann Nikos Kalogeras

Does the Market Misprice Customer Satisfaction? New Evidence on Errors in Investors’ Expectations
March 2010

Abstract 
Studies on the returns of strong versus weak customer-satisfaction stock portfolios provide mixed support for the hypothesis that the financial market misprices the relation between firms’ cash flows and customer satisfaction. None of these studies directly examines whether the market is systematically surprised by this relation, and if so, whether these systematic surprises cause abnormal stock returns. We focus on the key mechanism through which customer satisfaction manifests in abnormal stock returns when the “errors-in-expectations” hypothesis holds. First, we confirm a positive relation between customer satisfaction and a firm’s future cash flow, as measured by future return on assets. Second, we analyze whether investors misunderstand the relation between customer satisfaction and future earnings using data on analysts’ earnings forecasts. For various forecast horizons, we find that analysts anticipate the future earnings associated with customer satisfaction. Third, we show that stock price reactions to firms’ earnings announcements, which reflect investors’ learning about incorrect expectations, are unrelated to customer satisfaction. We reject the hypothesis that customer satisfaction causes abnormal stock returns because of errors in investors’ expectations. More generally, our tests lay new foundations for studies that describe how marketing translates into financial outcomes that are relevant to both companies and investors.

Keywords: customer satisfaction, return on assets, earnings forecasts, earnings announcements, stock return, errors in expectations



SIRP WP 10-03

Joakim Sandberg

Socially Responsible Investment and Fiduciary Duty: Putting the Freshfields Report into Perspective (PDF) 
January 30, 2010

Abstract
A critical issue for the future growth and impact of socially responsible investment (SRI) is whether institutional investors are legally permitted to engage in it – in particular whether it is compatible with the fiduciary duties of trustees. An ambitious report from the United Nations Environment Programme’s Finance Initiative (UNEP FI), commonly referred to as the ‘Freshfields report’, has recently given rise to considerable optimism on this issue among proponents of SRI. The present paper puts the arguments of the Freshfields report into some further both empirical and critical perspective, however, and suggests that its findings do not call for very much optimism. The general argument is that while the understanding of fiduciary duty outlined by the Freshfields report seems to allow institutional investors to at least sometimes take some social or environmental considerations into account, the support it gives for SRI is notably contingent and, furthermore, it seems to rule out exactly the kind of SRI which proponents of social responsibility and environmental sustainability should hold in highest regard – proactive cases and socially effective investment strategies. If SRI is to become an important force for corporate social responsibility through its adoption by institutional investors, then, it is suggested that legal reform is needed.

Keywords: Socially Responsible Investment; Fiduciary Duty


ECCE

Jeroen Derwall, Kees Koedijk, Jenke Ter Horst

Values-Driven and Profit-Seeking SRI
January 2010

Abstract
We show that a segmentation of the socially responsible investing (SRI) movement by valuesversus-profit orientation solves the puzzling evidence that both socially responsible and controversial stocks produce superior returns. We derive that the segment of values-driven investors, who are willing to sacrifice financial return to derive non-pecuniary utility, is primarily served by “negative” screens that avoid controversial stocks. Consistent with values affecting stock prices, controversial stocks produce anomalously positive returns. The profitdriven segment is best served by specific “positive” screens: stocks with positive scores on environmental and social issues have produced superior returns. The finding that each segment is served by a different form of SRI explains why the average SRI mutual fund, which adopts a mixture of screens, neither outperforms nor underperforms conventional peers. Our conclusions highlight that different views about SRI that are observed in the literature are complementary, which begs the question whether SRI should be the only term for different types of social investment practices.

Keywords: Investor Behavior, Values, Socially Responsible Investing (SRI), Risk, Return.

JEL classification: A13, G11
 



SIRP WP 10-02

Martin Hedesström

Incentive systems for stock portfolio managers in Sweden (PDF) 
January 22, 2010

Abstract
Interviews with Swedish investment professionals show that incentivising stock portfolio managers on the basis of short term returns performance is a widespread practice across several types of fund management. Among retail funds, state pension funds, and hedge funds, bonuses are predominantly based on one-year intervals. Longer-term bonus components, if offered, are generally of insignificant size. Small fund companies may offer longer-term bonuses, but then as incentive not only to produce good results but also – if results are good – to stay at the company for a longer time. Pension insurance companies also apply longer-term bonuses, possibly because they do not risk money being withdrawn by investors due to poor performance. Experimental studies are needed in order to disentangle the effects of longer term bonuses on sustainable investments.

Keywords: incentive system; compensation scheme; bonus; stock portfolio manager; shorttermism



ECCE

Nils Kok, Piet Eichholtz, Rob Bauer, Paulo Peneda

Survey Environmental Performance

January 2010

This report, Environmental Performance: A Global Perspective on Commercial Real Estate, is based on a global survey of 700 listed property companies and fund managers.


SIRP WP 10-01

Georgios Foufas, Mattias Sundén and Evert Carlsson

On Incentives for Sustainable Investments (PDF)
January 19, 2010

Abstract
There is a trend among institutional investors to split their assets between index-managers and specialists. The specialist mandates are typically delegated to specialist asset managers, who are assumed to generate "alpha", take on large risks and whose remuneration is performance based. In this paper, we will study how the optimal behavior of the specialist manager will depend on the remuneration structure. 

Keywords: Incentives, portfolio choice, sustainable investments, value function.

JEL classification: G23



ECCE


Piet Eichholtz, Nils Kok, John M. Quigley

Who Rents Green? Real Property and Corporate Social Responsibility

January 2010

Abstract:
This paper provides the first systematic analysis of the choice by organizations to occupy green office space. We analyze the decisions of more than 11,000 tenants to choose office space in green buildings or in otherwise comparable conventional buildings nearby. We find that corporations in the oil and banking industries, as well as non-profit organizations, are among the most prominent green tenants. After controlling for building quality and location, we document that firms in mining and construction and organizations in public administration, as well as organizations employing higher levels of human capital, are more likely to lease green office space.



ECCE

Rob Bauer, Piet Eichholtz and Nils Kok

Corporate Governance and Performance: The REIT Effect
January 15, 2010

Abstract: 
Real estate investment trusts (REITs) offer a natural experiment in corporate governance due to the fact that they leave little free cash flow for management, which reduces agency problems. We exploit a unique and leading corporate governance database to test whether corporate governance matters for the performance of U.S. REITs. We document for a sample including governance ratings of more than 220 REITs that firm value is significantly related to firm- level governance for REITs with low payout ratios only. Repeating the analysis with the complete database that includes more than 5,000 companies and a control sample of firms with high corporate real estate ratios, we find a strong and significantly positive relation between our governance index and several performance variables, indicating that the partial lack of a relation between governance and performance in the real estate sector might be explained by a REIT effect.

 




Working papers of 2009



SIRP WP 09-09

Eli Amir, Juha-Pekka Kallunki and Henrik Nilsson

Personal Character and Firm Performance. The Economic Implications of Having Fraudulent Board Members (PDF)

May 30, 2010, 2nd Version

Abstract
Unique proprietary data on Swedish board members reveal that a non-trivial proportion of board members in Swedish listed firms have been convicted of serious crimes. Analyzing the data shows that board members with personal fraudulent behavior are more likely to be males than females. We also find that the greater the proportion of fraudulent board members, the lower is the profitability and the higher are the earnings (and cash flows) volatility of the firm. However, the negative effect of fraudulent behavior on profitability is mitigated when fraudulent board members have a larger stake in the firm’s equity. Finally, we find that the earnings of firms with more fraudulent board members are lower and less value-relevant. Given the strong legal enforcement in Sweden, our results raise serious concerns about the effects of board members’ personal fraudulent behavior on firm performance and risk-taking in other countries, particularly the United States and the United Kingdom.

Keywords:  Fraudulent behavior, Fraud, Crimes, Convicted board members, Corporate governance, Profitability, Earnings volatility


SIRP WP 09-08

Pontus Cerin and Mohammed Belhaj

Extra Financial Analysis – EFA: Environmental and financial performances of ABB, Akzo-Nobel and SCA: Picturing the business opportunities and risks associated to stakeholder perceptions and environmental and social prerequisites (PDF)

November 21, 2009

Abstract
External assessment of companies’ environmental aspects often focus on the existence of strategies, commitments, management systems and reporting of firms that concerns environmental aspects. Instead, in line with extra financial analysis, in order to play a role in decision-making, analysis of environmental aspects should incorporate the influence that stakeholders may have on future revenues of the assessed firm and how well advanced corporate strategies are in meeting these threats, turning them into business opportunities. Thereafter, the environmental information financial analysts’ use in their financial analyst reports as well as the relation between environmental and financial performance are illuminated. Three industry sectors, Chemicals, Electrical Equipment and Paper & Forest Products, are specially analysed in this report.
Out of almost 4500 analyst reports about 36 percent contain environmental information, but when looking at industry sectors these numbers range from only 3 to up to 79 percent. The type of environmental information that the analysts focus on in their reports are on how firms’ products and product portfolios are adopted to Environmental regulations facing customers/markets, Customer demands and Eco-Efficiency. This product perspective is strongly related to discussions of business opportunities of the firm. In fact, a good 77 % of the financial analyst reports containing environmental information dealt with opportunities linked to environmental aspects. To a lower extent, financial analysts write about company specific risk issues like emissions and litigations while their reports is virtually absent from aspects like environmental strategies, policies, management systems, reporting and auditing.
The correlation between corporate financial and environmental performances is illuminated through regression analyses. Industry environmental risk is found to be negatively correlated to corporate return on assets – ROA – (in an static model) while (when applying a dynamic model) corporate environmental performance and ROA have a positive correlation in the short term, which can find support by other studies using different data.

Keywords: Extra financial analysis - EFA; Financial analyst reports; Content analysis; ESG Framework; Return on assets - ROA; Environmental performance; performance social; financial performance; Financial accounting; Non-financial information



ECCE


Patrick Verwijmerena and Jeroen Derwall

 

Employees, Leverage, and Bankruptcy
October 2009

Abstract
Employees of liquidating firms are likely to lose income and non-pecuniary benefits of working for the firm, which makes bankruptcy costly for employees. This paper examines whether firms take these costs into account when deciding on the optimal amount of leverage. We find that firms with leading track records in employee well-being significantly reduce the probability of bankruptcy by operating with lower debt ratios. Moreover, we observe that firms with better employee track records have better credit ratings, even when we control for differences in firm leverage.

JEL classification: G32; G33; J24

Keywords:
Employee well-being; Capital structure; Bankruptcy risk; Corporate social responsibility



ECCE


Rob Bauer, Jeroen Derwall and Daniel Hann


Employee Relations and Credit Risk
October 2009

Abstract
Consistent with the theory that human capital management influences organizational performance and risk, we find that employee relations explain the cross-sectional variation in credit risk. We construct an aggregate measure for the quality of employee relations based on the firm’s engagement in employment practices and policies, and document that firms with stronger employee relations enjoy a statistically and economically lower cost of debt financing, higher credit ratings, and lower firm-specific risk. These findings are robust to the inclusion of a comprehensive set of controls and to alternative explanations.

JEL classification:
M54; M12; G33; G32

Key Words:
Nonfinancial stakeholders, Employee relations, Cost of debt, Credit ratings, Idiosyncratic risk



SIRP WP 09-07

Tommy Gärling, Erich Kirchler, Alan Lewis and Fred van Raaij 

Psychology, Financial Decision Making, and Financial Crises (PDF)

September 29, 2009


Abstract:

It is understandable in times of financial crisis that the general public asks how this could happen. And since the market actors appear so irrational, it is also understandable that people – lay people and experts alike – believe that “psychological” factors play a decisive role. Is there evidence for this and what is the evidence? It is true that in general people individually use their cognitive and other resources in sensible ways, and that they collectively have developed institutions that effectively regulate economic and other transactions. It is likewise true that extreme circumstances sometimes are beyond people´s capacity, individually as well as collectively. It is therefore essential that scientific knowledge of people´s cognitive and other limitations is brought to bear on the issue of how to prevent such extreme circumstances to occur.





ECCE


Dirk Brounen and Nils Kok


On The Economics of Energy Labels in the Housing Market
November 2009

Abstract:
The 2003 European Performance of Buildings Directive mandated all EU member states to enforce disclosure of building’s energy performance. This is the first paper to analyse the introduction, adoption and market implications of energy labels (EPCs) in the housing market. We use a unique dataset on housing transactions in the Netherlands, including 194,000 transactions since the introduction of energy labels in January 2008. The results show that when energy performance certification is not mandatory, adoption rates are low and declining over time. Labels are clustered among post-war, single-family homes in more expensive, low-density neighbourhoods, where competition among buyers is low. This provides an indication that energy labels are adopted as a strategic tool in the transaction process. We also document that adoption rates of energy labels are highest in areas that have a high propensity of ‘green’ voters during elections, which implies that idealistic motives may also play a role in the decision to adopt an energy label. The energy label seems to carry a moderately powerful market signal. We analyse the impact of energy labels on the transaction process of homes and find that the label does not affect time on the market. However, within the sample of certified homes, we document a significant price premium for homes with a ‘green’ energy label. The size of the ‘green’ increment is positively related to the energy efficiency of a dwelling and this
result holds while controlling for various hedonic features, such as quality of insulation and the maintenance of the interior. Even though the label adoption rate is declining, the label premium is rather constant over time. The energy label creates transparency in energy consumption of homes and our analysis shows that consumers capitalize this
information in the price of their prospective home. 


Keywords:
Energy labels, real estate, environmental sustainability



SIRP WP 09-06

Magnus Jansson and Anders Biel

Psycological Influences on Investor Intention to be Socially Responsible Investments: A Comparison what influences SRI intentions among different types of investors (PDF
August 31, 2009
  

Abstract

This study investigates determinants of equity investments according to socially responsible criteria among Swedish investors such as investment institutions, institutional investors and private investors. In total 38 investment institutions, 60 employees from 19 investment institutions, 453 private investors and 71 institutional investors participated in a questionnaire study. The aim of the study was to investigate financial beliefs and psychological factors that may promote or impede SRI among different types of investors. It was found that while Socially Responsible Investment (SRI) among private and institutional investors was guided by self-transcendent values (environmental and social values), this was not the case among fund managers working in investment institutions. Fund managers were affected by beliefs about long-term returns of SRI.  Private investors were, in addition, influenced by beliefs about long-term returns, while institutional investors were motivated by an effort to reduce financial risks. Finally, investment institutions tended to overrate the importance of financial returns among their beneficiaries (private and institutional beneficiaries) and underestimate the importance of ethical, environmental and social aspects for beneficiaries. The results indicate that private and institutional investors/beneficiaries give a wider interpretation of fiduciary duty than institutional investors do.

Keywords:  Socially responsible investment, Investment decisions, Ethical investments, Values, Beliefs


SIRP WP 09-05

Magnus Jansson and Anders Biel

Investment Institutions' beliefs about and Attitudes toward Socially Responsible Investments (SRI): A Comparison between SRI and non-SRI Management 
(PDF
August 31, 2009
  

Abstract

This paper investigates psychological drivers and financial motives that may influence major Swedish investments institutions to adopt Socially Responsible Investment (SRI). Based on an instrument that captures concepts in the Value-Belief-Norm theory by Stern et al. (1999), and potential financial beliefs that may influence investors’ SRI intentions, a survey was addressed to all major Swedish investments institutions. Fifty-eight respondents from 17 different investment institutions participated in the survey among those, 31 were conventional (non-SRI investors) and 27 socially responsible investors. Our results show that conventional and SRI investors share similar beliefs about short- and long-term performance on SRI investments in that SRI gives less return in the short term but slightly more than conventional investments in the longer run. However, SRI investors express significantly more interest in increasing their future SRI investments than conventional investors do. We discover that future SRI is not influenced by social and environmental concerns. Rather, financial beliefs about risk and beliefs about increased market shares drive SRI forward. The business case for SRI seems thus to be the only reason for major investment institutions to adopt SRI.


Keywords: Environmental and Social Performance, Equity Valuation, Financial Accounting, Non-Financial Information



SIRP WP 09-04

Natalia Semenova, Lars Hassel and Henrik Nilsson

August 28, 2009

Abstract
Environmental, social, and governance information has attracted close attention around the world and is becoming a focus of many companies, investors, financial analysts, and accounting policy makers. This paper provides insight into how environmental and social information is reflected in the market value of listed SIX 300 companies on OMX Stockholm. Applying the residual income valuation model, we express the market value of equity as a function of the book value of equity, accounting earnings, and environmental and social performance, where the last two variables are the proxies for other value-relevant information.
We test this model with data from the GES Investment Services® opportunity ratings that enable us to disaggregate the effects of various dimensions of environmental and social performance on market returns. The evidence presented in this study finds support for the value relevance of environmental performance at both aggregated and sub-aggregated levels. In the social dimension, support is found for community and supplier relations. We contribute empirical findings to the current debate on the relations between environmental and social performance and shareholder value, and demonstrate the extra-financial value of environmental and social information.  

Keywords: Environmental and Social Performance, Equity Valuation, Financial Accounting, Non-Financial Information

JEL classification: M41, Q56, M14.
 



SIRP WP 09-03

Eva-Lotta Sundblad, Tommy Gärling, Anders Biel and Martin Hedesström

Portfolio managers’ attitudes towards policy regulations of environmental reporting (PDF)
May 28, 2009

Abstract
Attitudes towards policy regulations of environmental reporting were examined in a survey of 15 portfolio managers of stock funds lacking an explicit environmental strategy. The managers’ evaluated three regulative measures. They were most positive toward requirements for companies to report their environmental impacts in a standardized way, a measure that also was perceived to have the largest impact on social responsible investment. They were less positive toward a requirement for the funds to display in which way they themselves take environmental criteria into account in their investments. They were least positive to announce the proportion of companies in their portfolios that in a standardized way reports environmental performance.  

Keywords: Socially, Responsible, Investments.




SIRP WP 09-02

Runar Brännlund and Tommy Lundgren

Environmental policy and profitability. Evidence from Swedish industry (PDF)
March 21, 2009

Abstract

The purpose of this paper is to investigate the existence of a “Porter effect” using firm level data on output and inputs from Swedish industry between 1990 and 2004. By utilizing a factor demand modeling approach, and specifying a profit function which has a technology component dependent upon firm specific effective tax on CO2, we are able to separate out the effect of regulatory pressure on technological progress. The results indicate that there is evidence of a reversed “Porter effect” in most industrial sectors, specifically energy intensive industries.  

Keywords: CO2 tax, factor demands, induced technological change, Porter argument. 

JEL classification: D20, H23, Q52, Q55. 



SIRP WP 09-01

Runar Brännlund and Tommy Lundgren

Environmental policy without costs? A review of the Porter hypothesis 
(PDF)
March 6, 200
9

Abstract
This paper reviews the theoretical and empirical literature connected to the so called Porter Hypothesis. That is, to review the literature connected to the discussion about the relation between environmental policy and competitiveness. According to the conventional wisdom environmental policy, aiming for improving the environment through for example emission reductions, do imply costs since scarce resources must be diverted from somewhere else. However, this conventional wisdom has been challenged and questioned recently through what has been denoted the “Porter hypothesis”. Those in the forefront of the Porter hypothesis challenge the conventional wisdom basically on the ground that resources are used inefficiently in the absence of the right kind of environmental regulations, and that the conventional neo-classical view is too static to take inefficiencies into account. The conclusions that can be made from this review is (1) that the theoretical literature can identify the circumstances and mechanisms that must exist for a Porter effect to occur, (2) that these circumstances are rather non-general, hence rejecting the Porter hypothesis in general, (3) that the empirical literature give no general support for the Porter hypothesis. Furthermore, a closer look at the “Swedish case” reveals no support for the Porter hypothesis in spite of the fact that Swedish environmental policy the last 15-20 years seems to be in line the prerequisites stated by the Porter hypothesis concerning environmental policy.

JEL-Codes: D20, H23, Q52, Q55, Q525, Q56. 




Working papers of 2008




SIRP WP 08-02

Natalia Semenova and Lars Hassel

Industry Risk Moderates the Relation between Environmental and Financial Performance
September 16, 2008

Abstract
This study extends previous research on the relation between different measures of environmental and financial performance by introducing moderating effects of inherent environmental industry risk. We provide empirical evidence from the MSCI World Index U.S. companies by using the GES Investment Services® risk rating for the period 2003-2006. The inherent environmental industry risk has a significant moderating effect on the form of the relation between environmental preparedness/performance and operating performance of the companies. In high risk or polluting industries, environmental management is costly and reduces the operating performance of companies. In low risk sectors, such as banking and insurance, leading companies on environmental management are also more profitable. The paper makes a distinction between the reputational benefits of environmental preparedness and the operational gains of environmental performance when studying the effects on market value. A significant direct effect of environmental preparedness on the market value of the companies is present, while the relation between environmental performance and market value is stronger in low risk industries than in high risk industries. In low risk industries, the market value of the companies is also on average higher and more attuned to benefits to environmental performance than in high risk industries.



ECCE

Jeroen Derwall, Kees Koedijk

Socially Responsible Fixed-Income Funds
September 2008

Abstract

The growing importance of SRI in the investment arena has resulted in considerable academic interest in the performance of socially responsible equity mutual funds. Remarkably, no attempts have been made to evaluate the performance of mutual funds that invest in socially responsible fixed-income securities. This study fills that gap by measuring the performance of socially responsible bond and balanced funds relative to matched samples of conventional funds, over the period 1987-2003. Using multi-index performance evaluation models, we show that the average SRI bond fund performed similar to conventional funds, while the average SRI balanced fund outperformed its conventional peers by more than 1.3% per year. The expenses charged by SRI funds, match those charged by conventional funds and, evidently, do not cause SRI funds to underperform.

Key words:
Socially Responsible Investing, Bonds, Mutual Funds, Performance Measurement

JEL Classification
: C22, G12, G20, G23, M14



ECCE

Piet Eichholtz, Nils Kok and John Quigley

Doing Well by Doing Good: Green Office Buildings
September 2008

Abstract
This paper provides the first credible evidence on the economic value of the certification of “green buildings” – value derived from impersonal market transactions rather than engineering estimates. For some 10,000 subject and control buildings, we match publicly available information on the addresses of Energy Star and LEED-rated office buildings to the characteristics of these buildings, their rental rates and selling prices. We find that buildings with a “green rating” command rental rates that are roughly three percent higher per square foot than otherwise identical buildings – controlling for the quality and the specific location of office buildings. Ceteris paribus, premiums in effective rents are even higher – above six percent. Selling prices of green buildings are higher by about 16 percent. For the Energy-Star-certified buildings in this sample, we subsequently obtained detailed estimates of site and source energy usage from the U.S. Environmental Protection Agency. Our analysis establishes that variations in the premium for green office buildings are systematically related to their energy-saving characteristics. For example, calculations show that a one dollar saving in energy costs from increased thermal efficiency yields roughly 18 dollars in the increased valuation of an Energy-Star certified building. Beyond the direct effects of energy savings, further evidence suggests that the intangible effects of the label itself also play a role in determining the value of green buildings in the marketplace.

JEL Codes: G51, M14, D92

Keywords: Environmental sustainability, Energy efficiency, Green labels, Real estate



SIRP WP 08-01

 

Tommy Lundgren and Rickard Olsson

How Bad is Bad News? Assessing the Effects of Environmental Incidents on Firm Value
January 30, 2008

Abstract
Based on a formal model of how investments in corporate social responsibility act upon .rm value through goodwill, we derive the hypothesis that under uncertainty, bad news are detrimental to good-will, and subsequently have a negative impact on value. We examine by event study methodology whether bad news in the form of environmental (EV) incidents a¤ect .rm value negatively as measured by abnormal returns using a global data set. An EV incident is a company incident allegedly in violation of international norms on environmen-tal issues. We analyze 142 EV incidents 2003-2006. The incidents are generally associated with negative cumulative abnormal returns, but which are not statistically signi.cant, except for incidents for .rms in the EURO zone. The results are robust with respect to a number of variations in test methodology.




Working papers of 2007



SIRP WP 07-05

Gary M. Cunningham, Lars G. Hassel and Henrik Nilsson

A Study of the Provision of Environmental Information in Financial Analysts Reports

Abstract
Reporting of environmental information along with financial information has become an important research topic. Research to date has focused on the nature of the information reported by companies. This study extends prior research by examining the inclusion of environmental information by financial analysts in their research reports of companies in the chemical and in the oil and gas industries. Both companies and the financial analysts are divided into subsets by geographic region, Europe and North America. Results show that only 35 per cent of financial analysts’ reports have environmental information. Those reports that do have such information have more environmental information for North American companies than for European companies and analysts tend to report more information for companies in their regions. The chemical industry receives more attention, especially for downside information.

Keywords: Environmental information, financial analysts’ reports, equity valuation, content analysis



SIRP WP 07-04

Rickard Olsson

Portfolio performance and environmental risk
November 24, 2007


Abstract
This paper examines the performance of US stock portfolios constructed and rebalanced to have different environmental (EV) risk. EV risk is proxied by EV risk ratings from GES Investment Services. Portfolios with high EV risk generate higher raw returns than low EV risk portfolios, but when risk and other factors are controlled for using the three Fama-French factors and a momentum factor, the risk-adjusted returns of both high and low EV risk portfolios are not statistically different from zero. The evidence thus indicate that a portfolio of stocks with low EV risk, intended to be more responsible, neither underperform or outperform on a risk-adjusted basis.

Keywords:
Socially responsible investment, environmental risk, portfolio performance evaluation



SIRP WP 07-03

Tommy Lundgren

On the Economics of Corporate Responsibility
November 22, 2007

Abstract
This paper seeks to explore the economic mechanisms behind corporate social responsibility (CSR) in a micro-economic model of the firm. The motivation of this study is to shed some light on the potential causes of the observed phenomena of voluntary over-compliance among firms. We consider a few diferent models, both static and dynamic, to investigate how various assumptions about costs and benefits may aspect CSR behavior through a stock of goodwill capital. Our analysis show that in optimum, the profit maximizing firm must balance costs and benefits of CSR. From a cursory look into the CSR literature, we find evidence that some of the hypotheses that can be derived from the models in this paper can be verified empirically.

Keywords: Corporate social responsibility, Dynamics, Goodwill, Uncertainty



SIRP WP 07-02

Ian Hamilton

Why the Climate Change Debate has not Created more Cleantech Funds in Sweden
November 20, 2007

Abstract

There are a number of long-term global trends driving the demand for more environmentally friendly technologies. This area, referred as “cleantech”, was coined in the United States during this century and described as “new technology and related business models offering competitive returns for investors and customers while providing solutions to global challenges” ( Cleantech Network, 2007). This and others like it represent broad definitions of technology that can replace old technology with new and improved solutions that offer a reduced impact on the environment.

Urbanization and growing world population are strong drivers for technologies that offer solutions in the area of transportation, water supply and treatment, air pollution and energy (Nutek, 2006). As mentioned in reports by Stern and International Panel of Climate Change (IPCC) the consequences of over 150 years of mainly western industrialization have resulted in imbalances of the global ecosystem. The unsustainable production and consumption of non-renewable energies have caused a global increase in green house gas emissions and the emerging threat of climate change (Stern, 2006). The depletion of energy resources calls for a need to develop even more effective ways of combustion of fossil fuels or renewable energies. The uncertainty of global fossil fuel supply is causing non-renewable energy price to move up. This has a destabilizing effect on national security as governments grow dependent on oil & natural gas imports (Nutek, 2006).


For these reasons there are strong incentives for investors to receive attractive returns for investments in cleantech industries. So far the interest from the investment community has been by far greater in the United States than in Europe and especially Scandinavia. This by itself is remarkable as US is many times portrayed as unwilling to take on and bare responsibility for its contribution towards climate change. In spite global trends driving demand for cleantech companies this paper looks at reasons why Swedish fund managers have not until now launched a few products for private investors on the Swedish fund market.




SIRP WP 07-01

Lars Hassel, Natalia Semenova


Financial Outcomes of Environmental Risk and Opportunity for U.S. Companies
November 19, 2007

Abstract
The study extends previous research on the relation between environmental and financial performance in two ways. First, we recognise that the inherent environmental risk differs among industries. Increased levels of industry risk cause companies to have lower market values even if they are more profitable than companies in low risk industries. Second, we decompose the multidimensional environmental opportunity construct into dimensions of preparedness and performance. As an extension of previous research on the economic value of environmental performance, we show that the reputational benefits of environmental preparedness mainly increase market value, while environmental performance also can bring operational benefits to financial performance. In high risk or polluting industries, environmental management is costly and reduces the operating performance of companies.

Keywords: Environmental risk and opportunity, financial performance, return on assets, Tobin’s Q, panel data analysis 



ECCE


Rob Bauer, Robin Braun and Gordon Clark

European Governance and Expenditure 
November 2007

Abstract
We examine European corporate governance with respect to the relationship between shareholder value and capital investment. Based upon Europe’s largest listed companies, it is shown that Anglo-American conceptions of shareholder value are increasingly important for European firms whatever their home jurisdictions and inherited traditions. Using annual capital expenditures as a proxy for corporate managers’ commitment to shareholder value it is shown contra arguments to the effect that the map of European corporate governance regimes is fixed and virtually immutable, even large firms from paradigmatic stakeholder regimes believed focused upon long-term value increasingly act to maximise short-term shareholder value. We divide Europe into three regions based on ownership concentration, legal systems, board structures, and the presence of corporate governance codes. In this multi-jurisdictional setting, we compare the effects of different elements of corporate governance on capital expenditures in each region. Our analysis shows that the overall effect of investor-sensitive corporate governance on capital expenditures is consistently negative notwithstanding differences in the
formal nature and quality of governance standards between regions. We explain this finding by reference to the governance standards of United Kingdom: a market for corporate governance that has come to dominate its continental European neighbours.

JEL Codes: G11, G31, P51 R30

Keywords: Capital expenditure, Corporate governance, Europe, Shareholder value



ECCE

Abstact
This paper provides the first credible evidence on the economic value of thecertification of “green buildings” – value derived from impersonal market transactionsrather than engineering estimates. For some 10,000 subject and control buildings, wematch publicly available information on the addresses of Energy Star and LEED-ratedoffice buildings to the characteristics of these buildings, their rental rates and sellingprices. We find that buildings with a “green rating” command rental rates that are roughlythree percent higher per square foot than otherwise identical buildings – controlling forthe quality and the specific location of office buildings. Ceteris paribus, premiums ineffective rents are even higher – above six percent. Selling prices of green buildings arehigher by about 16 percent.For the Energy-Star-certified buildings in this sample, we subsequently obtaineddetailed estimates of site and source energy usage from the U.S. EnvironmentalProtection Agency. Our analysis establishes that variations in the premium for greenoffice buildings are systematically related to their energy-saving characteristics. Forexample, calculations show that a one dollar saving in energy costs from increasedthermal efficiency yields roughly 18 dollars in the increased valuation of an Energy-Starcertified building. Beyond the direct effects of energy savings, further evidence suggeststhat the intangible effects of the label itself also play a role in determining the value ofgreen buildings in the marketplace.

JEL Codes: G51, M14, D92

Keywords: environmental sustainability, energy efficiency, green labels, real estate



ECCE

This paper provides the first credible evidence on the economic value of thecertification of “green buildings” – value derived from impersonal market transactionsrather than engineering estimates. For some 10,000 subject and control buildings, wematch publicly available information on the addresses of Energy Star and LEED-ratedoffice buildings to the characteristics of these buildings, their rental rates and sellingprices. We find that buildings with a “green rating” command rental rates that are roughlythree percent higher per square foot than otherwise identical buildings – controlling forthe quality and the specific location of office buildings. Ceteris paribus, premiums ineffective rents are even higher – above six percent. Selling prices of green buildings arehigher by about 16 percent.For the Energy-Star-certified buildings in this sample, we subsequently obtaineddetailed estimates of site and source energy usage from the U.S. EnvironmentalProtection Agency. Our analysis establishes that variations in the premium for greenoffice buildings are systematically related to their energy-saving characteristics. Forexample, calculations show that a one dollar saving in energy costs from increasedthermal efficiency yields roughly 18 dollars in the increased valuation of an Energy-Starcertified building. Beyond the direct effects of energy savings, further evidence suggeststhat the intangible effects of the label itself also play a role in determining the value ofgreen buildings in the marketplace.

JEL classification: G51, M14, D92

Keyworlds: environmental sustainability, energy efficiency, green labels, real estate





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