Rocco Ciciretti,
Alessandro Giovannelli
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
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.
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
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
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
Natalia Semenova
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
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,
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.
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.
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
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
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
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
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.
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.
Eli Amir, Juha-Pekka Kallunki and Henrik Nilsson
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.
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
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.
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.
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
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
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
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.
JEL classification: M41, Q56, M14.
SIRP WP 09-03
Eva-Lotta Sundblad, Tommy Gärling, Anders Biel and Martin Hedesström
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
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, 2009
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.
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.
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
Piet Eichholtz, Nils Kok and John Quigley
Doing Well by Doing Good: Green Office Buildings September 2008
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.
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
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).
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