I'm a PhD Candidate in Finance at Copenhagen Business School
I believe ESG ratings should look forwards, not backwards!
We document a significant difference in the returns to sustainable investing across investor types. Investors with strict ESG mandates earn 3.1% less than flexible investors. The mechanism is that flexible investors are able to react on expected ESG improvements. Without engaging in activism, flexible investors buy stocks that subsequently experience ESG score increases. After ESG improvements have realized, demand from strict mandate investors pushes up stock prices, resulting in positive returns for flexible investors. A new climate sentiment measure shows that the performance gap is higher when accompanied by rising sentiment, as seen during the 2010s. Our channel accounts for 51% of the return difference between strict and flexible ESG investment mandates. Hence, going from backward to forward-looking ESG ratings could reduce both capital misallocation and wealth transfer from strict investors, such as pension funds, to more flexible investors, such as hedge funds.
Very excited that our work has been featured by the blog of CAIA -- the credentialing body for investors with a focus on Alternative Investment and Ethics! Our work asks what effect the increased interest in ESG has had on returns? https://t.co/IjlLeO4yOY— Andreas Brøgger (@AndreasBrogger) July 26, 2020
Here you will find my previous and current research.
We argue for the introduction of firm-level emission futures contracts as a novel way of assessing the real impact of ESG initiatives. Our measure is based on the forward-looking market-based valuation of firm-level CO2 emissions. We establish both theoretically and empirically that backward-looking subjective ratings are limited to the extent that they fail to capture future reductions in emissions. We show evidence that although lower emissions have predicted higher E ratings, higher E ratings have predicted higher, not lower, emissions. As such, by following these subjective ratings, investors may have inadvertently allocated their money to firms that pollute more, not less. We discuss several applications of our new measure, including executive pay and investment management.
I show the new fact that idiosyncratic volatility significantly predicts the convenience yield. This fact is hard to reconcile with current theories. I develop a new theory that reconciles this puzzle - a theory I label Corporate Asset Pricing (CAP). CAP is verified in the cross-section of firm holdings and has been an important driver at least since the 1920’s. I provide causal interpretability by isolating my demand-based effect from confounders by using plausably exogenous cross-sectional variation in corporation size and industry exposures. The results provide support for the importance of corporates as an investor class.
I document that equity prices fall as macroprudential buffers are announced. This is consistent with macroprudential buffers leading to an increase in risk premia, from a heightened price of risk. Theoretically, I develop a model that predicts that as buffers are announced 1) The price of risk increases, 2) Systemic risk falls, and 3) Intermediaries' risky asset allocation decreases, as other agents with higher risk aversion increase their portfolio weights in the risky asset. Empirically, I find evidence consistent with the first and third prediction. The second remains a testable implication of my model. In summary, this paper sheds light on the equilibrium effects of implementing new financial regulation on asset prices and systemic risk.
This paper investigates fire sales triggered by regulatory cliff effects induced by the loss of Capital Requirements Regulation (CRR) compliance on covered bonds. The loss of CRR compliant status leads to banks holding these covered bonds to lose several regulatory advantages, one consequence being a lower solvency. In our analysis, following the loss of CRR compliance, banks sell off their covered bonds in a fire sale, in an attempt to return to their initial solvency, resulting in losses of equity for the system as a whole. Further, we find that, for price impacts larger than a critical threshold, even small shocks lead to explosive fire sales and large losses of equity. While these losses can be averted if the banks allow their solvency levels to fall temporarily, other regulations, such as those relating to large exposures to other banks, could still trigger similar fire sales.
We derive a model that predicts the rise of green investment funds. The model further explains how green funds have higher value-added, even though their alphas are lower than brown funds after controlling for rising sentiment. We go on to document the growth of green funds from 12% of managed equities in 2013 to 56% by 2021, where we circumvent issues of greenwashing by using the actual emissions of underlying holdings. Dissecting this growth, we find stark differences between North America and Europe, both in terms of magnitude and source of growth. The results provide support for a lower expected return for green funds going forward, and raises concerns regarding the investor share of value-added in green funds.
Here you can find my publicly available datasets.
Department of Finance Copenhagen Business School Solbjerg Plads 3 2000 Frederiksberg Denmark Email: email@example.com