The Future of Emissions

(with Jules van Binsbergen). [SSRN]

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.

Podcast: Rig på viden, Episode 111 (In Danish).

Skills and Sentiment in Sustainable Investing

(with Alexander Kronies). [SSRN]

Invited for Dual-Submission by the Review of Financial Studies (RFS).

Awarded: Best Paper in Finance at the 2020 Conference on Behavioral Research in Finance, Governance, and Accounting (BFGA).

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.

Podcasts: Rig på viden, Episode 13 (In Danish); Rig på viden, Episode 79 (In Danish).

Press: CAIA Association.

Presented at: 1st YSBC Sustainable Finance Conference, HEC Paris 6th Phd Workshop, CFA Meeting on ESG-Ratings and Sustainable Investing, University of Oklahoma Energy and Climate Finance Research Conference 2022, American Finance Association Annual Meeting Poster Session (AFA 2022), University of Luxembourg Seminar 2021, The Central Bank Research Association Annual Meeting (CEBRA 2021), Nordic Finance Network Young Scholars Finance Workshop (NFN 2020), 2nd Conference on Behavioral Research in Finance, Governance and Accounting (BFGA 2020), PhD Symposium of the 32nd Northern Finance Association Conference (NFA 2020), 19th Conference on Credit Risk Evaluation (CREDIT 2020), Becker Friedman Institute Macro-Finance Research Program Summer Session for Young Scholars (MFR 2020), Wharton PhD Brown Bag Series 2020.

Two scholars at Copenhagen Business School created a “text-based sustainability sentiment measure,” that explores concerns with climate change among investors. https://t.co/mYjhcFFIRK pic.twitter.com/XnZTg6rTnW

— Portfolio for the Future | CAIA Association Blog (@CAIA_Blog) June 11, 2020

The Market for Green Funds

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.

Altruism or self-interest? ESG and participation in Employee Share Plans

Presented at: Conference in Sustainable and Socially Responsible Finance (2022).

Corporate Asset Pricing

(sole author). [SSRN]

Presented at: American Economic Association Annual Meeting Poster Session (AEA 2022), 36th Congress of the European Economic Association and the Econometric Society European Meeting (EEA-ESEM 2021), Econometric Society Asian Meeting (2021), Nordic Finance Network PhD Workshop (NFN 2021), Copenhagen Business School Brown Bag PhD seminar (2021).

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.

Macroprudential Buffers: Trading Systemic Risk for Risk Premia

(sole author)

Presented at: Wharton School at the University of Pennsylvania, PhD Nordic Finance Workshop, Poster Session at American Finance Association Annual Meeting (AFA), Copenhagen Business School.

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.

Presented at: Financial Management Association (FMA) Europe (University of Agder), RiskLab (Bank of Finland), Bank of England, Copenhagen Business School, Lund University, Nykredit A/S, Danmarks Nationalbank.

Press: Finans, FinansWatch, Danmarks Radio, Danmarks Nationalbank.

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.