Get green or die trying? Carbon risk integration into portfolio management
Maximilian Görgen, Andrea Jacob, Martin Nerlinger
Journal of Portfolio Management 47 (3), 77-93.
Portfolio management is confronted with climate change – stronger and more rapidly than expected. Risks arising from the transition process from a brown, carbon-based to a green, low-carbon economy need to be integrated into portfolio and risk management. We show how to quantify these carbon risks by using a capital markets-based approach. Our measure of carbon risk, the carbon beta, can serve as an integral part to portfolio management practices in a more comprehensive way than fundamental carbon risk measures. Apart from other studies, we demonstrate that both green and brown stocks are risky per se, but there is no adequate remuneration in the financial markets. In addition, carbon risk exposure is correlated with exposures towards other common risk factors. This requires due diligence when integrating carbon risk in investment practices. By implementing carbon risk screening and best-in-class approaches, we find that investors can gain a desired level of carbon risk exposure, but this does not come without well-hidden costs.
Investors’ carbon risk exposure and their potential for shareholder engagement
Lukas Benz, Stefan Paulus, Julia Scherer, Janik Syryca, Stefan Trück
Business Strategy and the Environment, early view.
This article examines the exposure to and management of carbon risks of different investor types. Considering the dual role as portfolio manager and partial owner, we analyze carbon risk for investors both in terms of exposure to portfolio values and in terms of responsibility as shareholder of carbon‐intensive firms. We show that among various investor types, the preference for holding carbon‐intensive stocks differs substantially, even when considering traditional investment decision parameters. In particular, it is governments whose portfolio values are most threatened by a carbon risk exposure of 49%, but at the same time, they prefer larger ownership shares in polluting firms. In contrast, individual investors, investment advisors, and mutual funds avoid holding stakes in these firms, while revealing only a moderate exposure of their assets to carbon risk. In view of the Paris Agreement, which includes the consistent steering of financial flows towards a low carbon transformation of the economy, our study provides policymakers with important implications regarding the coverage and effects of respective regulations. By identifying the ownership structures of carbon‐intensive firms and respective owners' portfolio compositions, we also offer implications for further research on portfolio decarbonization and shareholders' influence of corporate carbon management.
Herds on green meadows: the decarbonization of institutional portfolios
Lukas Benz, Andrea Jacob, Stefan Paulus, Marco Wilkens
Journal of Asset Management 21, 13-31 (2020).
We analyze an emerging sustainable trend in asset management: the decarbonization of institutional portfolios. By using broad institutional ownership data, we show that investors exhibit herding behavior in the sense of decarbonization. They are inclined to follow their own or other investors’ buys in green stocks and sales in brown stocks over adjacent quarters. Beyond that, we find that Hedge Funds as well as Investment Advisors lead the herd by executing trades in the sense of decarbonization. This is in line with expectations that sophisticated investors, who integrate environmental aspects into their investment decision process, are able to attract imitators. For the aspired achievement of market-wide decarbonization, investors leading the herd should be encouraged to further decarbonize their portfolios in order to trigger follow-up trades.
Will the DAX 50 ESG establish the standard for German sustainable investments? A sustainability and financial performance analysis
Credit and Capital Markets, forthcoming.
The demand for sustainable investments is growing worldwide. As a result, the DAX 50 ESG was introduced in March 2020 as the first ESG index by the German stock exchange. It is promoted as the new standard for German sustainable investments. We are the first to comprehensively examine the financial and non-financial performance of the index and its constituents. Therefore, we examine the sustainability performance using both ESG criteria and the alignment of products and services with the Sustainable Development Goals. Our results show that the DAX 50 ESG may only to a limited extent be promoted as the most sustainable German index. Moreover, since inception as well as during the COVID-19 crisis, the DAX 50 ESG’s financial performance is comparatively worse. Our findings suggest that stock markets penalize the inclusion of a firm in the DAX 50 ESG in the short run, thus affecting the overall index performance. Our analysis of the DAX 50 ESG further increases investor attention to sustainable financial products and enables better investment decisions.
Carbon footprints sind nicht gleich Carbon-Risiken
Martin Nerlinger, Marco Wilkens, Jonas Zink
Zeitschrift für das gesamte Kreditwesen 73, 32-35 (2020).
Green Finance und Carbon-Risiken im Asset Management
Marco Wilkens, Andrea Jacob
Zeitschrift für das gesamte Kreditwesen 73, 88-91 (2020).
Maximilian Görgen, Andrea Jacob, Martin Nerlinger, Ryan Riordan, Martin Rohleder, Marco Wilkens
Working Paper, 2020.
We investigate carbon risk in global equity prices. We develop a measure of carbon risk using industry standard databases and study return differences between brown and green firms. We observe two opposing effects: Brown firms are associated with higher average returns, while decreases in the greenness of firms are associated with lower announcement returns. We construct a carbon risk factor-mimicking portfolio to understand carbon risk through the lens of a factor-based asset pricing model. While carbon risk explains systematic return variation well, we do not find evidence of a carbon risk premium. We show that this may be the case because of: (1) the opposing price movements of brown firms and firms becoming greener, and (2) that carbon risk is associated with unpriced cash-flow changes rather than priced discount-rate changes. We extend our analysis to different geographic regions and time periods to confirm the missing risk premium.
► Highest Impact Award, Green Summit Vaduz, 2017.
► Best Paper Award, Southwestern Finance Association Conference, 2018.
What drives sustainable indices? A framework for analyzing the sustainable index landscape
Andrea Jacob, Marco Wilkens
Working Paper, 2020.
This article investigates the drivers of sustainable indices. We find that the sustainable investment focus determines index-specific return and risk exposures. Portfolio managers taking this into account are able to steer portfolio characteristics more appropriately. Furthermore, ESG metrics and sector exclusion strategies do not necessarily lead to a clear-cut exposure towards an aspired sustainability focus following allocation strategies. For an index strategy, stock selection is more salient than allocating towards certain sustainable classes. This finding implies that stocks are substantially heterogeneous within classes allowing to optimizing portfolio characteristics efficiently without losing the sustainable investment focus.
Enhancing the accuracy of firm valuation with multiples using carbon emissions
Working Paper, 2020.
Carbon emissions are nowadays an important driver of the value of a firm. We are the first to analyze the potential of carbon emissions data in enhancing the accuracy of firm valuations using the similar public company methodology with multiples. Using carbon emissions has a potential to improve firm valuation accuracy in two separate ways. First, we construct multiples based on carbon emissions (CEM) which are able to estimate firm values. And second, we create more precise peer groups by including carbon emissions (CEPG) in the composition process. To gain deeper insights, we are conducting further analyses, e.g. by measuring the accuracy of carbon emissions peer groups and carbon emissions multiples at valuing carbon intensive or carbon inefficient firms. We extend our study by looking at firms in countries with carbon pricing or by taking ESG and SDGs concerns into account. Overall, we find that CEPG improves the accuracy of firm valuations in more than three quarters of all cases whereas CEM have limited use. Therefore, we recommend analysts, asset managers and investors to include carbon emissions data into their peer group composition.
You never know the value of water before the well runs dry – The impact of Sustainable Development Goals on firm value
Martin Nerlinger, Marco Wilkens
Working Paper, 2020.
The contribution to the 17 Sustainable Development Goals (SDGs) represents the next generation of measures for the sustainability of firms. We are the first to study the impact of a firm’s SDG performance on its value using unique data on SDG-aligned products and services from more than 5,800 global firms. Comparing firms that disclose their SDG performance to 25,800 non-disclosing firms reveals significant differences. We estimate an SDG disclosure-choice model and integrate the results into a firm-value model. Our results reveal the impact on firm value of specific SDGs; for example “combating hunger”, “attaining gender equality”, and “optimizing material use” have a significantly negative, whereas “ensuring health” and “mitigating climate change” have a significantly positive impact. The results remain robust after controlling for firms’ environmental, social und governance (ESG) scores and countries’ SDG performance. We recommend including a firm’s SDG performance to more precisely assess its value.
► Impact Award, Green Summit Vaduz, 2020.
Ownership Comes with Responsibility – the Impact of Ownership Characteristics on CSR
Lukas Benz, Stefan Paulus, Martin Rohleder, Marco Wilkens
Working Paper, 2020.
This article provides a novel methodology to investigate the influence of share ownership on corporate decision making. Quantifying the characteristics of firms’ owners based on their measurable investment habits enables us to assess their predominant preferences. We demonstrate that a preference by owners for eco-social investments is a positive force in their firms’ CSR performance. In contrast, firms exhibit a lower CSR performance when owners show a higher degree of heterogeneity in terms of eco-social preferences. Furthermore, we find that universal as well as long-term ownerships significantly encourage CSR, hence confirming prominent theoretical concepts.
The Impact of Corporate Social Responsibility on Firm Value: The Role of Shareholder Preferences
Working Paper, 2020.
This article shows that corporate social responsibility (CSR) is positively related to firm value, given firms have shareholders who reveal a corresponding preference for social or environmental performance, as proxied by their quantifiable investment habits. I suspect that this corresponds to an appreciation by socially responsible investors and is reflected in higher value for firms with a stronger CSR performance. In line with this conjecture, I find a premium of 4% in relation to the average firm value for higher environmental performance and 3.5% for higher social performance. The results are consistent with theoretical concepts arguing that CSR expenditures can be compatible with value maximization if it is a response to shareholder preferences.
Green Data or Greenwashing? Do Corporate Carbon Emissions Data Enable Investors to Mitigate Climate Change?
Vitali Kalesnik, Marco Wilkens, Jonas Zink
Working Paper, 2020.
Absent mandatory reporting, and although many companies report their carbon emissions, much of the emissions data are estimated by data providers. As we evaluate the forward-looking carbon scores from several popular data providers, we find no evidence that these scores predict future changes in emissions. Further, we find that data on estimated emissions are at least 2.4 times less effective than reported data in identifying the worst emitters and provide little information to identify green companies in brown sectors. Our results debunk the belief that third-party estimated emissions are a satisfactory substitute for company-reported emissions and call for mandatory and audited carbon emissions disclosure.
The Effects of Decarbonizing Institutional Portfolios on Stock Prices and Carbon Emissions
Martin Rohleder, Marco Wilkens, Jonas Zink
Working Paper, 2020.
This study provides a first consistent answer to the important question of whether decarbonizing institutional portfolios affects the stock prices of carbon-intensive companies and if it contributes to the reduction of carbon emissions. With a new method to identify decarbonization trades in a comprehensive dataset of equity mutual fund holdings and firm-level carbon emissions, and controlling for endogeneity, we find that portfolio divestment of carbon-intensive holdings pressures stock prices downwards over several periods. Furthermore, we find first evidence of divestment-affected firms reducing their carbon emissions as compared to non-divested firms. This confirms the divestment movement’s hope that a critical mass of investors will be able to positively influence firms’ carbon-emitting behavior.
Nachhaltige Geldanlagen – nur gutes Gewissen oder wirklich Wirkung?
Timo Busch, Christian Klein, Marco Wilkens
Audit Committee Quarterly III/2020, S. 47-49.
CARIMA – A Capital Market-Based Approach to Quantifying and Managing Transition Risks
Maximilian Görgen, Marco Wilkens, Henrik Ohlsen
NGFS Occasional Paper: Case Studies of Environmental Risk Analysis Methodologies, Chapter 34.
Verpflichtende klimabezogene Unternehmens-Berichterstattung als Mittel zur Reduzierung von CO2-Emissionen
Frank Schiemann, Timo Busch, Alexander Bassen, Christian Klein, Ingmar Jürgens, Ulf Moslener, Marco Wilkens, Rüdiger Hahn, Daniel Reimsbach, Thomas Pioch, Tobias Bauckloh, Matthias Kopp, Claudia Tober
Wissenschaftsplattform Sustainable Finance in Kooperation mit BMBF-Projekt „Klimaberichterstattung als Instrument zur CO2-Reduktion (CRed)“.
Bedingungen für eine wirksame Sustainable Finance Taxonomie
Franziska Schüzte, Karsten Neuhoff, Ingmar Jürgens, Ulf Moslener, Marco Wilkens, Timo Busch, Christian Klein
Wissenschaftsplattform Sustainable Finance Policy Brief – 1/2019.
Carbon Risiken und Financed Emissions von Finanztiteln und Portfolios. Handbuch
Marco Wilkens, Maximilian Görgen, Andrea Jacob, Martin Nerlinger, Bernd Wagner, Henrik Ohlsen, Sven Remer
Geld grün oder braun anlegen?
Augsburger Allgemeine Forschungsbeilage, Ausgabe 14, Winter 2020, S. 02.
Wie schätzt der Markt die Risiken eines Ausstiegs aus fossilen Brennstoffen ein?
Deutsche Bundesbank Finanzstabilitätsbericht 2019, S. 120.
Klimarisiken von Kapitalanlagen werden messbar
Susanne Bergius, Tagesspiegel Background, 22. August 2019.
Klimarisiken messen und in den Griff kriegen
Susanne Bergius, Handelsblatt Business Briefing, Nr. 8, 9. August 2019.
Von der Brown Economy zur Green Economy
Marco Wilkens, Augsburger Allgemeine Forschungsbeilage, Ausgabe 09, Sommer 2017, S. 05.