Adaptation and Transparency Lead Discussions at ESG Investing Research Conference

Greenhouse gas emissions are a global issue, but foreign investors frequently don’t bear the local externalities. Some investors are motivated by an agenda focused on environmental, social, and governance (ESG) factors, while others are opposed to that framework. In pursuit of a net-zero economy that aligns with productivity, investors and researchers are retrofitting and applying practices and instruments in new ways and examining their effectiveness.

About 100 academics and investment professionals brought their perspectives and experience from the evolving discipline of ESG finance to the second Environmental, Social, and Governance (ESG) Investing Conference, hosted by the Cornell SC Johnson College of Business and held at Statler Hall on the Cornell University campus in Ithaca, July 19-21.

Of sixty papers submitted, six were accepted for presentation followed by an expert discussant’s prepared response and audience discussion. Between papers, three practitioner panels from government and industry discussed specific understandings of environmental, social, and governance factors in the contexts of real estate, portfolio management, investment research, and policy. Several alumni participated as panelists.

Conference organizer Scott Stewart, clinical professor and faculty co-director of the Parker Center for Investment Research at the Samuel Curtis Johnson Graduate School of Management, said that the unique design of the conference, including both academic papers and practitioner panels, facilitated the exchange of ideas between professors and investment professionals.

“One Cornell faculty member shared that the intimate event provided professors with the opportunity to learn how things really work in investment firms,” said Stewart, “which is invaluable as they seek to design realistic research studies.” 

Frank exchanges transform differences into productive conversations

One discussant argued that sustainability-linked loans (SLLs) are unlikely to drive greater sustainability because they embody weak financial incentives and too-easy environmental targets. He illustrated his point by naming a loan which he conjectured might have been issued as a greenwashing gesture. As it happened, a principal of that loan’s issuing firm was present and he weighed in. Agreeing that the climate ambition embodied in the loan was modest, he highlighted his firm’s strong overall environmental credentials. The exchange was pointed but productive, and the parties continued talking after the session.

The six featured papers are described below:

“Does Foreign Institutional Capital Promote Green Growth for Emerging Market Firms?”

Winner of the conference’s Best Paper Prize

Coauthors: Sophia Chiyoung Cheong, City University of Hong Kong; Jaewon Choi, University of Illinois, Urbana-Champaign; Sangeun Ha, Copenhagen Business School; Ji Yeol Jimmy Oh, Sungkyunkwan University.

Presenter Sangeun Ha explained the paper’s examination of the positive and negative effects of foreign investors on emerging markets’ green growth. Firms emit more when growing, so companies whose stocks are added to market indexes earn lower costs of capital, but reduce their GHG efficiency despite theorized economies of scale.

The paper’s discussant, Minmo Gahng, recently-appointed assistant professor of finance at the SC Johnson College, praised the paper for its timeliness and for broadening the scope of externalities into the international market for ESG. “Achieving net zero is difficult without emerging markets firms reducing their greenhouse gas production,” he said. “Foreign investors don’t bear the local externalities, but carbon emissions are a global issue. They can do more.”

“Reducing Carbon Using Regulatory and Financial Market Tools”

Coauthors: Franklin Allen, Imperial College London; Adelina Barbalau, University of Alberta; Federica Zeni, World Bank.

Presenter: Federica Zeni

Discussant: Ryan Pratt, Brigham Young University

As with sustainability-linked loans and bonds, carbon-contingent debt securities can, under certain conditions, be equivalent to a carbon tax, enabling finance to curb carbon emissions in developing economies where political support for a formal carbon tax may not exist.

“Do Homeowners Care About Sustainability?”

Author and presenter: Milind Goel, London Business School

Discussant: Nora Pankratz, Federal Reserve Board

Housing is the world’s largest asset class and consumes over one-fifth of global energy, but homeowners’ concern about the environment is not well understood. The author’s comprehensive dataset provides large-scale evidence that homeowners derive both pecuniary and non-pecuniary benefits from the energy efficiency of their dwellings.

“ESG Lending”

Coauthors: Seehoon Kim, University of Florida; Nitish Kumar, University of Florida; Jongsub Lee, Seoul National University; Junho Oh, Hankuk University of Foreign Studies

Presenter: Seehoon Kim, Warrington College of Business, University of Florida

Discussant: Gregory Nini, LeBow College of Business, Drexel University

Sustainable lending has flourished amid widespread issuance of sustainability-linked loans (SLLs) with spreads contingent on borrower ESG performance. Consistent with greenwashing concerns, borrower ESG scores deteriorate after the issuance of low-transparency SLLs.

“Green Window Dressing”

Coauthors: Gianpaolo Parise, EDHEC Business School and Center for Economic Policy Research (CEPR); Mirco Rubin, EDHEC Business School

Presenter: Gianpaolo Parise

Discussant: Huaizhi Chen, University of Notre Dame, Mendoza School of Business

The authors uncover evidence of widespread sustainability ratings manipulation by mutual funds, motivated by a tradeoff between responsibility and performance. As a result, publicly disclosed portfolios receive substantially higher ratings than actual portfolios would.

“Feedback on Emerging Corporate Policies”

Coauthors: Sean Cao, University of Maryland, Smith School of Business; Itay Goldstein, University of Pennsylvania, Wharton School;  Jie (Jack) He, University of Georgia, Terry College of Business; Yabo Zhao, Chinese University of Hong Kong, Shenzhen Finance Institute School of Management and Economics.

Presenter: Jie He

Discussant: Jennie Bai, Georgetown University, McDonough School of Business

The authors assemble a large sample of corporate disclosures in which managers voluntarily discuss their green/AI technology-related investment plans, illustrating what firms learn from the market, and when.

Farm-to-table dinner and keynote by BlackRock’s Andrew Ang

The conference showcased the picturesque Finger Lakes region with a keynote dinner at Silver Queen Farm in Trumansburg, presented by the nonprofit Healthy Food for All.

Economist Andrew Ang, head of factors, sustainable and solutions at global investment advising firm BlackRock, delivered the keynote talk. A prolific researcher and Columbia University professor, Ang had spent the full day at the conference, participating actively in discussion and commentary on the research presentations.

Ang’s work was already well known to Andrew Karolyi, Charles Field Knight Dean of the Cornell SC Johnson College of Business. “Elegant, novel, clarifying, path-defining” were the terms Karolyi used in his introduction, specifically referring to Ang’s influential 2006-2009 publications, which “founded the concept of ‘idiosyncratic volatility’ and its puzzling ‘low-vol’ pricing in global markets that spawned many systematic factors to be built by investors and for investors.”

Ang’s talk was titled “Sustainable Alpha” and applied financial theory to creating portfolios that could reduce carbon emissions and use climate and ESG data to generate excess returns. Portfolios that aim to reduce carbon greenhouse gas (GHG) emissions to zero by 2050 are called “net zero” portfolios or “Paris Aligned Benchmark” portfolios.

Set in financial terms, Ang showed that reducing GHG is a constraint in portfolio optimization, and constraints can only reduce the returns of a portfolio holding risk constant. He showed, however, that the reductions of returns are fairly small, even when all sectors of the market are held. Going further, he showed how climate and ESG signals can be used to predict returns.

Central to BlackRock’s approach, Ang explained, is a proprietary double-bottom-line framework where climate and ESG variables can both predict financial outcomes and contribute or measure a desirable real-world social outcome. As examples of double-bottom-line signals, he discussed companies that have committed to future reductions in GHG emissions, green patents, LEED-certified buildings, and how companies with purposeful employee cultures outperform their peers (for instance, companies that hire more veterans have higher returns).

“Capital markets are a powerful force for human civilization, because they govern where capital gets allocated,” said Ang. “And the great thing about putting together investment portfolios is you can allocate and encourage capital to move to where it needs to go to help society transition to a low carbon future and benefit more people.” 

The ESG Investing conference was co-hosted by the Parker Center for Investment Research, the Center for Sustainable Global Enterprise, and the Investing at Cornell and Business of Sustainability interdisciplinary themes. 

Conference takeaways: Panel insights on real estate, investor advisement, private markets

 Between the paper presentations, industry practitioners candidly shared common practices and research needs. Insights offered included:

• Investors are more comfortable with investing in low-ESG-ranked companies with expectations for improvement when earlier they were interested in investing only in high-ESG-ranked companies.
• Some investors avoid over-burdening startups with detailed ESG questionnaires, instead collecting information in meetings.
• Like most investment presentations, slide decks are customized with information most relevant for the prospective clients.
• Green subsidies may simply increase the price of an asset.
• Sufficient tax credits will incentivize developers.
• Doing well by a community makes it easier to draw permits.
• Roof-top solar panels can yield benefits for both owners and tenants.
• Whether or not ESG is stated in an effort’s narrative, an investment is likely to have increased returns when it decreases carbon emissions.