- Downloadable Working Papers - 

EU mutual funds classified as either Article 8 or 9 experience on average a 0.96 percentage point higher annualized flow post SFDR relative to Article 6 funds. This difference in flow is significant after both the SFDR introduction date and implementation date and holds regardless of whether funds received a high or low Morningstar Sustainability Rating pre-SFDR. Following SFDR, retail (but not institutional) funds with Article 8 or 9 classification demonstrate stronger portfolio decarbonization and higher portfolio-level ESG scores compared to Article 6 funds. In aggregate, EU-regulated funds significantly improve the ESG profile of their investments relative to U.S. mutual funds, holding for both retail and institutional funds. Taken together, the results suggest that sustainable finance disclosure regulation enables mutual funds to attract capital by signaling commitments to sustainable investments, and it induces funds to change their behavior. 

Using a unique global sample of 740 ESG-related name changes between July 2016 and September 2022, we investigate investors' response and fund managers' behaviour in terms of fund flows, portfolio-level ESG metrics, portfolio turnover, and fees. Using difference-in-differences analysis and accounting for heterogeneous treatment effects, we provide mixed evidence on whether funds increase flows by renaming, although effects appear significant for funds domiciled in Europe.Fund managers do improve the ESG performance, reduce exposure to controversial businesses, decrease the carbon intensity, and lower the overall ESG risks of their portfolios after ESG renaming. Repurposing has no material impact on funds' turnover rates and on fees. The results alleviate concerns that funds use ESG-oriented name changes cosmetically. 

We study private shareholder engagements with 2,465 publicly listed firms from 2007 to 2020 about environmental, social, and governance (ESG) issues. Around 75% of engagements are financially material and that targets of successful material engagements significantly outperform their peers by 2.5% over the next 14 months. Material engagements are more often significantly associated with improvements in profitability, sales, and cost ratios than immaterial engagements. Finally, our evidence indicates that a decrease in CO2e intensity accompanies environmental engagements but that total CO2 emissions are unaffected.  

Using data on 1,858 proposals that went to a vote at Russell 3000 firms between 2008 and 2020, we find that the percentage of for/against votes favoring a financially material proposal increases by 1.3 percentage points when ownership from civil-law institutional investors increases by 1 percentage point. However, we find no effect of common-law institutional ownership on support for material CSR proposals. Lastly, we find no effect of common-law nor civil-law institutional ownership on support for immaterial CSR proposals. Hence, we provide empirical evidence that investors’ local institutional environment shapes their vote support for CSR proposals. Our results indicate that civil-law institutional investors, guided by a stakeholder-oriented conception of the firm, can recognise which CSR proposals are financially material. 

- Journal Publications - 

Published, forthcoming & accepted papers - Unfold for abstract

We study private shareholder engagements with 2,465 publicly listed firms from 2007 to 2020 about environmental, social, and governance (ESG) issues. Around 75% of engagements are financially material and that targets of successful material engagements significantly outperform their peers by 2.5% over the next 14 months. Material engagements are more often significantly associated with improvements in profitability, sales, and cost ratios than immaterial engagements. Finally, our evidence indicates that a decrease in CO2e intensity accompanies environmental engagements but that total CO2 emissions are unaffected.  

We relate firm performance, analysts forecast errors, and the returns after earnings announcements to firm-specific measures of heat exposure absed on more than 13,000 firms in 93 countries from 1995 to 2019. We find that greater exposure to high temperatures reduces firms' revenues and operating income, and negatively impacts on earnings surprises.   

Motivated by concerns about impact washing and confusions about different types of sustainable investments, the paper offers a new typology of sustainable investments. This typology more concretely specifies what impact investments are and what they (should) entail. We propose a  distinction between impact-aligned investments and impact-generating investments. 

We investigate the effect of insider ownership on corporate bond yield spreads from 2003 to 2014 using a sample of 10,470 bonds issued by 1,222 non-financial firms from 48 countries. Greater insider ownership is associated with higher yield spreads. This positive relationship holds after controlling for measures of risk-taking, which suggests that bondholders price-protect against greater insider ownership for reasons beyond insiders’ heightened incentives to take risk. We consider consumption of private benefits as another economic channel through which insider ownership hurts bondholders. We show that the positive association between insider ownership and the spread decreases for firms with relatively stronger shareholder rights, in which consumption of private benefits is less likely to occur. Furthermore, we present evidence that the probability of related-party transactions is larger in firms with more insider ownership. 

We study the economic significance of social dimensions in investment decisions by analyzing the holdings of U.S. equity mutual funds over the period 2004–2012. Using these holdings, we measure funds’ exposures to socially sensitive stocks in order to answer two questions. What explains cross-sectional variation in mutual funds’ exposure to controversial companies? Does exposure to controversial stocks drive fund returns? We find that exposures to socially sensitive stocks are weaker for funds that aim to attract socially conscious and institutional investor clientele, and they relate to local political and religious factors. The financial payoff associated with greater “sin” stock exposure is positive and statistically significant, but becomes non-significant with broader definitions of socially sensitive investments. Despite the positive relation between mutual fund return and sin stock exposure, the annualized risk-adjusted return spread between a portfolio of funds with highest sin stock exposure and its lowest-ranked counterpart is statistically not significant. The results suggest that fund managers do not tilt heavily towards controversial stocks because of social considerations and practical constraints. 

A significant number of institutional investors publicly state the belief that corporate stakeholder relations are associated with firm value in a manner that the financial market fails to understand. We investigate whether stakeholder information predicted risk-adjusted returns due to errors in investors' expectations and ultimately ceased to do so as attention for such information increased. We build a stakeholder-relations index (SI) for a wide range of U.S. firms over the period 1992–2009 and provide evidence that the SI explained errors in investors' expectations about firms' future earnings. The SI was positively associated with long-term risk-adjusted returns, earnings announcement returns, and errors in analysts' earnings forecasts over the period 1992–2004. However, as attention for stakeholder issues became more widespread, subsequently, these relationships diminished considerably. The results are consistent with the idea that increased investor attention for stakeholder issues eventually eliminates mispricing. 

A segmentation of the socially responsible investing (SRI) movement by values-versus-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 profit-driven segment is best served by specific “positive” screens involving environmental and social issues, which also 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 in the short run, which begs the question whether SRI should be the only term for different types of social investment practices. However, economic theory predicts that profit-generating opportunities disappear in the long run, which is supported by our empirical analysis over the period 1992-2008. 

This study adds new insights to the long‐running corporate environmental‐financial performance debate by focusing on the concept of eco‐efficiency. Using a new database of eco‐efficiency scores, we analyse the relation between eco‐efficiency and financial performance from 1997 to 2004. We report that eco‐efficiency relates positively to operating performance and market value. Moreover, our results suggest that the market's valuation of environmental performance has been time variant, which may indicate that the market incorporates environmental information with a drift. Although environmental leaders initially did not sell at a premium relative to laggards, the valuation differential increased significantly over time. Our results have implications for company managers, who evidently do not have to overcome a tradeoff between eco‐efficiency and financial performance, and for investors, who can exploit environmental information for investment decisions. 

This paper investigates the relation between portfolio concentration and the performance of global equity funds. Concentrated funds with higher levels of tracking error display better performance than their more broadly diversified counterparts. We show that the observed relation between portfolio concentration and performance is mostly driven by the breadth of the underlying fund strategies; not just by fund managers’ willingness to take big bets. Our results indicate that when investors strive to select the best performing funds, they should not only consider fund managers’ tracking error levels. It is of greater importance that they take into account the extent to which fund managers carefully allocate their risk budget across multiple investment strategies and have concentrated holdings in multiple market segments simultaneously. 

We examine the effects of terrorist attacks on stock markets, using a dataset that covers all significant events and that directly relate to the major economies of the world. Our event study suggests that terrorist attacks produce mildly negative price effects. We compare these price reactions to those from an alternative type of unanticipated disaster, earthquakes, and find that price declines following terror attacks are more pronounced. However, in both cases prices rebound within the first week of the aftermath. We also compare price responses internationally and for separate industries, and find that reactions are strongest for local markets and for industries that are directly affected by the attack. Our results suggest that financial markets react strongly to terror events but then recover swiftly and soon return to business as usual. The September 11th attacks turn out to be the only event that caused long‐term effects on financial markets, especially in terms of industries' systematic risk. 

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. 

REITs exhibit a strong and prevalent momentum effect that is not captured by conventional factor models. This REIT momentum anomaly hampers proper judgments about the performance of actively managed REIT portfolios. In contrast, a REIT momentum factor adds incremental explanatory power to performance attribution models for REIT portfolios. Using this factor, this study finds that REIT momentum explains a great deal of the abnormal returns that actively managed REIT mutual funds earn in aggregate. Accounting for exposure to REIT momentum also materially influences cross-sectional comparisons of the performances of REIT mutual funds. This study has important implications for performance evaluation, alpha–beta separation, and manager selection and compensation. 

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. 

We investigate persistence in the relative performance of 3549 bond mutual funds from 1990 to 2003. We show that bond funds that display strong (weak) performance over a past period continue to do so in future periods. The out-of-sample difference in risk-adjusted return between the top and bottom decile of funds ranked on past alpha exceeds 3.5 percent per year. We demonstrate that a strategy based on past fund returns earns an economically and statistically significant abnormal return, suggesting that bond fund investors can exploit the observed persistence. Our results are robust to a wide range of model specifications and bootstrapped test statistics. 

Although the academic interest in ethical mutual fund performance has developed steadily, the evidence to date is mainly sample-specific. To tackle this critique, new research should extend to unexplored countries. Using this as a motivation, we examine the performance and risk sensitivities of Canadian ethical mutual funds vis-à-vis their conventional peers. In order to overcome the methodological deficiencies most prior papers suffered from, we use performance measurement approaches in the spirit of Carhart (1997, Journal of Finance 52(1): 57–82) and Ferson and Schadt (1996, Journal of Finance 51(2): 425–461). In doing so, we investigate the aggregated performance and investment style of ethical and conventional mutual funds and allow for time variation in the funds’ systematic risk. Our␣Canadian evidence supports the conjecture that any␣performance differential between ethical mutual funds and their conventional peers is statistically insignificant.

Does socially responsible investing (SRI) lead to inferior or superior portfolio performance? This study focused on the concept of “eco-efficiency,” which can be thought of as the economic value a company creates relative to the waste it generates, and found that SRI produced superior performance. Based on Innovest Strategic Value Advisors' corporate eco-efficiency scores, the study constructed and evaluated two equity portfolios that differed in eco-efficiency. The high-ranked portfolio provided substantially higher average returns than its low-ranked counterpart over the 1995–2003 period. This performance differential could not be explained by differences in market sensitivity, investment style, or industry-specific factors. Moreover, the results remained significant for all levels of transaction costs, suggesting that the incremental benefits of SRI can be substantial. 

We examine whether the short-term variation in the japanese size and value premium is sufficiently predictable to be exploited by a timing strategy. In the spirit of Pesaran and Timmermann [1995], we adopt a dynamic modeling approach that explicitly allows for permutations among regressors over time. The results confirm sufficient predictability under lower transaction cost levels. Under high transaction costs scenarios it is more difficult to obtain incremental benefits. 

- Contributions to books and industry reports - 

The Materiality of ESG Factors For Emerging Markets Equity Investment Decisions: Academic Evidence. A NN Investment Partners Publication for Professional Investors in collaboration with ECCE (2016). Download report

This study is an investigation into global emerging markets equity portfolios that are formed by means of corporate ESG ratings. 

The Materiality of ESG Factors for Equity Investment Decisions: Academic Evidence. A NN Investment Partners Publication for Professional Investors in collaboration with ECCE (2016). Download report. Using ESG data from Sustainalytics and GMI Ratings, the study finds that various global equity portfolios formed on best "momentum" in ESG ratings provide Sharpe ratios that exceed those of portfolios with weakest ESG momentum. Exclusion of stocks based on ESG controversies improved the Sharpe ratios of global equity portfolios. 

Values-Driven and Profit-Seeking Dimensions of Environmentally Responsible Investing, in Bansal, P. and A. Hoffman (eds), The Oxford Handbook of Business and the Natural Environment (2011), with Rob Bauer.

- Permanent working papers

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. First, we confirm a positive relation between customer satisfaction and a firm’s future return on assets. Second, 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.