Showing papers in "Journal of Sustainable Finance and Investment in 2016"

Is it risky to go green? A volatility analysis of the green bond market

Abstract: Since its inception in 2007, the green bond market has experienced a compound growth rate of 50% annually. In 2014, green bond issuance totaled USD 36.6 billion, more than threefold its previous ye...

ESG factors and risk-adjusted performance: a new quantitative model

Abstract: Conventional finance wisdom indicates that less risk leads to lower returns. Against this belief, new mathematical analysis, introduced in this article, demonstrates that companies that incorporate Environmental, Social and Fair Governance (ESG) factors show lower volatility in their stock performances than their peers in the same industry, that each industry is affected differently by ESG factors, and that ESG companies generate higher returns. The study assessed, for a period of 2 years, 157 companies listed on the Dow Jones Sustainability Index and 809 that are not.

A systematic review of literature about finance and sustainability

Abstract: The relationship between finance and environmental sustainability areas has increasingly been attracting the attention of researchers and professionals in this field. However, there are not many studies that gather and systematize the available knowledge about the issue of financial management and the concern with sustainable development. The objective of this paper is to present the results or main gaps from a systematic review of literature about the relationship between finance and sustainability. We have adapted the methods presented by Lage Junior et al. [2010. “Variations of the Kanban System: Literature Review and Classification”.International Journal of Production Economics 125 (1), 13–21.], Jabbour [2013. Environmental Training in Organisations: From a Literature Review to a Framework for Future Research. Resources, Conservation and Recycling 74, 144–155] and Seuring [2013. A Review of Modeling Approaches for Sustainable Supply Chain Management. Decision Support Systems 54 (4), 1513–1520]...

Integrating ESG into valuation models and investment decisions: the value-driver adjustment approach

Abstract: True Environmental, Social and Governance issues (ESG) integration means ESG factors are systematically fed into the valuation models and investment decisions of analysts and portfolio managers (PM...

Allocating climate mitigation finance: a comparative analysis of five major green donors

Abstract: A mitigation finance allocation framework (global needs, recipients’ performance, recipients’ needs and donors’ interests) is introduced as a way to identify determinants according to which individual donors allocate climate mitigation finance across developing countries. A two-part model was used to analyse a three-dimensional Rio Marker panel data set (donor-recipient-time), representing 5 green donors and 180 developing countries in the time period 1998–2010. Overall, while the determinants that the donors used to allocate mitigation finance across countries are heterogeneous, their responses to global needs are almost homogenous. Developing countries with large carbon sinks and good institutional performance tend to be the main destination for major green donors’ mitigation finance. Unsurprisingly, as with environmental aid, and aid more broadly, Japan and France’s allocation of mitigation finance is influenced by their geopolitical interests, which may divert it from its principal objective o...

Climate change and the fiduciary duties of pension fund trustees – lessons from the Australian law

Abstract: Leading financial market participants increasingly recognise that issues associated with climate change present significant – if not unparalleled – financial risks. Regulatory, technological and social responses present particular issues for investment strategy, asset valuation, risk assessment and disclosure by institutional investors. However, governance literature has historically characterised climate change as a non-financial issue, at least over mainstream investment horizons. Accordingly, there has been little academic analysis of whether trustee directors are compelled, rather than permitted, to have regard to climate change risks. This paper seeks to advance the literature by examining the obligations of pension (or ‘superannuation’) fund trustee directors in Australia. The analysis focuses on the obligation to apply due care, skill and diligence under section 52A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). It concludes that a passive or inactive governance of c...

The risk of social responsibility – is it systematic?

Abstract: This paper empirically investigates the risk characteristics of three environmental, social and corporate governance (ESG) rating concepts commonly used for assessing corporate social performance (CSP). Analogous to financial returns, investors are subject to the risk of changes in the average ESG level of their portfolio which is denoted as ESG risk. This is of special interest to private and institutional investors focused on a socially responsible investment strategy. Moreover, a growing number of financial products, such as mutual funds, include sustainability objectives. With a large data set including the scores of three important ESG rating agencies, the paper further examines the convergence of ESG risk among different rating providers. Applying a regression-based approach, the paper provides evidence that ESG ratings are subject to a non-diversifiable risk component. Investors are therefore not able to fully avoid ESG risk by diversification. Furthermore, the three rating concepts are not...

Influences for using sustainability information in the investment decision-making of non-professional investors

Abstract: Non-professional investors face a series of complex decisions when considering environmental, social and governance (ESG) issues for their investment activities. As such, this study sheds light on the question: what influences the use of sustainable information and the decision to invest in a sustainable company by non-professional investors? In order to answer the question, this article builds on the behavioral finance and information overload literature. We used an online survey carried out in Germany and applied a structural equation model. The results show that the personal orientation toward sustainability issues is the most important factor in deciding to use a company’s sustainability information. Furthermore, the study reveals that the decision to invest in a sustainable company is influenced by the personal sustainability orientation, identification induced by a good feeling, their willingness to waive returns for sustainability, their exposure to sustainability information, the investor’...

Social performance and sustainability of Indian microfinance institutions: an interrogation

Abstract: This paper has come forward from the research proposal to understand the effect of social performance on the sustainability of microfinance institutions. It has been revealed that the conventional method of assessment of financial institutions is not applicable to the microfinance sector. Performance measurement of microfinance institutions has to be different from that of other financial institutions because of the social aspects involved besides profitability. Social performance has now become part of microfinance business along with business sustainability. Our whole study course is entitled “Effect of social performance on the sustainability of microfinance institutions.” In this paper, we elucidate the topic, find the underrepresented research areas and formulate a research hypothesis for understanding the relationship between social performance and the sustainability of microfinance institutions.

Crossing the energy efficiency chasm: an assessment of the barriers to institutional investment at scale, a UK perspective

Abstract: Significant savings in CO2 can be won from fabric upgrades, and improved forms of heating. An increase in the number of building retrofits and installations of energy efficient plant such as biomass boilers or combined cooling, heating and power plants must be the aim if the UK is serious in meeting its commitment to CO2 reduction at both the domestic and EU level. A way of achieving this increase, which will need to be significant, would be to tap into the vast funds under management by institutional investors who are required to invest those funds to optimise its monetary return, taking into account the level of risk. The aim of the research is to identify the enabling conditions that would need to exist to attract institutional investment in energy efficiency at scale. The UK Green Investment Bank (GIB) has invested £50 million into three energy efficiency funds, requiring each fund manager to match the amount by attracting investment from institutional investors. It is these funds that have be...

What has failed: microfinance or evaluation methods?

Abstract: This research note reflects on existing research and perspectives on the efficacy of microfinance as a poverty alleviation tool. We argue that while the story about the success of microfinance is widespread, its failure is also well documented at various levels. More importantly, systematic reviews of the existing research on microfinance performance do not support the efficacy of microfinance. This suggests that microfinance has failed. However, these reviews are based on studies that have adopted widely criticized empirical/quantitative techniques. Thus, in this research note, we attempt to sensitize both the research community and policy-makers to reconsider what has really failed in the context of microfinance, and act accordingly.

The influence of environmental NGOs on project finance: a case study of activism, development and Australia’s Great Barrier Reef

Abstract: Project financiers often influence not only the standards against which a project is managed, but also whether the project goes ahead at all. Non-government organizations (NGOs) are acutely aware of the leverage that project financiers possess. In today’s media-driven world, banks are especially sensitive to public opinion and bad press. Perception and reputation are important. In Australia, we have seen this play out with several of the world’s biggest financiers refusing to fund projects which might impact the Great Barrier Reef. In this paper, I explore some of those decisions and the influence of NGOs on the project finance industry. My aim is to better understand the context in which certain financial decisions are made, including who wields influence and how such influence is brought to bear. What seems apparent is that while financiers are powerful gatekeepers of major projects, their influence appears closely connected to that of civil society.

On the relevance of low-carbon stock indices to tackle climate change

Abstract: In a context where the necessary transition to a climate-resilient economy creates financing needs as well as new and underestimated financial risks for investors, low-carbon or carbonefficient financial indices represent a rapidly growing and promising instrument. By building and testing representative optimization methodologies for low-carbon stock indices, this study investigates their ability to both (i) allow investors to hedge against climate-related financial risks and (ii) promote companies with higher contribution to the energy transition. The analysis is based on a large European stock index for which we benefit from a complete set of bottom-up calculated environmental indicators, including indirect and avoided carbon emissions figures. The results indicate that mainstream low-carbon indices methodologies fail to address the challenges they are based on and call for further improvements in order to align diversified financial instruments with ambitious climate objectives.

Legitimacy and accountability in the global governance of large-scale agricultural land investments

Abstract: This article examines the international regulatory framework for large-scale agricultural land investments (‘LSALIs’). Population growth, natural resource scarcity, and the financial and food price crises have made financial actors revise their long-held hesitation towards direct investment in farmland. Although these investments could inject much-needed capital into rural areas, LSALIs have been connected with grievous human rights violations and environmental degradation. This article finds that the instruments designed to promote socially and environmentally responsible LSALIs have increasing levels of legitimacy but lack accountability mechanisms. As a result, the emerging regulatory framework for LSALIs does not create the balance required between protecting investors from host state interference and ensuring socially and environmentally responsible agricultural investments.

The construction of an investment portfolio using stochastic programming

Abstract: The aim of this paper is to construct a portfolio of eight different stocks from New York Stock Exchange market (AIR, ABM, TSCO, HLX, KO, DIS, AMZN, and VZ) using stochastic programming. The next stage (period) prices are generated using a stochastic difference equation in order to introduce uncertainty. For the portfolio selection, we use three different risk measures – min–max decision rule, value-at-risk, and conditional value-at-risk. After constructing three different portfolios, they are compared using well-known efficiency ratios – Sharpe, Sortino, and Rachev ratios.