Finance: Research, Policy and Anecdotes

Last week saw the virtual ADBI-JBF-SMU joint conference on green and ethical finance. 13 papers over three days, ranging from banks and mass shooting, to private prisons and institutional investors, and the pricing of environmental risks, plus exciting keynotes by Ross Levine and Laura Starks.  Herewith a short summary with some of the most exciting papers; unfortunately, I do not have the time/space to discuss all of them.

Varun Sharma and co-authors gauge the effect of environmental activist investing on corporate environmental behaviours, using as identification strategy an initiative in 2014 by the New York City Pension System to request the inclusion of proxy access bylaws in targeted firms’ corporate charters.   Using plant-level data in a quasi-experimental setting, they find that firms targeted for their environmental impact reduce their toxic releases, greenhouse-gas emissions, and cancer-causing pollution through preventative efforts, compared to comparable firms that were not targeted. So, activist investing can have an effect, though one wonders about decreasing marginal returns.

Kathrin de Greiff, Torsten Ehlers and Frank Packer test if the risks of climate policy change are priced in the syndicated loan market and find that (i) the premia for environmental risk, as measured by firm-specific CO 2 emissions, are significantly priced, but only since the Paris accord agreement in 2015; (ii) there is a difference in risk premia due to CO2 emissions within as well as across different industries; (iii) only greenhouse gas emissions directly caused by the firm are priced, and not those indirectly caused by production inputs, transportation or use of final products; and (iv) “green” banks—either self-identified or those that lend less to carbon-intensive sectors—do not appear to price such risks differently from other banks.  Another interesting contribution to the literature on pricing environmental risks by financial institutions and markets.

Focusing on the ethical part of the conference theme, Eyub Yegen finds empirical evidence that privatization of prisons in the US deteriorates the quality of prisoners’ lives, leading to higher prisoner suicides and unexpected deaths. However, privatized prisons with higher passive institutional ownership see significant improvements compared to other private prisons.  But why would that be? Eyub shows that an increase in passive institutional ownership leads to a rise in the number of health, education, and suicide-prevention programs offered in prisons. Very innovative work, relying on detailed data collection through freedom of information requests!

Following the conference, the JBF will open the call for submissions for a special issue on green and ethical finance between 1 November and 31 December. Check back on the JBF website in November!

Overview