Finance: Research, Policy and Anecdotes

Following a virtual conference in September 2020, jointly organized by Asian Development Bank Institute (ADBI), the Journal of Banking & Finance, and the Singapore Management University’s Sim Kee Boon Institute for Financial Economics, we issued a call for papers on green and ethical finance, with five papers now published in a special issue.  The papers are discussed in more detail in this editorial, but below a quick run-down

Climate change poses new risks for financial intermediaries and an important question is to which extent these risks are being priced properly. Combining syndicated loan data with carbon intensity data (CO2 emissions relative to revenue) of borrowers across a wide range of industries, Torsten Ehlers , Frank Packer and Kathrin de Greiff  find a significant “carbon premium”, but only since the Paris agreement in 2015.  The question to which extent banks internalise climate risks in their loan pricing has been also explored in many other papers, as well as the question whether markets or banks are better in terms of addressing climate change (some of this discussed in my paper with Yung Chul Park).

What turns firms’ attention to ESG scores? Mark Shackleton, Jiali Yan, and Yaqiong Yao show that worse stock market performance increases firms’ efforts on environmental and social (ES) activities, using a panel vector autoregression to control for endogeneity. So, there seems to be a certain investor discipline!

Do retail investors really incorporate social considerations into their investment decisions? Philipp Kollenda analyzes 70,000 transactions by retail impact investors on a peer-to-peer lending platform that intermediates loans to firms in low-income countries and finds that financial returns significantly influence investors’ decisions, while expected social impact has no or limited influence on investors’ funding decisions.

Ann-Christine Brunen and Oliver Laubach gauge whether people behave consistently when it comes to sustainability, using a financially incentivized choice to study the non-investment-related sustainable behavior of the clients of three German robo advisors and relate it to their investment decisions with a digital wealth manager that offers both conventional and sustainable investments. They find that households with more sustainable consumption patterns are also more likely to choose a portfolio following a sustainable investment strategy, but that self-reported sustainable consumer behavior not backed up by pertinent actions is not significantly related to sustainable investment choices

Mikael Homanen gauges whether depositors react to negative non-financial and climate related information about their financial institutions, studying the case  of the highly controversial Dakota Access Pipeline and shows strong negative depositor reaction to the banks funding the pipeline.  I have discussed this paper before and given that Mikael was my PhD student, the paper was handled by a different editor.

These five papers show the importance of climate change and ESG concerns for firms, financial institutions and households, but also that there are limits to the extent to which these risks are properly priced.  Green finance is certainly a growth area in research and policy importance!

Overview