Integrated Reporting,Quality of Management,and Financial Performance

Interest in integrated reporting continues to grow as its proponents cite a number of significant benefits to both companies and investors. But given the still‐early stages of development of this new management practice and the relative paucity of data, establishing empirical confirmation of these claims is difficult. Using RobecomSAM's proprietary database of over 2,000 companies surveyed during its annual Corporate Sustainability Assessment (CSA), the authors discuss the extent and recent growth of integrated reporting, and its likely effects on important indicators of both ESG quality of management and financial performance. The authors begin by reporting that although only 12% of the companies in the survey dataset practiced some form of integrated reporting in 2012, that number represented a 50% increase from 2011. The authors also report a strong relationship between integrated reporting and ESG quality of management, which some studies suggest has become a useful indicator of the overall effectiveness of management in creating value over the long term. This relationship is particularly strong in certain sectors, notably healthcare. At the same time, the authors find a relationship between integrated reporting and financial performance for two sectors—healthcare and information technology—though not for the population as a whole. The authors suggest that this apparent lack of effect may be attributable to a time lag between integrated reporting's contribution to better ESG quality of management, and the eventual reflection of such management in financial performance.     

ESG for All? The Impact of ESG Screening on Return,Risk, and Diversification

A large body of research has documented a positive relationship between different measures of sustainability—such as indicators of employee satisfaction and effective corporate governance—and corporate financial performance. Nevertheless, many investors still struggle to quantify the value of ESG to investment performance. To address this issue, the authors tested the effects of using different ESG filters on an investable universe that serves as the starting point for a fund manager. In this way, they attempted to determine the extent to which ESG data can add value to any investment approach, regardless of preferences towards sustainable investing. The authors report “an unequivocally positive” contribution to risk‐adjusted returns when using a 10% best‐in‐class ESG screening approach (one that effectively removes companies with the lowest 10% of ESG rankings), both on a global and a developed markets universe. More specifically, as a result of such screening, both the global and developed markets portfolios show higher returns, lower (tail) risk, and no significant reduction of diversification potential despite the reduction in the number of companies. Use of a 25% screening filter was also found to add value, especially by reducing tail risks, but with a larger deviation from the unscreened universe. Overall, then, the authors’ finding is that the incorporation of ESG information contributes to better decision‐making in every investment approach, with the optimal configuration depending on a fund manager's preferences and willingness to deviate from an unscreened benchmark.     

Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability

In this paper, we empirically examine whether superior performance in corporate social responsibility (CSR) results in lower credit risk, measured by credit ratings and zero-volatility spreads (z-spreads). We are especially interested in how the environmental, social, and governance (ESG) related performance of the corresponding countries moderates this relationship. We find only weak evidence that superior corporate social performance (CSP) results in systematically reduced credit risk. However, we do find strong support for our hypothesis that a country’s ESG performance moderates the CSP–credit risk relationship. Superior CSP is regarded as risk-reducing and rewarded with better ratings and lower z-spreads only if it is recognized by the environment. In addition, we find a reduction of corporate bonds’ z-spreads by approx. 9.64 basis points if the CSP of a company mirrors the ESG performance of the country it is located in.     

The Next Wave of ESG Integration: Lessons from Institutional Investors

In this panel that also took place at the recent SASB Symposium, senior representatives of four leading institutional investors—BlackRock, Ca lPERS, Ca lSTRS, and Wells Fargo—emphasize the relevance of ESG data for “mainstream” investors and the importance of integrating it with traditional fundamental analysis rather than viewing it as a separate set of reporting responsibilities. Moreover, the logical place for integrating ESG information is in the most forwardlooking section of financial reports, the “Management Discussion and Analysis,” or “MD&A,” which would be strengthened by including more and better information about the companies' ESG risks and initiatives. Some panelists noted that ESG information is likely to be valued by investors because of its ability to shed light on “idiosyncratic” risks that are not captured by the traditional risk factors that have long dominated asset pricing models. Others described ESG information as helpful in evaluating and comparing the “quality” of management in portfolio companies. But all agreed that efforts like the SASB's to standardize ESG data are essential to successful integration of that data into the decision‐making process of large mainstream investors. And as the panelists also made clear, there is an important generational component to the growing movement to integrate ESG into mainstream investing, with Millenials—and particularly Millenial women—showing especially strong support.     

Credit risk spillovers and cash holdings

This paper examines how credit risk spillovers affect corporate financial flexibility. We construct separate empirical proxies to disentangle the two channels of credit risk spillovers—credit risk contagion (CRC), where one firm's default increases the distress likelihood of another; and product market rivalry (PMR), where the same default strengthens the position of a competitor. We show that firms facing greater CRC have weaker subsequent operating performance and must contend with less favorable bank loan terms. Meanwhile, they accumulate more cash by issuing equity, selling assets, and reducing investment and payout. In contrast, PMR generally has opposite, albeit weaker, effects. Our findings suggest that credit risk spillovers, especially CRC, play an important role in corporate liquidity management.     

信用衍生品在我国商业银行信用风险管理中的应用

我国商业银行针对其面临最重要的风险之一的信用风险采取的信用风险管理方式长期以传统模式为主,这种方式较为被动,缺少积极性及动态有效性。该种方式的缺陷在经济全球化的形势下显得更为严峻,而信用衍生品作为能够有效转移信用风险的创新产品,很有须要将其引进到信用风险管理中。在学习与借鉴前人关于信用衍生品在银行信用风险管理应用的经验上,运用了实证分析方法,对银行信用资产质量与信用衍生品交易量的关系作出了研究,得出了信用衍生品在一定程度上对于降低或转移商业银行信用风险产生了作用,进而保证了信用资产质量的结论,结合了信用衍生品在我国实际的发展现状与条件,提出了该产品在我国商业银行信用风险管理中运用的建议。     

ESG as a Value‐Creation Tool for Active Investors: A Profile of Inherent Group

A growing number of investment managers claim to integrate environmental, social, and governance considerations into their investment strategy and processes, but few have described how they do so in depth. Even fewer reinforce the importance of sustainability within their own firms by becoming a certified ‘B Corporation.’ This article offers a rare, inside look at how one such value‐oriented manager uses ESG as a tool for differentiated investment sourcing, underwriting, and corporate engagement with the aim of achieving superior risk‐adjusted returns. One of the main arguments of the article—and a key principle of the firm's investment approach—is that ESG, as applied to both corporate strategy and operations, is an important factor in determining a company's cost of capital. The authors present specific examples of their investment process at work, highlighting how active engagement with management on ESG issues can catalyze progress that becomes valued by the capital markets.     

金融科技布局、银行信贷风险与经营绩效——来自商业银行与科技企业战略合作的证据

商业银行通过布局金融科技进行的金融服务创新,已成为深化金融供给侧结构性改革的重要举措。本文通过手工搜集2005—2019年323家商业银行与科技企业战略合作的数据,研究银行布局金融科技如何影响其信贷风险与经营绩效。结果表明：(1)银行布局金融科技战略能降低银行信贷风险,提高银行经营绩效;(2)银行布局金融科技通过提高其自身创新能力与竞争力从而降低银行的信贷风险水平;(3)银行布局金融科技,通过降低信贷风险、提升普惠金融服务、提高运营管理能力与拓展中间业务这四个渠道提高了银行经营绩效;(4)全国性银行发展金融科技使其信贷风险水平得到降低,资本充足率低的银行通过布局金融科技降低信贷风险的效果更强。同时,信用贷款比重越高的银行通过发展金融科技降低信贷风险、提高经营绩效的效果更加明显。本文研究有助于理解商业银行顺势而为所进行的金融科技布局的微观经济后果,也为进一步完善金融服务实体经济相关政策提供参考。     

Sustainability and sovereign credit risk

The study investigates the impact of Environmental, Social, and Governance (ESG) ratings on sovereign credit risk. The study measures sovereign credit risk using a market-based, structural and an analyst-based approach, while ESG scores are obtained from three different rating agencies. The contributions of this paper are multifold. First, we discover that higher sustainability performance at the corporate level significantly decreases market-based (CDS spreads) and structural (Distance-to-default) sovereign credit risk but has no consistent impact on analyst-based (Credit ratings) sovereign credit risk measure. Second, by expanding our research to include the concept of financial materiality based on the SASB materiality map, we break down and highlight the sustainability themes that require the most attention at the sovereign level and those that can affect the credit health of countries. Third, we demonstrate that the relationship between sustainability and sovereign credit risk varies across ESG rating providers, supporting the widespread belief that sustainability metrics lack standardization and are difficult to compare across providers.     

商业银行信用卡业务个人信用评估模型研究

个人信用评估是商业银行信用卡业务一直存在的问题,本文通过信用卡客户信息数据进行实证研究,构建基于C4.5算法的个人信用评估模型,并对信用模型进行了预测和评估,模型有较好的预测效果,可以为信用卡业务的个人信用风险管理提供借鉴。     

Private Equity 4.0: Using ESG to Create More Value with Less Risk

A growing number of private equity firms have responded to the increased focus on climate change, social issues, and technology disruption by broadening their corporate mission to encompass all important stakeholders, as well as their limited partners. And in the process, the management of ESG risks and pursuit of ESG opportunities have become increasingly fundamental to the staying power and value creation potential of PE firms by reducing the risk of their investments, discovering new sources of growth, and increasing their resilience to changes in the political and regulatory environment. This article tells the story of how the Nordic PE firm, Summa Equity, has turned its ESG approach into a core competence and a source of competitive advantage that has enabled the firm to distinguish itself from its competitors and bring about significant improvements in the financial performance of its portfolio companies while providing benefits for their stakeholders. Using the U.N. Sustainable Development Goals to guide them, the firm invests in companies they perceive to be addressing major environmental or social challenges in an innovative and commercially successful way. This has led to investments in significant growth opportunities in areas such as health care, education, waste management, and acqua‐culture. And the firm's returns to its investors have been high enough—and the perceived social benefits large enough—that the firm recently closed its second fund (which was significantly oversubscribed) for 650 million euros, and received the ESG award at the 2019 Private Equity Awards in London.     

Loyalty‐Shares: Rewarding Long‐term Investors

In the face of growing concern about investors' excessive focus on quarterly earnings, recent research has found new evidence of the benefits of a committed long‐term shareholder base, whether in terms of higher profitability, R&D investment, greater integration of ESG factors, or a reduced cost of capital. In light of this evidence, this article takes up the challenge of proposing a market solution to this problem. Although much has already been done in the financial industry to lengthen the outlook of executives by imposing longer vesting periods for stock options, a significant fraction of institutional shareholders continues to have a short‐term orientation. The authors propose that companies try to attract a more long‐term‐oriented shareholder base by modifying the form of the common share contract to include a special reward for buy‐and‐hold investors. The type of contract proposed—called a “loyalty share”—is a call‐warrant attached to each share that is exercisable at a specified time‐horizon—say, three years—and exercise price, but is nontransferable and hence has value only if the share is held for the entire length of the specified “loyalty period.” Such a reward is expected to encourage a longer‐term valuation outlook, since those shareholders seeking the loyalty reward are likely to be those who are most confident about the company's ability to increase its value through the expiration of the loyalty period.     

Credit reallocation

A growing empirical literature finds that the allocation of credit across firms is as important as its total volume for economic performance. This paper investigates the process through which credit is reallocated across US businesses employing the methodology developed by Davis and Haltiwanger (1992) for the analysis of job reallocation. We find that credit reallocation is intense, highly volatile and moderately procyclical and that it primarily occurs across firms similar in size, industry or location. The results suggest that microeconomic heterogeneity can play a key role in the interaction between the credit market and the aggregate economy.     

The Need for Sector‐Specific Materiality and Sustainability Reporting Standards

The market continues to show growing interest in how well companies are performing across a broad range of environmental, social, and governance (ESG) dimensions. Partly as a result, the companies themselves are paying more attention to these performance dimensions, how they contribute to financial performance, and how to evaluate tradeoffs that arise. One of the greatest challenges facing both investors and companies in using ESG performance information is the absence of standards. Another challenge is knowing which of the many ESG dimensions are most material for a company in terms of creating value for shareholders and stakeholders over the long term. The authors argue that materiality and reporting standards must be developed on a sector‐by‐sector basis, and that failure to do so will result in inconsistent and even misleading disclosures. The authors illustrate this with the case of climate change. The SEC has already issued interpretive guidance on climate change disclosures, making it quite clear that existing regulations require companies to report on material effects of climate change, from both an upside and downside perspective. Based on an analysis of 10K filings in six industries, the authors show that, even within a given industry, there is substantial variation in reporting among companies that ranges from no disclosure, to boilerplate disclosure, industry‐specific interpretation, and the use of quantitative metrics. After providing further detail on this by looking at the airline and utilities industries, the authors conclude by offering a methodology for defining material ESG issues on a sector‐by‐sector basis that could provide the basis for developing key performance indicators.     

How to Integrate ESG into Investment Decision‐Making: Results of a Global Survey of Institutional Investors

The authors review the findings of their global survey of 582 institutional investors that were either practicing or planning to practice some degree of integration of environmental, social, and governance (ESG) factors into their investment decision‐making process. The investors were evenly split between asset owners and asset managers, equity and fixed income, and across the three regions of the Americas, Asia Pacific, Europe, Middle East, and Africa. The survey explored reasons for ESG investing; the barriers to such investing and investor approaches to overcoming them; and the time frames used for making investment decisions, evaluating the performance of managers, and awarding compensation. The authors report finding that the commonly perceived barriers to ESG integration—the belief that ESG integration requires sacrificing returns, that fiduciary duty prevents one from doing so, and unrealistically short‐term expectations for ESG to deliver outperformance—were not as great as commonly believed. The biggest barrier is the lack of high quality data about the performance of companies on their material ESG factors—a scarcity that the authors attribute to the lack of standards for measuring ESG performance and the lack of ESG performance data reported by companies. The results were very similar between asset owners and asset managers, equity and fixed income, and across regions. However, the investment horizons of asset owners were notably longer than those of asset managers, and the same was true of equity vs. fixed income investors. Investors in the Americas were more patient about time frames for seeing outperformance from ESG, while those in Asia Pacific were the least patient. There were also differences across regions in how to overcome the barriers to ESG integration.     

The impact of news on the volatility of ESG firms

This study provides one of the first empirical investigations of asymmetric volatility for environmental, social, and governance (ESG) investing. Using the Morgan Stanley Capital International (MSCI) indices as proxies for ESG test assets, this study investigates volatility risk for the highest ESG-rated firms through an empirical analysis in assessing how good news and bad news impact the risk of ESG firms. The analysis provides empirical evidence in support of the hypothesis that the impact of news on the volatility of ESG firms is larger for bad news, compared to good news. Employing an EGARCH framework, the analysis also finds that, in response to bad news, the observed volatility increases for small size ESG firms is lower compared to large and mid-cap ESG firms. The findings provide evidence of a slow response by small size firms to news in an ESG context. In modeling the conditional volatility of the ESG test assets, the analysis also provides evidence of higher persistence in the conditional volatility dynamics for small size ESG firms.     

Fiscal Transparency,Fiscal Performance and Credit Ratings

Fiscal transparency can provide policymakers with incentives to adopt better policies by enhancing the public debate on the design and sustainability of fiscal policy and establishing accountability for their implementation. Fiscal transparency can also reduce uncertainty about fiscal policy and fiscal outturns by providing more information on the underlying fiscal position and fiscal risks. Both effects suggest that countries should benefit from adopting transparency enhancing policies through better market assessments of their sovereign risk. In this paper, we investigate whether fiscal transparency has an effect on market perceptions of sovereign risk, as measured by sovereign credit ratings, and if so, through which channels. We find that fiscal transparency has a positive and significant effect on ratings – one standard deviation increase in fiscal transparency increases credit ratings by 0.7 and 1 notches (or steps in the credit rating scale) in advanced and developing economies, respectively – but its effect works through different channels in advanced and developing economies. In advanced economies, fiscal transparency is associated with better fiscal outcomes, leading indirectly to higher credit ratings. In developing economies, the direct uncertainty‐reducing effect of fiscal transparency seems to be more important. Indeed, the effect of fiscal transparency on fiscal performance is found to increase with the level of institutional development.     

Analysts' Roundtable on Integrating ESG into Investment Decision‐Making

In this third of the three discussions that took place at the SASB 2016 Symposium, practitioners of a broad range of investment approaches—active as well as passive in both equities and fixed‐income—explain how and why they use ESG information when evaluating companies and making their investment decisions. There was general agreement that successful ESG investing depends on integrating ESG factors with the methods and data of traditional “fundamental” financial statement analysis. And in support of this claim, a number of the panelists noted that some of the world's best “business value investors,” including Warren Buffett, have long incorporated environmental, social, and governance considerations into their investment decision‐making. In the analysis of such active fundamental investors, ESG concerns tend to show up as risk factors that can translate into higher costs of capital and lower values. And companies' effectiveness in managing such factors, as ref lected in high ESG scores and rankings, is viewed by many fundamental investors as an indicator of management “quality,” a reliable demonstration of the corporate commitment to investing in the company's future. Moreover, some fixed‐income investors are equally if not more concerned than equity investors about ESG exposures. ESG factors can have pronounced effects on performance by generating “tail risks” that can materialize in both going‐concern and default scenarios. And the rating agencies have long attempted to reflect some of these risks in their analysis, though with mixed success. What is relatively new, however, is the frequency with which fixed income investors are engaging companies on ESG topics. And even large institutional investors with heavily indexed portfolios have become more aggressive in engaging their portfolio companies on ESG issues. Although the traditional ESG filters used by such investors were designed mainly just to screen out tobacco, firearms, and other “sin” shares from equity portfolios, investors' interest in “tilting” their portfolios toward positive sustainability factors, in the form of lowcarbon and gender‐balanced ETFs and other kinds of “smart beta” portfolios, has gained considerable momentum.     

Market Interest in Nonfinancial Information

During the past two decades, more and more companies have volunteered to provide “corporate social responsibility” or “sustainability” reports that include information about their environmental, social, and governance (ESG) policies and performance. Such reporting has come about largely in response to demands by a wide range of stakeholders for information about how the company's operations are affecting society in a number of different ways. But do investors really care about companies' ESG performance and policies? Using data from Bloomberg, the authors provide the first broadly based empirical evidence of investors' interest in ESG data. More specifically, the authors show how interest in the top 20 ESG metrics varies with geographical location (European vs. American), asset class (fixed income vs. equity), and firm type. At the aggregate market level, there is greater interest in environmental and governance information than in “social” information. U.S. investors are more interested than their European counterparts in governance and less interested in environmental information. Equity investors are interested in a wider range of nonfinancial information than are fixed income investors. And whereas sell‐side analysts are primarily interested in greenhouse gas emissions, money managers tend to focus on a broader set of metrics. Similarly, pension funds and hedge funds have shown interest in more nonfinancial metrics than insurance companies. The authors' bottom line: Companies need to recognize the growing market interest in nonfinancial information and ensure that they are providing it according to the specific information needs of market users.     

Systemic Bank Risk in Brazil: A Comprehensive Simulation of Correlated Market, Credit, Sovereign and Inter-Bank Risks

In this study we present a comprehensive forward‐looking portfolio simulation methodology for assessing the correlated impacts of market risk, private sector and Sovereign credit risk, and inter‐bank default risk. In order to produce better integrated risk assessment for banks and systemic risk assessments for financial systems, we argue that reasonably detailed modeling of bank asset and liability structures, loan portfolio credit quality, and loan concentrations by sector, region and type, as well as a number of financial and economic environment risk drivers, is required. Sovereign and inter‐bank default risks are increasingly important in the current economic environment and their inclusion is an important model extension. This extended model is demonstrated through an application to both individual Brazilian banks (i.e., 28 of the largest banks) and groups of banks (i.e., the Brazilian banking system) as of December 2004. When omitting Sovereign risk, our analysis indicates that none of the banks face significant default risk over a 1‐year horizon. This low default risk stems primarily from the large amount of government securities held by Brazilian banks, but also reflects the banks' adequate capitalizations and extraordinarily high interest rate spreads. We note that none of the banks which we modeled failed during the very stressful 2007‐2008 period, consistent with our results. Our results also show that a commonly used approach of aggregating all banks into one single bank, for purposes of undertaking a systemic banking system risk assessment, results in a misestimate of both the probability and the cost of systemic banking system failures. Once Sovereign risk is considered and losses in the market value of government securities reach 10% (or higher), we find that several banks could fail during the same time period. These results demonstrate the well known risk of concentrated lending to a borrower, or type of borrower, which has a non‐zero probability of default (e.g., the Government of Brazil). Our analysis also indicates that, in the event of a Sovereign default, the Government of Brazil would face constrained debt management alternatives. To the best of our knowledge no one else has put forward a systematic methodology for assessing bank asset, liability, loan portfolio structure and correlated market and credit (private sector, Sovereign, and inter‐bank) default risk for banks and banking systems. We conclude that such forward‐looking risk assessment methodologies for assessing multiple correlated risks, combined with the targeted collection of specific types of data on bank portfolios, have the potential to better quantify overall bank and banking system risk levels, which can assist bank management, bank regulators, Sovereigns, rating agencies, and investors to make better informed and proactive risk management and investment decisions.