Christian Kontz

Do ESG investors care about carbon emissions? Evidence from securitized auto loans

Abstract:

Securitized auto loans present a clean empirical setting to study the effects of ESG investing on equilibrium asset prices and quantities. I find that the convenience yield of ESG investments increased almost threefold from 0.14% in 2017 to 0.39% p.a. in 2022. The pass-through of this convenience yield to consumer interest rates can be substantial for captive lenders, with implied changes in consumer loan demand ranging from 1.05% to 4.77%. However, I document that the market's focus on firm-level ESG scores, rather than the collateral's CO2 emissions, lowers the cost of capital for high-emission auto ABS by 6 basis points; due to a positive correlation between ESG scores and CO2 emissions. ESG mutual funds allocate more capital to auto ABS from issuers with higher ESG scores, even if those securities finance higher-emission vehicles. These findings highlight that while green premia can have a meaningful impact, they do not necessarily increase the cost of emitting CO2.
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Presentations: FIRS Conference 2024 (main program), GRASFI 2024 (main program, scheduled), SoFiE Conference 2024 (main program), CEPR-ESSEC-Luxembourg Conference on Sustainable Financial Intermediation (scheduled), UC Santa Cruz, Harvard Climate Economics Workshop, UChicago, USC Marshall, NYU Shanghai/SoFiE Summer School, MFR/IMSI "Assessing the Economic and Environmental Consequences of Climate Change" Conference, Inter-Finance PhD Seminar, GEA Conference 2022
Awards: FIRS Conference 2024 Prize for PhD Students, Myron S. Scholes PhD Prize 2024



The Real Cost of Benchmarking

with Sebastian Hanson

Abstract:

This paper documents a novel channel through which the benchmarking of fund managers affects firm behavior. Using a difference-in-differences design, we show that increases in a stock's benchmarking intensity cause its CAPM β to rise. Stocks with a benchmarking intensity increase of more than 5 percentage points due to index inclusion subsequently have 15% higher CAPM βs. These changes in CAPM βs are not driven by changes in firm fundamentals and persist for at least seven years. Using an instrumental variable design, we find that firms with higher CAPM βs due to index inclusion reduce investment and have 7.1% less physical capital after six years. Instead of investing, these firms hold more cash and gradually increase payouts to shareholders. Consistent with this mechanism, we show that increasing benchmarking intensity predicts a higher perceived cost of capital by firm managers. From 2000 to 2016, increases in CAPM βs due to higher benchmarking caused a 7.6% reduction in capital accumulation at the aggregate level. Our findings highlight the significant influence of fund manager benchmarking on firm behavior and real quantities through changes in the perceived cost of capital.
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Presentations: Macro Finance Research Program (MFR) 2024 Summer Session for Young Scholars (scheduled), Inter-Finance PhD Seminar


ESG induced capital misallocation: Is ESG doing good, by doing well?

Abstract:

This paper studies the impact of environmental, social, and governance (ESG) investing on the real economy. Using within industry-year variation, I show that 1.) firms with high ESG ratings have low marginal revenue products of capital (MRPK), while, 2.) firms with high sales per tCO2 emission have high MRPKs. This implies that reallocating capital to firms with high ESG ratings lowers allocative efficiency while reallocating capital to greener firms increases it. Additionally, I document that that 3.) capital investment by firms with high ESG ratings is less sensitive to Tobin's Q, 4.) ESG mutual funds' capital allocation decisions are not sensitive to the MRPK of their portfolio firms. Motivated by these facts, I structurally estimate a dynamic investment model featuring convenience yields on ESG assets and a CO2 externality. I use the model to explore the implications of ESG investing for capital misallocation, aggregate total factor productivity, and climate change mitigation. I simulate a counterfactual economy where investors internalize CO2 emissions instead of ESG convenience yields.