Diego Pérez Guisande

Abstract

This thesis is a compilation of three papers that study different aspects of sustainable banking \& finance. Firstly, I assess how banks compromise to Socially Responsible Investment by analysing if they divest shares of banks found guilty of misconduct. In the second essay, I examine whether institutional investors can reduce their exposure to climate-change-induced systematic risk by privately engaging with their portfolio firms to solve environmental issues. In the final chapter, I ask whether investors use industry classification benchmarks as sustainability measures by analysing firms' performance after their code changes to a greener or a browner code. 

A growing group of institutional investors use divestment strategically to deter harmful misconduct to the climate and society. In Chapter 2, based on Kantian ethics, I propose that divestment represents investors' universal and absolute moral commitment to socially responsible investing (SRI). Following categorical and hypothetical imperatives and reciprocity as a norm, I hypothesize how institutional investors commit to SRI through a divestment strategy against ethically reprehensible behaviour of banks, especially when these investors represent banks themselves. Using a hand-collected database of the revelation dates of enforcement actions on banks, I find evidence that banks are less likely to divest equity holding on banks with misconduct (fined banks) than their non-bank institutional investor peers. Banks that commit to investing responsibly by signing for the Principles for Responsible Investment (PRI) are not significantly more likely to divest on fined banks stocks than non-signatory banks. Moreover, divestment of fined banks whose own legitimacy to operate is in question is not significantly different from non-fined banks' divestment. European banks are more inclined to sell their holdings permanently on fined banks than their United States peers. Therefore, bank's moral commitment to SRI via divestments is influenced more by cultural and reciprocity norms than their moral commitment to participate in the PRI.

In Chapter 3, I study whether investors can reduce their systematic risk exposure by engaging with their portfolio firms to solve environmental issues. Engagements targeting environmental issues that can be solved in the short term reduce firms' systematic risk by 11.3% of a standard deviation two years after the engagement starts. Engagements looking to solve long-term issues (e.g. achieving carbon neutrality) or asking the firm to disclose environmental metrics do not reduce systematic risk in our observed period. Given the systematic nature of environmental risk and the difficulty of hedging it, these findings show how investors can reduce their exposure to environmental risk through activism.

Finally, Chapter 4 studies whether investors use industry classification codes as sustainability metrics. Industry codes are widely available and is used in sustainable finance regulations such as the EU taxonomy; investors make decisions based on mental categories, and ESG scores are often calculated with respect to the firms' industry. Furthermore, a change in a firms' code highlights that a large shift in the firms' activity might have happened. Using a dataset of over 9000 firms from 2010 to 2022, I show that MSCI's Global Industry Classification System (GICS) changes are generally not explained by significant changes in firms' revenue stream or M\&A activity. Then, I find that firms for which GICS code changes have lower returns compared to similar firms. Further, using an industry-level sustainability measure based on industry weights in a broad market index and its low carbon equivalent, I find that the negative result on returns is explained by firms' moving to a browner code, while moving to a greener code does not have a negative impact.