Green Finance and the Transformation of Rural Property

Green Finance and the Transformation of Rural Property in Brazil: Building New Theoretical and Empirical Knowledge Institutional Investors and Regulatory Preferences Simone Traini Warwick Business School Collective Training Session - Bristol University Law School

Financial Globalization • Relevance of institutional investors around the world Ø 76, 200 mutual funds around the world: $30 trillion of asset under management (AUM) (The World Bank, 2015) Ø Black. Rock: $6. 3 trillion of asset under management (AUM) (Black. Rock, 2017) Ø Role and real effects of institutional investors Ø Geographical differences

Financial Globalization • Geographical concentration of institutional investors (OECD, 2015) Mutual funds in $ US around the world

Financial Globalization • Geographical concentration of institutional investors (OECD, 2016) Pension funds in $ US around the world

Financial Globalization • Geographical concentration of institutional investors Foreign (blue bars) and domestic (red bars) institutional ownership (2000 -2016)

Financial Globalization • Geographical concentration of institutional investors Foreign institutional ownership (2000 -2016)

Financial Globalization • Geographical concentration of institutional investors Domestic institutional ownership (2000 -2016)

Financial Globalization • Geographical concentration of institutional investors Foreign total (blue line), US (red line) and Non-US institutional ownership (2000 -2016)

Financial Globalization • Example: Norway’s Sovereign Wealth Fund Ø International capital flow and regulation Ø Regulatory change in the Norway’s insurance and pension fund industry: Elimination of portfolio restriction to equity investments (OECD, Pension Fund Regulation, 2009 & 2015) Ø Before January 2008: Portfolio share invested in equities could not exceed 35% Ø Since January 2008: No limit to the portfolio share invested in equities

Financial Globalization • Example: Norway’s Sovereign Wealth Fund Green line: foreign stocks held by Norwegian insurances and pensions Orange line: foreign stocks held by Norwegian institutional investors other than insurances and pensions

Financial Globalization • Example: Norway’s Sovereign Wealth Fund 2008

Financial Globalization • Example: Norway’s Sovereign Wealth Fund

Financial Globalization and Green Finance • American Jobs Creation Act: $ 2 billion worth of US Treasury bonds to finance environmental development • Berkshire Hathaway: $ 850 million to finance a solar farm in California • Apple: $ 1 billion to fund environmentally focused initiatives • Poland France: green sovereign bonds • Total green bond issued in 2016: $ 113 billion

Financial Globalization and Green Finance • Challenges faced by dedicated green bond funds: • Investing limits into green bonds by dedicated green bond funds and stringent investment criteria (environmental concerns over the issuers (Repsol) and concerns over the actual use of financial resources) • Diversification (some sectors such as supranational and utilities have issued more green bonds than sectors traditionally dominant in the corporate bond market such as financial and energy groups) and limited number of bonds available for investment • performance assessment issues (usually over a three-year period)

Financial Globalization and Green Finance • Real effects of international capital (vs. domestic capital) flows on environmental projects? • Logic of profit, risk and need for diversification • Investment horizons • Regulation: investor protection, investing limits, minimum ownership disclosure, bondholder rights vs. shareholder rights

Financial Globalization and Green Finance • Other financial products (fixed income ETFs) vs. tax-exempt green bonds? • Green investments and corporate governance?

Institutional Investors’ Preferences • Heterogeneity of institutional investors Ø By type: pension funds, mutual funds, insurance companies, investment banks, hedge funds, etc. Ø By investment horizon: short vs. long Ø By activism: active vs. passive Ø By origin: geographical and legal

Institutional Investors’ Preferences • Finance literature focuses on stock market returns following changes in ownership structures of listed companies, but fewer studies examine the real effects of institutional ownership

Institutional Investors’ Preferences • Bena, Ferreira, Matos & Pires (2017) Ø Are foreign institutional investors locusts?

Institutional Investors’ Preferences • Does foreign institutional ownership promote myopic investments in their equity holdings? No. Consistent evidence. Instead, foreign institutions promote: Ø Shareholder-centric governance practices (Aggarwal et al. 2011) Ø Financial reporting comparability (Fang et al. 2015) and quality (Beuselinck et al. 2017) Ø Cross-border M&A (Ferreira et al. 2010) Ø Innovation and long-term investments in tangible, intangible and human capital (Bena et al. 2017)

Institutional Investors’ Preferences • Real effects of hedge fund activism (Brav, Jiang & Kim, 2015): Ø After their intervention, a typical target firm improves production efficiency ( = difference between actual and predicted output given inputs) in following three years Ø Yet, employees experience stagnation in work hours and wages despite an increase in productivity

Institutional Investors’ Preferences • Raise of cheap index funds delivering market returns (Appel, Gormley & Keim, 2016) and general inability of actively managed funds to provide superior returns to those of the market (Fama & French, 2010)

Institutional Investors’ Preferences • Indexed institutional investors and mutual funds in the US

Institutional Investors’ Preferences • Real effects of passive (vs. active) capital flows on environmental projects? • Are green companies/projects included in market indexes? Including ESG ratings into market index criteria (MSCI ESG projects)? Share of green bonds in fixed-income securities traded by passive investors (such as ETFs)? • Financial markets (high, short-term return logic) and green investments (long-term return)

Thank you for your attention! Simone Traini simone. traini. 15@mail. wbs. ac. uk