Open Access

Stefan Paulus

• With recently published draft amendments to the Markets in Financial Instruments Directive (MiFID II), the European Commission is one of the first supranational authorities to strive for the regulatory integration of sustainability risks and factors in investment advisory and asset management processes. As part of the so-called European Green Deal, as well as in line with the adoption of the Paris Climate Agreement and the United Nations 2030 Agenda for Sustainable Development Goals (SDG), the initiative aims to use the financial system to support the transformation of the economy into a greener, more resilient and circular system (European Commission, 2020a). Albeit to a lesser mandatory degree, government efforts to utilize the financial system as a "catalyst" for sustainable development are also emerging outside the European Union. Besides regulatory efforts, voluntary initiatives by institutional investors, such as the Portfolio Decarbonization Coalition (PDC) or the PrinciplesWith recently published draft amendments to the Markets in Financial Instruments Directive (MiFID II), the European Commission is one of the first supranational authorities to strive for the regulatory integration of sustainability risks and factors in investment advisory and asset management processes. As part of the so-called European Green Deal, as well as in line with the adoption of the Paris Climate Agreement and the United Nations 2030 Agenda for Sustainable Development Goals (SDG), the initiative aims to use the financial system to support the transformation of the economy into a greener, more resilient and circular system (European Commission, 2020a). Albeit to a lesser mandatory degree, government efforts to utilize the financial system as a "catalyst" for sustainable development are also emerging outside the European Union. Besides regulatory efforts, voluntary initiatives by institutional investors, such as the Portfolio Decarbonization Coalition (PDC) or the Principles for Responsible Investors (PRI), have been launched in recent years to encourage the consideration of environmental, social, and governance (ESG) criteria in portfolio management. Also, equity investors are increasingly using the influence associated with their ownership shares to engage investee firms on ESG-related topics (e.g., Goldstein, 2014). The instrumentalization of dogmatically risk-/return-focused processes in terms of sustainable prosperity as well as the interrelated consequences for investors and corporations offer a broad basis for academic discussion. The fiduciary duty of asset managers to act in the best interest of their beneficiaries expediently implies the protection of financial wealth. It is therefore hardly surprising that an intensive debate is focusing on the question of whether the consideration of ESG criteria conflicts with this obligation. However, empirical results on the link between sustainable investing and risk-adjusted returns show contradictory results. In contrast, the implications with regard to a specific subcategory of sustainability issues, i.e. the carbon intensity, are quite consistent. According to this, several studies (e.g., Busch and Hoffmann, 2011, Oestreich and Tsiakas, 2015, and Goergen et al., 2020) indicate that considering carbon risk would be equivalent to complying with rather than violating fiduciary duty. Chapter 2 is based on this deduction and examines the carbon risk exposure of different investor types. Complementary, the analysis of ownership structures also reveals the potential of these investor types to influence corporate carbon management according to their (risk) preferences. Apart from executing shareholder rights, Chapter 3 discusses a second option for a preferred reduction of carbon risk exposure, the so-called portfolio decarbonization. From a societal perspective, however, the operationalization of ESG integration in asset management can ultimately only be regarded as successful if it has an impact on corporations, or more precisely on corporate social responsibility (CSR). In this context, several studies (e.g., Lamb and Butler, 2016, and Villalonga, 2018) suggest that investors, and thus corporate owners, suspected of considering sustainability issues, encourage their firms’ responsible behavior. One difficulty in empirically testing such assumptions is the quantification of corporate ownership’s sustainability preferences. Chapter 4 presents a methodology for deriving these preferences from respective owners’ investment behavior and shows that these quantified preferences actually drive CSR. In analogy to the aforementioned fiduciary duty of asset managers, the objective function of corporate management is to maximize shareholder value. Accordingly, the promotion of (costly) sustainability projects could also lead to a conflict of interest at the corporate level - and thus possibly be avoided. Chapter 5 addresses this possible conflict and demonstrates that promoting sustainability activities at the corporate level can even create value, given shareholders appreciate such activities based on a corresponding preference. The final Chapter 6 summarizes the results and gives an overview of implications that build on the insights of this dissertation. The remaining Chapter 1 concludes with a brief description of the research articles contained in this cumulative thesis.…